In the year 2017, the government of India had implemented the Goods and Services Tax (GST) Act throughout the nation, including its union territories (UT). This led to the earlier taxes such as Value Added Tax (VAT), central excise, and service tax to be subsumed into one indirect taxation regime, now known as GST. The whole idea of bringing these taxes under one umbrella is to create the concept of “One Nation One Tax” in India. Since GST is a primarily a destination-based tax, and end-user consuming any goods or services or both are liable to pay the Goods and Services Tax (GST). The tax is acquired through the State in which the goods or services or both are consumed and not by the state wherein such goods/items are manufactured. In cases of exports, the seller of the goods or services is exempted from paying the tax.

In this post, we will cover the different types of Goods and Services Tax (GST) and also know how each of them affects the cost of goods and services that are supplied within one state or another.

How GST is Determined and Levied on Various Goods and Services

In order to be able to determine whether the Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST), or Integrated Goods and Services Tax (IGST) will be applicable in a taxable transaction, it is, therefore, vital to first realize if the transaction is an intra-state or inter-state supply.

Intra-state supply of goods or services: An intra-state supply of goods and/or services refers to the area or location of the supplier and the place of supply i.e., the location of the purchaser of such goods and/or services that are in the same state. Thus, in Intra-state transactions, a dealer has to acquire both CGST and SGST from the purchaser. The CGST gets deposited in the accounts of the Central Government, while the SGST gets deposited in the accounts of the State Government.

Inter-state supply of goods or services: On the other hand, inter-state supply of goods and/or services refers to the area or location of the supplier and the area of supply that are in different states. Also, in instances of import or export of goods and/or services or when the supply of goods or services is made to or by means of an SEZ (Special Economic Zones) unit, then the transaction is assumed to be an inter-state supply. In an inter-state transaction, a vendor/seller is required to collect IGST from the buyer/customer.

Types of Goods and Services Tax (GST)

The Goods and Services Tax (GST) system of taxation is categorised into three broad types. These are explained below.

• SGST (State Goods and Services Tax)
• CGST (Central Goods and Services Tax)
• IGST (Integrated Goods and Services Tax)
• UTGST (Union Territory Goods and Services Tax)

The separate state GST is implemented to protect the constitutional rights of the state governments, where they can impose taxes on various goods or services or both that are sold or purchased with a particular state.

1. State Goods and Services Tax (SGST)

The State Goods and Services Tax (SGST) is a form of tax that is levied on intra-state supplies of both goods and services. The tax is imposed by the state government under the regulations of the SGST Act, 2017. Any tax liability that is obtained under SGST can be set off against SGST or IGST (Integrated Goods and Services Tax) input tax credit (ITC) only. Thus, it will be a replacement of all the prevailing state taxes, along with VAT, State Sales Tax, Entertainment Tax, Luxury Tax, Entry Tax, State Cesses and Surcharges on any sort of transaction regarding goods and services. The State Government is the only claimer of the revenue earned under SGST.

Example:

Mahesh from Maharashtra wants to sell some goods to Sanjay who is also in Maharashtra. The product, which is originally priced at Rs. 10,000 will attract GST at the rate of 18%, comprising of a rate of 9% towards CGST and another being rate of 9% as SGST. The SGST tax amount, in this case, is Rs. 900 (i.e., 9% of Rs. 10,000), which is fully claimed by the State Government of Maharashtra. Thus, the rate of the item after calculating SGST will be Rs. 10,900.

2. Central Goods and Services Tax (CGST)

The Central Goods and Services Tax (CGST) is a form of tax that is levied on intra-state supplies of both goods and services. The tax is imposed by the central government under the regulations of the CGST Act, 2017. In addition to this, SGST that is governed by the state government is also levied on the same intra-state supplies of goods and services. It is one of the taxes that is charged on each intra-state (i.e., goods and services supplied within a particular state) transaction, the opposite one being SGST (or UTGST for Union Territories). CGST replaces all the prevailing Central taxes, which include Service Tax, Central Excise Duty, CST, Customs Duty, SAD, etc. The rate charged as CGST is typically equal to the SGST rate. Both taxes are charged on the base price of the item.

Example:

Taking the same example as mentioned above, as Mahesh sells an item to Sanjay, both of which are in the same state i.e., Maharashtra, Mahesh is required to pay two taxes. One is CGST, which is for the central government, whilst SGST is for the state. The rate of CGST is 9%, which is as SGST. After the application of CGST (i.e., 9% of Rs. 10,000), the final cost of the item is amounted to Rs. 11,800.

All taxes in the situations mentioned above are borne by the end-customer in the final cost and not by the producer/manufacturer or the dealer of the product/item or service. Since GST is levied on consumption, the state wherein the product is originally manufactured does no longer entitle to any tax amount. However, if the state manufacturing the product levies a tax, then the same may be transferred to the consuming state through the central government.

The Integrated Goods and Services Tax (IGST) is a form of tax which is levied on all inter-state supplies of goods and services and is governed under the regulations of the IGST Act, 2017. The tax is imposed on any supply of goods and services, both in the case where such goods and services are imported into India as well as exported from India. Also, under IGST, the export of goods and services are to be zero-rated and that the tax is to be shared between the state and central governments. This tax can be accumulated with the aid of the central government and will, in addition, be distributed among the respective states. IGST is charged while a service or product is moved from one state to another. It is to make sure that a state has to deal only with the Union government and not with every state separately to settle the inter-state tax amounts.

Example:

Ashok is a manufacturer in the state of Andhra Pradesh. He had sold goods well worth Rs. 10,000 to Mahesh in Maharashtra. Since this is an inter-state transaction, the IGST will be relevant here. Now, let us assume that the GST rate is 18% for a particular item. So, the IGST amount charged by the central government would be Rs. 1,800 (i.e., 18% of Rs. 10,000) and the refined rate of the item would be Rs. 11,800.

Here, GST is a consumption tax, which means that only the state where the products are actually consumed gets the tax benefits, irrespective of the manufacturing state.

4. Union Territory Goods and Services Tax (UTGST)

The Union Territory Goods and Service Tax, commonly known as UTGST, is the GST applicable on the goods and services supply that takes place in any of the 5 Union Territories of India, which are Andaman and Nicobar Islands, Dadra and Nagar Haveli, Chandigarh, Lakshadweep and Daman, and Diu respectively. This UTGST may be charged in addition to the CGST as has already been explained above.

Therefore, for any transaction of goods and/or services which takes place within a Union Territory,a rate of UTGST, plus rate of CGST will be charged. The reason why a separate GST was applied for the Union Territories is that the SGST cannot be carried out in a Union Territory without a legislature. Union Territories such as Delhi and Puducherry have already got their own legislatures, which means that SGST is applicable to these regions.

How is Input Tax Credit (ITC) Adjusted Under GST?

To understand how the input tax credit (ITC) is claimed under GST, let us take an example here. Assuming that goods well worth Rs. 10,000 are sold by Venkatesh, a manufacturer from Maharashtra to Dhirubhai, who is a dealer also based in the state of Maharashtra.

Now, Dhirubhai,who is a dealer, resells the same goods for a price of Rs. 17,500 to another person, say Chamanlal, who is a trader based in Rajasthan. Again, Chamanlal, who is a trader, then finally sells the goods for Rs. 30,000 to Topiram, who is an end-consumer also based in the state of Rajasthan.

Let’s assume that the applicable rates of tax for the goods sold are given as follows:

CGST =  9%

SGST = 9%

IGST = 9 + 9 = 18%

Thus, from this, we now come to understand that:

(i) Since Venkatesh is selling goods to Dhirubhai in Maharashtra, both of whom are based in the same state, it is, thus, an intra-state sale. Therefore, the applicable CGST rate levied is 9% and the SGST rate is also 9%.

(ii) Secondly, Dhirubhai, who is a dealer in the state of Maharashtra, is selling goods to Chamanlal, who is a trader in the state of Rajasthan. Here, this is an inter-state sale, where the IGST rate of 18% will be applicable to the goods sold.

(iii) Lastly, Chamanlal, who is a trader in the state of Rajasthan, is selling the same goods to Topiram, an end-user, who is also in the state of Rajasthan. Again, this is an intra-state sale and hence, the CGST rate of 9% as well as SGST rate of 9% respectively, will be applicable to the goods sold.

Conclusion

India is a federal country, where both the Centre and the States had been assigned the powers to levy and collect taxes. Both the Governments have different roles and obligations to perform, as in keeping with the Constitution of India, for which they want to elevate tax revenue. The Centre and States are simultaneously levying GST on goods and services.