Types of GST in India- What is CGST, SGST and IGST?

Goods and Services Tax(GST) came into effect on 1st July 2017, by amending the Constitution of India. It is the One hundred and first amendment introduced by the Government of India. GST was hailed as a significant tax reform of Independent India, that will help streamline the taxation process and reshaping India’s $2.4 trillion economies. The primary objective was to strive for $5 trillion benchmark set by the government for the country’s economy, making India a major economic powerhouse of the world.

Under GST regime, there are five distinct tax slabs to make tax collection easy, these are – 0%, 5%, 12%, 18%, 28%. Most of the items of daily consumption of masses are charged 5% tax, while luxury items invites 28% tax. Most of the other products are kept under 18% tax bracket. To encourage gems and jewellery industry which is a prime export of India, there is a special rate, which is .25% for precious and semi-precious rough stones while 3% on gold.

One major positive outcome after the implementation of GST is the 20% drop in interstate travel time as all the interstate check posts are now disbanded. According to reports, it also has positive implications for the transportation sector as crude consumption and delivery time has reduced. Goods and Services Tax or GST is a comprehensive, destination-based, single, and multistage indirect tax that is imposed on value-addition. GST has subsumed around 17, different types of indirect taxes in the country. These different taxes that gave way to GST includes state VAT, entertainment tax, Octroi, excise tax and more. All the Goods and Services are now covered under GST, and the tax is levied according to the tax slabs that are decided by the GST Council.

The Main Features of GST

The main features of the GST are :

    GST has led to the subsuming of 17 different indirect taxes at the Central and State level.

    GST is a consumption-based tax.

    GST led to ‘one country one tax-rate’ system implemented across the country.

    Taxes imposed on – ‘supply of goods or services’

    No differentiation between goods or services

    It is a comprehensive tax levied on all goods and services.

    Most importantly, it stopped the earlier tax on the tax structure.

    GST led to the free-flow of credit.

    GST is collected on value addition at every step of the supply chain. GST is multistage; however, input tax credit mitigates the imposition of extra taxes.

    GST is dependent on goods consumption destination. For example – Suppose some particular goods are manufactured in State A while consumed in State B, under such circumstances. In that case, the collected GST is accredited to State B(consumption state) and not to State A(manufacturing state). This, however, may lead to loss of revenue to the manufacturing states, which is compensated by levying GST Compensation Cess.

1. Intra-State transactions

The transaction which is carried out within a state, both the SGST along with CGST are applied at the collection time. For example – For 1 tonne of Iron-ore supplied in Jharkhand state by a supplier to a consumer within the Jharkhand state, will invoke 5% of GST that is collected from the consumer by a supplier. The 5% GST collected constitutes 2.5% CGST and 2.5% SGST. The tax collected will be diverted directly to the centre and state govt.

2. Inter-State transactions

If the transactions are carried out between two different states, then IGST is applied. For example – If a supplier supplies iron ore from Jharkhand to a consumer in Punjab, then IGST is levied. Here, the IGST tax collected by the central government will be divided between the Punjab government(State of consumption) and the Centre. In a nutshell, intra-State transactions invite both the CGST and the SGST whereas IGST is levied on goods and service transactions carried out between different states. Most importantly, a consumer does not have to spend more money because the CGST and SGST combined rate equals IGST. The system has brought uniformity in tax structure, and a win-win situation created both for a consumer and seller.

CGST, SGST and IGST- rates of common items

Goods CGST SGST IGST

Household necessities like coffee (except instant), tea, spices, edible oil,and sugar. Life-saving drugs, coal and Indian sweets are coveredunder present GST slab. 2.5% 2.5% 5%

Processed Food and computers 6% 6% 12%

Hair oil, soap and toothpaste, Capital goods and Industrial intermediaries. 9% 9% 18%

Luxury items, premium cars and consumers durables such as AC and refrigerator, cigarettes, aerated drinks, and High-end motorcycles  14% 14% 28%

Input Tax Credit under GST

Suppose you being a producer has paid GST of ₹500 on the final-product. But you have paid ₹300 GST on the purchase of the required raw material. Now, according to the input tax credit system, you can claim ₹300, and the total tax outgo(GST) is only ₹200 at the delivery time.

Now let us understand the method to implement input tax credit concerning CGST, SGST and IGST credit. In accordance with the GST act, the GST credit should be applied as follows;

    To set-off IGST liability

    To set-off CGST liability

    To set-off SGST liability

Explanation –

Let us assume that Raj, a manufacturer from UP, has sold goods to a dealer Sumit also from UP worth ₹1 lakh. Sumit has further sold the goods to a trader in Haryana named Manav. Sumit has sold the goods to Manav for ₹1.2 lakh. Manav finally sells the product to an end consumer named Mehak at ₹1.5 lakh.

Now the GST rates applied on the goods are – CGST= 6%, SGST= 6% and IGST= 12%

Transaction 1 –

Since Raj and Sumit are from U.P, the intra-State transaction will invite CGST and SGST at 6%.

SGST = 6% on ₹1 lakh = ₹6000 (to the State of consumption, U.P)

CGST = 6% on ₹1 lakh = ₹ 6000 (to the Centre)

Total GST- (payable by Raj) = ₹12,000

Transaction 2 –

The inter-State transaction worth ₹1.2 lakh between Sumit (U.P) and Manav (Haryana) will invite IGST at 12% rate.

IGST = 12% on ₹1.2 lakh = ₹14400 (to the Center)

IGST credit = ₹12000

Net IGST liability on Sumit = ₹14400-₹12000 = ₹2400 (to the Center)

Transaction 3 –

Now, in the end, the intra-State transaction between Manav and Mehak (both from Haryana) will invite CGST and SGST at 6% rate.

SGST = 6% on ₹1.5 lakh = ₹9000 (Haryana- consumption state)

CGST = 6% on ₹1.5 lakh = ₹9000 (Center)

Total IGST (Credit) = ₹14400(as per- the previous transaction)

IGST credit to put off IGST liability = ₹2400 (IGST Credit Balance = 14,400-2400 = ₹12000)

IGST credit to put off CGST = ₹9000 (IGST Credit Balance = 12000-9000 = ₹3000)

IGST credit to put off SGST = ₹3000 (IGST credit balance =0)

Net SGST = ₹9000-₹3000 = ₹6000 (To Haryana state)The consumer state receives final settlement – GST a consumption-based tax. In the above case, Haryana is the consumer state where the goods/services are consumed and is liable to receive the tax. U.P a manufacturer will not receive the GST, and hence a system of GST compensation cess was introduced.

  Selling Price Particulars Uttar Pradesh (U.P) Haryana Centre

Transaction 1 ₹ 1 lakh Income (+) (+) ₹ 6000 (SGST) – (+) ₹ 6000 (CGST)

Transaction 2 ₹ 1.2 lakh Income (+) – – (+)₹14,400 (IGST)

SGST Credit (–) CGST Credit (-) – – (-) ₹ 6000 (-) ₹ 6000

Net IGST liability – – (+) ₹ 2400

Transaction 3 ₹ 1.5 lakh Income (+) – (+) ₹ 9000 (SGST) (+) ₹ 9000 (CGST)

    IGST Credit (-) – (-) ₹ 3000 (for SGST) (-) ₹2400 (For IGST liability) (-) ₹9000 (For CGST)

Total     ₹ 6000 ₹ 6000 ₹ 6000 

Adjustment     (-) ₹6000 (towards the Centre) (+) ₹3000 (from the Centre) (+) ₹ 3000 (from UP)

Net     ₹ 0 ₹9000 ₹9000

Goods and Services tax, is a Value-Added tax which is levied on almost all the goods/services that is sold for domestic consumption. The tax is paid by the customers and is finally remitted by the traders/businesses to the government. The GST tax has four components and is implemented throughout the country. There are GST slabs for different goods/services and is decided by the GST council..