Goods & Services Tax or GST has been introduced in India as an alternative to all the previous indirect taxes levied by the State and the Center. Although GST claims to be a ‘one tax’ system, there are actually three different taxes under GST regime.
Need for 3 separate taxes
If you are wondering why the government introduced three different taxes instead of one single tax as promised by GST, you will find the answer here. In India, both the Central government and the government of individual Indian States have the Constitutional right to levy taxes on various supplies performed in their respective regions. So, it was not possible to replace all those taxes by a single tax since they are levied and consumed differently by the States and the Centre. So, a mechanism was devised under which both the Centre and States will simultaneously levy GST.
The GST tax structure was divided into 2 tiers (and 3 taxes) with the concept of “Input Tax Credit” so that taxpayers can take the credit against an already paid tax. It not only removes the cascading effect of taxes but also realizes the concept of “one nation one tax”.
GST Tax Structure
The dual-tax structure ensures that both the Center and States get their tax revenue.
What is SGST/CGST/IGST?
SGST (State GST) is the GST levied on the intra-state (within a state) supplies of goods and services. This tax is levied, collected and owned by the State government of the respective state.
CGST (Central GST) is also levied on the intra-state (within a state) supplies, but the tax is collected and owned by the Central government in this case.
* So an intra-state supply is liable for two different taxes – CGST and SGST
IGST (Integrated Tax) is the tax levied on the inter-state (between two states and Union Territories) supplies and imports of goods/services. This tax is collected by the Central government and distributed among states and Centre accordingly.
Since GST is a consumption based tax, only the state where the goods were actually consumed is liable to get the revenue, not the state where they are manufactured. The interstate tax process gets easier under GST as every state will now only has to deal with the Center for settlements of their revenues.
Let’s understand this with an example:
Sohan is a manufacturer in Rajasthan, who sells his goods to Shubham (a wholesaler) in Bihar. The transaction amount is Rs. 1000 and the GST (IGST) rate 18%, so the tax amount will be Rs. 180 which will go to the Centre. The cost of the product will become Rs. 1180 for Shubham.
Now, if Shubham makes some changes (packaging, etc.) in the product and adds his profit, the cost of the product further increases by, let’s say Rs. 200. So the cost now becomes Rs. 1380.
Now, Shubham further sells the goods to Rohan (a shopkeeper) in Bihar. Since it is an intrastate transaction, both SGST (9%) and CGST (9%) will be levied on the cost of the product. SGST will go to the state government of Bihar while CGST will be collected by the Centre.
SGST = CGST = 9% of 1380 = Rs. 124.20
The cost of the product for Rohan becomes Rs. 1628.40 (1380 + 124.20 + 124.20)
Since GST is a destination/consumption based tax, the tax is actually borne by the final consumer of goods/services.
When Rohan sells this item to the final buyer, he includes the tax as well as his profit in the cost. So, let’s say that his profit is Rs. 200, and the final cost of the product is Rs. 1828.40 for the end consumer.
Now, you must have noticed that the buyer is here paying double taxes, once IGST and then, SGST & CGST on the same product. This is called the tax on tax, or cascading of taxes. GST has the provision of Input Tax Credit (ITC) to deal with this situation.
The original cost of product was Rs. 1000
Tax amount (IGST + CGST + SGST) is Rs. 428.40 (180 + 124.20 + 124.20)
The profits of different parties are 200 + 200 = Rs. 400
How does Input Tax Credit work?
The ITC system makes sure that a buyer/consumer doesn’t have to pay tax on tax. This is how it works.
In the example above, when SGST & CGST are levied in the second transaction, the taxpayer is given the facility to claim the input credit on tax paid in the first transaction. So, he will get Rs. 180 IGST credit in his credit ledger. This amount he can use to pay further taxes in the next tax return.
So, the final tax amount will be 180 + 124.20 + 124.20 – 180 = Rs. 248.40
The cost of the product also gets reduced by Rs. 180
This is how the one tax system is being implemented under Goods & Services Tax. If you notice carefully, you will find that the GST is actually levied on the added value, not on the entire cost of the product. It also confirms GST being a ‘value added tax’.
Now, since GST is a consumption based tax, the state of Rajasthan (manufacturing) state will not get any tax, and only the state of Bihar (where goods are actually consumed) and the Centre will get the revenue. If the manufacturing state levies any tax, the same will be transferred to the Centre and will be further distributed between the Centre and the consuming state.
Note: The GST rate of different products is fixed and already available online for dealers to use. Search for HSN codes or GST rates of your products online.