Under the GST law, the central government will collect CGST and SGST or only IGST depending upon whether the transaction is intrastate or interstate, respectively.
Introduction to CGST, SGST and IGST
Unlike pre-GST regime when there were multiple taxes such as Central Excise, Service Tax, State VAT, etc., the GST law introduces just one tax with three components- CGST, SGST and IGST.
When the supply of goods or services happens within a state, also called intra-state transactions, then both the CGST and SGST will be collected. Whereas, if the supply of goods or services happens between the states, also called inter-state transactions, then only IGST will be collected.
The use of correct GSTIN becomes important to identify the applicability of tax components. Hence, validate with the help of the GST search tool before using the GST number in the sales invoice.
It is to be noted that the GST is a destination-based tax, which is received by a State in which the goods are consumed but not by a state in which such goods are manufactured.
IGST full form and when IGST is applicable
The full form of IGST is Integrated Goods and Services Tax. Under GST, IGST is a tax levied on all interstate supplies of goods and/or services or across two or more states/Union Territories. Further, IGST levy and collection will be governed by the IGST Act, 2017, as amended from time to time.
IGST will be applicable on any supply of goods and/or services in both cases of import into India and export from India.
Note: Under IGST,
- Exports would be zero-rated.
- Tax will be shared between the Central and State governments.
Example for IGST with calculation
Consider that a businessman M/s Rajesh Ltd from Chandigarh in India had sold goods to Anand Ltd from Dadra & Nagar Haveli & Daman & Diu in India worth Rs.1,00,000. The GST rate is 18% referring particularly to the 18% IGST. In such a case, the dealer has to charge Rs.18,000 as IGST. This IGST will go to the Centre, later split between the Centre and Dadra & Nagar Haveli & Daman & Diu (if this is ultimate consuming state).
CGST full form and when CGST is applicable
Many may be looking for an answer to ‘what is the full form of CGST’. The full form of CGST is Central Goods and Services Tax. Under GST, CGST is a tax levied on intrastate supplies of both goods and services by the Central Government and collected by it for its coffers. Accordingly, the levy and collection of CGST are governed by the provisions of the CGST Act, 2017 as amended from time to time.
Together with CGST, an equal value of SGST will also be levied on the same intrastate supply but will be governed by the particular state government. In other words, if a seller sells a product to a buyer within the same state, say Telangana, then CGST and SGST will apply.
This implies that both the Central and state governments will agree on combining their levies with an appropriate proportion for revenue sharing between them.
It is clearly mentioned in Section 8 of the CGST Act that the taxes be levied on all intrastate supplies of goods and/or services but the rate of tax shall not be exceeding 14%, each.
Note: Any tax liability obtained under CGST can be set off against CGST or IGST input tax credit only and not any SGST.
SGST Full form and when SGST is applicable
SGST means State Goods and Services Tax. Under GST, an equivalent amount of SGST is a tax levied on intrastate supplies of both goods and services by the particular state government where the product sold is consumed.
Therefore, levy and collection of SGST are governed by the respective state’s SGST Act, 2017 as amended from time to time, for instance, Telangana GST Act. After the introduction of the SGST, all the state taxes such as the value-added tax, entertainment tax, luxury tax, entry tax, etc. were merged under SGST.
As explained above, CGST will also be levied on the same intrastate supply but will be governed by the Central Government.
Note: Any tax liability obtained under SGST can be set off against SGST or IGST input tax credit only and not CGST.
Example for CGST and SGST with calculation
Let’s suppose M/s Rajesh Ltd is a dealer in Chattisgarh who sold goods to Vijay Ltd in Chattisgarh worth Rs.10,000. The GST rate is 18% comprising of a CGST rate of 9% and an SGST rate of 9%.
In such a case, the dealer collects a total of Rs. 1,800 and deposits over the GST portal, out of which Rs. 900 will be apportioned to the Central Government and Rs. 900 will go to the Chattisgarh Government.
UTGST full form and when UTGST is applicable
UTGST stands for the Union Territory Goods and Services Tax. Similar to how SGST is levied by the state governments on the intra-state supply of goods and services, UTGST is levied by the handful of Union Territory governments.
It refers to the tax levied on the intra-Union Territory supply of goods and services. It is governed by the UTGST Act, 2017 as amended from time to time and is levied together with CGST.
UTGST is similar to SGST and is levied in Union Territories which do not have their own legislature. UTGST is applicable to the supplies that take place in the Union Territories of Ladakh, Andaman and Nicobar Islands, Chandigarh, Dadra & Nagar Haveli and Daman & Diu, and Lakshadweep. Please note that the Union Territories of Delhi, Jammu & Kashmir and Puducherry will fall under SGST law as they have their own legislature.
Note: The order of ITC utilisation of UTGST is similar to SGST. ITC of UTGST should first be set off against UTGST. Any balance remaining may be used to set off any IGST liability.
Why there is split into SGST, CGST, and IGST?
India is a federal country where both the Centre and states have been assigned the powers to levy and collect taxes by our Constitution. Both governments have distinct responsibilities to perform for which they need to raise tax revenue, in the form of GST.
The Centre and states are simultaneously levying GST. The three-type tax structure is implemented to help taxpayers take the credit against each other, thus ensuring “One Nation, One Tax”.
What determines if CGST, SGST or IGST is applicable?
To determine whether Central Goods & Services Tax (CGST), State Goods & Services Tax (SGST) or Integrated Goods & Services Tax (IGST) applies in a taxable transaction, find if the transaction is intrastate or an interstate supply.
- Intrastate supply of goods or services is when the location of the supplier and the place of supply i.e., the location of the buyer are in the same state. In Intrastate transactions, a seller has to collect both CGST and SGST from the buyer. The CGST gets deposited with the Central Government and SGST gets deposited with the State Government.
- Interstate supply of goods or services is when the location of the supplier and the place of supply are in different states. Also, in cases of export or import of goods or services or when the supply of goods or services is made to or by an SEZ unit, the transaction is assumed to be interstate. In an interstate transaction, a seller has to collect IGST from the buyer.
How are input tax credits adjusted? Offset liability in GST
The CGST Rules define the logic of adjusting CGST, SGST and IGST input tax credit with the tax liabilities of CGST, SGST and IGST. One must follow the rules since accurate ITC utilisation is crucial to avoid fines later on.
Let us consider that goods worth Rs.10,000 are sold by manufacturer A from Maharashtra to Dealer B in Maharashtra.
Dealer B resells them to Trader C in Rajasthan for Rs.17,500.
Trader C finally sells to end-user D in Rajasthan for Rs. 30,000.
Suppose the applicable tax rates for the goods sold are CGST= 9%, SGST=9%, and IGST=9+9=18%
Since A is selling this to B in Maharashtra itself, it is an intra-state sale and so, CGST@9% and SGST@9% will apply.
Dealer B (Maharashtra) is selling to Trader C (Rajasthan). Hence, this is an interstate sale, with IGST@18%.
Trader C (Rajasthan) is selling to end user D also in Rajasthan. Once again it is an intra-state sale and hence, CGST@9% and SGST@9% will apply.
How is SGST, CGST and IGST collected?
*** Any IGST credit will first be applied to set off in this order:
- First set off against IGST liability.
- Then either set off with CGST or SGST liability, at your preference.
GST is a consumption-based tax the state where the goods were consumed(Rajasthan) will receive GST. By that logic, Maharashtra (where goods were sold) should not get any taxes. State Rajasthan and Central Government should have got (30,000*9%) = 2,700 each.
Thus, Maharashtra (exporting state) will have to transfer credit of SGST of Rs. 900 (used in payment of IGST) to the Centre.
In turn, Central Government will transfer to the state Rajasthan (importing state) Rs. 450 IGST.
The above example shows the need for 3 taxes: SGST, CGST, and IGST. All 3 together will serve the two purposes of GST :
- One Nation, One Tax – so all taxes on all purchases are available as credits.
- Dual tax system – both the Centre and states have their revenue.
GST is a completely new tax with new concepts like the place of supply and new tax structures. This creates confusion among taxpayers who may end up paying the wrong type of GST.
