The goods and services tax law has been billed as “one nation, one tax.” Because of the way India’s government is set up, GST is not actually a single tax and, in some cases, it’s multiple taxes that add up to a single overall rate. As a business owner, it’s important to know how GST is administered and where your tax money is going for each month and each sale.
Dual GST and the Federation
India is a federal country, which means there’s a division of power between the federal government and the state governments. Before GST, this meant that each state had its own tax system in addition to the central government’s tax system. As a result, business owners had to deal with a variety of complicated state and federal taxes for each sale. Since the taxes were often levied over each other, you ended up paying tax on tax, a problem called cascading taxes.
The GST regime replaces those confusing taxes with a single, nationwide tax rate. This is intended to unify India’s tax system, make it easier to do business, and reduce prices for consumers. Because of India’s federal structure, dual GST model had been adopted. This means GST is administered by the central government and the states.
What Is a Destination-Based Tax?
GST is a destination-based tax, meaning sales are taxed in the place where the buyer resides rather than where goods are produced. If you live in Delhi but are selling to a customer in Mumbai, the state’s portion of GST for that sale goes to Maharashtra, which is the place of supply.
GST for Sales Within the Same State
GST applies differently depending on where your customers are located. When you’re selling to people or businesses within the same state, GST is split into two parts: state GST and central GST. The SGST goes directly to your state’s government while CGST goes to the central government. When you file your monthly returns, you need to enter amounts for both SGST and CGST.
SGST and CGST are each charged at half of the total GST rate. Imagine you sell mobile phones, which have a GST rate of 12% as of May 2018. If you sell one phone for ₹6,000, you’d need to charge a 6% SGST of ₹360 and a 6% CGST of ₹360, for a total GST of ₹720. When you pay your taxes for the month, you’d send ₹360 each to the state and central government.
GST for Sales Between States
When it comes to sales between states, GST is administered on a federal level. This means that instead of paying separate taxes to the state and central government, you pay one integrated GST. Basically, IGST is equal to SGST and CGST.
Your taxes are slightly easier for interstate sales. If you’re selling a ₹6,000 mobile phone to a customer in another state, you’d simply charge a 12% IGST. That is ₹720. When it comes to filing returns, you only need to report and pay IGST. This amount goes to the central government, which keeps half and sends half to the state in which your buyer lives.
IGST is a big change from India’s previous regime in which the seller’s state kept the central sales tax. What’s more, each state had its own system of taxes, which made interstate sales difficult and expensive for small businesses. IGST is designed to fix these problems and make the process easier.
The GST law sees both exports and imports as interstate sales. Taxes are administered by the central government, and you only need to worry about IGST.
Flow of Input Tax Credit
Another big change under GST is the input tax credit (ITC) which was created to remove the issue of cascading taxes. With GST, you only need to pay tax when you add value to the supply chain. This credit allows you to deduct the SGST, CGST, or IGST that you paid from your company’s tax liability so you’re only paying tax on the added value.
For intrastate sales, the ITC is administered separately by your state government and the central government. So if you pay ₹100 in SGST on purchases, you can claim that ₹100 as ITC to reduce your SGST bill. You cannot use it to reduce your CGST bill; the same process applies for CGST. This ensures that credits flow smoothly through the supply chain at both the state and federal levels. If you have credit left over for either CGST or SGST, you can then use it to reduce your IGST bill.
Interstate sales are different. When you have a credit from IGST, it applies to your IGST bill first. Then, the government uses it to reduce your SGST and CGST liability.
What Happens When There’s a Dispute Between States or the Central Government?
Under GST, there’s a possibility for disputes between states or between states and the central government. When that happens, the responsibility shifts to the GST Council. This advisory board sets up ways to resolve arguments relating to GST.
Overall, the dual GST regime streamlines the way state and central governments administer taxes. As a business owner, you benefit from rates that are easier to understand and a simple filing process.