GST is a major tax reform in India’s indirect tax structure. It is a consumption-based tax levied on the supply of goods and services.
The essence of such a tax is to integrate a host of indirect taxes into a comprehensive single tax both at the Central and State level. Accordingly, GST has subsumed an array of indirect tax levies that resulted in a cascading effect in the previous indirect tax regime. Moreover, the implementation of such a tax was introduced as a set-off relief mechanism for the seamless flow of input credit across the chain.
But, to administer GST in a country like India, a model had to be designed involving both Centre and States in its implementation. This is because India is a federal country. Here, both Centre and States have powers to levy and collect taxes through their respective legislations.
Accordingly, a Dual GST Model has implemented that distributed powers to both Centre and States to levy the tax concurrently.
The following are the Main components of GST:
1) Central GST (CGST)
2) State GST (SGST)
3) Union Territory GST (UTGST)
4) Integrated GST (IGST)
Hence, to understand each of the above mentioned GST components, we first need to look at
- previous indirect tax structure in India,
- levy and collection of taxes under such a structure and
- the reasons for implementing GST.
I. Pre-GST Indirect Tax Structure
Since India is a federal country, the Constitution gives powers to both Centre and States to levy and collect taxes. Under the post-independence indirect tax regime, separate Central and State laws were formulated to govern the taxation of goods and services. Therefore, both Central and State governments levied and collected taxes on goods or services at different points of the supply chain. This meant that the same set of goods or services were taxed multiple times throughout the value chain.
For instance, the Central Government had powers to levy a tax on the manufacture of goods except for alcoholic liquor, narcotics, etc. Central Excise, Customs, and Service Tax were the major taxes for the Central Government. The States, on the other hand, had powers to levy tax on the sale of goods. Central Sales Tax (CST) was the major tax for State Governments along with Octroi, Entertainment Tax, etc.
It was levied on inter-state sales by the Central Government but the same was collected and retained by States. And as for the services, Centre alone had the power to levy Service Tax. Such a complicated tax structure resulted in a ‘tax on tax’ scenario with cascading effects.
Moreover, no set-off relief for input tax was given to the manufacturers or dealers under such a regime.
Introduction of VAT
But with the introduction of VAT in 2002-03, the indirect tax structure took a leap. In the case of VAT, a set-off was given for input tax from the overall tax burden to a manufacturer or a dealer. Such a tax credit benefit helped in removing ‘tax on tax’ challenge to a greater extent. Although VAT was successful, it had its own set of shortcomings both at the Central and State level.
A host of indirect taxes such as luxury tax, entertainment tax, etc. were still not subsumed under the VAT regime. This kept the benefits of comprehensive input tax credit out of reach for manufacturers or dealers. Furthermore, there were many other taxes levied by Central and State Governments where no set-off relief was available.
The following example demonstrates the scenario under previous indirect tax regime:
An Ltd having a manufacturing unit in Punjab had to deliver goods to B Ltd, a dealer in Maharashtra. Following are the indirect taxes levied by different authorities under the previous indirect tax system:
- Central Excise levied on manufacture by the Centre;
- VAT/CST levied by the Punjab Government on the sale of goods;
- Entry Tax collected by Maharashtra Government on the entry of goods into Maharashtra; and
- Octroi collected by BMC
The above scenario shows that the same set of goods manufactured by A Ltd have been charged for Central Excise, VAT, Central Sales Tax, Entry Tax and Octroi. This escalated the cost of goods. Also, the credit of Central Excise paid on the manufacture of goods could not be claimed either against VAT paid or Service Tax.
Therefore, in an attempt to further improve the indirect tax system, GST was thought of as the next logical step. This is indeed an improvement over the previous indirect tax regime as it aims to
- remove ‘tax on tax’ burden and
- bring in a comprehensive set-off relief mechanism.
II. Dual GST Model: CGST, SGST, IGST
Since India is a federal country, the Constitution gives powers to both Centre and States to levy and collect taxes. Such an administration is achieved through legislation laid down at Centre and State level respectively.
Hence, for implementing GST in India, a model had to be sketched that involved both Centre and States in its administration.
Accordingly, a dual GST model was implemented in India. Under such a model, both Centre and States have defined functions and responsibilities to implement GST. Moreover, the levy and collection of the tax are done concurrently under Central and State jurisdictions. Such a feature makes the GST model completely different from the previous indirect tax regime. As under the previous tax system, both Centre and States levied taxes independently.
Furthermore, the dual GST model incorporates two components
1) one levied by the Central Government
2) the other levied by the State Government. And, depending upon the place of supply and nature of supply, there are four tax levies under GST:
- Central GST (CGST)
- State GST (SGST)
- Integrated GST (IGST)
- Union Territory GST (UTGST)
Additionally, to empower Centre and States for administering GST, following legislations have been passed:
- Central GST Act, 2017
- State GST Act, 2017
- Integrated GST Act, 2017
- GST (Compensation to States) Act, 2017
- Union Territory GST Act, 2017
Now, such an indirect tax model stands in stark contrast to the previous tax system. Formerly, multiple taxes were levied on the same set of goods at different points in the supply chain. But with the advent of GST, an array of such indirect taxes have been subsumed. This gives way to a more efficient indirect tax system that aims to remove ‘tax on tax’ effect.
III. Taxes Subsumed Under GST
The main objective of GST is to consolidate multiple indirect taxes levied under the previous indirect tax structure. Thus, the essence of such a tax regime is to remove the cascading effect of multiple taxes. Therefore, GST is a well-designed VAT that aims to eliminate distortions existing in the previous indirect tax structure.
Accordingly, the following indirect taxes have been subsumed under GST:
- Countervailing Duty (CVD) of Customs
- Central Excise Duty
- Special Additional Duty of Customs
- Service Tax
- Duties of Excise Under Medicinal and Toilet Preparations Act
- Additional Duties of Excise
- Cesses and Surcharges
- Central Sales Tax
- State VAT
- Purchase Tax
- Luxury Tax
- Entry Tax
- Taxes on Lotteries, Betting, and Gambling
- Entertainment Tax
- Taxes on Advertisements
- State Cesses and Surcharges
IV. Applicability of CGST, SGST, IGST
As mentioned above, there are 4 tax levies under GST, namely, (i) CGST, (ii) SGST, (iii) IGST and (iv) UTGST. Now, the kind of tax to be paid under GST depends on the nature of supply.
There can be two types of supply – Intra-State and Inter-State.
1. Intra-State Supply
It refers to any supply where the location of the supplier and the place of supply are in the same State or Union Territory. In case of such a supply of goods and services, a seller has to collect both CGST and SGST. Thereafter, the CGST part gets deposited with the Central Government. And the SGST portion gets deposited with the respective State Government.
2. Inter-State Supply
It refers to any supply where the location of the supplier and the place of supply are in:
- Two different States
- 2 Different Union Territories
- A-State and a Union Territory
Additionally, any supply in a taxable territory, that is not an Intra-State supply is deemed to be an Inter-State supply. The following supplies are also treated as Inter-State supplies:
- Supplies to or by Special Economic Zones (SEZs)
- Goods or services imported to India
- Services or goods exported outside India
- Supply of goods or services to international tourists
Thus, on the Inter-State supply of goods or services, only IGST is levied and collected by the Central Government.
V. What Is Central Goods and Services Tax (CGST)?
It is an indirect tax levied and collected by the Central Government on the intra-state supplies. Such supplies do not include alcoholic liquor for human consumption. This tax levy is governed by the Central Goods and Services Act, 2017. And such a tax is levied on the transaction value of the goods or services supplied as per section 15 of the CGST Act. The transaction value is the price actually paid or payable for the said supply of goods or services.
Further, the liability to pay CGST shall arise at the time of supply of goods or services as specified in sections 12 and 13 of the CGST Act. The SGST portion will also be levied on the same intra-state supply of goods. But SGST will be governed by the SGST Act, 2017.
Say, for instance, Omkar Enterprises, a manufacturer in Punjab, supplies goods to Vipul Traders, a dealer in Punjab. Goods worth Rs 1,00,000 are supplied by Omkar Enterprises after adding GST @ 18%. Since it is an intra-state supply, GST gets deposited to both Central and State Governments. But the total GST amounting to Rs 18,000 gets deposited equally into separate heads. This means Rs 9,000 gets deposited into the CGST account. And another Rs 9,000 gets deposited into SGST head.
VI. What Is State Goods and Services Tax (SGST)?
It is an indirect tax levied and collected by the State Government on the intra-state supplies. Such supplies do not include alcoholic liquor for human consumption. This tax levy is governed by the State Goods and Services Act (SGST), 2017. And such a tax is levied on the transaction value of the goods or services supplied as per section 15 of the SGST Act. The transaction value is the price actually paid or payable for the said supply of goods or services.
Further, the liability to pay SGST shall arise at the time of supply of goods or services as specified in sections 12 and 13 of the SGST Act. The CGST portion will also be levied on the same intra-state supply of goods. But CGST will be governed by the CGST Act, 2017.
VII. What Is Integrated Goods and Services Tax (IGST)?
It is an indirect tax levied and collected by the Central Government on the inter-state supply of goods or services. Such supplies do not include alcoholic liquor for human consumption. This tax levy is governed by the Integrated Goods and Services Tax Act, 2017. And the same is apportioned between the Centre and State governments.
For instance, Prakash Ltd, a manufacturer in Punjab, supplies goods to Verma Traders, a dealer in Maharashtra. Goods worth Rs 1,00,000 are supplied by Prakash Ltd after adding GST @ 18%. Since it is an inter-state supply, GST gets deposited only to the Central Government. Therefore, total GST amounting Rs 18,000 gets deposited into CGST head only.
VIII. What Is Union Territory Goods and Services Tax (UTGST)?
It is an indirect tax levied and collected by the Union Territory on the intra-state supply of goods or services. Such supplies do not include alcoholic liquor for human consumption. This tax levy is governed by the Union Territory Goods and Services Act (UTGST), 2017. And such a tax is levied on the transaction value of the goods or services supplied as per section 15 of the CGST Act, 2017. The transaction value is the price actually paid or payable for the said supply of goods or services.
According to the UTGST Act, 2017, UTGST will be applicable to the following territories:
- Andaman and Nicobar Islands
- Dadra and Nagar Haveli
- Daman and Diu
- Other Territory
Delhi and Puducherry are the other two Union Territories. But this Act is not applicable there as they have their own State Legislature and Government. For both the territories, State GST is applicable.
IX. A claim of Input Tax Credit under CGST, SGST, IGST
In order to understand how Input Tax Credit is claimed under CGST, SGST and IGST, we need to consider the following example:
Say for instance, Raman a manufacturer in Punjab Supplies goods to Venkatesh, a wholesaler in Punjab for Rs 1 Lakh @18% GST. Venkatesh further supplies these goods to Dhiraj, a retailer in Maharashtra, for Rs 1.75 Lakhs @18% GST. Finally, Dhiraj sells the goods to Karthik, a consumer in Maharashtra for Rs 3 Lakhs, again @ 18% GST.
Since Raman is selling the goods to Venkatesh in Punjab itself, it is an intra-state supply. And for intra-state supplies, both CGST and SGST are levied. Therefore, GST @ 18% is split between CGST and SGST equally. Where CGST levied is 9% and SGST is also 9%.
Then, Venkatesh after adding some value sells the goods to Dhiraj in Maharashtra for Rs 1.75 Lakhs @ 18% GST. Since this is an inter-state supply, only IGST is levied and collected by the Central Government. Therefore, the entire 18% GST is levied as IGST and gets deposited with the Central Government.
But how are CGST, SGST and IGST collected?
|Point At Supply Chain||Value of Sales||Calculation of Tax||Punjab Govt.||Calculation of Tax||Maharashtra Govt.||Calculation of Tax||Central Govt.|
|Raman to Venkatesh||Rs 1,00,000||(18% * 1,00,000)/2||Rs 9,000||–||–||(18% * 1,00,000)/2||Rs 9,000|
|Venkatesh To Dhiraj||Rs 1,75,000||–||–||–||–||(IGST 18% * 1,75,000)|
(-) CGST Credit
(-) SGST Credit
|Dhiraj To Karthik||Rs 3,00,000||–||–||(18% * 3,00,000)/2|
(-) IGST Credit Balance
|(18% * 3,00,000)/2|
(-) IGST Credit
|Total GST Collected||–||–||Rs 9,000||–||Rs 22,500||–||Rs 22,500|
|Adjustment||(Rs 9,000)||Rs 4,500||Rs 4,500|
|Final Amount of GST||0||Rs 27,000||Rs 27,000|
At the point of the supply chain where Dhiraj supplies goods to Karthik, ITC Utilization rules for IGST apply. As per the rule, IGST liability is extinguished by first using ITC standing under IGST. Then ITC standing under CGST and SGST are used in the same sequence to set off balance output IGST liability.
Additionally, since GST is a consumption-based tax, the state where the goods were consumed will receive GST. Therefore, going by this rule, Punjab will not receive any taxes since goods were sold and not consumed there. Ideally, Maharashtra should receive the entire amount of GST.
Therefore, in the last section of the above table, an adjustment is made to adhere to the above rule. Accordingly, the Punjab government will have to transfer to the Centre Rs 9,000 GST amount received on account of sales made. In turn, the Central Government will transfer Rs 4,500 to Maharashtra Government’s account. Such an adjustment is done to adhere to the ‘consumption-based tax’ rule. Since the final consumption is done in Maharashtra, hence the Maharashtra government will receive the entire amount of GST.
X. Utilization of ITC between CGST, SGST, IGST
Input Tax Credit (ITC) is credited to a taxpayer’s electronic ledger. The taxpayer may use the ITC to pay his output tax liability. Section 49(5) of the CGST Act, 2017 describes the manner of utilization of ITC. The same is as under:
The CGST Output Tax liability can be set off by first utilizing ITC standing under CGST. Then, ITC standing under IGST is utilized to set off the balance CGST Liability. Similarly, SGST Output Tax liability can be set off by first utilizing ITC standing under SGST. Then, ITC standing under IGST is utilized to set off the balance SGST Liability. Finally, IGST Output Tax liability can be set off by first utilizing ITC standing under IGST. Then, ITC standing under CGST is utilized. Lastly, the ITC standing under SGST is used to set off the balance IGST Liability.
The example above demonstrates the utilization of ITC against CGST and SGST liability on output. Out of the total IGST ITC of Rs 31,500, Dhiraj first utilizes Rs 27,000 to meet his CGST liability. The balance Rs 4,500 IGST ITC is used by Dhiraj in meeting the SGST liability.