The government launched the GST or the Goods and Services Tax in July 2017. The objective of this move was to make the process of taxpaying uncomplicated and simple! Before GST made its debut as the One Nation’s ‘One Tax,’ consumers had to shuffle between paying taxes for sales, services, entry, custom, etc. separately. But such is not the case anymore. Today, a single GST bill will replace all these varied and multiple taxes. Let’s learn more about GST and how it works!
What is GST?
GST is an indirect tax. This means that it has subsumed all the different taxes and converted those into one homogenous tax that is collected by the Centre and/or the State. In India, the goods and services sector is divided into five different levels, and each level demands a different tax value to be collected, i.e. , 0%, 5%, 12%, 18% and 28%. These taxes either go to the State or the Central government depending on the type and mode of transaction that has taken place. This is where it becomes crucial to understand SGST, CGST, and IGST.
Types of GST:
What is significant to know is that when one files to pay a GST tax, the tax is directly being collected by the Centre and/or the State. Then it is the responsibility of the Centre/State to reimburse the tax to all the parties that were involved in the different stages of production. The Centre/State is the supervisor distributing the taxes to the sub-parties justly. The ‘One Tax’ or the GST is divided into three sub-taxes:
- The State Goods and Services Tax (SGST)
- The Central Goods and Services Tax (CGST)
- The Integrated Goods and Services Tax (IGST)
The State Goods and Services Tax (SGST):
The SGST makes up for the tax that is collected by the State. The State government of every state imposes it and since GST’s introduction, it has subsumed all the prior-existing taxes such as sales tax, entertainment tax, and entry tax to name a few.
The Central Goods and Services Tax (CGST):
The CGST is the second of the two taxes (other than SGST) that is imposed on transactions and consumption of various goods and services. The Central government imposes it, and hence collected by the Centre. The CGST is inclusive of other taxes like the State tax, CST, SAD, etc.
The Integrated Goods and Services Tax (IGST):
As the name of the tax suggests, the IGST is an integrated type of tax that is levied on interstate transactions of goods and services. The IGST is only collected when the movement of the transaction is from one state to another. The IGST goes straight to the Centre from the dealer since the Centre handles the dynamics that play between two states involved in the dealership. From here on, it is distributed to the State/s since the IGST tax is shared between the Central and State Government.
How does it work?
How does one calculate GST and its types? How do we know what exactly SGST, CGST and IGST are? The best way to understand GST and its types is through a simple example. Refer to the chart below for clarity.
Let's take a hypothetical supply chain consisting of Person A, Person B, and Person C. Person A and B are both from the state of Maharashtra, whereas Person C is based in Gujarat. In this specific example, let’s consider the tax value to be 18%. Now, when Person A supplies their goods and services to Person B, Person A will have to give 9% CGST to the Centre and 9% SGST to the state of Maharashtra. When Person B forwards this supply to Person C, who is in the state of Gujarat, Person B will have to pay 18% IGST to the Centre. This clearly shows how CGST and SGST are levied on intrastate supplies of goods and services whereas IGST is only charged on interstate supply of goods and services.
GST was introduced as the new method of tax registration just so that filing several taxes could be avoided. With GST also came the added benefit of knowing the difference between intrastate and interstate supplies and identifying how much of your tax is benefitting the State and how much is collected by the Centre. Within GST, these categories, i.e. SGST, CGST, IGST, have excellently provided a level of transparency to the taxpayers. Along with that, GST also brings about transparency in the taxes imposed on goods and services.
The three types of taxes under GST compensate for the several taxes that used to exist before. GST and its three categories are meant to make India’s objective of ‘One Nation, One Tax’ a worldwide success and a prime example of the ease of taxpaying!
Q. Is there a major difference between the 3 sub-types of GST?
A. The significant and major difference between the 3 types of Goods and Services Tax, i.e. CGST, SGST, IGST is while the first two focus on taxes levied on Intrastate transactions, the third type of GST, i.e. IGST emphasises on taxes levied on Interstate transactions or exchange.
Q. Why are there 3 different types of GST?
A. This distinction in GST (SGST, CGST, IGST) is made so that identifying taxes levies for transactions within a state and between different states becomes easier. There is a distinction so that -
1. It helps differentiate between inter and intrastate transactions. The taxpayer can know how much tax accounts for the State government and how much tax will go to the Central government and
2. It helps ease the presence of any indirect taxes
Q. Who levies taxes in India?
A. India is a federal country where the power to levy taxes is given to both, the Centre and the State. Hence, in India, the Goods and Services Tax (GST) is levied by the Central government and the State government.