The Goods and Services Tax (GST) is a destination-based indirect tax, which means that an end-user is required to pay tax on goods and services they purchase or consume. The state that consumes the goods or services collects such tax and not the manufacturer state.
To understand the applicability of GST, it is necessary to know if the transaction is an intrastate (within the same state) or interstate (between different states) supply.
If the supply of goods happens within the same state, CGST and SGST will be applied by the supplier. Similarly, if the supply happens between two different states, the supplier charges IGST.
Let’s understand the concept of CGST, SGST, and IGST in detail.
What is Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST)?
CGST is a tax charged on intrastate supply of goods and services by the central government and is governed by the CGST Act, 2017. And, SGST is a tax component applied to the same intrastate supplies by the state government.
This means that both the central government and the state governments agree to combine their tax collection and share the revenue in equal proportions.
Still confused! Let’s understand the concepts with an example.
Mr Raj is a goods dealer in Karnataka and has sold goods worth Rs 20,000 to Mr Anand who is also a dealer in Karnataka. The GST rate of such goods is 18% comprising CGST of 9% and SGST of 9%.
So, Mr Raj will collect Rs 3,600, of which Rs 1,800 goes to the central government, and another Rs 1,800 goes to the Karnataka state government.
[Suggested reading: A Detailed Guide on the Goods & Services Tax]
What is Integrated Goods and Services Tax (IGST)?
IGST is a tax charged on all the interstate supplies of goods and services and is governed by the IGST Act, 2017. The IGST collected is shared equally between the central government and state government.
Let’s take another example to understand how it works in an IGST case:
Mr Kunal, a dealer from West Bengal, sells goods worth Rs 50,000 to Ms Simran in Punjab. The GST rate on such goods is 5% comprising 5% IGST since it is an interstate supply. The centre collects IGST of Rs 2,500.
How is input tax credits adjusted?
ITC means one can reduce the credit of taxes already paid on purchases from his GST liability arising from the sales of goods and services.
Here are the rules to claim ITC under GST:
- To pay IGST – First IGST credit will be used followed by CGST or SGST as per the taxpayer’s preference
- For paying CGST – Starting from CGST credit and then IGST credit will be used
- To pay SGST – First SGST credit and the IGST credit will be used
Suppose, manufacturer A from Maharashtra sold goods worth Rs 10,000 to dealer B in Maharashtra only. Then, the dealer B resells the goods to dealer C in Gujarat for Rs 15,000. Finally, dealer C sells the goods to an end-user in Gujarat for Rs 30,000. Let’s assume that the goods sold at 9% CGST, 9% SGST (for intrastate supplies) and 18% IGST (for interstate supplies).
Here’s how the collection of tax happens after input tax credit adjustment:
|Step 1: For goods of Rs 10,000 sold from A to B||10,000* SGST @ 9%= Rs 900||10,000* CGST @ 9%= Rs 900|
|Step 2: For goods of Rs 15,000 sold by B to C||15,000*18%= Rs 2,700
(-) CGST credit = Rs 9,00
(-) SGST credit = Rs 9,00
Net tax payable = Rs 900
|Step 3: For goods of Rs 30,000 sold by C to D||30,000* SGST @ 9%= Rs 2,700
(-) IGST credit = NIL
Net payable = Rs 2,700
|30,000 CGST @ 9%= Rs 2,700
(-) IGST credit = Rs 2,700
Net payable = NIL
Going to the centre
|Final tax payable||NIL||Rs 2,700||Rs 2,700|
Since GST is a destination-based tax, the state consuming the goods (in this case Gujarat) will receive the GST amount. The state of Gujarat and the central government will receive Rs 2,700 each.
So, this way the central government and state governments collects CGST, SGST, and IGST.
To pass on the credit of the taxes paid, you will have to issue GST-compliant invoices. The invoice should include the necessary details such as name, address, GSTIN of the supplier and the recipient of goods, HSN codes of the goods supplied and so on. You can refer to our GST invoice guide and create GST-compliant invoices using Razorpay Invoices.
If you are interested in more in-depth details about GST, then stay updated with Razorpay Learn.