Why there was a need for 3 types of GST – CGST, SGST & IGST

Since GST subsumed both indirect taxes of central government (excise duty, service tax, custom duty, etc. ) and state governments (VAT, Luxury tax, etc.),  both the government now depend on GST for their indirect tax revenue. Therefore the GST rate is composed of two rates, one of CGST and one of SGST. Therefore, while making an intra-state sale (i.e., sale within the same state), CGST collected will go to the central government and SGST collected will go the respective state government in which sale is made.

UTGST is more or less similar to SGST. In a state, SGST will be applicable while in an union territory UTGST will be applicable.

For example: – A dealer in Maharashtra sells goods to the consumer worth Rs. 10,000. The GST rate is 18% comprising of CGST rate of 9% and SGST rate of 9%. In such a case the dealer will collect Rs. 1800, Rs. 900 will go to the central government and Rs. 900 will go to the Maharashtra government.

GST is also a consumption based tax i.e.; the tax should be received by the state in which the goods or service are consumed, not by the state in which such goods are manufactured.

IGST is designed to ensure seamless flow of input tax credit from one state to another. It is designed so that a state doesn’t have to deal with every other state to settle the tax amounts. A state has to deal with only Central government.

How GST credits will be adjusted between states and Centre

The exporting State will transfer to the Centre the credit of SGST used in payment of IGST. This way the exporting state will not get any revenue from tax.

The Centre will transfer to the importing State the credit of IGST used in payment of SGST. This way the importer’s state will get the full amount of SGST.

This way any tax earned by exporting state in such goods is transferred to the importing state. And the net result is that the Central government and importing state both get their respective shares.

For example:-

A manufacturer (A) sells goods to a trader (B) in same state i.e. Rajasthan for Rs.100. Now, the goods are sold by B to a trader (C) in Gujarat for Rs.175 and finally sold by C to the consumer (D). Assuming CGST @ 9% and SGST @ 9%.

Amount Received as Tax by
Sale Price Rajasthan Gujarat Central  Invoice Amount
 A to B Rs. 100 100*9% = Rs. 9 0 100*9%= Rs. 9  100+18= Rs. 118
 B to C Rs. 175 0 0 175*18%= Rs. 31.5
Less: CGST Credit of Rs. 9
Less: SGST Credit of Rs. 9
Payment of Rs. 13.5
 175+31.5= Rs. 206.5
 C to D Rs. 300 0 300*9%= Rs. 27
Less: IGST Credit of Rs. 4.5
Payment of Rs. 22.5
300*9%= Rs. 27
Less: IGST Credit of Rs.  27*
Payment of Rs. 0
 300+54= Rs. 354
 Total Receipt Rs. 9 Rs. 22.5 Rs. 22.5

* Any credit standing for IGST should be first utilized for payment of CGST and then for payment of SGST.

This will complete the procedure on behalf of the tax payers. But as you can see from the above example the Rajasthan Government gets Rs. 9 as tax when it was not eligible to receive it. This is because the goods are finally consumed in Gujarat and GST is a consumption based tax. Also Gujarat and Central government should each receive Rs. 27 (300*9%) as tax  while they have received only Rs. 22.5 each. Therefore following transaction takes place as defined above.

The exporting State (Rajasthan) will transfer to the Centre the credit of SGST used in payment of IGST which is Rs. 9. (Transaction B to C).

The Centre will transfer to the importing State (Gujarat) the credit of IGST used in payment of SGST which is Rs. 4.5 (Transaction C to D).

This way Rajasthan’s Government revenue is Nil, Gujarat’s revenue is Rs. 27 and Centre’s revenue is also Rs. 27.

Rohit Pithisaria

Rohit Pithisaria

I am a Chartered Accountant based in Jaipur (Rajasthan). Started TaxAdda in 2011 as a blog and now providing various services related to GST and Income Tax to the client all over India.

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