In contrast to the pre-GST era, which encompassed various taxes such as Central Excise, Service Tax, State VAT, and more, the GST law consolidates these into a singular tax structure featuring three components – CGST, SGST, and IGST.
For transactions transpiring within a state, termed intra-state transactions, both CGST and SGST are levied. Conversely, in the case of transactions occurring between states, denoted as inter-state transactions, only IGST is imposed.
Accurately using the Goods and Services Tax Identification Number (GSTIN) becomes paramount in determining the relevant tax components. Therefore, validating the GST number using the GST search tool before incorporating it into the sales invoice is advisable.
What is Integrated Goods & Services Tax
The IGST, or Integrated Goods & Services Tax, operates under the IGST Act and applies to imports, exports, and the interstate supply of goods and services within the framework of the GST regime. An interstate supply occurs when the supplier’s location and the supply place are in different states. Moreover, transactions related to the export, import, or provision of goods or services to or by a Special Economic Zone (SEZ) unit are also considered interstate.
In such interstate transactions, it is the seller’s responsibility to collect IGST from the buyer. The collection and functioning of the IGST mechanism is overseen by the Central Government, which subsequently allocates the revenue among the respective states after its collection.
What is SGST?
The State Goods and Services Tax is regulated by the SGST Act, which is imposed on intrastate transactions by individual states within the GST framework. Intrastate supply of goods/services falls under the jurisdiction of both State GST (SGST) and Central GST (CGST), resulting in the imposition of both where applicable. SGST, specifically, is levied by the state government solely on goods or services exchanged within the state. Furthermore, the respective State Government exclusively claims the revenue generated from inter-state and intra-state GST proceeds.
What is CGST?
The Central Goods and Services Tax (CGST) is a tax regulated by the CGST Act, imposed by the Central Government on the supply of goods and services within a single state. As previously mentioned, intrastate transactions of goods/services are subject to both State (SGST) and Central (CGST) levies, resulting in the application of both as deemed appropriate. The Central and State Governments collaborate to establish these levies, with an equal proportion of revenue sharing between the two entities. The CGST Act updated in 2023 to incorporate provisions for the imposition and collection of CGST on intra-state transactions involving goods and services.
Why is GST split into SGST, CGST, and IGST?
The Indian Government functions at two levels – the Central and the State Governments, each with distinct duties and responsibilities defined by the Constitution of India. Both entities collect tax revenue. Before the advent of GST, a multitude of indirect taxes were levied by both the State and Central Governments, resulting in inefficiencies within the taxation system. Aligning with the ‘One Nation One Tax initiative, all indirect taxes were consolidated under the umbrella of GST. This strategic move aimed to eradicate inefficiencies and complexities in the taxation system.
In addition to fostering a unified tax structure, the GST was further segmented into IGST, SGST, and CGST to facilitate a seamless and transparent distribution of taxes. This restructuring not only streamlined the country’s tax framework but also ensured that the State Government received its due share of funds without any impediments.
CGST vs SGSTvs IGST
Applicability of the Tax
- CGST: Applicable to the supply of goods and services within a single state (intra-state).
- SGST: Also applicable to the supply of goods and services within a single state (intra-state).
- IGST: Applicable to the supply of goods and services across different states (inter-state).
Tax Levying and Collecting Authority
- CGST: Levied and collected by the central government.
- SGST: Levied and collected by the state government.
- IGST: Levied and collected by the central government, with revenue equitably distributed between the central and state governments.
Input Tax Adjustment Permissible
- CGST: Input tax credit can be utilized against CGST or IGST, but not SGST.
- SGST: Input tax credit can be employed against SGST or IGST, but not CGST.
- IGST: Input tax credit can be used against CGST or SGST after the payment of IGST.
Under the Goods and Services Tax (GST) system, the purchaser remits Integrated Goods and Services Tax (IGST) to the supplier for inter-state transactions involving the exchange of goods and services. The collected IGST is then forwarded to the Central government and subsequently divided into Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST). For intra-state transactions, the supplier separately submits the collected tax directly to both the Central Government and the relevant State Government.
The transparency embedded in the allocation of taxes under CGST, SGST, and IGST adds a positive dimension to the process. It ensures a clear understanding of where each taxed amount is directed, providing accountability for every expenditure.
Moreover, the GST framework is primarily technology-oriented, requiring all activities such as registration, refund applications, and return filings to be conducted online through the GST portal. This technological emphasis contributes to enhanced convenience and expeditious processing of various GST-related tasks.
Frequently Asked Questions(FAQs)
How is the revenue from IGST distributed between the central and state governments?
IGST is levied and collected by the central government, and the revenue is equally distributed between the central and state governments.
Can the input tax credit of CGST be used against SGST?
No, it can be used against CGST or IGST, but not SGST.
In the case of SGST, can the input tax credit be adjusted against CGST?
No, it can be used against SGST or IGST, but not CGST.
After paying IGST, can the input tax credit be utilized against CGST or SGST?
Yes, it can be used against CGST or SGST after paying IGST.
Why was the GST system split into CGST, SGST, and IGST?
The division ensures a streamlined taxation system, with CGST and SGST catering to intra-state transactions and IGST facilitating inter-state transactions, aiming for equitable revenue distribution between the central and state governments.