How GST Works in India?

GST i.e. Goods and Service Tax is a consumption based tax which is levied on sale, manufacture and consumption of goods and services. Following Central and State taxes are subsumed into GST –

Central Taxes State Taxes
Central excise duty VAT / Sales Tax
Additional excise duty Central Sales Tax
Service Tax Purchase Tax
Excise duty levied under the Medical preparations (Excise Duties) Act, 1955 Luxury Tax
Additional Customs Duty (CVD) Entertainment Tax (other than the tax levied by local bodies)
Special Additional Duty of Customs (SAD) Octroi tax and entry tax
Surcharge and cesses on central tax Taxes on lottery, betting and gambling
  Surcharge and cesses on state tax

Subsuming various indirect taxes into GST has resulted in the removal of the cascading effect of taxes.

Tax slabs under GST is divided into 4 rates i.e. 5%, 12%, 18% and 28%. Essential items are taxed at lower rate i.e. generally 5%, however, luxury and de-merit goods are taxed at the higher rates under GST.

The dual model of GST –

India has adopted a dual model of GST due to its unique federal nature. Under the dual model, tax is levied simultaneously by the Centre and the State on a common base. Under the below paras, we will try and understand how GST works in India –

Understanding the concept of SGST, CGST, IGST and UTGST –

SGST –

  • Full form of SGST is State Goods and Service Tax.
  • SGST is levied on every intra-state transaction (i.e. transaction within the State).

CGST –

  • Full form of CGST is Central Goods and Service Tax.
  • CGST is levied on every intra-state transaction (i.e. transaction within the State).

IGST –

  • Full form of IGST is Integrated Goods and Service Tax.
  • IGST is levied on every inter-state transaction (i.e. transaction between two States).
  • IGST is also levied on imports.

UTGST –

  • Full form of UTGST is Union Territory Goods and Service Tax.
  • UTGST would be levied on the supply of goods and services which take place in any of the union territories of India.

Common details are highlighted here under –

  • GST is a dual levy and both Centre and State tax is levied.
  • In case of intra-state supply i.e. within the state supply both CGST and SGST / UTGST would be levied. In this case, the tax amount would be shared equally between the Centre and the State. 
  • In case of inter-state supply i.e. supply between states IGST would be levied.
  • The tax rates of CGST and SGST / UTGST would be equal.
  • IGST would be levied at a rate equal to the sum total of CGST and SGST / UTGST.

Illustration –

The below illustration practically explains, how GST works in India –

Suppose Mr. X sales the goods worth INR 10,000 on which GST is levied @5%. In case Mr. X has done intra-state supply, Mr. X would be liable to pay 2.5% CGST (i.e. INR 250) and 2.5% SGST (i.e. INR 250). Total invoice amount in case of intra-state supply would be INR 10,500 (10,000 + 250 CGST + 250 SGST).

Further, if Mr. X undertakes inter-state supply, then, Mr. X is liable to pay 5% IGST (i.e. INR 500). Total invoice amount in this case also would be INR 10,500 (10,000 + 500 IGST).

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