Types of GST in India- CGST, SGST, and IGST Explained

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India is a vast country with over a billion people and more than 20 official languages. And although it has 29 states and seven Union Territories. Earlier, each state had its taxation system, which was quite complex.

The Indian government introduced the Goods and Services Tax (GST) in July 2017 to replace all the existing indirect taxes levied by the central and state governments. It was possibly an essential tax reform introduced in India since independence. It aimed to simplify the country’s complicated tax structure.

Table of Contents

What is Tax?

Taxation is the process of collecting money from people. The government spends this money on providing services, building infrastructure, and maintaining law & order in society.

Every country has a tax collection system. The amount collected through taxes depends on how many services the government provides its citizens.

The function of taxation is to raise revenue for governing or altering prices to affect demand. Throughout history, states and their functional equivalents have used the money provided by taxations functions, including financing many activities.

The levying taxes aims at achieving one goal: getting more funds to inject into programs, projects, or services that benefit people’s lives. And over time, you must have observed that there are many ways this simple act has been incredibly versatile.

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Importance of Taxation

There are many reasons why taxation is required. However, the primary reason is that it allows the government to provide essential services to its citizens. These services include education, healthcare, infrastructure development, and defence.

A taxation process is also a vital tool for regulating economic activity. By taxing certain products or activities, the government can discourage people from engaging in them. This activity helps to maintain financial stability and control inflation.

Finally, taxation is a crucial way for the government to raise revenue. The use of this money will be to finance a wide range of government programs and projects that benefit society as a whole.

Types of Taxes?

There are two types of taxes:

Direct taxes are paid by individuals or businesses directly to the government. The most common type of direct tax is income tax, which is levied on the profits made by companies and the income earned by individuals.
Indirect taxes are those that are paid by individuals or businesses indirectly. The most common type of indirect tax is sales tax, which is levied on the purchase of goods and services.

Difference Between Direct and Indirect Taxes

The government needs taxes to fund its operations, and it’s no surprise that they’re essential. Tax includes a significant part of revenue for the country as both direct and indirect types come into play, and both are important for the growth of the economy:

What is GST?

GST is a type of tax imposed on the supply and consumption and production or sale in some cases.

The goal behind this indirect revenue-generating system was to make things more simple by combining various other taxes like VAT (value-added taxes), excise duty, etc., into just one single rate for all these transactions under their new name, “Goods & Services Tax”.

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Types of GST in India

GST has been subdivided into four critical categories based on the new tax system.

Let us understand each of the GST categories in detail-

#1. Integrated Goods and Services Tax (IGST)

This tax is levied on the supply of all goods and services, except for alcoholic liquor for human consumption. The IGST is collected by the central government and is apportioned between the central and state governments according to section 11 of the CGST Act.

The IGST applies to:

The supply of goods and services in the course of inter-state trade or commerce
And in the distribution of goods and services through the use of electronic commerce.
The import of goods into India

The IGST is a destination-based tax, which means that it is levied on the consumption of goods and services. The tax is collected at the point of sale.

The IGST system is designed to prevent double taxation. Let us understand IGST with a simple example:

A trader in Orissa sold goods to a customer in Rajasthan worth Rs. 10,000/- Now, IGST shall be applicable as this business transaction is an interstate transaction. If the rate of GST charged on the goods is 18%, the trader will charge Rs. 10,000 + Rs. 1800 (GST). The GST amount collected will be received by the central government.

#2. State Goods and Services Tax (SGST)

The State Goods and Services Tax, also known as SGST, is a tax under GST and is applicable on intrastate transactions, i.e. transactions occurring within the state.

The SGST is levied on the taxable value of goods and services at the rate specified by the GST Council headed by the Union Finance Minister. This tax can be collected only when a registered dealer supplies goods or services to another registered dealer in the same state as the supplier.

The state government receives revenue under the SGST head, For example:

If a trader in Orissa sold goods to a customer in Orissa worth Rs. 10,000/- then GST applicable on the transaction will be bifurcated between SGST and CGST.

If the GST is charged @ 18%, it will be equally split as 9% SGST and 9% CGST. The whole amount charged by the trader, in this case, will be Rs. 11800/-, And the revenue earned from GST under SGST will be Rs. 900/- which will go to Orissa State governments pocket in the name of SGST.

#3. Central Goods and Services Tax (CGST)

The Central Goods and Services Tax or CGST applies to intrastate transactions, i.e. transactions occurring within the state. The CGST is levied on the taxable value of goods and services at the rate specified by the GST Council. This tax can be collected only when a registered dealer supplies goods or services to another registered dealer who resides in the same state.

The central government receives revenue under the CGST head, For example:

If a trader in Orissa sold goods to a customer in Orissa worth Rs. 10,000/- then GST applicable on the transaction will be bifurcated between CGST and SGST.

If the GST is charged @ 18%, it will be equally split as 9% CGST and 9% SGST, The whole amount charged by the trader, in this case, will be Rs. 11800/-, And the revenue earned from GST under CGST will be Rs. 900/- which will go to the Central government’s region in the name of CGST.

#4. Union Territory Goods and Services Tax (UTGST)

The Union Territory Goods and Services Tax or UTGST is a tax under GST. It applies to the supply of goods and services in the territories. UTGST is the equivalent of SGST.

UTGST applies to the supply of goods and services in the Andaman & Nicobar Islands, Nagar Haveli, Lakshadweep, and other union territories specified by the Indian government. The respected union territory governments earn revenue generated through UTGST. And UTGST is levied along with CGST.

Conclusion

So, the above article makes it apparent that tax is a compulsory contribution to state revenue or public expenditure. Also, it has a significant role to play in the economy. Taxes can be categorized into two types – direct and indirect. Direct taxes are levied on the income of individuals. In contrast, indirect taxes are imposed on goods and services consumed by people. GST (Goods and Services Tax) is an example of an indirect tax. Its purpose is to create a common market with uniform rates for all products across states. This common market can remove interstate trade barriers such as administrative costs, time delays due to border checks, double taxation, etc. The Indian government has been gradually implementing this new taxation system since 1 July 2017 with five different slabs ranging from 5% to 28%.

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