Different Types of GST in India: Meaning and Classification Explained

The Government of India passed the GST (Goods and Services Tax) in the parliament in March 2017, and it subsequently came into effect in July 2017. Since its introduction, it has been hailed as one of the most significant tax reforms, replacing the array of indirect taxes like VAT (Value Added Tax), service tax, and excise duty that existed earlier. One of the primary objectives of introducing GST was to simplify the taxation system in the country.

What is GST?

The Goods and Services Tax, better known by its acronym, GST, is essentially a value-added tax that is levied on the supply of goods and services for domestic consumption. In other words, GST is a single, all-encompassing indirect tax system in the country.

It is included in the final price of the product. As a consumer, when you buy any product in India, you need not pay the GST separately, as it is included in the final price of the product. The seller or the business entity then forwards the GST to the government.

The central government of India levies this tax. In case of any interstate transaction, this tax is distributed between the central and the state governments under CGST (Central Goods and Services Tax) and SGCT (State Goods and Services Tax).

Also Read: GST on MRP – Meaning, Rules & Calculation

Objectives of GST

The government of India introduced the GST with a few specific objectives. Some of them are:

• Eliminate the complicated and multiple tax system and simplify it
• Increase legal and tax compliance among the business entities and reduce the problems of tax evasion
• Reduce the prices of goods and services
• Give a boost to India’s revenue
• Increase the business efficiency and productivity

Different types of GST

In India, there are two main types of GST. The structure of GST is such that it is differentiated based on the type of transaction, and the tax amount is levied accordingly.

• Inter-state transactions

  Inter-state state transactions, as the term explains itself, are transactions that happen between two states. For example, let us assume a business entity based in Nagpur, Maharashtra, that deals in iron ore and supplies raw materials to a business owner based in Raipur, Jharkhand.

  
  

  In this case, the GST collected is divided between the states of Jharkhand (the state of consumption) and the central government.

  
  

• Intra-state transactions

  Amongst the different types of GST, the tax levied on intra-state transactions is quite prominent. It is levied on the transactions that take place within the state. For example, let us assume a business entity based in Nagpur, Maharashtra, that deals in iron ore and supplies raw materials to a business owner based in Aurangabad, Jharkhand.

In this case, the GST collected is divided between the central and Maharashtra governments.

Components of GST

There are four main components of GST. These are CGST, SGCT, IGST (Integrated Goods and Services and Tax) and UTGST (Union Territory Goods and Services Tax). Let us know more about these components.

CGST (Central Goods and Services Tax)

The CGST is collected by the central government of India. It works similarly to the SGST as it is collected on intrastate transactions. All the business organisations registered under the GST system are required to file CGST returns every year, and the details of all the vital information on the intra-state transaction must be listed in their filings.

Let us understand this better with an example.

When a business owner in Jaipur, Rajasthan, sells items worth Rs. 5,000 to a consumer based in Pune, Maharashtra, equal parts of CGST and SGST will be applied to the transaction.

If the applicable tax rate is 18%, it will be split equally, i.e., 9% CGST and 9% SGST. In this instance, the seller would charge Rs. 5,900, whereas Rs. 5,000 is the taxable value, Rs. 900 is the total GST, and Rs. 450 will be equally distributed between CGST and SGST.

SGST (State Goods and Services Tax)

Just like CGST, the Stage Goods and Services Tax is collected by the state government through all intrastate transactions. However, the state imposes only SGST on commodities and services bought and sold within the state.

The funds collected through SGST are claimed and governed only by that state. After the introduction of the GST system, many state-level indirect taxes are subsumed into the SGST, simplifying the tax structure.

However, you must know that SGST is not a single and unified tax, and the state has the power to retain all the additional taxes.

Let us understand the workings of SGST using the same example above.

GST is split equally between the central and the state governments in intrastate transactions. The seller or the business owner would charge a total of Rs. 5,900, and the state government would charge GST of Rs. 450 in the form of SGST and the same amount to the central government.

IGST (Integrated Goods and Services Tax)

It is a GST tax levied on imports, exports and sales of goods and services between two states. The central government collects this tax in the form of IGST.

UTGST (Union Territory Goods and Services Tax)

This type of tax is levied on the supply of goods and services in the Union Territories of India. The Union Territory Government is responsible for collecting the UTGST.

Also Read: GST on Labour Charges

Conclusion

The introduction of GST has simplified the taxation system and process in India. As a business owner and consumer in India, you must be aware of the applicable GST rates on different types of goods and services so that you can be tax compliant and file your tax returns correctly.