GST is an Indirect Tax imposed on the supply of goods and services which has combined all other taxes into one. With this one indirect tax that the entire country has, GST is a multi-staged, comprehensive and destination-based tax that is levied at every stage of value addition in the supply chain.

Types of GST

There are three main types of GST in India, including –

• CGST – The Central Goods and Service Tax is levied when an intra-state supply of goods or services takes place. In other words, if the location of the supplier and the place of the supply of a product or service takes place in the same state, then a seller would collect equal percentages of both CGST and SGST from the buyer. While the former is collected by the Central Government, the latter is deposited with the State Government.

• SGST – The State Goods and Services Tax is levied and collected by the State Government in an intra-state supply of goods or services, along with an equal portion of revenue being collected by the Central Government as well. This provides both Governments with the power of collecting tax revenues.

• IGST – In case of inter-state supply of goods or services, that is when the location of the supplier and the place of the supply are in two different states, IGST is charged on the product or service being sold. The IGST tax is collected from the consumer at the point of buying. In such a case, the proportion of tax revenue distribution between the Central and the State Governments would be as per their agreement. However, the total tax charged from the consumer in an intra-state transaction would be equivalent to that collected in inter-state supply of goods and services.

How GST Works?

To understand GST better, let’s first elaborate on its three main aspects.

• Multi-staged. Throughout the supply chain right from the collection of raw materials to its finishing and selling it to the end-user, GST taxes are imposed at every stage wherever a new value is being added.

• Comprehensive. All other indirect taxes that were levied on goods and services both by the Central and the State Governments have been replaced by a single tax called GST, thus promoting ‘One Nation, One Tax’.

• Destination-based. The tax will be charged on the end-user of the product or service. For example, if a product is manufactured in Maharashtra, but is sold to a consumer in Kolkata, then the whole tax revenue goes to the State Government of Kolkata, and not to Maharashtra.

Although GST reform is a simpler form of taxation system as compared to all the previous indirect taxes, yet it often becomes difficult to understand. Such a complex thing as an entire taxation structure can be best understood with the help of pictorial representations and illustrations.

As seen from the GST latest news, critics have raised requests for adopting the Singapore model of indirect tax in India. While in our nation, there are multiple taxation slabs under GST, in Singapore there is only one. A total of 7% is being charged on all taxable goods and services. If the policy-makers of our country consider an adaptation of the Singapore taxation policy, our motherland would behold the greatest of all reforms.

An Illustration to View the Entire Picture

Now that we are aware of the basic features that GST has to offer, let’s simplify our understanding with the help of a simple illustration.

Since GST is charged on each level or stage of value-addition of the product or service. We will move on to see what happens in this tax structure. Let’s take the instance of a pencil manufacturing company. It would at first buy raw materials like graphite, clay, wax-based colours, wood or other synthetic material and other ingredients. The value of the product increases the moment graphite and clay are added and processed to make the ‘lead’.

The product is then passed on to the packaging house, typically the warehouse agent, where it is packed in large quantities along with a bunch of others and puts labels on it, such as the brand name. This is another stage of value addition.

From here, the product gets passed down to the retailer who packages the pencils to smaller measurable quantities and starts marketing them, thereby increasing their value by another step.

GST is imposed on each of these stages where value is being added to the product or service. The final tax revenue is collected from the end-user or the consumer buying the pencil.

Illustration to Show the Working of CGST, SGST and IGST

In our next illustration, we will be trying to understand how the different types of GST work.

Let’s suppose that Arjun is a dealer of printers based in Bangalore. He sells a printer worth 10,000 to a customer within the state. Then the bill would look like this –

Therefore, with a CGST and SGST taxation of 9% each, the total tax becomes 18%, with the total amount payable being Rs. 11,800.

If, however, the printer is sold by Arjun at a location other than the place of the supplier (that’s in Bangalore), say Chennai, then the supply is inter-state. In such a case, an IGST of 18% would be charged from the buyer at the point of sale. This would end up in a net payable amount of Rs. 11,800, the same total percentage as collected in an intra-state supply. This tax revenue would be distributed among the Central and the State Governments in proportional amounts as agreed upon by them and as updated by the Government in the GST policies from time to time.

If you are confused about whether to charge CGST/SGST or IGST for a particular product or service, keep following the GST latest notifications or contact at the GST toll-free number 1800 1200 232.