How GST will operate in India? Your quick guide to our new tax reform

GST is one of the most revolutionary tax systems to be rolled-out in the country. However, as with all tax things, there exists some confusion like division of taxation powers between the Central and State government. But, producers and manufacturers believe it would make the entire taxation system more fair, transparent and efficient. This blog throws light on how GST will operate in India.

Indian government is set to implement dual GST tax system, which would be administered at both Central and the State Government levels. Dual GST will comprise of SGST (collected by the State government), CGST (collected by the Central government) and IGST (collected by the central government on inter-State supply of goods and services).

Under the new levy, a transaction of sale within the state shall have the following taxation structure:

1. SGST, collected by the State government
2. CGST collected by the Central government
3. Sale from one state to another shall have only one type of tax i.e., IGST collected to the Central government.

Now let us look at how GST will operate in India with a simple example.

1: Sale and resale within a state

Suppose goods are being transported from Mumbai to Nagpur. As the sale took place in the same state, both SGST and CGST will be levied on the goods. Thus, the tax amount will go to both Central as well as State government. Now if the goods are resold from Nagpur to Nasik, the sale is again within the state thus, CGST and SGST will be applicable on the goods. Talking about resale, input credit of SGST and CGST is claimed, whereas the remaining taxes go to both the governments. For a graphical illustration, refer the below diagram.

Since the Input Tax Credit comes from the same government, which is also entitled to receive the output tax, there is no question of credit transfer within both the governments.

2: Sale within the state and resale in another state

Suppose goods are moving from Mumbai to Pune. As the sale is within the state, SGST and CGST will be levied on the goods. Therefore, tax will go to both State as well as Central government. Now if the goods are resold from Pune to Amritsar (Maharashtra to Punjab), IGST comes into play and will be levied on the goods. In this case, only Central government will collect the tax.

Here, both the input taxes are taken as credit against IGST. Here, SGST did not go to the Central government, but the credit was claimed thus, in such cases, State government would have to compensate the Central government by transferring the credit to them.

3: Sale outside the state and resale in the same state

Suppose goods are moving from Mumbai to Bhopal. Now is an interstate sale, IGST will be levied on the goods and therefore, tax will be collected by Central government only. Later, if the goods are resold from Bhopal to Gwalior. Now this it is a sale within the state SGST and CGST will be levied. Hence, both State as well as Central government will collect tax.

In this particular example, 50% of the IGST i.e. 100 is taken as credit against SGST and CGST, but IGST never went to the State government and yet credit was being claimed against SGST. As this a loss to the State Government, the Central government would have to compensate the State government by forwarding credit to them.

The GST is all set to knock the doors of India the coming financial year. Nonetheless, there is much confusion around how GST will actually work and how much tax percentages would be levied on goods and services.

Thus, it is advisable to buckle up for our all-new tax reform, as it is expected to throw many surprises. According to experts, India is all set to join the global bandwagon standards in managerial practices, corporate laws and taxation in years to come.

Disclaimer: All the views, opinions and information expressed in this blog are those of the author and its web source and in no way reflects the principles, views or objectives of Sage Software Solutions (P) Ltd.