The Goods and Services Tax (GST) system in India is a monumental shift in the country’s tax framework. Since its introduction on 1st July 2017, GST has streamlined the taxation system by replacing multiple indirect taxes, such as VAT, excise duty, and service tax, with a single unified tax. However, the GST system isn’t just a single entity; it consists of different types, each designed to address specific taxation needs. Whether you are a business owner, a tax professional, or someone interested in the subject, understanding the types of GST in India is crucial for navigating the tax landscape effectively.
In this blog, we will look into the different types of GST in India, explaining each one in detail, their functions, and their importance in the broader tax system. Let’s dive in!
What is GST?
Before understanding the various types of GST, let’s first get a solid understanding of what GST is and why it matters. GST, short for Goods and Services Tax, is an indirect tax that has replaced multiple taxes previously levied by the Central and State Governments. It is designed to streamline the tax structure, ensuring that there is a single point of taxation rather than multiple overlapping ones.
The GST system is based on a dual tax structure, which means that both the Central Government and State Governments levy tax, but on different transactions. The introduction of GST has simplified tax compliance and removed barriers to interstate trade, allowing businesses to operate more efficiently across state lines.
Why Are There Different Types of GST?
One of the reasons India adopted multiple types of GST is due to the federal structure of the country. India’s taxation system needed to accommodate both central and state-level taxation. Additionally, to cater to the complexities of interstate transactions, the government introduced a system that allows for both state-level and central-level taxes to coexist.
By creating different types of GST, India ensured that businesses are taxed based on the nature of the transaction—whether it is within a state, between states, or in union territories. Each type of GST has a distinct role in the functioning of the tax system, making it easier to manage and track transactions, ensuring smooth operations for businesses and taxpayers alike.
The Four Main Types of GST in India
Now that we understand why multiple types of GST are required, let’s dive deeper into the four main types of GST in India. Each one serves a unique purpose in the tax system and impacts businesses in different ways.
1. CGST (Central Goods and Services Tax)
CGST is the portion of GST that is levied by the Central Government on transactions that occur within a single state. It applies to intra-state (within the same state) sales of goods and services. For example, if a company based in Maharashtra sells goods to a customer within Maharashtra, CGST is applicable.
Key Points:
- Levying Authority: Central Government
- Applies to: Intra-state transactions (sales and purchases within the same state)
- Rate: The rate is defined by the government based on the type of goods or services being sold
CGST ensures that the Central Government receives its share of tax revenue for intra-state sales. It is important for businesses to understand CGST because it directly impacts the cost of goods and services sold within the state.
Example:
If the sale price of a product in Maharashtra is ₹1,000 and the CGST rate is 9%, the CGST charged will be ₹90.
2. SGST (State Goods and Services Tax)
SGST is the counterpart to CGST, and it is levied by the State Government on the same intra-state transactions. SGST ensures that the state government receives a portion of the tax revenue from sales within its jurisdiction.
Key Points:
- Levying Authority: State Government
- Applies to: Intra-state transactions
- Rate: Similar to CGST, the rate depends on the goods or services being sold
The CGST and SGST are applied simultaneously but separately. Both taxes are collected from the same transaction, with each government receiving its portion. This is why GST is often referred to as a “dual tax” system.
Example:
Continuing with the same sale price of ₹1,000 in Maharashtra, if the SGST rate is also 9%, the SGST charged will be ₹90. So, the total GST paid for the transaction would be ₹180 (₹90 CGST + ₹90 SGST).
3. IGST (Integrated Goods and Services Tax)
IGST is applied when goods or services are sold from one state to another, i.e., in the case of interstate transactions. IGST is levied and collected by the Central Government, but the revenue is apportioned between the state from which the goods or services are supplied and the state where the goods or services are consumed, in accordance with the place of supply rules.
The purpose of IGST is to ensure that the tax structure is seamless across state lines. Instead of having separate taxes for both the selling and receiving states, IGST allows for one tax to be levied on interstate trade, making the entire process more efficient.
Key Points:
- Levying Authority: Central Government
- Applies to: Interstate transactions (goods or services sold from one state to another)
- Rate: IGST is typically the sum of CGST and SGST rates. For instance, 18% IGST when the combined CGST and SGST rate is 18%.
For businesses involved in interstate trade, understanding IGST is crucial for accurate tax filing. It also ensures that Input Tax Credit (ITC) is available for interstate transactions, which was previously difficult under the old tax system.
Example:
If the sale price of a product is ₹1,000 and the IGST rate is 18%, the total IGST charged will be ₹180. The Central Government will distribute the revenue between the states based on the place of supply rules.
4. UTGST (Union Territory Goods and Services Tax)
UTGST is applicable in Union Territories (UTs) without their own legislature, such as Lakshadweep, Andaman and Nicobar Islands, Dadra and Nagar Haveli and Daman and Diu, Chandigarh, and Ladakh. For these territories, UTGST functions similarly to SGST. The Union Territories collect UTGST, just as states collect SGST.
Key Points:
- Levying Authority: Central Government (collected for Union Territories)
- Applies to: Intra-Union Territory transactions
- Rate: Similar to SGST, UTGST rates vary depending on the nature of goods and services
Note: Delhi and Puducherry, although Union Territories, have their own legislatures, so SGST (not UTGST) applies to intra-state transactions in these territories.
Example:
If a product is sold in Chandigarh for ₹1,000, and the UTGST rate is 9%, the UTGST would be ₹90.
How the Types of GST Work Together
The beauty of India’s GST system lies in its dual taxation model—CGST and SGST for intra-state transactions, and IGST for interstate transactions. Here’s how they work together:
- Intra-state Transactions: When goods or services are sold within the same state, both CGST and SGST (or UTGST in certain UTs) are applied. The tax rate is divided equally between the Central and State (or UT) Governments.
- Interstate Transactions: For interstate transactions, IGST is applied. The Central Government collects the tax and distributes it in accordance with the place of supply rules.
Comparison Between the Types of GST
Here’s a quick comparison table for better clarity:
| Type of GST | Levying Authority | Applicability | Rate |
| CGST | Central Government | Intra-state | Varies by product/service |
| SGST | State Government | Intra-state | Varies by product/service |
| IGST | Central Government | Interstate | Sum of CGST and SGST rates |
| UTGST | Central Government (for UTs without legislatures) | Intra-UT (non-legislative UTs) | Varies by product/service |
Impact of Different Types of GST on Businesses
Understanding the different types of GST is essential for businesses to stay compliant. Here’s how each type impacts businesses:
- Intra-state Transactions: Businesses need to collect both CGST and SGST (or UTGST in applicable UTs) for local sales and file returns separately for each tax.
- Interstate Transactions: For businesses involved in interstate trade, IGST comes into play, making tax collection and credit much easier.
- Union Territories: If you operate in a Union Territory without its own legislature, you will need to comply with UTGST, which functions just like SGST but is managed by the Central Government for Union Territories.
To ensure smooth operations and avoid legal troubles, businesses must track transactions accurately, charge the correct type of GST, and maintain proper records for tax filing.
Final Thoughts:
The introduction of GST has been a pivotal moment for India’s tax system, making it easier to manage taxes and ensuring fair distribution of tax revenue across states, Union Territories, and the Central Government. The four types of GST—CGST, SGST, IGST, and UTGST—are designed to handle different types of transactions, be it local, interstate, or in Union Territories.
For businesses, understanding these types of GST is crucial for compliance, accurate tax filing, and seamless operations. Whether you are a small business owner or part of a large corporation, staying on top of GST laws will ensure you maximise the benefits of the system, such as Input Tax Credit, and avoid penalties.
So, whether you are dealing with goods sold within a state or managing interstate transactions, understanding the types of GST will help you stay on top of your tax game and drive your business forward with confidence!
