Understanding Goods and Services Tax (GST) – II

Taxes merged under GST

Indirect taxes are numerous -few biggies and several small ones. The question was which of the central and state indirect taxes are to be merged with the GST. At last, after discussions, two (out of the three big) of the prominent central taxes and the state sales tax along with several small central and state taxes were brought under the GST.

 There are three important indirect taxes for the centre – the union excise duties, service tax and customs duties. Of these, the central excise duties and service taxes are brought under the GST. Customs duties as a tax on trade was not merged with the GST.

States have two important indirect taxes – sales tax and state excise duties. Of these two, only the sales tax is merged with the GST.

Along with these four big taxes of the centre and states, several other low revenue incurring taxes are also brought under the GST.

A. The following taxes levied and collected by the Centre are merged with the GST:

a. Union Excise duties

b. Service tax

c. Duties of Excise (Medicinal and Toilet Preparations)

d. Additional Duties of Excise (Textiles and Textile Products)

e. Additional Duties of Excise (Goods of Special Importance)

f. Additional Duties of Customs (commonly known as CVD)

g. Special Additional Duty of Customs (SAD)

h. Cesses and surcharges

B. State taxes that are subsumed under the GST are:

a. State VAT

b. Central Sales Tax

c. Entertainment Tax (not levied by the local bodies)

d. Entry Tax (other than those in lieu of octroi)

e. Luxury Tax

f. Taxes on advertisements

g. Taxes on lotteries, betting and gambling

h. State cesses and surcharges insofar as they relate to supply of goods or services.

Some notable items are not covered under GST and these include: levies on petroleum products, tax on alcoholic products, electricity duties/taxes, stamp duties on immovable properties and vehicle taxes.

The achievement of GST reform is the unification of these numerous taxes into one.  Both the centre and states agreed to sacrifice their fiscal right or power to give way for common rates.

Components of GST: CGST, SGST and IGST

When the centre and states are merging their prominent indirect taxes under GST, both should get their own share in the GST. For this, the GST Council has adopted a dual GST with two components – the Central GST (CGST) and the State GST (SGST).

Objective of this division is sharing the revenue from the unified GST between the centre and states.

Central and State GST

There is sharing of GST by the centre and the tax accruing state at 50:50 ratio. For example, if a good is taxed at 18%, out of this, 9% will go to the centre and the remaining 9% will go to the state where the good is consumed. The GST going to the Centre is called as Central GST (CGST) and that toes to the States is known as State GST (SGST). Here, the centre and the concerned state will equally share GST on goods and services.

Basically, GST is a destination based or consumption tax. Meaning of a destination based tax is that tax revenue (SGST) will go to the consuming state and not to the producing state.

In the case of intrastate production and consumption (production and consumption takes place in the same state), the share of SGST will accrue to the concerned state where as the share of CGST should be credited to the center’s account.

Integrated GST (IGST)

The IGST comes to play when the commodity is produced in one state and is traded to another state (interstate trade). In this case, the share of SGST should go to the consuming state (as the GST is a destination based tax). As a consumption based tax i.e the tax SGST share should be received by the state in which the goods or service are consumed and not by the state in which such goods are manufactured.

 As per the GST law (Article 269 A), an Integrated GST (IGST) would be levied and collected by the Centre on inter-State supply of goods and services. This tax will be collected by the Centre to ensure that the supply chain or interstate trade is not disrupted.