GST stands for Goods and Services Tax — you already knew that. GST will be levied on every supply of good and services and will be composed of two parts: one that goes to the central government (CGST) and one that goes to either a state (SGST) or a union territory government (UTGST), depending on where a company is based.

If your company is based in Mumbai and you invoice a customer also in Mumbai, you will charge both CGST and SGST to your customer, pay CGST to the Central government and SGST to the state of Maharashtra. If your company is based in Kolkata and you make a sale in Burdwan, both cities within West Bengal, you will pay SGST to the state of West Bengal.

What if your company based in Delhi, which isn’t a state, but a Union Territory, sells to a customer also in Delhi? Instead of charging and paying SGST, you will charge and pay UTGST. The UT replaces the S. Easy, huh? As long as the vending company and the customer are within the same state or the same territory, you collect CGST and either SGST or UTGST as appropriate. Together they compose one GST.

Let’s see it with an example — refer to the figure below. A sugar producer in Bengaluru sells sugar to a mithai shop at ₹20 plus 5% GST = ₹ 21. Of that total, ₹20 goes to the sugar producer’s pocket, ₹0.50 to the central government, as CGST, and ₹0.5 to the government of the state of Karnataka, as SGST.

Now, the mithai shop makes sweets with that sugar (and several other ingredients, of course, but we’re simplifying here) which they sell to a coffee shop at ₹40 plus 12% GST = ₹44.80. Why 12%? Because that’s the rate at which processed foods will be taxed under GST. When the time comes to pay GST, the mithai shop pays the Centre CGST for ₹1.90, which results from deducting a ₹0.50 credit, coming from the CGST they paid when they bought sugar, to the CGST collected from the coffee shop, ₹2.40. Likewise, the mithai shop pays the government of Karnataka only ₹1.90 because of the existing credit on SGST. Thus, assuming they did not pay for other raw materials, the mithai shop makes a gross profit of ₹20. See the small table below.

Concept

Amount

Balance

Sweets sold to Coffee shop

 ₹ 40.00

 ₹ 40.00

12% GST collected

 ₹ 4.80

 ₹ 44.80

Cost of Sugar

 ₹ -20.00

 ₹ 24.80

GST Paid to Sugar Producer

 ₹ -1.00

 ₹ 23.80

CGST to Pay to Centre

 ₹ -2.40

 ₹ 21.40

CGST to credit

 ₹ 0.50

 ₹ 21.90

SGST to Pay to Karnataka

 ₹ -2.40

 ₹ 19.50

SGST to credit

 ₹ 0.50

 ₹ 20.00

Net CGST Paid

 ₹ 1.90

Net SGST Paid

 ₹ 1.90

Gross Profit

 

 ₹ 20.00 

Then, the coffee shop sells those sweets at ₹50 to different consumers, plus 12% GST for a total of ₹56. Of the total GST collected, one-half goes to the Centre and one-half to the state of Karnataka, minus the credits for the GST paid to the mithai shop. That is, the Centre receives ₹0.60 from the coffee shop: ₹3 minus a credit for ₹2.40 paid to the mithai shop. The same for the state of Karnataka. If we break down the coffee shop profit, we have:

Concept

Amount

Balance

Sweets sold to consumer

 ₹ 50.00

 ₹ 50.00

12% GST

 ₹ 6.00

 ₹ 56.00

Cost of sweets

 ₹ -40.00

 ₹ 16.00

GST Paid to Wholesaler

 ₹ -4.80

 ₹ 11.20

CGST to Pay to Centre

 ₹ -3.00

 ₹ 8.20

CGST to credit

 ₹ 2.40

 ₹ 10.60

SGST to Pay to Karnataka

 ₹ -3.00

 ₹ 7.60

SGST to credit

 ₹ 2.40

 ₹ 10.00

Net CGST Paid

 ₹ 0.60

Net SGST Paid

 ₹ 0.60

Gross Profit

 

 ₹ 10.00 

How much have the state of Karnataka and the Centre received from GST so far? ₹3.00 each, ₹0.50 collected by the sugar producer, ₹1.90 collected by the mithai shop, and ₹0.60 collected by the coffee shop. Note that the total GST paid by final consumers is ₹6, which is the same amount that, together, the Centre and the state received in CGST and SGST respectively. That is, under GST, the final amount that the government receives will equal what the final consumer pays. This is what mitigating a cascade effect of taxes means.

Now, what if the sale is interstate? What if your customer is in Chennai? Then you charge one Integrated Goods and Services Tax, or IGST, instead of CGST and SGST. You will pay IGST to the Centre after crediting what as a producer you paid before in IGST, CGST, and SGST — in that order. Using the example above, say that the coffee shop wasn’t based in Bengaluru, Karnataka, but in Chennai, Tamil Nadu.

Concept

Amount

Balance

Sweets sold to Coffee shop

 ₹ 40.00

 ₹ 40.00

12% IGST collected

 ₹ 4.80

 ₹ 44.80

Cost of Sugar

 ₹ -20.00

 ₹ 24.80

GST Paid to Sugar Producer

 ₹ -1.00

 ₹ 23.80

IGST to Pay to Centre

 ₹ -4.80

 ₹ 19.00

CGST to Credit

 ₹ 0.50

 ₹ 19.50

SGST to Credit

 ₹ 0.50

 ₹ 20.00

Net IGST Paid to Centre

 

 ₹ -3.80 

Gross Profit

 ₹ 20.00 

Here, neither Karnataka nor Tamil Nadu gets paid directly by the producer, all goes to the Centre. Yet, when the coffee shop sells to the final consumers, the coffee shop will credit IGST paid to the Centre from CGST collected first, then credit the difference to what they need to pay the state in SGST. That is, because the coffee shop already paid an IGST of ₹4.80 when they bought the sweets from the mithai shop, they will pay the Centre zero because ₹3 is the maximum amount they can deduct, then deduct the difference paid in IGST from what they owe the state: ₹3 – ₹1.80 = ₹1.20

Concept

 Amount 

Balance

Sweets sold to consumer

 ₹ 50.00

 ₹ 50.00

12% GST

 ₹ 6.00

 ₹ 56.00

Cost of sweets

 ₹ -40.00

 ₹ 16.00

IGST Paid to Wholesaler

 ₹ -4.80

 ₹ 11.20

CGST to Pay to Centre

 ₹ -3.00

 ₹ 8.20

IGST to credit from Centre

 ₹ 3.00

 ₹ 10.60

SGST to Pay to Tamil Nadu

 ₹ -3.00

 ₹ 7.60

IGST to credit from State

 ₹ 1.80

 ₹ 10.00

Net CGST Paid to Centre

 0

Net CGST Paid to Tamil Nadu

 ₹ 1.20

Gross Profit

 

 ₹ 10.00 

Note that at the end, because the sale was interstate, the Centre ends up with ₹0.5 (from the sugar producer) + 3.80 (from the mithai shop + 0 (from the coffee shop in Chennai) = 4.3; Karnataka received ₹0.5, and Tamil Nadu ₹1.20. Not fair, huh?

To balance this out, Karnataka, as an exporting state will transfer to the Centre the ₹0.5 paid by the sugar producer by the mithai shop, which the mithai shop used as a credit against IGST. Thus Karnataka, as an exporting state ends up with zero.

The Centre will have now ₹ 4.30 + ₹ 0.5 = ₹4.80. The Centre will then transfer to Tamil Nadu the ₹1.80 that the coffee shop claimed as IGST Credit when paying SGST. Thus, the Centre will keep ₹3.00 and Tamil Nadu ₹3.00.

Complicated? A little. It’s all about keeping track of every transaction. You cannot do that by hand! You need a computer to keep track of all your transactions. Maybe that smartphone inside your pocket will do. Make sure you download a powerful Point of Sale app that is GST, CGST, SGST and IGST ready. Make sure you have ePaisa!

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