Overview of India’s 4 GST Acts: CGST, SGST, IGST, UTGST

This blog provides insights into India's four key Goods and Services Tax (GST) Acts, implemented in 2017. It examines the Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST), Union Territory Goods and Services Tax (UTGST), and Integrated Goods and Services Tax (IGST). Each Act plays a vital role in the unified tax structure, addressing taxation at different levels and ensuring a seamless flow of credit.

The Goods and Services Tax, introduced in 2017, is perhaps the most significant alteration in India’s indirect tax structure since independence. This was intended to simplify and harmonise the complex web of multiple indirect taxes levied both by the central and state governments into a single system.

The GST framework was designed to make India’s tax structure more efficient and transparent, eliminating cascading taxes and reducing the compliance burden on businesses.

Overview of GST Implementation in India 

As one of the most prominent landmark economic reforms of the 21st century, GST replaced all the erstwhile indirect tax structures of India with a more unified approach. It started a new era of taxation in the country, effectively replacing several taxes, that is, excise duty, VAT, service tax, and others, then paid by the respective parties at their respective stages of goods or services.

This unification in GST helped ease compliance in a more transparent tax scenario, thereby increasing economic integration across the country.

Unified Tax System: The Core Objective of GST Acts

The primary intent of the GST Acts was to bring various indirect taxes under a single, overarching system. The consolidation resulted in the elimination of duplications and making tax administration easier for business and tax administrations. This would also remove obstacles between states and make a more competitive and integrated national market.

Importance of the Four Main GST Acts

India has four principal components of the GST structure, which includes the CGST and SGST Acts, the IGST Act, and UTGST Act. They help establish tax compliances and consistency for the multiple states and union territories in a country:

• Central Goods and Services Tax: The CGST is charged by the central government on an intra-state transaction to ensure that its central revenue requirements are met 
• State Goods and Services Tax: The SGST is charged by state governments on an intra-state transaction. Both CGST and SGST will share in the revenue from goods and services consumed within a state 
• IGST (Integrated Goods and Services Tax): This tax is applicable for inter-state transactions. This is to make the taxing process smooth and easy without crossing state borders by aggregating various taxes into a single tax. It provides hassle-free transactions between states 
• UTGST (Union Territory Goods and Services Tax): This is applied in the union territories. UTGST works just like SGST, but it is designed to suit the specific needs of those union territories under the GST structure.

Central Goods and Services Tax (CGST) Act, 2017

The Central Goods and Services Tax (CGST) Act, 2017, is a comprehensive legislation enacted to levy and collect taxes on the supply of goods and services within a state in India. It forms part of the dual GST system, complementing the State GST (SGST) to ensure uniform taxation across states. The Act aims to streamline indirect taxation, reduce tax cascading, and facilitate seamless input tax credit across the country.

Overview of the CGST Act

The Central Goods and Services Tax Act, 2017 is a comprehensive law of regulation for the taxation made within the state territory about the supply of goods and services in India. In the integral part of the GST regime, the CGST Act gives the central government powers to levy and collect taxes on transactions in the state boundaries so that, there may not be inconsistency in tax administration across all the states of India.

• Levy of Tax on Intra-State Supplies: All intra-state supplies of goods and services are mandatorily required to be levied with taxes under the CGST Act. This means that any transaction made within the same state would generate revenue at the central level.
• Rules and Thresholds Concerning Registration It is to be registered by those entities whose turnovers have crossed turnover thresholds in GST under CGST Act. The idea behind the process is mainly to get broad-based taxes and the requirement of people to come in line within the tax regime.
• Mechanism of Input Tax Credit: ITC mechanism under CGST is the mechanism by which the business enterprise is allowed to claim credit on taxes paid on inputs. This mechanism is very important because it prevents the cascading effect of taxes and allows a business enterprise to offset its tax liability on sales against taxes already paid on purchases.
• Mandates on Compliances Corporations are obligated to file periodical returns, prepare bills in given formats of prescriptions, and maintain necessary records. This makes them accountable in procedures which may thus make it easy for enterprise businesses as well as respective tax authorities to track them.
• Tax Rates and Revenue-Sharing Model: The CGST Act has tax rates categorised on the basis of classification of goods and services. Collected revenue is shared between the central and state governments, which promotes cooperative federalism and ensures that tax proceeds benefit both the central and local administrations.

Major Amendments to the CGST Act 

There are numerous amendments of the CGST Act that seek improvement in compliance and further improvement in credit claims and provision for smooth tax procedures in accordance with changing requirements and technological advancement in the business context.

State Goods and Services Tax (SGST) Act, 2017

The State Goods and Services Tax Act will be dealing with the collection of taxes for intra-state supplies. Here is a detailed outline of the same: 

Overview of State Goods and Services Tax (SGST) Act, 2017

The State GST would manage goods and services tax at the state level. According to this, every state is empowered and collects taxes from within the boundaries of its respective territory, hence similar to the Central Goods and Services Tax. All revenue collected is kept by the respective state government and control is maintained over the same. The provisions dealt with in the SGST Act include registration, input tax credit, assessment, and penalty. Every state has different regulations towards the said issues.

The variation in rules among the states may make compliance requirements under SGST vary from state to state.

State-Specific Adaptations of the SGST Act

Each state has its own version of the SGST Act, like the Maharashtra Goods and Services Tax Act, 2017 (MGST Act), which includes minor adaptations to suit its needs. The state-level SGST Acts may include localised amendments or additional provisions to better suit each state’s taxation framework and priorities.

This means that, whereas the structure of SGST is uniform for all the states, compliance varies extensively. For instance, for a certain document, a specific state may have different conditions or timelines. Businesses having multiple locations within the different states must, therefore, know what these differences are so as to adhere to the local differences, since differences locally affect how the SGST is applied within those different states and also what affects the administration of how the Act is implemented at that particular state level.

Integrated Goods and Services Tax (IGST) Act, 2017

The Integrated Goods and Services Tax (IGST) Act is a central law governing inter-state transactions and taxation on imports and exports within India. Here’s an overview of key elements:

• Tax on Inter-State Supply: IGST is levied on inter-state supplies of goods and services, which includes all imports into India. The tax is collected by the centre and later shared with the states.
• Input Tax Credit (ITC) Mechanism: IGST’s ITC mechanism allows businesses to claim credit on taxes paid during purchases. This credit can offset IGST, Central GST (CGST), or State GST (SGST) liabilities. Exports are zero-rated, which means that tax credits for IGST can be claimed as refunds.
• Revenue Sharing Model: Revenue from IGST is split between the centre and the states based on where goods and services are consumed, fostering balanced revenue distribution across states.
• Special Provisions: Specific regulations under the IGST Act apply to e-commerce operators and major importers. For instance, e-commerce platforms are responsible for collecting and paying IGST on supplies made through their platforms.

Union Territory Goods and Services Tax (UTGST) Act, 2017

 The UTGST Act, 2017, is specifically enacted to cover the tax levied on supplies made by intra-union territory, and it applies to Chandigarh and Lakshadweep-type UTs as these do not have their own legislatures. In brief:

• Tax on Intra-UT Supplies: UTGST is levied on intra-UT supply of goods and services specified by the Union Territories. As per integrated taxation, there would be a levy of Central GST along with the UTGST tax.
• Registration and Compliance: The registration requirements of businesses operating in Union Territories under UTGST are no different from those of State GST (SGST). However, the rules are tailored to the unique tax environment of UTs. Businesses need to adhere to the rules of UTGST registration and compliance for proper intra-UT taxation.
• Provisions relating to Input Tax Credit (ITC) Mechanisms under UTGST: the provisions relating to ITC under UTGST are similar to CGST. This provides business entities within Union Territory an opportunity to claim credits for taxes paid on input supplies used in business activities. This further helps with easy tax adjustment for such business entities operating within UT.

Goods and Services Tax (Compensation to States) Act, 2017 

The GST Compensation Act would provide not only the states with fiscal stability while entering into GST but also strength in the unified tax structure in India by balancing both state and central fiscal requirements.

Overview of the GST Compensation Act

The Goods and Services Tax (Compensation to States) Act, 2017 (“the GST Compensation Act”) is constituted for compensation to the states on account of loss of revenues that might be suffered because of the implementation of the GST. 

It covers five years of transition, which, in all fairness, closely follows the Constitutional (One Hundred and First Amendment) Act, 2016. It aims to have a structured fiscal cushion support the states to adjust into the system of GST.

• Base Year: The compensation for all states will be calculated using the base year as the fiscal year 2015-16.
• Compensated Revenue: Every tax, which was absorbed under GST, has been considered for compensation and this has been audited and confirmed by the CAG, India.
• Growth Rate: The growth of revenues has been taken into account at a fixed rate of 14 per cent every year for all states.
• Bi-Monthly Payments: It is released bi-monthly based on provisional numbers with final adjustments after CAG audit.
• Cess Collection: A compensation cess is levied on luxury goods, etc. for payments to states. Proceeds from this cess are solely used for compensating states’ revenue losses.
• Special Category States Revenue: In computing the base year, special category states revenue is taken into consideration. Hence, historical exemptions enjoyed by these states are considered in the compensation.
• Unutilized Funds Distribution: At the end of five years, unutilized funds are distributed; half are transferred to the Centre, and the remaining half are transferred to the states on a revenue-sharing basis.

Role of GST Council in Shaping GST Acts 

The Goods and Services Tax Council is a constitutional body under Article 279A of the Indian Constitution. It primarily makes recommendations regarding the framework of the Goods and Services Tax, including rates, exemptions, and laws. Members of the council include the Union Finance Minister, the Union Minister of State for Finance, and the finance ministers of the states and Union territories. This diverse representation would ensure that the central and state governments’ interest is considered in decision making.

This Council has a defining role to play in building the GST Acts through decisions critical to altering the tax landscape and encompass rate reforms, ITC regulations, and several compliance provisions to further the smooth governance of the tax administration process. With this consensus established, the GST framework of India has to remain dynamic as well as responsive to such changing economic scenarios.

Conclusion on GST Acts

The Central Goods and Services Tax Act, the State Goods and Services Tax Act, and the Integrated Goods and Services Tax Act are all working in a direction of building an efficient and coherent regime of tax, with the former serving a different purpose altogether. CGST and SGST facilitate central and state taxation, while IGST simplifies inter-state transactions and brings uniform compliance.

This is very important so that the businesses may not run into risk and operate in a smooth manner. It is possible for the business to keep pace with GST Council decisions so that it acts accordingly and continues to be compliant. Ultimately, these Acts are very important to India’s tax system, and their continuous evolution through amendments reflects the government’s responsiveness to changing economic needs, supporting businesses in adapting to new challenges and opportunities. Consult with our senior tax experts for more information.