GST (Goods and Services Tax) simplifies business compliance in India by replacing a confusing structure of multiple indirect taxes. It is a destination-based tax that applies to all goods and services that pass through the entire value chain. In total, there are four types of GST:
- CGST (Central GST): Imposed by the central government.
- SGST (State GST): Imposed by state governments.
- IGST (Integrated GST): Applied to inter-state supply of goods and services.
- UTGST (Union Territory GST): Imposed in the union territories.
Each type of GST plays a major role in tax distribution between the central and state governments. However, businesses face challenges understanding and applying GST due to different rates, compliance requirements, and the dual taxation system operating at both the state and national levels.
Types of GST Transactions in India
Two types of GST transactions are available in India:
Intra-State Transactions: Goods or services supplied within the same state or union territory. As a result, GST is divided into:
- CGST (Central GST): Collected by the central government.
- SGST (State GST): Collected by the state government (or UTGST in union territories).
Inter-State Transactions: Two states or union territories supply goods or services to each other. These transactions are subject to IGST (Integrated GST), which is assessed by the central government and shared with the destination state.
Types of GST in India
There are 4 types of GST in India:
- CGST (Central Goods and Services Tax)
- SGST (State Goods and Services Tax)
- IGST (Integrated Goods and Services Tax)
- UTGST (Union Territory Goods and Services Tax)
GST Types in Detail
- CGST (Central Goods and Services Tax) : It is a tax imposed by the Central Government on goods and services that are supplied within a state. CGST revenue is directly transferred to the central government. It is applied concurrently with SGST, with both taxes typically split equally between the central and state governments. As an example, a 12% GST would contribute 6% to CGST and the remaining 6% to SGST.
- SGST (State Goods and Services Tax) : It is the state government’s responsibility to levy SGST on intrastate supplies of goods and services. The revenue generated from SGST is retained by the state where the goods or services are sold or consumed. As with CGST, it applies to transactions within a state and works in coordination with it to ensure a fair distribution of revenue between the state and the center.
- IGST (Integrated Goods and Services Tax) : A central government tax on interstate supplies of goods and services (between different states) as well as imports and exports is the IGST. As a result of the tax, goods and services crossing state borders are taxed appropriately without being double taxed. Revenue is divided between the destination and the central state, ensuring a seamless flow of taxes across state borders.
- UTGST (Union Territory Goods and Services Tax): As the name suggests, UTGST applies to goods and services supplied in Union Territories without a legislature, such as Ladakh, Puducherry, Diu & Daman , Dadara & Nagar haveli, Chandigarh, Lakshadweep, and the Andaman & Nicobar Islands. The UTGST is a similar tax to the SGST, but it applies to union territories only. It is levied in conjunction with the CGST for transactions within union territories.
Different Types of GST in India: CGST, SGST, IGST, and UTGST
| Type | Levied By/Authority benefited | Applicable On | Revenue Distribution | Example |
| CGST | Central Government | Intra-state supply of goods and services | Entire revenue goes to the Central Government | A sale within Maharashtra where 6% CGST is levied (from 12% GST total) |
| SGST | State Government | Intra-state supply of goods and services | Entire revenue goes to the State Government | A sale within Karnataka where 6% SGST is levied (from 12% GST total) |
| IGST | Central Government | Inter-state supply, imports, and exports | Revenue is shared between the Central and State Governments of the destination state | A sale from Delhi to Tamil Nadu with 12% IGST levied |
| UTGST | Union Territory Government | Intra-union territory supply of goods and services | Entire revenue goes to the Union Territory Government | A sale within Chandigarh where 6% UTGST is levied (from 12% GST total) |
Goods Exempted from GST Payment
Certain essential goods are exempted from GST in order to reduce the burden on consumers and ensure that basic necessities are affordable. It is important to note that these exemptions are applicable to goods that are essential for daily living or essential to certain industries. The following items are exempt from GST payments:
- Agricultural Produce: Fresh fruits, vegetables, cereals, pulses, and other unprocessed agricultural products.
- Dairy Products: Fresh milk, curd, lassi, and other unprocessed dairy items.
- Health and Medical Items: Blood and blood products, contraceptives, and organic manure.
- Books and Education Supplies: Printed books, slates, and chalk used in education.
- Handloom and Khadi Products: Handloom fabrics, khadi garments, and other similar items.
- Unbranded Food Items: Unbranded atta, maida, besan, and other unprocessed food items.
- Fuel for Agriculture: Firewood, excluding cashew wood, and items like kerosene for domestic consumption.
The GST system remains fair and inclusive by providing exemptions for essential goods. Businesses selling or purchasing exempt goods do not have to pay GST, simplifying compliance.
Prime Minister Narendra Modi:
“GST is not just a tax reform; it is an economic reform that promotes transparency, efficiency, and inclusion. By exempting essential goods, we ensure that the common man benefits the most.”
What Taxes Did GST Replace?
Business owners had to pay multiple indirect taxes at both the national and state levels prior to the introduction of GST. The following indirect taxes have been replaced by GST:
Central Taxes Replaced by GST
- Central Excise Duty
- Service tax
- Additional excise duty
- Countervailing duty (CVD) on imports
- Special Additional Duty (SAD) on imports
- Central Sales Tax (collected by the Central Government and distributed to states)
- Central Surcharges and Cesses related to goods and services (e.g., Swachh Bharat Cess, Krishi Kalyan Cess, etc.).
State Taxes Replaced by GST:
- Value Added Tax (VAT).
- Entry tax (all forms of entry tax levied by states)
- Octroi and Local Body Taxes
- Purchase tax
- Luxury tax
- Entertainment tax (other than local taxes)
- Taxes on advertisements
- Taxes on Lotteries, Betting, and Gambling
- State-level surcharges and cesses related to goods and services supply
As a result of the GST, these taxes were merged into one tax system, thus simplifying compliance burdens and promoting the ease of doing business across the country.
Now lets say for example; A manufacturer in Maharashtra produces goods with a cost price of ₹1,000 and sells them to a wholesaler within Maharashtra. The wholesaler then sells the goods to a retailer in Gujarat, who finally sells them to the consumer. Assume the GST rate (after GST) and combined tax rate (before GST) are both 18%.
Before GST (Cascading Tax System)
After GST (Unified Tax System)
A cascading tax effect was created before GST when taxes such as VAT and excise duty were charged on values that already included other taxes like excise duty. As a result of GST, a cascading effect is eliminated by only charging tax on the value added at each stage. In addition to simplifying compliance, GST consolidates multiple taxes into one. While the total tax rate may remain the same (18% in this case), the burden is reduced due to the elimination of the cascading effect.
I just wanted to let you know that cascading in taxation describes the phenomenon of ‘tax on tax,’ which means a new tax is levied on a value that already has a previous tax attached to it. Eventually, this increases the overall tax burden on businesses and consumers, making things more expensive. (If you’re a manufacturer, and you pay a tax on raw materials purchased to produce goods. When you sell the finished goods, you pay another tax on the total selling price, which already includes the raw material tax. You’re paying taxes on a value you’ve already paid taxes, which means you’re getting double taxes at different stages of production and supply. It’s called cascading.)
Example before GST
Suppose you buy raw materials for ₹1,000, and there’s an excise duty of 10% (₹100). The cost becomes ₹1,100. When you sell your finished product for ₹2,000, VAT is charged at 12.5% on the total amount, including excise duty (₹2,000 + ₹100 = ₹2,100).
- VAT = 12.5% of ₹2,100 = ₹262.50.
- Total cost to the buyer = ₹2,362.50.
Here, VAT is charged on ₹2,100, which already includes ₹100 excise duty. This is a cascading effect, as tax is levied on a value that already includes another tax.
What is the effect of GST on the cascading effect?
GST combines taxes, and input tax credits (ITCs) allow businesses to claim tax credits based on input taxes paid. As an example, GST allows businesses to claim a credit for input tax paid:
- Raw materials = ₹1,000 + GST (18%) = ₹1,180.
- Finished goods sold for ₹2,000. GST is charged only on the value added (₹2,000 – ₹1,000).
- GST on value added = 18% of ₹1,000 = ₹180.
The input tax credit of ₹180 paid earlier can be adjusted against this, so the cascading effect is eliminated.
Here’s why this matters?
By eliminating the cascading effect, businesses and consumers will benefit from reduced tax rates. By removing the cascading effect, costs, compliance, and transparency of taxation are reduced, resulting in a reduction in tax rates. GST requires businesses to register under the tax law and remain compliant at all times in order to reap its full benefits. With GST your business will be able to benefit from the unified tax system, claim input tax credits (ITCs), expand operations across India, and build customer trust. We will take care of your compliance issues, so you can focus on growing your business instead.
Register GST with Vakilsearch today to benefit from the easier GST system we offer end-to-end solutions, including GST registration and return filing, ensuring businesses meet all regulatory requirements.
Frequently Asked Questions on GST Types
How are CGST and SGST different from IGST?
CGST and SGST apply to intra-state transactions (within the same state), where CGST is collected by the central government, and SGST is collected by the state government. On the other hand, IGST is levied on inter-state transactions (between different states) and is collected by the central government, with the revenue later distributed between the central and state governments.
Is UTGST applicable in all Union Territories?
No, UTGST (Union Territory GST) is levied only in union territories which do not have their own legislatures like Lakshadweep and Andaman and Nicobar Islands. Union territories which have their own legislatures like Delhi and Puducherry are liable to SGST as in case of states.
What is the purpose of the GST Compensation Cess?
GST Compensation Cess is a second-line tax levied on luxury goods and 'sin' goods, like tobacco and luxury automobiles. It is for compensating states in case they face revenue loss because of the introduction of GST. The centre collects the cess from them and equips the states with the exact revenue status prior to GST.
How does the GST system ensure equitable tax distribution?
The GST ensures equal intra-state and Central (CGST) and state governments (SGST) collection; inter-state IGST revenues are divided between the central government and the destination state. This way, the states benefit from both local as well as inter-state trade revenue and there is a good revenue-sharing balance.
Which transactions qualify as zero-rated under IGST?
Under the IGST, exports and supplies to the Special Economic Zones are covered under zero-rated supplies. In other words, since GST is not charged on these supplies, the exporter can still claim input tax credits on all the GST paid at the time of production. This would thereby reduce the overall tax burden and support competitive exports.
