Understanding CGST, SGST and IGST with Real-Life Examples

The Goods and Services Tax (GST) regime in India is a major overhaul that consolidates various indirect taxes under one framework for ease of understanding, compliance, and taxability. GST is a multi-stage, destination-based tax on everything quintessentially modern, goods, and services. GST has three levels for collection and distribution: central goods and services tax (CGST), state goods and services tax (SGST), and an integrated goods and services tax (IGST).

Understanding what these terms mean and their applicability is critical for businesses and taxpayers in order to have an accurate compliance and operational process. This article explores the CGST, SGST, and IGST with examples and illustrative tax calculations and compliance standards.

Overview of CGST, SGST, and IGST

The GST framework is designed to ensure neutrality of tax and to prevent taxation at different points in the supply chain. The differentiation into central goods and services tax, state goods and services tax, and integrated goods and services tax is intended to assist tax collection between the central and state governments while also enabling free movement of goods and services. 

• Central Goods and Services Tax (CGST): CGST represents the central government’s tax applicable to all intra-state supplies of goods and services. This means that when a transaction occurs within the same state, the CGST is levied along with an equal amount of SGST. Businesses must also consider the CGST tax rates applicable to each category to ensure accurate calculation.
• State Goods and Services Tax (SGST): SGST represents the state government’s tax that is collected on the intra-state sale of goods and services. SGST exists with CGST, which is charged together and splits the GST liability equally. Understanding the SGST tax rate and applicability is critical to ensuring pressing compliance.
• Integrated Goods and Services Tax: IGST applies to inter-state supplies of goods and services and also covers goods and services that cross national borders through imports or exports. It is collected by the central government, which later allocates or apportions the total tax liability between the consuming state and the center as per the GST Council’s guidelines and procedures. 

The idea is that the CGST and SGST are charged simultaneously for any intra-state supply, while the integrated goods and services tax (IGST) is the sole tax charged for inter-state supply, to avoid double taxation and tax evasion.

How to Calculate CGST and SGST for Intra-State Sales?

CGST and SGST are both imposed when services and goods are sold within the boundary of a single state. GST will be divided equally between both levies, thus dividing tax collection between both the state and the central government. The computation should apply the applicable GST tax rates for each type as specified by the GST Council.

As an example, a business in Gujarat sells electrical goods for ₹50,000 to a customer in Ahmedabad.  The applicable GST is 18% for the transaction, then:

• Total GST Amount = 18% of ₹50,000 = ₹9,000
• CGST = 9% of ₹50,000 = ₹4,500 – goes to Central
• SGST = 9% of ₹50,000 = ₹4,500 – goes to paid to Gujarat
• Total Amount Paid by the Customer = ₹50,000 + ₹9,000 = ₹59,000

CGST and SGST can be paid together; however, both amounts will go into separate accounts of the government. This is how both the central and state governments receive their fair share of intra-state transactions.

Comprehensive Insight into IGST on Inter-State Supplies

For transactions occurring between states, IGST will be imposed instead of CGST or SGST. IGST is to be levied on the total goods & services tax (CGST + SGST) rate, allowing the nation to maintain a single unified tax structure. 

Consider the following scenario:

A manufacturer in Delhi sells a product to a dealer in Karnataka for a total of ₹1,00,000, for which GST of 18% is applied to the price. 

In that situation: 

IGST = 18% of ₹1,00,000 = ₹18,000 

So the dealer effectively pays ₹1,18,000 to the seller with IGST included. 

This amount would be initially collected by the central government, and then it will be eventually allocated between both the center and the destination state (Karnataka) based on the guidelines introduced by the Goods & Services Tax (GST) council. To clarify the process, the taxes owed would flow from the seller’s state to the state of the buyer, for the same goods, without being taxed twice. 

Calculation Fundamentals of CGST, SGST, and IGST

Understanding and applying the appropriate calculation method for taxes will allow for their proper billing, compliance, and operation for businesses. It is essential to know the GST tax rates for CGST, SGST, and IGST to properly use these rates in conducting business transactions. 

• CGST and SGST Calculation: CGST and SGST are half of the total taxes on the items. So, for 18% GST, CGST is 9% on the value, and SGST is 9% on the value. 

CGST = GST rate2 ×Taxable Value

SGST = GST rate2 ×Taxable Value

• IGST Calculation: The tax is charged at the full GST rate on the taxable value. 

IGST = GST Rate × Taxable Value

Case Study: Transaction Flow Through States and Intra-state: 

To aid in further understanding of how CGST, SGST, and IGST flow in a real example. Consider the following stages:

• Intra-state Sale (Delhi Farmer to Delhi Retailer): Goods sold in Delhi for ₹30,000, at 12% GST (6% CGST +  6% SGST) tax applied to the sale price. 

• CGST = ₹1,800 
• SGST = ₹1,800
• Total Price = ₹33,600 

• Inter-state Sale (Delhi Retailer to Mumbai Wholesaler): Wholesaler in Mumbai buys goods worth ₹40,000 for a 12% GST IGST tax applied to goods. 

• IGST = ₹4,800
• Total Price = ₹44,800

The consistent flow of taxes and taxes that apply makes clear the importance of CGST/SGST to in-state sales, and IGST to inter-state sales.

Compliance Essentials for Businesses under the GST System

Businesses must confirm the correct tax application for compliance purposes and be able to apply Input Tax Credit (ITC). Here’s a breakdown of key essentials for compliance:

• Invoice Requirements: Invoicing from intra-state sales must show CGST and SGST separately and show rates and amounts. Inter-state sales must show the integrated goods and services tax with clear breakdowns of rates.
• Input Tax Credits: Following registration, taxpayers should claim Input Tax Credit on CGST, SGST, and IGST for acquisitions to mitigate output tax. 
• Timely Return Filing: Each GST taxpayer should accurately report their CGST, SGST, and IGST in the goods & services tax (GST) return, such as GSTR-1 or GSTR-3B. 
• State-wise Registration: Depending on the location of your business operations, registration might be required in multiple states. They must comply with the SGST tax rate and applicability for each state.
• Maintenance of Records: Maintain proper books and electronic records while separating transactions for the application of the correct tax and for the purpose of audit.

Simplify GST Compliance and Enhance Business Efficiency

For businesses, understanding the specifics in the structure of all three levels of goods & services tax (CGST, SGST, and IGST) and how to calculate them, as well as any compliance implications, is very important. This level of understanding of GST allows for tax compliance free of errors and builds trust in businesses. This helps them assert their input tax claims, earn bank credits on input tax, and avoid penalties on tax filings. An adept and systematic approach to handling GST, when proper invoice separation and timely payment of taxes are followed, will underpin effective management of GST. 

Businesses looking to unravel GST complexities with ease should seek expert assistance from Credlix or use their digital GST tools tailored to support business owners. Credlix offers comprehensive solutions to support your GST compliance journey effectively.

Frequently Asked Questions 

1. Where does IGST apply?

IGST applies to all interstate trade, and when products and services move into and out of the country.

2. How is GST revenue shared between the center and states?

CGST goes to the center, SGST to the state where the sale occurs, and IGST is shared between the center and the destination state, as per the GST Council’s rules.

3. Which documents are required to claim Input Tax Credit?

GST-compliant invoices are the source documentation for claiming input tax credits that state the amount and the rate of CGST, SGST, or IGST.