fincalculatorBefore July 1, 2017, India had a complex web of indirect taxes—VAT, Excise Duty, Service Tax, Octroi, Luxury Tax, etc. If you manufactured a pen in Maharashtra and sold it in Karnataka, you paid multiple taxes at checkposts. GST (Goods and Services Tax) replaced all of them with a single tax structure.
1. The 3 Types of GST
Many people get confused seeing CGST and SGST on their restaurant bills. Here is the logic:
- CGST (Central GST): Collected by the Central Government.
- SGST (State GST): Collected by the State Government.
- IGST (Integrated GST): Collected by the Centre for inter-state transactions.
Example Scenario
Suppose you are a trader in Mumbai (Maharashtra) selling goods worth ₹10,000. Let's assume the GST rate is 18%.
Scenario A: Selling to a customer in Pune (Maharashtra)
Since buyer and seller are in the same state, tax is split 50-50.
- CGST (9%): ₹900
- SGST (9%): ₹900
- Total Tax: ₹1,800
Scenario B: Selling to a customer in Bangalore (Karnataka)
Since buyer and seller are in different states, IGST applies.
- IGST (18%): ₹1,800
- Total Tax: ₹1,800
Note: The Centre collects this IGST and later shares it with the destination state (Karnataka).
2. Input Tax Credit (ITC) - The Heart of GST
The biggest benefit of GST for businesses is ITC. It ensures you pay tax only on the Value Added.
How ITC Works?
- Step 1: You buy raw materials for ₹100 and pay ₹18 tax. (Input Tax = ₹18)
- Step 2: You make a product and sell it for ₹150 + ₹27 tax. (Output Tax = ₹27)
- Step 3: While paying tax to the govt, you subtract Input Tax from Output Tax.
- Tax Payable: ₹27 (Output) - ₹18 (Input) = ₹9 only.
Without ITC, tax would legally cascade (tax on tax), increasing inflation.
3. Current GST Slabs in India
| Slab | Items Included |
|---|---|
| 0% | Grains, Milk, Salt, Curd, Unbranded Food (Essentials) |
| 5% | Sugar, Spices, Tea, Coffee, Edible Oil, Economy Flights |
| 12% | Mobiles, Processed Food, Computers |
| 18% | Hair Oil, Toothpaste, Soaps, Restaurants, Electronics (Standard) |
| 28% | Cars, ACs, Refrigerators, Cement, Aerated Drinks (Luxury/Sin) |
4. Composition Scheme
Small businesses with turnover up to ₹1.5 Crores can opt for the Composition Scheme. They pay a lower, flat rate of tax (1% for traders/manufacturers, 5% for restaurants) and file simpler returns. However, they cannot collect tax from customers and cannot claim ITC.
Conclusion
GST has brought transparency and formalized the Indian economy. While compliance has increased for businesses, the seamless flow of goods across state borders has been a game-changer for logistics and supply chains.
Need to calculate GST for a bill? Try our GST Calculator.