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The Goods and Services Tax (GST) is a destination based tax, which means that the state in which the goods are consumed receives the tax. The GST is implemented using three separate taxes:

  1. Central Goods and Services Tax (CGST)
  2. State Goods and Services Tax (SGST)
  3. Integrated Goods and Services Tax (IGST)

The first two taxes are levied on intra-state transactions while the third one is levied on inter-state transactions. Together, these three taxes ensure that the state in which the goods are consumed, receive the tax.

The following article gives us an example:

Here, there are three transactions:

  1. Person A sells goods to B within Maharashtra for ₹10,000 (with tax ₹11,800).
    • Central government receives ₹900 tax (CGST).
    • Maharashtra government receives ₹900 tax (SGST).
  2. Person B sells the same goods to C who is in Rajasthan for ₹17,500 (with tax ₹20,650).
    • Central government receives ₹3,150 tax (IGST).
  3. Person C sells the same goods to D within Rajasthan for ₹30,000 (with tax ₹35,400).
    • Central government receives ₹2,700 tax (CGST).
    • Rajasthan government receives ₹2,700 tax (SGST).

Hence, in the end, ₹10,350 was collected in tax:

  • Central government got ₹6,750 in tax (₹900 + ₹3,150 + ₹2,700).
  • Maharashtra government got ₹900 in tax.
  • Rajasthan government got ₹2,700 in tax.

Now, according to GST, only the central government and Rajasthan should get tax. Hence, I believe that ₹10,350 should be split between the two (i.e. the central government gets ₹5,175 and Rajasthan government gets ₹5,175). However, this is not what happens. According to the article, here's what would happen:

Maharashtra sends ₹900 to the central government. This is the only thing that makes sense to me. Here's what doesn't make sense to me:

  1. The above pictures debits ₹3,600 from the central government columns as “Credit taken”. Where does this money go? Why isn't in included in the net income of the central government?
  2. Why does the Rajasthan government have to pay ₹450 as “Input Credit”?
  3. At the end, the total net income is ₹5,400 (the central government gets ₹2,700 and the Rajasthan government gets ₹2,700). What happened to the rest of the ₹4,950 (i.e. ₹900 + ₹3,150 + ₹900)?

Also, could somebody explain to me the entire process of redistributing tax money, step-by-step?

Aadit M Shah
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1 Answers1

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  1. Person A sells goods to B within Maharashtra for ₹10,000 (with tax ₹11,800).
    • Central government receives ₹900 tax (CGST).
    • Maharashtra government receives ₹900 tax (SGST).
  2. Person B sells the same goods to C who is in Rajasthan for ₹17,500 (with tax ₹20,650).
    • Central government receives ₹3,150 tax (IGST).

Pause here. By GST, when transactions happen on the same goods multiple times, all GST paid on it in previous transactions count towards the taxes now due. The Central Government has already received ₹900 in tax, and further, the amount previously collected by the Maharashtra state government is also now due to the Central government. The Central government received ₹3150 in tax, yes, but this amount includes the ₹1800 previously collected. This is where the amount collected by Maharashtra goes to the Centre.

In the next transaction, ₹5400 is the tax, but ₹3150 has already been paid, so the amount due is ₹2250. This is what Rajasthan collects. And now, the amount owed to the Centre has decreased, to ₹2700, so it will transfer ₹450 to Rajasthan, so that at the end, the Centre and Rajasthan will have received ₹2700 each.

The total tax paid isn't (900+900)+3150+(2700+2700), but 5400, since the 3150 includes the (900+900) and (2700+2700) includes the 3150.

muru
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