What Is CGST And How Does It Work?

Introduction

Living in India means dealing with a variety of taxes. Apart from the income tax you pay on your earnings, there are several other taxes applied to the goods and services you use every day. Understanding these taxes is crucial to knowing exactly what you are paying for and why. This article will focus on CGST, the Central Goods and Services Tax, and explain everything you need to know about how it works. 

What Does CGST Mean? 

CGST stands for Central Goods and Services Tax. It is a tax levied and collected by the Central Government on the supply of goods and services for transactions that take place within the same state or union territory. CGST is charged as part of the overall GST structure. 

Why Was CGST Introduced?

CGST was introduced under the CGST Act, 2017, to create a unified tax system across the country. It replaced multiple central taxes, such as service tax, central excise duty, surcharges, and cesses, and combined them into a single tax. CGST was announced to ensure a seamless tax process for businesses and consumers and to eliminate tax evasion. 

How Does CGST Work In Practice?

CGST applies to intrastate transactions when goods or services are purchased and sold within the same state or union territory. The revenue from CGST goes directly to the Central Government.

Let’s consider an example:

If a business in Karnataka sells its products to customers within Karnataka, CGST will be charged on the invoice. The CGST share will be given to the Centre and can be used by the Centre for developmental projects around the country. 

The applicable CGST rate is set by the Goods and Services Tax (GST) Council. 

CGST Features That Matter To You

Here are some CGST features you should know:

• Levied on intrastate or intra-union territory sales: CGST applies only to transactions that happen within the same state or union territory. For instance, if you purchase goods in Maharashtra and the seller delivers them within Maharashtra, CGST will be applicable. However, purchases across state lines are subject to Integrated Goods and Services Tax (IGST) instead.
• Self-assessment: CGST follows a self-assessment model, where businesses calculate their own tax liability and pay it to the government through the GST portal.
• Penalties for non-compliance: Failing to pay CGST or filing incorrect returns can attract penalties, interest charges, or even audits by the tax authorities.
• Rate structure: CGST rates vary based on the category of goods or services. The tax is divided into multiple slabs to ensure fair taxation across essentials and luxury goods and services. 

CGST vs SGST vs IGST

In India, GST is split into CGST, SGST, and IGST, depending on where and how the transaction takes place. Here is a breakdown of how they differ:

Example: CGST Calculation In Action

Suppose Business ABC, located in Tamil Nadu, sells goods worth ₹ 10,000 to Business DCE, also in Tamil Nadu. The applicable GST rate on these goods is 5% (for essential goods and services).

Here’s how the calculation works:

Total GST: 5% of ₹ 10,000 = ₹ 500

Since this is an intrastate transaction, GST is split equally into CGST and SGST.

• CGST: 2.5% of ₹ 10,000 = ₹ 250 goes to the Central Government
• SGST: 2.5% of ₹ 10,000 = ₹ 250 goes to the State Government

Business ABC will collect ₹ 10,500 (₹ 10,000 + ₹ 500 GST) from Business DCE and deposit the tax amounts via the GST portal.

Advantages Of CGST

Here are some benefits of CGST:

• Streamlined tax process: CGST simplifies the way taxes are collected and paid, which makes compliance easier for businesses and reduces administrative hassles.
• Steady revenue for the government: The central government receives a consistent flow of revenue, which can then be used to fund development projects and public welfare programs across the country.
• Customer savings: With clearly defined tax rates, there is less risk of overcharging. This allows customers to save money. It also ensures price transparency.
• Reduced tax evasion: The structured and transparent system under CGST minimises tax fraud. 

Also Read: GST in India: Meaning, Advantages & Disadvantages Explained

Conclusion

The CGST system was designed to simplify tax collection and create a unified approach to taxation in the country. It reduces the chances of tax fraud, makes compliance easier for businesses, and ensures a steady flow of revenue for the government. Overall, CGST contributes to a more transparent and efficient tax framework. 

Also Read: GST Registration - What is GST Registration & its Types