How does the dual GST structure work?

The dual GST structure in India is designed to address the needs of a federal country, balancing revenue between the central and state governments. Unlike a single, unified GST system, India’s GST comprises two main components on every taxable supply within a state: Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST) (or Union Territory Goods and Services Tax (UTGST) in Union Territories without a legislature). For transactions across states, the Integrated Goods and Services Tax (IGST) applies.

1. How Does the Dual GST Structure Work?

In India’s dual GST system:

Intra-State Transactions (within the same state or Union Territory): Both CGST and SGST (or UTGST) are levied. The tax collected is split equally, with half going to the central government (CGST) and half to the state government (SGST/UTGST).
- Example: If the GST rate on a product is 18%, for an intra-state sale, 9% would go to CGST, and 9% to SGST.
Inter-State Transactions (between different states or Union Territories): IGST is levied on the total value, and the revenue collected is distributed between the central and the destination state.
- Example: For an inter-state sale with a GST rate of 18%, the IGST of 18% would be applied. The central government collects IGST, and then transfers the state’s share based on consumption.

2. Relevant Acts and Provisions in India

The dual GST structure is implemented through specific acts, which set the legal and administrative framework for each GST component.

Central Goods and Services Tax (CGST) Act, 2017: Governs the provisions for CGST, including tax rates, registration requirements, compliance procedures, and input tax credit (ITC) for intra-state transactions.
State Goods and Services Tax (SGST) Act, 2017: Each state has enacted its own SGST Act based on a common framework. The SGST Act defines provisions for intra-state transactions and revenue collection by individual states.
Union Territory Goods and Services Tax (UTGST) Act, 2017: Similar to SGST, but specific to Union Territories without a legislature (like Lakshadweep and Daman and Diu).
Integrated Goods and Services Tax (IGST) Act, 2017: Governs inter-state and international transactions, including imports and exports. It details how IGST is collected, the distribution of revenue, and ITC utilization for inter-state supplies.
Constitution (One Hundred and First Amendment) Act, 2016: This constitutional amendment enabled the GST system by empowering both the central and state governments to collect taxes on goods and services, creating a shared tax structure.

3. Notable Cases Related to the Dual GST Structure

Several landmark cases have shaped and clarified the interpretation and application of the dual GST structure in India:

Mohit Minerals Pvt Ltd. v. Union of India (2020): The Supreme Court ruled that IGST cannot be charged twice for the same transaction. Specifically, it held that IGST on ocean freight was unconstitutional if the importer already paid IGST on the imported goods, clarifying the concept of “double taxation” under GST.
Union of India v. VKC Footsteps India Pvt. Ltd. (2021): The Supreme Court addressed the issue of refund of unutilized ITC under GST. The judgment clarified that CGST and SGST credits on certain inputs could be restricted based on legal provisions, showing how the central and state components of GST function together.
Skill Lotto Solutions Pvt Ltd. v. Union of India (2020): This case involved the application of GST on lottery tickets, which raised questions about the dual structure of GST and its applicability on different types of goods and services. The Supreme Court upheld the GST on lotteries, emphasizing the broad applicability of GST under both CGST and SGST/UTGST components.
AAR Karnataka – M/s Toshniwal Brothers (SR) Pvt. Ltd.: This Advance Ruling addressed the applicability of SGST and CGST for certain types of intra-state transactions and clarified that ITC on SGST can only be utilized for SGST and IGST liabilities, reinforcing the dual credit structure.

4. Key Provisions and Compliance Requirements

Input Tax Credit (ITC): The dual GST system allows businesses to claim ITC for CGST, SGST, and IGST paid on inputs. However, ITC on CGST can only offset CGST and IGST liabilities, while ITC on SGST can only offset SGST and IGST liabilities. This separation reinforces the dual nature of GST, ensuring that central and state taxes remain distinct.
Return Filing and Compliance: Businesses need to file separate returns for CGST, SGST, and IGST, ensuring transparency and accountability for both central and state revenue departments. Monthly and annual returns include details of intra-state and inter-state supplies.
Anti-Profiteering Measures: The GST law includes provisions to prevent businesses from unjustly benefiting from tax reductions. The National Anti-Profiteering Authority (NAA) was established to monitor and ensure that benefits of reduced GST rates or input tax credits are passed on to consumers.

5. Conclusion

India’s dual GST structure is a key element of its tax reform, balancing the interests of the central and state governments while simplifying compliance for businesses. By dividing tax liabilities into CGST, SGST, and IGST, the GST system achieves a uniform tax base across the country, facilitates the free movement of goods and services, and minimizes cascading taxes. Legal provisions and significant cases have further refined the GST framework, ensuring that it meets the evolving needs of India’s federal economy.