GST & Indirect Tax — Practice Q&A
Q: What's the difference between when CGST+SGST apply versus when IGST applies?
A: CGST and SGST apply to intra-state transactions (buyer and seller in the same state), splitting the total GST between the central and state governments. IGST applies to inter-state transactions (buyer and seller in different states), charged at the full combined rate by the central government and then apportioned to the destination state — this destination-based apportionment ensures the state where goods/services are actually consumed receives its due tax revenue.
Q: How does Input Tax Credit prevent the cascading-tax problem that existed before GST?
A: ITC allows a business to credit the GST it already paid on its own purchases against the GST it owes on its own sales, meaning the business effectively pays GST only on the value it actually added at its stage of the supply chain. Before GST, multiple separate taxes applied at different supply-chain stages without this credit mechanism, meaning tax could effectively be charged on top of previously-taxed value — ITC directly eliminates this by ensuring tax is only ever levied on the incremental value added at each stage.
Q: A business has a valid tax invoice and has received the goods it purchased, but its supplier never actually remitted the GST charged to the government. Can the business still claim ITC on that purchase?
A: Not reliably — ITC eligibility depends partly on the supplier's own compliance, specifically whether the supplier has reported the sale and paid the GST charged. This means a business can lose ITC eligibility due to a supplier's non-compliance even when the business's own invoice and receipt records are entirely correct — a practically important risk that makes supplier GST-compliance a real business consideration, not just a paperwork formality.
Q: Why might a business primarily selling to other GST-registered businesses avoid the composition scheme, even though it offers simpler compliance?
A: Composition-scheme businesses cannot claim ITC on their own purchases and generally can't pass GST through as a separate charge to customers. This means a business's own customers, if they're GST-registered and would want to claim ITC on their purchase from this business, can't get that benefit from a composition-scheme seller — potentially making the composition-scheme business a less attractive supplier in a B2B context, even at a nominally lower price, offsetting the compliance-simplification benefit.
Q: Why does an error in determining "place of supply" potentially cause more than just a wrong tax rate?
A: Place of supply determines whether a transaction is intra-state (CGST+SGST) or inter-state (IGST) — getting it wrong means charging an entirely different tax type, not just a different rate. This error can then cascade further: it affects what the buyer can correctly claim as ITC, since claiming CGST/SGST credit when IGST was actually correct (or vice versa) creates a mismatch the GSTR-1/GSTR-3B return-matching system is specifically designed to flag, turning one initial classification error into a downstream compliance problem for the buyer as well.
Q: What's the purpose of the reverse charge mechanism, and how does it differ from standard GST collection?
A: Under standard GST, the seller collects GST from the buyer and remits it to the government. Under reverse charge, this flips — the buyer becomes directly liable to pay GST to the government instead of the seller, applicable to specific notified transaction categories. This mechanism exists partly to ensure reliable GST collection in situations where the seller might not be dependably GST-compliant, such as certain unregistered suppliers, by shifting the compliance responsibility to the buyer, who is more likely to already be within the formal GST system.