Let us look at the three cases below to understand how GST would work in India.
(CGST stands for Central Goods and Services Tax, SGST stands for State Goods and Services Tax, IGST stands for Integrated Goods and Services Tax)
Illustration 1: Sale and resale in the same state
Let us say goods are moving from Pune to Nasik. Since it is a sale within a state (Maharashtra), CGST and SGST will be levied. The collection goes to the Central Government and the State Government.
Then the goods are resold from Nasik to Mumbai. This is again a sale within the state (Maharashtra), so CGST and SGST will be levied. Sale price is increased by the reseller to cover for his profit so tax liability will also increase. In the case of resale, the credit of input CGST and input SGST is claimed and the remaining taxes go to the respective governments.
Illustration 2 : Sale in one state, resale in another state
Let us say goods are moving from Pune to Nasik. Since it is a sale within a state (Maharashtra), CGST and SGST will be levied. The collection goes to the Central Government and the State Government. Later the goods are resold from Nasik to Delhi (outside the Maharashtra state). Therefore, IGST will be levied. IGST goes to the central government.
Against IGST, both the input taxes are taken as credit by the reseller. SGST paid by the initial seller never went to the central government, still the credit is claimed by the reseller. This is the important thing about GST. Since this amounts to a loss to the Central Government, the state government compensates the central government by transferring the credit to the central government.
Illustration 3 : Sale in another state, resale in the same state
Let us say goods are moving from Nasik to Lucknow. Since it is an interstate sale, IGST will be levied. The collection goes to the Central Government. Later the goods are resold from Lucknow to Varanasi (within the state). Therefore, CGST and SGST will be levied.
Against the payment of CGST and SGST, credit of IGST will be taken. IGST never went to the state government, still the credit is claimed against SGST. Since this amounts to a loss to the State Government, the Central government compensates the State government by transferring the credit to the State government.