Goods & Service Tax (GST)

The Goods and Services Tax (GST) stands as a landmark tax reform in India, fundamentally transforming the nation's indirect tax structure.

Enacted on July 1, 2017, the GST replaced a complex network of multiple taxes levied by the central and state governments, unifying them under a single umbrella tax.

This revolutionary tax system has had a profound impact on the Indian economy, streamlining processes, promoting transparency, and aiming to create a unified national market.

GST operates on the principle of 'One Nation, One Tax, One Market,' designed to consolidate various indirect taxes such as service tax, excise duty, VAT, and others into a unified tax structure.

It eradicates the cascading effect of taxes, fostering a more efficient tax system where the taxes are levied only on the value added at each stage of the supply chain.

This comprehensive, multi-stage 'destination-based consumption tax' ensures that tax revenue accrues to the state where goods or services are ultimately consumed.

The GST is ultimately paid by the consumers who are the final link in the chain, but it is remitted to the government by the businesses selling the goods and services.

☰Table of Contents

Basic Facts

GST Day – July 1.
Introduced – July 1, 2017.
Type of Tax – Destination-based, Indirect Tax.
Applicable on – Supply of goods and services.
Levied from – Manufacturers, Retailers & Consumers.
Implemented by – Both Central and State Governments.
Aim – To reduce tax evasion, simplify the tax structure, promote ease of doing business, and enhance tax compliance.
First Country in the World where the concept of GST evolved – Canada.
First Country in the World to implement GST – France (1954).
Global Adoption – More than 180 countries in the world have implemented GST or a similar value-added tax system.
Country with the Highest GST Rate in the world – India. (>28%).

2nd – Argentina (27%)
3rd – UK (20%).

GST was First Proposed in India in – 2000.
Father of GST in India – Atal Bihari Vajpayee.
The Real Architect of India’s GST – Azim Dasgupta.
First Committee to study the model of GST in India – Asim Dasgupta Committee.
First person to introduce the concept of GST in the Indian Parliament – P. Chidambaram (2005).
Constitutional Amendment for GST – A Separate List, Article 246A, was inserted into the Constitution.

This article grants concurrent power to both the Parliament and state legislatures to make laws concerning GST.

The task force that proposed the idea of a nationwide GST – Kelkar Task Force on indirect tax (2000; report submitted in 2003).
First State in India to ratify GST – Assam (August 12, 2016).

2nd – Bihar.
3rd – Jharkhand.

GST introduced in Jammu & Kashmir with effect from – July 8, 2017
Form of GST practiced in India – Dual GST (separate GSTs for the central and state governments).
Other countries that use the Dual GST system – Canada & Brazil.
Types of GSTs in India – 4.

CGST
SGST
IGST
UTGST

Four Tier Structure of GST in India (tax slabs) – 0%, 5%, 12%, 18% & 28%.
After the introduction of GST, supplies to SEZ (Special Economic Zone) units are – 0%.
GST Threshold Limit –

Goods – Rs 40 lakhs & Rs 20 lakhs.
Services – Rs 20 lakhs & Rs 10 lakhs.

Brand Ambassador of GST – Amitabh Bachchan.
Punishment for non-payment of GST – Can include imprisonment up to 5 years for serious offenses like tax evasion.

History

The idea of GST was first proposed by the Atal Bihari Vajpayee government in 2000. A committee under the leadership of Asim Dasgupta was formed to recommend a framework for GST.

(There was a precursor to GST: the Modified Value Added Tax (MODVAT), introduced in India in 1986 by then Finance Minister V.P. Singh. MODVAT allowed manufacturers to claim credit for excise duties paid on inputs, reducing tax cascading and laying groundwork for future indirect tax reforms.)

This was followed in 2003 by the Kelkar Task Force, chaired by Dr. Vijay L. Kelkar, which was set up to recommend a framework for the GST system in India.

The Task Force's detailed report laid the foundation for the dual GST model and the removal of cascading taxes, which significantly influenced the design and eventual implementation of GST in 2017.

The momentum continued when Finance Minister P. Chidambaram mentioned GST in his 2006 Budget Speech, (the plan to introduce GST by April 1, 2010) signaling the government's commitment to this major tax reform.

The initial attempt to legislate GST saw the 115th Constitutional Amendment Bill introduced (again by P. Chidambaram) in Parliament in 2011, but it lapsed due to political disagreements and a lack of consensus among parties.

After the 2014 general elections, NDA came to power and Arun Jaitley became the new Union Finance Minister.

The reform gained new impetus when the Modi government reintroduced the 122nd Constitutional Amendment Bill in 2014 by Arun Jaitley in the Lok Sabha on December 19, 2014.

. After extensive deliberations and amendments, it was successfully passed by Parliament in 2016.

This culminated in the enactment of the 101st Constitutional Amendment Act in 2016, which provided the essential legal framework for GST and led to the formation of the GST Council, a constitutional body tasked with governing the new tax regime.

The 101st Constitutional Amendment Act, 2016, introduced three new articles to the Indian Constitution to enable the implementation of the GST:

Article 246A grants concurrent power to both Parliament and State Legislatures to make laws for GST, with Parliament having exclusive power for inter-state GST.
Article 269A mandates the Central Government to levy and collect IGST (Inter-State GST), with its apportionment between the Union and States determined by Parliament based on GST Council recommendations.
Article 279A establishes the Goods and Services Tax Council (GST Council), a joint forum of the Centre and States, to make recommendations on various aspects of GST, including rates, exemptions, and laws.

Finally, after nearly two decades of conceptualization and legislative efforts, India officially launched GST on July 1, 2017, marking a historic overhaul of the nation's indirect tax structure by replacing a complex web of existing taxes with a unified system.

Empowered Committee of State Finance Ministers on Goods and Services Tax (GST)

It was originally set up by the Government of India on July 17, 2000, with finance ministers from several states as members. It later registered as a Society under the Societies Registration Act in 2004.

Its primary objective was to monitor and facilitate the transition from the existing indirect tax system (like VAT) to a unified GST regime.

First chairman of the Empowered Committee – Dr. Azim Dasgupta.
Only Keralite who has served as the chairman of the Empowered Committee of State Finance Ministers on GST – K.M. Mani.

It has been largely superseded by the GST Council since the formal implementation of GST on July 1, 2017.

GST Bill Milestones

First Introduced in Parliament – 2014 (as the 122nd Constitution Amendment Bill).
First introduced in Lok Sabha on – December 19, 2014.
Rajya Sabha passed the GST Bill on – August 3, 2016
Lok Sabha passed the GST Bill (after Rajya Sabha's amendments) on – August 8, 2016
Presidential Assent – September 8, 2016
Officially inaugurated on – June 30, 2017 (a midnight session in Parliament)

Inaugurated by – Pranab Mukherjee (then President of India) & Narendra Modi (Prime Minister of India)

Came into effect on – July 1, 2017

GST Council

The Council is a constitutional body and a joint forum of the centre and the states, responsible for key decision-making and ensuring the smooth functioning of the tax system.

Headquarters – New Delhi
First Chairperson of the GST Council – Arun Jaitley.
Current Chairperson of the GST Council – Nirmala Sitharaman.
Constitutional Basis – Under Article 279A of the Constitution.
The first meeting of the GST council was held on – 22nd & 23rd September, 2016.

Composition

Chairperson – Union Finance Minister.
Members – Union Minister of State for Finance/Revenue & State Finance Ministers or any other Minister nominated by each state government
No. of members in the GST Council – 33 members.
The members of the Council from the states have to choose one amongst themselves to be the Vice-Chairperson of the Council. They can also decide his term.

In the GST Council, the central government's votes account for one-third of the total, with the state governments collectively holding the remaining two-thirds.

For any decision to be approved by the GST Council, a majority of not less than three-fourths (75%) of the weighted votes of the members present and voting is required.

Functions of the GST Council

The GST Council is a pivotal body responsible for making recommendations to the Union and State Governments on issues related to GST, including:

Fixing GST Rates: recommends tax rates for various goods and services.
Exemptions and Threshold Limits: decides which goods and services should be subjected to, or exempted from GST, which taxes, cesses, and surcharges to be subsumed in GST, and sets the threshold limit for registration.
Harmonization of Laws: works towards uniformity in GST laws across states, such as principles of levy, apportionment of IGST, and principles ensuring no major discrepancies in implementation.
Dispute Resolution: resolves issues between the Centre and states, ensuring a smoother tax implementation process.
Special Provisions: recommends special provisions for states like Jammu & Kashmir and other special category states.

GST Appellate Tribunal (GSTAT)

It is a specialized quasi-judicial body established under GST laws to resolve disputes between taxpayers and tax authorities.

Its principal branch is located in New Delhi.

GSTAT serves as the second level of appeal for GST-related grievances, aiming to provide faster, consistent, and expert resolution of cases.

GSTN (Goods and Services Tax Network)

The GSTN is the technological backbone of the GST system, providing a seamless digital infrastructure for taxpayers and tax authorities.

It is a 100% government-owned company incorporated under Section 8 of the Companies Act, 2013 (for not-for-profit companies).

Initially, GSTN was set up in 2013 with a 51% stake held by private financial institutions and the remaining 49% by the Central and State Governments. However, this structure raised concerns about data security and accountability.

To address this, in 2018, the government approved a change in the ownership model.

As of 2019, GSTN is now 100% government-owned, with:

50% held by the Central Government
50% collectively held by State Governments and Union Territories

TCS (Tata Consultancy Services) serves as the Managed Service Provider (MSP) responsible for developing and maintaining the IT infrastructure, including the GST portal used by taxpayers and officials.

Responsibilities

Facilitating GST Registration: GSTN handles the process of registration for businesses under GST.
Return Filing: It processes the filing of GST returns (e.g., GSTR-1, GSTR-3B).
Payments: GSTN enables taxpayers to make tax payments online.
Compliance Tracking: It monitors tax compliance and ensures taxpayers are adhering to the rules.

Types of GST

To ensure proper division of revenue between the central and state governments, GST is broadly categorized into four types.

Depending on the nature of the transaction (intra-state or inter-state) and the type of territory (state or union territory), they are as follows:

CGST (Central GST) – collected by the Central Government on intra-state transactions.
SGST (State GST) – levied by the State Government on intra-state supplies)
UTGST (Union Territory GST) – Union Territory Goods and Services Tax (levied by Union Territories on intra-Union Territory supplies)
IGST (Integrated GST) – imposed on inter-state trade, imports into India & exports from India (even though exports are zero-rated). It is collected by the Central Government and then revenue is apportioned between the Centre and the destination state as per the provisions laid out under the IGST Act, 2017.

In essence:

Intra-state transactions: CGST + SGST (or CGST + UTGST for specific Union Territories)
Inter-state transactions (and imports/exports): IGST

GST Composition Scheme / Composite GST

The GST Composition Scheme (often referred to as 'composite GST') is a simplified tax option for small taxpayers in India.

It allows eligible businesses to pay GST at a lower, fixed percentage of their turnover, significantly reducing their compliance burden and simplifying tax filings compared to regular GST.

Under this scheme, the taxpayers have to file returns quarterly.

GST Threshold Limit

The threshold limit determines the minimum turnover a business must have to register under GST. This varies based on the type of goods or services provided and the location of the business.

Category	Standard States (Aggregate Turnover)	Special Category States (Aggregate Turnover)
Goods	Exceeds Rs 40 lakhs	Exceeds Rs 20 lakhs
Services	Exceeds Rs 20 lakhs	Exceeds Rs 10 lakhs
Special Category States include: Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Puducherry, Sikkim, Telangana, Tripura, and Uttarakhand. *Note: For interstate supply of goods, GST registration is required regardless of turnover.

Taxes subsumed by GST

GST was introduced to eliminate the tax cascading effect (tax on tax) and streamline the indirect tax structure. Multiple taxes were subsumed into the GST regime to create a single tax system.

Central Taxes Subsumed by GST

Tax Name	Brief Description
Central Excise Duty	Tax on goods manufacture (excl. petroleum/alcohol).
Service Tax	Tax on services provided.
Additional Excise Duties	Special excise duties on specific goods.
Excise Duty (incl. Medicinal & Toiletries)	Duty on medicinal/toilet preparations with alcohol/narcotics.
Additional Customs Duty (CVD)	Equalizes excise duty on imported goods.
Special Additional Duty of Customs (SAD)	Counterbalances state VAT/sales tax on imports.
Central Surcharges and Cesses	Central levies related to goods/services.

State Taxes Subsumed by GST

Tax Name	Brief Description
State Value Added Tax (VAT) / Sales Tax	Primary state tax on intrastate goods sales.
Central Sales Tax (CST)	Tax on interstate goods sales (collected by the origin state).
Luxury Tax	Tax on luxury goods and services (e.g., hotels).
Octroi & Entry Tax (All forms)	Tax on goods entering a local area.
Entertainment Tax	Tax on entertainment (excl. local body levies).
Purchase Tax	Tax on certain goods purchases.
Taxes on Advertisements	Tax on advertisements (excl. local body levies).
Taxes on Lotteries, Betting, and Gambling	State taxes on these activities.
State Surcharges and Cesses	State levies related to goods/services.

Important Taxes NOT Subsumed by GST

Below is the list of important taxes that are not subsumed by GST:

Basic Customs Duty (BCD): Still levied on imported goods.
Anti-Dumping Duty (ADD) and Safeguard Duty (SGD): These are trade remedial measures imposed under the Customs Tariff Act, 1975, to protect domestic industries from unfair trade practices (dumping) or a sudden surge in imports (safeguard).
Customs Cess and Surcharge on Customs Duty: Various cesses and surcharges (like Education Cess, Higher Education Cess, Social Welfare Surcharge) were levied on top of Basic Customs Duty. While some of the terminology or specific rates might have changed, the concept of levying additional cesses or surcharges on customs duties is a long-standing practice in India's import taxation structure.
Excise Duty on Alcoholic Liquor for Human Consumption: Continues to be levied by state governments.
Taxes on Petroleum Products: This includes petroleum crude, high-speed diesel, motor spirit (petrol), natural gas, and aviation turbine fuel (ATF). These remain outside GST and are subject to central excise duty and state VAT/sales tax.
Stamp Duty: Levied on the transfer of immovable property.
Electricity Duty: Levied by states on the consumption of electricity.
Road & Passenger Tax, Toll Tax: Often seen as user fees, not taxes on goods/services

Items exempted from GST

Some essential goods and services are exempt from GST to ensure that basic needs remain affordable for all sections of society.

Alcohol for human consumption (States retain control over alcohol taxation).
Petroleum products (Crude oil, Petrol, Diesel, Natural Gas, ATF (aviation fuel) – currently outside GST)
Electricity
Basic food items like fresh fruits, vegetables, milk, eggs, etc.
Healthcare and educational services
Tobacco Products

Advantages of GST

The advantages of GST are as follows:

Simplified Tax Structure: Replaced a multitude of complex indirect taxes with a single, unified tax, making compliance easier for businesses.
Elimination of Cascading Effect: By allowing input tax credit across the entire supply chain, it prevents 'tax on tax,' leading to a reduction in the final cost of goods and services.

Input Tax Credit

Input Tax Credit (ITC) in GST allows businesses to reduce their tax liability on sales by claiming credit for the GST they've already paid on their purchases of goods and services used for business.

Essentially, it prevents 'tax on tax' (the cascading effect) by ensuring tax is only paid on the value added at each stage of the supply chain.

National Anti-Profiteering Authority (NAA)

The National Anti-Profiteering Authority (NAA) was a statutory body established in November 2017 under Section 171 of the Central Goods and Services Tax Act, 2017.

Its primary role was to investigate complaints of profiteering and take action against non-compliant suppliers.

National Anti-Profiteering Authority (NAA) officially ceased to exist on November 30, 2022.

The reason was that it was established as a temporary body for two years (until November 2019) to oversee the initial transition to GST and ensure that tax benefits were passed on.

Its tenure was extended multiple times before its eventual winding up in 2022.

Its functions were largely taken over by the Competition Commission of India (CCI) from December 1, 2022. The anti-profiteering division now functions under the Principal Bench of the Goods and Services Tax Appellate Tribunal (GSTAT).

Unified National Market: Facilitates seamless movement of goods and services across states by removing state-specific barriers and checkpoints, fostering economic integration.
Increased Transparency: The digital nature of GST operations enhances transparency in the tax system.
Improved Compliance: Simplified procedures, digital interfaces, and automated processes encourage businesses to comply, leading to a broader tax base and higher revenue collection.
Boost to 'Make in India': Reduces manufacturing costs and makes Indian products more competitive in both domestic and international markets.
Better Logistics and Supply Chain Efficiency: With the removal of interstate check posts, goods movement is faster, leading to optimized logistics.

Challenges of GST

Despite its significant advantages, the implementation of GST in India has faced and continues to navigate several challenges.

These issues stem from its complex structure, the unique federal setup of the country, and the ongoing process of adapting to a new tax regime:

Initial Implementation Hurdles: Businesses faced challenges in adapting to the new compliance regime, particularly with the digital infrastructure and frequent changes in rules and rates during the initial years.
Complexity of Compliance for Some: While simplified for some, for many small and medium businesses, navigating the multiple return filings and reconciliation processes can still be complex.
Complexity in Input Tax Credit Utilization (Cross-Utilization Restrictions):
One of the fundamental principles of GST is seamless input tax credit (ITC) flow. However, a significant practical challenge arises from the restrictions on cross-utilization, particularly where SGST and CGST input credits cannot be cross-utilized against each other.
This means a business might have accumulated SGST credit in one state but needs to pay CGST in cash for intra-state sales, leading to blocked working capital and cash flow disruptions, especially for businesses with varied intra-state and inter-state transactions.

Revenue Impact on Manufacturing States:
As a destination-based consumption tax, GST means that tax revenue accrues to the state where goods or services are finally consumed, not where they are manufactured.
Consequently, manufacturing states, which previously collected various taxes at the point of production, face a significant shift in their revenue streams and may experience a loss of revenue on a larger scale compared to consumer states.
While a compensation cess was introduced for the initial five years (subsequently extended), the long-term impact on the fiscal health of manufacturing states remains a key concern.
High Revenue Neutral Rate (RNR) and Multi-Tier Structure:
The "Revenue Neutral Rate" (RNR) was a critical concept debated during GST formulation, aiming to compensate for the revenue collected from multiple previous taxes.
To ensure no loss of revenue for central and state governments, the GST was introduced with a relatively high aggregate tax burden, leading to a high effective Revenue Neutral Rate.
This, coupled with India's multi-tier tax structure (0%, 5%, 12%, 18%, and 28% for common goods and services, along with special rates for certain items), diverges from the "One Nation, One Tax" ideal.
This complexity can lead to classification disputes and higher compliance costs for businesses, potentially burdening consumers.

Revenue Neutral Rate (RNR)

The Revenue Neutral Rate (RNR) is a theoretical tax rate designed to ensure that a government collects the same amount of revenue under a new tax system as it did under the pre-GST tax system.

This ensures no loss or gain in revenue after transitioning to GST.

It is a weighted average of the previous indirect tax rates collected by both the Centre and States, adjusted for the tax base and exemptions. The RNR helps maintain fiscal stability during tax reform.

In 2015, the Thirteenth Finance Commission under Dr. Vijay Kelkar estimated the RNR between 15%–15.5%.

The Arvind Subramanian Committee (2015) estimated the RNR to be around 15%, with a recommended standard GST rate of 17–18%. In essence, RNR ensures the shift to GST remains revenue-neutral for the government.

However, today the effective weighted average GST rate has fallen to to 12.2% as of 2023.

Reduction in States' Fiscal Autonomy:
The establishment of the GST Council, where decisions on tax rates, exemptions, and laws are made collectively by the Centre and States, has undeniably led to a reduction in the fiscal autonomy of the States.
While fostering cooperative federalism, states have less independent power to set their own tax policies for a significant portion of their revenue base, which was previously possible under the VAT regime.
This centralisation of indirect tax policy-making represents a fundamental shift in fiscal federalism.
Multiple Registrations for Pan-India Businesses (e.g., Banks and Insurance Companies):
For businesses with a pan-India presence, such as banks and insurance companies, a major concern raised has been the need for multiple GST registrations.
Unlike the previous centralized registration for service tax, GST mandates separate registrations for each state or Union Territory where it operates.
This significantly increases their compliance burden in terms of filings, assessments, and reconciliations across different jurisdictions, even if their operations are centrally managed.
The Levy of Additional Cess:
Beyond the standard GST rates, the government levies an additional cess (GST Compensation Cess) on certain luxury, demerit, and sin goods (e.g., tobacco products, aerated drinks, luxury cars).
While initially intended to compensate states for revenue losses during the transition period, the continued imposition of this cess raises questions about its long-term necessity and impact on product pricing.
Furthermore, the proceeds from this cess are not part of the divisible pool shared with states, which can sometimes lead to fiscal imbalances.
Capacity of State Tax Authorities:
Historically, state tax authorities were primarily accustomed to taxing goods (through VAT/sales tax) and had limited experience with taxing services.
Under GST, both goods and services are taxed comprehensively.
This required a significant shift in expertise and training, and the capacity of State tax authorities to effectively deal with the taxation of services is an ongoing challenge and an area that requires continuous strengthening.
Technological Reliance: The entire system is heavily dependent on the robust functioning of the GSTN portal, and any technical glitches can disrupt operations.
Exclusion of Key Sectors: Keeping petroleum products, alcohol, and electricity out of GST creates breaks in the input tax credit chain, leading to higher costs for certain industries.
E-invoicing and E-way Bill Adoption: While largely successful, consistent adoption and understanding of these digital tools remain an ongoing effort for all businesses.

Electronic Way Bill or E-Way Bill

It is a mandatory digital document required under the Goods and Services Tax (GST) regime in India for the movement of goods. It's generated electronically on the GST portal.

It contains details about a consignment of goods, including the consignor (sender), consignee (receiver), point of origin, destination, value of goods, GSTIN, HSN code (Harmonized System of Nomenclature for goods), and transport details (vehicle number, transporter ID).

The validity of an e-way bill depends on the distance the goods are to be transported. For regular vehicles, it's typically one day for every 200 km or part thereof.

HSN Code (Harmonized System of Nomenclature for goods)

HSN code is an internationally recognized system for classifying goods.

Developed by the World Customs Organization (WCO), it provides a systematic way to categorize products based on their characteristics, composition, and function. It gets updated every 5 years.

Under the GST regime, goods are classified under the HSN Code.

HSN Code Requirement –

Businesses with an aggregate turnover up to Rs. 5 crore are required to use 4-digit HSN codes.
Businesses with an aggregate turnover above Rs. 5 crore must use 6-digit HSN codes.

SAC Code (Service Accounting Code)

It is a six-digit classification system used under India's GST regime to uniquely identify and categorize various services.

SAV was developed by the Central Board of Indirect Taxes and Customs (CBIC), drawing from the UN Central Product Classification.

Every SAC code begins with '99' to denote services, followed by four digits that specify the major and detailed nature of the particular service.

Its primary purpose is to ensure accurate GST rate determination, simplify invoicing, streamline GST return filing, and enable effective government monitoring of service-related tax collections, thereby bringing uniformity and clarity to the taxation of services across the country.

Dynamic QR Code on B2C invoices

The Dynamic QR Code on B2C (Business to Customer) invoices, mandatory from July 1, 2021, for businesses with over ₹500 crore turnover, aims to boost digital payments and transparency in India's GST system.

Each unique QR code contains crucial invoice details, enabling customers to easily scan and pay, while also helping tax authorities curb evasion in B2C transactions.

SideNotes:

Indirect Tax – the tax levied on goods and services that is collected by an intermediary (like a seller) and then passed on to the final consumer through the price of the product or service.
The first country to implement a modern VAT/GST system – France.
Gift Tax –

Introduced in 1958.
Repealed in 1998.
reintroduced under the Income Tax Act, 1961 (specifically Section 56(2)) in 2004.
a tax imposed on the transfer of money or property from one living person or entity to another, where nothing (or less than full value) is received in return.
Recipient pays the tax.

Sin Tax –

an excise tax specifically levied on certain goods or services that are considered harmful to individuals or society
applied to tobacco, sugary drinks, pan masala and gambling.