GST

1. Meaning, objectives and tax structure

GST is a value-added tax collected at successive stages of production and distribution, with credit generally available for eligible tax paid on business inputs. Its taxable event is supply, rather than manufacture, sale or provision of services considered separately under the earlier system. Although businesses collect and remit it, the economic burden generally falls on the final consumer. It is an indirect tax, not a tax on income or wealth.

Before GST, Union excise duty, service tax, State value-added tax and several other levies operated through partly disconnected credit chains. GST subsumed major taxes including central excise on covered goods, service tax, State VAT on covered goods, central sales tax, purchase tax and luxury tax. It also subsumed entertainment tax except that levied by local bodies. Customs basic duty, stamp duty, electricity duty and motor vehicle taxes were not generally subsumed.

India adopted a dual GST because both the Union and States require taxation powers and revenue. An intra-State taxable supply ordinarily bears Central GST and State GST; Union Territory GST applies instead of State GST in relevant Union Territories. An inter-State taxable supply bears Integrated GST, levied and collected by the Union and apportioned under the constitutional and statutory framework. Thus, one nation, one tax describes market integration, not one authority or one rate.

2. Constitutional design and fiscal federalism

The 101st Constitutional Amendment received presidential assent on 8 September 2016. Article 246A gives Parliament and State legislatures power to make GST laws, while Parliament has exclusive power over GST on inter-State supplies. Article 269A governs inter-State GST and treats imports as inter-State supplies. Article 279A provides for the GST Council, chaired by the Union Finance Minister and including the Union Minister of State in charge of Revenue or Finance and State-nominated ministers.

The Council recommends matters such as rates, exemptions, threshold limits and model laws. Its quorum is one-half of its total membership. A decision requires at least three-fourths of the weighted votes of members present and voting: the Union has one-third weight and States collectively two-thirds. Consequently, the Union can block a proposal, but cannot secure its adoption alone. In practice, consensus has been an important mode of decision-making.

In Union of India v. Mohit Minerals, 2022, the Supreme Court held that GST Council recommendations are not binding on the Union and States. The judgment emphasised cooperative federalism and the simultaneous legislative powers recognised by Article 246A. A Council recommendation must therefore be distinguished from an operative legal change, which requires the appropriate legislative or executive action.

The GST (Compensation to States) Act, 2017 protected State revenue for five years from GST’s introduction, using FY 2015–16 as the base and a projected annual growth rate of 14%. This compensation entitlement ended in June 2022. Collection of compensation cess was extended through March 2026 to service borrowing-related liabilities; this did not extend the original five-year compensation entitlement.

3. Input tax credit, destination principle and compliance

Input tax credit, or ITC, allows a registered taxpayer to offset eligible GST paid on inward supplies against output tax liability, subject to statutory conditions and restrictions. If output GST is ₹180 and eligible input credit is ₹100, the remaining liability is ₹80. Across the supply chain, the credit mechanism reduces tax cascading, meaning the imposition of tax on a value that already contains an earlier tax.

GST follows the destination principle rather than the origin principle. If goods are supplied from Maharashtra to a buyer in Telangana in an inter-State transaction, IGST applies and settlement arrangements allocate the State component towards the destination jurisdiction. Statutory place-of-supply rules identify that jurisdiction; the seller’s location or the physical movement of goods alone does not settle every case, especially for services.

GST administration relies heavily on registration, invoices, returns, payments and electronic ledgers supported by the Goods and Services Tax Network. E-way bills facilitate monitoring of prescribed goods movements, while e-invoicing applies to notified classes of taxpayers. The composition scheme offers eligible small taxpayers a simplified method of taxation, but generally denies input tax credit and does not permit them to collect tax separately from customers. Registration thresholds vary with the nature of supplies, jurisdiction and statutory exceptions.

Exports and supplies to Special Economic Zone units or developers for authorised operations are zero-rated. Unlike an ordinary exempt supply, zero-rating generally preserves access to eligible input credit or refunds, subject to legal conditions. Under reverse charge, liability shifts from the supplier to the recipient for notified supplies; it is not a blanket rule for every purchase from an unregistered supplier.

4. Coverage, rates and important exclusions

GST is broad-based but not comprehensive. Alcoholic liquor for human consumption is excluded by the constitutional definition. Petroleum crude, high-speed diesel, petrol, natural gas and aviation turbine fuel are constitutionally capable of entering GST, but levy awaits a notified date on the Council’s recommendation. For the reference period used here, these five products remained outside the operational levy. Tobacco, by contrast, falls within GST and may also bear Union excise duty.

During FY 2024–25, the principal GST rate slabs were 5%, 12%, 18% and 28%, alongside nil rates and special rates for specified supplies. Compensation cess applied to selected goods, including certain luxury and demerit goods. Rates and classifications are notification-dependent, so aspirants should not treat this reference-period structure as permanently fixed.

Sale of land and, subject to the statutory construction-service exception, sale of buildings are treated as neither a supply of goods nor a supply of services. Under-construction property can therefore attract GST, whereas sale of a completed building ordinarily does not. Nil-rated, exempt, zero-rated and outside-GST supplies should not be used as interchangeable terms.

5. Public finance significance and reform challenges

GST promotes a common national market by reducing fragmented taxation and connecting credit chains. Invoice-based credit creates incentives for recorded transactions and can improve formalisation. Gross GST revenue reached about ₹20.18 lakh crore in FY 2023–24, approximately 11.7% above the previous year. Nevertheless, higher nominal collections can reflect inflation, economic activity, enforcement and policy changes together; they do not independently prove improved compliance.

Major challenges include classification disputes, multiple rates, fraudulent invoicing, blocked credits, refund delays and compliance costs for smaller enterprises. An inverted duty structure, where inputs face higher rates than outputs, can accumulate credit and strain working capital. Consumption taxes can also be regressive relative to household income, although exemptions and differentiated rates partly address distributional concerns.

The reform agenda includes simpler rates, predictable administration, faster dispute resolution, improved refunds and a broader, more continuous credit chain. Public finance analysis must balance revenue adequacy, economic efficiency, equity and State fiscal autonomy rather than judge GST solely by monthly collection records.

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