Indirect taxes

1. Meaning, incidence and economic effects

An indirect tax is conventionally distinguished by the possibility that the person responsible for paying it to the government can shift its burden through prices. A supplier may collect GST from a buyer and remit the amount to the government. By contrast, income tax is assessed directly on the taxpayer’s income. This distinction is useful for classification, but actual economic incidence depends on market conditions rather than the legal label alone.

Statutory incidence identifies who must account for the tax under law; economic incidence identifies whose real income falls because of it. When demand is relatively inelastic, consumers generally bear more of a tax. When supply is relatively inelastic, producers generally bear more. Competition, bargaining power and price regulation also influence pass-through. Therefore, the statement that consumers always bear the entire burden of an indirect tax is incorrect.

Indirect taxes can mobilise substantial revenue through a wide consumption base and are collected at identifiable transaction points. Taxes on tobacco or polluting products can also discourage activities with negative externalities. However, broad consumption taxes may be regressive relative to current income because poorer households typically consume a larger share of their income. Exemptions for essentials, differentiated rates and targeted public expenditure can moderate this effect, although multiple rates complicate compliance.

• Ad valorem tax: calculated as a percentage of value, such as a customs duty expressed as a percentage of assessable value.
• Specific tax: a fixed amount per physical unit, such as a levy per litre or per thousand units.
• Buoyancy: responsiveness of tax revenue to changes in GDP, including the effects of discretionary policy changes.

2. GST design and input tax credit

Before GST, India imposed several overlapping indirect taxes, including central excise duty, service tax, State VAT, entry taxes and luxury taxes. Credit across these tax systems was restricted, producing cascading: tax became part of the cost on which another tax was charged. GST subsumed many, but not all, of these levies and adopted supply as its principal taxable event.

GST is a multi-stage value-added tax. Registered businesses generally deduct eligible tax paid on purchases from tax payable on outward supplies. Suppose a trader purchases goods worth ₹100 plus ₹18 GST and sells them for ₹150 plus ₹27 GST. Assuming full credit eligibility, the trader remits ₹9, after using ₹18 as input tax credit. The final consumer cannot ordinarily claim this business credit.

Input tax credit is not automatic for every expenditure. Eligibility depends on legal conditions, documentation, receipt of supplies, prescribed compliance and the absence of blocked-credit restrictions. Exempt output supplies generally require denial or reversal of related input credit. Missing invoices, fraudulent credit claims and failures in supplier compliance can disrupt the credit chain.

An exemption is different from zero-rating. An exempt supply generally bears no output GST but does not preserve ordinary credit for attributable inputs. Zero-rating permits eligible input credit and refunds through prescribed routes, helping prevent exports from carrying domestic GST. A nil-rated supply has a zero rate in the rate schedule; it should not be confused with an export merely because both may show no output tax.

• GST is destination-based: revenue is intended to accrue to the jurisdiction of consumption, determined through place-of-supply rules.
• Reverse charge shifts the liability to pay GST from the supplier to the recipient in specified cases.
• Under the composition scheme, eligible small taxpayers pay through a simplified arrangement but ordinarily cannot collect GST separately or claim input tax credit.

3. Constitutional structure and fiscal federalism

Article 246A gives Parliament and State legislatures powers to make GST laws, while Parliament has exclusive power over GST on inter-State supplies. Article 269A governs the levy and collection of GST on inter-State trade or commerce by the Union and its apportionment between the Union and States. Imports are treated as inter-State supplies for this constitutional framework.

India follows a dual GST model. An intra-State taxable supply ordinarily attracts Central GST and State GST, or Union Territory GST where applicable. An inter-State taxable supply attracts Integrated GST. IGST provides the mechanism for credit transfers and revenue settlement across jurisdictions; it is not simply an additional tax layered over CGST and SGST on the same transaction.

The GST Council, established under Article 279A, is chaired by the Union Finance Minister and includes representatives of the Union and States. If voting occurs, a decision requires at least three-fourths of the weighted votes of members present and voting. The Union holds one-third of the voting weight and States collectively hold two-thirds. Neither can independently secure a decision.

In Union of India v. Mohit Minerals, 2022, the Supreme Court held that GST Council recommendations are not binding on the Union and States. They nevertheless have major persuasive and practical importance in maintaining a coordinated tax system. The GST compensation framework guaranteed States compensation for specified revenue losses for five years from GST’s introduction, using 2015–16 as the base year and 14 per cent annual protected revenue growth. That five-year compensation period ended in June 2022.

• The Council recommends matters including rates, exemptions, threshold limits and model GST laws.
• GST compensation entitlement and the period of collection of compensation cess are distinct; extending cess collection does not itself extend the compensation guarantee.

4. Indirect taxes outside GST

Alcoholic liquor for human consumption is outside the constitutional definition of GST. States continue to derive revenue from State excise and applicable sales taxes on it. Petroleum crude, high-speed diesel, petrol, natural gas and aviation turbine fuel have a different status: the constitutional framework permits GST, but its commencement requires a notified date on the GST Council’s recommendation. They continue under relevant existing tax arrangements until that transition.

Basic Customs Duty remains a Union levy on imports under the customs framework. Imports may also attract Social Welfare Surcharge, IGST and other applicable levies, subject to exemptions and product-specific provisions. Import IGST may qualify for input credit for an eligible registered importer, whereas Basic Customs Duty is not available as GST input credit. Customs duties serve revenue, trade-policy and protection objectives.

GST did not abolish every levy associated with goods, services or property. Electricity duty, motor vehicle taxes and stamp duties remain important examples outside its general credit chain. Tobacco is a notable exception to simplistic classifications: tobacco products are within GST, while central excise may also apply. Consequently, the claim that GST replaced all indirect taxes is false.

• Central excise concerns specified domestically produced goods; customs duties concern cross-border movement of goods.
• Sale of land and sale of a completed building, subject to statutory conditions, are treated as neither a supply of goods nor a supply of services under GST.
• GST rates and exemptions can change through notifications; always distinguish durable institutional principles from date-specific rate facts.

5. Administration, revenue interpretation and reform issues

GST administration combines registration, invoices, returns, payment and credit matching through a common digital framework. GSTN provides the technology infrastructure, while Union and State tax administrations exercise statutory functions. E-way bills track specified movements of goods, whereas e-invoicing involves reporting prescribed invoice details to an authorised system for authentication. Neither should be confused with the other.

GST can support formalisation by encouraging purchasers to seek invoices and eligible credit. A more integrated market can reduce tax-related fragmentation and improve logistics. However, smaller firms may face disproportionate compliance costs, exporters can experience refund-related working-capital pressures, and fake invoices can facilitate fraudulent credit claims. Effective administration must balance enforcement with certainty and ease of compliance.

Higher nominal GST collections do not necessarily prove that compliance alone has improved. Collections also reflect inflation, real economic growth, imports, rate changes, enforcement and the timing of refunds. Analysts should distinguish gross collections from revenue after refunds and distinguish pre-settlement tax components from final Union and State receipts. Reform debates commonly concern rate rationalisation, fewer classification disputes, predictable refunds and reduction of breaks in the input-credit chain.

• Prelims approach: identify the taxable event, collecting authority, destination rule and credit treatment before evaluating a statement.
• Equity must be assessed across taxes and expenditure together, rather than from an isolated tax rate.

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