Goods and Services Tax

Introduction- The goods and services tax (GST), is a multi-stage, destination-based tax that is levied on most of the
goods and services sold in India for domestic consumption. It is based on the principle of Value Added Tax (VAT).
Introduced in India on 1 July 2017 as the Constitution (101st Amendment) Act in 2016. Replaced a host of indirect taxes
being levied by the central and state governments, which has changed the taxation landscape. Theme was to have a
‘one nation one tax’ which would improve ease of doing business for taxpayers, bring in transparency, ensure timely
compliance and ultimately reduce the tax burden for the common man. Assam was the first state to implement the GST.
The GST Council is now chaired by Finance Ministe. France was the first country to impose the Goods and Services Tax
(GST).

In 2003, the Kelkar Task Force on Indirect Tax mentioned a comprehensive Goods and Services Tax, which is based on
the principle of Value Added Tax (VAT).
 “GST is a good reform for India in the long run, but the success depends on its proper implementation and the
willingness of states to cooperate.”
 Bibek Debroy has been a strong advocate of GST, asserting that it is crucial for India’s economic modernization.
Constitutional Framework for Goods and Services Tax (GST) - New Articles Introduced by the
101st Amendment
1. Article 246A- Grants concurrent powers to both Parliament and State Legislatures to legislate on GST. Exclusive
power given to Parliament for legislating on inter-state trade of goods and services.
2. Article 269A- GST on inter-state trade to be levied and collected by the Union Government. The tax revenue
proceeds to be apportioned between the Centre and States. Apportionment to be based on Parliamentary law
and recommendations from the GST Council.
3. Article 279A- Empowers the President to constitute the GST Council.
Rationales behind the implementation of GST in India
1. Simplification of the Tax Structure
o Unified multiple indirect taxes (e.g., VAT, excise, service tax) into a single tax system, reducing
complexity.
o Eliminated cascading effects of "tax on tax," creating a more transparent tax regime.
2. Creation of a Common National Market
o GST standardized taxes across states, removing barriers to inter-state trade.
o Promotes economic integration by reducing logistics costs and boosting the ease of doing business.
3. Boost to Economic Efficiency
o Encourages formalization of businesses by providing input tax credits.
o Reduces tax evasion through technology-based compliance, like e-invoicing and GST portals.
4. Enhancement of Revenue Collection
o Broadens the tax base by bringing unorganized sectors under the GST net.
o Rationalizes the system, leading to increased compliance and improved tax buoyancy.
5. Encouragement for Cooperative Federalism
o The GST Council ensures collaboration between the Centre and States, enabling joint decision-making.
o Strengthens fiscal federalism by allowing both levels of government to share revenues.
Benefits of GST in India

1. Boosts Economic Integration- GST unified India into a single national market by replacing 17 central and state taxes
and 13 cesses. Reduced logistical barriers and interstate tax discrepancies. Ex- The E-Way Bill system, launched in 2018,
reduced truck transit times by 20%-30%, according to a report by NITI Aayog.
2. Promotes Ease of Doing Business- India's rank in the World Bank's Ease of Doing Business Index improved from 130
in 2016 to 63 in 2024, with GST cited as a key reform. Streamlined tax compliance through online systems like GSTN
Portal, enabling seamless filing for businesses. Example: The Quarterly Return Filing Mechanism for small taxpayers
simplifies compliance for 1.25 crore businesses.
3. Enhances Tax Revenue Collection- Gross GST collection: ₹1.87 lakh crore, marking the second-highest monthly record
in FY 2024-25. Broader tax base due to formalization of businesses and reduced evasion through technology-driven
compliance like e-invoicing. Example: Economic Survey 2022-23 highlighted that GST has increased tax buoyancy,
boosting revenues for both Centre and States.
4. Encourages Formalization of the Economy- over 1.3 crore taxpayers registered under GST by 2023, formalizing
unorganized sectors. Input Tax Credit (ITC) incentivizes businesses to register under GST, curbing tax evasion.
5. Reduces Logistical and Supply Chain Costs- Logistics costs reduced by 30%, increasing India's competitiveness in
global trade in Financial Year 2024. The gross GST collection reached Rs 20.18 trillion in FY24. Faster movement of
goods, promoting trade and economic growth. The Gati Shakti Master Plan aligns with GST’s goals by enhancing
multimodal infrastructure for seamless logistics.
Indirect Taxes Subsumed under GST
Central Taxes Subsumed under GST- The Goods and Services Tax replaced the following taxes levied and collected by
the Centre:
 Service Tax, Central Sales Tax, Central Excise Duty, Additional Duties of Excise (Goods of Special Importance) and
(Textiles and Textile Products).
 Additional Duties of Customs (commonly known as CVD)
 Special Additional Duty of Customs (SAD)
 Central Surcharges and Cess, so far as they relate to the supply of goods and services.
State Taxes Subsumed under GST
 State VAT/Sales Tax, Purchase Tax, Entertainment Tax (other than those levied by the local bodies), Luxury Tax,
Octroi Duty and all other forms of Entry Tax, Taxes on lotteries, betting and gambling, Mandi Tax.
 Taxes on advertisements, State Surcharges and Cess, so far as they relate to the supply of goods and services.
Taxes Exempted from GST
 Basic Customs Duty charged on goods imported in India, Surcharge on Customs Duty, Customs Cess, and Motor
Vehicle Tax.
 Stamp Duty, Excise Duty on Liquor (which is levied by State Governments), Excise Duty on Petroleum Products
(which is levied by Central Government), VAT on Petroleum Products, VAT on Tobacco Products
 Anti-Dumping Duty and Safeguard Duty, Toll Tax and Entertainment Tax levied by Local Bodies
GST Council-
o The GST Council is a constitutional body established under Article 279A of the amended Constitution of India.
o It is a joint forum consisting of the Union Finance Minister (as Chairperson), the Union Minister of State for
Finance, and representatives from each state and Union Territory (UT) with legislatures.
o The Council is responsible for making recommendations on issues related to GST, including tax rates,
exemptions, and model GST laws.
Powers and Functions of the GST Council
1. Recommendations on GST Issues: The Council advises the Union and State Governments on matters related to
the goods and services tax.
2. Tax Rates: It decides on the rates of GST applicable to goods and services, including any modifications or
exemptions.
3. Dispute Resolution: It addresses disputes that may arise between the Union and States or among States
regarding GST.
4. Administrative Changes: The Council can recommend administrative changes to improve the efficiency of GST
implementation.
5. Review and Revision: Periodically review GST rates and provisions to align with economic realities and policy
objectives.
Issue of GST Compensation to States
 GST, being a consumption-based tax, led to a fear that the manufacturing states would lose out a big chunk of
their tax revenue. As a result, several states strongly opposed the idea of GST.
 The idea of compensation, the Centre promised to compensate for the potential revenue loss for states due to
the implementation of the Goods and Services Tax (GST).
 The GST (Compensation to States) Act, 2017 guarantees the state compensation for loss of revenue on account
of the implementation of GST for a transition period of five years between 2017 and 22.
  The compensation is calculated based on the difference between the states’ current GST revenue and the
projected revenue after estimating an annualized 14% growth rate from the base year of 2015-16.
 The 2019 GST Council report highlighted issues like technical glitches in the GST portal, complex returns, and
lack of adequate training for businesses.
 Many states, like Kerala, have faced revenue losses as the promised revenue neutral rate (RNR) was not
achieved, leading to fiscal strain.
 A significant GST fraud case was reported in 2019, where fake GST invoices worth ₹20,000 crore were
generated, causing massive revenue loss.
 The Directorate General of GST Intelligence (DGGI) has flagged the need for better enforcement and monitoring
to reduce tax evasion, while the GST Council has been exploring methods like e-invoicing to curb fraud.
 The issue arose when apparel and footwear were initially classified under higher GST rates and then reclassified
after protests from industry bodies.
Current Major Challenges Related to GST in India
 Complexity and Compliance Burden: GST in India has a complex structure with multiple tax slabs, leading to
increased compliance requirements.
o This complexity poses a challenge for businesses, especially smaller enterprises, in understanding and
adhering to the diverse regulations.
 Technology and Infrastructure Readiness: The successful implementation of GST relies heavily on robust
technological infrastructure. Issues such as lack of technological readiness among businesses, and disparities in
technology adoption can hinder the seamless functioning of the GST network.
 Input Tax Credit (ITC) Verification: The government authorities have recently identified and busted more than
29,000 bogus firms involved in evading GST dues.
 Multiple Registrations Across States: Businesses operating in multiple states must register separately in each
state for GST compliance.
o This multiplicity of registrations adds administrative burden and increases compliance costs for businesses
with a pan-India presence, contributing to logistical challenges.
Way Forward
 Simplify and Rationalize Tax Structure: Simplifying the GST tax structure by reducing the number of tax slabs.

o A more straightforward and uniform tax system would ease compliance for businesses and promote a
clearer understanding of tax obligations.
 Streamline Compliance Procedures: Work towards simplifying and streamlining compliance procedures to reduce
the administrative burden on businesses. This could involve harmonizing return filing processes, ensuring timely
refunds, and implementing user-friendly interfaces for tax filings.
 Focus on Anti-Evasion Measures: Strengthen measures to curb tax evasion, especially through fake invoices and
fraudulent activities.
o Utilizing advanced data analytics and technology to identify suspicious transactions, and implement stringent
penalties for non-compliance to deter fraudulent practices.
Input Tax Credit - In the context of GST, Input Tax Credit (ITC) refers to the tax already paid by a person or
business and which is available as a deduction from the final tax to be payable. Input Tax Credit (ITC) can be enjoyed at
all levels, such as raw material suppliers, manufacturers, distributors or retailers. Input Tax Credit (ITC) on goods and
services is not allowed for personal use. For example, suppose a shoe manufacturer procures leather as raw material for
₹100 + 5% GST (= ₹5). This ₹5 is his input tax credit. Later, when he sells his final product i.e. shoe for say ₹300 + 12%
GST (=₹36), this ₹5 will be adjusted against the final GST. Thus, the final value of GST paid to him will be = ₹36-₹5 = ₹31.
Goods and Services Tax Network (GSTN) - (GSTN) is a Special Purpose Vehicle (SPV) and a fully
Government-owned entity. The Central Government and the states have equal shares in GST Network (GSTN). It
functions as the technology backbone for GST in India. It is entrusted with the responsibility of maintaining the GST
Portal as a single-use interface for the registered taxpayers, which deals with taxpayer registration, return, refund, etc.

Electronic Way Bill or E-Way Bill- Introduced under the GST regime, an Electronic Way Bill or E-Way Bill is a
document required to be carried by the person carrying consignments of goods of value exceeding ₹50,000 for sale
beyond 10 km. A single system of E-Way Bill is valid throughout the country. Under the GST regime, an E-Way Bill is
mandatory for movement of goods either within the state or outside the state. An E-Way Bill, once created, is valid for 1
day for up to 200 km of travel.

GST Appellate Tribunal- Goods and Services Tax Act, 2017 mandates the constitution of a GST Appellate
Tribunal (GSTAT) and its benches. All disputes related to GST Laws at the appellate level are resolved by the GST
Appellate Tribunal (GSTAT). The principal bench of the GSTAT is to be located in New Delhi. Apart from the principal
bench, each state can create a number of benches or boards, subject to the approval of the GST Council.

National Anti-Profiteering Authority (NAA) - The National Anti-Profiteering Authority (NAA) is a statutory
body set up in India under the Central Goods and Services Tax (CGST) Act, 2017. Its primary function is to ensure that the
benefits of reduced tax rates or Input Tax Credit (ITC) under GST are passed on to consumers by way of lower prices.
Harmonized System Nomenclature Code or HSN Code - It is an internationally adopted system for
commodity description and product nomenclature. It has been developed and is updated every 5 years by the World
Customs Organization (WCO). HSN Code is a unique number given to each product, so it’s easy to know what the
product is and how it should be treated for customs, taxes, and trade. Goods are classified under the HSN Code
(Harmonized System Nomenclature Code).
Service Accounting Code or SAC Code- Similar to the HSN Code, the Service Accounting Code or SAC Code
is an internationally adopted system for service description and nomenclature. Under the GST regime: Services are
classified under the SAC Code (Services Accounting Code).
Revenue Neutral Rate (RNR) is the tax rate at which the government can collect the same amount of revenue under the
new GST system as it did under the old tax system (before GST).
Inverted Duty Structure in GST Regime- In the context of Goods and Services Tax, an Inverted Duty
Structure arises when the tax rate on inputs goods, and services used in the production of another good or service is
higher than the tax rate on the final product.
For example, suppose fabric bags are being produced using non-woven fabric as raw materials. If non-woven fabrics are
taxed at 12% and fabric bags are taxed at 5%, the Input Tax Credit (ITC) always gets accumulated at the fabric bags
manufacturer’s end. The Input Tax Credits (ITCs) so accumulated are finally refunded at the end of a fiscal year.
However, it amounts to blocking capital for a certain period.