Goods and Services Tax, History, Components, Benefits

The Goods and Services Tax was an important reform introduced on 1st July 2017 by the Government of India to reform the indirect tax structure of the country. This new initiative also helped in improving Ease of Doing Business (EoDB) of India as well as unified and simplified the existing tax system. In this article, we are going to study about the Goods and Services Tax, its features, objectives and benefits. 

Goods and Services Tax (GST)

• Goods and Services Tax (GST) is an indirect tax levied on the supply of goods and services for domestic consumption across India. 
• While consumers pay this tax at the point of purchase, it is collected and deposited with the government by the businesses providing these goods and services. GST has unified and replaced a range of previous indirect taxes levied by both the Central and State Governments. 
• It is implemented nationwide and is based on the principle of value addition at each stage of the supply chain.

GST History and Evolution in India

• The Kelkar Task Force on Indirect Tax, suggested the implementation of Goods and Services Tax in 2003, on the lines of Value Added Tax. 
• In 2006, the National Goods and Services Tax implementation was suggested in the Budget Speech. 
• The ‘One Nation One Tax’ system bill was introduced in 2014 as the 122nd Amendment. The bill got passed in 2016. 
• The Goods and Services Tax was finally implemented in India on 1st July 2017.  

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Goods and Services Tax Constitutional Framework

In 2014, the Goods and Services Tax was introduced in the Parliament in order to provide it a constitutional status. The bill got passed in 2016 as the Constitutional 101st Amendment Act. This amendment brought in 3 new articles to the constitution: 

• Article 246A- The Parliament and State Legislatures both get concurrent powers to make laws about GST. The Parliament will have the power to legislate in inter state trade of goods and services. 
• Article 269A- the inter-state trade is collected by the central government and then distributed between the centre and state on the basis of the numbers recommended by the GST Council. 
• Article 279A- The President of India has the power to outline the functioning and composition of the GST Council. 

Goods and Services Tax Features

1. Tax on Supply, Not Sale or Manufacture:
   GST is levied on the supply of goods and services, unlike the earlier regime where tax was imposed at multiple stages like manufacture or sale.
2. Destination-Based Consumption Tax:
   GST follows the destination principle—tax revenue goes to the state where goods or services are consumed, not where they are produced.
3. Dual GST Structure:
   India has adopted a dual model, allowing both the Centre and States to levy GST simultaneously on a common base.
4. Four Components of GST:

• CGST (Central Goods & Services Tax)
• SGST (State Goods & Services Tax)
• UTGST (Union Territory GST)
• IGST (Integrated GST on inter-state supply)

5. Harmonised Tax Rates:
   Tax rates are finalized through mutual agreement between the Centre and States, based on GST Council recommendations.
6. Multiple Tax Slabs:
   Different goods and services are taxed under various slabs—currently, 7 for goods and 5 for services.
7. Threshold Exemptions:
   Small businesses with turnover below specified limits are exempt from GST. The exact exemption threshold varies by category and region.

Goods and Services Tax Components

The Goods and Services Tax can be be divided into 4 components: 

Central Goods and Services Tax (CGST) 

• Levied on intra-state and intra-UT on Goods and services. 
• The Central Government can levy as well as collect this tax. 
• All the transactions occurring all over India are to charge this tax alongside the State GST. 
• CGST is charged uniformly all over the country. 

State Goods and Services Tax (SGST) 

• The State Government levies and collects this tax from their respective states. 
• Applied on all transactions happening in the state along with CGST. 
• The state government has the power to decide their own rates. 

Union Territories Goods and Services Tax (UTGST) 

• The Union Territory that has its own legislature can collect this tax. 
• CGST is also collected alongside  the UT translation. 
• Each union territory has the authority to decide their own GST rates. 

Integrated Goods and Services Tax (IGST)

• Levied on inter-state supply of goods and services. This is also known as a combined tax.
• The central government levies and collects this tax and the collected amount is distributed between the centre and the state.  
• The IGST rate remains uniform all over the country. 

Indirect Taxes Subsumed under GST 

The following indirect taxes are subsumed under the 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
• Duties of Excise (Medicinal and Toiletries Preparations)
• Additional Duties of Excise (Goods of Special Importance)
• Additional Duties of Excise (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 taxes subsumed under the Goods and Services Tax are:

• State VAT/Sales Tax
• Purchase Tax
• Entertainment and Amusement 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 

While maximum indirect taxes have been subsumed under the Goods and Services tax, there are a few taxes that still stand independent. These taxes are: 

• Basic Customs Duty charged on goods imported in India.
• Surcharge on Customs Duty.
• Customs Cess.
• 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

Goods and Services Tax Council (GST Council)

The 101st Constitutional Amendment Act introduced Article 279A, empowering the President to establish the GST Council to oversee the implementation and administration of the GST framework in India.

The GST Council plays a central role in recommending key aspects of GST—such as tax rates, exemptions, laws, and procedural rules.

To explore the composition, functioning, and powers of the GST Council in detail, refer to our comprehensive article on the GST Council.

Goods and Services Tax Benefits

The implementation of Goods and Services taxes had the following benefits: 

• Establishment of a Unified National Market: By subsuming numerous Central and State taxes into a single tax structure, GST has facilitated the formation of a seamless national market.
• Elimination of Cascading Taxes: GST has removed the burden of tax-on-tax, thereby reducing overall tax incidence and improving business efficiency.
• Boost to Competitiveness: Lower indirect tax rates have enhanced the cost competitiveness of Indian goods and services, both domestically and globally.

For Business and Industry

• Simplified Compliance: GST is supported by a robust IT infrastructure, streamlining return filing and tax payments.

• Uniform Taxation: Harmonized tax rates and structures across the country bring predictability and reduce complexities.

• Enhanced Competitiveness: Lower transaction costs and removal of cascading taxes improve overall business efficiency and competitiveness.

For Central and State Governments

• Simplified Administration: Replaces multiple indirect taxes with a single tax, making the system easier to manage through a unified digital platform.

• Reduced Tax Evasion: Digital trail and simplified procedures enhance transparency and reduce leakages.

• Improved Revenue Efficiency: Lower cost of tax collection and increased compliance lead to more efficient revenue mobilization.

For Consumers

• Lower Tax Burden: Elimination of tax-on-tax and rationalized rates reduce the overall tax burden on goods and services.

• Price Stability: Transparency and efficiency help curb inflationary pressures, offering relief to end consumers.

For States

• Wider Tax Base: States can now tax the full value chain, including services, expanding their revenue scope.
• Greater Revenue Autonomy: Empowered to tax the fast-growing service sector, boosting state revenues.
• Investment Boost: As a destination-based tax, GST benefits consuming states and enhances the investment climate.
• Higher Compliance: Uniform tax rates across states discourage tax arbitrage and improve tax discipline.