The Goods and Services Tax (GST) is one of the most significant reforms in the Indian indirect tax system since independence. Introduced on 1st July 2017, GST aimed to eliminate the cascading effect of multiple taxes, simplify the tax regime, and bring the entire country under a “One Nation, One Tax” structure. It replaced a complex web of Central and State indirect taxes, transforming the way India conducts business and collects revenue.
Objectives of GST Implementation
The primary objectives of GST were:
- To eliminate the cascading effect of taxes.
- To bring uniformity in the indirect tax structure across India.
- To facilitate ease of doing business.
- To expand the tax base and increase compliance.
- To create a common national market for goods and services.
To achieve these objectives, several indirect taxes levied at different stages and by different authorities were merged under the umbrella of GST.
Structure of GST
GST in India is structured as a dual model, implemented concurrently by the Centre and the States. The three components of GST are:
- CGST (Central GST): Levied by the Central Government on intra-state supply of goods and services.
- SGST (State GST): Levied by State Governments on intra-state supply.
- IGST (Integrated GST): Levied by the Central Government on inter-state supply and imports.
Taxes Subsumed by GST
A. Central Taxes Subsumed
1. Central Excise Duty
- Levied on manufacture of goods in India (except on alcohol and petroleum products).
- Subsumed except for certain items like tobacco and petroleum (temporarily kept out).
2. Additional Excise Duties
- Duties in lieu of Sales Tax on textiles, tobacco and sugar.
3. Service Tax
- Levied on provision of services under Finance Act, 1994.
4. Additional Customs Duty (CVD)
- Levied in lieu of excise duty on imports.
5. Special Additional Duty of Customs (SAD)
- Imposed to counterbalance sales tax, VAT, etc., on imports.
6. Excise Duty under Medicinal and Toilet Preparations Act
- Duty on manufacture of medicinal products.
7. Central Surcharges and Cesses
- Related to supply of goods and services (like Swachh Bharat Cess, Krishi Kalyan Cess).
B. State Taxes Subsumed
1. State Value Added Tax (VAT)/Sales Tax
- Levied on intra-state sales of goods.
2. Central Sales Tax (CST)
- Collected by the Centre but appropriated by originating States for inter-state sales.
3. Purchase Tax
- Levied on purchase of certain goods (e.g., food grains in some States).
4. Luxury Tax
- Levied on luxuries such as hotels and lodging.
5. Entertainment Tax
- Levied by States on movie tickets, amusement parks, etc. (excluding taxes by panchayats and municipalities).
6. Entry Tax
- Levied by States on entry of goods into local areas (except for local bodies).
7. Taxes on Advertisements
- Not levied by local bodies.
8. Lottery, Betting and Gambling Taxes
- Subject to GST for these supplies.
9. State Surcharges and Cesses
- Applicable on goods and services, subsumed into GST.
Taxes Not Subsumed Under GST
Though GST has significantly rationalized India’s tax system, certain taxes remain outside its purview:
- Stamp duty on immovable property
- Basic Customs Duty (BCD) on imports
- Tax on petroleum products (until decided by the GST Council): includes petrol, diesel, aviation turbine fuel (ATF), crude oil and natural gas
- Alcohol for human consumption remains under State taxation
Legal Backing and Constitutional Amendment
The implementation of GST was made possible by the 101st Constitutional Amendment Act, 2016. Key highlights include:
- Insertion of Article 246A empowering both the Centre and the States to make laws on GST.
- Introduction of Article 279A to create the GST Council.
- Amended the Seventh Schedule to remove or modify entries enabling the subsuming of central and state taxes.
GST Council: Federal Consensus Mechanism
The GST Council, chaired by the Union Finance Minister and comprising State Finance Ministers, plays a pivotal role in deciding:
- Tax rates and slabs,
- Goods/services classifications,
- Threshold exemptions,
- Special provisions for certain States.
Its decisions led to the identification of the taxes to be subsumed and also provided a revenue compensation formula to States for losses incurred due to GST.
Advantages of Subsuming Taxes under GST
1. Reduction in Multiplicity of Taxes
Businesses earlier had to comply with different taxes like VAT, CST, Excise, etc. GST consolidated them under a single umbrella.
2. Mitigation of Cascading Tax Effect
Earlier, tax was levied on tax. GST introduced input tax credit (ITC) across goods and services to break this chain.
3. Ease of Doing Business
Uniformity in tax procedures and digitized compliance (GSTN portal) simplified operations across states.
4. Broadened Tax Base
Earlier, services were taxed only at the central level. GST empowered states to tax services too, thereby broadening the base.
5. Improved Logistics and Supply Chains
Abolition of entry tax and a unified market enabled efficient interstate movement of goods.
Challenges in the Subsumption Process
1. Transition Management
Shifting from multiple taxes to a single GST required reconfiguring accounting systems, training, and handling legacy issues.
2. Initial Revenue Loss for States
The Centre had to guarantee five-year compensation under the GST (Compensation to States) Act, 2017.
3. Complex Rate Structure
Despite aiming for simplification, GST still has multiple slabs (0%, 5%, 12%, 18%, 28%), making classification difficult.
4. Exclusion of Key Products
Petroleum and alcohol being outside the GST breaks the uniformity principle.
Case Law
Union of India v. Mohit Minerals Pvt Ltd (2022)
The Supreme Court ruled that Article 279A does not override Article 246A, nor does Article 246A make itself subject to Article 279A. Both Parliament and State legislatures hold equal, simultaneous powers to legislate on GST, without any repugnancy clause to resolve conflicts. The GST Council’s recommendations emerge from cooperative dialogue and are not binding. Treating them as mandatory would undermine fiscal federalism, where the Union and States are meant to function as equal partners. Indian federalism allows for both cooperation and contestation between federal units.
Conclusion
The subsumption of multiple Central and State taxes into GST represents a monumental stride towards harmonised taxation in India. By replacing a complex and fragmented indirect tax system, GST has simplified compliance, improved transparency, and increased economic efficiency. However, the journey is ongoing. To realise the full benefits of GST, continuing reforms—such as the inclusion of remaining items, reducing complexity, and ensuring fiscal balance—remain essential.
References
- The Constitution (One Hundred and First Amendment) Act, 2016
- Central Goods and Services Tax Act, 2017
- GST (Compensation to States) Act, 2017
- Union of India v. Mohit Minerals Pvt Ltd, Civil Appeal No. 1390 of 2022