Goods and Services Tax

Also called: GST, One nation one tax one market · Topic: Taxation: Direct and Indirect Taxes, GST and Global Tax Issues · NCERT: Class 11, Ch 3 "Liberalisation, Privatisation and Globalisation: An Appraisal"; Class 11, Ch 7 "Index Numbers"; Class 12, Ch 5 "Government Budget and the Economy"

Meaning

Goods and Services Tax (GST) is a single, wide indirect tax (a tax the seller collects from the buyer and pays to the government) on the supply of goods and services. The Centre and the states levy it together. It goes to the state where the goods are consumed. At every stage, a business gets credit for the tax it already paid on its inputs. It started on 1 July 2017.

It matters because it subsumed (absorbed and replaced) many central and state taxes, turning India into one common market. Because of input tax credit it taxes only value addition, not the full price again and again.

Formula: GST payable = Output tax − Input tax credit

Explanation

How it works: dual, destination-based, credit-linked

• Dual: the Centre and the states both tax the same sale at the same time. Each has its own law and its own tax officers.
• Four laws put it into effect:
• CGST Act: central GST on sales inside one state.
• SGST Acts: state GST, one Act for each state.
• UTGST Act: GST in union territories that have no legislature.

• IGST Act: integrated GST on sales between states and on imports.

• Destination-based: the tax goes to the state where goods are consumed, not the state where they are produced.

• Under the old Central Sales Tax (CST), the producing state kept the tax on inter-state sales. That was origin-based.
• Why destination-based is better:
  • States stop cutting taxes just to attract factories.
  • The tax follows the final buyer, which fits a consumption tax.
  • Exports can leave the country tax-free.

Which tax on which sale: CGST, SGST, IGST

Type of supply	Tax charged	Who levies	Who gets the revenue
Intra-state (inside one state)	CGST + SGST (or CGST + UTGST in UTs)	Centre and state together	Centre and that state, in equal shares
Inter-state (across a state border) and imports	IGST	Centre	Shared between the Centre and the destination state

• Worked example (18%):
• A ₹1,000 sale inside Tamil Nadu is taxed ₹90 CGST + ₹90 SGST, so ₹180 in total.
• The same ₹1,000 sale from Tamil Nadu to Uttar Pradesh is taxed ₹180 IGST.

• The buyer pays ₹180 either way. Only the route of the money changes.

• How IGST gets settled:

• The Tamil Nadu seller pays ₹180 IGST to the Centre.
• The UP buyer uses this ₹180 as input credit when it pays its own tax in UP.
• The Centre then sends the state's share to UP, the consuming state. Tamil Nadu gets nothing on this sale.

Input tax credit (ITC): the credit chain

• ITC is credit for the tax paid at the previous stage. It is set off against the tax due at the next stage.
• Worked example (18%):

Stage	Sale price	Output tax (18%)	ITC	Net GST paid
Manufacturer	₹100	₹18	₹0	₹18
Wholesaler	₹150	₹27	₹18	₹9 (18% of ₹50 value added)
Retailer	₹200	₹36	₹27	₹9 (18% of ₹50 value added)
Total to government				₹36 = 18% of ₹200

• Without ITC → cascading:
• Each stage would pay tax on a price that already has tax in it.
• This "tax on tax" is called cascading.

• The final price would be higher.

• Order of using credit:

• IGST credit is used first: against IGST, then CGST, then SGST.
• CGST credit and SGST credit are used after that.

• CGST credit cannot pay SGST, and SGST credit cannot pay CGST. This keeps the Centre's money and the states' money separate.

• Blocked credits under Sec. 17(5): purchases such as food, personal cars and personal consumption give no ITC, because they are final consumption, not business inputs.

• Inverted duty structure: the tax on inputs is higher than the tax on the final product, so unused credit piles up with the business. The 2025 rate cuts may make some of these gaps worse. A refund mechanism is available, and process changes are meant to speed up refunds [3].

Special mechanisms and rate structure

• Reverse charge mechanism (RCM): the recipient (the buyer), not the supplier, pays the GST.
• Examples: services of goods transport agencies (GTAs) and advocates, and notified supplies from unregistered persons.

• Reason: the suppliers are small, scattered or unregistered, so it is easier to collect from the registered buyer.

• Composition scheme: a simple option for small taxpayers. They pay a low flat rate on turnover (total sales) and file fewer, simpler returns.

Category	Turnover limit	Rate
Traders and manufacturers	₹1.5 crore (₹75 lakh in special-category states)	1%
Restaurants	₹1.5 crore	5%
Service providers	₹50 lakh	6%

• The trade-off: a composition dealer gets no ITC, cannot make inter-state supplies, and cannot pass on credit to its buyers.

• Rates after "GST 2.0":

• The 56th GST Council meeting (3 September 2025) replaced the four main slabs (5%, 12%, 18%, 28%) with two main rates: 5% (merit rate) and 18% (standard rate) [2][4].
• A 40% special rate applies to sin and luxury goods such as pan masala, aerated drinks, high-end cars, yachts and private aircraft [2][4].
• The new rates came into force on 22 September 2025 [2][3].
• Tobacco is an exception. For cigarettes, chewing tobacco, unmanufactured tobacco and beedi, the old GST and compensation cess rates continue for now. Compensation cess is an extra levy that paid states for the revenue they lost when they moved to GST. The new rates will apply only after the loans and interest taken to pay that compensation are fully repaid [3].

In India

• Constitutional base: the 101st Amendment Act, 2016 (Presidential assent 8 September 2016):
• Art. 246A: Parliament and the state legislatures get the same power at the same time to make GST laws. Only Parliament makes laws on inter-state supply.
• Art. 269A: GST on inter-state supply is levied and collected by the Centre, then shared with the states.
• Art. 279A: sets up the GST Council.

• Art. 366(12A): defines GST as a tax on the supply of goods or services or both, except alcohol for human consumption.

• Before 2016, the tax powers were split. The Centre taxed manufacturing (excise) and services. The states taxed sales (VAT). Art. 246A removed this split.

• Launch: 1 July 2017, at a midnight session of Parliament on the night of 30 June–1 July.
• What GST subsumed:
• From the Centre: central excise, service tax, CST, Krishi Kalyan Cess and Swachh Bharat Cess.

• From the states: VAT/sales tax, entry tax, octroi, luxury tax, entertainment tax, taxes on advertisements, taxes on lottery, betting and gambling, and state cesses.

• What is still outside GST:

• Alcohol for human consumption. The Constitution keeps it out.
• Five petroleum products: crude oil, petrol, diesel, ATF (aviation turbine fuel) and natural gas. They are inside the GST law, but the Council has not yet notified a date to start taxing them.
• Electricity, stamp duty and basic customs duty.

• Tobacco pays GST plus central excise.

• Compliance tools:

• E-way bill (April 2018): an electronic document needed to move goods worth over ₹50,000. It helps curb tax evasion.
• E-invoicing: each invoice is checked online and given an Invoice Reference Number (IRN). The turnover threshold was cut to ₹5 crore from August 2023.

• GSTN portal: registration, returns and payments are all done online.

• Latest figures:

• Gross GST collection in 2024-25 was a record ₹22.08 lakh crore, up 9.4% on the year before, with a monthly average of ₹1.84 lakh crore [5].
• This is up from ₹11.37 lakh crore in 2020-21 [5].

• There were over 1.51 crore active GST registrations as of 30 April 2025 [5].

• Revenue neutral rate (RNR): the GST rate that would collect the same revenue as all the taxes it replaced. The Arvind Subramanian Committee (2015) put the RNR at 15-15.5%, with a standard rate of 17-18%.

Don't confuse with

• Zero-rated vs exempt vs nil-rated:
• Zero-rated supplies, such as exports and supplies to SEZs (Special Economic Zones), carry no GST and keep ITC. The credit comes back as a refund, or the exporter uses a Letter of Undertaking (LUT) to export without paying IGST.

• Exempt and nil-rated supplies carry no GST but get no ITC, so hidden tax from inputs stays in their price.

• Destination-based GST vs origin-based CST: GST revenue goes to the consuming state. The old CST went to the producing state.

• IGST vs CGST + SGST: IGST applies to inter-state supply and imports and is levied only by the Centre. CGST + SGST applies to sales inside one state, and the two are levied together in equal shares.
• Petroleum vs alcohol outside GST: petroleum is inside the GST law but not yet taxed, because no date has been notified. Alcohol for human consumption is kept out by the Constitution itself.

Prelims Hooks

• 101st Amendment (assent 8 September 2016): Art. 246A gives concurrent power to make GST laws, Art. 269A covers inter-state GST, Art. 279A creates the GST Council, and Art. 366(12A) defines GST.
• IGST on inter-state supply and imports is levied by the Centre and shared with the destination state. Trap: it is not shared with the origin state.
• RCM means the recipient pays the GST. Mohit Minerals (Supreme Court, 2022) struck down RCM IGST on ocean freight as double taxation. It also held that GST Council recommendations are persuasive, not binding.
• Composition dealers get no ITC and cannot sell inter-state. For service providers the limit is ₹50 lakh and the rate is 6%.
• GST 2.0: two main rates of 5% and 18%, plus a 40% special rate. Recommended at the 56th Council meeting (3 September 2025) and in force from 22 September 2025 [2].
• E-way bill: needed for goods worth over ₹50,000 (from April 2018). Gross GST collection in 2024-25: ₹22.08 lakh crore, a record [5].

Mains Points

• Cooperative federalism under strain:
• Consuming states like UP and Bihar gain from the destination principle. Manufacturing states lose the tax they used to get on production.

• The Mohit Minerals (2022) ruling says Council recommendations are not binding. So GST works only as long as the Centre and the states keep agreeing.

• A broken credit chain limits the gains:

• Petroleum and electricity are outside GST → no ITC on fuel and power → cascading continues in transport and manufacturing. For example, transport firms pay GST on trucks but get no credit on diesel.

• Fuel taxes are a big source of revenue for both the Centre and the states, so bringing fuel into GST needs a deal on sharing that revenue.

• Simpler rates vs revenue, and the "2% GDP" claim:

• The 2025 move to 5%/18%/40% reduces disputes over which rate applies and lowers prices for consumers [2]. But revenue could fall below the RNR, and inverted duty refunds could rise [3].
• NCERT (Class 12, Box 5.3) said GDP was expected to rise by about 2%. Treat this as a claim to test.
  • For: collections rose from ₹11.37 lakh crore (2020-21) to ₹22.08 lakh crore (2024-25), and there are 1.51 crore registrations. Both point to formalisation [5].
  • Against: MSMEs face compliance costs, slow refunds block their working capital, and the informal sector was disrupted early on. So the gains came slowly and unevenly.

Related concepts

• Destination-based taxation
• CGST, SGST and IGST
• Input tax credit
• Reverse charge mechanism
• Composition scheme
• Zero-rated supply
• E-way bill
• E-invoicing
• Revenue neutral rate

Read more

• GST architecture: dual, destination-based, credit-linked