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

Detail

1. What GST is

• Goods and Services Tax (GST) is a single, wide indirect tax on the supply of goods and services. An indirect tax is one the seller collects from the buyer and pays to the government.
• It comes with input tax credit. This means a business gets back the tax it already paid on its inputs.

• It subsumes (absorbs and replaces) many central and state taxes.

• Launch: 1 July 2017, at a midnight session of Parliament held on the night of 30 June-1 July.

• Four laws put it into effect:
• CGST Act: central GST on sales inside one state.
• SGST Acts: state GST, one Act passed by each state.
• UTGST Act: GST in union territories that have no legislature.

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

• Why "dual": the Centre and the states both tax the same sale at the same time. Each keeps its own law and its own tax officers.

2. Constitutional base: 101st Amendment Act, 2016

• Presidential assent: 8 September 2016.

Article	What it does
Art. 246A	Gives Parliament and state legislatures the same power at the same time to make GST laws. Parliament alone makes laws for inter-state supply.
Art. 269A	GST on inter-state supply is levied and collected by the Centre. It is then shared between the Union and the states.
Art. 279A	Sets up the GST Council. Its working is covered in the Fiscal Federalism note.
Art. 366(12A)	Defines GST as a tax on the supply of goods or services, or both. Alcohol for human consumption is excluded.

• Before 2016, the tax powers were split. The Centre taxed manufacturing (excise) and services. The states taxed sales (VAT).
• Art. 246A removed this split, so both levels can now tax a single "supply".

3. Destination-based taxation

• Definition: the tax goes to the state where goods or services are consumed, not the state where they are produced.
• Who gains:
• Big consuming states, such as Uttar Pradesh and Bihar, gain.

• Big manufacturing states lose the tax they used to get on production.

• How it worked before: under the old Central Sales Tax (CST), the producing state kept tax on inter-state sales. So it was origin-based.

• Why destination-based is better:
• States stop competing by cutting taxes to attract factories.
• Tax follows the final buyer, which fits the idea of a consumption tax.
• Exports can leave the country tax-free, because the tax belongs to the country where the goods are used.

4. CGST, SGST and IGST: which tax on which sale

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 (from the scaffold):
• ₹1,000 sale at 18% inside Tamil Nadu: ₹90 CGST + ₹90 SGST. Total ₹180.
• The same ₹1,000 sale from Tamil Nadu to Uttar Pradesh: ₹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 moves the state's share to UP, the consuming state. Tamil Nadu gets nothing on this sale. This is destination-based taxation in action.

• Rate structure after the "GST 2.0" reform:

• The 56th GST Council meeting (3 September 2025) replaced four main slabs (5%, 12%, 18%, 28%) with two main rates: 5% (merit rate) and 18% (standard rate) [2][4].
• A 40% special rate now 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].

• The scaffold's 18% example is still the standard rate today.

• Tobacco is an exception:

• For cigarettes, chewing tobacco, unmanufactured tobacco and beedi, the old GST and compensation cess rates continue for now [3].
• The new rates will apply only after the loans and interest taken to pay compensation to states are fully repaid [3].
• Compensation cess is an extra levy on some goods. It was used to pay states for revenue they lost when they moved to GST.

5. What GST replaced and what it left out

Subsumed in GST	Outside GST
Centre: central excise, service tax, CST, Krishi Kalyan Cess (KKC) and Swachh Bharat Cess (SBC)	Alcohol for human consumption. The Constitution keeps it out. States levy VAT and excise on it.
States: VAT/sales tax, entry tax, octroi, luxury tax, entertainment tax, taxes on advertisements, taxes on lottery/betting/gambling, state cesses	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.

• Why the petroleum gap matters:
• Fuel taxes are a large source of revenue for the Centre and the states, so neither wants to give them up.
• Transport firms pay GST on trucks but get no input credit on diesel. So some tax-on-tax (cascading) still remains in the system.

6. Input tax credit (ITC): the credit link

• Definition: ITC is credit for tax paid at the previous stage. It is set off against the tax due at the next stage. This makes GST a tax on value addition (the extra value each business adds), not on the full price every time.
• Formula: GST payable = Output tax − Input tax credit
• 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, each stage would also pay tax on the tax already built into the price. This "tax on tax" is cascading, and the final price would be higher.

• Utilisation order (which credit is used first):

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

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

• Blocked credits under Sec. 17(5): some purchases give no ITC, for example food, personal cars and personal consumption. The reason is that these are final consumption, not business inputs.

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

7. Reverse charge mechanism (RCM)

• Definition: the recipient (buyer), not the supplier, pays the GST to the government.
• Examples:
• Services of goods transport agencies (GTAs) and advocates.

• Notified supplies from unregistered persons.

• Why it exists: the supplier is often small, scattered or unregistered. It is easier to collect the tax from the registered buyer.

• Mohit Minerals case (Supreme Court, 2022):
• The Court struck down RCM IGST on ocean freight in imports on CIF terms, where the foreign seller pays freight and insurance up to the Indian port.
• The reason: the importer had already paid IGST on the full CIF value of the goods, which includes freight. Taxing freight again was double taxation.
• The Court also held that GST Council recommendations are persuasive, not binding. Parliament and state legislatures can still make their own laws. This is a major point for cooperative federalism.

8. Composition scheme

• Definition: a simple option for small taxpayers. They pay a small 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 and cannot make inter-state supplies.
• It also cannot pass on any credit to its buyers. So registered businesses often prefer to buy from normal taxpayers instead.

9. Zero-rated vs exempt vs nil-rated

Type	GST on the sale	Input credit kept?	Examples
Zero-rated	None	Yes. Claimed as a refund, or by exporting under a Letter of Undertaking (LUT) without paying IGST	Exports and supplies to SEZs (Special Economic Zones)
Exempt	None	No	Notified exempt goods and services
Nil-rated	0% rate in the schedule	No	Items listed at a 0% rate

• Why the difference matters:
• A zero-rated export leaves India completely free of tax, so Indian goods stay competitive abroad.
• An exempt item still carries hidden tax from inputs that could not be credited.

10. Compliance tools

• E-way bill (April 2018): an electronic document made on the GST portal to move goods worth over ₹50,000. It tracks where goods travel and curbs evasion.
• E-invoicing:
• Each invoice is checked online and given an Invoice Reference Number (IRN). Returns are then filled in automatically.

• The turnover threshold was cut to ₹5 crore from August 2023.

• GSTN portal (www.gst.gov.in): registration, returns and payments are all done online.

• Registration thresholds: ₹40 lakh of turnover for goods and ₹20 lakh for services, per the scaffold (lower in some special-category states). These figures could not be checked against a current source for this note.
• Taxpayer base: over 1.51 crore active GST registrations as of 30 April 2025 [5].

11. Revenue neutral rate (RNR)

• Definition: the GST rate that collects the same revenue as all the taxes it replaced put together.
• Arvind Subramanian Committee (2015): put the RNR at 15-15.5%, with a standard rate of 17-18%.
• Why it matters:
• If the rate is set below the RNR, the government loses revenue.

• If it is set above the RNR, prices and inflation go up.

• Actual revenue record:

Year	Gross GST collection
2020-21	₹11.37 lakh crore (about ₹95,000 crore a month) [5]
2021-22	₹14.83 lakh crore [5]
2022-23	₹18.08 lakh crore [5]
2023-24	₹20.18 lakh crore [5]
2024-25	₹22.08 lakh crore, a record. Growth was 9.4% year-on-year, and the monthly average was ₹1.84 lakh crore [5].

12. The benefits NCERT promised (Class 12, Government Budget and the Economy, Box 5.3)

• A common market, with goods moving more freely. Check posts and entry taxes were removed.
• Lower business costs and less cascading.
• More competitive Indian goods.
• Easier online compliance and less face-to-face dealing with tax officers.
• GDP "expected to rise by about 2%". Treat this as a claim to evaluate, not an established fact.
• Evidence for: rising collections and a growing registration base point to formalisation [5].
• Evidence against: petroleum is still outside GST, credit remains blocked in places, and inverted duty cases continue.

Prelims Hooks

• 101st Amendment: assent on 8 September 2016. Art. 246A gives concurrent GST law-making power. Art. 269A covers inter-state GST. Art. 279A creates the GST Council. Art. 366(12A) defines GST.
• Inter-state supply and imports attract IGST, levied by the Centre and shared with the destination state. Trap: it is not shared with the origin state.
• Petroleum trap: the five petroleum products are within the GST law but not taxed yet, because no date has been notified. Alcohol for human consumption is kept out by the Constitution itself.
• Zero-rated supply keeps ITC. Exempt and nil-rated supplies do not.
• Composition dealers get no ITC and cannot sell inter-state. Service providers: ₹50 lakh / 6%.
• RCM means the recipient pays GST. Mohit Minerals (2022) struck down IGST on ocean freight and held that Council recommendations are persuasive, not binding.
• E-way bill: goods worth over ₹50,000 (from April 2018). E-invoicing threshold: ₹5 crore (from August 2023).
• GST 2.0: two main rates, 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].
• Gross GST collection 2024-25: ₹22.08 lakh crore, a record [5].
• Arvind Subramanian Committee (2015): RNR 15-15.5%, standard rate 17-18%.

Mains Points

• Destination principle and fiscal federalism:
• Consuming states like UP and Bihar gain, and manufacturing states lose tax on production.

• Together with the Mohit Minerals ruling that Council advice is not binding, this shows how GST depends on cooperative federalism, and how fragile that can be.

• An incomplete credit chain limits the gains from GST:

• Petroleum and electricity are outside GST → no ITC on fuel and power → cascading continues in transport and manufacturing.

• Bringing them in needs Centre-state agreement on sharing revenue.

• Simpler rates vs revenue:

• The 2025 move to 5%/18%/40% reduces classification disputes and makes goods cheaper for consumers [2].

• But it risks revenue falling below the RNR and more inverted duty refunds [3]. The Centre and states must balance relief for consumers against their own budgets.

• Checking the "2% GDP" claim:

• For: rising collections (₹11.37 lakh crore in 2020-21 → ₹22.08 lakh crore in 2024-25) and 1.51 crore registrations show formalisation and better compliance [5].
• Against: compliance costs for MSMEs, blocked working capital from slow refunds, and early disruption in the informal sector suggest the growth gains came slowly and unevenly.