What is GST, and how does it function in India?

Goods and Services Tax (GST) is a comprehensive, multi-stage, destination-based indirect tax that was implemented in India on July 1, 2017. GST is designed to replace various central and state taxes such as the Central Excise Duty, Service Tax, Value Added Tax (VAT), Sales Tax, and CST (Central Sales Tax), among others, to create a unified tax structure for goods and services across the country.

How Does GST Function in India?

GST operates under a dual system of taxation, involving both Central GST (CGST) and State GST (SGST) for intrastate transactions, and Integrated GST (IGST) for interstate transactions. Here’s how it works:

Multi-stage Taxation: GST is levied at each stage of production or distribution. The tax is collected on the value-added at each stage, and the final consumer bears the entire tax burden.
Destination-based Tax: GST is applied to goods and services at the point of consumption, not at the point of origin. This means that the tax revenue goes to the state where the product is consumed, not where it is produced.
Input Tax Credit (ITC): One of the key features of GST is the Input Tax Credit mechanism. This allows businesses to set off the tax paid on their inputs against the tax payable on their output, reducing the cascading effect of taxes (i.e., tax on tax).
Dual Structure: GST is a dual tax system where both the Central Government and the State Government have the power to levy taxes on goods and services. This leads to the following types of taxes:
- CGST (Central Goods and Services Tax) – for the Central Government.
- SGST (State Goods and Services Tax) – for the State Government.
- IGST (Integrated Goods and Services Tax) – for inter-state transactions, which is collected by the central government but later shared between the central and the destination state.

Basis of Implementation by the Government

GST was implemented to address several challenges faced by the Indian taxation system, including:

Multiple Taxation: Before GST, the tax system in India was fragmented with different taxes at the central, state, and local levels, leading to complexity and cascading taxes.
Ease of Doing Business: GST aimed to simplify the tax system, reduce compliance costs, and promote a common market across the country.
Increased Transparency and Compliance: GST promotes transparency by digitizing the entire tax process, which reduces tax evasion and increases compliance.
Boosting Exports: By eliminating the cascading effect of taxes and providing exporters with input tax credits, GST was expected to make Indian goods and services more competitive in the global market.
Tax Neutrality: GST ensures that taxes are levied only on the value added at each stage of the supply chain, making the system more efficient and reducing the distortion in the tax system.

The implementation of GST in India is governed primarily by the following key legislations:

The Central Goods and Services Tax Act, 2017 (CGST Act, 2017): This Act governs the imposition of tax by the central government on all goods and services (except alcohol and petroleum products) in India.
The State Goods and Services Tax Act, 2017 (SGST Act, 2017): This Act deals with the taxation of goods and services by state governments.
The Integrated Goods and Services Tax Act, 2017 (IGST Act, 2017): This Act governs the taxation of inter-state transactions of goods and services.
The Goods and Services Tax (Compensation to States) Act, 2017: This Act provides for compensation to states for the revenue loss that occurred due to the implementation of GST. Initially, states were compensated for any loss of revenue in the first five years after GST’s implementation.
GST Rules and Notifications: Various rules and notifications are issued from time to time to ensure proper implementation, administration, and clarification of the provisions under the GST laws. These include rules relating to registration, returns, invoices, payment of tax, etc.
GST Council: The GST Council, consisting of the Union Finance Minister and the Finance Ministers of the States, is a key decision-making body in matters related to GST. The council is responsible for deciding the GST rate structure, resolving disputes, and recommending changes to the law.

Several landmark cases have shaped the interpretation and application of GST in India. Here are some significant ones:

Union of India v. Mohit Mineral Pvt. Ltd. (2020): This case dealt with the GST on Ocean Freight. The Supreme Court held that the tax on ocean freight was unconstitutional under the provisions of IGST, leading to a refund for importers.
State of West Bengal v. Calcutta Export Company (2019): This case clarified the Input Tax Credit (ITC) and the refund mechanism under GST for exporters. The court ruled in favor of exporters who were unable to claim the refund due to procedural issues.
M/s. Vikash Metal & Power Ltd. v. Union of India (2021): This case centered around the constitutional validity of certain GST provisions. The Supreme Court clarified the scope of IGST and affirmed the constitutional validity of GST in its current form.
Sunil Kumar Agarwal v. Union of India (2020): The case dealt with the GST on Liquor and clarified that liquor and petroleum products are excluded from the ambit of GST, continuing to be taxed under the respective state and central laws.
K. Anandraj v. Union of India (2021): This case involved a dispute regarding the applicability of GST on residential properties and whether they would be subject to tax under the provisions of GST. The court ruled that the construction of residential properties for personal use is not subject to GST.

Challenges and Criticisms of GST in India

While GST has had several positive impacts, it has also faced criticism and challenges:

Complexity of Tax Structure: Initially, the multi-rate structure of GST (ranging from 5% to 28%) and constant amendments led to confusion among businesses.
Compliance Burden: Despite the digitalization of tax filing, small and medium-sized enterprises (SMEs) and traders found the compliance requirements burdensome.
Inadequate Infrastructure: There were significant challenges in the implementation of the GSTN (GST Network), especially during the initial phase, leading to frequent system breakdowns.
Impact on Small Traders: Smaller traders, who were accustomed to simpler tax systems like VAT, faced difficulties in transitioning to GST due to more elaborate documentation and filing requirements.

Conclusion

GST has revolutionized the tax landscape in India by promoting a unified, transparent, and efficient taxation system. While it has addressed long-standing issues like cascading taxes and complex tax laws, its implementation has not been without challenges. Over time, however, it is expected that the system will continue to evolve with refinements and simplifications based on feedback from stakeholders, and the country will gradually witness greater economic benefits from the tax reform.