Introduction to GST
The Goods and Services Tax (GST) is one of the most significant economic reforms in India since independence. Introduced on July 1, 2017, GST is a comprehensive, multi-stage, destination-based indirect tax that replaced a complex web of central and state taxes. It aims to create a unified tax system that enhances transparency, improves ease of doing business, and eliminates the cascading effect of multiple taxes.
What is GST?
GST is an indirect tax levied on the supply of goods, or services or both except on the supply of the alcoholic liquor for human consumption & Five petroleum products – Crude Oil, Diesel, Petrol, Natural Gas and ATF (GST Council is yet to decide the date of levy of GST on these products). GST is designed to be collected at every point in the supply chain, but businesses can claim input tax credit on the taxes paid on their purchases. This ensures that tax is only paid on the final value addition.
GST is categorized into:
- CGST (Central Goods and Services Tax): Collected by the central government on intra-state sales.
- SGST (State Goods and Services Tax): Collected by the state government on intra-state sales.
- IGST (Integrated Goods and Services Tax): Collected by the central government on inter-state sales or imports.
Law related to GST in India?
1. The Central Goods and Services Tax Act, 2017 (CGST Act)
This is the main legislation that governs the levy and collection of GST on intra-state supplies of goods and services by the Central Government. It outlines provisions related to registration, filing returns, assessment, penalties, appeals, and administration.
2. The Integrated Goods and Services Tax Act, 2017 (IGST Act)
This act governs inter-state supply of goods and services and imports/exports. It defines how taxes are shared between the Centre and the States.
3. The State Goods and Services Tax Acts (SGST Acts)
Each State and Union Territory (with a legislature) has its own SGST Act to manage intra-state supplies of goods and services. These acts are aligned with the CGST Act but enforced by state governments.
4. The Union Territory Goods and Services Tax Act, 2017 (UTGST Act)
This act is applicable to Union Territories without legislatures (e.g., Chandigarh, Andaman & Nicobar Islands), managing intra-UT supplies.
5. The Goods and Services Tax (Compensation to States) Act, 2017
This act provides for compensation to states for any revenue loss arising from the implementation of GST, for a period of five years.
Objectives of GST
- To simplify the indirect tax structure
- To eliminate the cascading effect of taxes
- To create a unified national market
- To increase tax compliance and transparency
- To promote the ease of doing business in India
Benefits of GST
- Elimination of Cascading Tax: GST avoids “tax on tax” by allowing credit for taxes paid on inputs.
- Uniform Tax Structure: A single tax regime across the country ensures consistency in pricing.
- Increased Revenue: The broader tax base and improved compliance increase government revenue.
- Ease of Compliance: Online registration, return filing, and payments make the system user-friendly.
- Boost to Economy: GST simplifies logistics and promotes efficiency in the supply chain.
- Transparency: Every transaction is documented and traceable through GSTIN (GST Identification Number).              Â
Need for GST in India
Before GST, India had a complicated and fragmented tax system with multiple indirect taxes such as:
- Value Added Tax (VAT)
- Central Excise Duty
- Service Tax
- Entertainment Tax
- Octroi, and many others
These taxes were levied at different stages by different authorities, causing inefficiency and double taxation. GST replaced this complex system with a single, unified tax, simplifying compliance and boosting tax revenues.
GST System: A Step-by-Step Illustration
Here’s a simple illustration of how the GST system works in India, showing how tax is applied at each stage and how input tax credit (ITC) is claimed, eliminating the cascading effect of “tax on tax.”
Before GST (Old Tax System)
Let’s say a product goes through three stages: Manufacturer → Wholesaler → Retailer.
Stage 1: Manufacturer to Wholesaler
- Cost of Production: ₹1,000
- Excise Duty @10%: ₹100
- Subtotal: ₹1,100
- VAT @10%: ₹110
- Selling Price: ₹1,210
VAT was charged on the total including excise duty — a tax on a tax.
Stage 2: Wholesaler to Retailer
- Wholesaler adds ₹300 margin: ₹1,210 + ₹300 = ₹1,510
- VAT @10%: ₹151
- Total: ₹1,661
Again, tax is applied without input credit for previous taxes like excise. Total Tax Burden: Higher due to compounding taxes.
After GST (New Tax System)
All indirect taxes are merged under GST, and businesses can claim Input Tax Credit (ITC).
Stage 1: Manufacturer to Wholesaler
- Cost: ₹1,000
- GST @18%: ₹180
- Selling Price: ₹1,180
- Wholesaler can claim ITC of ₹180
Stage 2: Wholesaler to Retailer
- Adds ₹300 margin: ₹1,000 + ₹300 = ₹1,300
- GST @18%: ₹234
- Invoice Amount: ₹1,534
- Retailer claims ITC of ₹180
Net Tax at Each Stage:
- Only the value added is taxed (₹300 by wholesaler), avoiding cascading.
Comparison Summary
| System | Tax on Tax? | Input Credit? | Final Price | Transparency |
| Pre-GST | Yes | No | High | Low |
| Post-GST | No | Yes | Lower | High |
Conclusion
GST eliminates the cascading effect by allowing businesses to claim credit for the tax paid on inputs. This results in:
- Reduced cost of goods and services
- Transparent tax structure
- Efficient flow of credit across supply chains
- Made India a more investment-friendly destination
