The implementation of Goods and Services Tax (GST) on July 1, 2017, marked a significant reform in India’s indirect tax structure. The primary objective was to develop a unified national market under the principle of One Nation One Tax. GST aimed to eliminate the cascading effect caused by multiple indirect taxes like Central Excise, Central Sales Tax, State VAT, and Entry Tax (Octroi). By simplifying the tax structure, it sought to reduce the multiplicity of indirect taxes and remove barriers to the interstate movement of goods.
Before GST, different taxes applied separately at various stages of the supply chain, resulting in tax on tax and increased costs. GST introduced a comprehensive tax on the supply of goods and services, blending the previously separate levies into one unified tax structure. This simplification was expected to lower the overall tax burden on goods and services and encourage ease of doing business.
A significant purpose of GST was to reduce the distinction between goods and services, thereby eliminating overlapping State and Central taxes on the same transaction. This also facilitated smoother inter-state movement of goods by abolishing the need for multiple checkpoints and inspections, which had caused delays and increased logistics costs.
Achievements of GST in the Last Five Years
Since its introduction, GST has achieved several important milestones. About 70 percent progress has been made in developing the national market, significantly reducing tax barriers between states. The cascading effect of taxes has been reduced by approximately 60 percent, improving the efficiency of the tax system. The problems arising from overlapping VAT and service tax have been largely eliminated, simplifying compliance for businesses.
One of the most noticeable changes has been the abolition of check posts at state borders. While check posts have been removed, issues such as road checks and harassment at times continue to affect the smooth flow of goods, referred to colloquially as official highway robbery.
GST has made trade and commerce within India more seamless and transparent, thereby promoting economic growth and integration.
Unique Features of GST as Implemented in India
India’s GST model incorporates several unique features that differentiate it from tax systems elsewhere in the world. One of the most innovative concepts is the concept of Integrated GST (IGST), which allows goods to move with taxes embedded. This concept is a game-changer in ensuring seamless movement of goods and services across states.
GST is levied on the supply of goods or services rather than on manufacture or sale. This shift fundamentally changes the tax structure and its administration. The Indian GST system follows a dual structure where both the Central Government and the State Governments levy and collect GST concurrently on a common base.
There is a uniform law for goods and services across India, which is a remarkable achievement considering the country’s size and federal structure. This uniformity helps businesses by providing a consistent tax framework throughout the country.
The dual GST structure consists of Central GST (CGST) and State GST (SGST) for intra-state supplies, and Integrated GST (IGST) for inter-state supplies, creating a balanced system that respects both central and state fiscal autonomy while maintaining harmony.
Overall Structure of Goods and Services Tax
GST in India applies to the supply of goods or services or both and has been effective since July 1, 2017. The territory of India for GST purposes includes the mainland as well as the maritime zones up to 200 nautical miles inside the sea.
For supplies within a State or Union Territory, two components are levied simultaneously. Central GST (CGST) is collected by the Central Government, while State GST (SGST) or Union Territory GST (UTGST) is collected by the respective State Government or Union Territory administration. The territorial jurisdiction extends up to 12 nautical miles within the sea for State or Union Territory supplies.
Inter-state supplies, which involve the movement of goods or services from one State or Union Territory to another, attract Integrated GST (IGST), payable to the Central Government. IGST applies beyond 12 nautical miles and up to 200 nautical miles within India’s maritime boundary. However, sales on the high seas beyond 200 nautical miles or sales made before clearance from customs bonded warehouses do not attract IGST.
Apart from CGST, SGST/UTGST, and IGST, a Compensation Cess is imposed on certain specified goods such as tobacco products, pan masala, coal, aerated waters, and motor vehicles. This cess helps compensate states for any revenue loss due to GST implementation.
Imports into India attract several duties, including Basic Customs Duty, Social Welfare Cess, IGST, and GST Compensation Cess, where applicable. These duties ensure that imported goods are taxed similarly to goods produced domestically, maintaining a level playing field.
The GST framework reduces the distinction between goods and services, addressing previous issues of dual taxation. This has been particularly beneficial for sectors such as construction, works contracts, restaurants and catering, leasing, hire services, and software.
GST is based on the Value Added Tax (VAT) concept that allows input tax credit on taxes paid for inputs, input services, and capital goods to offset the output tax liability. This mechanism avoids tax-on-tax or cascading effect, thereby reducing the overall tax burden.
GST is a consumption-based tax, meaning the tax is generally paid in the State or Union Territory where the goods or services are finally consumed, not where they are produced or sold. This promotes fair taxation aligned with the place of consumption.
The rates under GST include Nil, 0.25%, 3%, 5%, 12%, 18%, and 28%. For intra-state supplies, the CGST and SGST/UTGST components are each 50% of the IGST rate, ensuring that the total tax rate is consistent whether the supply is within a state or across states.
Though tax collection is split between the Central and State Governments, only one authority exercises control at a time, preventing dual control over the same transaction and simplifying compliance.
Certain goods, including petroleum products like crude oil, high-speed diesel, petrol, natural gas, and aviation turbine fuel, remain outside GST and continue to be taxed under Central Excise duty. These products may be integrated into GST at a later date. Tobacco products attract both excise duty and GST, while alcoholic liquor is subject to state excise duty and remains outside GST for now.
The Goods and Services Tax Council, a constitutional body, determines GST policies and rates. This council comprises representatives from both the Center and the States and acts as the apex authority to oversee GST administration and harmonization.
Budget 2024 and Changes in GST Law Made by Finance Bill 2024
The Union Finance Minister presented the Budget for the first four months of the financial year 2024-25 on February 1, 2024. Along with the Budget, the Finance Bill, 2024, was introduced. Once passed by Parliament and assented to by the President, it will become the Finance Act, 2024. This Budget was a pre-election Budget, and accordingly, only a few changes to the GST law were introduced.
The Finance Bill primarily focused on ensuring continuity in tax administration with minimal disruptions, rather than making wide-ranging reforms or amendments to the GST framework. The objective was to maintain fiscal stability and provide a predictable tax environment for businesses while keeping the ongoing GST processes intact.
Details of specific amendments or proposed changes under the Finance Bill, 2024 include minor modifications aimed at clarifying procedural aspects or compliance norms, without altering the core principles of GST or its rate structure. These changes reinforce the existing GST architecture and help improve its implementation efficiency.
Nature of Integrated GST (IGST)
Integrated GST (IGST) is a central component of India’s GST system, applicable to the supply of goods or services between states. IGST functions primarily as an intermediary tax, especially in business-to-business (B2B) transactions where input tax credit can be claimed by the recipient located in a different state.
IGST is not considered a final tax in itself because the recipient in the destination state will eventually claim input tax credit for the IGST paid, thereby ensuring that the final tax incidence is borne in the state of consumption.
In cases of business-to-consumer (B2C) transactions, IGST is collected, but the state where consumption occurs receives its share as State GST (SGST). This system ensures the proper apportionment of tax revenue among states while maintaining tax neutrality on interstate supplies.
The IGST rate is designed to be double the CGST rate, maintaining uniformity across the country and facilitating seamless interstate trade. The IGST mechanism ensures that goods and services move with the tax embedded, preventing multiple taxation and facilitating a smooth tax flow across state boundaries.
Because of IGST, there is typically no need to claim refunds of input taxes, except in specific cases such as physical exports or supplies to Special Economic Zones (SEZ). Refunds are also possible in scenarios of inverted duty structure, where the tax on output supplies is lower than the tax paid on inputs and input goods.
Exports and supplies to SEZ units are treated as zero-rated supplies under GST. This means that suppliers can claim input tax credit on inputs and input services used for such supplies even if no GST is paid on the output, effectively making exports and SEZ supplies tax-free.
Supply from SEZ units to Domestic Tariff Area (DTA) units is treated as import by the DTA unit, and customs duty is applicable in such cases. This maintains the fiscal boundary between SEZs and the rest of the domestic economy.
The IGST system, the concept of ‘supply’ instead of just ‘sale’, and the removal of distinction between goods and services are among the fundamental game changers in the GST regime. IGST is a concept unique to India and has not been adopted in this form by other countries.
Overview of the Integrated Goods and Services Tax Act (IGST Act)
The IGST Act is a relatively concise but crucial law that governs the levy and collection of Integrated GST on inter-state supplies of goods and services. It shares similarities with the earlier Central Sales Tax Act but is more aligned with the GST framework.
The Act defines ‘Integrated tax’ as the tax levied under the IGST Act on inter-state supplies. It also contains important definitions related to exports and imports of goods and services, the location of suppliers and recipients, taxable territory, and zero-rated supplies.
The Constitution (101st Amendment) Act empowered Parliament to exclusively legislate on goods and services tax concerning inter-state trade and commerce from September 16, 2016. Accordingly, Section 5(1) of the IGST Act imposes tax on all inter-state supplies except certain notified goods like alcoholic liquor, petroleum crude, high-speed diesel, petrol, natural gas, and aviation turbine fuel.
The IGST Act also deals with the levy of IGST on imports of goods other than those notified by the Government. Amendments introduced in 2023 intend to align IGST payment with customs duties payable on such imports, to streamline the taxation and warehousing of imported goods.
The Act covers provisions related to iinterstate supplyyof aircraft engines, parts, and accessories by airlines to their branches in other states, specifying that such supplies are subject to IGST and that input tax credit can be claimed under prescribed conditions.
Reverse charge provisions under IGST make it mandatory to pay tax on certain notified services, where the recipient is liable to pay the tax instead of the supplier. These provisions ensure tax compliance in cases where the supplier may not be registered or is located outside India.
The Act contains detailed principles for determining the place of supply of goods or services to ascertain whether a supply is inter-state or intra-state, which is critical for proper tax administration.
It provides for refund of IGST paid in error instead of CGST and SGST/UTGST, ensuring fairness in tax administration. In such cases, the taxpayer can claim a refund subject to specified conditions.
The IGST Act is supplemented by provisions of the CGST Act in several respects, ensuring harmonized application of GST laws.
Though there is no statutory mandate, IGST rates are generally set at double the CGST rates, maintaining consistent tax incidence across inter-state supplies.
GST Compensation Cess
Certain producing states in India, such as Maharashtra, Gujarat, Tamil Nadu, Punjab, and Karnataka, faced potential revenue losses due to the abolition of Central Sales Tax with the introduction of GST. To address this, the Central Government agreed to compensate these states for five years.
To fund this compensation, a GST Compensation Cess was introduced, levied on the supply of specified goods and services within India as well as on imports. The cess is charged in addition to the applicable GST rates on items like tobacco products, coal, and luxury automobiles.
The method of calculating the compensation payable to states is laid out in the GST Compensation Cess Act, which works alongside the CGST Rules to govern procedural aspects of the cess.
Input tax credit is available for GST Compensation Cess, but this credit can only be utilized for payment of the same cess, preventing its use for offsetting regular GST liabilities.
The compensation mechanism and cess are set to continue until March 31, 2026, after which a review and adjustment will be necessary based on revenue patterns.
State GST Act (SGST)
Each State Government in India enacted its own State GST Act to impose SGST on supplies of goods or services within the respective state. These Acts closely mirror the Central GST Act in terms of definitions, provisions, and rules, ensuring uniformity and simplicity.
While the SGST Acts are largely identical to the CGST Act, minor variations exist to address state-specific transitional provisions and input tax credit rules, adapting the central framework to local needs.
Central Sales Tax continues to apply to petroleum products, which remain outside GST. For the procurement of such products, C forms can still be issued even when the final product is subject to GST.
The SGST Acts empower state authorities to collect and administer the state component of GST, ensuring that states retain fiscal control and revenues from intra-state transactions.
Union Territories GST Act (UTGST)
Union Territories of India without legislative assemblies do not have their own GST Acts but are governed by the Union Territory Goods and Services Tax Act (UTGST Act), passed by Parliament in 2017.
The UTGST Act applies to territories such as Andaman and Nicobar Islands, Lakshadweep, Dadra and Nagar Haveli, Daman and Diu, Chandigarh, and other designated territories.
Each Union Territory is treated as a separate jurisdiction under the UTGST Act. As a result, IGST is applicable on supplies made from one Union Territory to another, similar to inter-state supplies between states.
Union Territories with legislative assemblies, such as Delhi, Puducherry, and Jammu and Kashmir, have their own GST Acts and administer their GST accordingly.
The term ‘other territory’ under the GST law includes areas within India’s exclusive economic zone between 12 and 200 nautical miles. Though UTGST is applicable in such areas, practical registration and tax compliance may be limited due to the lack of fixed establishments.
GST on Supply of Goods or Services or Both
The taxable event under GST is the supply of goods or services or both in the course or furtherance of business. This event triggers the liability to pay GST as specified in the CGST and SGST Acts.
The definition of ‘business’ under GST is broad. It covers all activities performed by a person,, whether or not they are commercial, including occasional transactions. The law ensures that all types of supplies forming part of a business are captured for GST purposes.
Supply under GST covers a wide range of transactions, including sale, barter, rental, lease, exchange, or disposal made or agreed to be made. Any supply made for consideration is taxable. Consideration need not be in monetary form but can be any form of return.
Certain activities specified in Schedule I of the CGST and SGST Acts are treated as supply even if there is no consideration. This includes transactions such as the transfer of business assets without consideration.
Supply by a taxable person to a related person is taxable even without consideration. This provision ensures that transactions between group companies, branches in different states, or divisions under different GST registrations are taxed appropriately.
Gifts given to related persons are subject to GST. For example, if a company supplies goods free of charge to its sister company or branch in another state, GST is applicable on such supply.
The relationship between employer and employee is recognized under GST law. Services or benefits provided by the employer to employees, such as transport, meals, or telephone, may attract GST, though clarifications have been issued to exempt certain fringe benefits.
Gifts to employees up to a value of Rs. 50,000 are exempt from GST, but input tax credit related to such gifts must be reversed. The term ‘gift’ is interpreted based on trade practices; for instance, provision of meals in canteens is generally not considered a gift.
Supply between two distinct persons within a business is taxable. This includes inter-state stock transfers, branch transfers, and intra-company services provided by banks or telecom companies across states.
Supply made by a principal to an agent is taxable under GST. This means that transactions such as supplies to clearing and forwarding agents attract GST. However, the agent is liable to pay GST only on commission received,, as the agent does not deal with goods or services directly.
Import of services from related persons or business establishments outside India is taxable under GST, even if no consideration is paid. Branch offices in India receiving free services from their foreign head office must account for GST under reverse charge provisions.
Lottery, betting, and gambling are specifically included under GST. Lottery tickets are treated as goods, and GST applies to their sale. Services relating to betting and gambling also attract GST.
Certain services provided by government entities and local authorities, except sovereign functions, are taxable. Mostly, GST on such services is payable by the recipient under the reverse charge mechanism.
Alcoholic liquor for human consumption and petroleum products such as crude oil, HSD, petrol, natural gas, and aviation turbine fuel are currently outside the GST net. However, petroleum products other than these specified ones are subject to GST.
Definition and Classification of Goods under GST
Though GST applies uniformly on goods and services, distinguishing between them is important for determining the place of supply, time of supply, valuation, and applicability of schemes such as composition.
The distinction is provided in Schedule II of the CGST and SGST Acts. Certain transactions, which may seem like services, are classified as goods and vice versa based on these schedules.
Hire purchase transactions and financial leases are considered as a supply of goods. For example, goods supplied under hire purchase contracts attract GST as goods.
Supply of goods in a club or association is treated as a taxable supply of goods.
Development of software is considered a service, but software supplied in physical form, whether packaged or tailor-made, is classified as goods.
Permanent transfer of intellectual property rights, such as patents, copyrights, trademarks, and designs is treated as goods, whereas temporary transfer or licensing of these rights is treated as a service.
Lottery, betting, and gambling products are taxable as goods. However, actionable claims other than lottery tickets are not subject to GST.
Giftson-related persons are not subject to GST, but input tax credit claimed on such gifts must be reversed.
Securities and money are excluded from the definition of goods. However, facilitation or arrangement of transactions in securities is a taxable service under GST.
Definition and Classification of Services under GST
The classification of services under GST is also governed by Schedule II of the CGST and SGST Acts. Certain transactions that involve goods may still be treated as services based on the nature of the supply.
Hire or operating lease of goods is classified as a supply of services. This means renting or leasing movable property falls under services.
Renting or leasing of immovable property, such as land or buildings, is a supply of service under GST.
Works contract relating to immovable property, including construction, erection, commissioning, installation, fitting, repair, maintenance, renovation, or alteration, is treated as a service.
Supply of food as part of a service, for example by restaurants or caterers, is treated as a supply of service.
Development of software is a service unless supplied in physical form, which classifies it as goods.
Temporary transfer or permitting use or enjoyment of intellectual property rights,, like patents, designs, and copyrights,, is treated as a supply of service.
Job work, which involves processing or working on goods supplied by another person, is treated as a service. GST is payable on job work charges unless specifically exempted.
Services provided by an employer to employees, such as transport, canteen facilities, or telephone, can be taxable under GST depending on the circumstances.
Place of Supply under GST
Determining the place of supply is crucial under GST as it decides whether a supply is intra-state or inter-state, and thus which taxes apply: CGST and SGST or IGST. The GST law provides detailed rules for determining the place of supply for both goods and services.
For goods, the place of supply generally is the location where the goods are delivered to the recipient. In cases where goods are delivered by the supplier or a third party, the place of supply is where the goods are handed over. If goods are supplied on board a conveyance such as a ship, aircraft, or train, the place of supply is where the goods are taken on board.
For services, the place of supply is generally the location of the recipient. If the recipient is not registered under GST, the place of supply is where the supplier is located. Specific rules exist for various types of services, such as transportation, telecommunications, restaurant services, and events.
The law also contains special provisions for supplies involving immovable property, performance-based contracts, and supplies through electronic commerce operators.
The place of supply rules are designed to allocate taxing rights fairly between states and prevent tax evasion or double taxation.
Time of Supply under GST
Time of supply determines the point in time when the liability to pay GST arises. This is important for the correct determination of tax periods, filing returns, and payment schedules.
For goods, the time of supply is the earliest of the date when goods are removed, delivered, or the invoice is issued. If the supplier fails to issue the invoice within the prescribed time, the date of receipt of payment can be considered the time of supply.
For services, the time of supply is generally the earliest of the date of invoice issuance or payment receipt. If the invoice is not issued within the stipulated time, the date when services are performed or the payment date can be considered.
In case of continuous supply of goods or services, the time of supply is determined periodically, usually monthly, depending on contractual terms.
Advance payments also trigger the time of supply. Tax liability arises when an advance is received, even if goods or services are supplied later.
Proper determination of the time of supply helps avoid interest and penalties due to delayed payment of GST.
Input Tax Credit under GST
Input Tax Credit (ITC) is a fundamental feature of GST that eliminates the cascading effect of taxes. It allows a taxpayer to claim credit for the tax paid on inputs, input services, and capital goods used in making taxable supplies.
ITC can be claimed only if the taxpayer possesses a valid tax invoice or debit note, has received the goods or services, and has furnished the required returns.
The credit claimed must be used only to pay output tax liabilities. ITC on inputs used for exempt supplies or non-business purposes is not allowed and must be reversed.
Proper maintenance of records, timely filing of returns, and reconciliation between suppliers and recipients are essential for smooth availing of ITC.
Certain restrictions apply, such as no credit on motor vehicles unless used for specified purposes, and ITC must be reversed proportionally if inputs are used partly for exempt supplies.
The availability of ITC reduces the effective tax burden and enhances the competitiveness of businesses.
Registration under GST
Every person making taxable supply of goods or services or both and whose aggregate turnover exceeds the prescribed threshold must register under GST.
Separate registrations are required for each state or Union Territory where the person operates. Different registration is also required for distinct business verticals within a state.
Certain persons are mandatorily required to register irrespective of turnover, such as casual taxable persons, non-resident taxable persons, e-commerce operators, and persons required to pay tax under reverse charge.
Registration enables the person to collect and pay GST, claim input tax credit, and comply with GST law.
The registration process is online and requires submission of documents, including proof of identity, address, bank details, and constitution of business..
Conclusion
The implementation of GST in India marks a significant reform in the country’s indirect tax system. By unifying multiple taxes into a single comprehensive framework, GST has simplified taxation, reduced cascading effects, and created a more efficient national market. The introduction of unique concepts such as Integrated GST and the dual GST structure ensures proper distribution of revenues between the Centre and the States, while facilitating seamless interstate trade.
GST’s broad definition of supply, inclusive of goods and services, and its consumption-based taxation principle ensure fairness and uniformity. The mechanisms for input tax credit, place of supply, and time of supply are designed to avoid tax evasion, double taxation, and compliance difficulties. The provisions for compensation cess protect the interests of states facing revenue losses during the transition period.
Though some challenges remain, especially regarding items outside the GST net like petroleum and alcoholic liquor, the system’s ongoing evolution through legislative amendments and policy measures promises better clarity and efficiency.