GST explained for UPSC

Before July 2017, a product moving across India could be taxed by the Centre (excise duty, service tax), by the state of origin (central sales tax), by the destination state (VAT, entry tax, octroi) and more — with taxes levied on taxes along the way. The Goods and Services Tax (GST) replaced most of these with a single, shared tax on the supply of goods and services. It is one of India's largest economic reforms, and a favourite topic for GS III and GS II (fiscal federalism).

The constitutional basis

• The 101st Constitutional Amendment Act, 2016 created the legal foundation.
• Article 246A gives both Parliament and state legislatures the power to make laws on GST — an unusual concurrent taxing power.
• Article 269A deals with GST on inter-state supply, which is levied and collected by the Centre and apportioned between the Centre and states.
• Article 279A creates the GST Council.
• GST came into force on 1 July 2017.

How GST works

Dual GST

India chose a dual structure:

For a sale within a state, CGST and SGST are charged together. For a sale across states, IGST is charged.

Destination-based

GST is a destination-based consumption tax: the tax revenue accrues to the state where the goods or services are consumed, not where they are produced. This benefited consuming states and was a concern for major manufacturing states.

Input tax credit

A business pays GST on its purchases and collects GST on its sales. It can deduct the tax already paid on inputs from the tax it owes on its output. So tax is effectively paid only on the value added at each stage, and the "tax on tax" (cascading) of the old system is removed.

Technology

The GST Network (GSTN) runs the IT backbone — registration, returns, payments. The e-way bill system tracks the movement of goods, and e-invoicing has been extended in phases to smaller businesses.

The GST Council

• Chairperson: the Union Finance Minister.
• Members: the Union Minister of State for Finance and the finance (or other nominated) ministers of all states and Union territories with legislatures.
• Voting: decisions require a three-fourths majority of weighted votes of members present and voting. The Centre's vote counts for one-third of the total; all states together count for two-thirds.

This means neither the Centre alone nor the states alone can push through a decision. In practice, most decisions have been taken by consensus.

In Union of India v. Mohit Minerals (2022), the Supreme Court held that the Council's recommendations are persuasive rather than binding on Parliament and state legislatures — an important statement about cooperative federalism.

What is outside GST

• Alcohol for human consumption — outside GST by constitutional design; states tax it.
• Petroleum products — crude oil, petrol, diesel, aviation turbine fuel and natural gas are constitutionally within GST's scope, but GST will apply only from a date recommended by the Council. Until then, they continue under the old taxes.
• Electricity — outside GST.

Rates

For its first eight years, GST had four main slabs — 5, 12, 18 and 28 per cent — plus a compensation cess on certain goods such as tobacco, luxury cars and aerated drinks.

In September 2025, the GST Council approved a major rate rationalisation, often called "GST 2.0", which took effect on 22 September 2025. The structure moved to two main rates of 5 and 18 per cent, with a special higher rate of 40 per cent for a small set of "sin" and luxury goods. Many everyday items moved to lower rates. Details of individual items should be checked against the official notifications.

Compensation to states

When GST was introduced, states gave up significant taxing powers. The GST (Compensation to States) Act, 2017 guaranteed them compensation for five years (until June 2022) for any shortfall below a 14 per cent annual growth in revenue from the taxes subsumed. It was funded by the compensation cess.

When the pandemic caused a large revenue shortfall, the Centre borrowed and passed funds on to the states, and the cess was extended to repay those loans. The end of compensation has been a significant fiscal issue for many states.

Assessment

Gains:

• A common national market; removal of check posts and faster movement of goods.
• Reduced cascading and a more transparent tax system.
• Improved compliance through invoice matching and technology.
• A new institution of cooperative federalism in the GST Council.

Concerns:

• Loss of fiscal autonomy for states, which can no longer set rates on most goods independently.
• Complexity of compliance for small businesses in the early years, and frequent changes to rules and rates.
• Multiple rates and classification disputes — partly addressed by the 2025 rationalisation.
• Petroleum and electricity outside GST, which breaks the input tax credit chain for many industries.
• Dispute resolution — the GST Appellate Tribunal took years to become operational.

Practice questions

1. Prelims-type: Which Article creates the GST Council? What share of the voting weight does the Centre have?
2. Mains-type (150 words): Explain how input tax credit removes the cascading effect of taxes.
3. Mains-type (250 words): "The GST Council is an experiment in cooperative federalism." Critically examine.