GST in India: One Nation, One Tax or Many Challenges?

GST in India: One Nation, One Tax – Success or Challenge?

“GST is not merely a tax reform; it is a reform of the entire economic framework of India.” — Arun Jaitley

Abstract

GST stands for Goods and Services Tax, which is one of the biggest taxation rules reforment in the history of India. This was introduced in Constitution (One Hundred and First Amendment) Act, 2016, aiming in simple and destination-based taxation regime instead of fragmented taxation laws. GST came to be popularly called “One Nation One Tax” for the purpose of minimizing cascading effect of tax, facilitating business and transparency and to create a level playing field for the national market. The reform incorporated a number of direct taxes at the centre and state levels which streamlined tax administration and enhanced compliance by using a technology-based system.

The present blog article discusses about the structure, aims, accomplishments, and problems of GST in India. It examines the constitutional structure of GST, the role of the Articles 246A, 269A, 279A and the role of GST Council as an institution of cooperative federalism. The blog also examines if GST has been able to achieve the goal of economic integration and tax simplification or whether it faces certain challenges in practice, including various tax rates, compliance obligations and technical concerns.

The study finds GST has significantly modernized the indirect tax regime in India and improved economic integration of the country but it is a never ending journey of reforms that need further improvement and policy stability to achieve its desired goals.

Keywords: GST, One Nation One Tax, cooperative federalism, ITC, Tax Reformation

I. Introduction

GST was one of major economic and tax reforms in India which came on 1 July 2017. It was famously known as “One Nation One Tax”, aiming to replace the complex federal indirect taxation system imposed by Central and state governments. Before GST, a complicated structure of excise duty, service tax, value added tax (VAT), central sales tax (CST), octroi, entry tax and other indirect taxes on businesses and consumers used to exist. The variety of taxes raised not only made compliance more expensive, but also made commerce more difficult in the interstate market and led to tax cascading.

The introduction of the GST regime was intended to provide for a common national market, a better tax compliance, a reduction in corruption, transparency and an increase in economic growth. The reform was also likely to make the tax system easier for companies and would give consumers reduced tax rates and an increased flow of goods and services throughout India.

Although it was designed with great lofty goals and promises in its agenda, GST has never been put beyond discussion. Its supporters argue that it is an innovative reform that has modernized the indirect tax system in India, but its opponents say that it has created compliance problems, technical difficulties, a multitude of tax brackets and difficulties for small businesses. After almost 10 years of its implementation, there is a pivotal question which remains unanswered: What has been the impact of GST on achieving its goals?

This blog is a critical analysis of the concept, structure, the goals, achievements and challenges of GST in India, discussing how the idea of “One Nation One Tax” has turned into a practical success or is it still a challenge?

II. Understanding GST

There are two types of tax—Direct tax and Indirect tax. GST is indirect tax that is being imposed on the supply of good or services and taxed at the point of supply. The fundamental difference between the earnest tax regime and the new GST tax regime is that formerly the tax was being imposed at each stage of value addition and the burden of tax often comes on the shoulders of final consumer. Businesses have the benefit of the Input Tax Credit (ITC) for taxes already paid which eliminates the cascading effect of “tax on tax”.

Illustration:

Suppose a furniture manufacturing company buys raw materials worth of ₹ 50,000 and pays the respective GST of ₹ 9,000. He sells the furniture he produces at a selling price of ₹1,00,000 including Goods and Service Tax at 18% (amount on ₹10,000).

With the ITC mechanism:

Output GST Liability = ₹18,000

Less: Input Tax Credit = ₹9,000

Net GST payable = ₹9,000

This mechanism will help to avoid double taxation and enhance tax efficiency.

GST in India is a dual GST regime as both the Centre and States have taxing powers under the constitution. The main items are:

• CGST (Central Goods and Services Tax): Tax imposed on goods transactions within the State by Central Government.
• SGST (State Goods and Services Tax): It is collected by the State Governments for transactions made in the State.
• IGST (Integrated Goods and Services Tax): Duty charged on the imports and on the interstate transactions.
• Union Territory Goods and Services Tax (UTGST): Tax applicable in UTs which do not have legislative bodies.

The Constitution (One Hundred and First Amendment) Act, 2016 which inserted the Articles 246A, 269A and 279A in the Constitution of India is the underlying legislation of GST. It also set up the GST Council, a constitutional body to suggest on matters related to the GST rate, exemption and policy issues.

III. Reasons for Implementing GST

Several economic and administrative goals were the reasons for implementing the GST:

1. Elimination of Cascading Effect: In the old tax system, taxes were levied on taxes multiple times, resulting in taxation of goods and services at each step. The Indian government has given the concept of ITC i.e. Input Tax Credit in GST in order to levy the tax on value addition.

Illustration:

Pre GST: Suppose that the manufactured goods worth ₹ 1,00,000 were sold by a manufacturer.

Excise Duty @12.5% = ₹12,500

Total value = ₹1,12,500

The value of the goods was reduced to ₹1,12,500 and thereafter VAT was imposed on the reduced value. The reduced value of the goods is ₹1,12,500 and then the reduced value is calculated to determine the VAT.

VAT @10% = ₹11,250

Final value = ₹1,23,750

This led to the tax cascading, or “cascading effect.”

Under GST:

Value of goods = ₹1,00,000

GST @18% = ₹18,000

Final value = ₹1,18,000

Hence, GST has minimised the cascading effect (ITC and taxation of value addition).

2. Development of a unified national market: Prior to the introduction of GST, there were various tax laws and procedures in each State which prevented cross State trade. The main objective of GST was to bring the Indian market together as a single market.

3. Minimisation of Tax Structure: The previous indirect tax regime was very complex. GST was to bring about the concept of single tax regime.

4. Support for ease of doing business: It was expected that a uniform tax system would eliminate compliance problems and help to make India’s business environment more efficient.

5. Greater Tax Compliance and Tax Transparency: The heavy dependence on digital compliance, online return filing and invoice matching, were all part of a drive to curb tax evasion and boost transparency.

6. Economic Growth: Experts felt that GST would lead to a rise in efficiency of production and distribution and boost India’s GDP growth.

IV. Taxes Subsumed Under GST

GST has incorporated several indirect taxes that had been levied by both the Centre and the States.

Central Taxes Replaced

• Central Excise Duty
• Service Tax
• Additional Customs Duty
• Special Additional Duty of Customs
• Central Surcharges and Cesses

State Taxes Replaced

• Value added tax (VAT)
• Entertainment Tax
• Luxury Tax
• Purchase Tax
• Entry Tax and Octroi
• State Cesses and Surcharges

These taxes were replaced with much that lessened over-taxation and duplication of taxes.

V. Significant outcomes of GST

1. Unified Taxation System: The most significant success of GST has been the creation of a fairly integrated tax regime in India. No longer will businesses have to deal with a different tax system in each state.

The concept of “One Nation, One Tax” represented economic integration and less trade fragmentation.

2. Reduction in Cascading Taxes: The cascading effect of taxation has been significantly curtailed through use of Input Tax Credit mechanism. Now manufacturers and service providers can avail tax credits for the taxes paid on their inputs, which reduces the cost of production.

This has helped to increase efficiencies in supply chains and encouraged formal business practices.

3. Digitalisation of Tax Administration: The introduction of a technology-based tax system is GST. The GST Network (GSTN) facilitates online registration, return filing, payment of taxes, processing of refunds and compliance.

The digital system has:

• • Increased transparency,
  • A lower level of interaction with tax authorities, and
  • High level of corruption, and
  • Improved tax monitoring

4. Growth in Taxability: GST has broadened the tax base by encouraging the formalisation of business in India. Improved tax compliance with mandatory registration requirements, and with invoice matching mechanisms.

Small businesses, which were once outside the tax system, were brought in.

5. Bettering Revenue Collection: The collection of GST has gradually increasing over the time. GST collection continues to increase monthly and now has surpassed 1.5L crore rupees, showing increased economic activity and compliance to the laws. This has contributed to better fiscal health and fiscal strength of government revenues.

6. Interstate Trade, which includes: Eliminating entry taxes and border check posts also help minimize transportation delays and logistics costs. Today, goods move more freely between states, enhancing the supply chain.

VI. Challenges and Criticisms faced by the implementation of GST

GST has also come a long way and has been criticized for its achievements.

1. Multiple Tax Slabs: The complexity arises because of multiple tax slabs.The complexity comes with multiple tax slabs. While GST was brought in as “One Nation, One Tax”, there are several rates of tax in India:

• 0%
• 5%
• 12%
• 18%
• 28%

Other luxury and sin goods are also subject to compensation cess. The multi-rates structure is often complex to classify and can lead to conflicts over tax rates.

2. Compliance burden on small businesses: The following have been the challenges faced by small and medium enterprises (SMEs):

• Frequent return filing,
• Technical requirements,
• Digital compliance,
• Invoice uploading,
• E-way bill generation.

But many small traders were finding the system hard to understand, difficult and costly to maintain.

3. Technical Glitches in GSTN: There were some technical problems with the GST portal in the first few years:

• Server crashes,
• Delayed refunds,
• Filing errors,
• Challenges with invoice matching.

These problems caused discontent for taxpayers and vocational groups.

4. Delay in Refunds: The delays in obtaining GST refunds have impacted exporters and businesses that rely heavily on working capital, as it affects their liquidity and efficiency in business operations.

5. Federal tensions between Centre and States: The problem of GST compensation has come into focus, especially during the pandemic of COVID-19. Multiple states claimed the lack of compensation payments impacted their economies, weakened federalism and cooperation, and made their states less competitive.

6. Constant Amendments and Notifications: GST laws often get changes through notifications, circulars and amendments. Adherence to such frequently changing rules is difficult for businesses.

VII. GST and the Indian Economy

The effects of GST on the Indian economy have been mixed but mostly positive.

Positive Economic Effects

• More formal organization of enterprises,
• Improved tax compliance,
• Better logistics efficiency,
• Development of digital economy,
• and Enhanced transparency.

Negative Economic Concerns

• Initial slowdown in small business sectors,
• Increased compliance costs,
• Transitional disruption;
• and Mixing up the rates.

Smaller companies had more trouble in adapting but larger corporations adapted relatively quick.

VIII. Constitutional Philosophy behind GST

GST is fundamentally rooted in the notions of economic unity, cooperative federalism, fiscal efficiency and constitutional balance between Union and the States. Before GST, the indirect tax regime was a dual tax regime, where tax rates are imposed by both the Centre and the States, and, very often, there was a lack of coordination between the two, leading to inefficiency and multiple taxes on interstate trade. GST has been implemented to overcome these structural deficiencies and to create a unified tax system that is in line with the constitutional principles.

1. Principle of Cooperative Federalism: Cooperative federalism is one of the important constitutional philosophies on the basis of which the GST was introduced. The Seventh Schedule of the Indian Constitution allocates legislative powers between the Union and the States. Prior to GST, the manufacturing and services were subject to tax by the Centre, whereas sale of goods was primarily subject to tax under the States. This division led to administrative complexity and economic division.

The Constitution (One Hundred and First Amendment) Act, 2016 was passed to provide simultaneous powers to Parliament and the State Legislature to enact law on GST under Article 246A of the Constitution. This was a major departure from the previous principle of strict federal separation to the principle of co-operative fiscal governance.

Under Article 279A of the Constitution, the formation of the GST Council is a step which further gave a shape to the cooperative federalism. The Council is a decision making forum where the Union and the States come together to decide on tax rates, exemptions and procedural issues. Hence, the GST reflects the constitutional concept that in order to achieve economic development of the nation, it is necessary to cooperate between various levels of government instead of conflict.

2. Economic Security and Economic Protectionism: Another objective of GST in the constitution is to form a single economic market in India. Prior to GST, it was evident that trade barriers and the free movement of goods were obstructed by having different state tax laws. Interstate transactions often required entry tax, octroi and various compliance requirements.

GST upholds the principle of economic integration as it provides uniformity in tax structure and eliminates the artificial barriers to trade, as enshrined in the Constitution. The reform reinforces the notion of a unified Indian economy and thus promotes national unity and economic efficiency.

3. Fiscal Efficiency and Transparency: The philosophy of GST is also based on improving fiscal accountability and transparency. The Input Tax Credit mechanism helps in eliminating cascading taxes and also gives tax fairness by way of only taxing value addition.

The digitalization of GST administration promotes transparency, less human discretion and less chances for corruption. This is in keeping with the principles of good governance and accountability as enshrined in the Constitution.

The next case involves balancing the Federal autonomy with national interest. The following case is balancing the Federal autonomy and national interest.

GST is a compromise between the States’ autonomy and the economy of the nation. State powers to tax have been ceded but the States remain stakeholders in policy-making at the GST Council. This balance is the outcome of a constitutional vision that federalism in India is cooperative and flexible in nature and not strictly compartmentalized.

Meanwhile, discussions about compensation payments and fiscal independence highlight ongoing central versus state financial rivalry.

4. Enabling of the GST through constitutional amendments: The Constitution (One Hundred and First Amendment) Act, 2016 made several important amendments:

• Article 246A – Grants concurrent powers to Parliament and State Legislatures to legislate on GST.
• Article 269A – Applicable to levy and collection of tax on interstate trade and commerce.
• Article 279A – Establishes the GST Council.

Changes also made to the Seventh Schedule and to provisions on taxation powers.

All of these constitutional modifications brought about a change in India’s fiscal federalism and helped pave the way for GST in the country.

IX. Role of the GST Council

The GST Council is one of the major institutional measures introduced in the framework of the Goods and Services Tax regime. It consists of:

• Union Finance Minister,
• The Union Minister for State Finance,
• State Finance Ministers.

The Council recommendations cover:

• Tax rates,
• Exemptions,
• Threshold limits,
• Model GST laws,
• Administrative procedures.

The GST council is an application of the principle of cooperative federalism since the Centre and the States are involved in decision making.

But in a few cases the differences on the revenue-sharing and compensation issues has marred the Centre-State relations.

X. Judicial Recognition of Cooperative Federalism

The Supreme Court in Union of India v. Mohit Minerals Pvt. Ltd. (2022) 10 SCC 700 ruled that the recommendations issued by the GST Council are not binding on the Centre or the States but have great persuasive value. The Court highlighted the concept of cooperative federalism and the role of both governments in fiscal decision making in the operation of GST.

Such a decision upheld the constitutional equilibrium between Union and the States in the context of GST regime. 

XI. Is the Goods and Services Tax really “One Nation One Tax”?

The phrase “One Nation, One Tax” is more aspirational than literal. There is no single rate of the GST in India. Instead, it has:

• Multiple tax slabs,
• Different exemptions,
• Sector-specific rules,
• Divide the Central and State Parts.

Furthermore, petroleum products and alcohol for human consumption continue to be exempt from GST.

Thus, even though GST has brought a lot of convergence in tax, all the tax still has not converged to a single system.

XII. The Way Forward

Some changes are needed to fully realize the goals of GST:

1. Rationalization of Tax Slabs: The fewer tax slabs, the less will be the disputes and it will be easier to observe.
2. Avoiding complexity for small businesses.
3. Government should facilitate return filing and compliance of SMEs.
4. Petroleum Products – the inclusion of petroleum products.
5. The introduction of petroleum products under GST will further improve tax uniformity and the reduction of distortions in fuel prices.
6. Stronger Technological Infrastructure: The enhancement of GST portal efficiency and reliability would minimize taxpayer problems.
7. Transparency of Tax Policies: Avoid too many changes to ensure businesses have certainty and predictability.

Conclusion

GST was an historic change in India’s tax regime. It has superseded a disjointed and complex system that has been replaced by a more cohesive and technology-based system. The introduction of GST has brought about a significant increase in transparency, elimination of cascading taxation, ease of interstate trade, and an increase in the formal economy.

But the reform has not been without difficulties. It remains inefficient due to several tax rates, compliance process, technical difficulties and conflicts with the federal authorities. The promise of One Nation One Tax is yet to be realised. Thus, it can be said neither that GST is a success nor the failure. Rather, it is a developing reform which has radically altered the indirect taxation regime in India, but needs further maturation to realize the grand vision.

References

Statutes and Constitutional Provisions

1. Constitution of India, Articles 246A, 269A and 279A.
2. Constitution (One Hundred and First Amendment) Act, 2016.
3. Central Goods and Services Tax Act, 2017.
4. Integrated Goods and Services Tax Act, 2017.
5. State Goods and Services Tax Acts.
6. Goods and Services Tax (Compensation to States) Act, 2017.

Books

1. Girish Ahuja and Ravi Gupta, Systematic Approach to GST (Bharat Law House).
2. V.S. Datey, GST Ready Reckoner (Taxmann Publications).
3. Dr. Vinod K. Singhania and Monica Singhania, Students’ Guide to Income Tax including GST (Taxmann).
4. S.S. Gupta, Service Tax, VAT and GST (Taxmann Publications).

Journal Articles

1. Rajarshi Dasgupta, “GST and Cooperative Federalism in India” (2019) Economic and Political Weekly.
2. Arvind Subramanian, “India’s GST Reform: Progress and Challenges” (2018) Indian Economic Review.
3. Nani Palkhivala, “Taxation and Constitutional Governance in India” (Journal Article).
4. Union of India v. Mohit Minerals Pvt. Ltd., (2022) 10 SCC 700