INTRODUCTION
The Goods and Services Tax (GST), implemented in India in 2017, represents one of the country’s most transformative fiscal reforms since independence. It replaced a highly fragmented indirect taxation structure that previously consisted of multiple central and state-level taxes such as excise duty, VAT, service tax, and entry tax. These older taxes often overlapped, created confusion, and led to a phenomenon popularly referred to as the “cascading effect of taxes”—in which a product was taxed multiple times at different stages of its production and distribution.
GST aims to provide a single, streamlined, and transparent taxation system that treats India as a unified common market. The key principle behind GST is the taxation of supply rather than specific events like manufacturing, sales, or provision of services. Moreover, GST functions as a destination-based tax, which means the revenue from taxation accrues to the state where the goods or services are finally consumed, rather than where they are produced. This approach ensures fairness in revenue distribution among states, balancing the interests of both producing and consuming regions.
CONSTITUTIONAL AND LEGAL FOUNDATION
The legal authority for GST is embedded in the Constitution of India, through the 101st Constitutional Amendment Act, 2016, which introduced a framework for the new tax regime. GST is implemented through a combination of central and state legislation, supported by detailed rules:
1.Central Goods and Services Tax Act (CGST), 2017: Governs the levy and collection of GST by the central government on intra-state transactions (i.e., supply of goods and services occurring within a single state).
2. State Goods and Services Tax Act (SGST), 2017: Each Indian state has enacted its own version of this law to allow taxation on intra-state supplies within its jurisdiction. Revenue under SGST accrues directly to the respective state government.
3. Integrated Goods and Services Tax Act (IGST), 2017: Managed by the central government, IGST applies to inter-state supplies as well as imports and exports. It eliminates the need for businesses to deal with multiple states’ tax systems when goods and services move across state borders.
4. Union Territory Goods and Services Tax Act (UTGST), 2017: This law applies specifically to India’s Union Territories, such as Delhi or Chandigarh, operating in a manner like SGST.
At the core of the GST system is the GST Council, a constitutional body comprising representatives from the central and state governments. This council plays a crucial role in setting rates, implementing exemptions, and making other regulatory decisions to maintain uniformity across the nation. Although the maximum permissible GST rate is fixed at 40% (20% CGST + 20% SGST), in practice, the council has kept most goods and services within lower rate categories such as 5% and 18%. Some luxury items, such as premium cars, aerated drinks, or tobacco products, attract higher rates to discourage excessive consumption. It is also noteworthy that commodities like alcoholic liquor, petroleum, and stamp duties on property transactions remain outside the GST system and continue to be taxed under older frameworks.
MECHANISM OF GST COLLECTION AND INPUT TAX CREDIT
One of the most innovative features of GST is its method of tax collection through crediting and offsetting, designed to prevent the tax-on-tax phenomenon. At every stage of the supply chain, GST is levied both on procurement by businesses and on sales to customers. To prevent double taxation, businesses can avail the Input Tax Credit (ITC) system.
- When a manufacturer purchases raw materials, they pay GST on those inputs.
- Later, when they sell the finished good to a retailer or consumer, they charge output GST on the selling price.
- The actual liability of the manufacturer is not the full output GST but the difference between the output tax collected and the tax already paid on inputs.
This mechanism ensures that tax is effectively levied only on the value addition at each stage of the supply chain, meaning a fair distribution of tax without unnecessary burden on either producers or consumers. To claim ITC, a business must hold proper documentation such as tax invoices, and crucially, the supplier must have deposited the tax with the government. This creates a strong system of accountability and traceability.
REVERSE CHARGE MECHANISM (RCM)
Under normal circumstances, the seller or supplier of goods and services is responsible for collecting and remitting GST. However, certain cases fall under the Reverse Charge Mechanism (RCM), where this responsibility is shifted to the recipient of the transaction.
For example, if a registered company avails services from an unregistered vendor—say, hiring a consultant or purchasing from a small supplier without GST registration—the responsibility to calculate and pay GST lies with the buyer (the recipient of goods or services). The recipient deposits this tax directly with the government.
This mechanism serves multiple objectives:
- It brings otherwise unorganized or unregistered sectors under indirect compliance.
- It reduces potential tax evasion by shifting responsibility to the more accountable party (the buyer).
- It ensures that every transaction contributes to the tax base, even when one side of the trade is outside the GST network.
RECENT REFORMS AND SLAB RATIONALIZATION
One of the criticisms of GST since its launch has been its complex multiple-slab structure, which previously included rates of 5%, 12%, 18%, and 28%. This often-created confusion and compliance challenges for both taxpayers and administrators. To address these concerns, the GST Council has recently approved the rationalization of slabs into a simplified two-rate structure of 5% and 18%, effective September 22, 2025.
Key highlights of the reform include:
- Consumer durables becoming cheaper: Products like televisions, air conditioners, and smaller passenger cars have seen reductions in tax rates, leading to more affordable pricing.
- Relief on essentials: Household staples such as ghee, nuts, and medicines, which were previously taxed at 12%, now fall within the 5% slab.
- Promotion of insurance: Life insurance and health insurance premiums, which were earlier taxed, have now been exempted from GST. This move is aimed at increasing insurance penetration and encouraging financial security among citizens.
The rationalization of GST rates is expected to encourage consumption by lowering the burden on everyday goods and services, while simultaneously reducing the complexity of the taxation system. Beyond this, it provides a much-needed relief to the middle-class population by making essential commodities more affordable and ensuring wider financial inclusion through cheaper insurance.
CONCLUSION
The Goods and Services Tax has significantly altered the taxation landscape in India by consolidating a fragmented and inefficient system into a unified, value-added tax regime. It is designed not only to simplify compliance for businesses but also to ensure fairness in tax distribution across states. By introducing mechanisms like Input Tax Credit and Reverse Charge, GST ensures that the tax base is wide, systematic, and less prone to evasion.
The recent reforms of 2025, particularly the slab rationalization and exemptions on critical items like health and life insurance, underline the government’s intent to make GST more citizen-friendly and consumption-driven. Over time, GST is expected to strengthen India’s economy by fostering transparency, reducing compliance burdens, promoting interstate trade, and supporting the vision of India as a single, integrated market.
REFERENCES
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