Unit 2

An overview of goods and services tax (GST)

Introduction

Introduction of Goods and Services Tax (GST) in India

The Goods and Services Tax (GST) is one of the most significant tax reforms in India's history.
It was introduced to unify and simplify the indirect tax system, replacing a complex structure
of multiple indirect taxes levied by the central and state governments.
GOODS AND SERVICE TAX (GST) – CONCEPT Introduction: The introduction of Goods and
Services Tax (GST) would be a very significant step in the field of indirect tax reforms in India.
By amalgamating a large number of Central and State taxes into a single tax, it would mitigate
cascading or double taxation in a major way and pave the way for a common national market.
From the consumer point of view, the biggest advantage would be in terms of a reduction in the
overall tax burden on goods, which is currently estimated to be around 25%-30%. Introduction of
GST would also make Indian products competitive in the domestic and international markets.
Studies show that this would have a boosting impact on economic growth. Last but not the least,
this tax, because of its transparent and self-policing character, would be easier to administer.

Goods and Services Tax: What is GST in India? Indirect Tax Law Explained

What is GST in India?

GST is known as the Goods and Services Tax. It is an indirect tax which has replaced many
indirect taxes in India such as the excise duty, VAT, services tax, etc. The Goods and Service
Tax Act was passed in the Parliament on 29th March 2017 and came into effect on 1st July 2017.

In other words, Goods and Service Tax (GST) is levied on the supply of goods and services.
Goods and Services Tax Law in India is a comprehensive, multi-stage, destination-based
tax that is levied on every value addition. After subsuming majority indirect taxes, GST is a
single domestic indirect tax law for the entire country.
Before the Goods and Services Tax could be introduced, the structure of indirect tax levy on
goods in India was as follows:

Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales,
Central GST and State GST are charged. All the inter-state sales are chargeable to the Integrated
GST.

Kelkar committee:

The Kelkar Committee, officially known as the Task Force on Indirect Taxes, played a crucial
role in shaping the Goods and Services Tax (GST) in India. Headed by Vijay Kelkar, the
committee submitted its report in 2002, recommending a comprehensive overhaul of the existing
indirect tax system and suggesting the implementation of GST.
 Here's a more detailed look at the Kelkar Committee's recommendations regarding GST:

 Unified Tax System:

The committee proposed replacing the multitude of existing indirect taxes with a single,
unified GST.

 Central and State GSTs:

The report recommended the implementation of both a Central GST and state-level GSTs,
suggesting a dual GST model for India.

 Comprehensive Tax Base:

The committee advocated for a broad tax base, covering almost all goods and services up to the
final consumer.

 Tax Rate Structure:

The report suggested a multi-rate structure for GST, with rates ranging from 6% to 20%
depending on the goods and services, according to Scribd .

 Exemptions:

Certain essential items like unprocessed food, medical services, and education were
recommended to be exempted from GST.

 Petroleum Products:

The committee proposed taxing petroleum products at a higher rate but without input tax
credits, according to Scribd.

 Phased Implementation:

The committee also suggested a phased approach to GST implementation, including setting up
IT systems, building the Central GST system, and engaging with states.

 Other Recommendations:
The committee also addressed issues related to direct taxes, including rationalizing
exemptions, abolishing long-term capital gains tax, and expanding the service tax net.
The Kelkar Committee's recommendations laid the groundwork for the eventual introduction of
GST in India, with the GST Council building upon the initial framework provided by the
committee.

Constitutional Amendment - Goods and Service Tax: Concepts, Meaning, Significance, Features
and Benefits

In order to amend the Constitution to enable introduction of GST, the Constitutional (122nd
Amendment) Bill, 2014 was introduced in the Parliament. The Constitution Amendment Bill was
passed by the Lok Sabha in May, 2015.

DEFINITION
A Goods and Services Tax (GST) is a value-added tax levied on goods and services and
included in the price of a product.

What Is the Goods and Services Tax (GST)?

The goods and services tax (GST) is a value-added tax (VAT) levied on most goods and
services sold for domestic consumption. The GST is paid by consumers, but it is remitted to the
government by the businesses selling the goods and services.

Critics point out, however, that the GST may disproportionately burden people whose self-
reported income are in the lowest and middle income brackets, making it a regressive tax. These
critics argue that GST can therefore exacerbate income inequality and contribute to social and
economic disparities. In order to address these concerns, some countries have introduced GST
exemptions or reduced GST rates on essential goods and services, such as food and healthcare.
Others have implemented GST credits or rebates to help offset the impact of GST on lower
income households.

Goods and services tax should not be confused with the generation-skipping trust, also
abbreviated GST (and its related taxation, GSTT).

Understanding the Goods and Services Tax (GST)

The goods and services tax (GST) is an indirect federal sales tax that is applied to the cost of
certain goods and services. The business adds the GST to the price of the product, and a
customer who buys the product pays the sales price inclusive of the GST. The GST portion is
collected by the business or seller and forwarded to the government. It is also referred to
as Value-Added Tax (VAT) in some countries.

Most countries with a GST have a single unified GST system, which means that a single tax rate
is applied throughout the country. A country with a unified GST platform merges central taxes
(e.g., sales tax, excise duty tax, and service tax) with state-level taxes (e.g., entertainment tax,
entry tax, transfer tax, sin tax, and luxury tax) and collects them as one single tax. These
countries tax virtually everything at a single rate.

Dual Goods and Services Tax Structures

Only a handful of countries, such as Canada and Brazil, have a dual GST structure. 3 Compared
to a unified GST economy where tax is collected by the federal government and then distributed
to the states, in a dual system, the federal GST is applied in addition to a local sales tax. In
Canada, for example, the federal government levies a 5% tax and some provinces also levy a
provincial sales tax (PST), which varies from 8% to 10%.45 In this case, a consumer's receipt
will clearly have the GST and PST rate that was applied to their purchase value.

More recently, the GST and PST have been combined in some provinces into a single tax
known as the Harmonized Sales Tax (HST). Prince Edward Island was the first to adopt the
HST in 2013, combining its federal and provincial sales taxes into a single tax. 6 Since then,
several other provinces have followed suit, including New Brunswick, Newfoundland and
Labrador, Nova Scotia, and Ontario.4

Critiques of the GST

GST is generally considered to be a regressive tax, meaning that it takes a relatively larger
percentage of income from lower-income households compared to higher-income
households.7 This is because GST is levied uniformly on the consumption of goods and
services, rather than on income or wealth.
Lower income households tend to spend a larger proportion of their income on consumables,
such as food and household goods, which are subject to GST. As a result, GST can
disproportionately burden lower income households.

Because of this. some countries with GST have considered possible adjustments that could
make the tax more progressive by taking a larger percentage from higher-income earners.

Example: India's Adoption of the GST

India established a dual GST structure in 2017, which was the biggest reform in the country's
tax structure in decades.9 The main objective of incorporating the GST was to eliminate tax on
tax, or double taxation, which cascades from the manufacturing level to the consumption
level.10

For example, a manufacturer that makes notebooks obtains the raw materials for, say, Rs. 10,
which includes a 10% tax. This means that they pay Rs. 1 in tax for Rs. 9 worth of materials. In
the process of manufacturing the notebook, the manufacturer adds value to the original
materials of Rs. 5, for a total value of Rs. 10 + Rs. 5 = Rs. 15. The 10% tax due on the finished
good will be Rs. 1.50. Under a GST system, the previous tax paid can be applied against this
additional tax to bring the effective tax rate to Rs. 1.50 – Rs. 1.00 = Rs. 0.50.

In turn, the wholesaler purchases the notebook for Rs. 15 and sells it to the retailer at a Rs.
2.50 markup value for Rs. 17.50. The 10% tax on the gross value of the good will be Rs. 1.75,
which the wholesaler can apply against the tax on the original cost price from the manufacturer
(i.e., Rs. 15). The wholesaler's effective tax rate will, thus, be Rs. 1.75 – Rs. 1.50 = Rs. 0.25.

Similarly, if the retailer's margin is Rs. 1.50, his effective tax rate will be (10% x Rs. 19) – Rs.
1.75 = Rs. 0.15. Total tax that cascades from manufacturer to retailer will be Rs. 1 + Rs. 0.50 +
Rs. 0.25 + Rs. 0.15 = Rs. 1.90.

India has, since launching the GST on July 1, 2017, implemented the following tax rates:11

 A 0% tax rate applied to certain foods, books, newspapers, homespun cotton cloth, and
hotel services.
  A rate of 0.25% applied to cut and semi-polished stones.
 A 5% tax on household necessities such as sugar, spices, tea, and coffee.
 A 12% tax on computers and processed food.
 An 18% tax on hair oil, toothpaste, soap, and industrial intermediaries.
 The final bracket, taxing goods at 28%, applies to luxury products, including
refrigerators, ceramic tiles, cigarettes, cars, and motorcycles.

The previous system, with no GST, implied that tax was paid on the value of goods and margin
at every stage of the production process. This would translate to a higher amount of total taxes
paid, which was then carried down to the end consumer in the form of higher costs for goods
and services. The implementation of the GST system in India was, therefore, a measure that was
used to reduce inflation in the long run.

Goods and Services Tax vs. Generation-Skipping Transfer Tax

GST should not be confused with the generation-skipping transfer tax (GSTT), and they are not
at all related to one another.

The former is a sort of VAT tax added to the purchase of goods or serves. Meanwhile, GSTT is
a flat 40% federal tax on the transfer of inheritances from one's estate to a beneficiary who is at
least 37½ years younger than the donor. The GST Tax prevents wealthy individuals from
avoiding estate taxes through naming younger beneficiaries, such as grandchildren.

Who Has to Pay GST?

In general, goods and services tax (GST) is paid by the consumers or buyers of goods or
services. Some products, such as from the agricultural or healthcare sectors, may be exempt
from GST depending on the jurisdiction.

How Is GST Calculated?

The goods and services tax (GST) is computed by simply multiplying the price of a good or
service by the GST tax rate. For instance, if the GST is 5%, a $1.00 candy bar would cost $1.05.
What Are the Benefits of the GST?

The GST can be beneficial as it simplifies taxation, reducing several different taxes into one
straightforward system. It also is thought to cut down on tax avoidance among businesses and
reduces corruption.

Are VAT and GST the Same?

Value-added tax (VAT) and goods and services tax (GST) are similar taxes that are levied on
the sale of goods and services. Both VAT and GST are also indirect taxes, which means that
they are collected by businesses and then passed on to the government as part of the price of the
goods or services.

However, there are some key differences between the two. VAT is primarily used in European
countries and is collected at each stage of the production and distribution process, while GST is
used in countries around the world and is collected only at the final point of sale to the
consumer. VAT is generally applied to a wider range of goods and services than GST, and the
rates of VAT and GST can vary depending on the type of goods or services being sold and the
country in which they are sold.

Meaning

The goods and services tax (GST) is an indirect federal sales tax that is applied to the cost of
certain goods and services. The business adds the GST to the price of the product, and a
customer who buys the product pays the sales price inclusive of the GST.

What is the significance of GST in detail?

It is expected to lower the cost of goods and services, boost the economy and make our products
and services globally competitive. GST will make India a common national market with uniform
tax rates and procedures and removes the economic barriers, thereby paving the way for an
integrated economy at the national level.

. Concept & Meaning:

GST is a comprehensive, destination-based indirect tax levied on the supply of goods and
services. It replaces multiple indirect taxes previously levied by the central and state
governments such as excise duty, VAT, service tax, etc.
It is designed as "One Nation, One Tax" to create a unified national market.
the salient features of GST: One Nation, One Tax:GST replaced multiple indirect taxes levied
by the Central and State Governments, such as excise duty, service tax, value-added tax (VAT),
and others. It brought uniformity in the tax structure across India, eliminating the cascading
effect of taxes.

What is GSTN (Goods and Services Tax Network)?

By Tanya Gupta
|
Updated on: Jun 5th, 2025
|
3 min read

The Goods and Services Tax Network (GSTN) is a 100% Government owned enterprise. It
manages the entire IT system of the GST portal, which is the mother database for
everything GST. The government uses this portal to track every financial transaction and provide
taxpayers with all services – from registration to filing taxes and maintaining all tax details.

Structure of GSTN

The Union Government owns a 50% share in the GSTN jointly with State Governments & UTs.
The authorized capital of the GSTN is Rs 10 crore (US$1.18 million), of which 50% of the
shares are divided equally between the Central and State governments.

The GSTN has also been approved for a non-recurring grant of Rs 315 crores. The contract for
developing this vast technological backend was awarded to Infosys in September 2015. The
GSTN was first chaired by Mr Navin Kumar, an Indian Administrative Service (IAS) officer
(1975 batch), who has served in many senior positions with the Government of Bihar and the
Central Govt.

Shareholder Shareholding

Government of India 50%

State Governments 50%

Total 100%

Salient Features of the GSTN

The GSTN is a complex IT initiative. It establishes a uniform interface for the taxpayer and also
creates a common and shared IT infrastructure between the Centre and States.

 Trusted National Information Utility

The GSTN is a trusted National Information Utility (NIU) that provides a reliable, efficient, and
robust IT backbone for the smooth functioning of GST in India.

 Highly Scalable and Secure Technology Platform:

The GST System has been developed on an Open Source technology platform. This strategy
provides for seamless interchange of information between diverse systems. It ensures high
availability, fault tolerance, and data security, employing multi-tier design to protect sensitive
data both in transit and at rest. The platform also supports a horizontal scaling approach,
allowing for increased capacity by adding hardware without affecting user experience.

 Handles complex transactions

GST is a destination-based tax. The adjustment of IGST (for inter-state trade) at the government
level (Centre & various states) is extremely complex, considering the sheer volume of
transactions all over India. A rapid settlement mechanism amongst the States and the Centre is
possible only when a strong IT infrastructure and service backbone captures, processes and
exchanges information. Please read our article to know more about how the Centre and the
States will settle IGST.

 Efficient Stakeholder Integration and Collaboration:

The GST system integrates external entities such as banks, RBI, GST Suvidha Providers, and
other stakeholders via an open architecture and well-defined APIs. This platform-driven
approach facilitates seamless data interchange, helping improve tax compliance and transparency
while reducing information asymmetry and transaction costs.

 All information will be secure

The government has strategic control over the GSTN, as it is necessary to keep the information
of all taxpayers confidential and secure. The Central Government has control over the
composition of the Board, mechanisms of special resolution and shareholders agreement, and
agreements between the GSTN and other state governments.

 Focus on Continuous Improvement and User-Friendliness:

GSTN prioritises enhancing taxpayer interaction by continuously improving the system to

handle more users, improve load management, and refine user experience. This includes the
development of offline tools, mobile apps, and AI/ML-driven business intelligence services,
aiming to simplify compliance-related activities for taxpayers and provide pre-filled return forms
for easier filing.

Functions of GSTN
GSTN is the backbone of the common portal, which is the interface between the taxpayers and
the government. The entire process of GST is online, starting from registration to the filing of
returns. As on 31st March, 2025 It supports about 23.58 billion invoices and the subsequent
return filing for 15.1 million taxpayers. The GSTN handles:

Rates of

GST in india

Goods and services in India fall under different GST slabs: 0% for essential items, 5% for basic
necessities, 12% for standard goods, 18% for most consumer products, and 28% for luxury and
sin goods. Each slab is designed to categorise goods and services according to necessity and
luxury. What is the current GST rate

GSTN

GSTN stands for Goods and Service Tax Network, is a non-profit non-government company.

It provides shared IT infrastructure and service to both central and state governments including
taxpayers and other stakeholders. The registration Front end services, Returns, and payments to
all taxpayers will be provided by GSTN. In a nutshell, it will act as the interface between the
government and the taxpayers.

Structure of GSTN

The GST System Project is one of a kind and complex IT initiative. What makes it unique is the
way it seeks, for the first time to establish a uniform interface for the taxpayer and a common
and shared IT infrastructure between the Centre and States.

Talking about the structure of it, private players have a 51% share in the GSTN, and the
remaining is owned by the government. The authorized capital of the GSTN is Rs. 10 crores
(US$1.6 million), out of which the percentage divided equally between the Central and State
governments is 49%, and the remaining is with private banks.
Furthermore, the GSTN has also been approved for a non-recurring grant of Rs. 315 crores. This
vast and complex technological backend development was taken by Infosys in September 2015.

The GSTN is headed by Dr. Ajay Bhushan Pandey (Chairman), an Indian Administrative Service
servant (1984 batch IAS), along with the CEO of GSTN, Shri Prakash Kumar.

Key Features of the GSTN

Below listed are the prominent features of GSTN that can assist to understand what is gst
network-

 National Information Utility

The GST Network has been considered to be a trusted National Information Utility(NIU). What
this means primarily is that the network is in charge of providing reliable, strong as well as,
seamless IT infrastructure and information passing.

 GSTN Ownership

It is partially owned by the Central Government (49%) and the rest by private players (51%)
which includes Banks and Financial Institutions

 Robust Infrastructure and Complex Operations

The basic function of GSTN is to help taxpayers to register themselves, make tax payments, and
claim GST returns to generate business analytics among others. Furthermore, the network is also
responsible for calculating and settling the Integrated GST (IGST) along with the Input Tax
Credit (ITC). The GSTN thus focuses to provide holistic solutions to difficult and exhaustive
taxation solutions

 Information Security
A major share of the GST network is owned by the central government as compared to any other
individual player. Hence the major chunk of the responsibility for confidentiality as well as the
security of the information provided by the taxpayers.

The central government will handle the composition of the board, special resolutions mechanism,
shareholder’s agreement, and the agreements made between the network and other state
governments.

 Payment

The GSTN has provided the taxpayers with the options of payment through both online and
offline methods-

- Online: Online payment can be availed through internet banking. The RBI has allocated certain
banks (Agency Banks ) for the same purpose with authority to collect payments made in favor of
GST. The taxpayer will have to make the payment by selecting from a list of the agency banks
authorized by RBI to collect the tax.

Once selected, the taxpayer needs to login to the respective bank’s online portal and make the
payment and download the challan generated for the said payment of GST.

- Offline: Taxpayers can also make payments through offline methods. The government has also
made the provision of payment of GST offline via “over the counter” payments. You can directly
visit the respective bank to make the payment for GST. Bank will further notify the RBI as well
as the GST portal to update all the relevant details.

 Expenses

The user charges will be paid solely by the Central Government and the State Governments in
equal proportion (i.e. 50:50) on behalf of all users. The state share will be then divided into
individual states according to the number of taxpayers in the state.
Functions of GSTN

The GST Network is basically the front end of the IT ecosystem for taxpayers and thus forms a
channel of communication for the government and the business taxpayers online.

The total number of invoices processed by GSTN per month sums up to more than 2 billion and
moreover, it also processes the returns for over 65 lakh taxpayers and counting. Here are some of
the major key responsibilities that the GSTN is in charge of the following-

 Registration

As mentioned earlier, the GST network is an online portal that forms the interface between the
taxpayer looking to register GST under the new taxation laws and the government.

GSTN issues the GST Identification Number to the respective taxpayer and files the information
with the respective Tax authorities once the registration has been verified.

 Invoice Matching

Delving deeper, the Goods and Services Tax Network basically tallies the purchase invoices with
the sale invoices to check for mismatches and fixes them so that the taxpayers can avail of the
benefits of Input Tax Credit.

 Return Filing

The services of GSTN includes processing and forwarding the returns to both the central and
state tax authorities.

The best and the unique thing about GSTN is, there is a unified common return filing for all
types of GST i.e. SGST (State GST), CGST (Central GST), IGST (Integrated GST). This, in
turn, has eliminated the need for filing multiple returns.

 Taxpayer Profile Analysis

 When a taxpayer wants to register for GST, all the particular details of the taxpayer are verified,
and then it is put forth to the Central as well as the state government tax authorities for approval.

Latest News - GST System is Integrated with Bank Validation

As per the latest news, the GST Network advisory stated on April 24, 2023, the bank account
validation will be required to be synced with the GST System. It would help to ensure the
accuracy of the bank details of GST taxpayers. According to the advisory, a taxpayer is supposed
to check the status of the bank account verification on the official portal.

Some Additional Duties of GSTN

Further to managing the basic tax filing and tax returns, there are a few more responsibilities of
GSTN that come along with managing taxation, these are as follows-

 Calculation and settlement of IGST (Integrated GST)

 Integrating Banking Network (Agency banks) with tax payment details

 Managing Computation Engine of Input Tax Credit

 Submitting the MIS reports to the Government

Challenges in GST Implementation

 Last Updated onNov 30, 2024
Context: Former Chief Economic Adviser Arvind Subramanian emphasises the need for
simplification of GST structure and rate rationalisation under the current system.
Relevance of the topic:
Prelims: Features of GST
Mains: Challenges in GST Implementation
Features of GST
 Goods and Services Tax (GST) is a single tax levied on the supply of goods and
services across all stages of the supply chain (right from the manufacturer to the consumer).
GST subsumes multiple state and central taxes:
 Excise duty
 Service tax
 Additional excise duty
 Additional Customs duty
 States sales tax
 Entertainment tax
 Octroi tax (Entry tax)
 GST has Dual Tax Structure:
o CGST (Central GST) goes to the Central Government.
o SGST (State GST) goes to the state government, in which the sale is taking place.
 GST is a destination based tax. During interstate trade, tax is imposed by the state (importing
state) in which the consumption takes place instead of the state which supplied the
goods/service.
 Current Challenges in GST Implementation:
1. Too many Tax Rates:
 There are four primary tax rates (5%, 12%, 18%, and 28%) under GST. Besides this, there
are special rates (0%, 0.25%, 1%, and 3%). Additionally, there are more than 50 different cess
rates ranging from 1% to 25% that complicate the tax structure.
 Issue: When there are multiple tax rates then there exists a risk of misclassification, as
taxpayers try to classify their products or services under lower tax brackets, whereas tax
authorities would try to classify them under higher tax brackets.
 Solution: Lower number of tax brackets/rates will reduce possibilities of such classification
disputes and also increase tax compliance.
2. Revenue Neutral Rate:
 The revenue-neutral rate (RNR) is the tax rate at which the GST system would generate the same
revenue as the pre-GST indirect tax regime. The Aravind Subramanian Committee
had recommended an RNR of 15%–15.5%. This was to ensure that the income to the states
and the Centre is not eroded in absence of pre-GST taxes.
 Issue: India’s GST Council has over the years reduced several tax rates, resulting in the lowering
of the average GST rate to around 12% percent from recommended ideal RNR. This has hurt
the revenue collections for both the Centre and states.
3. Inverted Duty Structure:
 Inverted duty structure refers to a situation where the GST rate paid on inputs received, is more
than the GST rate of tax on output supplies.
 Issue: Persistence of inverted duty structure in sectors (like textiles) has resulted
in accumulation of unutilised input tax credit. Such unutilised tax credit has to be carried over
to the next financial year, until it can be adjusted against future taxes. This is eroding the
working capitals for many small firms.
 Solution: Correcting the inverted duty structure will lead to a reduction in the requirement of tax
refunds.
4. Issues with Exemptions:
 Issue: When a good/service is exempted from GST, only the final output is exempted from the
tax but the input taxes paid in the process of manufacturing the goods are not refunded.
 Solution: Zero rating can be more transparent than exemption, as the taxes paid on inputs and
the resulting tax liability can be easily tracked and verified. This can help to reduce the risk of
tax evasion and increase the overall effectiveness of the tax system.
5. Rising pendency due to delay in establishment of Tribunals:
 GST Tribunals are envisioned as specialised bodies to handle disputes related to GST,
providing a timely and efficient resolution mechanism.
 Issue: Several legal, administrative and constitutional challenges have contributed to the delay in
their establishment. Aggrieved taxpayers have to approach the High Court through writ, post
receipt of an order from an Appellate Authority. Due to the pending backlog, High Courts
are unable to dispose of the matters expeditiously.
UPSC Mains PYQ:
1. Explain the rationale behind the Goods and Services Tax (Compensation to States) Act of
2017. How has COVID-19 impacted the GST compensation fund and created new federal
tensions? (2020)

2. Enumerate the indirect taxes which have been subsumed in the goods and services tax (GST)
in India. Also, comment on the revenue implications of the GST introduced in India since July
2017. (2019)

Challenges in GST Implementation

 Last Updated onNov 30, 2024
Context: Former Chief Economic Adviser Arvind Subramanian emphasises the need for
simplification of GST structure and rate rationalisation under the current system.
Relevance of the topic:
Prelims: Features of GST
Mains: Challenges in GST Implementation
Features of GST
 Goods and Services Tax (GST) is a single tax levied on the supply of goods and
services across all stages of the supply chain (right from the manufacturer to the consumer).
GST subsumes multiple state and central taxes:
 Excise duty
 Service tax
 Additional excise duty
 Additional Customs duty
 States sales tax
 Entertainment tax
 Octroi tax (Entry tax)
 GST has Dual Tax Structure:
o CGST (Central GST) goes to the Central Government.
o SGST (State GST) goes to the state government, in which the sale is taking place.
 GST is a destination based tax. During interstate trade, tax is imposed by the state (importing
state) in which the consumption takes place instead of the state which supplied the
goods/service.
 Current Challenges in GST Implementation:
1. Too many Tax Rates:
 There are four primary tax rates (5%, 12%, 18%, and 28%) under GST. Besides this, there
are special rates (0%, 0.25%, 1%, and 3%). Additionally, there are more than 50 different cess
rates ranging from 1% to 25% that complicate the tax structure.
 Issue: When there are multiple tax rates then there exists a risk of misclassification, as
taxpayers try to classify their products or services under lower tax brackets, whereas tax
authorities would try to classify them under higher tax brackets.
 Solution: Lower number of tax brackets/rates will reduce possibilities of such classification
disputes and also increase tax compliance.
2. Revenue Neutral Rate:
 The revenue-neutral rate (RNR) is the tax rate at which the GST system would generate the same
revenue as the pre-GST indirect tax regime. The Aravind Subramanian Committee
had recommended an RNR of 15%–15.5%. This was to ensure that the income to the states
and the Centre is not eroded in absence of pre-GST taxes.
 Issue: India’s GST Council has over the years reduced several tax rates, resulting in the lowering
of the average GST rate to around 12% percent from recommended ideal RNR. This has hurt
the revenue collections for both the Centre and states.
3. Inverted Duty Structure:
 Inverted duty structure refers to a situation where the GST rate paid on inputs received, is more
than the GST rate of tax on output supplies.
 Issue: Persistence of inverted duty structure in sectors (like textiles) has resulted
in accumulation of unutilised input tax credit. Such unutilised tax credit has to be carried over
to the next financial year, until it can be adjusted against future taxes. This is eroding the
working capitals for many small firms.
 Solution: Correcting the inverted duty structure will lead to a reduction in the requirement of tax
refunds.
4. Issues with Exemptions:
 Issue: When a good/service is exempted from GST, only the final output is exempted from the
tax but the input taxes paid in the process of manufacturing the goods are not refunded.
 Solution: Zero rating can be more transparent than exemption, as the taxes paid on inputs and
the resulting tax liability can be easily tracked and verified. This can help to reduce the risk of
tax evasion and increase the overall effectiveness of the tax system.
5. Rising pendency due to delay in establishment of Tribunals:
 GST Tribunals are envisioned as specialised bodies to handle disputes related to GST,
providing a timely and efficient resolution mechanism.
 Issue: Several legal, administrative and constitutional challenges have contributed to the delay in
their establishment. Aggrieved taxpayers have to approach the High Court through writ, post
receipt of an order from an Appellate Authority. Due to the pending backlog, High Courts
are unable to dispose of the matters expeditiously.
UPSC Mains PYQ:
1. Explain the rationale behind the Goods and Services Tax (Compensation to States) Act of
2017. How has COVID-19 impacted the GST compensation fund and created new federal
tensions? (2020)

2. Enumerate the indirect taxes which have been subsumed in the goods and services tax (GST)
in India. Also, comment on the revenue implications of the GST introduced in India since July
2017. (2019)