What is GST?

The Goods and Services Tax (GST) in India, introduced on July 1, 2017, is a landmark indirect tax reform aimed at creating a unified tax system by replacing multiple central and state taxes such as excise duty, service tax, VAT, and others. It’s a destination-based, multi-stage, value-added tax levied on the supply of goods and services across the entire supply chain, from manufacturer to consumer.

Below is a comprehensive overview of GST in India, covering its structure, implementation, rates, processes, benefits, challenges, and recent developments as of June 8, 2025.

KEY DATES

Constitutional & Legal Basis behind GST

• Introduced via 101st Constitutional Amendment Act, 2016
• Article 279A established the GST Council
• Parliament empowered under Article 246A

Historical Background of GST

The idea of GST in India was first proposed in 2000 by Prime Minister Atal Bihari Vajpayee, who set up a committee to draft the law. Key milestones include:

1. 2004: Vijay Kelkar’s task force recommended GST to streamline indirect taxes.
2. 2006: Finance Minister announced a target implementation date of April 1, 2010.
3. 2011: The Constitution (115th Amendment) Bill was introduced but lapsed due to disagreements.
4. 2014: The Constitution (122nd Amendment) Bill was introduced, passed by Lok Sabha in 2015, and by Rajya Sabha in 2016.
5. 2016: The Constitution (101st Amendment) Act was enacted on September 8, enabling GST implementation.
6. 2017: GST was rolled out on July 1 after the GST Council, a constitutional body, was formed to oversee its implementation.

GST’S DUAL STRUCTURE

Since GST is a federal tax, therefore both centre and the states have the power to levy it and appropriate the tax. Therefore it operates on a dual structure

• Central GST (CGST): Levied by the Central Government on intra-state supplies.
• State GST (SGST): Levied by the State Government on intra-state supplies.
• Integrated GST (IGST): Levied by the Central Government on inter-state supplies and imports, with revenues shared between the Centre and the destination state.
• Union Territory GST (UTGST): Levied on supplies within Union Territories, similar to SGST.

For example, on an intra-state sale worth ₹100,000 at a 12% GST rate, CGST (6%) and SGST (6%) would each be ₹6,000. For an inter-state sale, IGST at 12% would be ₹12,000, collected by the Centre and apportioned to the destination state.

Input Tax Credit (ITC)

Input Tax Credit (ITC) under India’s Goods and Services Tax (GST) is a mechanism that allows registered taxpayers to offset the GST they have paid on their purchases (inputs) against the GST they collect on their sales (outputs). This ensures that tax is levied only on the value added at each stage of the supply chain, eliminating the cascading effect of taxes. Businesses can offset the GST paid on inputs (purchases) against the GST collected on outputs (sales), ensuring tax is only levied on the value added at each stage.

For example : A manufacturer buys raw materials for ₹1,00,000 + 18% GST (₹18,000). They sell the finished product for ₹2,00,000 + 18% GST (₹36,000). The manufacturer can claim ITC of ₹18,000 (GST paid on inputs) and pay only the net GST liability of ₹18,000 (₹36,000 - ₹18,000) to the government.

GST COUNCIL

The GST Council is a constitutional body in India responsible for making decisions on the Goods and Services Tax (GST), which was implemented on July 1, 2017.  It plays a pivotal role in shaping India’s indirect tax system by ensuring a unified tax structure across the country.

Structure of the GST Council

• Chairperson: The Union Finance Minister of India, currently Nirmala Sitharaman.
• Vice-Chairperson: Chosen from among the state finance ministers, typically rotated based on consensus.
• Members: Includes the Union Minister of State for Finance, and finance ministers (or nominated ministers) from all states and Union Territories with legislatures.

Voting Power

• The Centre holds one-third (33%) of the votes.
• States and UTs collectively hold two-thirds (67%).
• Decisions require a three-fourths (75%) majority, ensuring cooperative federalism by necessitating broad consensus.
• Quorum: One-third of the total members must be present for a meeting to be valid.

GST Rates and Slabs

GST rates in India are divided into five primary slabs, with some items attracting additional cess:

1. 0%: Essential items like fresh fruits, vegetables, unbranded food grains, milk, eggs, books, and certain educational services. Also includes nil-rated, exempt, and zero-rated supplies (e.g., exports where GST paid is refundable).
2. 5%: Basic necessities like packaged food, edible oils, tea, coffee, domestic LPG, and life-saving drugs. For example, millet flour (loose) was reduced to 0% and pre-packaged to 5% in 2024.
3. 12%: Standard goods like butter, ghee, computers, and packed coconut water.
4. 18%: Most consumer products, including hair oil, toothpaste, electronics, and restaurant services. For example, laptops and TVs (depending on screen size) fall under this slab.
5. 28%: Luxury and sin goods like cement, luxury cars, motorcycles, tobacco, and aerated drinks, often with additional cess (e.g., 1% to 204% on items like cigarettes and motor vehicles).
6. Special rates include 3% on gold and 0.25% on certain precious stones. GST on hotels varies from 12% to 18% based on room tariff. The GST Council periodically revises rates; for instance, in the 54th meeting (2024), molasses rates dropped from 28% to 5%, and electric vehicles were reduced from 12% to 5% earlier to promote green energy.

Classification Systems: HSN and SAC Codes

• Harmonized System of Nomenclature (HSN) Code: Used for goods classification. It’s a six-digit code (e.g., rice is 1006, taxed at 5%). Businesses with turnover up to ₹15 million don’t need to mention HSN codes on invoices; those with ₹15-50 million mention the first two digits, and above ₹50 million, the first four digits. From April 2021, businesses with turnover above ₹5 crore must mention 6-digit HSN codes for B2B/B2C supplies.
• Service Accounting Code (SAC): Used for services, also with a tiered requirement for mentioning digits based on turnover. For example, services generally default to 18% unless specified otherwise.

Registration and Threshold Limits

Businesses must register for GST if their annual turnover exceeds:

• ₹40 lakh for goods suppliers (₹10 lakh in special category states like the Northeast, J&K, Himachal Pradesh, and Uttarakhand).
• ₹20 lakh for service providers (₹10 lakh in special category states).

Certain entities, like casual taxable persons and Input Service Distributors (ISDs), must register regardless of turnover.

ABOUT GSTIN

A GSTIN (15-digit GST Identification Number) is issued upon registration, used for filing returns, claiming refunds, and availing loans. Registration is done online via the GST portal (gst.gov.in), with no fees for self-registration, though professional assistance may incur costs.

Filing and Compliance

• Returns: Businesses file two monthly returns (e.g., GSTR-1 for outward supplies, GSTR-3B for summary returns) and an annual return. The Quarterly Return Monthly Payment (QRMP) scheme allows taxpayers with turnover up to ₹5 crore to file returns quarterly while paying taxes monthly.
• E-Invoicing: Mandatory for businesses with turnover above ₹5 crore (since August 1, 2023) for B2B supplies, reducing data entry errors and enabling real-time invoice sharing with the GST and e-way bill portals.
• E-Way Bill: Required for inter-state goods movement beyond 10 km and worth over ₹50,000, effective since June 2018. It’s an electronic permit generated online, valid for one day per 200 km, with extensions available.

Revenue sharing

• Intra-state: CGST and SGST revenues are split equally (50-50) between the Centre and the state.
• Inter-state: IGST is collected by the Centre, with the destination state receiving its share after adjustments.

What is the Composition Scheme?

The Composition Scheme under India’s Goods and Services Tax (GST) is a simplified tax mechanism designed for small businesses to reduce compliance burdens and simplify tax payments. It allows eligible taxpayers to pay GST at a fixed rate on their turnover, instead of the regular GST rates, and file returns quarterly instead of monthly.

Under the Composition Scheme, small taxpayers can opt to pay a flat rate of GST on their annual turnover, without the need to maintain detailed records of input tax credits (ITC). This scheme is aimed at easing the compliance burden for small businesses, traders, and manufacturers by reducing paperwork and simplifying tax calculations.

Eligibility for the Composition Scheme : A taxpayer can opt for the Composition Scheme if their aggregate annual turnover in the preceding financial year does not exceed:

• ₹1.5 crore for businesses dealing in goods (₹75 lakh for special category states like the Northeast, J&K, Himachal Pradesh, and Uttarakhand).
• ₹50 lakh for service providers or mixed suppliers (goods and services).

For Example

A small retailer in Maharashtra with a turnover of ₹80 lakh in FY24 opts for the Composition Scheme in FY25. They deal only in intra-state goods sales. GST Payable: 1% of ₹80 lakh = ₹80,000 (₹40,000 CGST + ₹40,000 SGST). If the same retailer accidentally makes an inter-state supply, they would be required to exit the scheme, pay regular GST (e.g., 12% or 18% on their entire turnover), and face penalties for non-compliance.

What is Reverse Charge Mechanism (RCM)?

The Reverse Charge Mechanism (RCM) under India’s Goods and Services Tax (GST) is a system where the recipient of goods or services, rather than the supplier, is liable to pay the GST to the government. This shifts the tax payment responsibility from the supplier to the buyer, typically to ensure tax compliance in specific scenarios or to curb tax evasion.

Under the normal GST mechanism, the supplier of goods or services collects GST from the recipient and deposits it with the government. However, under RCM the recipient pays the GST directly to the government. RCM is primarily used to ensure tax compliance in cases where the supplier is unregistered, non-compliant, or operates in sectors prone to tax evasion, and to simplify tax collection from certain categories of suppliers.

Achievements of GST

As of May 2025, GST has achieved significant milestones

• Unified Market: Replaced multiple indirect taxes, creating a seamless national market with uniform tax rates across states.
• Revenue Growth: Gross GST collections crossed ₹2 lakh crore in April 2024, with May 2023 recording ₹1.57 lakh crore (12% YoY growth), reflecting improved compliance and economic activity.
• Tax Base Expansion: Over 3.8 million new taxpayers registered by 2018, with the total exceeding 11.4 million by October 2018, bringing unorganized sectors like construction under the tax net.
• Simplified Compliance: Online processes for registration, filing, refunds, and e-way bill generation have streamlined operations, boosting ease of doing business.
• Cascading Effect Eliminated: ITC ensures tax is levied only on value addition, reducing the cost of goods and inflation.
• Technology-Driven: The GST Network (GSTN), initially a public-private partnership but now fully government-owned, automates processes, with 49% shares each for the Centre and states.

Challenges

Despite its successes, GST faces ongoing issues:

• Technological Glitches: The GSTN portal has experienced server downtimes and navigation difficulties, particularly for small businesses unfamiliar with digital filing.
• Complex Compliance: Multiple return forms and frequent filings remain cumbersome. For instance, businesses must file GSTR-1 and GSTR-3B monthly, which can be intricate.
• Rate Rationalization: The four-slab structure (5%, 12%, 18%, 28%) is seen as complex. Proposals to reduce it to three slabs (e.g., 5%, 15%, 28%) are under discussion.
• Sectoral Issues: Petroleum products remain outside GST, creating vertical fiscal imbalances. Online gaming and casinos face unresolved rate structures.
• Transparency: Lack of public access to Group of Ministers (GoM) reports and delays in setting up the GST Appellate Tribunal (GSTAT) for dispute resolution have drawn criticism.
• Corruption and Bureaucracy: Posts on X highlight concerns about lower-level corruption and bureaucratic overreach, with some users suggesting the standard 18% rate be reduced to 15% to ease the burden.

Unresolved Issues and Future Reforms

1. Petroleum Inclusion: Bringing petroleum products under GST remains politically contentious, as states fear revenue loss.
2. Rate Simplification: Reducing the number of slabs and addressing inverted duty structures (where inputs are taxed higher than outputs) is a priority.
3. Dispute Resolution: The delay in operationalizing GSTAT hinders efficient dispute resolution.
4. Fiscal Federalism: States argue the Centre retains less than 30% of GST revenue, with SGST and IGST allocations favoring states, creating tensions in revenue sharing.
5. Anti-Profiteering: Since December 2022, the Competition Commission of India (CCI) handles anti-profiteering complaints, replacing the National Anti-Profiteering Authority (NAA), but enforcement remains a challenge.

In summary, GST has transformed India’s indirect tax landscape, fostering economic integration and compliance, but its complexity, sectoral exclusions, and bureaucratic challenges indicate there’s still a long way to go for it to fully realize the “One Nation, One Tax” vision. Future reforms must prioritize simplification, transparency, and inclusivity to balance revenue needs with taxpayer ease.