Goods and Services Tax : Structure, Rates, Compensation and Administration
The Goods and Services Tax (GST) is a comprehensive, multi-stage, destination-based indirect tax levied on the supply of goods and services across India. Implemented on July 1, 2017, through the 101st Constitutional Amendment Act, 2016, GST subsumed numerous central and state indirect taxes to create a unified national market. It operates on the principle of value addition at each stage of the supply chain, allowing businesses to claim Input Tax Credit (ITC) to eliminate the cascading effect of tax-on-tax.
Constitutional Framework and Dual GST Model
The 101st Constitutional Amendment inserted Article 246A, granting concurrent powers to Parliament and State Legislatures to make laws regarding GST. To maintain fiscal federalism, India adopted a dual GST model where both the Central and State governments levy tax concurrently on a common base.
Components of GST
- Central GST (CGST): Levied by the Central Government on intra-state supplies of goods and services.
- State GST (SGST): Levied by respective State Governments on intra-state supplies.
- Union Territory GST (UTGST): Levied by Union Territories without legislatures (such as Andaman and Nicobar Islands, Lakshadweep, Ladakh, Dadra and Nagar Haveli and Daman and Diu, and Chandigarh) on intra-state transactions.
- Integrated GST (IGST): Levied and collected by the Centre under Article 269A on inter-state transactions and imports. The collected IGST is shared between the Centre and the destination State.
Taxes Subsumed and Excluded
GST replaced 17 indirect taxes and 13 cesses levied by central and state authorities.
| Tier | Taxes Subsumed | Major Exclusions |
| Central Level | Central Excise Duty, Service Tax, Additional Excise Duties, Countervailing Duty (CVD), Special Additional Duty (SAD) | Basic Customs Duty (BCD) |
| State Level | State VAT, Central Sales Tax (CST), Entry Tax, Octroi, Luxury Tax, Entertainment Tax (except levied by local bodies) | Alcoholic liquor for human consumption, Stamp Duty, Property Tax |
| Out of GST Scope | Petroleum crude, high-speed diesel, motor spirit (petrol), natural gas, aviation turbine fuel (ATF) | Taxed under central excise and state VAT until GST Council decides |
Rate Architecture and Composition Scheme
Tax rates are fixed by the GST Council based on product classifications using Harmonized System of Nomenclature (HSN) codes for goods and Services Accounting Codes (SAC) for services.
Primary Tax Slabs
The tax structure categorizes items under standard tax slabs alongside special exemptions and levies.
- 0% (Exempt/Nil Rate): Applied to unbranded essential food grains, fresh vegetables, unpasteurized milk, healthcare, and educational services.
- Standard Slabs: Goods and services are categorized into standard slabs of 5%, 12%, 18%, and 28% based on essentiality and industrial usage.
- Special Rates: Applied at 3% on gold, silver, and precious metals, and 0.25% on rough diamonds.
- Compensation Cess: Levied on top of the highest slab on select luxury goods and demerit goods like aerated drinks, motor vehicles, and tobacco products to fund state compensation.
Composition Scheme
Small businesses with an annual turnover up to ₹1.5 crore (₹75 lakh for special category states) can opt for the Composition Scheme under Section 10 of the CGST Act. Eligible taxpayers pay tax at a flat rate on turnover (1% for manufacturers and traders, 5% for restaurants) without claiming Input Tax Credit or collecting tax from buyers.
GST Compensation and Fiscal Federalism
To address state concerns over revenue losses arising from the transition to a destination-based consumption tax, Parliament enacted the Goods and Services Tax (Compensation to States) Act, 2017.
Mechanism of Compensation
- Revenue Base: Projected state revenues grew at an assumed annual rate of 14% over the base year 2015-16.
- Compensation Period: The Central Government guaranteed full compensation for any shortfall in state tax collections for a period of five years, ending in June 2022.
- Funding Source: Compensation was funded through a GST Compensation Cess levied on luxury and sin goods.
- Cess Extension: While the revenue compensation guarantee ended in June 2022, the collection of the Compensation Cess was extended to pay off back-to-back loans taken during the pandemic.
Administrative Mechanism and Digital Infrastructure
Administration is shared equally between central and state tax authorities using a single interface for taxpayers.
GST Council
Article 279A empowered the President to constitute the GST Council as a joint constitutional forum for the Centre and States.
- Composition: Union Finance Minister (Chairperson), Union Minister of State for Finance, and Finance or Taxation Ministers from each State and Union Territory with a legislature.
- Voting Structure: The Central Government holds one-third of the total votes cast. State Governments collectively hold two-thirds of the total votes cast.
- Decision Threshold: Decisions require a majority of at least three-fourths (75%) of the weighted votes of members present and voting.
Goods and Services Tax Network (GSTN)
GSTN is a non-government, non-profit company that provides the central IT infrastructure for the entire GST ecosystem. It handles tax registrations, invoice matching, return processing, and remittance distribution between the Centre and States.
Key Compliance Tools
- E-Way Bill System: Electronic document generated on the portal for the movement of goods worth more than ₹50,000 across state borders or within a state.
- E-Invoicing: Mandatory generation of a unique Invoice Reference Number (IRN) on the Invoice Registration Portal (IRP) for business-to-business (B2B) transactions based on turnover thresholds.
- GST Appellate Tribunal (GSTAT): Statutory body constituted under Section 109 of the CGST Act to resolve second-appeal disputes between taxpayers and revenue authorities.
Key Facts for Quick Revision
- Constitutional Amendment: 101st Constitutional Amendment Act, 2016 introduced GST in India.
- Effective Date: GST came into force on July 1, 2017.
- Key Constitutional Articles: Article 246A (concurrent legislative power), Article 269A (IGST levy and collection), and Article 279A (GST Council).
- Destination-Based Principle: Tax accrues to the state where goods or services are consumed, not where they are manufactured.
- GST Council Voting Ratio: Centre holds 1/3rd voting weight; States hold 2/3rd voting weight; decision threshold is 75% majority.
- Excluded Items: Alcoholic liquor for human consumption is constitutionally excluded from GST; petroleum products remain outside the current GST scope until notified by the Council.
- IT Infrastructure: Goods and Services Tax Network (GSTN) manages registration, return processing, and ledger maintenance.
- GST Identification Number (GSTIN): 15-digit alphanumeric state-wise structure based on the taxpayer’s PAN.
