Indirect Taxes in India: Gst, Excise, Customs and Service Tax — Structure and Distinctions

Indirect taxes are levies collected by an intermediary—such as a manufacturer, trader, or service provider—from the ultimate consumer. Unlike direct taxes imposed on income and wealth, indirect taxes target expenditure and consumption. They form a critical pillar of revenue generation for both the Union and State Governments. The Indian indirect tax system underwent a structural overhaul with the implementation of the Goods and Services Tax (GST) in July 2017, which subsumed a multitude of central and state levies to create a unified national market. Certain goods remain outside the purview of GST and continue to attract traditional duties like Central Excise and State Excise.

Core Structural Pillars of India’s Indirect Tax System

The indirect tax landscape comprises dual frameworks: the subsumed GST framework and non-GST statutory levies.

Goods and Services Tax (GST)

• Nature and Architecture: GST is a comprehensive, multi-stage, destination-based tax levied on the supply of goods and services. It operates on a dual model involving Central GST (CGST) and State GST (SGST)/Union Territory GST (UTGST) for intra-state supplies, while Integrated GST (IGST) governs inter-state supplies and imports.
• Tax Slabs: The GST Council simplified the rate structure into four working bands: 0% (exempt), 5% (merit rate), 18% (standard rate), and a 40% rate applied to specified luxury and demerit goods. Gold attracts a special 3% rate.
• Constitutional Basis: Enacted via the 101st Constitutional Amendment Act, 2016, introducing Article 246A, which confers concurrent tax-legislating powers upon Parliament and State Legislatures.
• Subsumed Levies: Replaced Central Excise Duty (on most goods), Service Tax, Additional Customs Duty (CVD), Special Additional Duty (SAD), State VAT, Central Sales Tax (CST), Octroi, Entertainment Tax, and Entry Tax.

Central Excise Duty

• Scope and Application: Levied on the manufacture or production of goods within India under the Central Excise Act, 1944.
• Excluded Items: Following the implementation of GST, Central Excise remains restricted to five petroleum products (petroleum crude, high-speed diesel, motor spirit/petrol, natural gas, and aviation turbine fuel) along with tobacco products.
• State Excise: Distillates, alcoholic liquors for human consumption, and opium/narcotics remain under State Excise taxation as per Entry 51 of the State List (List II, Seventh Schedule).

Customs Duty

• Statutory Framework: Governed by the Customs Act, 1962 and the Customs Tariff Act, 1975. It is levied on goods imported into or exported out of India.
• Components: Comprises Basic Customs Duty (BCD), Social Welfare Surcharge (SWS), and Integrated GST (IGST) levied in place of earlier Countervailing Duty (CVD) and Special Additional Duty (SAD).
• Jurisdiction: Exclusively administered by the Union Government under Entry 83 of the Union List (List I, Seventh Schedule).

Service Tax (Historical Context)

• Evolution: Introduced in 1994 under the Finance Act, 1994 covering just three services (telephone connections, non-life insurance, and stockbroking) at a rate of 5%.
• Negative List Framework: Shifted in 2012 from a positive list approach to a Negative List regime, taxing all services except those explicitly specified.
• Subsumption: Completely subsumed into GST on July 1, 2017. Services are now categorized under Service Accounting Codes (SAC) within the GST framework.

Comparative Analysis of Major Indirect Taxes

Constitutional and Institutional Frameworks

• Article 246A: Grants simultaneous power to Parliament and State Assemblies to make laws regarding GST. Parliament retains exclusive power for inter-state supply (IGST).
• Article 279A: Constitutes the GST Council, chaired by the Union Finance Minister, with State Finance Ministers as members. Decisions require a three-fourths weighted majority (1/3rd voting weight for the Centre, 2/3rd for all States combined).
• Central Board of Indirect Taxes and Customs (CBIC): The nodal statutory body under the Department of Revenue, Ministry of Finance, responsible for administering CGST, IGST, Customs, and remaining Central Excise levies.

Exam-Oriented Key Facts

• Indirect taxes target expenditure and consumption, making them regressive in nature unless offset by tiered tax rates.
• The 101st Constitutional Amendment Act, 2016 introduced Article 246A, Article 269A (IGST administration), and Article 279A (GST Council).
• Alcoholic liquor for human consumption is constitutionally barred from GST coverage under Article 366(12A); it remains under State Excise and State VAT.
• Five petroleum products (crude oil, petrol, diesel, natural gas, ATF) are temporarily outside GST; the GST Council holds the power to decide the date of their inclusion under Article 246A(2).
• Integrated GST (IGST) is collected by the Central Government and apportioned between the Centre and the destination State.
• Basic Customs Duty (BCD) is not subsumed under GST and continues as a separate import tariff.
• Input Tax Credit (ITC) prevents the cascading effect of taxation (tax on tax) by allowing credit for taxes paid on inputs against output tax liabilities.
• The GST rate structure centers around 0%, 5%, 18%, and a 40% rate for luxury and demerit items, with a special 3% rate on gold.
• Customs duty is levied up to the baseline of India’s Territorial Waters, extending up to 12 nautical miles from the coast.
• Service Tax was introduced in 1994 based on the recommendations of the Dr. Raja Chelliah Committee on Tax Reforms.