Introduction to GST

C HAPTER 1

I NTRODUCTION TO GST

1. INTRODUCTION TO TAX

▪ Tax is a money that people pay to the Government, which is used to provide public services.
▪ It is a pecuniary burden on taxpayers to fulfill the socio-economic objectives of the Government.
▪ It is not a voluntary payment, but an enforced contribution, exacted as per legislative authority.

Direct Tax Indirect Tax

1. Burden & Liability to pay Tax lies on Same Person Burden & Liability to pay lies on Different Person
2. Burden of Tax is not shifted Burden of Tax is shifted to consumer

3. Progressive Taxation → Higher the Income, Higher Regressive Taxation → Same tax levied on all
the rate of Tax irrespective of level of income
4. Levied on Income of Assessee Levied on supply of goods, service or both and also
on Imports. Also called Consumption Tax.
5. Concept of ‘Previous year’ and ‘Assessment Year’ No such concept. Financial year is considered.
Economists world over agree that direct and indirect taxes are complementary and therefore, a rational tax
structure should incorporate in itself both types of taxes.

2. GST

Gabbar Singh Tax

GST is an indirect tax levied on supply of goods or services
Good & Simple Tax or both except alcoholic liquor for human consumption.
(Article 366)
Goods & Services Tax Supply may be Inter-state or Intra State.

Earlier Tax Regime/ Pre-GST 01/07/2017

1. Excise duty levied on Manufacture/ Prodn. of goods GST levied on supply of goods/ services/ both
2. Sale Tax on sale of goods
3. Service Tax on provision of services
4. Multiple other Central and State taxes

Simplifying Complexity P a g e | 1.1

Harder you work, luckier you get
 Introduction to GST

3. J O U R N E Y O F GST

2000 Atal Bihari Vajpayee, Prime Minister of India, set up a committee to design GST model for India
2004 GST Recommended by Kelkar Task Force on national basis
2006 Finance Minister P. Chidambaram announced in 2006-07 budget that GST would be introduced
on 1/4/2010
1/07/2017 GST came into effect in Rest of India
8/07/2017 GST came into effect in Jammu & Kashmir
For detailed timeline, refer Pg 1.6 of ICAI Study Material (not relevant for exams)

4. W H Y S O M U C H D E L A Y / D I F F I C U L T Y I N I N T R O D U C I N G GST?

India has 3-tier federal structure comprising of CG/ SG/ LA. Power to levy taxes is distributed among them.
Article 265 Prohibits arbitrary collection of Tax i.e. no Tax shall be levied/collected except by authority of
law.
Article 245 Power for enacting law is conferred on Parliament and State Legislative Assembly.

Constitution (Supreme Law of India)

Article 246 (Power To LevyTax)
Seventh Schedule (prior to 01/07/2017)

Union List State List Concurrent List

Entry No. 82 → Income tax Entry No. 54 → Sale Tax on ‘Intra state sales’ Forest

Entry No. 83 → Custom Duty Entry No. 51 → Duties of excise on alcoholic Education
liquor for human consumption, opium, Indian
Entry No. 84 → Central Excise Duty hemp and other narcotic drugs and narcotics. Health

Entry No. 97 → Residuary The entry does not include duties of excise on No Tax element
medicinal and toilet preparations containing
Entry No. 92A → Central sales Tax alcohol/ opium/ Indian hemp/ narcotic drugs/
on ‘Inter State sale’ narcotics

Inter Nation → Between two Nations Inter-state → Between two States

Intra Nation → Within the Nation → Inter state Intra-state → Within the State

▪ Initially, focus was to implement National GST model under which CG shall collect full GST and later
distribute the share of State Governments to respective State Governments.
▪ As seen above, in the earlier Indirect Tax regime, fiscal powers between Centre and the States were
clearly demarcated.
▪ CG had exclusive power to levy tax on services & manufacturing of goods, except alcoholic liquor for
human consumption, opium, narcotics etc. Similarly, SG had exclusive power to levy tax on sale of goods.
▪ State Governments were not willing to let go their power of levying tax on goods.
▪ Accordingly, India adopted Dual GST Model, under which both ‘CG’ and ‘SG’ has powers to

Simplifying Complexity P a g e | 1.2

Harder you work, luckier you get
 Introduction to GST
simultaneously/ concurrently levy tax on supply of Goods or Services or both.
▪ Hence, it was necessary to amend the constitution for redistribution of powers to levy tax on goods or
services or both by CG & SG.
▪ This was done through ‘Constitution [101st Amendment] Act 2016; which introduced “Article 246A” for
empowering the CG & SG to simultaneously levy and collect GST.
▪ Note: For amendment in Constitution, at least 2/3rd of Rajya Sabha & Lok Sabha members present and
voting must vote in its favour.

GST Council
▪ All decisions related to GST, viz. rate of tax, exemption etc. is taken by a GST Council [Constituted by
President under Article 279A].
▪ GST Council is the governing body of GST having 33 members. It comprises of
a) Union Finance Minister as Chairman;
b) Union Minister of State in charge of Revenue or Finance;
c) Ministers in charge of Finance or any other Minister nominated by each of the States & UTs with
Legislatures. These members may choose one amongst themselves as Vice-Chairperson of Council.
▪ Quorum for meeting: One-half of total members.
▪ To pass any decision in GST council, 3/4th (weighted) votes of members present and voting is required .
Weight of CG Votes → 1/3 of total votes cast
Weight of SG Votes combined → 2/3 of total votes cast
Hence, to pass any decision, support of both CG & majority of SG is required. (co-operative federalism)
▪ Once a decision is passed, Council sends recommendation to the Government. Government issues an
official notification in the regard. Change shall be effective from the date mentioned in notification.
▪ Example: A proposal is voted in favour by CG and 20 states. Is this proposal passed?

5. W O R K I N G O F GST

I. Before VAT regime

Manufacturer Wholesaler/ Dealer Retailer
Raw Material purchased Purchase Cost Purchase Cost
Processing Exp. @ 10% Profit @ 10% Profit @ 10%
Cost of production
Profit @ 10% Sale Tax @10% Sale Tax @ 10%
Sale Price Sale Price
Excise Duty @ 10%

Sale Tax @ 10%

Sale Price
Total Tax Payable

Simplifying Complexity P a g e | 1.3

Harder you work, luckier you get
 Introduction to GST

2. During VAT regime

Manufacturer Wholesaler Retailer
Raw Material purchased Purchase Cost Purchase Cost
Processing Exp. Profit @ 10% Profit @ 10%
Cost of production
Profit @ 10% VAT @10% VAT @ 10%
Sale Price Sale Price
Excise Duty @ 10%

Sale Tax @ 10%

Sale Price
Tax Payable
Excise Duty @ 10% Output Tax Liab. Output Tax Liab.
Sale Tax @ 10% Less: ITC Less: ITC
Net Tax payable Net Tax payable Net Tax payable

Ideally, every person should pay tax on their own value addition/ contribution.
Value Added Taxation is a mechanism of Taxation, where tax is levied at each stage of supply chain &
➢ tax paid on inputs i.e. purchase, is allowed as credit from Tax liability on sale;
➢ thereby, taxing only value added at each stage.
Thus, only the final consumer bears the GST charged by the last supplier in the supply chain, with set-off
benefits at all the previous stages.
This results in no double taxation and no tax on tax (cascading effect).
France was the first country to implement VAT/ GST in 1954. Presently, more than 160 countries have
implemented VAT/ GST in some form or the other.

Three Rules for lifetime

Rule 1 Tax paid/ payable on eligible purchase → Purchase made is not the value addition of buyer.
Accordingly, such tax paid on purchase is not his liability to pay but still paid.
Hence, treat such tax paid/ payable on purchase as ‘Tax Asset’ and not as part of cost.
Rule 2 Tax charged on Sale/ received on sale → It is Government money which the seller has received.
Seller must pay it to Government.
Hence, treat such tax collected on sale as Tax Liability.
Rule 3 Net Tax payable = Tax collected on Sales – Tax paid/payable on purchases

Six Cases on Allowability of Input Tax Credit – Refer class discussion

Case I Case II Case III

Simplifying Complexity P a g e | 1.4

Harder you work, luckier you get
 Introduction to GST

As seen above, ‘tax on input’ is allowed as credit from output tax liability, only when both are payable to
same Government.
In case Input tax is paid to one Government & output tax is payable to another Government, credit is not
allowed. Such tax paid on Input is treated as part of cost.
To resolve this & few other shortcomings of VAT regime, ‘GST’ was introduced.

3. “During GST” [1/7/2017 onwards] Assume effectiveness rate → 12%

Manufacturer Wholesaler Retailer
Raw Material purchased Purchase Cost Purchase Cost
Processing Expenses Profit@10% Profit@10%
Cost of production
Profit @ 10% CGST@6% CGST@6%
SGST@6% SGST@6%
CGST@ 6% Sale Price Sale Price
SGST@ 6%
Sale Price
Tax Payable
CGST SGST CGST SGST
Output Tax Output Tax
(-) ITC (-) ITC
Net Tax payable Net Tax payable

Total Value Addition =

=
GST payable = Total value addition x 12%
=
=
Total GST paid =
=
GST → Comprehensive VAT → No double taxation → No tax on tax [cascading effect] → Reduced prices

Thus, concept of GST is based on 6 principles of:

a) Value Added Tax system b) Continuous chain of Input Tax credit
c) No cascading effect d) Burden of tax borne by end user
e) Dual GST f) Destination principal

Simplifying Complexity P a g e | 1.5

Harder you work, luckier you get
 Introduction to GST

6. T A X E S S U B S U M E D I N GST

Central Taxes State Taxes

1. Central Excise duty except on DAMN & 1. VAT except on DAMN & alcoholic liquor for human
Tobacco consumption
2. Service tax 2. Luxury Tax
3. Central sales tax except on DAMN & 3. Entry Tax
alcoholic liquor for human consumption
4. Countervailing duty (CVD) 4. Octroi Tax
5. Special additional duty (SAD) 5. Entertainment Tax
6. Other central surcharge & cess 6. Tax on Lottery, Betting & Gambling
7. Tax on Advertisement
8. Other state surcharge & cess

7. T A X N O T S U B S U M E D U N D E R G ST

1. Central Excise duty on ‘DAMN’

- ‘D’ – High speed diesel
- ‘A’ – Aviation Turbine Fuel’ Petroleum Crude
- ‘M’ – Motor spirit (Petrol)
- ‘N’ – Natural Gas
2. VAT/ CST on “DAMN”
3. State excise duty on alcoholic liquor for human consumption
4. VAT/ CST on alcoholic liquor for human consumption
5. Basic custom duty
6. Stamp duty. Thus, Real estate sector has been kept out of ambit of GST, i.e. GST will not be levied on
sale/purchase of immovable property.
7. Electricity duty
8. Entertainment Tax levied by ‘Local Authority’

Levied by State Govt Levied by Local Authority

Subsumed under GST Not subsumed under GST

Note: ‘Tobacco → Both Central Excise Duty & GST is levied

Note: Opium, Indian hemp and other narcotic drugs and narcotics → Both State Excise Duty
& GST is levied
Note: ‘Petroleum Gas’ → Already covered under GST
Note: Drinking alcohol in Bar → VAT, State Excise Duty and GST
Illustration: Central/ State Taxes Levied after introduction of GST

Simplifying Complexity P a g e | 1.6

Harder you work, luckier you get
 Introduction to GST

Goods GST Central ED VAT/CST State ED

Alcoholic liquor for HC
Petroleum Products
Tobacco
Opium, Hemp, & Narcotics
Other Goods & Services

GST Compensation cess on goods and services – only for knowledge

GST compensation cess is levied by Central Government in case of supply of certain luxury or SIN goods, in
order to compensate states for the loss of any revenue due to implementation of GST for a period of 5 years
i.e. till June 30, 2022.
This cess will be in addition to GST payable. The ceiling on GST compensation cess is 15%, though higher
cess is leviable on pan masala and tobacco products.
The levy of GST Compensation cess was extended till March 31, 2026 to repay the loans taken by the Union
Government, to make up for the shortfall in their revenue collection during covid period.
However, the period for which states would be compensated hasn’t been extended beyond June 30, 2022.

8. S T A T U S A F T ER GST

S No. Before GST After GST

1. Many Central & state taxes 1 GST and few other taxes
2. Taxable event → manufacture, sale etc. Supply

3. Name of taxpayer → Manufacturer, Dealer etc. Supplier

4. Double taxation & cascading effect No double taxation & cascading effect
5. Article 246A, 269A, 279A, Changes in Schedule VII

Relevant entries of Union List and State List (Post-GST):

Union List (List-I) State List (List-II)
Customs duties State excise duties
Entry 83: Duties of customs including export Entry 51: Duties of excise on
duties
➢ Alcoholic liquor for human consumption; &
➢ Opium, Indian hemp, other narcotic drugs & narcotics.
Central excise duties State level VAT
Entry 84: Duties of excise on: Entry 54: Taxes on intra-state sale of following goods:
➢ Petroleum crude; ➢ Petroleum crude;
➢ High speed diesel; ➢ High speed diesel;
➢ Motor spirit (i.e. petrol) ➢ Motor spirit (i.e. petrol)
➢ Natural gas; ➢ Natural gas;
➢ Aviation turbine fuel; and ➢ Aviation turbine fuel; and
➢ Tobacco and tobacco products ➢ Alcoholic liquor for human consumption.

Simplifying Complexity P a g e | 1.7

Harder you work, luckier you get
 Introduction to GST

9. A R T I C L E S O F C O N S T I T U T I O N

1. 366: Definitions GST means Tax levied on supply of goods or services excluding Alcoholic Liquor for
home consumption.
Goods: Any kind of movable property.
Services: Anything other than Goods.
2. 246A: Power to For Intra-State Supplies: Contral Government and every State Government have the
make laws w.r.t. simulations/ shared power to make laws.
GST For Inter-State Supplies: Central Government has exclusive power to make laws,
namely IGST Act 2017.
5 Petroleum Products: will be covered under the ambit of GST from the date as
recommended by the GST Council.
3. 269A: Levy & GST on inter-state supply i.e. Integrated GST shall be levied and collected exclusively
Collection of GST by Central Government.
on Inter-state IGST will be shared in the ratio of 50-50 between CG and SG. (In case of UT, 50%
supply: shall be transferred to UTGST fund rather than SGST fund).
All international transactions will be called as Inter-State transactions.
4. 279A: GST Council: Already discussed in detail above on Page 1.3

10. F E A T U R E S O F I N D I R E C T T A X E S

1. An important source In India, indirect taxes contribute more than 50% of the total tax revenues of
of revenue Central and State Governments.
5. Tax on commodities It is known as commodity taxation & also levied on provision of services.
and services
6. Shifting of burden Tax paid by the supplier of the goods is recovered from the buyer by including
the tax in the cost of the commodity.
7. No perception of Value of indirect taxes is generally inbuilt in the price of the commodity, most of
direct pinch the time the tax payer pays the same without actually knowing that he is
paying tax to the Government.
8. Inflationary It directly affects the prices of commodities and services and leads to
inflationary trend.
9. Wider tax base Majority of the products or services are subject to indirect taxes.
10. Regressive in nature Both rich and the poor have to pay the same rate of indirect taxes on a
product/service. Hence, it is more burdensome for poor people.

11. D E F I C I E N C I E S O F E A R L I E R T A X R E G I M E / VAT R EG I M E & B EN EF I TS O F GST

1. Several taxes not For a single transaction multiple taxes in multiple forms were required to be paid
subsumed in VAT as taxes like Luxury tax, Entertainment tax etc. which were not subsumed in VAT
2. High Compliance Large number of taxes created high compliance cost for the taxpayers in form of
Cost more returns, payments etc.
3. Double taxation Earlier some items were treated both as goods and Services that led to double
taxation. Example: Earlier, software was subject to both service tax and VAT

Simplifying Complexity P a g e | 1.8

Harder you work, luckier you get
 Introduction to GST

4. No set-off of Both CENVAT and State level VAT were value added taxes but cross utilisation of
CENVAT & State credit i.e. set off of those were not possible as CENVAT was levied by Central
Level VAT Government and VAT levied by State Government.
5. Non-Integration of VAT on Goods was not integrated with service tax at the state level. So the
VAT & Service Tax cascading effect of service tax was not removed.
6. Cascading nature of CST was non-vatable (i.e. no credit was allowed) and an origin based tax which
CST had cascading effect.
No CENVAT after Manufacturing Stage

12. GST – A C U R E O F A L L I L L S I . E . B E N E F I TS O F GST

Benefits to a) Creation of unified national market with common tax rates and procedures thereby
economy paving the way for an integrated economy at the national level.
b) Boost to ‘Make in India' initiative: by making goods and services produced in India
competitive in the national as well as international market.
c) Boost to investments & employment: by reducing cost of locally manufactured goods
and services, thus boosting Investment and Employment.
Simplified tax a) Ease of doing business: Simpler tax regime along with reduction in multiplicity of taxes
structure and uniformity.
b) Certainty in tax administration: Common procedures for registration, refund of taxes,
uniform formats of tax return, along with timelines ensures certainty.
Easy tax a) Automated procedures with greater use of IT: GST is technology driven. The interface of
compliance the taxpayer with the tax authorities is through the common portal (GSTN).
b) Easier tax compliance: Harmonization of laws, procedures and rates of tax has made
compliance easier and simple.
Advantages a) Benefits to industry: Average tax burden has come down, which resulted in reduction in
for trade and prices of goods/services. This has resulted in more consumption & production.
industry
b) Mitigation of ill effects of cascading: GST is a destination-based consumption tax based
on VAT principle. This eradicates “tax on tax”.
c) Benefits to small traders & entrepreneurs: GST has increased threshold limit for GST
registration for small businesses & they are provided benefit of composition scheme.

13. GST C O M M O N P O R T A L

Common GST Portal – [Link] – is a website managed by Goods and Services Network (GSTN)
➢ to provide shared IT infrastructure &
➢ establish a uniform interface for the tax payer, Centre & States.
The GST portal provides facilities viz. registration, filing of returns, payment of GST etc.
It is accessible over Internet (by taxpayers and their CAs/ Tax Advocates etc.) and Intranet by Tax Officials
etc. The portal is one single common portal for all GST related services.
GSTN is a company incorporated u/s 8 of the Companies Act, 2013 by Government.
However, common GST Electronic Portal for furnishing electronic way bill is [Link]
Further, website for reporting of e-invoices by the notified persons is Invoice Registration Portal (IRP).
These two websites are managed by the National Informatics Centre, Ministry of Electronics & Information

Simplifying Complexity P a g e | 1.9

Harder you work, luckier you get
 Introduction to GST
Technology, Government of India]. (just for knowledge)
Concept of GST Suvidha Provider and Application Service Provider (GSP/ASP) is covered in Ch 15.

14. H O W TO S TU D Y GST

Laws/ Concepts Procedures

Taxable Event (Supply) Registration
Charge Under GST Tax Invoice, Debit & Credit Note and E-Way Bill
Place of Supply Accounts and Records
Exemption from GST Returns
Time of Supply Payment of GST
Value of Supply TDS and TCS
Input Tax Credit Assessment, Refunds, Audit, Appeals etc.

Simplifying Complexity P a g e | 1.10

Harder you work, luckier you get