Historical Background

Before GST, India had a complex web of indirect taxes levied by both the Centre and States. For example, excise duty, service tax, and customs duty were imposed by the Centre, while VAT, entry tax, and entertainment tax were imposed by States. This fragmented system often led to overlapping taxes and cascading effects, where tax was charged on tax. The idea of GST was first proposed in 2000, but it took nearly 17 years of debate, negotiation, and consensus-building between the Centre and States before it was finally implemented in July 2017.

Constitutional Framework

GST was introduced through the 101st Constitutional Amendment Act, 2016. It gave concurrent powers to both the Centre and States to levy GST. To manage disputes and ensure smooth functioning, the GST Council was created. This council, chaired by the Union Finance Minister and comprising state finance ministers, decides on tax rates, exemptions, and rules. The council embodies cooperative federalism, as decisions require consensus between the Centre and States.

GST Rate Structure

GST in India is levied under a multi-slab system:

• 0%: Essential items like fresh fruits, vegetables, milk, and healthcare services.

• 5%: Items of mass consumption such as edible oil, sugar, and transport services.

• 12% & 18%: Standard goods and services, including processed food, mobile phones, and financial services.

• 28%: Luxury goods and sin items like cars, tobacco, and aerated drinks. This multi-slab structure was designed to balance revenue needs with affordability, though experts argue that fewer slabs would make GST simpler and more efficient.

Input Tax Credit (ITC)

One of the most revolutionary aspects of GST is the Input Tax Credit mechanism. Businesses can offset the tax they pay on inputs (raw materials, services) against the tax they collect on outputs (finished goods/services). This eliminates the cascading effect of taxation and reduces the overall burden on consumers. For example, if a manufacturer pays GST on raw materials, they can claim credit for it when selling the finished product, ensuring tax is only levied on value addition.

Impact on Economy

GST has significantly improved India’s tax compliance and widened the tax base. By bringing more businesses under a unified system, it has reduced tax evasion and increased transparency. It has also made interstate trade smoother by removing entry taxes and checkpoints, creating a truly national market. However, small businesses initially struggled with compliance due to frequent return filings and technical glitches in the GST portal. Over time, reforms like simplified return filing and composition schemes have eased the burden.

Challenges Ahead

Despite its success, GST faces challenges:

• Complexity of slabs: Multiple tax rates create confusion and compliance difficulties.

• Revenue concerns: States worry about losing fiscal autonomy and revenue shortfalls.

• Technical issues: The GST Network (GSTN) portal has faced glitches, especially during peak filing times.

• Litigation: Ambiguities in rules often lead to disputes between taxpayers and authorities.

Future Outlook

Experts believe that GST will evolve into a simpler system with fewer slabs and better IT infrastructure. The government is working towards rationalizing rates, improving compliance mechanisms, and expanding GST coverage to sectors like petroleum, electricity, and real estate, which are currently outside its ambit. If these reforms succeed, GST could become a truly seamless tax system that boosts India’s competitiveness globally.

In essence, GST is not just a tax reform but a structural transformation of India’s economy. It has unified the market, reduced inefficiencies, and increased transparency, though it still needs fine-tuning to achieve its full potential.