UNIT - 1

Meaning of Indirect Tax:

Indirect tax is a type of tax that is levied on goods and services rather than on
income or profits. The burden of this tax is initially paid by the seller, service
provider, or manufacturer, but it is ultimately passed on to the final consumer.
Essentially, the tax is included in the price of the goods or services, making the
consumer the one who bears the cost.
Features of Indirect Tax:
1. Shiftability of Burden:
o The primary feature of indirect tax is that the burden of the tax can
be shifted from the entity liable to pay it (e.g., a business) to another
party (usually the consumer). The seller collects the tax on behalf of
the government and includes it in the product's price.
2. Regressive Nature:
o Indirect taxes tend to be regressive in nature, meaning they affect
lower-income individuals more than higher-income individuals. Since
the same rate applies regardless of a consumer’s income, the relative
burden on low-income earners is higher.
3. Collected by Intermediaries:
o Indirect taxes are collected by intermediaries such as retailers,
wholesalers, or manufacturers, who then remit the tax to the
government. These intermediaries act as agents collecting the tax
from consumers.
4. Uniform Rate:
o Indirect taxes are usually applied uniformly on goods and services,
regardless of who the buyer is. For example, all consumers pay the
same percentage of tax on a specific product, irrespective of their
income levels.
 5. Broad Coverage:
o Since it applies to goods and services, indirect tax covers a wide range
of transactions in the economy, leading to broad tax collection across
various sectors and industries.
6. Affects Prices:
o Indirect taxes directly impact the price of goods and services. The tax
is added to the selling price, which increases the final cost to the
consumer.
7. Easy to Collect:
o Indirect taxes are relatively easier to administer and collect since
businesses collect them at the point of sale and remit them to the
government. There is no need for extensive assessment processes
like with income taxes.
8. Encourages Compliance:
o As indirect taxes are built into prices, consumers often have little
choice but to pay the tax, resulting in fewer issues of tax evasion
compared to direct taxes.
9. Types of Indirect Taxes:
o Common types of indirect taxes include value-added tax (VAT), goods
and services tax (GST), excise duty, customs duty, and sales tax.

Types of indirect tax before GST

Before the implementation of the Goods and Services Tax (GST) in many countries,
including India in 2017, there were several types of indirect taxes levied at both
the central and state levels. Here are the types of indirect taxes that existed
before GST:
1. Central Excise Duty:
 • Description: This was a tax levied on the manufacture or production of
goods within a country. It applied to a wide range of products manufactured
domestically.
• Administered by: The Central Government.
• Example: Excise duty was imposed on goods like cigarettes, alcohol, and
petroleum products.
2. Service Tax:
• Description: This tax was levied on services provided in the country. It
applied to a broad spectrum of services such as telecom, consultancy,
hospitality, and others.
• Administered by: The Central Government.
• Example: Consumers paid a service tax on mobile phone bills, hotel stays,
and professional services.
3. Value Added Tax (VAT):
• Description: VAT was a state-level tax imposed on the sale of goods within
the state. Each state had its own VAT laws, and rates varied depending on
the type of goods. VAT was charged at each stage of production and
distribution but allowed for input tax credit (ITC).
• Administered by: State Governments.
• Example: VAT was applicable on the sale of goods like electronics, clothing,
food items, etc., within a state.
4. Sales Tax:
• Description: Sales tax was also a state-level tax, but it applied to the sale of
specific goods (often referred to as state sales tax) within a particular state.
In some cases, it overlapped with VAT.
• Administered by: State Governments.
• Example: Sales tax was charged on goods sold to the final consumer in
many states.
5. Central Sales Tax (CST):
• Description: CST was levied on the interstate sale of goods, meaning it
applied when goods were sold from one state to another. It was collected
by the central government but was shared with the state where the sale
originated.
• Administered by: The Central Government.
• Example: If a seller in one state sold goods to a buyer in another state, CST
was charged.
6. Customs Duty:
• Description: Customs duty was levied on goods imported into or exported
out of the country. It included both basic customs duty and additional
duties like countervailing duty (CVD) and special additional duty (SAD).
• Administered by: The Central Government.
• Example: Customs duty was charged on imported electronics, cars,
machinery, etc.
7. Octroi and Entry Tax:
• Description: Octroi or entry tax was levied by local municipalities on goods
entering a specific city or state. This tax was typically applied to goods being
brought into the municipal area for local consumption.
• Administered by: Local Governments or Municipal Authorities.
• Example: Octroi was charged on goods like construction materials or
finished goods entering a city's municipal limits.
8. Entertainment Tax:
• Description: This tax was levied on entertainment activities such as movie
tickets, sporting events, concerts, etc.
• Administered by: State Governments.
• Example: Consumers paid entertainment tax when purchasing tickets for
movies, theater shows, and amusement parks.
9. Luxury Tax:
• Description: This tax was imposed on luxury items or services such as hotel
accommodation (above a certain price point), high-end restaurants, and
other services deemed luxurious.
• Administered by: State Governments.
• Example: Luxury tax was applicable on premium hotel rooms and high-end
resorts.
10. Purchase Tax:
• Description: Purchase tax was levied on the purchase of certain goods by
traders or manufacturers. It was typically applied when goods were bought
for resale or further processing.
• Administered by: State Governments.
• Example: This tax was imposed on agricultural products purchased for
resale by traders.
11. Lottery, Betting, and Gambling Tax:
• Description: This tax applied to lotteries, betting, and gambling activities.
• Administered by: State Governments.
• Example: Lottery tickets and betting activities were subject to this tax.
12. Cess and Surcharges:
• Description: Cess and surcharges were additional taxes levied on specific
products or services, often for specific purposes such as education, health,
or infrastructure development.
• Administered by: The Central or State Governments.
• Example: Education cess or Swachh Bharat cess was imposed on certain
services.

Challenges with Pre-GST Indirect Tax System:

 • Complexity: The system was fragmented with multiple indirect taxes levied
by both the central and state governments, making compliance difficult for
businesses.
• Cascading Effect: Since input tax credits were not fully available across
different types of taxes, there was a cascading or "tax on tax" effect, leading
to higher prices.
• Inconsistent Rates: Different states had different rates for VAT and other
state taxes, causing disparities and complications in interstate trade.

Merits and Demerits of Indirect Tax:

Merits of Indirect Tax:
1. Convenient for Consumers:
o Consumers pay indirect taxes when they purchase goods and
services, making it less noticeable and easier to manage compared to
paying a lump sum amount like in direct taxes.
2. Broad Coverage:
o Indirect taxes apply to a wide range of goods and services, ensuring
that everyone contributes to the government’s revenue, regardless of
their income level.
3. Easier to Collect:
o Indirect taxes are collected at the point of sale by businesses, which
then remit the taxes to the government. This makes administration
relatively simple and minimizes direct interaction between the
government and individuals.
4. Discourages Harmful Consumption:
o Higher taxes on harmful products such as tobacco, alcohol, and
sugary drinks (often called "sin taxes") help reduce their consumption
and promote public health.
 5. Less Evasion:
o Since indirect taxes are included in the prices of goods and services,
they are harder to evade compared to direct taxes, which rely on
personal declarations of income.
6. Encourages Savings:
o Since indirect taxes are primarily based on consumption, individuals
who save more and spend less are not taxed as heavily as those who
spend more.
Demerits of Indirect Tax:
1. Regressive Nature:
o Indirect taxes affect low-income individuals disproportionately
because the tax is the same for everyone, regardless of their ability to
pay. Poorer individuals end up spending a higher percentage of their
income on these taxes.
2. Cascading Effect (Before GST):
o In some cases, there was a cascading effect of taxes, meaning a "tax
on tax," where consumers ultimately paid higher prices. This has
been largely addressed in systems like GST, but was an issue before
such reforms.
3. Inflationary Impact:
o Indirect taxes can lead to higher prices for goods and services,
contributing to inflation. When taxes increase, businesses often pass
on the additional cost to consumers.
4. Does Not Reflect Ability to Pay:
o Since indirect taxes are applied uniformly, they do not account for an
individual’s financial condition. Both the wealthy and the poor pay
the same rate on goods and services.
5. No Incentive for Productivity:
 o Indirect taxes do not provide incentives for increasing income or
productivity, as they are based on consumption rather than earnings.

Merits and Demerits of Direct Tax:

Merits of Direct Tax:
1. Progressive Nature:
o Direct taxes, like income tax, are usually progressive, meaning that
higher-income individuals pay a higher rate, ensuring equity in the tax
system. This ensures that the tax burden is distributed according to
one’s ability to pay.
2. Redistribution of Wealth:
o Direct taxes help reduce income inequality by redistributing wealth
from the richer segments of society to fund government programs
that benefit lower-income groups.
3. Reflects Ability to Pay:
o Direct taxes are based on an individual’s or a corporation’s income,
making them fairer as the amount paid reflects the taxpayer’s
financial capacity.
4. Promotes Transparency and Accountability:
o Direct taxes require taxpayers to disclose their income and wealth,
fostering transparency. It also makes it easier for governments to
track and assess wealth in the economy.
5. Incentivizes Saving and Investment:
o Taxpayers are often incentivized to save or invest through tax
deductions or rebates on specific savings schemes, which can
encourage good financial habits and stimulate economic growth.
6. Helps Control Inflation:
 o By adjusting the rates of direct taxes, governments can control the
amount of disposable income in the economy, thus helping to
manage inflation.
Demerits of Direct Tax:
1. Complex Compliance:
o Direct taxes require detailed reporting, making compliance
complicated for many individuals and businesses. Tax laws are often
complex, necessitating the use of accountants and tax consultants.
2. Possibility of Evasion:
o Direct taxes are more prone to evasion because individuals may
underreport their income or wealth to reduce their tax liability. This
can reduce the government’s revenue and lead to inequalities.
3. Disincentive to Work Harder:
o High rates of direct taxes can act as a disincentive for people to work
harder or earn more because a significant portion of their additional
income would go towards taxes. This can potentially hinder
productivity and economic growth.
4. Burden on Taxpayers:
o Direct taxes, especially if set at high rates, can be a heavy burden for
taxpayers. It may reduce disposable income, which could in turn
affect consumption and savings.
5. Delays in Collection:
o Direct taxes are often collected annually, which can delay
government revenue streams compared to indirect taxes that are
collected more frequently (e.g., at the point of sale).
6. Administrative Costs:
o Collecting direct taxes involves significant administrative work and
costs, including tax assessments, audits, and enforcement actions.
 This requires substantial resources from both taxpayers and the
government.

Basis Direct Taxes Indirect Taxes

Meaning A direct tax is a tax levied An indirect tax is levied on goods and
directly on a taxpayer and services and is paid by an individual
is paid straight to the to the intermediaries who then
imposing authority. submit the tax to the government.

Governing Central Board of Direct Central Board of Indirect Taxes and

authority Taxes (CBDT) Customs (CBIC)

Shift of The burden of direct taxes The burden of indirect taxes can be
burden cannot be shifted to shifted to others.
another person.

Taxpayer Individuals, companies and Final consumer

HUFs (Hindu Undivided
Family)

Taxable Direct taxes are levied Indirect taxes are levied when the
condition when the income of the consumer sells and purchases goods
individual is more or and services.
equivalent to the maximum
limit.

Tax evasion An event of tax evasion is Tax evasion is not possible as the tax
possible. amount is included in the value of
goods and services.
Tax Tax collection is complex Tax collection is easy and convenient.
collection and difficult.

Impact of The impact of tax falls on The impact of tax falls on different
tax the same person. people.

Final Any person on whom the Only the person who is receiving the
liability tax is levied is liable to pay benefits is liable to pay the tax.
the tax.

Nature of Direct taxes are progressive Indirect taxes are regressive in

tax in nature. nature.

Shortcoming of indirect tax system during pre-gst era in India

During the pre-GST era in India, the indirect tax system had several shortcomings
that led to inefficiencies and complexities in the economy. Some of the key
shortcomings include:
1. Cascading Effect of Taxes (Tax on Tax):
• The biggest issue was the cascading effect, where taxes were applied at
every stage of the supply chain without the benefit of input tax credit. This
meant that tax was levied on tax, increasing the cost of goods and services.
2. Lack of Uniformity:
• Different states had different tax structures, especially with Value Added Tax
(VAT) rates varying from state to state. This created discrepancies and made
it difficult for businesses to operate seamlessly across states.
3. Multiple Taxes:
 • There were several types of indirect taxes such as excise duty, service tax,
central sales tax (CST), VAT, octroi, entry tax, luxury tax, etc. This multiplicity
of taxes created confusion, increased compliance burdens, and made it hard
for businesses to understand and comply with all the different tax
requirements.
4. Complex Compliance and High Administrative Costs:
• Businesses had to comply with both central and state tax authorities,
requiring multiple registrations, filings, and payments. This increased the
administrative burden and cost for businesses, especially those operating
across states.
5. No Seamless Input Tax Credit (ITC):
• Input tax credit was not available across different types of taxes. For
example, credit on central excise duty paid on goods could not be used to
offset VAT or service tax liabilities. This restricted the ability of businesses to
claim credits and increased their tax liabilities.
6. Discouraged Interstate Trade:
• The existence of Central Sales Tax (CST) on interstate trade created barriers
for businesses. CST was not creditable against other taxes, leading to higher
costs when goods moved between states, discouraging interstate commerce
and integration of the national market.
7. Cascading of Customs Duty:
• Imports were subject to customs duties, and these duties were included in
the value on which other indirect taxes (such as excise duty and VAT) were
charged. This led to higher prices for imported goods due to the
compounded tax burden.

Goods and Services Tax (GST) - Meaning:

GST is a comprehensive, multi-stage, destination-based tax levied on every value
addition. It is a single indirect tax for the entire country that replaced a plethora of
indirect taxes that existed before, such as VAT, service tax, excise duty, and others.
GST aims to simplify the tax structure, avoid the cascading effect (tax on tax), and
create a unified market across the country.
GST is charged at each stage of the supply chain, but businesses can claim input
tax credit (ITC) for the GST paid on purchases, meaning only the final consumer
bears the cost.
Features of GST:
1. Comprehensive Tax:
o GST subsumes multiple indirect taxes like VAT, service tax, excise duty,
and CST into one single tax.
2. Destination-Based Tax:
o GST is a destination-based tax, meaning the tax is collected where
goods and services are consumed, not where they are produced.
3. Dual Structure (in India):
o GST in India follows a dual model, with both the Central Government
and State Governments imposing taxes:
▪ Central GST (CGST): Levied by the Central Government.
▪ State GST (SGST): Levied by State Governments.
▪ Integrated GST (IGST): Levied on interstate transactions.
4. Input Tax Credit (ITC):
o GST allows businesses to claim credits for the taxes paid on their
purchases (input taxes). This eliminates the cascading effect of taxes.
5. Four-Tier Tax Structure:
o GST has multiple tax rates depending on the type of goods and
services:
▪ 0%, 5%, 12%, 18%, and 28%.
▪ Special rates apply for items like gold, luxury goods, and
demerit goods.
 6. Composition Scheme for Small Businesses:
o Small businesses with annual turnover below a certain threshold can
opt for the composition scheme, which simplifies compliance with
lower tax rates and fewer filing requirements.
7. GST Council:
o A governing body comprising members from both central and state
governments, the GST Council oversees the administration and
revision of GST laws, ensuring uniformity across the country.
8. Online Filing and Compliance:
o GST requires businesses to file tax returns and make payments online
through a common GST portal, making tax compliance easier and
more transparent.
Advantages of GST:
1. Elimination of the Cascading Effect:
o GST removes the tax-on-tax effect by providing input tax credit at
every stage of the supply chain, reducing the overall tax burden on
goods and services.
2. Simplified Tax Structure:
o By replacing multiple taxes with one unified tax, GST simplifies the
taxation process and makes it easier for businesses to comply with
tax laws.
3. Boosts Economic Growth:
o GST encourages a more efficient flow of goods across state borders
by eliminating Central Sales Tax (CST) and other taxes on interstate
commerce, fostering a seamless national market.
4. Increased Transparency:
o Since all transactions are recorded digitally, GST increases
transparency and minimizes tax evasion. Input tax credit can only be
claimed on valid invoices, ensuring accountability.
 5. Reduced Logistics Costs:
o GST reduces the cost and time associated with inter-state goods
transport by eliminating multiple state-specific entry taxes and check-
posts, boosting supply chain efficiency.
6. Encourages Formalization of Economy:
o GST has brought more businesses into the formal economy by
incentivizing registration (to avail of input tax credit) and reducing the
opportunities for tax evasion.
7. Encourages Exports:
o Under GST, exports are zero-rated, meaning businesses can claim
refunds on taxes paid during the production process, making Indian
goods more competitive in global markets.
8. Simplified Compliance for Small Businesses:
o The composition scheme allows small businesses to pay a reduced
rate of GST and face less stringent filing requirements.
Disadvantages of GST:
1. Complexity for Small Businesses:
o Although the system is simplified, compliance with multiple returns
(monthly, quarterly, annual) and invoice matching processes can be
cumbersome for small and medium-sized enterprises (SMEs).
2. Higher Compliance Costs:
o Businesses need to maintain accurate records, file multiple returns,
and invest in software or accounting expertise to comply with GST
requirements, increasing administrative costs.
3. Multiple Tax Rates:
o While GST aimed for simplicity, the existence of multiple tax rates
(0%, 5%, 12%, 18%, 28%) and classification disputes sometimes
complicates tax calculation and compliance.
 4. Increased Working Capital Requirements:
o GST is collected at the point of sale, but businesses may have to wait
to claim the input tax credit on purchases, leading to a higher
working capital requirement for companies.
5. Technical Challenges:
o The online GST portal has faced technical issues, especially in the
initial years, causing delays in filing returns, processing refunds, and
dealing with compliance matters.
6. Impact on Services Sector:
o The services sector, which previously paid a uniform 15% service tax,
saw an increase in tax rates under GST, with many services falling
under the 18% bracket. This led to higher costs for consumers in
service-based industries.
7. Compliance Burden for Interstate Business:
o While GST simplifies taxation across states, businesses operating in
multiple states still need to comply with state-specific SGST
regulations and file separate returns, which adds to the compliance
burden.
8. Transitional Challenges:
o The transition from the previous tax system to GST created initial
confusion among businesses, with challenges like changes in
invoicing, inventory management, and adapting to the new software
systems.

Structure of gst,cgst,sgst,igst,utgst
The Goods and Services Tax (GST) in India is structured as a dual tax system,
meaning both the Central Government and State Governments have the
authority to levy taxes on goods and services. This dual structure consists of four
main components: CGST, SGST, IGST, and UTGST, each serving a specific purpose.
Here's an overview of the structure:
1. Central Goods and Services Tax (CGST):
• Levied by: Central Government.
• Applicability: CGST is levied on all intra-state (within the same state)
transactions of goods and services. It applies when a transaction occurs
within a single state or union territory.
• Purpose: Revenue collected from CGST goes to the Central Government.
• Example: If goods are sold in the state of Maharashtra, CGST will be levied
on that sale alongside SGST.
2. State Goods and Services Tax (SGST):
• Levied by: State Governments.
• Applicability: SGST is levied on intra-state transactions (within the same
state) of goods and services along with CGST.
• Purpose: Revenue collected from SGST goes to the respective state
government where the sale or service is provided.
• Example: For a sale within Maharashtra, both SGST and CGST are levied,
with the revenue from SGST going to Maharashtra’s state government.
• CGST and SGST Split:
o In intra-state transactions, the GST rate is split equally between CGST
and SGST. For example, if the GST rate is 18%, 9% will be collected as
CGST and 9% as SGST.
3. Integrated Goods and Services Tax (IGST):
• Levied by: Central Government.
• Applicability: IGST is applied on inter-state transactions (between two
states or union territories) as well as imports and exports. It also applies to
supply transactions in special economic zones (SEZs).
 • Purpose: Revenue from IGST is collected by the Central Government, which
then shares the appropriate portion with the states involved in the
transaction.
• Example: If goods are sold from Maharashtra to Karnataka, IGST is levied
instead of CGST and SGST.
• Transfer of Revenue:
o IGST is levied in place of CGST and SGST for inter-state transactions.
The Central Government distributes the revenue portion to the
destination state where the goods or services are consumed.
4. Union Territory Goods and Services Tax (UTGST):
• Levied by: Union Territory Governments (with no legislative assembly).
• Applicability: UTGST is applied on intra-union territory transactions of
goods and services in union territories without a legislature (like
Lakshadweep, Andaman and Nicobar Islands, etc.). It is charged along with
CGST in these regions.
• Purpose: Revenue from UTGST goes to the Union Territory Government.
• Example: For a sale within Lakshadweep, both UTGST and CGST are levied.
• Difference between SGST and UTGST:
o SGST applies to states with legislative assemblies, while UTGST
applies to union territories without legislatures. UTGST is effectively
the equivalent of SGST but for union territories.
5. GST Rate Structure:
• GST has a four-tiered tax rate structure:
o 0%: Essential goods and services (e.g., unbranded food items).
o 5%: Necessities (e.g., household items, basic services).
o 12% and 18%: Standard rates for most goods and services.
o 28%: Luxury and demerit goods (e.g., automobiles, luxury items).
Summary of the GST Structure:

Type of GST Levying Authority Applicability Revenue Sharing

CGST (Central Central Intra-state Collected by Central

GST) Government transactions Government

Collected by the
SGST (State State Intra-state
respective State
GST) Governments transactions
Government

IGST Inter-state Collected by Central

Central
(Integrated transactions, Government, shared
Government
GST) imports, exports with states

UTGST (Union Union Territory Intra-Union Territory Collected by Union

Territory GST) Governments transactions Territory Governments

important definition under gst act in india

Under the GST Act in India, there are several key definitions that provide clarity on
the scope, applicability, and legal framework of the tax. Understanding these
terms is essential for businesses and taxpayers to comply with the GST laws. Here
are some of the important definitions under the GST Act:
1. Supply (Section 7 of CGST Act):
• Meaning: "Supply" is the foundation of GST and refers to the supply of
goods or services for consideration by a person in the course or furtherance
of business. Supply includes:
o Sale, transfer, barter, exchange, license, rental, lease, or disposal of
goods and services.
o Supply can be made with or without consideration in certain cases
(like business assets).
o Import of services for a consideration is considered a supply even if it
is not in the course or furtherance of business.
2. Goods (Section 2(52) of CGST Act):
• Meaning: Goods are defined as every kind of movable property other than
money and securities but include actionable claims, growing crops, grass,
and things attached to or forming part of the land which are agreed to be
severed before supply or under a contract of supply.
3. Services (Section 2(102) of CGST Act):
• Meaning: Services mean anything other than goods, money, and securities.
However, activities relating to the use of money or conversion by cash or by
any other mode from one form, currency, or denomination to another are
considered services.
• This broad definition includes most forms of commercial activities except
the sale of goods.
4. Person (Section 2(84) of CGST Act):
• Meaning: "Person" includes:
o An individual.
o Hindu Undivided Family (HUF).
o Company.
o Firm.
o Limited Liability Partnership (LLP).
o Association of Persons (AOP) or Body of Individuals (BOI).
o Government or any local authority.
o Trust and other artificial juridical persons.
• This broad definition ensures that all types of entities are liable to GST.
5. Business (Section 2(17) of CGST Act):
• Meaning: Business includes any trade, commerce, manufacture, profession,
vocation, adventure, or any other similar activity, whether or not for a
pecuniary benefit. It also includes the provision of facilities by clubs or
 associations, admission to events, and activities related to the
commencement or closure of a business.
6. Consideration (Section 2(31) of CGST Act):
• Meaning: Consideration refers to any payment made or to be made,
whether in money or otherwise, in respect of, in response to, or for the
inducement of the supply of goods or services. This includes monetary
payments, non-monetary payments, and promises to pay.
• Consideration can be received by the supplier or by a third party.
7. Aggregate Turnover (Section 2(6) of CGST Act):
• Meaning: Aggregate turnover is the total value of all taxable supplies,
exempt supplies, exports of goods or services, and inter-state supplies of a
person having the same PAN, to be calculated on an all-India basis.
• It excludes central tax, state tax, union territory tax, integrated tax, and
cess.
8. Input Tax (Section 2(62) of CGST Act):
• Meaning: Input tax refers to the central tax (CGST), state tax (SGST), union
territory tax (UTGST), integrated tax (IGST), or cess charged on any supply of
goods or services or both. This also includes the tax paid on imports of
goods or services.
9. Input Tax Credit (ITC) (Section 2(63) of CGST Act):
• Meaning: Input Tax Credit (ITC) is the credit that a registered taxpayer can
claim for the GST paid on inputs (goods or services used to produce goods
or services). ITC can be used to offset the tax liability on the output (final
goods or services).
10. Exempt Supply (Section 2(47) of CGST Act):
• Meaning: Exempt supply refers to the supply of goods or services or both
which attract a Nil rate of tax or are wholly exempt from tax under the GST
law. This also includes non-taxable supplies.
11. Reverse Charge (Section 2(98) of CGST Act):
 • Meaning: Reverse charge refers to a situation where the recipient of the
goods or services is liable to pay the tax instead of the supplier. This usually
applies to specific notified goods/services or certain categories of suppliers
(such as unregistered suppliers in certain cases).
12. Composite Supply (Section 2(30) of CGST Act):
• Meaning: Composite supply refers to a supply made by a taxable person to
a recipient that consists of two or more goods or services, which are
naturally bundled and supplied together. The tax rate applicable to the
principal supply is levied on the entire composite supply.
• Example: The supply of a laptop with a charger is a composite supply,
where the laptop is the principal supply, and both are taxed at the rate
applicable to the laptop.
13. Mixed Supply (Section 2(74) of CGST Act):
• Meaning: Mixed supply refers to two or more individual supplies of goods
or services, made together for a single price, but each of which could be
supplied separately. The tax rate applicable to the item with the highest rate
is applied to the entire mixed supply.
• Example: A gift pack containing chocolates, watches, and perfumes, all
taxed at different rates, will be taxed at the rate of the highest-taxed item.
14. Output Tax (Section 2(82) of CGST Act):
• Meaning: Output tax refers to the tax chargeable on the taxable supply of
goods or services made by a registered person or on the reverse charge
basis. It excludes taxes paid on importation of goods or services.
15. Taxable Person (Section 2(107) of CGST Act):
• Meaning: A taxable person is anyone who is registered or liable to be
registered under the GST Act. This includes individuals, businesses, and
organizations that engage in the supply of goods and services and meet the
turnover thresholds specified under the law.
16. Non-taxable Supply (Section 2(78) of CGST Act):
 • Meaning: Non-taxable supply refers to the supply of goods or services that
are not subject to GST. This includes items outside the scope of GST or
those specified in the negative list (like petroleum products and alcohol for
human consumption).
17. Zero-Rated Supply (Section 16 of IGST Act):
• Meaning: Zero-rated supply refers to the supply of goods or services, such
as exports or supplies to SEZs, that are taxable under GST but at a zero rate,
meaning no tax is levied. However, input tax credit is available on these
supplies.
18. Place of Supply (Section 2(86) of CGST Act):
• Meaning: Place of supply determines the location where a supply is
considered to have been made. This is important for determining whether a
transaction is intra-state or inter-state, and hence whether CGST/SGST or
IGST applies.

GST Council in India

The Goods and Services Tax (GST) Council is a constitutional body responsible for
making recommendations on important issues related to the Goods and Services
Tax (GST) in India. The council plays a crucial role in determining how GST is
structured, administered, and implemented across the country. It acts as a
collaborative platform between the Central Government and State Governments
to make decisions on GST law, tax rates, exemptions, and other crucial matters
related to indirect taxation.
1. Formation of the GST Council:
• The GST Council was constituted under Article 279A of the Indian
Constitution, introduced by the 101st Constitutional Amendment Act,
2016.
• It was formally constituted on September 15, 2016.
 • The primary purpose of the GST Council is to ensure a uniform tax
structure, policy coherence, and the seamless functioning of GST across
India.
2. Composition of the GST Council:
The GST Council is a federal body and has a two-tier structure, involving both the
Central and State Governments. The members of the GST Council include:
1. Chairperson:
o Union Finance Minister (currently the chairperson).
o The Finance Minister of India automatically becomes the Chairperson
of the GST Council.
2. Members from the Central Government:
o Union Minister of State for Finance (in charge of Revenue or
Finance).
3. Members from State Governments:
o Finance Ministers or Taxation Ministers or any other nominated
minister of each state or union territory.
3. Voting Power in the GST Council:
• The GST Council follows a weighted voting system to ensure balanced
decision-making between the Center and the states. This system is crucial
since both the Center and the states have vested interests in tax revenue.
o Voting power is divided as follows:
▪ Central Government: 1/3rd of the total votes.
▪ State Governments (including Union Territories): 2/3rd of the
total votes.
• Every decision of the GST Council requires the approval of at least 75% of
the weighted votes.
o The Central Government alone cannot impose a decision since it has
only 33.33% of the votes.
 o The States collectively hold 66.67% of the voting power, making it
necessary for both the Center and a significant number of states to
agree for any decision to pass.
4. Key Functions of the GST Council:
The GST Council is responsible for making recommendations on the following
matters:
1. Tax Rates and Slabs:
o The Council decides on the tax rates for different goods and services.
GST has multiple tax rates (0%, 5%, 12%, 18%, 28%), and the Council
recommends adjustments to these slabs based on economic needs.
2. Exemptions and Thresholds:
o It recommends which goods or services should be exempt from GST.
o It also determines the turnover threshold for businesses below
which GST is not applicable (currently, businesses with annual
turnovers of less than ₹40 lakhs for goods and ₹20 lakhs for services
are exempt from GST registration).
3. GST Laws and Rules:
o It suggests amendments or changes to GST laws, rules, and
procedures to facilitate better compliance and efficiency in the
system.
4. Special Rates for Certain Goods and Services:
o It can recommend special rates, including zero-rated or concessional
rates, for certain goods and services based on social and economic
priorities.
5. Input Tax Credit Provisions:
o The Council defines the rules and mechanisms for Input Tax Credit
(ITC), including the items for which ITC is allowed or restricted.
6. Model GST Law and Compliance Procedures:
 o The Council formulates and recommends a model GST law to ensure
uniformity across states. It also determines procedural rules for filing
returns, maintaining records, and audit procedures.
7. Compensation to States:
o The Council recommends how the compensation to states (for
revenue losses due to GST implementation) should be determined
and distributed. This compensation mechanism is important for
states that might experience a shortfall in revenue after GST replaced
earlier taxes.
8. Dispute Resolution:
o The Council resolves disputes that may arise between states or
between the Center and states on issues related to GST.
9. GST Cess:
o It recommends the imposition and administration of additional GST
Cess on specific items (such as luxury goods, tobacco, aerated drinks,
etc.) to generate revenue for compensating states.
5. GST Council Meetings:
• The GST Council typically meets periodically to discuss and review the
status of GST implementation, to address issues raised by states or
stakeholders, and to propose amendments or changes in rates or
procedures.
• The decisions are usually taken by consensus, but in case of disagreement,
the weighted voting system is used.
• The council’s decisions have been pivotal in adjusting GST rates based on
economic conditions, such as during the pandemic when rates for essential
goods were reduced.
6. Achievements of the GST Council:
Since its formation, the GST Council has played a significant role in streamlining
the GST system. Some of its key achievements include:
 1. Simplification of Tax Rates:
o The Council reduced the tax burden on several items by moving them
to lower tax slabs and simplifying the tax structure.
2. Resolution of State Concerns:
o It has addressed the concerns of state governments regarding
revenue losses and ensured regular compensation payouts.
3. Addressing Compliance Challenges:
o To reduce the compliance burden on small businesses, the Council
has introduced measures like the Composition Scheme and quarterly
return filings for small taxpayers.
4. Reduction of GST Rates:
o The Council has frequently reviewed and reduced GST rates for
several items based on public and industry feedback, including
essentials like sanitary napkins, movie tickets, and restaurants.
5. Facilitating E-Way Bill and Online Compliance:
o The Council has introduced the E-Way Bill system to streamline the
movement of goods across state borders, minimizing delays and
reducing logistical costs.
7. Challenges Faced by the GST Council:
While the GST Council has made significant progress, it also faces challenges:
1. Revenue Shortfall:
o Several states have reported revenue shortfalls after the introduction
of GST, especially in sectors like liquor and petroleum, which are not
yet included under GST. The Council has had to negotiate
compensation payouts.
2. Tax Rate Rationalization:
 o The multiple tax rates (0%, 5%, 12%, 18%, 28%) have been criticized
for complicating the system. There have been ongoing discussions on
rationalizing the rate structure.
3. Dispute Resolution:
o Occasionally, disagreements arise between the Central Government
and states or between states on the interpretation of GST laws and
revenue sharing. Handling these disputes remains a delicate task for
the Council.
4. Inclusion of Petroleum Products:
o One of the ongoing debates is whether to bring petroleum products
under the GST regime. This has not yet been achieved due to
concerns over revenue implications for states.
8. Importance of the GST Council:
• The GST Council is a vital institution for maintaining the federal structure of
India’s taxation system. It ensures that both the Central Government and
State Governments have a say in the implementation and changes to GST,
promoting cooperative federalism.
• It has been instrumental in resolving conflicts and ensuring that the
transition to the GST system was smooth and inclusive.
• The council’s recommendations have shaped the trajectory of GST,
improving its effectiveness and addressing concerns raised by industries,
taxpayers, and the government.