Unit 1: Introduction to indirect taxes & GST
Goods and Services Tax notes · PTU syllabus (BCOM 502-18)
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Unit summary
Before 2017, goods and services in India were taxed by a tangle of central and state levies. GST replaced most of them with one tax. This unit covers the background and concept of indirect taxes, shortcomings of the pre-GST era, administration of indirect taxation, the concept, need and benefits of GST, and its constitutional framework.
After this unit you can
- Explain the concept and features of indirect taxes
- Identify the shortcomings of the pre-GST indirect tax system
- Explain the concept, need and benefits of GST
- Explain the constitutional framework of GST — 101st Amendment, Articles 246A, 269A and 279A
PTU syllabus topics
- Background and concept of indirect taxes
- major shortcomings of the pre-GST era
- administration of indirect taxation in India
- basic concept and overview of GST
- need and benefits
- constitutional framework of GST
Central taxes
Central excise, service tax, additional customs duties
State taxes
VAT, entry tax, luxury tax, entertainment tax
Not subsumed
Basic customs duty, alcohol for human consumption
Topic 1
Background and concept of indirect taxes
An indirect tax is levied on goods and services; the impact (on the seller) and incidence (on the consumer) fall on different persons because the tax is passed on through prices.
Levied on
Income and wealth
Goods and services (consumption)
Shifting
Cannot be shifted
Shifted to the consumer
Nature
Progressive
Regressive (same rate for all)
Evasion
Easier
Harder (collected at each stage)
Examples
Income tax, corporate tax
GST, customs duty
Administration
CBDT
CBIC
Pre-GST indirect taxes
| Levied by the Centre | Levied by the States |
|---|---|
| Central excise duty (on manufacture) | Value Added Tax (VAT) on intra-state sale |
| Service tax | Central Sales Tax (CST) on inter-state sale (collected by states) |
| Additional excise duties | Entry tax, octroi |
| Countervailing duty (CVD) and special additional duty (SAD) on imports | Entertainment tax, luxury tax |
| Central surcharges and cesses | Tax on lottery, betting and gambling; purchase tax |
Topic 2
Shortcomings of the pre-GST system
Cascading of taxes
Tax on tax — no credit of excise against VAT or of CST
Multiplicity of taxes
Many laws, returns and authorities
Non-integrated market
Check-posts, entry tax, varying state rates
Classification disputes
Goods vs services (software, works contracts)
Limited input credit
Service tax credit not available against VAT
Compliance burden
Separate registrations and returns
Tax evasion and unorganised sector
Example
A manufacturer paid excise on production; the trader then paid VAT on the price including excise — excise itself was taxed again (cascading), raising consumer prices.
Topic 3
Administration of indirect taxation in India
- Central Board of Indirect Taxes and Customs (CBIC) under the Department of Revenue, Ministry of Finance — administers CGST, IGST, customs and central excise.
- State tax departments — SGST and state taxes on petroleum and liquor.
- GST Council — recommends rates, exemptions, thresholds and laws.
- GSTN (Goods and Services Tax Network) — IT backbone for registration, returns, payments.
- Appellate structure: Appellate Authority → GST Appellate Tribunal (GSTAT) → High Court → Supreme Court; Authority for Advance Ruling (AAR) and Appellate AAR.
Topic 4
Concept, need and benefits of GST
GST is a comprehensive, multi-stage, destination-based tax levied on every value addition on the supply of goods and services, introduced on 1 July 2017.
- 1Manufacturer sells ₹100 + GST ₹18
Pays ₹18
- 2Wholesaler sells ₹120 + GST ₹21.6
Pays ₹21.6 − ₹18 = ₹3.6
- 3Retailer sells ₹150 + GST ₹27
Pays ₹27 − ₹21.6 = ₹5.4
- 4Consumer pays ₹177
Total GST collected ₹27 = 18% of final value only
Features
- Dual GST: Centre (CGST) and States (SGST/UTGST) levy simultaneously on intra-state supplies; IGST on inter-state supplies and imports.
- Levied on supply (not manufacture or sale); destination-based consumption tax.
- Seamless input tax credit across goods and services.
- Online compliance — registration, returns, payments, e-invoicing, e-way bill.
- Exclusions: alcoholic liquor for human consumption (outside GST); petroleum crude, diesel, petrol, natural gas and ATF (GST from a date to be notified by the Council).
Need and benefits
| For business | For government | For consumers |
|---|---|---|
| Removes cascading — lower cost | Wider tax base, better compliance | Lower overall tax burden |
| One national market — no check-posts | Invoice matching reduces evasion | Transparent tax in the invoice |
| Simpler compliance, fewer taxes | Common rates reduce disputes | Uniform prices across states |
| Exports zero-rated — competitive | Higher revenue buoyancy over time | Better supply chains |
Topic 5
Constitutional framework of GST
- 1
122nd Constitution Amendment Bill (2014)
Passed by Parliament in August 2016
- 2
101st Constitutional Amendment Act, 2016
Ratified by states, assent on 8 September 2016
- 3
Article 246A
Concurrent power to Parliament and state legislatures to make GST laws; Parliament exclusively for inter-state supplies
- 4
Article 269A
IGST on inter-state supplies, apportioned between Centre and states
- 5
Article 279A
GST Council
- 6
Article 366(12A)
Defines GST as tax on supply except alcoholic liquor for human consumption
- 7
GST Compensation to States Act, 2017
Compensation for revenue loss for 5 years (till June 2022)
GST Council (Article 279A)
- Chairperson: Union Finance Minister; members: Union MoS (Revenue/Finance) and the Finance/Taxation Minister of each state.
- Quorum: one-half of total members. Decisions: at least three-fourths of weighted votes — Centre one-third, states together two-thirds.
- Functions: recommends taxes to be subsumed, exempted goods and services, model GST laws, rates and slabs, thresholds, special provisions for special category states, dispute resolution.
- Legislation: CGST Act 2017, IGST Act 2017, UTGST Act 2017, GST (Compensation to States) Act 2017 and 31 SGST Acts.
Exam tip
The GST Council is often called an example of cooperative federalism — use the phrase in long answers.
Key terms
- Indirect tax
- A tax whose burden is shifted to the consumer
- Cascading
- Levying tax on a value that already includes tax
- GST
- Destination-based tax on supply of goods and services with input credit
- Dual GST
- Simultaneous levy by Centre and states on the same transaction
- GST Council
- Constitutional body under Article 279A that recommends GST matters
Quick revision
- Direct vs indirect taxes: shifting, progressivity.
- Pre-GST problems: cascading, multiplicity, fragmented market.
- GST from 1 July 2017; CGST + SGST intra-state, IGST inter-state.
- Constitution: 101st Amendment; Articles 246A, 269A, 279A, 366(12A).
- Council: FM chairs; three-fourths weighted majority.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.Define indirect tax.
- Q2.What is cascading of taxes?
- Q3.Name four taxes subsumed in GST.
- Q4.What is dual GST?
- Q5.What is Article 246A?
- Q6.State the voting pattern in the GST Council.
Long-answer questions
- Q1.Explain the shortcomings of the pre-GST indirect tax structure.
- Q2.Explain the concept, features and benefits of GST.
- Q3.Explain the constitutional framework of GST.
- Q4.Discuss the composition and functions of the GST Council.
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