History of GST in India

Understanding GST

The Goods and Services Tax (GST) is a destination-based indirect tax levied on the supply of goods and services. It replaces multiple taxes such as excise duty, VAT (Value Added Tax), service tax, central sales tax, luxury tax, entertainment tax, and other state and central levies. The primary objective of GST is to create a single, simplified tax system that promotes ease of doing business and enhances tax compliance.

GST is a multi-tiered tax structure comprising:

• CGST (Central GST) – Collected by the central government.
• SGST (State GST) – Collected by the state governments.
• IGST (Integrated GST) – Collected on inter-state transactions, with revenue shared between the centre and the states.
   

The Historical Journey of GST in India

The journey of GST in India spans nearly two decades. The idea of implementing GST was first discussed in 2000, but it took several years of negotiations, political discussions, and structural changes before it was finally implemented on 1st July 2017. Below is a timeline outlining the evolution of GST in India.

2000: The Idea of GST is Introduced

• The concept of GST was first proposed by the Atal Bihari Vajpayee government.
• A committee of state finance ministers was formed to design the framework for GST.

2004: Kelkar Committee’s Recommendation

• The Kelkar Task Force on Indirect Taxes, led by Vijay Kelkar, recommended GST as a way to streamline the indirect tax system and replace the existing complex structure.

2006: GST Proposal in Union Budget

• Finance Minister P. Chidambaram formally proposed the introduction of GST by April 1, 2010, during the 2006-07 budget speech.
• The proposal aimed to create a common national market by eliminating tax barriers between states.

2009: First Discussion Paper on GST

• The Empowered Committee of State Finance Ministers, chaired by Asim Dasgupta, released the First Discussion Paper (FDP) on GST.
• This paper outlined the dual GST model, which would involve both central and state governments imposing and collecting GST.

2011: Constitution Amendment Bill Introduced

• The Constitution (115th Amendment) Bill was introduced in Parliament to enable the implementation of GST.
• However, due to political opposition, the bill faced delays and was not passed.

2014: Reintroduction of the GST Bill

• After the 2014 General Elections, the newly elected Narendra Modi government reintroduced the Constitution (122nd Amendment) Bill, 2014.
• The government emphasised the importance of GST in improving tax efficiency and boosting economic growth.

2015: Lok Sabha Passes the GST Bill

• The Lok Sabha passed the GST Bill in May 2015.
• However, the Rajya Sabha referred the bill to a Select Committee, which suggested further modifications.

2016: GST Bill Passed by Parliament

• In August 2016, after extensive discussions, both the Lok Sabha and Rajya Sabha passed the GST Bill.
• President Pranab Mukherjee gave his assent, and it became the Constitution (101st Amendment) Act, 2016.
• The GST Council was also formed to finalise tax rates and other regulations.

2017: Official Implementation of GST

• The GST Council, chaired by the Union Finance Minister, finalised the GST rates and rules.
• On 1st July 2017, Prime Minister Narendra Modi and President Pranab Mukherjee launched GST nationwide, marking the biggest tax reform in independent India.
   

The Need for GST

Before the implementation of GST, India had a complicated indirect tax system with multiple taxes imposed at different levels by the Centre and State Governments. Some of the key challenges were:

Multiple Taxes and Compliance Burden

Businesses had to comply with numerous indirect taxes, such as:

• Central Excise Duty (on manufacturing)
• VAT (Value Added Tax) (on intra-state sales)
• Central Sales Tax (CST) (on inter-state sales)
• Service Tax (on services)
• Luxury Tax, Entry Tax, Octroi, and Entertainment Tax

This resulted in higher compliance costs and administrative complexities.

Cascading Effect of Taxes

• Taxes were applied at multiple levels without allowing input tax credit (ITC), leading to a tax-on-tax effect.
• Example: Excise duty was charged at the manufacturing stage, and VAT was applied at the sale stage, leading to double taxation.

Lack of a Unified National Market

• Different states had different tax rates and procedures, creating barriers to the free flow of goods and services.
• This lack of uniformity discouraged business expansion across states.

Impact on Prices and Inflation

Due to multiple taxes and cascading effects, the cost of goods and services increased, affecting consumers and businesses alike.
 

Key Benefits of GST

The implementation of GST brought several advantages to the Indian taxation system and economy:

One Nation, One Tax

• GST replaced multiple indirect taxes with a single, uniform tax structure, simplifying tax administration.
• It eliminated state-wise tax barriers, promoting a seamless national market.

Elimination of Cascading Effect

• GST allows for input tax credit (ITC), meaning businesses can offset the tax paid on purchases against the tax collected on sales.
• This reduces the overall tax burden and prevents the tax-on-tax effect.

Simplified Compliance Through Digitalisation

• GST introduced a single online platform (GSTN - Goods and Services Tax Network) for registration, filing returns, and tax payments.
• It reduced paperwork and enhanced transparency in tax administration.

Boost to Business and Economic Growth

• The removal of entry tax and check posts at state borders improved logistics efficiency.
• Reduced compliance costs and ease of doing business encouraged investment and economic growth.

Revenue Generation for Government

• The broad tax base under GST helped increase government revenue collection.
• Anti-evasion measures such as e-way bills and e-invoicing reduced tax fraud.

Improved Competitiveness

• With lower tax rates and compliance costs, Indian businesses became more competitive globally.
• Small businesses benefited from the Composition Scheme, reducing their tax burden.

Conclusion

The history of GST in India is a testament to the country's commitment to tax reform and economic progress. From its initial discussions in 2000 to its final implementation in 2017, GST has transformed the indirect tax system, creating a transparent, efficient, and business-friendly tax regime.

Despite some initial challenges, including technological issues, compliance difficulties, and concerns from small businesses, GST has largely succeeded in achieving its objectives. By eliminating the cascading effect of taxes, reducing compliance burdens, and creating a unified market, GST has played a crucial role in India's economic growth.

As the GST system continues to evolve with new policies and simplifications, it remains a landmark reform in India's journey towards becoming a modern and globally competitive economy.