INTRODUCTION

Taxation is the most important and decisive element in a nation's working machinery, and it
is a necessary aspect of a nation's development. Tax refers to the government's mandatory
financial charge assessed on income, commodities, services, activities, or transactions. Taxes
are collected as revenue by the Centre and the State Governments for achieving the social and
economic objectives of a welfare state; every bit collected is contributed to creating better
infrastructure facilities for the general public. It is a tool for reducing inequalities in income
and wealth. Tax reform is the key to formulation of a strategy aimed at holistic societal
growth. Thus, the significance of an efficient taxation system and tax reform cannot be
understated.

In India, two types of taxes are levied: Direct Tax and Indirect Tax. Direct Tax is levied
directly on income, profession etc. of an individual and where the tax burden cannot be
passed from one person to another. Indirect Tax, is levied indirectly on the ultimate consumer
of goods and services for their consumption. In Indirect taxes, immediate burden is on one
person and ultimate burden is on some other person. i.e., the consumer.

The Goods and Services Tax (GST) was implemented on July 1, 2017, as India's most
comprehensive indirect tax reform. It merged several previously existing indirect taxes into a
single one. With GST, India has joined the league of developed and progressing nations
which already have a common tax for goods and services. The present paper seeks to analyse
the how is GST used as a source of revenue by the Government and its impact on the
economy.

CONTRIBUTION OF INDIRECT TAXES TO THE ECONOMY

Indirect Taxes, as already discussed above are consumption-based taxes on goods and
services where the tax payer pays taxes indirectly through intermediaries like importers,
suppliers etc. Customs and GST are the major indirect taxes in India. Thus, in this case, the
incidence and impact fall on two distinct individuals i.e., tax burden ultimately shifts to the
customer or user of products or services.

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Article 246 of the Indian Constitution lays down three types of lists 1 which entail the subject
matters upon which the Parliament, State Legislature or both can legislate. Such matters
include power to levy taxes as well. Thus, the Indian Constitution divides the authority to
charge various taxes between the Centre and the states.

The old indirect tax regime was comprised of Central and State laws. The three main
components of indirect taxes for the Central Government were Central Excise, Customs, and
Service Tax. While for the state government, the principal taxes were Value Added Tax
(VAT) and CST, as well as Octroi, Entertainment Tax etc. These taxes were levied and
collected exclusively through their separate entries in the Union and State lists, as defined by
Article 246. However, in 2017 GST was rolled out which replaced the pre-existing indirect
taxes in India. The GST regime of indirect taxes introduced a single tax assessed on the
supply of goods or services, or both, with concurrent jurisdiction of the Centre and the states.
The implementation of GST sought to make the country's indirect tax structure more unified
across its many states.

Contribution of Indirect Taxes:

India earns around 80% of its total revenue through taxes. While the Central Board of Direct
Taxes (CBDT) is in charge of direct taxes in India, the Central Board of Indirect Tax and
Customs is in charge of indirect taxes.

As per the Analysis done by The Hindu of the Union Budget record from 2014-2019, it was
shown the government's reliance on tax money has progressively increased, with tax revenue
accounting for little more than 70% of overall collections in 2018-19, up from 65% in 2014-
15. The analysis of tax income further shows that the share of indirect tax has increased over
time, rising to nearly 50% in 2018-19 from less than 45% in 2014-15.2 India's direct tax
collection in Fiscal Year 2021 was Rs 9.45 lakh crore, while indirect tax collection was Rs
10.71 lakh crore. In 2020-21, direct taxes accounted for 4.7% of GDP, while indirect taxes
accounted for around 5.4%.3 Higher indirect taxes are viewed as regressive to an economy
since they disproportionately burden the poor.

1
Union List, State List and Concurrent List (provided in the seventh schedule of the Constituion).
2
T. C. A Sharad Raghavan, GST can boost direct, indirect tax collections, say experts, THE HINDU, January 6,
2019, https://www.thehindu.com/business/Industry/gst-can-boost-direct-indirect-tax-collections-say-experts/
article25926721.ece (last visited Mar 26, 2022).
3
Krishna Veera Vanamali, What are direct and indirect taxes?, BUSINESS STANDARD INDIA, January 25, 2022,
https://www.business-standard.com/podcast/finance/what-are-direct-and-indirect-taxes-122012500094_1.html
(last visited Mar 26, 2022).

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 GST AS A SOURCE OF REVENUE FOR THE GOVERNMENT

Under the previous regime, taxation of goods and services were governed under different
legislations. While the Centre had the authority to impose taxes (excise duty) on the
manufacture of goods (excluding alcoholic liquor for human consumption, opium, drugs,
goods manufactured in SEZ etc.), the states had the authority to levy taxes on the sale of
goods. The Centre had the authority to charge a tax (the Central Sales Tax) on inter-state
sales, but the tax was collected and maintained completely by the states. In terms of services,
the Centre was the only one with the authority to charge Service Tax under the terms of the
Finance Act. Further, Centre levied custom duty on goods that were imported and exported to
and from India.

There were certain loopholes (cascading effect, double taxation) in this taxation system as a
result of which VAT was introduced in 2005 to make substantial changes in the state level tax
structure. However, further loopholes in the Indirect Tax regime paved the way introduction
of GST reforms. Some of the major reasons for introduction of GST were:

a) Multiplicity of taxes: Indirect Tax comprised Value Added Tax, Entry Tax,
Entertainment Tax, Luxury Tax, CST (State), Central Sales Tax, Service Tax and
Customs Duty (Centre) and Excise Duty (Centre and State). Further local bodies
levied Entertainment Tax, Octroi, Entry Tax etc.
b) Plenty of Taxable Events: Taxes were levied at different stages by different on the
same subject matter. The same products were subject to various taxes on a number of
taxable events such as entrance, transportation, manufacture, sale, and so on. Since
there was no benefit of input tax credit, the majority of the taxes had a cascading
impact.
c) Double Taxation: Multiple taxes were imposed on a single transaction, frequently by
separate authorities. The Central Government collected service tax, while the State
Government collected appropriate local taxes.
d) Cascading Effect: Taxes paid on input purchases could not be set off against output
tax payable on services, and vice versa. Similarly, central taxes could not be used as a
credit against state taxes, and vice versa.

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The GST Regime in India:

Globally, GST was first implemented as a tax regime in France, in 1954 following which
several other countries such as Australia, Canada, UK etc, started implementing the same.
The GST journey began in 2000, when the Kelkar Task Force on Implementation of Fiscal
Responsibility and Budget Management (FRBM) Act, 2003 was formed to develop
legislation. It took 17 years for the Law to evolve after that. The GST Bill was passed in both
the Lok Sabha and the Rajya Sabha in 2017 and on 1st July 2017, the GST Law came into
force.

GST was introduced via the 101st Amendment Act of the Constitution, 2016 under Article
246A which empowered the Parliament and State Legislature to make laws w.r.t to goods and
service tax. It is a single unified, destination-based tax which covers manufacturing and
sale/consumption of goods and services. As a result, with the introduction of GST, the legacy
taxes on manufacture (Excise), inter-state sales (CST), intra-state sales (VAT), and service
tax were subsumed.

The GST model in India is based on a dual structure. For intra-state sale, it is equally divided
between the Centre (Central Goods & Services Tax/CGST) and the State (State Goods and
Services Tax/SGST). For inter-sale tax, the GST is solely collected by the Centre (Integrated
Goods and Service Tax/IGST).

GST is levied at the time and place of supply and it would be levied on the transactional
value4. For goods, rates are 0.25%, 3%, 5%, 12%, 18% and 28% which is equally split into
CGST and SGST for Intrastate sales and fully leviable as IGST for Inter-state sale. For
services, rates are broadly 5%, 12%, 18% and 28% which is equally split in to CGST and
SGST for Intra-state sales and fully leviable as IGST for Inter-state sale. Section 7(1)(a) of
the CGST Act defines supply of goods and services as “all kinds of supply of goods and
services made or agreed to be given for a consideration by any person in the course of or
promotion of business.”5

4
Section 15 of the CGST Act, 2017.
5
Such supply includes such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed
to be made.

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In 2022-23, overall indirect tax collections are expected to reach Rs 13,30,000 crore. The
government estimates that GST will generate Rs 7,80,000 crore. 6 Similarly, in 2020-21,
28.5% of the revenue came from GST.7 In January 2022, GST collection crossed 1.38 trillion,
a growth of 15% from the previous year. 8 The GST revenues in February 2022 are 18%
higher than the GST revenues in the same month last year and 26% higher than the GST
revenues in February 2020. For the first time since the implementation of GST, GST cess
collection has surpassed Rs 10,000 crore.9 GST revenues were predicted to remain resilient in
February 2022, as the third wave had only a little influence on industrial activity and GST e
way bill creation in January 2022.

GST IN FIVE YEARS: IMPACT OF GST ON THE ECONOMY

Since the last two years, India has been suffering from the wrath of pandemic. However,
according to Economic Survey 2021, the impact of the second wave on GST was much
milder than the impact of the first wave, during the state-wide lockdown period. Despite
falling in the second covid wave, GST managed to recover quickly. GST revenues have
consistently increased over the last four years, with the year-average of monthly GST
collection increasing from Rs0.9 lakh crore in 2017-18 to Rs1.19 lakh crore in 2021-22. (Up
to December).10

The rapid recovery of the GST regime following the pandemic can be attributed to the
stringent enforcement drive against GST invaders and crack down on fake invoices 11,

6
UNION BUDGET 2022-23 ANALYSIS BUDGET HIGHLIGHTS NON-TAX PROPOSALS IN THE FINANCE BILL POLICY
HIGHLIGHTS, (2022), https://prsindia.org/files/budget/budget_parliament/2022/Union%20Budget%20Analysis
%20-%202022-23.pdf (last visited Mar 26, 2022).
7
TIMESOFINDIA COM / Jan 28, 2021 & 22:05 Ist, Budget 2021: What are the income sources of government
- Times of India, THE TIMES OF INDIA (2022),
https://timesofindia.indiatimes.com/business/faqs/budget-faqs/budget-2021-what-are-the-income-sources-of-
government/articleshow/80514295.cms (last visited Mar 26, 2022).
8
Press Trust of India, GST collection in Jan crosses Rs 1.3-trn mark for fourth time in FY22: Govt, BUSINESS
STANDARD INDIA, January 31, 2022, https://www.business-standard.com/article/economy-policy/gst-collection-
at-rs-1-38-trn-in-january-2022-finmin-122013101477_1.html (last visited Mar 26, 2022).
9
Capital Market, GST Holds Above 1.30 Lakh Mark In February 2022, BUSINESS STANDARD INDIA, March 2,
2022, https://www.business-standard.com/article/news-cm/gst-holds-above-1-30-lakh-mark-in-february-2022-
122030200228_1.html (last visited Mar 26, 2022).
10
IANS, Impact of Second COVID Wave on GST Collection Much More Muted than First Wave, MONEYLIFE NEWS
& VIEWS (2022), https://www.moneylife.in/article/impact-of-second-covid-wave-on-gst-collection-much-
more-muted-than-first-wave/66258.html (last visited Mar 26, 2022).
11
Special Correspondent, Crackdown on GST evaders continues, THE HINDU, July 13, 2021,
https://www.thehindu.com/business/Economy/gst-evasion-450-arrests-since-2020-21/article35304262.ece
(last visited Mar 26, 2022).

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systemic changes introduced in GST such as e-invoicing system 12 and the measures taken by
the GST council to rectify the inverted duty structure13.

During the period April to November 2021, the GST collection for the Centre was 61.4% of
the Budget Estimate. Gross GST collection by the Centre and states combined was Rs10.74
lakh crore from April to December 2021, representing a 61.5% rise over April to December
2020 and a 33.7% increase over April to December 2019.14

Some of the relevant impacts of GST on the Indian economy are:

1) Simplified tax structure: Our country's taxes structure has been simplified. Being a
single tax, it is easier to calculate. With GST, the customer has a clear understanding
of the amount of tax paid when purchasing specific products. When evaluating GST
and its impact on GDP, this is critical. Further, the unified taxation system has
eliminated cascading effect.
2) Support to small and medium enterprise: The amount of GST based on the size of
a company is determined by the firm's annual turnover, provided it is registered under
GST's Composition Scheme. Businesses with a yearly revenue of 50 lakhs must pay
6% GST, whereas businesses with a yearly turnover of 1.5 crores must pay 1% GST.
3) Boosting Start-up Ecosystem: Many start-ups are in the service industry, which
means they pay service tax. They can set against the VAT paid on purchases (say,
office supplies) against the service tax on their sales under the GST scheme, which
they cannot do under the current structure.
4) Increased Exports: Customs duties on exports will be eliminated under GST. Due to
lower transaction costs, the country's competitiveness in overseas markets will
improve.
5) Enhanced operations: Transporting goods across India has gotten easier with a
single taxation system, promoting operations across the country.

12
Explained: Here’s how systematic changes led to a record GST mop-up, THE INDIAN EXPRESS (2021),
https://indianexpress.com/article/explained/explained-why-gst-collection-is-at-an-all-time-high-7129118/ (last
visited Mar 26, 2022).
13
Course correction mode: GST Council looks to fix duty structure, boost revenues, THE INDIAN EXPRESS (2021),
https://indianexpress.com/article/india/course-correction-mode-gst-council-looks-to-fix-duty-structure-boost-
revenues-7520566/ (last visited Mar 26, 2022).
14
Supra No. 10.

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