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Indian Economy Taxation and GST GS Paper III

GST and the Indian Tax Structure

Tax concepts, the constitutional division of taxing powers, direct taxes, the 101st Amendment, GST design, the GST Council and compensation, explained for UPSC.

SyllabusGS III · Government budgeting; mobilisation of resources: taxation and the Goods and Services Tax

By UPSC Notes Editorial Team 13 min read Updated Oct 2026 #economy#taxation#gst

Prerequisites: The Union Budget and Fiscal Deficits · Federalism and Centre-State Relations

The Hook: A Midnight Session for a Tax

Connect: In the News → Concept

At midnight between 30 June and 1 July 2017, a special session in the Central Hall of Parliament launched the Goods and Services Tax. More than a dozen Central and State levies, including central excise, service tax, State VAT and entry tax, were folded into one tax on the supply of goods and services. To make it possible, the Union and the States had first amended the Constitution (the 101st Amendment, 2016) to give both of them the power to tax the same transaction.

The question this raises: how does the Constitution divide the power to tax, and how did GST change that bargain between the Centre and the States?

The Core Concept

Part 1: The language of taxation

ConceptMeaning
Direct taxImpact and incidence fall on the same person: income tax, corporation tax
Indirect taxPaid by one person (impact) but passed on to another (incidence): GST, customs duty
Impact vs incidenceImpact: who pays the tax to the Government. Incidence: who finally bears its burden
ProgressiveRate rises with income (income tax slabs)
ProportionalSame rate at all incomes
RegressiveTakes a larger share of a poor person’s income; indirect taxes on necessities tend to be regressive
Ad valorem vs specificA percentage of value vs a fixed amount per unit
Tax buoyancy% change in tax revenue ÷ % change in GDP, including the effect of policy changes
Tax elasticitySame ratio, excluding discretionary changes in rates and base
Laffer curveBeyond some point, higher tax rates can reduce revenue by discouraging activity or encouraging evasion (associated with Arthur Laffer)
Cess vs surchargeA cess is levied for a specific purpose; a surcharge is a tax on a tax. Both go only to the Union and are outside the divisible pool

Part 2: The constitutional division of taxing powers

The basic rule is in Article 265: no tax shall be levied or collected except by authority of law. Taxing powers come from the Seventh Schedule, and, after 2016, from Article 246A.

Union List (examples)State List (examples)
Entry 82: taxes on income other than agricultural incomeEntry 46: taxes on agricultural income
Entry 83: customs duties, including export dutiesEntry 49: taxes on lands and buildings
Entry 84: excise on petroleum crude, high-speed diesel, motor spirit, natural gas, aviation turbine fuel, and tobaccoEntry 51: excise on alcoholic liquor for human consumption, opium and narcotics
Entry 85: corporation taxEntry 54: sales tax on the five petroleum products and on alcoholic liquor for human consumption (except inter-State sales)

How the proceeds are shared

ArticleRule
268Stamp duties in the Union List: levied by the Union, collected and appropriated by States
269Taxes on inter-State sale and consignment of goods (other than GST): levied and collected by the Union, assigned to States
269AGST on inter-State supply (IGST): levied and collected by the Union, apportioned between the Union and States as Parliament provides on the GST Council’s recommendation
270All other Union taxes (including CGST) are shared with States through the divisible pool, as recommended by the Finance Commission; cesses and surcharges are excluded
271Surcharges on certain taxes, for the purposes of the Union only

The 80th Amendment (2000) made all central taxes shareable through Article 270, replacing the earlier system in which only income tax and some excise duties were shared. The 15th Finance Commission (chaired by N.K. Singh) set the States’ share at 41% of the divisible pool for 2021-26. The 16th Finance Commission, chaired by Arvind Panagariya, covers 2026-31.

Part 3: Direct taxes

  • Personal income tax: progressive slabs. The Income-tax Act, 1961 governed direct taxes for over six decades; the Income-tax Act, 2025, which replaces it with simplified language and a single “tax year” concept, takes effect from 1 April 2026.
  • Corporation tax: in September 2019, the Taxation Laws (Amendment) Ordinance offered domestic companies a base rate of 22% if they gave up exemptions, and 15% for new manufacturing companies.
  • Securities Transaction Tax (2004), capital gains tax, and the General Anti-Avoidance Rule (GAAR), in force from 1 April 2017.
  • Abolished taxes: estate duty (1985), gift tax (1998), wealth tax (from 2015-16, replaced by an additional surcharge on very high incomes).
  • Administration: the Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes and Customs (CBIC), both under the Central Boards of Revenue Act, 1963, in the Department of Revenue, Ministry of Finance.

Part 4: The Goods and Services Tax

The road to GST

YearStep
2004The Kelkar Task Force on implementing the FRBM Act recommends a comprehensive GST
2006Budget speech announces GST as a goal; Empowered Committee of State Finance Ministers begins work
2011115th Constitution Amendment Bill introduced; it lapsed
2014122nd Constitution Amendment Bill introduced
September 2016101st Constitutional Amendment Act receives assent; GST Council constituted
1 July 2017GST launched

What the 101st Amendment did

  • Article 246A: Parliament and State legislatures both get power to make laws on GST; Parliament alone for inter-State supply.
  • Article 269A: IGST on inter-State supply and imports.
  • Article 279A: the GST Council.
  • Article 366(12A): defines GST as a tax on supply of goods or services except alcoholic liquor for human consumption.
  • Amended Union List Entry 84 and State List Entries 54 and 62 to their present narrow form; omitted Entry 92C (service tax) and State List Entry 55 (advertisement tax).
  • Provided for compensation to States for revenue loss for five years.

How GST works

graph TD
    A["Supply of goods or services"] --> B{"Within the same State?"}
    B -->|"Yes: intra-State"| C["CGST to Centre + SGST or UTGST to State or UT"]
    B -->|"No: inter-State or import"| D["IGST collected by Centre"]
    D --> E["Apportioned to the consuming State"]
    C --> F["Input tax credit at each stage: tax only on value added"]
    D --> F
  • Destination-based consumption tax: revenue goes to the State where goods or services are consumed, not where they are produced.
  • Dual GST: the Centre and the State tax the same intra-State supply simultaneously (CGST + SGST).
  • Input tax credit: each business pays tax only on its value addition, ending the cascading “tax on tax” of the old system.
  • UTs with legislatures (Delhi, Puducherry, Jammu and Kashmir) are treated as States for GST; other UTs levy UTGST.

What GST subsumed and what it left out

Subsumed into GSTOutside GST
Central: excise duty, service tax, additional customs duties (CVD and SAD), central surcharges and cesses on supplyAlcoholic liquor for human consumption (excluded by the Constitution)
State: VAT, entry tax, luxury tax, entertainment tax (except by local bodies), purchase tax, taxes on advertisements, lotteries, betting and gamblingPetroleum crude, high-speed diesel, petrol, natural gas, aviation turbine fuel: within GST in law, but not taxed until the GST Council recommends a date
Electricity, stamp duty, property tax, basic customs duty

The GST Council (Article 279A)

FeatureRule
ChairpersonUnion Finance Minister
MembersUnion Minister of State for Revenue or Finance; the Finance or Taxation Minister (or another nominated minister) of each State
Vice-ChairpersonChosen by State members from among themselves
QuorumOne-half of total members
DecisionsBy a majority of not less than three-fourths of the weighted votes of members present and voting
WeightCentre: one-third of total votes cast; all States together: two-thirds
EffectThe Centre cannot pass a proposal without the support of a large majority of States, and the States cannot pass one without the Centre

In Union of India v. Mohit Minerals (May 2022), the Supreme Court held that the GST Council’s recommendations are not binding on Parliament and State legislatures; they have persuasive value, because Article 246A gives both a simultaneous power to legislate. The Court described the Council as a forum for cooperative federalism.

Compensation to States: the GST (Compensation to States) Act, 2017 guaranteed States compensation for any shortfall below an assumed 14% annual growth in revenue over the base year 2015-16, for five years (to 30 June 2022), financed by a compensation cess on luxury and sin goods. After the pandemic shortfall, the Centre borrowed and passed funds to States as back-to-back loans, and the cess was extended to repay them.

Rate structure: GST started with four main slabs (5%, 12%, 18%, 28%) plus the compensation cess on specified goods. In September 2025 the GST Council moved to two main slabs, 5% and 18%, with a 40% rate for a small list of luxury and sin goods, effective 22 September 2025. Special rates (for example on precious metals) and exemptions continue; check the current notifications for item-wise rates.

Memory Anchors

GST articles: “246A gives the Power, 269A sends Inter-state, 279A sets the Council, 366(12A) Defines.”

Council voting: “One-third Centre, two-thirds States, three-fourths to pass.”

Five fuels outside GST in practice: “CHAMP N”: Crude, High-speed diesel, ATF, Motor spirit (Petrol), Natural gas.

Direct vs indirect test: “Can the payer pass it on?” If yes, it is indirect.

For Prelims

Facts worth a mark
  • 101st Amendment, 2016; GST from 1 July 2017.
  • Article 246A (concurrent power), 269A (IGST), 279A (GST Council), 366(12A) (definition).
  • Alcohol for human consumption is outside GST by the Constitution; the five petroleum products are inside in law but await a Council recommendation.
  • GST Council: chaired by the Union Finance Minister; quorum one-half; decisions by three-fourths weighted majority; Centre one-third weight.
  • Mohit Minerals (2022): Council recommendations are not binding.
  • Compensation: 14% assumed growth over 2015-16, for five years.
  • Cesses and surcharges are not shared with States (Articles 270 and 271).
  • Taxes on agricultural income are a State subject (State List Entry 46).
  • Corporate tax: 22% base rate for companies forgoing exemptions, 15% for new manufacturing companies (2019).

For Mains

  • Dimensions: economic (one national market, removal of cascading, formalisation, logistics), federal (pooled sovereignty, loss of State fiscal autonomy, compensation), administrative (technology, compliance burden on small firms, litigation), equity (regressivity of consumption taxes, exemptions for essentials).
  • Keywords: pooled sovereignty, cooperative federalism, destination principle, input tax credit, cascading, formalisation, inverted duty structure, divisible pool, tax buoyancy.
  • Value-addition: the Kelkar Task Force (2004) first laid out a comprehensive GST. Mohit Minerals (2022) reaffirmed that GST rests on cooperative, not hierarchical, federalism. The rising share of cesses and surcharges in gross central tax revenue reduces the divisible pool shared with States, a recurring point in Finance Commission debates.

Common Traps

Trap #1: 'Petrol is outside GST by the Constitution'
No. Only alcoholic liquor for human consumption is excluded by definition. The five petroleum products are within GST’s constitutional scope, but GST will apply only from a date the GST Council recommends (Article 279A(5)).
Trap #2: 'GST Council decisions bind legislatures'
After Mohit Minerals (2022), recommendations are persuasive, not binding. Parliament and State legislatures legislate on GST under Article 246A.
Trap #3: 'Cess revenue is shared with States'
Cesses and surcharges stay entirely with the Union; they are outside the divisible pool under Articles 270 and 271.

In the News

  • May 2022: Union of India v. Mohit Minerals: GST Council recommendations held to be not binding.
  • June 2022: the five-year compensation period for States ended.
  • September 2025: the GST Council approved a two-slab structure (5% and 18%) with a 40% rate for select goods, effective 22 September 2025 → see Current Affairs.

Practice

Prelims

UPSC Practice · Prelims GS I Qtx-1

Consider the following statements about the GST Council:

  1. The Union Finance Minister is its Chairperson.
  2. The vote of the Central Government has a weightage of one-third of the total votes cast.
  3. According to the Supreme Court, its recommendations are binding on Parliament and the State legislatures.

Which of the statements given above is/are correct?

  1. A 1 and 2 only
  2. B 1 only
  3. C 2 and 3 only
  4. D 1, 2 and 3
Solution

Statements 1 and 2 follow Article 279A. Statement 3 is incorrect: in Union of India v. Mohit Minerals (2022), the Supreme Court held that the Council’s recommendations have persuasive value and are not binding, because Article 246A gives Parliament and State legislatures simultaneous power to legislate on GST.

Answer: A

UPSC-pattern practice question
UPSC Practice · Prelims GS I Qtx-2

How many of the following are not currently taxed under GST?

  1. Alcoholic liquor for human consumption
  2. Petrol (motor spirit)
  3. Electricity
  4. Tobacco
  1. A Only one
  2. B Only two
  3. C Only three
  4. D All four
Solution

Alcoholic liquor for human consumption is excluded by the Constitution (Article 366(12A)). Petrol is within GST in law but is not taxed under it until the GST Council recommends a date. Electricity is outside GST. Tobacco is under GST (with central excise also leviable under Union List Entry 84). So three are not taxed under GST.

Answer: C

UPSC-pattern practice question
UPSC Practice · Prelims GS I Qtx-3

Under Article 268 of the Constitution, which of the following is levied by the Union but collected and appropriated by the States?

  1. A Corporation tax
  2. B Taxes on agricultural income
  3. C Customs duties
  4. D Stamp duties on bills of exchange and cheques
Solution

Article 268 covers stamp duties mentioned in the Union List (such as on bills of exchange, cheques and promissory notes): the Union levies them, the States collect and keep them. Corporation tax and customs duties are levied and collected by the Union (Article 270 governs sharing of corporation tax; customs is shareable through the divisible pool). Taxes on agricultural income are a State subject.

Answer: D

UPSC-pattern practice question

Mains

UPSC Practice · Mains GS III 15 marks · 250 words Qtx-m1

GST has been described as an exercise in “pooled sovereignty”. Examine its achievements and the challenges it poses to fiscal federalism.

Solution

Introduction: The 101st Constitutional Amendment (2016) gave the Centre and the States concurrent power to tax the supply of goods and services (Article 246A) and created the GST Council (Article 279A). Both gave up independent taxing powers over a large base to share it jointly, which is why GST is called pooled sovereignty.

Body:

  • Achievements: a common national market; removal of check-posts and entry taxes; input tax credit ends cascading; e-way bills and e-invoicing improved compliance and formalisation; destination principle benefits consuming States; the Council has functioned largely by consensus.
  • Fiscal federalism concerns: States lost independent levers over most indirect taxes; dependence on compensation until June 2022 and the pandemic shortfall strained trust; the weighted voting gives the Centre an effective veto.
  • Design issues: petroleum products and electricity outside GST break the input-credit chain; inverted duty structures; frequent rate changes; compliance burden on small firms; slow dispute resolution.
  • Judicial view: Mohit Minerals (2022) held Council recommendations persuasive, not binding, affirming cooperative federalism.
  • Way forward: stable and simpler rates (the 2025 move to two main slabs is a step in this direction), gradual inclusion of fuels with State consent, a functioning GST Appellate Tribunal, and a permanent mechanism for resolving Centre–State disputes.

Conclusion: GST has unified India’s market and shown that Centre and States can share sovereignty. Its long-term success depends on preserving States’ trust through predictable revenues and genuine consensus in the Council.

UPSC-pattern practice question

Quick Revision

PointOne-liner
Article 265No tax without authority of law
Article 246AConcurrent power over GST; Parliament alone for inter-State
Article 269AIGST
Article 279AGST Council
Article 366(12A)GST definition; excludes alcohol for human consumption
GST Council votingThree-fourths weighted majority; Centre one-third
Mohit Minerals2022; recommendations not binding
Compensation14% growth over 2015-16; five years
Cess and surchargeNot in the divisible pool
15th FC41% to States, 2021-26

Key Takeaways

Key Takeaways
  1. The Seventh Schedule divides taxing powers; Articles 268–271 decide who keeps the money.
  2. GST created a concurrent taxing power (Article 246A) and a Council with weighted voting where neither the Centre nor the States can act alone.
  3. Alcohol is outside GST by definition; the five petroleum products are inside in law but await the Council’s recommendation.
  4. Cesses and surcharges stay with the Union, which is why their growth matters for fiscal federalism.
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