COM6CJ305 • Income Tax and GST

Module 3 Notes

Module III: Introduction to Goods and Services Tax (GST)

Constitutional and Economic Architecture of Indian GST

Indirect Tax Revolution

The introduction of the Goods and Services Tax (GST) on July 1, 2017 represents the most monumental indirect fiscal reform in India's post-independence economic history. Enacted via the Constitution (101st Amendment) Act, 2016, GST dismantled the fractured, cascading multi-tax regime—characterized by Central Excise, Service Tax, State VAT, Entry Tax, and CST—and substituted it with an integrated, dual-structured, destination-based consumption tax governed by the historic principle of "One Nation, One Tax, One Market." This module provides an exhaustive study of the constitutional foundation, statutory definitions, registration protocols, taxable supply mechanics, reverse charge rules, classification, and payment frameworks under the Central Goods and Services Tax (CGST) and Integrated Goods and Services Tax (IGST) Acts, 2017.

1. Evolution, Constitutional Foundation, and Principles of GST

Prior to GST, India's indirect taxation framework suffered from severe constitutional and structural deficiencies. The Constitution strictly bifurcated taxing powers: the Union Government possessed exclusive powers to tax manufacturing of goods (Central Excise) and provision of services (Service Tax), while State Governments possessed exclusive powers to tax the sale of goods (State VAT / Sales Tax). This prevented the Centre from taxing post-manufacturing value addition at the retail stage, and prevented States from taxing services. Furthermore, interstate sales were burdened by non-creditable Central Sales Tax (CST), resulting in a crippling cascading effect of taxation (tax on tax) and logistical barriers at state borders.

To overcome this constitutional impasse, the 101st Constitutional Amendment Act, 2016 introduced revolutionary provisions:

Article 246A (Special Provision with Respect to Goods and Services Tax): Conferred concurrent, simultaneous sovereign powers on both Parliament and State Legislatures to make laws with respect to goods and services tax. Parliament was granted exclusive power to make laws with respect to interstate supplies.
Article 269A (Levy and Collection of GST on Interstate Trade): Mandated that GST on supplies in the course of interstate trade or commerce (IGST) shall be levied and collected by the Government of India and apportioned between the Union and the States in the manner recommended by the GST Council.
Article 279A (Establishment of the GST Council): Created a constitutional federal body comprising the Union Finance Minister (Chairperson), Union Minister of State for Finance, and Finance/Taxation Ministers of all State Governments to decide tax rates, exemptions, and legislative rules.

The Dual GST Model: CGST, SGST, UTGST, and IGST

Structural Model

India adopted a Dual GST Model keeping in view the federal character of the nation:

Intra-State Supply (Within the same State): Both the Centre and the State simultaneously levy GST on a single taxable transaction. The Central component is termed Central GST (CGST) governed by the CGST Act, 2017; the State component is termed State GST (SGST) governed by respective State SGST Acts; or Union Territory GST (UTGST) in Union Territories without legislatures (e.g., Ladakh, Andaman & Nicobar, Chandigarh). (e.g., an 18% tax rate is levied as 9% CGST + 9% SGST).
Inter-State Supply (Between two different States / UTs or Imports): Governed by the Integrated GST (IGST) Act, 2017. Levied and collected exclusively by the Central Government at the full rate (e.g., 18% IGST) and systematically shared between the Centre and the destination consumption State.
Destination-Based Consumption Principle: GST is levied at the point of final consumption rather than the point of origin/manufacture. Revenue accrues to the State where goods or services are ultimately consumed.

Taxes Subsumed vs. Taxes Kept Outside GST

Central Taxes Subsumed into GST	State Taxes Subsumed into GST	Taxes Kept OUTSIDE GST Scope
• Central Excise Duty • Duties of Excise (Medicinal & Toilet Preps) • Additional Duties of Excise (Goods of Special Importance) • Additional Customs Duty (CVD) • Special Additional Duty of Customs (SAD) • Service Tax • Central Cesses and Surcharges	• State VAT / Sales Tax • Central Sales Tax (CST) • Entry Tax / Octroi / Purchase Tax • Luxury Tax • Taxes on Lottery, Betting & Gambling • Entertainment Tax (except local bodies) • State Cesses and Surcharges	• Alcoholic Liquor for Human Consumption (constitutionally excluded; taxed by States). • Five Petroleum Products (Crude oil, Diesel, Petrol, ATF, Natural gas - temporarily outside). • Electricity Duty. • Stamp Duty and Real Estate Registration. • Basic Customs Duty (BCD).

2. Key Statutory Definitions Under the CGST Act, 2017

The operational administration of GST depends upon precise interpretation of statutory terms defined under Section 2 of the CGST Act:

Goods & Services Definitions

Goods (Section 2(52)): Means every kind of movable property other than money and securities, but includes 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.

Services (Section 2(102)): Means anything other than goods, money, and securities, but includes activities relating to the use of money or its conversion by cash or any other mode, from one form, currency, or denomination to another for which a separate consideration is charged.

Turnover & Consideration

Aggregate Turnover (Section 2(6)): Aggregate value of all taxable supplies (excluding inward supplies on RCM), exempt supplies, exports of goods/services, and interstate supplies of persons having the same PAN, computed on an all-India basis, excluding CGST, SGST, UTGST, IGST, and cess.

Consideration (Section 2(31)): 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, including monetary value of any act or forbearance, excluding government subsidies.

3. The Taxable Event: Concept of "Supply" (Section 7)

Under GST, the traditional taxable events of "manufacture," "sale of goods," and "provision of services" have been completely replaced by a single, comprehensive taxable event: SUPPLY. If a transaction does not constitute supply within the meaning of Section 7, GST cannot be levied.

Scope of Supply under Section 7 of the CGST Act

Taxable Scope

Section 7(1)(a) - General Scope: All forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease, or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.
Section 7(1)(aa): The activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration (overcoming the doctrine of mutuality for clubs/associations).
Section 7(1)(b) - Import of Services: Importation of services for a consideration, whether or not in the course or furtherance of business.
Section 7(1)(c) - Supplies Without Consideration (Schedule I): Four specified activities treated as taxable supplies even when made without consideration:
1. Permanent transfer or disposal of business assets where Input Tax Credit (ITC) has been availed.
2. Supply of goods or services between related persons or between distinct persons (different registrations under same PAN) in the course of business.
3. Supply of goods by a principal to his agent, or by an agent to his principal.
4. Import of services by a person from a related person or from any of his other establishments outside India, in the course of business.
Schedule II - Classification Matters: Classifies ambiguous activities as either supply of goods or supply of services (e.g., transfer of title in goods = Goods; transfer of right in goods without transfer of title = Service; construction of complex = Service; restaurant service = Service).
Schedule III - Negative List (Non-Supplies): Activities treated neither as supply of goods nor as supply of services:
• Services by an employee to the employer in the course of employment.
• Services by any Court or Tribunal established under law.
• Functions performed by MPs, MLAs, and Constitutional post holders.
• Services of funeral, burial, crematorium, or mortuary including transportation of the deceased.
• Sale of land and, subject to Schedule II, sale of building (where entire consideration received after completion certificate).
• Actionable claims other than lottery, betting, gambling, and specified actionable claims (online money gaming).

4. Composite Supply vs. Mixed Supply (Section 8)

Commercial contracts frequently combine multiple goods and services into a single commercial package. Section 8 resolves the tax rate applicable to bundled supplies:

Dimension	Composite Supply (Section 2(30) & 8(a))	Mixed Supply (Section 2(74) & 8(b))
Statutory Definition	A supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.	Two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.
Key Test	Are the elements naturally bundled in commercial practice? Can they be naturally separated?	Are the items capable of being sold completely independently at separate prices, but bundled for a single price?
Tax Treatment & Applicable Rate	Treated as a supply of such principal supply. Taxed at the rate applicable to the principal supply.	Treated as a supply of that particular supply which attracts the highest rate of tax among all items bundled.
Practical Business Example	Supply of laptop with charger, operating system, warranty, and carry case. Supply of passenger airline ticket with in-flight meal. (Principal supply = Airline transport).	A gift hamper containing canned fruits (12%), chocolates (18%), dry fruits (12%), and aerated drinks (28%) sold for a single price of INR 2,000. Taxed at 28% on the entire hamper.

5. Registration Under GST: Thresholds, Compulsory Categories, and Procedure

Registration under GST is the foundational step in tax compliance. It confers legal recognition as a supplier of goods/services, authorizes the collection of tax from customers, and enables the pass-through of Input Tax Credit (ITC).

Turnover Thresholds (Section 22)

Suppliers of Goods Only (Normal States): Aggregate turnover in a FY exceeds INR 40 Lakh.
Suppliers of Services / Mixed (Normal States): Aggregate turnover exceeds INR 20 Lakh.
Special Category States (Goods & Services): Threshold is INR 10 Lakh in Manipur, Mizoram, Nagaland, and Tripura; INR 20 Lakh in Uttarakhand, Meghalaya, Sikkim, Arunachal Pradesh, Puducherry, and Telangana.

Compulsory Registration (Section 24)

Mandatory registration irrespective of turnover threshold:

Persons making any inter-state taxable supply.
Casual Taxable Persons (CTP) making taxable supplies.
Persons required to pay tax under Reverse Charge (RCM).
Non-Resident Taxable Persons (NRTP).
E-commerce operators required to collect TCS under Sec 52.
Input Service Distributors (ISD).
Persons supplying through e-commerce operators.

Structure of the 15-Digit Goods and Services Tax Identification Number (GSTIN)

Identifier Structure

Format: [State Code: 2 Digits] [PAN: 10 Digits] [Entity Code: 1 Digit] [Default 'Z': 1 Digit] [Checksum: 1 Digit]

Example: 32 AAAAA 0000 A 1 Z 5
• Digits 1-2: State Code under Indian Census (e.g., 32 for Kerala, 27 for Maharashtra, 29 for Karnataka, 33 for Tamil Nadu).
• Digits 3-12: Permanent Account Number (PAN) of the business entity.
• Digit 13: Entity code representing number of registrations within the same State under the same PAN (1 to 9, then A to Z).
• Digit 14: Default alphabetical character 'Z' reserved for future regulatory use.
• Digit 15: Checksum character (alphanumeric hash) for automated mathematical error detection.

6. Levy, Collection, and Reverse Charge Mechanism (RCM) (Section 9)

Under Section 9(1), CGST is levied on all intra-state supplies of goods or services on the value determined under Section 15, at rates not exceeding 20%, collected in the prescribed manner. IGST is levied under Section 5 of the IGST Act at rates not exceeding 40%.

Reverse Charge Mechanism (RCM - Section 9(3) & 9(4))

Under normal charge, the supplier of goods or services collects tax from the recipient and remits it to the government. Under the Reverse Charge Mechanism (RCM), statutory liability to pay tax is reversed: the recipient of goods or services is legally liable to pay GST directly to the government.

Notified Supply Category (Sec 9(3))	Supplier of Service / Goods	Recipient Liable to Pay GST under RCM
Goods Transport Agency (GTA) Services	GTA who has not opted to pay CGST @ 6% or 12% under forward charge.	Factory, registered society, co-operative society, registered body corporate, partnership firm, or registered taxable person.
Legal Services by Advocate / Firm	Individual advocate, senior advocate, or firm of advocates.	Any business entity located in the taxable territory having turnover > threshold.
Services by Director to Company	Director of a company or body corporate.	The company or body corporate located in the taxable territory.
Sponsorship Services	Any person.	Any body corporate or partnership firm located in the taxable territory.
Copyright Services (Original Work)	Author, music composer, photographer, or artist.	Publisher, music company, or producer.
Security Services (Personnel)	Any person other than a body corporate.	A registered person located in the taxable territory.

Critical Rules for RCM Compliance

1. Tax under RCM must be paid strictly in cash through the Electronic Cash Ledger; Input Tax Credit (ITC) CANNOT be utilized to discharge RCM liability. 2. The recipient, upon paying tax in cash, is immediately eligible to avail Input Tax Credit (ITC) of such tax paid, subject to Section 16 eligibility. 3. The recipient must issue a Payment Voucher to the supplier at the time of making payment, and a self-invoice if the supplier is unregistered.

7. Composition Levy Scheme (Section 10)

The Composition Levy Scheme is a simplified compliance mechanism designed to reduce the administrative burden on small traders, manufacturers, and restaurants. Instead of maintaining exhaustive invoice-level accounts and paying tax at normal rates with ITC, composition dealers pay a small, flat percentage of their turnover directly.

Eligibility Thresholds (Section 10(1) & (2))

Turnover Limit: Aggregate turnover in the preceding financial year did not exceed INR 1.5 Crore (INR 75 Lakh in Special Category States).
Composition Scheme for Services (Sec 10(2A)): Service providers having preceding FY turnover up to INR 50 Lakh can opt to pay a flat tax of 6% (3% CGST + 3% SGST).
Marginal Services by Traders/Manufacturers: Can supply services up to 10% of turnover or INR 500,000, whichever is higher.

Tax Rates and Strict Restrictions

Manufacturers: 1% of turnover in State (0.5% CGST + 0.5% SGST).
Restaurant Services: 5% of turnover (2.5% CGST + 2.5% SGST).
Traders: 1% of turnover of taxable supplies in State.
Strict Restrictions:
• Cannot claim any Input Tax Credit (ITC).
• Cannot issue a Tax Invoice; must issue a Bill of Supply.
• Cannot collect tax from customers.
• Cannot make inter-state outward supplies.
• Cannot supply goods through e-commerce operators.

8. Time of Supply and Place of Supply

Time of Supply: The Point in Time When Tax Liability Arises

Sections 12 & 13

Time of Supply of Goods (Section 12): Liability to pay GST on goods arises at the earliest of:
(a) The date of issue of invoice by the supplier or the last date on which he is required to issue invoice under Section 31(1) (date of removal of goods); OR
(b) The date on which the supplier receives payment (Note: Notification No. 66/2017-CT exempts advances received for supply of goods from GST at the time of advance; tax payable on invoice date).
Time of Supply of Services (Section 13): Liability arises at:
(a) If invoice issued within 30 days of service provision: Earlier of date of invoice OR date of payment.
(b) If invoice NOT issued within 30 days: Earlier of date of completion of service OR date of payment.
(c) Where (a) or (b) do not apply: Date on which recipient shows receipt of services in books.

Place of Supply (IGST Act, Sections 10 to 13)

The Place of Supply (POS) determines whether a transaction is an Intra-State supply (Location of Supplier and POS in same State = CGST + SGST) or an Inter-State supply (Location of Supplier and POS in different States = IGST):

Goods Involving Movement (Sec 10(1)(a)): Location of the goods at the time at which the movement of goods terminates for delivery to the recipient.
Goods Without Movement (Sec 10(1)(c)): Location of such goods at the time of delivery to the recipient.
Services on Immovable Property (Sec 12(3)): Location at which the immovable property, boat, or vessel is located or intended to be located.
General B2B Services (Sec 12(2)(a)): Location of the registered person receiving the service.
General B2C Services (Sec 12(2)(b)): Location of the recipient where address on record exists; otherwise location of supplier.

9. Payment Architecture: Electronic Ledgers and Utilization Hierarchy

Every registered taxpayer on the GST common portal (www.gst.gov.in) is allocated three distinct electronic registers under Section 49:

Electronic Cash Ledger

Contains details of all cash deposits made via net banking, NEFT/RTGS, or authorized bank counters (Challan PMT-06). Used to pay tax, interest, penalty, fees, or RCM liabilities.

Electronic Credit Ledger

Contains all eligible Input Tax Credit (ITC) self-assessed and claimed through monthly returns (GSTR-3B). Can be used ONLY for payment of output tax liabilities (never for interest or RCM).

Electronic Liability Ledger

Maintains a complete record of all total tax liabilities, interest, late fees, and penalties due from the taxpayer under the Act, debited automatically upon filing returns.

10. Classification: HSN and SAC Coding Architecture

To ensure uniform application of GST rates and avoid disputes over product descriptions, GST adopts international classification standards:

Harmonized System of Nomenclature (HSN): An 8-digit international coding system developed by the World Customs Organization (WCO) for classifying goods.
• Businesses with aggregate turnover up to INR 5 Crore: Must mention 4-digit HSN codes on B2B tax invoices.
• Businesses with aggregate turnover exceeding INR 5 Crore: Must mention 6-digit HSN codes on all B2B tax invoices.
• Export and import transactions: Mandatory 8-digit HSN code reporting.
Services Accounting Code (SAC): A 6-digit classification system developed specifically by the Central Board of Indirect Taxes and Customs (CBIC) for uniform classification and taxation of services. All service codes begin with the uniform prefix "99" (e.g., 9983 for Information Technology consulting, 9965 for Goods Transport Agency services).

11. GST Tariff Structure and Compensation Cess

Tariff Slab	Representative Goods Covered	Representative Services Covered
0% (NIL / Exempt)	Unbranded, fresh agricultural produce (fruits, vegetables, milk, eggs, unbranded curd), fresh meat, natural honey, salt, printed books, newspapers, handloom fabrics.	Basic healthcare services by clinical establishments, primary/higher school education, postal services by government, metro/railway passenger transport in non-AC.
5% (Merit Slab)	Household necessities: sugar, tea, coffee, edible oil, packaged food grains, coal, domestic LPG, life-saving medicines, footprint footwear ≤ INR 1,000, cotton fabrics.	Goods transport agency (GTA without ITC), non-AC restaurants, railways AC travel, economy air travel, cab aggregator rides without fuel ITC.
12% (Standard Slab 1)	Processed food products, fruit juices, dairy products (butter, cheese, ghee), sewing machines, umbrella, fertilizers, mobile phones, apparels > INR 1,000.	Business class air travel, state lottery, accommodation in hotels with room tariff INR 1,001 to INR 7,500 per day, construction of affordable residential units.
18% (Standard Slab 2 - Major)	Industrial inputs, capital goods, computers, monitors, electronic appliances, hair oil, toothpaste, soap, ice cream, steel, aluminum, capital machinery.	IT services, telecom, financial and banking services, professional and legal services, AC restaurant dining, hotel rooms > INR 7,500, intellectual property licensing.
28% (Demerit / Luxury Slab)	Luxury cars, sports utility vehicles (SUVs), racing motorcycles > 350cc, aerated carbonated beverages, air conditioners, dishwashers, tobacco products, pan masala.	Admission to race clubs, casinos, online money gaming, action-packed entertainment events, amusement theme parks.

The GST Compensation Cess Architecture

Compensation Act, 2017

Under the Goods and Services Tax (Compensation to States) Act, 2017, a specialized Compensation Cess is levied over and above the 28% GST rate on specified luxury and sin/demerit goods (such as pan masala, tobacco cigarettes, coal, caffeinated beverages, and motor vehicles). Proceeds are deposited into a non-lapsable GST Compensation Fund utilized to compensate manufacturing States for revenue shortfalls arising from transition to the destination-based GST model and servicing pandemic-era debt facilities.

12. TDS, TCS, and GST Refund Mechanisms

TDS & TCS Under GST (Sections 51 & 52)

Tax Deduction at Source (TDS - Sec 51): Departments of Central/State Governments, local authorities, and governmental agencies must deduct TDS @ 2% (1% CGST + 1% SGST or 2% IGST) from payments made to suppliers where the total contract value under a single contract exceeds INR 250,000 (excluding GST). TDS must be remitted by the 10th of the following month via Form GSTR-7.

Tax Collection at Source (TCS - Sec 52): Every Electronic Commerce Operator (ECO) (e.g., Amazon, Flipkart) must collect TCS @ 1% (0.5% CGST + 0.5% SGST or 1% IGST) of the net value of taxable supplies made through its platform by third-party suppliers, remitted monthly via Form GSTR-8.

GST Refunds Architecture (Section 54)

Under Section 54, a registered taxpayer can claim refund of unutilized Input Tax Credit in two specific statutory scenarios:

1. Zero-Rated Supplies: Exports of goods/services or supplies to Special Economic Zone (SEZ) developer/units made without payment of tax under Letter of Undertaking (LUT) / Bond.
2. Inverted Duty Structure: Where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than fully nil-rated or exempt supplies).
Doctrine of Unjust Enrichment: The claimant must prove that the incidence of tax has not been passed on to the buyer, or amount is credited to Consumer Welfare Fund.

13. Cancellation and Revocation of GST Registration (Sections 29 & 30)

Under Section 29, GST registration may be cancelled either by the Proper Officer suo-motu or on an application filed by the registered person:

Grounds for Cancellation: (1) Business discontinued, transferred, or merged; (2) Change in business constitution; (3) Taxable person no longer liable to be registered under Section 22/24; (4) Registered person contravening provisions of Act/rules; (5) Composition dealer failing to furnish returns for 3 consecutive tax periods; (6) Normal taxpayer failing to furnish returns for continuous prescribed periods; (7) Registration obtained by means of fraud, wilful misstatement, or suppression of facts.
Revocation of Cancellation (Section 30): Any registered person whose registration is cancelled by the Proper Officer on his own motion may apply for revocation in Form GST REG-21 within 30 days (extendable up to 90 additional days by Joint/Additional Commissioner) from the date of service of the cancellation order, after remedying defaults and paying all outstanding taxes, interest, and late fees.

Synthesis: The Indispensable Role of GST in Indian Economic Modernization

The Goods and Services Tax has unified India's massive subcontinental economy into a seamless national common market. By replacing complex multi-layered entry taxes with digital e-way bills, standardizing tax rates across federal states, establishing a constitutional consensus in the GST Council, and digitizing end-to-end tax compliance, GST provides the macroeconomic foundation for sustained commercial expansion and formalization of the Indian economy.