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Direct and Indirect Taxation · Concept of Indirect Taxes

Evolution of GST and Taxation Models in India

Updated 10 October 2026 · Fact-checked

GST is a destination-based, multi-stage tax on supply of goods and services, with credit for tax paid on inputs. India moved to it from excise, service tax and VAT to remove cascading. It follows a dual model: Centre levies CGST and IGST, States levy SGST, guided by the GST Council.

Understand Evolution of GST and Taxation Models

Before GST, India taxed the same transaction many times. The Centre levied excise duty on manufacture and service tax on services. States levied VAT on sale of goods, plus entry tax and octroi. Each tax was charged separately, and credit was often not allowed across them.

This caused cascading of taxes, also called tax on tax. When tax paid at one stage becomes part of the cost on which the next tax is charged, the final price is inflated. VAT reduced this within a State by allowing credit of input tax, but it did not cover services, and credit did not flow across the Centre-State divide or across States (Central Sales Tax was not creditable).

GST fixes this by taxing every supply at each stage, allowing credit for tax paid on inputs, so that tax effectively falls only on the value added. The final burden is on the consumer. It is destination based: tax goes to the State where goods or services are consumed, not where they are produced.

India adopted a dual GST model because it is a federation. Both the Centre and the States can tax the same supply. On an intra-State supply, CGST goes to the Centre and SGST (or UTGST in Union Territories without legislature) goes to the State. On an inter-State supply and imports, the Centre levies IGST, which is then shared with the destination State. The Constitution (One Hundred and First Amendment) Act, 2016 made this possible and created the GST Council under Article 279A.

The GST Council is chaired by the Union Finance Minister. Its members are the Union Minister of State in charge of Revenue or Finance and the Minister in charge of Finance or Taxation of each State. It recommends rates, exemptions, thresholds, model laws and special provisions. A decision needs not less than three-fourths of the weighted votes of members present and voting. The Centre's vote is weighted at one-third and all States' votes together at two-thirds of the total votes cast. A quorum of one-half of the total number of members is also required.

Key rules to remember

Intra-State supply
CGST + SGST/UTGST
Both levied on the same value. Rates are normally equal, each being half of the total GST rate.
Inter-State supply and imports
IGST
Levied and collected by the Centre. Revenue is apportioned to the destination State.
Value-added principle
Tax payable = Output tax − Input tax credit
Tax is effectively on value added at each stage.
GST Council voting
Decision needs not less than 75% of the weighted votes of members present and voting
Centre's vote is weighted at one-third and all States' votes together at two-thirds of the total votes cast.
GST Council quorum
One-half of total number of members
Chairperson is the Union Finance Minister.
Constitutional basis
101st Amendment Act, 2016; Article 279A
Article 279A provides for the GST Council. Article 246A gives concurrent power to tax goods and services.

How to solve Evolution of GST and Taxation Models questions

Most questions on this topic are theory: explain, distinguish, state advantages, or show how cascading is removed. Use this method.

  1. 1Identify the type of question: evolution, model, Council, advantages, or a numerical on cascading.
  2. 2For evolution, write in time order: earlier indirect taxes (excise, service tax, VAT), their problems, then the move to GST and the 101st Amendment.
  3. 3For models, state the dual structure and name which tax applies to which supply: intra-State, inter-State, import.
  4. 4For the Council, give composition, chair, voting rule and key functions in separate points.
  5. 5For advantages or disadvantages, group them: for government, trade and industry, consumers. Give a reason with each point.
  6. 6For a numerical on cascading, compute tax stage by stage, first without credit and then with credit, and compare.
  7. 7Close with a one-line conclusion linking back to the question, such as removal of cascading or one national market.

Quickest way: Four-line answer frame

When to use it: Use for 4-6 mark theory parts or when you are short of time.

  1. Line 1: define GST as a destination-based, multi-stage tax with input credit.
  2. Line 2: state the problem it solved (multiple taxes, cascading, no credit across goods and services).
  3. Line 3: state the structure (CGST, SGST/UTGST, IGST) and the GST Council.
  4. Line 4: give three to four advantages and one or two limitations.
  5. For cascading numericals, always do Output tax − Input tax at each stage and show that total tax equals tax on final price.

Common mistakes in Evolution of GST and Taxation Models

  • Saying GST is an origin-based tax

    Old taxes like excise were charged at the place of manufacture, so students carry that idea forward.

    Fix: Write that GST is destination based. Revenue belongs to the State of consumption, which is why IGST is passed to that State.

  • Applying CGST and SGST to an inter-State supply

    Students memorise the dual model but not which tax goes with which supply.

    Fix: Intra-State means CGST plus SGST/UTGST. Inter-State and imports mean IGST only.

  • Stating the Council's voting weights wrongly

    The one-third and two-thirds split is easily reversed.

    Fix: A decision needs not less than three-fourths of the weighted votes of members present and voting. The Centre's vote is weighted at one-third and all States' votes together at two-thirds of the total votes cast.

  • Claiming VAT had no credit mechanism

    Students over-simplify the case for GST.

    Fix: Say VAT allowed input credit within a State but did not cover services, and credit did not flow across the Centre-State divide or for Central Sales Tax.

  • Listing only advantages

    Students treat GST as purely beneficial.

    Fix: Add limitations such as compliance burden, multiple rates, technology dependence, and the revenue effect on States, with brief reasons.

  • Taxing the full selling price at each stage in cascading numericals

    Students forget to deduct input tax credit.

    Fix: At each stage compute tax on the selling price, then deduct tax already paid on inputs. Pay only the difference.

Worked examples

Example 1

A manufacturer buys raw material for ₹10,000, adds value of ₹5,000 and sells to a wholesaler at a base price of ₹15,000. The wholesaler adds ₹3,000 and the retailer adds ₹2,000 of value. Tax rate is 10% at every stage. Show the tax borne with and without input tax credit, assuming the raw material seller charged tax on ₹10,000. Without credit, tax is charged on the price including earlier tax (cascading).

Show the solution
  1. Without credit, each seller's tax base includes the tax charged at earlier stages, so tax is charged on tax.
  2. Raw material seller: base ₹10,000. Tax 10% = ₹1,000. Price charged = ₹11,000.
  3. Manufacturer: base = ₹11,000 + ₹5,000 = ₹16,000. Tax 10% = ₹1,600. Price charged = ₹17,600.
  4. Wholesaler: base = ₹17,600 + ₹3,000 = ₹20,600. Tax 10% = ₹2,060. Price charged = ₹22,660.
  5. Retailer: base = ₹22,660 + ₹2,000 = ₹24,660. Tax 10% = ₹2,466. Final price = ₹27,126.
  6. Total tax without credit = 1,000 + 1,600 + 2,060 + 2,466 = ₹7,126. Value before any tax = ₹20,000, and 10% of it is ₹2,000, so the tax burden is far above 10% of value because tax is charged on tax. Check: 20,000 + 7,126 = ₹27,126.
  7. With credit, tax is charged only on the price excluding tax, and each person pays output tax minus input tax.
  8. Raw material seller: output tax ₹1,000 on ₹10,000, no input tax assumed, pays ₹1,000.
  9. Manufacturer: sells at ₹15,000, output tax ₹1,500. Credit ₹1,000. Pays ₹500.
  10. Wholesaler: sells at ₹18,000, output tax ₹1,800. Credit ₹1,500. Pays ₹300.
  11. Retailer: sells at ₹20,000, output tax ₹2,000. Credit ₹1,800. Pays ₹200.
  12. Total tax with credit = 1,000 + 500 + 300 + 200 = ₹2,000, which equals 10% of the final value ₹20,000. The consumer pays ₹22,000.

Answer: Without credit the chain bears ₹7,126 of tax on a pre-tax value of ₹20,000, and the consumer pays ₹27,126. With credit total tax is ₹2,000, equal to 10% of ₹20,000. Credit removes the cascading effect.

Example 2

Explain the dual GST model and state which tax applies when a dealer in Pune sells goods to a buyer in Pune and when the same dealer sells to a buyer in Chennai.

Show the solution
  1. Define the dual model: the Centre and the States both levy GST on the same supply, under the powers of Article 246A, each with its own law and share.
  2. Sale to the Pune buyer: both supplier and place of supply are in Maharashtra, so it is an intra-State supply.
  3. On an intra-State supply, CGST is levied by the Centre and SGST by Maharashtra. The rates are normally equal, each half of the total rate.
  4. Sale to the Chennai buyer: the supply moves from Maharashtra to Tamil Nadu, so it is an inter-State supply.
  5. On an inter-State supply, the Centre levies IGST, which is the sum of the CGST and SGST rates.
  6. IGST revenue is then apportioned to Tamil Nadu as the destination State, consistent with the destination principle.

Answer: Pune sale attracts CGST plus SGST of Maharashtra. Chennai sale attracts IGST, with the State share going to Tamil Nadu, the State of consumption.

Exam tips

  • Learn the Council's composition, chair, quorum and voting weights as a short list. These are frequent MCQ and short-note targets.
  • In MCQs, check which tax a supply attracts: intra-State means CGST plus SGST, inter-State and import means IGST.
  • For cascading numericals, set out a stage-wise table of selling price, output tax, input credit and net tax. This earns step marks.
  • For advantages questions, give four to six points with a reason each rather than one-word headings.
  • When asked about evolution, mention the 101st Amendment and the Council together, as they are the legal backbone of GST.

Practice questions from Concept of Indirect Taxes

Evolution of GST and Taxation Models in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Evolution of GST and Taxation Models: frequently asked questions

What is the cascading effect of taxes?

It is tax charged on tax. When tax paid on inputs is included in the cost on which the next tax is charged, the final price rises. GST avoids this by allowing credit for input tax at every stage.

What is the difference between CGST, SGST and IGST?

CGST is levied by the Centre and SGST by the State on intra-State supplies. IGST is levied by the Centre on inter-State supplies and imports. IGST revenue is shared with the destination State.

Who is in the GST Council?

The Union Finance Minister is the Chairperson. Members are the Union Minister of State in charge of Revenue or Finance and the Ministers in charge of Finance or Taxation of the States. It is set up under Article 279A.

What are the main disadvantages of GST?

Common points are a heavy compliance burden for small businesses, multiple rate slabs, dependence on technology and the internet, and revenue concerns for some States. Present them briefly alongside the advantages.