Tax Laws and Practice · Basics of Goods and Services Tax

Introduction to GST and Indirect Tax Background

Updated 11 October 2026 · Fact-checked

GST is a destination-based tax on supply of goods and services, levied at each stage of the supply chain with credit for tax paid on inputs. It replaced many central and state indirect taxes to remove cascading and create one national market. In exams, explain the old structure, the problem, then GST's features and benefits.

Understand Introduction to GST and Indirect Tax Background

A direct tax is paid by the person on whom it is levied, and the burden cannot be shifted. Income tax is the usual example. An indirect tax is levied on a transaction, such as a sale or a service. The seller collects it from the buyer and pays it to the Government. The person who pays the tax to the Government is not the person who finally bears it. The final consumer bears it.

Before GST, India had many separate indirect taxes. The Centre levied central excise duty on manufacture, service tax on services and customs duty on imports. States levied VAT or sales tax on sale of goods, entry tax, octroi, luxury tax, entertainment tax and others. Each levy had its own law, rates, registration and returns.

This created three main problems. First, cascading of taxes: tax was charged on a price that already included earlier taxes, so you paid tax on tax. Second, credit was broken. Credit of excise did not set off against VAT, and credit of service tax did not set off against VAT on goods. Third, compliance was heavy, and states behaved like separate markets with check posts and varying rates.

GST was brought in to fix this. It is a comprehensive tax on supply of goods and services, charged at every stage, with credit for tax paid on inputs. Tax is effectively borne by the final consumer. It is destination-based, meaning tax accrues to the place where goods or services are consumed, not where they are produced.

India follows a dual GST model. The Centre and the States both levy GST on the same supply. On an intra-State supply, CGST and SGST (or UTGST) apply. On an inter-State supply, IGST applies. Customs duty on imports continues to exist alongside GST. Know this background well, because the later topics on levy, supply, credit and returns all build on it.

Key rules to remember

Basic GST chain rule: Net GST payable = Output tax − Input tax credit; Each supplier pays only on the value it adds. The credit mechanism is what removes cascading.
Direct vs indirect tax test: Direct: impact and incidence on the same person. Indirect: impact on the supplier, incidence on the consumer.; Use this one line to answer any 'difference' question.
Dual GST structure: Intra-State supply: CGST + SGST/UTGST. Inter-State supply: IGST.; Both Centre and States tax the same supply under the dual model.
Destination principle: Tax accrues to the State or place of consumption; This is the opposite of an origin-based tax, where the producing State gets the revenue.

How to solve Introduction to GST and Indirect Tax Background questions

For any question on introduction, background or features of GST, use a fixed answer structure so you cover provision, analysis and conclusion.

1Read the question verb: explain, distinguish, discuss, or state features/benefits. It decides your format.
2Open with a one-line definition of the key term, such as indirect tax or GST.
3Describe the pre-GST position: the Centre's taxes, the States' taxes and the problems of cascading, broken credit and multiple compliance.
4Link each problem to how GST solves it, for example credit chain against cascading and one common market against State barriers.
5List features or benefits as short numbered points, with a brief reason for each.
6If the question is a 'difference', use clear points: basis, who bears the burden, shiftability, examples.
7Close with a conclusion in one or two lines stating what GST achieves for the economy, traders and consumers.

Quickest way: Problem-Solution-Feature triple

When to use it: Use when you have little time and the question asks why GST was introduced or what its benefits are.

Write the problem in three words: cascading, fragmented, complex.
Write the fix in three words: credit chain, one market, one law.
Add the dual model line: Centre and States both levy; CGST, SGST, IGST.
Add the destination principle in one sentence.
Finish with a one-line conclusion.

Common mistakes in Introduction to GST and Indirect Tax Background

Saying GST is paid by the supplier as the final burden.
The supplier deposits the tax, so students assume the supplier bears it.
Fix: State that the supplier collects and pays it, but the final consumer bears it. That is the nature of an indirect tax.
Calling GST an origin-based tax.
Students confuse the place of production with the place of tax revenue.
Fix: Write that GST is destination-based: the tax goes to the place of consumption.
Saying GST replaced all indirect taxes, including customs duty.
The phrase 'One Nation One Tax' is taken literally.
Fix: Say GST subsumed many central and State levies, but customs duty on imports continues, and some goods are outside GST.
Explaining cascading without an example.
Students memorise the word but not the mechanism.
Fix: Add a short numeric illustration: tax charged on a value that already includes earlier tax, then show how input credit removes this.
Confusing the dual model with two separate taxes on two supplies.
CGST and SGST sound like separate levies on separate transactions.
Fix: Write that both are levied on the same intra-State supply, while inter-State supply attracts IGST.

Worked examples

Example 1

Distinguish between direct tax and indirect tax. Give examples.

Show the solution

Provision: a direct tax is levied on income or wealth of a person and is paid by that person. An indirect tax is levied on goods or services and is collected from the buyer by the seller.
Shifting of burden: in a direct tax, impact and incidence fall on the same person, so the burden cannot be shifted. In an indirect tax, the supplier is liable to deposit it but passes the burden to the consumer.
Nature: direct tax depends on the taxpayer's ability to pay, so it is generally progressive. Indirect tax is levied on consumption irrespective of the buyer's income.
Examples: income tax is direct. GST and customs duty are indirect.

Answer: A direct tax is borne by the person on whom it is levied and cannot be shifted. An indirect tax is collected by the supplier but borne by the final consumer. Income tax is direct; GST and customs duty are indirect.

Example 2

Why was GST introduced in India? State its main benefits.

Show the solution

Pre-GST position: the Centre levied excise duty, service tax and customs duty. States levied VAT and other taxes such as entry tax and octroi. Laws, rates and returns differed.
Problem 1: cascading. Tax was charged on tax because credit was not available across levies.
Problem 2: broken credit chain between goods taxes and service taxes, and between Centre and States.
Problem 3: heavy compliance and State-wise barriers which fragmented the national market.
GST fixes this by taxing every supply with input tax credit, under a largely uniform law across the country.
Benefits: removal of cascading, a wider tax base, simpler compliance, a common national market, and reduced cost of doing business through credit of taxes paid on inputs.
Conclusion: GST is destination-based and consumption-oriented, so the burden finally rests on the consumer.

Answer: GST was introduced to replace multiple Central and State indirect taxes, remove cascading, integrate the credit chain and create a common national market. Its benefits are lower tax-on-tax, simpler compliance and a broader tax base.

Exam tips

Answer 'why GST' questions in a fixed order: old structure, problems, GST solution, benefits, conclusion.
Always add a one-line example of cascading. It shows understanding and earns marks.
Mention the dual model and the three components CGST, SGST/UTGST and IGST even if the question only asks about features.
Use short numbered points. Examiners in descriptive papers reward clear structure over long paragraphs.
Keep the introduction brief and save your time for later GST topics such as supply, credit and returns.

Practice questions from Basics of Goods and Services Tax

Introduction to GST and Indirect Tax Background in other exams

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

CA IntermediateIndirect Taxes Before GST and Need for GST

Introduction to GST and Indirect Tax Background: frequently asked questions

What is the difference between direct tax and indirect tax?

A direct tax is paid by the person on whom it is levied, and the burden stays with that person. An indirect tax is collected by the supplier from the buyer and paid to the Government, so the final consumer bears it. Income tax is direct, while GST is indirect.

Why was GST introduced in India?

India had many separate Central and State indirect taxes with cascading, broken credit and heavy compliance. GST was brought in to tax supplies in one chain with input tax credit. It also aimed to create a common national market.

What are the main features of GST?

GST is a tax on supply of goods and services, charged at every stage with credit for input tax. It is destination-based and follows a dual model where the Centre and States both levy it. IGST applies to inter-State supplies.

Did GST replace customs duty?

No. Customs duty on imports continues alongside GST. GST replaced many Central and State levies such as excise duty on most goods, service tax and VAT.