The introduction of the Goods and Services Tax (GST) on July 1, 2017, marked a significant reform in India’s indirect tax structure. India adopted a unique Dual GST Model that reflects its federal structure, balancing taxation powers between the Central and State governments. This model subsumed multiple indirect taxes, simplified the tax structure, and aimed to create a unified national market. This article delves into the structure, functioning, and implications of the Dual GST Model in India, covering its key features, benefits, challenges, and impact.

India’s taxation system before GST was complex, comprising a multitude of indirect taxes levied by both the Centre and the States. These included central excise duty, service tax, value-added tax (VAT), entry tax, and others. The fragmented tax system resulted in inefficiencies, cascading taxes, and barriers to trade.

The idea of GST was first proposed in 2000 by the Vajpayee government, and a committee was set up to design the framework. Over the next decade, successive governments worked on the GST proposal. The 101st Constitutional Amendment Act, 2016, paved the way for the implementation of GST, establishing the legal framework for a dual model.

Different Models of GST

There are different models of GST practiced around the world. The popular models of GST and Indirect taxes followed are given below: Generally, there are 3 models under GST:

• Central Model of GST
• State Model of GST
• Dual GST: Dual Model of GST is further divided into 2 types viz: Concurrent Dual GST and Non-Concurrent Dual GST

Central Model of GST:

Under this model of GST, at the two levels of government that is at the Centre and at the State, the tax levy would be in the form of single national GST with appropriate revenue sharing agreements between Central government and the State governments. In this model of GST, most of the revenue would be collected by the Centre and little percentage would be shared with State governments. This model of GST is called as National GST model and is currently followed in Australia and China.

State Model of GST

States would have the power to levy the GST and Central Government would withdraw from levying GST and the revenue loss suffered by the Central Government would be set-off by suitable compensating reduction in the fiscal transfers to the States. This would significantly enhance the revenue capacity of the States and reduce their dependence on the Centre. This model of GST is followed in countries like the United States of America.

Dual GST Model:

There are two types of dual GST models as provided below:

• Concurrent Dual GST Model: There would be Central GST levied by Central Government and State GST levied by State government. In this model both goods and services would be con-currently taxed. Indian GST model is concurrent GST Model as both Centre and the State governments levying at the same time. Some of the countries following this model other than India are Brazil and Canada.
• Non-Concurrent Dual GST Model: Under this model, GST on goods would be levied by States only and on services by the Centre only. States already have the power to levy the tax on the sale and purchase of goods (and on immovable property), and the Centre for taxation of services. No special effort would be needed for levying a unified Centre tax on interstate services.

Structure of Dual GST Model in India:

Division of GST Components:

• Central Goods and Services Tax Act, 2017 (CGST): The Central Government levies CGST on the supply of goods and services within a state. Revenue collected under CGST goes to the Central Government. However, the input tax credits on CGST would be given to the respective States of the destination of goods/services/ both in the supply chain. CGST input tax credit can be utilized only for the Output taxes of CGST and IGST. CGST has subsumed various previous regime Indirect taxes like Service tax, Central Excise Duty, Additional Duty of Excise, Excise duty levied under the Medicinal and Toiletries Preparations Act 1955.
• State Goods and Services Tax Act, 2017 (SGST): The respective State Government levies SGST as per the State Goods and Services Act, 2017 on intra-state supplies of taxable goods or services or both. Revenue collected under SGST is retained by the State Government. SGST has subsumed various previous regime taxes like State value added tax (VAT), Entertainment taxes, Luxury taxes, taxes on lottery, betting and gambling, Entry taxes and Octrois imposed by the State governments such other state duties and surcharges. Any input tax credit of State taxes can be utilized against SGST output tax and IGST output tax only.
• Integrated Goods and Services Tax Act, 2017 (IGST): For inter-state transactions and imports, IGST is levied by the Central Government. The revenue from IGST is distributed between the Centre and the destination state, adhering to the destination-based taxation principle. The IGST rate would broadly be equal to CGST rate plus SGST rate. The revenue of inter-state sales will not accrue to the exporting state and the exporting state will be required to transfer to the Centre the credit of SGST/UTGST used in payment of IGST. IGST has subsumed various taxes like Central Sales Tax, the Countervailing duty of customs (CVD), Special Additional Duty of customs (SAD) levied during the previous tax regime. The input tax credit of IGST can be utilized firstly for payment of IGST output tax, CGST output tax and then for SGST output tax.
• Union Territory Goods and Services Tax (UTGST): UTGST levied and collected by Union Territories without State Legislatures, on intra-state supplies of taxable goods or services or both. The purpose of levying UTGST for Indian union territories is to apply tax collection on intrastate transactions on every union territory where there is the absence of legislature and have similar properties of SGST (i.e., union territories of Andaman and Nicobar Islands, Lakshadweep islands, Dadra and Nagar Haveli, Daman and Diu, Chandigarh). The input tax credit of UTGST would be utilized for the output tax liability of UTGST and for IGST.

Illustrations:

Illustration 1:

‘A’ supplies goods to ‘B’ for ₹ 25,000. B supplies these goods to the final consumer C for ₹ 28,000 with value addition of 20%. Rate of tax is 6% each CGST/ STGST. Tax position will be as follows:

Particulars	A to B	B to C	Addition
Price charged for supply of goods and services	₹ 25000	₹ 28000	₹ 3000
CGST @ 6%	₹ 1500	₹ 1680	₹ 180
SGST @ 6%	₹ 1500	₹ 1680	₹ 180
Total = CGST + SGST	₹ 3000	₹ 3360	₹ 360
Total Price Charged	₹ 28000	₹ 31360	₹ 3360

Explanations:

• ‘A’ will pay ₹ 3000 (₹ 1500 each CGST & STGST) without ITC as the goods originated from him in the supply chain.
• ‘B’s gross liability is ₹ 3,360 (₹ 1680 each CGST & STGST). B is entitled to avail ITC for tax of ₹ 3,000 paid to A (₹ 1500 each CGST & STGST). B is liable to pays only ₹ 360 (₹ 180 each CGST & STGST)
• Government gets total GST of ₹ 3360  (₹ 1500 X 2 from ‘A’ and 180 X 2 from ‘B’)
• But for the ITC, the liability would be ₹ 3,360 due to cascading effect of tax.
• ‘C’, the final consumer being last in the supply chain will have to bear the full GST of ₹ 3360 without any ITC.

Illustration 2:

‘A’ supplies goods to ‘B’ belonging to another state for ₹ 25,000. B supplies these goods to the final consumer C in home state of B for ₹ 28,000 with value addition of 20%. Rate of tax is 6% each CGST/ STGST. Tax position will be as follows:

Particulars	A to B	B to C	Addition
Price charged for supply of goods and services	₹ 25000	₹ 28000	₹ 3000
CGST @ 6%	–	₹ 1680	₹ 180
SGST @ 6%	–	₹ 1680	₹ 180
IGST = (@ 6% + @ 6%) = @ 12%	₹ 3000	–	–
Total = CGST + SGST	₹ 3000	₹ 3360	₹ 360
Total Price Charged	₹ 28000	₹ 31360	₹ 3360

Explanations:

‘A’ and ‘B’ belong to different states, then A will charge IGST of Rs 3000 (12%) and B will get ITC of RS 3000 against IGST and pay the balance just as before.

• ‘A’ will pay ₹ 3000 (IGST) without ITC as the goods originated from him in the supply chain.
• ‘B’s gross liability is ₹ 3,360 (₹ 1680 each CGST & STGST). B is entitled to avail ITC for tax of ₹ 3,000 paid to A (IGST). B is liable to pays only ₹ 360 (₹ 180 each CGST & STGST)
• Government gets total GST of ₹ 3360  (₹ 3000 from ‘A’ and 180 X 2 from ‘B’)
• But for the ITC, the liability would be ₹ 3,360 due to cascading effect of tax.
• ‘C’, the final consumer being last in the supply chain will have to bear the full GST of ₹ 3360 without any ITC.

Features of Dual GST Model:

Following are the features of dual GST Model:

• Comprehensive Tax Base: The GST subsumes a variety of indirect taxes, including central taxes (Excise duty, service tax, customs duties, countervailing duty and special additional duty, etc.), state taxes (VAT, sales tax, entry tax, entertainment tax, luxury tax, etc.).
• Dual Levy on Intra-State Transactions: For supplies within a state, both CGST and SGST are levied simultaneously on the same transaction value, ensuring that both the Centre and the States share revenue from the same tax base.
• IGST for Inter-State Supplies: IGST is levied on inter-state supplies, with the revenue apportioned between the Centre and the destination state. This ensures tax neutrality and facilitates seamless movement of goods and services across state borders.
• Input Tax Credit (ITC): The ITC mechanism allows businesses to claim credit for taxes paid on inputs against their output tax liabilities. Cross-utilization of ITC is permitted as follows:
  • CGST credit: Used for CGST and IGST payments.
  • SGST credit: Used for SGST and IGST payments.
  • IGST credit: Used for CGST, SGST, or IGST payments.
• Uniform Tax Rates and Classification: The GST Council, comprising representatives from the Centre and States, determines tax rates, exemptions, and rules, ensuring uniformity across India. Goods and services are categorized into tax slabs (e.g., 0%, 5%, 12%, 18%, 28%).
• Destination-Based Taxation: GST follows the destination principle, meaning tax revenue accrues to the state where goods or services are consumed, rather than the state of origin.
• Role of the GST Council: The GST Council ensures uniformity and fairness in tax rates and policies by collaboratively deciding on key aspects like exemptions and procedures.

Advantages of the Dual GST Model

The implementation of GST brought several benefits to India’s economy:

• Elimination of Cascading Taxes: Before GST, taxes were levied on top of other taxes, leading to cascading effects. GST’s comprehensive tax structure and ITC mechanism eliminate this issue, reducing the overall tax burden.
• Simplification of the Tax System: The Dual GST Model replaced a plethora of indirect taxes with a unified structure, making compliance easier for businesses and reducing administrative costs.
• Creation of a Unified Market: By subsuming state-level taxes and introducing IGST for inter-state transactions, GST facilitates the seamless movement of goods and services across India, fostering economic integration.
• Boost to Economic Efficiency: With a uniform tax base and lower compliance costs, GST reduces inefficiencies in the supply chain, promotes competition, and enhances productivity.
• Enhanced Revenue Collection: The GST regime’s transparency, along with improved compliance through electronic filing and tracking, boosts revenue collection for both the Centre and States.
• Encouragement to Formalization: GST’s requirement for registration and documentation incentivizes businesses to move from the informal to the formal economy, broadening the tax base.

Challenges in Implementing the Dual GST Model

Despite its advantages, the GST system faced several challenges:

• Technical Issues: The GST Network (GSTN), the IT backbone of GST, experienced glitches during the initial implementation phase, leading to delays in filing returns and claiming ITC.
• Compliance Burden: While GST simplified the tax structure, the frequency of returns, reconciliations, and audits initially posed a significant compliance burden, especially for small businesses.
• Revenue Shortfalls for States: States expressed concerns over revenue losses due to the transition to GST. The Centre introduced a compensation mechanism to address these shortfalls for the first five years.
• Complexity of Tax Rates: Multiple tax slabs (0%, 5%, 12%, 18%, 28%) and frequent changes in rates created confusion and compliance difficulties for businesses.
• Sector-Specific Challenges: Certain sectors, such as real estate, petroleum, and alcohol, remained outside the GST ambit, leading to continued complexity and cascading effects in these areas.
• Interstate Coordination: While IGST ensures smooth taxation of inter-state transactions, reconciliation between states and the Centre’s share of revenue posed challenges.

Impact of the Dual GST Model on the Indian Economy

• The GST regime has streamlined supply chains and reduced logistical costs, contributing to GDP growth. By creating a unified market, GST has improved ease of doing business.
• With mechanisms like e-invoicing, reverse charge, and real-time monitoring, GST has reduced tax evasion and improved compliance.
• GST has enhanced the competitiveness of Indian goods and services by eliminating embedded taxes and providing input tax refunds, boosting exports.
• By bringing more businesses into the tax net, GST has accelerated the formalization of the Indian economy, increasing transparency and accountability.
• While initial revenue collection faced hurdles, GST collections have stabilized over time, with monthly revenues crossing significant benchmarks.

Way Forward for GST in India

To further strengthen the GST system, the following measures can be considered:

• Streamlining return filing processes and reducing the frequency of filings can ease the compliance burden on businesses, particularly MSMEs.
• Reducing the number of tax slabs and bringing exempted sectors like petroleum and real estate under GST can simplify the structure and broaden the tax base.
• Enhancing the robustness and user-friendliness of the GST Network will improve the efficiency of the system and reduce technical glitches.
• Training and educating taxpayers, especially small businesses, about GST rules and compliance requirements can ensure smoother implementation.
• Bringing more sectors under the GST ambit can reduce cascading effects and increase revenue collection.

Conclusion

The Dual GST Model adopted by India is a distinctive and innovative approach to indirect taxation, wherein both the Central Government and State Governments levy and collect taxes on the same transaction. This model aims to balance the autonomy of states with the need for uniformity across the nation. The Dual GST model maintains the federal structure of India by allowing both the central and state governments to exercise their taxation powers simultaneously. This ensures that states retain their authority to collect taxes while promoting national uniformity. The model is designed to prevent the cascading effect of taxes, where taxes are levied on top of other taxes, thus making goods and services more expensive. By allowing the credit of both CGST (Central GST) and SGST (State GST), the system ensures that tax is only paid on the value added at each stage of production. The Dual GST model enables a fair and efficient distribution of revenue between the central and state governments. IGST (Integrated GST) ensures the smooth transfer of tax revenue in cases of inter-state transactions, promoting easier and faster interstate trade. By minimizing barriers to trade, the Dual GST system facilitates interstate commerce, creating a unified national market. This promotes the ease of doing business and reduces inter-state taxation disparities that previously existed under the older tax regime. The Dual GST model, though complex at first glance, streamlines the tax process by eliminating multiple layers of indirect taxation and consolidating them under a unified tax system. This helps reduce the administrative burden on businesses and government agencies.

The Dual GST model has faced challenges, particularly in terms of coordination between central and state authorities, as well as in the timely implementation of tax collection and distribution. The dual nature also adds a layer of complexity for businesses, especially for those dealing with both intra-state and inter-state transactions.

In conclusion, the Dual GST Model has proven to be an effective mechanism for aligning the tax system with the federal structure of India, while also fostering a more transparent, efficient, and equitable tax regime. Despite its initial challenges, the model has created a framework that is more conducive to interstate trade, business compliance, and revenue sharing. For it to fully realize its potential, ongoing improvements in coordination, technology, and tax administration will be necessary. Ultimately, the Dual GST model has been a critical factor in reshaping India’s indirect tax landscape, bringing it closer to a unified and modern tax system.