Is GST a Consumption Based Tax in India?


A straightforward answer to this question would be Yes, GST is a consumption based tax. Let’s understand the meaning of this

A consumption tax is a tax on goods and services based on the consumption of these goods and services. The structure of GST has been designed in such a way that money spent on consumption will be taxed. GST is not based on origin or manufacture of the goods and services. It is based on destination and final consumption of the goods and services. Under this new tax structure, tax revenues belong to the state where the goods are finally consumed.

As per the consumption principle in GST, the state or region where the goods are consumed will be entitled to receive the GST tax revenue. Under GST regime, the taxes are categorized as CGST (Central GST), SGST (SGST) and IGST (Integrated GST). If there is an intrastate transaction of goods and services a portion of revenue from GST tax will go to the respective state government. This is called as SGST. Since the consumption is within the state, the revenue will go to the state.

In the case of interstate transactions of goods and services, the GST tax will be collected by the Central government. The Central Government will then distribute the revenue to the state government depending on the final consumption of the goods and services. These adjustments will be done at the Central and State level and the taxpayers need not take the burden of these adjustments. This type of tax is called as Integrated GST. If the goods and services are supplied interstate then there will be no importance given to the origin or destination based, from the taxpayer’s point of view.

Another advantage of the consumption based tax is that the lesser developed states which have increased consumption and lesser production will earn more revenue. This will, in turn, flourish the economy of the states.

On the same lines, export goods will not be charged any duty whereas import of goods will be charged import duty as the consumption of these goods will be in India.

In the short run, due to difficulty in implementing the systems and other teething issues, it may feel that GST may not be beneficial. Also, one of the causes, why the implementation of GST is being hindered, is the restrictions from the various large producing companies and states to avoid the outflow of revenue out of the state. However, in the long run, GST may turn out to be a blessing to less developed states as well as to the country which will enable to achieve higher GDP and growth rate.