Why GST? Understanding the Purpose of GST and How It Functions

Goods and Services Tax commonly known as GST is one of the biggest tax reforms introduced in India on 1st July 2017. GST replaced multiple indirect taxes and created a unified tax system across the country. But why was GST needed and how does it actually work? Here is a simple explanation.

 

1. The Tax System Before GST

Before GST, India had many indirect taxes such as:

• VAT
• Service Tax
• Excise Duty
• Entry Tax
• Octroi
• Luxury Tax
• Entertainment Tax

Each state followed different rules and tax rates. This resulted in several challenges.

1.1 Major Problems Before GST

• Complex and confusing tax structure
• Cascading effect also called tax on tax
• Slow movement of goods due to checkpoints
• High overall tax burden
• Difficulty in interstate business
• Low transparency in tax reporting

Businesses faced heavy compliance and higher operational costs, which slowed down growth.

2. Why GST Was Introduced in India

GST was introduced to simplify India’s indirect tax system. The goal of GST is captured in the phrase: 

One Nation One Tax One Market

2.1 Main Objectives of GST

• Remove the cascading effect of taxes
• Increase transparency
• Reduce compliance burden for businesses
• Promote interstate trade
• Improve ease of doing business
• Create a digital tax framework
• Encourage business expansion and growth

By replacing multiple taxes with a single tax, GST made the system more efficient and business friendly.

3. How GST Works in Simple Terms

GST is based on a dual tax model where both Central and State governments share the tax.

3.1 Types of GST

• CGST Central Goods and Services Tax
• SGST State Goods and Services Tax
• IGST Integrated Goods and Services Tax for interstate sales

3.2 How GST Works Step by Step

1. The supplier sells goods or services and collects GST.
2. For sales within the same state, GST is divided into CGST and SGST.
3. For interstate sales IGST is charged.
4. The buyer receives Input Tax Credit for the GST paid on purchases.
5. Businesses pay GST only on the value they add.
6. All transactions filings and reports are handled online through the GST portal.

3.3 Example of GST Functioning

Imagine a manufacturer sells goods worth ₹1000 with 18 percent GST.

• He charges GST to the buyer.
• He deducts the GST he already paid on raw materials using Input Tax Credit.
• He pays GST only on the value he added to the product.

This system removes double taxation and reduces the final tax burden.

4. Benefits of GST

GST provides several important benefits for both businesses and the economy.

4.1 Key Benefits

• Removes cascading tax
• Fully online process for registration filing and refunds
• Faster movement of goods
• More transparency and accountability
• Reduced compliance burden
• Smooth interstate business operations
• Higher efficiency and lower costs

Conclusion

GST was introduced to simplify India’s complicated indirect tax structure and create a unified digital and transparent tax system. With Input Tax Credit and a single tax for goods and services GST has made compliance easier and improved ease of doing business across the country.