Economy
Public Finance, Budget and Taxation
Goods and Services Tax (GST) and GST 2.0
GST for CGPSC: 101st Amendment, CGST/SGST/IGST, taxes subsumed, petroleum outside, GST 2.0 slabs (5, 18, 40) from 22 Sept 2025, compensation cess, GSTAT.
Prerequisites
- Taxation: Direct and Indirect Taxes — what an indirect tax is and why incidence shifts.
- Centre-State Financial Relations — the GST Council (Art 279A), its voting rules and the Mohit Minerals judgment are covered there in detail; this page focuses on the tax itself.
The Hook: The Truck at the Chhattisgarh Border
Connect
Before July 2017, a truck carrying rice from Raipur to Nagpur stopped at the state check-post for entry-tax papers. The rice-mill owner paid central excise on inputs, state VAT on sales and central sales tax on the inter-state sale, and could not set much of one off against the other: tax was charged on tax.
GST replaced most of this with one tax on value addition, credited at every stage and collected where the goods are finally consumed. In September 2025, “GST 2.0” cut it to essentially two main rates. How does GST work, what is still outside it, and what changed in 2025-26?
Why it matters: Prelims tests the amendment, the articles, the taxes subsumed, the items outside GST and the current slabs. Mains asks about GST and cooperative federalism, the compensation issue and the impact on producing states like Chhattisgarh.
1. GST in Facts
| Item | Detail |
|---|---|
| Constitutional basis | 101st Constitutional Amendment Act, 2016 (introduced as the 122nd Amendment Bill) |
| Launch | 1 July 2017, at a special midnight session of Parliament |
| Type | Destination-based, multi-stage, value-added tax on supply of goods and services, with input tax credit (ITC) |
| Structure | Dual GST: Centre and states levy simultaneously |
| New Articles | 246A (simultaneous power; IGST by Parliament only), 269A (IGST levy and sharing), 279A (GST Council) |
| Definition | Art 366(12A): GST is any tax on supply of goods or services except on alcoholic liquor for human consumption |
| Petroleum | Art 279A(5): five petroleum products are under GST in law, but taxed only from a date the GST Council recommends — not yet recommended |
| IT backbone | GST Network (GSTN) |
| Appeals | GST Appellate Tribunal (GSTAT), launched on 24 September 2025, Principal Bench in New Delhi, with state benches |
The four components
| Levy | Collected by | Applies to |
|---|---|---|
| CGST | Centre | Intra-state supply (shared with states through the divisible pool) |
| SGST | State | Intra-state supply, alongside CGST |
| UTGST | Union Territory without legislature | In place of SGST |
| IGST | Centre (Art 269A) | Inter-state supply and imports; apportioned between the Centre and the destination state |
Taxes subsumed and taxes left out
| Subsumed — Central | Subsumed — State | Not subsumed |
|---|---|---|
| Central excise duty (except on petroleum and tobacco) | State VAT / sales tax | Basic customs duty |
| Service tax | Central sales tax (collected by states) | Alcohol for human consumption (state excise) |
| Additional duties of customs (CVD, SAD) | Entry tax and octroi | Five petroleum products (until the Council recommends) |
| Central surcharges and cesses on goods and services | Luxury tax, entertainment tax (except by local bodies), taxes on lotteries, betting and gambling, purchase tax | Stamp duty, electricity duty, property tax, motor vehicle tax |
Five petroleum products outside GST for now: petroleum crude, high-speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel (ATF).
Thresholds and compliance (main figures)
- Registration threshold: ₹40 lakh turnover for suppliers of goods and ₹20 lakh for services in most states (lower in special category states).
- Composition scheme for small businesses: turnover up to ₹1.5 crore, paying a small flat rate without ITC.
- E-way bill for movement of goods above ₹50,000 in value (from April 2018).
2. GST 2.0 (September 2025)
The 56th GST Council meeting on 3 September 2025 approved a simplified structure, effective from 22 September 2025.
| Before (2017–Sept 2025) | After GST 2.0 (from 22 Sept 2025) |
|---|---|
| Main slabs 5, 12, 18, 28% + compensation cess on luxury and sin goods | Two main slabs: 5% (merit) and 18% (standard) |
| 28% + cess on luxury and sin goods | 40% special rate for luxury and sin goods (for example, aerated and sugary drinks, pan masala, bigger cars, motorcycles above 350 cc, yachts, private aircraft) |
| Special rates | Nil, 0.25% (rough diamonds and precious stones) and 3% (gold, silver) retained |
Notable changes (2025):
- Individual life and health insurance premiums became exempt.
- Many daily-use goods moved to 5%, and some food items (such as UHT milk, paneer and Indian breads) to nil.
- Cement and most consumer durables (ACs, larger TVs) moved from 28% to 18%; small cars and motorcycles up to 350 cc to 18%.
- Coal: GST raised from 5% to 18%, but the flat ₹400 per tonne compensation cess was removed, lowering the overall tax on most grades and fixing an inverted duty structure. This matters directly to Chhattisgarh, a leading coal-producing state.
- The government estimated the annual revenue effect at about ₹48,000 crore (reported at the time of the decision).
The end of the compensation cess
| Date | Event |
|---|---|
| 2017 | GST (Compensation to States) Act, 2017: states guaranteed 14% annual growth in GST revenue (over the 2015-16 base) for five years, funded by a compensation cess on luxury and sin goods |
| 30 June 2022 | Compensation period ends |
| 2022–2025 | Cess continued to repay the back-to-back loans the Centre took in 2020-21 and 2021-22 to compensate states during the pandemic |
| 22 Sept 2025 | Cess removed on most goods under GST 2.0 (tobacco kept at 28% + cess until the loans were repaid) |
| 1 February 2026 | Compensation cess on tobacco ended; tobacco products moved to 40% GST (bidis to 18%), with a new central excise duty under the Central Excise (Amendment) Act, 2025, and the Health Security se National Security Cess Act, 2025 brought into force (aimed at pan masala) |
3. Analysis: GST and Federalism (Mains)
| Achievements | Concerns |
|---|---|
| One national market; check-posts gone, logistics faster | States surrendered most independent indirect-tax powers; fiscal autonomy reduced |
| Input tax credit ended the cascading “tax on tax” | Compensation ended (2022); revenue-weak states lost a cushion |
| Larger formal tax base; data trail through invoices and e-way bills | Destination principle shifts revenue to consuming states; producing states such as Chhattisgarh gain less |
| GST Council as a working model of cooperative federalism (Centre 1/3, states 2/3 votes) | Council works by consensus but states see the Centre’s one-third vote as an effective veto |
| GST 2.0 simplified rates and cut the burden on common goods | Petroleum, alcohol and electricity outside GST: cascading persists in energy-heavy sectors |
| GSTAT (2025) provides a dedicated appellate forum, years after launch | ITC fraud through fake invoices; compliance burden on small traders |
Chhattisgarh angle:
- Chhattisgarh is a producing state (coal, steel, cement, power). Under origin-based taxes (CST, excise) it collected tax on exports to other states; under destination-based GST, much of that goes to consuming states.
- The coal change of September 2025 (18% GST, no ₹400/tonne cess) lowered the tax on lower-grade coal, which dominates Chhattisgarh’s output and feeds power plants.
- SGST is now the state’s largest own tax. See Chhattisgarh Economy and Schemes and Minerals, Energy and Industry.
Memory Tricks
Five petroleum products: 'Cruel Diesel Pays Gas ATF'
Crude, Diesel (HSD), Petrol (motor spirit), natural Gas, ATF — under GST in law (Art 279A(5)), but still taxed through Union excise and state VAT until the Council fixes a date.
GST 2.0 = '5-18-40' on '3-9 / 22-9'
Decided on 3/9 (3 September 2025), applied on 22/9 (22 September 2025). Rates: 5 (merit), 18 (standard), 40 (sin and luxury). The old 12 and 28 disappeared.
Articles: 246A - 269A - 279A
All three new GST articles end in A: 246A power, 269A IGST, 279A Council. “Power, Inter-state, Council” = PIC.
Don’t Confuse
| This | vs | That |
|---|---|---|
| 101st Amendment Act (2016) | vs | 122nd Amendment Bill (its number as a Bill) |
| IGST — inter-state and imports, levied by Centre | vs | CGST + SGST — intra-state, levied together |
| Alcohol — outside GST by the Constitution (Art 366(12A)) | vs | Petroleum — inside GST in law, waiting for a Council date |
| Compensation period ended 30 June 2022 | vs | Compensation cess continued until 2025 (most goods) and 1 Feb 2026 (tobacco) to repay loans |
| GST Council (Art 279A, 2016) | vs | GSTAT (tribunal, launched 2025) and GSTN (IT network) |
Common Mistakes
MCQ traps
- “Petroleum products are outside GST by the Constitution.” False. That is alcohol. Petroleum is inside GST’s scope but not yet taxed under it.
- “GST 2.0 has only two rates.” Not quite. It has two main slabs (5% and 18%) plus a 40% special rate, and nil, 0.25% and 3% rates.
- “GST subsumed basic customs duty.” False. Only the additional customs duties (CVD, SAD) were subsumed; basic customs duty remains.
- “Stamp duty and electricity duty are part of GST.” False. Both remain state levies outside GST.
- “GST is origin-based.” False. It is destination-based, which is why consuming states gain.
- “The compensation cess ended in June 2022.” The compensation period ended then; the cess continued to repay loans.
Practice
All questions below are original practice questions written in CGPSC style. They are not previous-year questions.
Level 1: Foundation
- GST was introduced by the ______ Constitutional Amendment Act, 2016, and launched on ______.
- Under GST 2.0, the two main slabs are ______% and ______%.
- Which levy applies to an inter-state supply of goods from Raipur to Hyderabad?
Answers
- 101st; 1 July 2017.
- 5% and 18% (plus a 40% special rate).
- IGST.
Level 2: Prelims MCQs
Q1. Consider the following statements regarding GST:
- Alcoholic liquor for human consumption is excluded from GST by the Constitution itself.
- Petroleum crude and natural gas can be brought under GST from a date recommended by the GST Council.
- Basic customs duty was subsumed in GST.
Which of the statements given above is/are correct?
- (a) 1 and 2 only
- (b) 2 only
- (c) 1 and 3 only
- (d) 1, 2 and 3
Answer and explanation
(a) 1 and 2 only. Art 366(12A) excludes alcohol for human consumption. Art 279A(5) lets the Council recommend a date for the five petroleum products. Basic customs duty was not subsumed; only the additional duties (CVD and SAD) were.
Q2. Match List I (Article) with List II (Subject):
| List I | List II |
|---|---|
| A. Article 246A | 1. GST Council |
| B. Article 269A | 2. Definition of GST excluding alcohol |
| C. Article 279A | 3. Simultaneous power of Parliament and states to make GST laws |
| D. Article 366(12A) | 4. GST on inter-state supply (IGST) |
- (a) A-3, B-1, C-4, D-2
- (b) A-4, B-3, C-1, D-2
- (c) A-3, B-4, C-1, D-2
- (d) A-3, B-4, C-2, D-1
Answer and explanation
(c) A-3, B-4, C-1, D-2. 246A gives concurrent (simultaneous) taxing power, 269A covers IGST, 279A creates the Council, and 366(12A) defines GST while excluding alcohol for human consumption.
Q3. With effect from 22 September 2025, which of the following is the GST position on coal?
- (a) 5% GST plus ₹400 per tonne compensation cess
- (b) 18% GST with the compensation cess removed
- (c) 40% special rate
- (d) Exempt
Answer and explanation
(b). GST 2.0 raised coal from 5% to 18% but removed the flat ₹400 per tonne cess. Because the flat cess bore heavily on low-priced coal, the total tax on most grades fell, and an inverted duty structure was corrected.
Q4. The GST compensation cess on tobacco products finally ended on:
- (a) 30 June 2022
- (b) 22 September 2025
- (c) 1 February 2026
- (d) 31 March 2027
Answer and explanation
(c) 1 February 2026, when tobacco moved to the 40% GST rate (bidis to 18%) with a new central excise duty. 30 June 2022 is when the compensation period ended; 22 September 2025 is when the cess ended on most other goods.
Q5. Which one of the following is not subsumed in GST?
- (a) Entry tax
- (b) Service tax
- (c) Stamp duty
- (d) Central sales tax
Answer and explanation
(c) Stamp duty. It remains a state levy on instruments and property transactions. Entry tax, service tax and central sales tax were all subsumed.
Level 3: Mains Answer Writing
Q1. (60 words) What is meant by GST being a “destination-based” tax? How does it affect Chhattisgarh?
Model answer outline
- Meaning: tax revenue accrues to the state where goods or services are consumed, not where they are produced; IGST is apportioned to the destination state.
- Chhattisgarh: a producer of coal, steel, cement and power, it lost the origin-based revenue it earned under CST, and depends more on mineral royalty and central devolution.
- Conclusion: producing states argue for compensation mechanisms in Finance Commission criteria.
Q2. (150–200 words) “GST 2.0 completes the reform that GST 2017 began.” Critically examine.
Model answer outline
- Intro: GST (101st Amendment, 1 July 2017) unified indirect taxes; GST 2.0 (56th Council meeting, effective 22 September 2025) rationalised rates.
- What 2.0 fixed: four main slabs to two (5, 18) plus 40% for sin/luxury; lower burden on daily goods and insurance; inverted duty structures corrected (coal); compensation cess wound up (most goods 2025, tobacco 1 Feb 2026); GSTAT launched (September 2025).
- What remains: petroleum, alcohol and electricity outside GST; states’ fiscal autonomy and the end of compensation; destination principle hurting producing states; ITC fraud and MSME compliance.
- Chhattisgarh angle: coal rate change; SGST as main own tax; producing-state concerns.
- Conclusion: 2.0 is a major simplification but “one nation, one tax” is complete only when energy comes under GST with a fair revenue-sharing deal for states.
Quick Revision Table
| Fact | Detail |
|---|---|
| Amendment | 101st (2016); Bill no. 122 |
| Launch | 1 July 2017 |
| Articles | 246A, 269A, 279A; 366(12A) |
| Outside GST | Alcohol (Constitution); 5 petroleum products (till Council date); stamp duty, electricity duty, basic customs |
| Components | CGST, SGST, UTGST, IGST |
| GST 2.0 | 56th Council meeting 3 Sept 2025; effective 22 Sept 2025; slabs 5 / 18 / 40 (+ nil, 0.25, 3) |
| Insurance | Individual life and health insurance exempt (from 22 Sept 2025) |
| Coal | 5% + ₹400/t cess → 18%, no cess |
| Compensation | 14% growth for 5 years to 30 June 2022; cess ended on tobacco 1 Feb 2026 |
| GSTAT | Launched 24 Sept 2025; Principal Bench New Delhi |
| Thresholds | ₹40 lakh goods / ₹20 lakh services; composition up to ₹1.5 crore |
Key Takeaways
Key Takeaways
- GST is a destination-based, dual value-added tax under the 101st Amendment (2016), launched 1 July 2017.
- Alcohol is outside GST by the Constitution; the five petroleum products await a GST Council date.
- GST 2.0 (effective 22 September 2025): slabs 5% and 18%, special 40%; 12% and 28% abolished.
- The compensation period ended in 2022; the cess ended on most goods in 2025 and on tobacco on 1 February 2026.
- For Chhattisgarh, the destination principle and the coal rate change are the key Mains angles.
What’s Next
- Public Finance — Quick Revision — the whole chapter on one page
- Centre-State Financial Relations — GST Council voting and Mohit Minerals (2022)
- External Sector — customs duty and trade policy
- Chhattisgarh Economy and Schemes — the state’s own taxes and budget
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