Did GST subsume customs duty on imports?

No. Basic customs duty remains. Only the additional and special additional customs duties that matched excise and CST were subsumed into IGST.

Why was compensation needed if GST is a good tax?

Because rates were cut, IT systems lagged, and producing States lost origin-based VAT. The 14 per cent floor bought the transition.

Enumerate the indirect taxes which have been subsumed in the goods and services

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GST from 1 July 2017 subsumed central excise, service tax, CVD, SAD, VAT, CST, entry tax, luxury tax and related cesses. Petroleum products, alcohol for human consumption and electricity stay outside. Compensation Act 2017 gave States a 14 per cent floor over the 2015–16 base for five years. Early collections were uneven; later compliance rails raised monthly GST. Revenue will thicken if slabs shrink and petroleum enters GST in a phased way.

Model answer

Introduction

The Goods and Services Tax (GST) began on 1 July 2017 under the 101st Constitutional Amendment. It replaced a stack of Union and State indirect taxes with a destination-based levy: Central GST, State GST and Integrated GST. The design aimed to end cascading and to create one national market. Revenue, however, is a separate test from legal subsumption.

Body

Indirect taxes subsumed

Central taxes that went into GST include Central Excise Duty on most goods, additional excise duties (including medicinal and toilet preparations and specified textile duties), Service Tax, Additional Duty of Customs (countervailing duty), Special Additional Duty of Customs, and Union surcharges and cesses linked to supply of goods and services.
State taxes subsumed include Value Added Tax / sales tax, Central Sales Tax, purchase tax, luxury tax, entry tax in all forms, entertainment and amusement tax except where a local body still levies it, taxes on advertisements, taxes on lotteries, betting and gambling, and related State surcharges and cesses.
Not subsumed: petroleum crude, high-speed diesel, petrol, natural gas and aviation turbine fuel (until the Council notifies them), alcoholic liquor for human consumption, electricity duty, stamp duty, and most local property taxes.
Tobacco still carries a residual Union excise in addition to GST. Compensation cess on specified luxury and sin goods funds State compensation, not the old VAT stack.

Revenue implications since July 2017

Cascading fell because of end-to-end input tax credit, and e-way bills plus later e-invoicing raised the audit trail, which is a revenue gain through formalisation.
The GST (Compensation to States) Act, 2017 promised States a 14 per cent annual increase over the 2015–16 protected base for five years, paid from compensation cess. That showed the Union expected a transition shortfall, especially for manufacturing States.
Early years saw uneven monthly collections, inverted duty structures, delayed refunds to exporters, and GST Network teething problems. Several States needed compensation; the GST Council repeatedly tweaked rates, which cut some buoyancy even as the base widened.
After the first shock, collections recovered and later crossed the one-lakh-crore-a-month mark on a sustained basis, which supports the claim that GST is revenue-productive once compliance rails work. Tax-to-GDP for GST still sits below the original ambition of a simple two-rate tax with petroleum inside the base.
Fifteenth Finance Commission treated GST as the new State tax reality and flagged compensation design after June 2022. Way forward: fewer slabs, a working GST Appellate Tribunal, including petroleum in a phased way, and faster refunds so credit does not become a hidden tax.

Flow diagram

flowchart TD
  O[Old Union and State indirect taxes] --> G[GST from July 2017]
  G --> C[CGST SGST IGST]
  G --> X[Petroleum alcohol still out]
  C --> R[Credit trail and e-way bill]
  X --> S[Compensation cess to States]
  R --> B[Buoyancy after teething]
  S --> B

Conclusion

GST subsumed the main Union and State indirect taxes on goods and services, leaving petroleum, alcohol and a few local levies outside. Revenue first dipped and needed a 14 per cent compensation floor; later, formalisation and e-way bills lifted collections. The next revenue gain is fewer rates and a wider base, not another cess.

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Next question on this syllabus topic (2019 · Q12). View answer →
Did GST subsume customs duty on imports?

No. Basic customs duty remains. Only the additional and special additional customs duties that matched excise and CST were subsumed into IGST.
Why was compensation needed if GST is a good tax?

Because rates were cut, IT systems lagged, and producing States lost origin-based VAT. The 14 per cent floor bought the transition.

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2020 · Q12 · GS III · 15 marks
Explain the rationale behind the Goods and Services Tax (Compensation to States) Act of 2017. How has COVID-19 impacted the GST compensation fund and created new federal tensions?
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Enumerate the indirect taxes which have been subsumed in the goods and services tax (GST) in India. Also, comment on the revenue implications of the GST introduced in India since July 2017.