Objectives of GST: Why Was GST Introduced in India?

Vishal, a Delhi freelancer, used to have difficulties paying multiple taxes, including excise, service tax, and VAT, which raised his expenses and paperwork. However, all of these were combined into a single tax after the introduction of the GST on July 1, 2017.

Vishal now files returns online conveniently, pays a single tax, and claims input credits on tools and software. GST allowed him to operate smoothly across states, eliminated tax-on-tax, and reduced compliance time by more than 50%. His freelance business expanded more quickly since there were fewer limitations and expenditures.

Why Was GST Introduced in India?

Creating a Unified National Market

Before GST, India’s indirect tax system created barriers between states due to different tax rates and laws. Each state had its own Value Added Tax (VAT) and other taxes, and inter-state trade was subject to Central Sales Tax (CST), which increased costs and delayed the movement of goods. Check-posts and inspections at state borders caused time and efficiency losses.

GST replaced all these state-level indirect taxes and CST with a single, nationwide tax system, creating a “One Nation, One Tax” regime. This has enabled the free flow of goods and services across states without multiple taxation or barriers, integrating the Indian market into a single unified market.

Example

Before GST:
 

A trader in Maharashtra sells goods worth ₹1,00,000 to a buyer in Gujarat.

• VAT in Maharashtra: 12% → ₹12,000
• Central Sales Tax (CST) on inter-state sales: 2% → ₹2,000 (paid by the buyer, no input credit)
• Total tax impact = ₹14,000

This leads to higher costs and no credit for CST paid, increasing the final price.

After GST: 

The GST rate on the product is 18%, which is split as CGST (9%) and SGST (9%) for intra-state sales or IGST (18%) for inter-state sales.

• For inter-state sales, IGST of 18% = ₹18,000
• Buyer claims input credit on IGST paid, reducing tax burden
• No cascading tax and seamless input tax credit ensure lower cost and smooth interstate movement.

How is it Enhancing Compliance and Transparency?

GST incorporates a strong digital platform called the GST Network (GSTN) which automates and simplifies tax administration in India. This digital framework enables online registration, return filing, payment, and refunds, reducing human intervention and opportunities for corruption or tax evasion.

Key ways GST enhances compliance and transparency include:

1. Online Filing and Payments: Businesses can file returns and pay taxes electronically, making the process faster and traceable.
   
   
2. Input Tax Credit Mechanism: The system automatically matches input and output tax credits, minimising fraudulent claims.
   
   
3. Real-Time Data Sharing: Information is shared seamlessly between the Centre and States, improving coordination and monitoring.
   
   
4. Reduction in Tax Evasion: Transparency and automation reduce fake invoicing and under-reporting of sales.
   
   
5. Audit Trail: Digital records create a clear audit trail, making it easier to track tax liabilities and compliance.

Example:

Suppose a business has ₹10 lakh worth of sales and pays ₹1.8 lakh as GST. Under the GST system:

• The business files are returned online through GSTN every month.
• The input tax credit is electronically verified to ensure tax paid on inputs is claimed properly.
• The government monitors these returns in real time, detecting discrepancies promptly.

Before GST, many businesses under-reported sales or inflated input credits due to a lack of digital integration, leading to significant revenue loss.

Boosting Economic Growth and Competitiveness

The Goods and Services Tax (GST) was introduced not only as a tax reform but also as an economic reform to enhance India’s growth potential. One of its core objectives is to make the Indian economy more efficient and competitive at both domestic and global levels.

Key Reasons GST Boosts Economic Growth:

• Lower Cost of Goods and Services: By eliminating the cascading effect (tax on tax), GST reduces the overall tax burden, which lowers prices and encourages consumption.
  
  
• Improved Supply Chain Efficiency: Removal of state-level taxes and border checkpoints cuts logistics time and cost, making businesses more competitive.
  
  
• Ease of Doing Business: Uniform tax rates, simplified compliance, and a fully digital system reduce business uncertainty, encouraging entrepreneurship and foreign investment.
  
  
• Formalisation of the Economy:
   The input tax credit system encourages vendors and businesses to register and comply, increasing formal economic activity.
  
  
• Increased Revenue Collection: Higher compliance leads to more tax revenue, which the government can invest in infrastructure, health, and education—fueling long-term growth.

Example: Let’s assume a manufacturing company sells goods worth ₹10,00,000.

Before GST:

• Excise Duty @ 12.5% = ₹1,25,000
• VAT @ 12.5% on ₹11,25,000 = ₹1,40,625
• Total tax burden = ₹2,65,625 (effective rate: 26.56%)
• These taxes were not always creditable, leading to higher costs of production.

After GST:

• GST @ 18% = ₹1,80,000
• Input tax credit available for taxes paid on raw materials and services
• Net effective tax paid is lower due to credit set-offs
• Savings in tax = ₹85,625 (26.56% - 18%)

These savings can be reinvested in production, hiring, or reducing product prices, increasing the company's competitiveness.

Conclusion

To merge the nation into a single market with simplified taxation, the GST marked a significant shift in India's indirect tax structure. GST has increased tax transparency, decreased compliance requirements, and improved economic efficiency by substituting a single, transparent, and technologically advanced system for several cascading taxes.

India's economy and ease of doing business are strengthened by its main goals, which include removing tax obstacles, promoting competition, and increasing formalisation.

Faqs

1. What is the main objective of GST in India?

To unify the country's indirect tax system under one tax for better efficiency and transparency.

2. Why was GST introduced in place of older taxes?

To eliminate the cascading effect of multiple taxes and simplify compliance.

3. How does GST benefit businesses?

It reduces tax burden, streamlines filings, and enables input tax credit across the supply chain.

4. Does GST promote a national market?

Yes, GST removes inter-state tax barriers, creating a seamless national market.

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?