origin-based production tax. This inverts both halves. GST is not origin-based, and it is not a tax on production. Central excise was a production tax and the central sales tax was origin-based, and replacing that pair is one of the reasons GST was introduced.

destination-based sales tax on transaction. The destination half is right, but calling GST a sales tax on the transaction leaves out the input tax credit that defines it. A transaction tax without credit taxes the same value again at every sale, which is exactly the cascade GST was designed to end.

origin-based tax on sales transaction. Wrong on both counts — origin-based rather than destination-based, and described as a tax on the sale rather than on value added through to consumption.

GST is a/an

Q: What is the answer to CAPF 2022 Paper I Q110?

A. Correct — A, destination-based consumption tax. Two words are being tested, and both are structural. It is destination-based because the revenue accrues to the State in which the goods or services are finally consumed rather than the State in which they were made — on an inter-State supply the Centre levies integrated GST and then transfers the State share to the consuming State. It is a consumption tax because the input tax credit chain lets every business in the chain recover the tax it paid on its purchases, so nothing sticks at the intermediate stages and the whole burden comes to rest on the final consumer. Together those two features are why the old central sales tax, which stayed with the exporting State, and the old cascading levies had to go.

(a)destination-based consumption tax
(b)origin-based production tax
(c)destination-based sales tax on transaction
(d)origin-based tax on sales transaction

Answer

Why

Correct — A, destination-based consumption tax. Two words are being tested, and both are structural. It is destination-based because the revenue accrues to the State in which the goods or services are finally consumed rather than the State in which they were made — on an inter-State supply the Centre levies integrated GST and then transfers the State share to the consuming State. It is a consumption tax because the input tax credit chain lets every business in the chain recover the tax it paid on its purchases, so nothing sticks at the intermediate stages and the whole burden comes to rest on the final consumer. Together those two features are why the old central sales tax, which stayed with the exporting State, and the old cascading levies had to go.

Why the others are wrong

(b)origin-based production tax — This inverts both halves. GST is not origin-based, and it is not a tax on production. Central excise was a production tax and the central sales tax was origin-based, and replacing that pair is one of the reasons GST was introduced.
(c)destination-based sales tax on transaction — The destination half is right, but calling GST a sales tax on the transaction leaves out the input tax credit that defines it. A transaction tax without credit taxes the same value again at every sale, which is exactly the cascade GST was designed to end.
(d)origin-based tax on sales transaction — Wrong on both counts — origin-based rather than destination-based, and described as a tax on the sale rather than on value added through to consumption.

Concept

GST is a single value-added tax on the supply of goods and services, introduced by the Constitution (One Hundred and First Amendment) Act, 2016 and brought into force on 1 July 2017. It is levied concurrently — central GST and State GST on a supply within a State, integrated GST on a supply between States or on an import — and it replaced central excise, service tax, State value added tax, central sales tax, octroi, entry tax and a group of cesses.

The clearest way to see the destination principle is to follow one consignment. A manufacturer in Tamil Nadu sells to a dealer in Bihar; the Centre collects integrated GST on that sale, and when the goods are finally sold to a consumer in Bihar, the State share of the tax ends up with Bihar rather than Tamil Nadu. Under the old central sales tax the exporting State kept the money, which is why producing States had to be promised compensation when GST came in. The consumption side is easier to see from the credit chain: each business pays tax on its output and subtracts what it already paid on its inputs, so no business bears the tax, and the consumer, who has nobody to pass it on to, bears all of it. Alcohol for human consumption remains outside GST, and five petroleum products are in the law but not yet notified for levy.

Key facts

GST came into force on 1 July 2017 under the Constitution (One Hundred and First Amendment) Act, 2016.
It is destination-based — the tax accrues to the consuming State, with integrated GST used to move revenue on inter-State supplies.
The input tax credit chain makes it a tax on value added whose burden falls on final consumption.
The GST Council, a constitutional body under Article 279A, is chaired by the Union Finance Minister and recommends rates and rules.
Alcohol for human consumption is outside GST altogether, and petroleum crude, petrol, diesel, natural gas and aviation turbine fuel remain outside the levy for now.

Study next

The GST Council under Article 279A — composition, voting weights and its recommendationsCentral GST, State GST, integrated GST and the compensation cessGoods and services kept outside GST and the reasons for keeping them outInput tax credit, the reverse charge mechanism and the composition schemeGST compensation to States and how the arrangement was funded

Common traps

Reading GST as origin-based because the manufacturer collects it first. The revenue is settled to the consuming State.
Calling it a sales tax. Without input tax credit it would be a cascading turnover tax, which is what it replaced.
Assuming every indirect tax was subsumed. Alcohol for human consumption stays out, and the five petroleum products are not yet within the levy.

As a definition item, as a 'not correct' statement about GST, or through the constitutional amendment and the GST Council.

Related PYQs

UPSC_2017_GS1_Q812017Open & attempt →

What is/are the most likely advantages of implementing 'Goods and Services Tax (GST)'? 1. It will replace multiple taxes collected by multiple authorities and will thus create a single market in India. 2. It will drastically reduce the 'Current Account Deficit' of India and will enable it to increase its foreign exchange reserves. 3. It will enormously increase the growth and size of economy of India and will enable it to overtake China in the near future. Select the correct answer using the code given below:

(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer(a) 1 only

The single-market claim there rests on the same two properties tested here. A tax that follows consumption and allows credit across State lines is what removes the border effect of the old origin-based levies.

CDS_GK_2024_I_Q702024Open & attempt →

Which one of the following statements regarding GST is not correct?

(a) Amendment 115 to the Constitution of India kept alcohol for human use and five petroleum products outside the ambit of GST.
(b) Amendment 122 to the Constitution of India kept only alcohol for human use outside the ambit of GST.
(c) Precious metals are taxed at a rate of 1% under GST.
(d) Unworked diamond is taxed at a rate of 0·25%.

Answer(c) Precious metals are taxed at a rate of 1% under GST.

The same tax at the level of coverage and rates rather than principle. Both items reward knowing what GST left out, which is where most of the exceptions to the consumption logic sit.

Practice

practice — not a real PYQ
On an inter-State supply of goods within India, which tax is levied?
- (a)Central GST only
- (b)State GST only
- (c)Integrated GST
- (d)Central sales tax
Answer(c) Integrated GST — collected by the Centre and settled so that the State share reaches the consuming State.
practice — not a real PYQ
Which one of the following is kept outside the ambit of GST altogether?
- (a)Textiles
- (b)Alcohol for human consumption
- (c)Cement
- (d)Air-conditioners
Answer(b) Alcohol for human consumption — it stays with State excise; the five petroleum products are within the law but not yet notified for levy.