Before 1 July 2017, India had a fragmented indirect tax system. The Centre and States levied separate taxes at different stages of production, sale and provision of services. GST unified these taxes into a single destination-based tax on supply. Understanding the old regime helps businesses appreciate current rules on place of supply, ITC and valuation.
Taxes Subsumed by GST
The following major taxes were subsumed into GST:
- Central excise duty on manufacture
- Service tax on specified services
- State VAT on sale of goods within the State
- Central Sales Tax (CST) on inter-state sale of goods
- Entry tax and octroi on entry of goods into a local area
- Luxury tax
- Purchase tax
- Entertainment tax except those levied by local bodies
- Taxes on advertisements
- Taxes on lottery, betting and gambling
- Surcharges and cesses related to supply of goods and services
Structural Differences
Taxable Event
- Excise duty was levied on manufacture.
- VAT was levied on sale of goods within the State.
- Service tax was levied on provision of taxable services.
- CST was levied on inter-state sale.
GST replaced multiple taxable events with a single taxable event: supply. Section 7 of the CGST Act defines supply to include all forms of supply of goods or services or both.
Tax Jurisdiction
- Excise and service tax were levied by the Centre.
- VAT, entry tax and luxury tax were levied by the States.
- CST was collected by the originating State but administered centrally.
GST operates as a dual tax:
- CGST by Centre on intra-state supplies.
- SGST or UTGST by State or Union Territory on intra-state supplies.
- IGST by Centre on inter-state supplies and imports.
Input Tax Credit
The pre-GST regime had restricted credit:
- Excise credit could be used against excise and service tax but not VAT.
- VAT credit could not be used against excise or service tax.
- CST paid was generally not creditable and became a cost.
- Entry tax and octroi were often not creditable.
GST provides a seamless credit chain across goods and services and across States. IGST credit is fully usable for IGST, CGST and SGST liabilities in a prescribed order.
Destination-Based Taxation
VAT and CST followed the origin principle for inter-state sales. The producing State collected tax, while consumption happened elsewhere. GST follows the destination principle. Revenue accrues to the State where goods or services are consumed.
Cascading Effect
The pre-GST regime suffered from cascading because credits were fragmented. Tax on tax could not be fully removed. GST removes cascading by allowing credit at every stage of supply, reducing the final cost of goods and services.
Compliance Changes
Earlier, businesses had to file separate returns for excise, service tax, VAT and CST with different authorities, formats and due dates. GST replaced this with a unified portal, PAN-based registration and common returns like GSTR-1 and GSTR-3B.
Practical Impact on Existing Businesses
Businesses should not assume old exemptions and classifications continue. For example:
- Works contracts were split between goods and services earlier; under GST works contract is deemed a service under Schedule II.
- Software transactions were treated differently under VAT and service tax; GST classifies development and customisation of software as a service.
- Free supplies were often not taxed; under GST, Schedule I may tax certain free supplies between related persons or distinct persons.
How Anuj Desai & Associates Can Help
We help businesses understand how legacy tax positions map to GST, review long-term contracts, manage transitional issues and avoid demands arising from old practices that no longer work under GST.
Contact Anuj Desai & Associates
Email: office@anujdesaiassociates.com
Phone: 9619456656
Website: https://anujdesaiassociates.com
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