GST: Background, 101st Amendment and the GST Council

Goods and Services Tax replaced a tangle of central and State indirect taxes with a single destination based tax on supply, levied concurrently by the Union and the States. It needed a constitutional amendment, because the earlier division of taxing powers did not allow either level to tax both goods and services. This note covers why GST was introduced, the 101st Amendment, the GST laws and the GST Council.

1. Why GST

• Earlier structure. The Union levied excise on manufacture and service tax; States levied VAT on sales, entry tax, entertainment tax and others; central sales tax applied to inter-State sales.
• Problems. Cascading of taxes, since credit of central taxes could not be set off against State taxes; multiple rates and registrations; and barriers to a common national market.
• Design of GST. A destination based tax on every supply, with seamless input tax credit, levied concurrently as Central and State GST on intra-State supplies and as Integrated GST on inter-State supplies.

2. The Road to GST

Figure 1: From proposal to rationalisation

• 101st Amendment, 2016. Inserted Article 246A (concurrent GST power), Article 269A (IGST on inter-State supplies) and Article 279A (GST Council), amended Articles 268 to 271 and 286 and the Seventh Schedule (Topic 3)
• Definitions. Article 366(12A) defines GST as any tax on supply of goods or services or both, except taxes on supply of alcoholic liquor for human consumption; Article 366(26A) defines services as anything other than goods.
• Compensation. Parliament enacted the GST (Compensation to States) Act, 2017 to compensate States for revenue loss for five years, financed by a compensation cess.

Figure 2: The GST laws

3. The GST Council: Article 279A

Figure 3: Composition, quorum and voting

The Council consists of the Union Finance Minister as Chairperson, the Union Minister of State in charge of revenue or finance, and the minister in charge of finance or taxation of each State. One-half of the members form the quorum. Decisions require three-fourths of the weighted votes of members present and voting, with the Union's vote weighing one-third and the States' votes together two-thirds, so neither side can carry a decision alone. The Council recommends the taxes to be subsumed, exemptions, model laws, rates, thresholds and other matters.

4. Nature of the Council's Recommendations

• Union of India v Mohit Minerals (2022). The Supreme Court held that the recommendations of the GST Council are not binding on Parliament and the State Legislatures; they have persuasive value as the product of collaborative discussion.
• Simultaneous power. Article 246A gives Parliament and the States simultaneous power over GST without a repugnancy rule like Article 254, which supports the view that the Council does not bind them.
• Ocean freight. In the same case, IGST on ocean freight paid by importers under reverse charge in CIF imports was struck down.

5. Rate Rationalisation, 2025

At its 56th meeting on 3 September 2025, the Council recommended moving to two main rates of 5 and 18 per cent, abolishing the 12 and 28 per cent slabs, with a 40 per cent rate for a small set of demerit goods. The new rates took effect on 22 September 2025. The compensation cess was largely absorbed into the new rates, while tobacco and pan masala kept their existing rates and cess until the loans raised for compensation are repaid.

6. Frequently Asked Questions

Are GST Council recommendations binding on States?

No. In Union of India v Mohit Minerals (2022), the Supreme Court held that the recommendations are persuasive, not binding, on Parliament and the State Legislatures, which have simultaneous power under Article 246A.

Is alcohol covered by GST?

No. Article 366(12A) excludes the supply of alcoholic liquor for human consumption from GST, and States continue to tax it under Entries 51 and 54 of List II.

7. Related Topics

• Topic 3: Distribution of Taxing Powers. Article 246A and the Lists.
• Topic 6: Fiscal Federalism and the Finance Commission. Sharing GST revenue.
• Topic 27: Supply and Levy. The taxable event.