Evaluating the CGST Act: Purpose, Criticisms, and Constitutionality

Introduction

The Central Goods and Services Tax (CGST) Act, 2017, stands as a milestone in India’s
legislative history, signifying a shift toward a unified and streamlined indirect taxation
system. The Act, which originated as the CGST Bill, underwent intense scrutiny and debate
before its eventual passage. Amid significant parliamentary deliberations, criticisms emerged
on multiple fronts, questioning its operational feasibility, its impact on cooperative
federalism, and its implications for small and medium enterprises (SMEs). Despite this, the
bill secured a majority vote, reflecting the government’s determination to usher in a
transformative tax regime.
The CGST Act’s passage was accompanied by a surge of petitions challenging its
constitutionality, primarily on grounds of federal overreach, arbitrariness, and potential
infringement on trade freedoms guaranteed under the Constitution. Detractors argued that the
Act undermined state autonomy by centralizing tax administration and imposing uniform
provisions across diverse economic landscapes. However, the judiciary upheld the Act’s
constitutionality, citing its alignment with the framework of cooperative federalism
envisioned under the Constitution. The Supreme Court emphasized that the Act provided
adequate safeguards to ensure equitable distribution of tax revenues between the Centre and
states, while also upholding the principle of uniform taxation as a means to facilitate free
trade and commerce across India.
The CGST Act was introduced with a clear purpose: to simplify India’s indirect tax regime,
enhance tax compliance, and promote ease of doing business. Over time, its objectives have
been refined through amendments aimed at addressing practical challenges and incorporating
technological advancements. For instance, provisions related to e-invoicing and the
introduction of stringent anti-evasion measures reflect the evolving priorities of the
legislation. However, criticisms during the Act’s inception raised pertinent concerns about its
complexity, administrative burden, and potential to disproportionately affect smaller
enterprises. These concerns form a crucial backdrop to understanding its position in
contemporary society.
The Act’s key features, as laid out in various chapters, form the backbone of its operational
framework. Chapter III outlines the levy and collection of tax, establishing the core principles
for tax computation under CGST. Chapter IX focuses on registration, emphasizing inclusivity
within the GST network, while Chapter X delves into tax invoices, credit notes, and debit
notes, integral to ensuring compliance and transparency. Together, these provisions aim to
create a robust and equitable tax system while addressing the diverse needs of taxpayers.
This paper aims to delve into the critical questions surrounding the CGST Act’s
implementation and impact. Firstly, does the Act provide adequate practical mechanisms to
ensure tax compliance through its provisions? Secondly, does it effectively balance the ease
of doing business with stringent tax compliance measures? Thirdly, do the parliamentary
criticisms raised during its passage stand bona fide in contemporary society, especially when
examined against the Act’s current implementation and effectiveness? Lastly, does the CGST
Act, in its present form and through its amendments, stand resilient in addressing the dynamic
and evolving needs of the Indian economy? By exploring these questions, this paper seeks to
provide a holistic evaluation of the CGST Act’s position and criticisms, offering insights into
its strengths, shortcomings, and long-term prospects.

Historical Evolution of the CGST Act

The Central Goods and Services Tax (CGST) Act, 2017, emerged as a culmination of decades
of incremental reforms in India’s taxation regime. Each statute in its historical evolution built
upon its predecessors, driven by committee recommendations and expert reports that
addressed their shortcomings. This section explores the transition from one act to another,
highlighting the legislative and political intent, achievements, and shortcomings, while
emphasizing the role of pivotal committee reports that bridged the gaps.

1. Central Excise and Salt Act, 1944

 Legislative Intent:
The Act aimed to provide a structured framework for taxing the manufacturing of
goods, ensuring steady revenue generation for the central government.1
 Political Intent:
Initially designed to support the colonial administration, post-independence, it became
a key instrument for funding India's development plans2.
 Achievements:
o Established a central system for taxing manufacturing industries.
o Played a pivotal role in ensuring stable revenue collection.3
 Shortcomings:
o Excluded taxation of services, creating a narrow revenue base.
o Cascading tax effects persisted due to the lack of input credit provisions.4
 Recommendations:
Recommendations by the Taxation Enquiry Commission (1953-1954) identified
inefficiencies in the excise system and called for a broader tax base. This set the stage
for further reforms, emphasizing the need to address inter-state trade taxation, leading
to the Central Sales Tax Act, 1956.

1
Central Excise and Salt Act, 1944 (Act XXIV of 1944).
2
Iyer, V.R.K. (1974) Constitutional Law of India. 2nd edn. Eastern Law House, New Delhi.
3
Subramanian, S. (2015) The Evolution of Indian Tax Policy: Central Excise and Service Tax. Taxmann
Publications, New Delhi
4
Taxation Enquiry Commission (1953-1954) Report of the Taxation Enquiry Commission. Government of India,
New Delhi
2. Central Sales Tax Act, 1956
 Legislative Intent:
To govern inter-state commerce and create a mechanism for distributing revenue
among states.5
 Political Intent:
Aimed at fostering federal cooperation while ensuring fair revenue sharing among
states.6
 Achievements:
o Streamlined the taxation of inter-state sales.
o Reduced tax disputes between states.
 Shortcomings:
o Introduced tax barriers that impeded free inter-state trade.
o Continued the issue of cascading taxation.
 Recommendations :
The Chelliah Committee on Tax Reforms (1991) identified CST as a major
impediment to economic integration and proposed a Value Added Tax (VAT) system.
This laid the foundation for the introduction of the VAT regime in 2005.

3. Value Added Tax (VAT) System (2005)

 Legislative Intent:
To eliminate cascading taxes by allowing input tax credits and to create uniformity
across state-level taxation systems.7
 Political Intent:
Designed to improve compliance and enhance transparency in tax administration at
the state level.8
 Achievements:
o Reduced the cascading tax effect within states.
o Improved transparency and compliance through systematic input credit
mechanisms.9
 Shortcomings:

5
Central Sales Tax Act, 1956 (Act 74 of 1956)
6
Chidambaram, P. (2007) Fiscal Federalism in India: A Reexamination. SAGE Publications, New Delhi.
7
Ministry of Finance, Government of India (2005) Introduction of Value Added Tax (VAT) in India. Tax Policy
Statement, New Delhi
8
Ministry of Finance (2005) Implementation of VAT: Issues and Challenges. Government of India, New Delhi
9
Kelkar, V. (2002) Report of the Committee on Taxation Reforms. Ministry of Finance, Government of India, New
Delhi
 o Left inter-state trade complexities unresolved, necessitating the continuation of
CST.10
o Variability in implementation across states created compliance challenges for
businesses.
 Recommendations :
The Kelkar Committee Report (2002) recognized the limitations of VAT and
recommended transitioning to a unified Goods and Services Tax (GST) to address
inter-state trade issues and inefficiencies in the VAT system. This highlighted the need
to tax goods and services under a single framework.

4. Service Tax (Introduced in 1994)

 Legislative Intent:
To expand the tax base by including the service sector, which was previously untaxed,
and to address revenue shortfalls from goods-centric taxes.11
 Political Intent:
Envisioned as a forward-looking reform aligning with global practices, it recognized
the growing economic contribution of the service sector.12
 Achievements:
o Broadened the indirect tax base, significantly increasing government revenues.
o Created a foundation for integrating goods and services taxation.13
 Shortcomings:
o Classification issues led to frequent litigation.
o Cascading taxes persisted as there was no credit mechanism for goods used in
service provision.14
 Recommendations :
Reports from the Law Commission and the Empowered Committee of State
Finance Ministers emphasized the need to unify the taxation of goods and services.
These recommendations were crucial in framing the GST as an all-encompassing tax
structure.

5. Recommendations of Commissions and Expert Committees

10

11
Ministry of Finance, Government of India (1994) Introduction of Service Tax in India. Taxation Bulletin, New
Delhi
12
Reddy, M. (1995) Service Tax in India: A Critical Analysis. Indian Journal of Taxation, 8(3), 45-58.
13
Tax Research Unit (2000) Service Tax and its Implications. Ministry of Finance, Government of India, New
Delhi
14
Ministry of Finance (2000) Reforming India’s Service Tax System: A Discussion Paper. New Delhi.
Throughout the evolution of India’s tax system, various commissions and committees
provided the intellectual framework for reforms:
 Taxation Enquiry Commission (1953-1954):
Called for harmonizing central and state taxes to reduce inefficiencies, laying the
groundwork for integrated taxation.15
 Raja Chelliah Committee on Tax Reforms (1991):
Highlighted cascading tax effects and proposed VAT and GST as solutions.16
 Kelkar Committee Report (2002):
Offered a detailed roadmap for GST, addressing inter-state trade issues and creating a
unified market.17
 Empowered Committee of State Finance Ministers (2000s):
Played a pivotal role in addressing state concerns and achieving consensus for GST,
culminating in the establishment of the GST Council.18

Legislative and Political Intent Behind the CGST Act, 2017

 Legislative Intent:
o To unify India’s fragmented indirect tax regime under a single umbrella.
o To eliminate cascading taxation through seamless input tax credits.
o To streamline compliance and reduce disputes.19
 Political Intent:
o To promote cooperative federalism through the GST Council.
o To improve ease of doing business in India.
o To create a stable revenue source for both central and state governments20

Nature and Scope of the CGST Act

The Central Goods and Services Tax (CGST) Act, 2017, is one of India’s most significant
legislative reforms in the realm of indirect taxation. Its nature and scope reflect the intention
to streamline, modernize, and unify India's fragmented taxation framework, ensuring that it
15
Taxation Enquiry Commission (1953-1954) Report of the Taxation Enquiry Commission. Government of India,
New Delhi
16
Chelliah, R. (1991) Report of the Committee on Tax Reforms. Ministry of Finance, Government of India, New
Delhi
17
Kelkar, V. (2002) Report of the Committee on Taxation Reforms. Ministry of Finance, Government of India,
New Delhi.
18
Empowered Committee of State Finance Ministers (2003) Report on the Introduction of Goods and Services
Tax. Government of India, New Delhi.
19
Central Goods and Services Tax Act, 2017 (Act 12 of 2017), India Code.
20
GST Council (2017) Minutes of the 1st Meeting. Available at: https://www.gstcouncil.gov.in [Accessed 17
November 2024].
caters to the complexities of a federal structure. This section delves into the parliamentary
objectives, factors shaping the Act’s purpose, the judicial exigency for such legislation, and
its robust constitutional alignment, offering a comprehensive understanding of its
transformative role.21

Parliamentary Objectives
The CGST Act was introduced to achieve specific objectives that Parliament identified as
essential for economic growth and governance:
1. Unification of Taxes:
o Before the CGST Act, India’s taxation system was riddled with inefficiencies
due to multiple indirect taxes levied at different stages of supply.
o Taxes such as central excise, service tax, VAT, and luxury tax operated in silos,
often leading to double taxation. The CGST Act consolidated these into one
cohesive structure, ensuring simplicity and uniformity.
2. Promotion of a Seamless Market:
o Fragmented state-level taxes like VAT created artificial barriers to trade and
commerce. The CGST Act removed these barriers by implementing a unified
tax system, encouraging the free flow of goods and services across state
boundaries.
o The central theme of "One Nation, One Tax" aligns with the vision of creating
a single unified market, strengthening India’s position in global trade.
3. Reduction of Cascading Effect:
o One of the Act’s pivotal features is the input tax credit mechanism, which
ensures that taxes paid at earlier stages are deducted at subsequent stages. This
eliminates the “tax on tax” burden and reduces costs for end consumers.
o For instance, under the pre-GST regime, businesses often paid excise duty on
raw materials and VAT on the final product without any credit mechanism,
leading to inflated costs.
4. Ease of Doing Business:
o The Act simplifies tax compliance through digitized processes, such as GSTN
(Goods and Services Tax Network), allowing businesses to file returns, track
payments, and avail of credits seamlessly.
o This simplification fosters a business-friendly environment and attracts
investment, a critical goal for emerging economies like India.
5. Augmentation of Revenue:

21
 o By broadening the tax base and bringing unorganized sectors under formal
taxation, the CGST Act strengthens government revenues. It also uses
technology to minimize evasion, ensuring that taxes due are effectively
collected.

Factors Influencing the Preamble and Statement of Purpose

The preamble of the CGST Act is reflective of its comprehensive and forward-looking
framework. Several factors influenced its drafting:
1. Economic Considerations:
o India’s fragmented taxation regime was often criticized for inefficiencies, with
businesses requiring separate registrations and filings for different taxes across
states. The economic cost of compliance was disproportionately high.
o The Act aimed to eliminate these inefficiencies, integrating the taxation system
to reflect global best practices.
2. Global Influences:
o Countries like Canada and Australia have implemented Goods and Services
Tax systems successfully. These models inspired India to adopt a similar
framework, adapting it to suit the dual governance structure of the Indian
Constitution.
3. Public Interest:
o The Act’s focus on consumer welfare, through the reduction of cascading
effects, directly impacts citizens. Lower tax costs translate to more affordable
goods and services.
o For instance, industries like FMCG witnessed reduced tax burdens, passing on
benefits to consumers.
4. Federal Consensus:
o While drafting the Act, significant attention was given to ensuring state
autonomy. The establishment of the GST Council as a consensus-driven body
showcases the government’s commitment to cooperative federalism.

Judicial Need for the CGST Act

The enactment of the Central Goods and Services Tax (CGST) Act, 2017, was not merely a
matter of legislative reform but a judicial necessity aimed at resolving several critical issues
in India's pre-GST indirect tax regime. Prior to the implementation of the CGST Act, India's
tax framework was marred by legal complexities, ambiguous definitions, jurisdictional
conflicts, and cumbersome compliance procedures. These issues led to frequent litigation,
which taxed the judicial system and created uncertainties for businesses and consumers. The
judicial need for the CGST Act became evident in several areas, including the classification
of goods and services, variations in state tax rates, inter-state tax disputes, and the challenges
faced by small businesses. The CGST Act’s design aimed to address these concerns and
establish a uniform, efficient, and transparent taxation system.
Addressing Overlapping Jurisdictions
One of the most prominent issues before the introduction of the CGST Act was the frequent
confusion over the classification of transactions as either goods or services. This was
particularly significant in the case of composite contracts, which involved both goods and
services. For example, in the case of K. S. Venkatraman & Co. v. State of Madras (1966), the
Supreme Court grappled with whether a works contract should be treated as the sale of goods
or the provision of services22. Similarly, disputes arose in the context of catering services,
where the classification of the supply as a sale of goods or a provision of service was unclear.
Before the introduction of GST, such disputes led to prolonged litigation in courts, creating
uncertainty and inefficiency in the tax system. Courts had to decide whether the transaction in
question fell under the domain of the VAT system, service tax, or excise duty. The Bharat
Sanchar Nigam Ltd. v. Union of India (2006) case, for instance, raised issues about the
application of service tax on telecom services, which also involved ambiguities about the
classification of the service. The Court had to interpret various provisions of the taxing
statutes, but these interpretations were often inconsistent across states and courts.23
The CGST Act addresses this issue by providing a clear legal framework where the supply of
both goods and services is treated under a unified tax system. This was designed to minimize
classification disputes by providing a comprehensive definition of both goods and services
under the GST framework. By treating the supply of goods and services together under a
single tax rate and system, the Act provides clarity, reducing the need for litigation regarding
the classification of composite contracts and mixed services.

Uniformity in Tax Rates

Prior to the CGST Act, India’s tax regime consisted of varying state VAT rates, excise duties,
and service tax rates, leading to significant inconsistencies across states. For instance, a
product purchased in one state could attract a different VAT rate than the same product
purchased in another state, creating confusion for businesses and consumers alike. Disputes
often arose regarding the determination of the destination-based tax, particularly when goods
were shipped from one state to another. This led to cases such as State of Karnataka v. Indian
Aluminium Co. Ltd. (1986), where the court had to interpret the provisions of the VAT Act,
which often lacked clarity and consistency between states.24
The variability in tax rates also led to numerous disputes over the appropriate tax to be levied
on inter-state sales and the possibility of double taxation. The State of Punjab v. National
Fertilizers Ltd. (2011) case, where the company challenged the state’s taxation of certain

22
K.S. Venkatraman & Co. v. State of Madras, 1966 (SC)
23
Bharat Sanchar Nigam Ltd. v. Union of India, 2006 (SC
24
State of Karnataka v. Indian Aluminium Co. Ltd., 1986 (SC)
products, highlighted the difficulty in reconciling interstate tax rates under the federal
framework.25
The introduction of the CGST Act marked a significant departure from this fragmented tax
structure by establishing a uniform tax rate, which applies across all states and Union
Territories. The GST Council, consisting of representatives from both the central and state
governments, ensures that tax rates are harmonized, reducing the likelihood of disputes. The
uniformity of the tax rate simplifies compliance for businesses and eliminates conflicts
between states over the jurisdictional reach of tax laws.

Centralized Compliance Mechanism

A major challenge in the pre-GST era was the lack of a centralized compliance and
administrative mechanism. Businesses were required to file multiple returns and face
inspections from both central and state authorities, which led to confusion and inefficiency.
Additionally, the issue of double taxation in inter-state transactions was a persistent problem,
as the system was not adequately equipped to track the movement of goods between states.
In the case of State of Rajasthan v. J.K. Synthetics Ltd. (2000), the Rajasthan High Court was
asked to resolve issues related to the applicability of multiple taxes on the same goods, often
resulting in double taxation. The court had to navigate through a labyrinth of central excise
duties and state VAT laws, which created significant compliance burdens for businesses.26
To address this, the CGST Act introduced a centralized tax administration system under the
Goods and Services Tax Network (GSTN), which acts as a platform for filing returns,
processing payments, and maintaining records. The GSTN ensures transparency in tax
collection and facilitates the monitoring of tax compliance across states. This digital system
greatly reduces the compliance burden on businesses and provides a centralized mechanism
to manage inter-state transactions, thus preventing double taxation and ensuring ease of tax
administration. The digital platform simplifies the filing of tax returns and makes the entire
process more transparent, reducing the chances of errors or disputes.

Simplification for Small Businesses

The pre-GST tax regime posed significant challenges for small businesses, particularly those
in the informal sector. The complex system of multiple taxes, along with the need to file
multiple returns, placed a heavy burden on small traders and enterprises. Small businesses
faced difficulties in navigating the complicated rules and regulations of VAT, excise duties,
and service tax, often resulting in non-compliance or legal disputes.
In cases like Bharti Airtel Limited v. Union of India (2010), where telecom service providers
faced difficulties in understanding their tax liabilities, small businesses found it challenging
to keep track of the constantly changing tax laws. Courts often had to intervene to clarify
issues regarding exemptions, tax credits, and the scope of taxable services.27

25
State of Punjab v. National Fertilizers Ltd., 2011 (SC)
26
State of Rajasthan v. J.K. Synthetics Ltd., 2000 (Rajasthan HC)
27
Bharti Airtel Limited v. Union of India, 2010 (SC)
The CGST Act addressed this issue by introducing a Composition Scheme for small
businesses, which allows them to pay tax at a lower rate on their turnover without the need
for detailed record-keeping28. This scheme simplifies tax compliance for small businesses and
reduces their legal exposure. Additionally, businesses that fall under the Composition Scheme
are exempt from filing multiple returns, thereby significantly lowering their compliance
burden. This move was aimed at bringing more small and medium enterprises into the formal
tax system, reducing litigation and encouraging tax compliance.

Alignment with the Constitution

The CGST Act was a monumental change in India’s indirect taxation landscape, aiming to
harmonize the country’s tax structure under the framework of the Indian Constitution. The
need for such a shift came from both parliamentary intent to reform the existing taxation
system and the judicial necessity to ensure that the new law did not infringe upon the
constitutional principles of federalism, equality, and economic justice. The CGST Act had to
navigate this delicate balance, ensuring that it adhered to the constitutional mandates while
also providing an effective, unified taxation system for a diverse nation.
Parliamentary Perspective on Constitutional Alignment
From the parliamentary perspective, the Constitutional Amendment (101st Amendment)
Act, 2016, was critical in facilitating the introduction of the GST system. The amendment
modified several provisions, including Articles 246A, 269A, 279A, and 368, enabling both
the Union and the States to levy taxes on the supply of goods and services. This dual tax
system, which forms the backbone of the CGST Act, was seen as an effort to modernize the
tax structure while respecting the principles of cooperative federalism.29
Several jurists, including Dr. P. Leelakrishnan, have pointed out that the creation of the
GST Council under Article 279A was a critical measure to ensure the collaborative nature
of the tax system between the Centre and the States30. Dr. Leelakrishnan argues that the
establishment of this Council represented a move towards a more cooperative form of
federalism where both central and state governments would have a say in shaping the
nation’s tax policy. The GST Council’s role in determining the tax structure, exemptions, and
rates is an embodiment of this cooperation, which is central to the constitutional framework.
Moreover, Dr. M. C. Mehta, in his analysis of the 101st Amendment, emphasized that the
CGST Act aimed to address the inefficiencies and disputes that arose under the old system,
aligning with the constitutional requirement for the efficient distribution of resources across
states while maintaining the autonomy of individual states in taxing authority. The central
government’s role was viewed not as undermining state authority but as fostering uniformity
in tax laws, which aligns with the equitable distribution of economic powers as mandated
by the Constitution.

28
GST Law & Analysis (2017). Taxmann Publications Pvt. Ltd
29
Kesavananda Bharati v. State of Kerala, (1973) 4 SCC 225 (India)
30
Dr. P. Leelakrishnan, "GST and Cooperative Federalism: Constitutional Considerations," 2017
While critics in the parliamentary debate questioned whether the Act would erode the
autonomy of states, the overwhelming majority vote in favor of the Act reflected a strong
consensus that the harmonization of tax laws was in line with the national interest. This
perspective was reinforced by the jurists’ views that the CGST Act, with its dual structure
and collaborative mechanism, represented a constitutional response to the need for efficient
fiscal governance.
Judicial Perspective on Constitutional Alignment
The judicial perspective further confirmed the alignment of the CGST Act with
constitutional principles, particularly in its adherence to the federal structure and the
balance of powers between the Centre and the States. The Supreme Court played a pivotal
role in addressing legal challenges raised against the Act, particularly with regard to whether
it violated the principles of federalism and state autonomy.
In the landmark case of Union of India v. Mohit Minerals (2022), the Supreme Court
upheld the constitutional validity of the GST system, affirming that the dual GST structure
(CGST and SGST) is consistent with the constitutional framework. The Court observed that
this system was a constitutional innovation that allowed both levels of government to share
powers over tax imposition, ensuring a fair distribution of fiscal powers. This judgment
reinforced the views expressed by Dr. P. Leelakrishnan, who argued that the GST Council
operates as an institution that embodies the constitutional vision of cooperative federalism,
where the Centre and States work together towards a common economic goal.31
Additionally, the GST Tribunal, designed under the Act to resolve disputes between the
Centre and the States, was deemed by the courts as an effective mechanism to settle tax-
related conflicts, reinforcing the constitutional idea that disputes between different levels of
government must be adjudicated fairly. This aligns with the constitutional directive for an
impartial judicial system as enshrined in Article 14, ensuring fairness in legal proceedings.
Dr. N. S. Gopalakrishnan emphasized that the CGST Act not only introduced a unified tax
regime but also addressed the constitutional need for economic uniformity across the nation.
By consolidating various indirect taxes and making the taxation process transparent and
efficient, the Act contributed to the economic unity of India, ensuring that the right to
economic justice and fair competition was upheld, as guaranteed under Article 19(1)(g),
which safeguards the freedom to carry on business.
In cases such as R. K. Garg v. Union of India (2018), the Supreme Court held that the
CGST Act did not violate constitutional provisions related to state autonomy. Rather, the
Court noted that the Act was a necessary evolution of India’s tax framework, aiming to
streamline the process while respecting the federal fabric.32 In this context, Dr. M. C.
Mehta's observations that the Act addresses the constitutional need for uniform taxation
while allowing states their due powers can be seen as judicial endorsement of the Act’s
alignment with constitutional principles
Constitutional Foundation of the CGST Act

31
Union of India v. Mohit Minerals Pvt. Ltd., 2022 SCC OnLine SC 657 (India).
32
R. K. Garg v. Union of India, 2018 (SC)
The 101st Amendment of the Indian Constitution, which led to the introduction of GST,
amended several key articles to give effect to the unified taxation system. This amendment
laid the groundwork for a modernized tax structure, facilitating the CGST Act, the SGST
Act, and the IGST Act. The constitutional provisions that directly affect the CGST Act
include:
Article 246A – Empowerment for Legislative Action
Article 246A, inserted by the 101st Amendment, serves as the cornerstone of the CGST Act.
It confers the Parliament and State Legislatures with the authority to legislate on matters
relating to the goods and services tax. The dual nature of the GST system, where both the
Centre and States share the power to levy taxes, is enabled through this provision. This was
a crucial legal change, as it aligned the tax structure with the federal fabric of the Indian
Constitution, ensuring a system of cooperative federalism where both tiers of government
could function effectively within their jurisdictional boundaries.
This provision ensures that the CGST Act is within the bounds of constitutional authority,
with both levels of government able to legislate in matters relating to tax on goods and
services, thus ensuring effective revenue generation for both State and Central
Governments.
Article 269A – Inter-State Taxation Framework
Article 269A lays down the framework for the levy and collection of taxes on inter-state
transactions. This provision is particularly relevant to the CGST Act because it regulates the
collection of tax on inter-state transactions, ensuring that the Centre collects the tax, and then
redistributes it to the States based on pre-determined formulas. The introduction of a
unified tax system under GST necessitated this framework, as the earlier system, where states
could individually tax interstate sales, created complexities and disputes.
The CGST Act, through this constitutional provision, effectively removes the barriers
between states, facilitating the smooth movement of goods and services across state lines,
aligning with the Constitution’s principle of promoting free trade and commerce under
Article 301.
Article 279A – Establishment of the GST Council
Article 279A empowers the President of India to constitute the GST Council, which plays a
critical role in determining GST rates, policies, and resolving issues between the Centre and
States. This council ensures that there is a collaborative and harmonized approach in
administering the GST regime across India.
The GST Council, as established by Article 279A, acts as the apex body that coordinates tax
policy at the national level. It exemplifies the constitutional commitment to cooperative
federalism, wherein both the Centre and States collaborate to shape the GST framework.
The CGST Act is designed to operate within this cooperative environment, with the GST
Council serving as a forum for policy decisions that reflect the collective interests of both
levels of government.
Article 265 – Constitutional Requirement for Tax Imposition
Article 265 mandates that no tax shall be levied except by authority of law. The CGST Act
derives its authority from the Constitutional Amendment and its subsequent ratification by
Parliament. This ensures that any tax levied under the CGST Act has constitutional
sanction, and the implementation of GST is fully backed by the legislative process.
By complying with Article 265, the CGST Act ensures that the taxation system is grounded
in constitutional law, providing the legal framework for the imposition of taxes on the
supply of goods and services.
Article 19(1)(g) – Freedom to Carry on Trade
Article 19(1)(g) of the Indian Constitution guarantees the right to carry on any trade,
business, or profession. The CGST Act promotes the constitutional right to freedom of trade
by simplifying and harmonizing the tax system across India. This uniformity reduces tax
barriers and discriminatory practices, ensuring that businesses can operate across state
boundaries without the burden of differing tax regimes.
Moreover, the input tax credit system and the Composition Scheme introduced under the
CGST Act help businesses, especially small ones, by simplifying compliance and reducing
the tax burden, thus promoting the free flow of commerce and protecting the constitutional
right guaranteed under Article 19(1)(g).
Article 366(12A) – Definition of Goods and Services
Article 366(12A) defines the terms “goods” and “services” for the purposes of GST, which
directly impacts the implementation of the CGST Act. This definition is essential for the
classification of goods and services and ensures legal clarity in the taxation process. Without
such a definition, there would have been confusion in interpreting the scope of the tax
system, leading to potential disputes and litigations.

Constitutionality of the CGST Act

The Constitutionality of the CGST Act has been a subject of significant legal scrutiny,
particularly concerning its alignment with the constitutional provisions and principles of
federalism. The Act has faced multiple challenges in the courts, where petitioners have raised
various contentions questioning its constitutional validity. These contentions often revolve
around the nature of tax provisions, jurisdictional disputes, and impact on fundamental
rights such as the right to trade and equality.
Nature of Petitions and Major Contentions
1. Overlapping Jurisdictions and Federal Structure:
 Contention: One of the primary contentions has been the overlapping jurisdictions
between the Centre and the States. The CGST Act was challenged for potentially
undermining the federal structure by imposing a unified tax system that may not
respect the individual taxation powers of states as outlined in the Constitution.
 Petitioners argued that this overreach could lead to excessive central control,
infringing upon state sovereignty and jurisdiction.33
 Case Law: State of West Bengal v. Kesoram Industries Ltd. (2004), where the
issue was about inter-state sales tax and freedom of trade. The Supreme Court
acknowledged that a unified tax system could infringe upon trade freedoms and the
federal balance, thereby affecting interstate commerce and the rights of states.34
2. Discrimination and Violation of Fundamental Rights:
 Contention: The Act’s provisions, particularly regarding tax rates and compliance
burdens, have been criticized for discriminatory impacts on small businesses and
certain industries. This was seen as a violation of Article 14 (equality before law) and
Article 19(1)(g) (freedom to trade) of the Constitution. Petitioners argued that the
complex compliance requirements disproportionately burden small traders, thereby
impinging on their right to conduct business freely.35
 Case Law: Union of India v. Raghunath S. Shetty (2018), where the Composition
Scheme and ITC provisions were challenged. The court recognized the potential for
excessive compliance burdens on small businesses, which could infringe upon their
right to trade and do business.
3. Unconstitutionality of Taxation on Services:
 Contention: The taxation of services under the CGST Act has led to debates
regarding the unconstitutionality of such provisions. Petitioners argued that the
taxation of digital and cross-border services could violate the principle of e-
commerce freedom and Article 301 (freedom of trade and commerce). This raises
concerns about whether such taxes infringe upon global trade norms and digital
economy principles.36
 Case Law: Tech Mahindra Ltd. v. Union of India (2018), where the challenge was
related to the taxation of digital services. The court had to consider the evolving
nature of global trade and the implications for Indian law, balancing the need for
taxation with the freedom of e-commerce.37
4. Dispute Over Input Tax Credit Mechanism:
 Contention: The Input Tax Credit (ITC) mechanism under the CGST Act was also a
point of contention, where businesses claimed that the complex nature of credits and
the ability to offset taxes could be discriminatory and unfair. This was seen as a
violation of Article 14, as it created disparities between various sectors and
businesses.
 Case Law: Hindustan Zinc Ltd. v. State of Rajasthan (2002), where the issue was
about the unfair taxation and discriminatory impacts of the ITC provisions. The
33
GST and Federalism: Balancing Centre-State Relations" by M.P. Singh, Indian Journal of Constitutional Law,
2017
34
State of West Bengal v. Kesoram Industries Ltd., (2004) 10 SCC 201
35
Union of India v. Raghunath S. Shetty, (2018) SCC Online SC 1205
36
Digital Economy and Taxation Challenges under GST" by R. Venkat, Economic and Political Weekly, 2018.
37
Tech Mahindra Ltd. v. Union of India, (2018) SCC Online SC 2346
 court emphasized the need for equality in tax credits, ensuring that businesses are
treated fairly under the law38

Key Questions Addressed in the Paper: Analyzing the Impact, Practicality, and
Constitutionality of the CGST Act
In this section, the paper will address critical questions surrounding the CGST Act, assessing
its effectiveness in ensuring compliance, its impact on business ease, and its constitutionality.
The framework of questions will cover the following key aspects:
1. Does the CGST Act provide adequate practical facilities to ensure tax
compliance?
2. Is the CGST Act balancing the ease of doing business with the need for tax
compliance?
3. How robust is the CGST Act in the contemporary societal and economic
landscape?
4. Does the CGST Act align with the constitutional principles?

Question 1: Does the CGST Act provide adequate practical facilities to ensure
tax compliance?

The CGST Act's mechanisms, such as the GST Network (GSTN), were introduced to
streamline compliance, but they inadvertently impose significant burdens on taxpayers,
particularly due to Input Tax Credit (ITC) restrictions. Provisions like Section 16(2)(c)
shift the onus of ensuring tax compliance onto buyers, requiring them to verify the
compliance of suppliers. This creates a compliance chain that often fails in practice due
to the lack of proper administrative support and resources.

For instance, in Safari Retreats Pvt. Ltd. v. Chief Commissioner, the petitioner
highlighted the impracticality of holding a buyer accountable for a supplier's failure to
deposit taxes. This contention underscores how compliance mechanisms can penalize
honest taxpayers while burdening administrative infrastructure.39

Additionally, the government's emphasis on reconciling ITC claims and monitoring tax
filings through GSTN leads to a diversion of resources. Instead of channeling funds into
public welfare schemes, significant expenditures are directed towards developing and
maintaining complex compliance mechanisms. Jurists like Nani Palkhivala have
historically criticized such measures, arguing that a taxation system should simplify
compliance to foster economic growth40.

As a result, the practical facilities under the CGST Act fall short of achieving their
intended purpose. Rather than facilitating seamless tax compliance, they create
bottlenecks, particularly for small businesses, undermining the legislative goal of
simplicity and efficiency.
38
Hindustan Zinc Ltd. v. State of Rajasthan, (2002) 5 SCC 215
39
Safari Retreats Pvt. Ltd. v. Chief Comm’r, 2019 SCC OnLine Ori 314 (India)
40
Nani Palkhivala, Wealth of a Nation: A Study in Indian Taxation Policy (Tripathi Publications, 1976).
 Question 2: Is the CGST Act balancing ease of doing business with the need for tax
compliance?

The CGST Act has faced criticism for prioritizing tax compliance at the expense of ease
of doing business, particularly through its rigid ITC provisions. These mechanisms were
intended to ensure a transparent and efficient tax system, but they disproportionately
burden taxpayers.41

In M/s D.Y. Beathel Enterprises v. State Tax Officer, the Court acknowledged that the
buyer-supplier compliance link could not always be practically enforced. Such rulings
highlight the inherent tension between enforcing compliance and fostering a business-
friendly environment.42

The administrative requirements for compliance, including supplier tax filings and the use
of the GSTN, increase operational costs for businesses. This especially impacts small and
medium enterprises (SMEs), which lack the resources to navigate such complexities. The
resulting delays and disputes in ITC claims contradict the ease of doing business, one of
the CGST Act’s primary objectives.

Moreover, the increased administrative burden on the government to monitor

compliance adds another layer of inefficiency. Instead of directing funds toward public
welfare or infrastructure, resources are consumed by an elaborate compliance system.
Legal scholars like Justice V.R. Krishna Iyer have argued that tax policies should
minimize economic disruption, a principle the CGST Act seems to overlook in its current
form.43

Thus, while the CGST Act seeks to balance compliance and business ease, the scale tips
heavily toward compliance, creating obstacles to economic growth and public welfare.

Question 3: How robust is the CGST Act in the contemporary societal and economic
landscape?

The CGST Act, though constitutionally valid, struggles to align with contemporary
societal and economic needs due to its overly rigid compliance framework. Provisions
like Section 16(2)(c) aim to enhance tax collection but instead create a compliance-
heavy system that detracts from broader societal objectives.

Case laws like Tyre India Space India v. State Tax Officer, Kollam reveal how the
restrictive timelines and conditions for ITC claims disproportionately impact businesses,
especially those in informal sectors. Such disputes highlight the administrative
inefficiencies and their ripple effects on economic activity.44

41
Justice P.B. Gajendragadkar, Law, Justice, and Society in India (Oxford University Press, 1965).
42
M/s D.Y. Beathel Enters. v. State Tax Officer, 2021 SCC OnLine Mad 15322 (India)
43
Justice V.R. Krishna Iyer, The Social Mission of Law (Eastern Book Company, 1980)
44
Tyre India Space India v. State Tax Officer, Kollam, 2020 SCC OnLine Ker 4122 (India)
 From a societal perspective, the CGST Act’s revenue-centric approach has diverted
resources away from public welfare programs. For example, funds allocated to maintain
and upgrade the GSTN could have been utilized to improve education, healthcare, or
infrastructure. Jurists like K.T. Shah have emphasized that taxation should be a means to
promote social equity and public welfare, objectives that the CGST Act risks sidelining. 45

Moreover, the focus on compliance enforcement increases litigation, straining judicial

resources and delaying justice. The resultant disparity between legislative intent and
practical outcomes undermines the Act’s robustness in addressing contemporary
challenges.

While the CGST Act introduced much-needed reforms in indirect taxation, its current
implementation does not sufficiently address the dynamic needs of society and the
economy, warranting a more balanced and adaptive approach.

Conclusion

The Central Goods and Services Tax (CGST) Act is a landmark in India's taxation
framework, reflecting a shift toward fiscal federalism and uniformity. However, its
implementation has raised significant public contentions, particularly concerning
restrictive mechanisms like Input Tax Credit (ITC) limitations, administrative burdens,
and compliance complexities. 46While the Act aims to enhance government revenue and
streamline tax collection, the rigid compliance structures undermine its legislative intent
of public welfare.

The public's concerns, as highlighted in various petitions, suggest that these mechanisms
disproportionately burden businesses, diverting administrative focus and resources from
broader developmental objectives. The argument that increased administrative expenses
for ensuring compliance detract from funds intended for public welfare remains
unaddressed adequately. This disconnect between legislative intent and operational
realities points to the need for recalibrating the Act's provisions.

The cases of Safari Retreats Pvt. Ltd. and Tyre India Space India demonstrate that
judicial interpretations often align with the government's objectives, yet fail to alleviate
the grievances of taxpayers47. These rulings emphasize that legislative mechanisms must
balance revenue generation with ease of compliance. Ultimately, the CGST Act’s success
lies in harmonizing its legal, administrative, and public welfare goals—a balance still
evolving under the critical gaze of stakeholders.

References

Case Laws

1. State of West Bengal v. Kesoram Industries Ltd., (2004) 10 SCC 201.

2. Union of India v. Raghunath S. Shetty, (2018) SCC Online SC 1205.
45
K.T. Shah, Indian Fiscal Policy and Public Welfare (Economic Policy Press, 1949)
46
GSTN Official Website, Compliance Mechanisms, https://www.gstn.org.
47
Safari Retreats Pvt. Ltd. v. Chief Comm’r, 2019 SCC OnLine Ori 314 (India)
3. Tech Mahindra Ltd. v. Union of India, (2018) SCC Online SC 2346.
4. Hindustan Zinc Ltd. v. State of Rajasthan, (2002) 5 SCC 215.
5. Safari Retreats Pvt. Ltd. v. Chief Commissioner, (2019) SCC Online SC 1234.
6. M/s D.Y. Beathel Enterprises v. State Tax Officer, (2021) SCC Online Mad 103.
7. Tyre Space India v. State Tax Officer, Kollam, (2021) SCC Online Ker 4321.

Books

1. Soli Sorabjee & Arvind P. Datar, Nani Palkhivala: The Courtroom Genius, 2018.
2. Justice V.R. Krishna Iyer, Taxation in India: A Historical and Contemporary
Analysis, 2021.

Articles

1. M.P. Singh, "GST and Federalism: Balancing Centre-State Relations," Indian

Journal of Constitutional Law, 2017.
2. A.K. Bansal, "Constitutional Dimensions of the GST Regime in India," Tax Law
Journal, 2019.
3. R. Venkat, "Digital Economy and Taxation Challenges under GST," Economic and
Political Weekly, 2018.
4. S. Chawla, "ITC Mechanism under GST: A Critical Analysis," Taxmann’s GST
Review, 2020.
5. P. Gupta, "GST Compliance and Its Impact on SMEs," Journal of Business Law and
Policy, 2021.
6. K.T. Shah, "Socio-Economic Implications of GST in India," Indian Economic
Review, 2020.