What is consumption based tax under GST?

Meaning of Consumption based tax

If we can assume goods or services as the horse, GST is a horse rider. Wherever the horse moves, the rider moves along with. GST is called a consumption based tax because of it was payable to the state in which goods or services are actually consumed.

There is a logical reason behind GST being a consumption based tax. Under the current scenario, the tax is payable in the state where goods are produced. E.g. if goods are sold from Gujarat to Rajasthan, then the tax shall be paid to the government of Gujarat. This is origin-based taxation. Under this principle, consuming state is not getting any tax revenue which is tax base erosion of that particular state. This problem is resolved under proposed GST regime.

Since GST is a consumption based tax, tax revenue will be levied and collected by the consuming state, and this helps the consuming state to protect their tax base.

Similar things were undertaken by the central government under Income-tax Act, 1961, to save the tax base by amending section 9 many times.

Conclusion

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