Q.Why is GST described as a destination-based tax? Explain with reference to inter-state trade.

GST is called destination-based because the tax revenue is ultimately meant to belong to the state where the goods or services are finally consumed, not the state where they were produced or despatched from.

The meaning of 'destination-based'. A tax system can be built around either where a good is produced/sold from (an origin-based system) or where it is ultimately consumed (a destination-based system). GST was deliberately designed as destination-based: the tax revenue is meant to belong to the state in which the goods or services are finally consumed, regardless of where in the country they were manufactured or from which state the sale originated.

Contrast with the earlier system. Under the central sales tax that applied to inter-state sales before GST, the tax collected largely stayed associated with the state from which the goods were despatched — the origin state — even though the actual consumer, and the associated infrastructure/public spending that consumption implicitly benefits from, was located in a different state. This meant a manufacturing-heavy state could accumulate tax revenue disproportionate to its own residents' actual consumption, while a state that consumed a lot but produced comparatively little received less than what its residents' consumption would justify.

How GST applies the destination principle. On an inter-state supply, IGST is charged and collected by the Central Government, precisely because a single central tax can be more easily apportioned afterward between the Centre and the state where consumption actually takes place, rather than each state trying to separately tax an inter-state movement. For example, if a manufacturer in Gujarat sells goods to a retailer in Rajasthan who then sells to a final consumer there, the state-level share of the GST is ultimately meant to be credited to Rajasthan, the state where the goods are finally consumed — not to Gujarat, even though Gujarat is where production and the initial despatch happened.

Why this matters. The destination principle ensures that GST revenue tracks actual consumption across the country, which is considered a fairer and more predictable basis for sharing indirect tax revenue between the Centre and states than an origin-based system that rewards states purely for being large producers or exporters to other states.