The GST is an indirect tax that would replace existing levies such as excise duty, service tax and

valueadded tax (VAT). The states and the federal government will impose the tax on almost all goods and services produced in India or imported. Exports will not attract GST. Producers will receive credits for tax paid earlier, which will eliminate multiple taxation on the same product or service. Direct taxes, such as income tax, corporate tax and capital gains tax will not be affected. WHAT'S THE RATIONALE? Eliminating a multiplicity of existing indirect taxes will simplify the tax structure, broaden the tax base, and create a common market across states and federally administered districts. At the same time, GST will lower the average tax burden for goods and services companies that now pay "cascading" taxes on top of taxes through the production process. Reducing production costs will make exporters more competitive. WHY THE OPPOSITION? States are worried they will lose their fiscal autonomy if they cannot impose taxes on their own. The BJP has said these concerns must be addressed by the government, but Prime Minister Manmohan Singh has said the resistance is because of political reasons. WHAT ARE THE PROPOSED RATES? In the first year, the government proposes two rates -- 12 percent for essential items and 20 percent for others. In the second year, the higher rate would be lowered to 18 percent, with the goal that both rates converge at 16 percent, split equally between the federal government and the states. ARE ANY EXEMPTIONS PROPOSED? Yes. The GST will not cover goods like crude oil, diesel, petrol and alcohol. These goods are major sources of revenues for most states. WILL THE STATES LOSE OUT? New Delhi will compensate states for potential lost revenue and Finance Minister Pranab Mukherjee has assured states that if needed, he would sweeten a 500-billion rupee ($10.8 billion) fund that a government panel has proposed as an incentive for the states to buy into GST. WHAT HAPPENS NEXT? The bill will go to a standing committee of parliament, which will make recommendations and send it back for voting. The government is not bound to accept these recommendations. It is unlikely the bill will be taken for voting before the monsoon session of parliament, likely in July. The bill needs the support of two-third of parliament and the approval of half of India's states. WILL THE ROLLOUT BE DELAYED? Revenue Secretary Sunil Mitra has said the implementation is likely to miss an April 2012 deadline. It would be the third such delay.

WHAT IS THE REVENUE IMPACT? The GST was initially intended to be revenue-neutral but is now expected to increase the tax take thanks to more efficient collection and increased compliance. WHAT ABOUT THE ECONOMIC IMPACT? Implementation of a comprehensive GST would lift India's economy of over $1 trillion by between 0.9 percent and 1.7 percent, on top of whatever growth would otherwise be achieved, according to a report by the New Delhi-based economic think-tank the National Council of Applied Economic Research.
Why GST is being introduced? A product or service passes through many stages till it reaches the final consumer. Governments at Central and State level have, as and when the need arose, introduced many indirect taxes on various taxable events in this value chain (such as Excise duty on manufacture, VAT on sale etc). As these taxes are levied on different taxable events they have their limitations. To illustrate further, lets take an example of Excise Duty. Excise duty is levied on manufacture and it fails to tax the value addition at distribution level. Additionally, at present, goods suffer two levies (Excise and VAT) whereas taxable services suffer only one levy i.e. service tax. This leads to distortion: distortion arises because the relative prices of services would be lower as compared to goods. Even, as current tax system treats goods and services differently, in certain cases there is double taxation (software being one of such case where the industry has taken conservative stand and both VAT and Service Tax is being currently levied). Also, there are restrictions on availment of credit such as a service provider cannot avail credit of VAT and a trader cannot avail credit of Service tax. The above lacunas affect free flow of goods and services. Additionally, it brings uncertainty in the trade which is not good for the economy as a whole. GST is now being projected as a solution to all these problems.