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Contents

Approval Sheet

Acknowledgement

Abstract

1. INTRODUCTIONS 1-1

Meaning of tax 1-1


Characteristic of tax 1-1
Constitutionally established scheme of taxation 1-2
Meaning of direct & indirect taxes 1-5
Direct tax 1-5
Indirect tax 1-5
Taxation in India 1-5
Revenue from indirect taxes. 1-7

2. INDIRECT TAX 2-1

Indirect Tax 2-1


Examples of Indirect Taxes 2-2
Central Excise Duty 2-2
Customs Duty 2-4
Service Tax 2-5
Central Sales Tax 2-6
Value Added Tax [VAT] 2-7
Merit of Indirect Taxes 2-8
Demerit of Indirect Taxes 2-4
Administration 2-10
Indirect tax reform in India 2-10

Towards Taxing the Value-Added: 2-10


From Central Excise to CENVAT:
Towards Taxing the Value Added: 2-11
From Sales Tax to State VAT
Expanding the Tax Base: Service Tax 2-14
Reducing the Tax Rate: Lowering Dependence 2-14
on Indirect Taxes
Unfinished reforms 2-16
Merger of indirect taxes i.e. GST 2-17
Summary 2-18

3. GOODS AND SERVICE TAXX [GST] 3-1

Introduction 3-1
Goods and Service Tax 3-2
GST – A backdrop 3-2
Highlights of the GST in India 3-3
Issues to be decided yet. 3-7
Administration of the tax. 3-8
Impact of GST India INC. 3-10
Beneficiaries after GST 3-12
Impact of GST on Economy. 3-12
GST work at the ground level. 3-12
Merits of GST 3-13
Pre-requisites for successful implementation of GST 3-14
GST- Expectation 3-15
Effective date of GST Rollout 3-17
Experience of GST in other country 3-17
Conclusion 3-18
Summary 3-20
Chapter 1

INTRODUCTION

MEANING OF TAX

Tax is the amount paid by person staying with a territorial limit of sovereign State
and is levied compulsory on individuals, goods, property, business, services etc. tax
constitutes government revenue. The purpose of taxation is to apportion the cost of
Government among those who in some measures are privileged to enjoy its benefits and
hence must bear its burden. Therefore, the ordinary notion of taxation that it is a penalty
imposed on the subject by the sovereign power is not correct. Tax is also not a liability on
the subject emanating from any contract. But it is a payment without any direct Quid Pro
Quo.

CHARACTERISTICS OF TAX;

Taxation is devoid of rational approach, Rates of taxation depend entirely on the will of
the Finance bill of country or State. There is no uniformity either in coverage of items or
quantum of levy in the state as the concept of fiscal policy for levy of tax differs.

Though there may not be any uniformity in taxation, determination of the rates of
taxes is a part of fiscal policy pursued by the Central Government or State Government as
the case may be for economic growth in the country. High or Low rates of taxes,
exemption full or partial, inclusions or otherwise of a particular section or taxation, etc.,
are broad policy issues decided by Government, keeping in view the socio-economic
compulsions, and revenue need. The incidence may vary depending on one’s abilities to
pay, though attempts are made to see that persons with equal financial status should make
equal tax payment. The great Economist and Statesman Kautilya had cautioned the
sovereign power on arbitrary taxation policy when he observed that “one’s own root
Chapter 1 Introduction 1-2

should not be destroyed by giving up taxes not that of others (subject) by excessive
taxation.” John Marshall had a dig at taxation when he observed that “The power to tax
involves power to destroy” and there appears a lot of sanity in the statement. Common
man is burden by taxation directly or indirectly.

CONSTITUTIONALLY ESTABLISHED SCHEME OF TAXATION

Article 246 of the Indian Constitution, distributes legislative powers including taxation,
between the Parliament and the State Legislature. Schedule VII enumerates these subject
matters with the use of three lists;

 List - I entailing the areas on which only the parliament is competent to makes
laws,

 List - II entailing the areas on which only the state legislature can make laws,
and

 List - III listing the areas on which both the Parliament and the State
Legislature can make laws upon concurrently.

Separate heads of taxation are provided under lists I and II. There is no head of taxation in
the Concurrent List (Union and the States have no concurrent power of taxation). The list
of thirteen Union heads of taxation and the list of nineteen State heads are given below:

List I – Union List

S.
Parliament
No.

1 Taxes on income other than agricultural income (List I, Entry 82)

2 Duties of customs including export duties (List I, Entry 83)

Duties of excise on tobacco and other goods manufactured or produced in India except
3
(i) alcoholic liquor for human consumption, and (ii) opium, Indian hemp and other
Chapter 1 Introduction 1-3

narcotic drugs and narcotics, but including medicinal and toilet preparations containing
alcohol or any substance included in (ii). (List I, Entry 84)

4 Corporation Tax (List I, Entry 85)

Taxes on capital value of assets, exclusive of agricultural land, of individuals and


5
companies, taxes on capital of companies (List I, Entry 86)

6 Estate duty in respect of property other than agricultural land (List I, Entry 87)

7 Duties in respect of succession to property other than agricultural land (List I, Entry 88)

Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway
8
fares and freight (List I, Entry 89)

Taxes other than stamp duties on transactions in stock exchanges and futures
9
markets (List I, Entry 90)

Taxes on the sale or purchase of newspapers and on advertisements published therein


10
(List I, Entry 92)

Taxes on sale or purchase of goods other than newspapers, where such sale or purchase
11
takes place in the course of inter-State trade or commerce (List I, Entry 92A)

Taxes on the consignment of goods in the course of inter-State trade or commerce (List
12
I, Entry 93A)

13 All residuary types of taxes not listed in any of the three lists (List I, Entry 97)

Table No. 1.1 – Union List of scheme of taxtion

List II – State List

S.
State Legislature
No.

Land revenue, including the assessment and collection of revenue, the maintenance
1 of land records, survey for revenue purposes and records of rights, and alienation of
revenues (List II, Entry 45)

2 Taxes on agricultural income (List II, Entry 46)


Chapter 1 Introduction 1-4

3 Duties in respect of succession to agricultural income (List II, Entry 47)

4 Estate Duty in respect of agricultural income (List II, Entry 48)

5 Taxes on lands and buildings (List II, Entry 49)

6 Taxes on mineral rights (List II, Entry 50)

Duties of excise for following goods manufactured or produced within the State (i)
7 alcoholic liquors for human consumption, and (ii) opium, Indian hemp and other
narcotic drugs and narcotics (List II, Entry 51)

Taxes on entry of goods into a local area for consumption, use or sale therein (List
8
II, Entry 52)

9 Taxes on the consumption or sale of electricity (List II, Entry 53)

10 Taxes on the sale or purchase of goods other than newspapers (List II, Entry 54)

Taxes on advertisements other than advertisements published in newspapers and


11
advertisements broadcast by radio or television (List II, Entry 55)

Taxes on goods and passengers carried by roads or on inland waterways (List II,
12
Entry 56)

13 Taxes on vehicles suitable for use on roads (List II, Entry 57)

14 Taxes on animals and boats (List II, Entry 58)

15 Tolls (List II, Entry 59)

16 Taxes on profession, trades, callings and employments (List II, Entry 60)

17 Capitation taxes (List II, Entry 61)

Taxes on luxuries, including taxes on entertainments, amusements, betting and


18
gambling (List II, Entry 62)

19 Stamp duty (List II, Entry 63)

Table No. 1.2 – State List of scheme of taxtion

Any tax levied by the government which is not backed by law or is beyond the powers of
the legislating authority may be struck down as unconstitutional.
Chapter 1 Introduction 1-5

MEANING OF DIRECT & INDIRECT TAX :

Taxes are either direct or indirect. Incidence of levy is the determinative factor to
distinguish between direct or indirect tax. The character of levy would remain so
notwithstanding the time and manner of collection. So long there are no changes to
essential features of a tax, it continues to be so.

DIRECT TAX :

A direct tax is one which is demanded from the very person who it is intended or desired
should pay it. Income-tax, professional tax, etc., are examples of direct tax. The tax is
paid by the person concerned without any hope of shifting the incidence to another
person. It is, therefore, levied on the person who ultimately bears the burden of it.

INDIRECT TAX :

“Indirect Taxes” accordingly to John Stewart Mill, “are those which are demanded from
one person on the expectation and intention that he shall indemnify himself at the expense
of another – such are the Excise and customs”. The tax is levied on goods and services
and not on income or profits. The incidence of tax is carried by the commodity to the
actual point of consumption.

TAXATION IN INDIA

Taxes in India are levied by the Central Government and the State Governments. Some
minor taxes are also levied by the local authorities such the Municipality or the Local
Council.
Chapter 1 Introduction 1-6

The authority to levy a tax is derived from the Constitution of India which allocates the
power to levy various taxes between the Centre and the State. An important restriction on
this power is Article 265 of the Constitution which states that "No tax shall be levied or
collected except by the authority of law." Therefore each tax levied or collected has to be
backed by an accompanying law, passed either by the Parliament or the State Legislature.

Table 1.3 Indian Taxation System


Chapter 1 Introduction 1-7

REVENUE FROM INDIRECT TAXES

REVENUE IMPORTANCE OF CENTRAL AND STATES TAXES


FOR DETERMINING GST RATE SHARES.

(Rs. crore)
Central and State Taxes 2000-01 2001-02 2002-03 2003-
04
Central Taxes Exci 90990 93692 105963 119116
(Union Duties se
+ Service Tax + CVD
+
SAD)
State Taxes: Group 1 # 104824 112054 124556 142613
State Taxes: Group 1+ 116010 125039 139981 160474
Group 2##
Centre + State I 195814 205746 230519 261729
Share of Centre (%) 46.5 45.5 46 45.5
Share of States (%) 53.5 54.5 54 54.5
Centre + States II 207000 218731 245944 279590
Share of Centre (%) 44 42.8 43.1 42.6
Share of States (%) 56 57.2 56.9 57.4
Central and State Taxes 2004-05 2005-06 2006-07 2007-08 2008-
09
Central Taxes Exci 135470 164031 203841 234826 233469
(Union Duties se
+ Service Tax + CVD
+
SAD)
State Taxes: Group 1 # 164478 182077 213714 247495 284153
State Taxes: Group 1 + 186785 209744 249687 290186 333448
Group 2##
Centre + State I 299948 346108 417555 482321 517622
Share of Centre (%) 45.2 47.4 48.8 48.7 45.1
Share of States (%) 54.8 52.6 51.2 51.3 54.9
Centre + States II 322255 373775 453528 525012 566917
Share of Centre (%) 42 43.9 44.9 44.7 41.2
Share of States (%) 58 56.1 55.1 55.3 58.8
Table No. 1.4 Revenue Importance of Central and States Taxes for Determining
GST Rate Shares.
Chapter 1 Introduction 1-8

Central taxes include Union excise duties, service tax, additional duties of
customs and special CVD. # Group 1: All sales taxes, state excise duties,
motor vehicle tax, tax on goods and passengers, taxes and duties on
electricity, entertainment tax, other taxes on goods and services
## Group 2: land revenue, stamps and registration fees, urban immovable property tax
Chapter 2

INDIRECT TAX

INDIRECT TAX

Indirect Tax or the tax that is levied on goods or services rather than on persons or
organizations are of different types in India like Excise Duty, Customs Duty, Service Tax,
and Securities Transaction Tax. In India, there are a series of Tax laws and regulations in
order to control the indirect taxation, which can be either law, made by the central
government or even can be state specific laws. As a result these taxes are an important
part of the total cost of material sold. It is thus essential to make appropriate planning for
such payments, collection and payment of taxes in input, input services & collection of
the said taxes on sale of goods and services and payment of such taxes to the credit of
Government of India.

In general, the Indirect Tax in India is a complex system of interconnecting laws and
regulations, which includes specific laws of different states. For this there are many
reliable organizations in India, which employs efficient Indirect Tax professionals to help
the industry and/or to their clients. These tax professionals with their in-depth knowledge
and wide-ranging experience offers effective planning methods to their clients in order to
help in their cost minimization. The Indirect Taxation regime encompasses various types
of taxes like Sales Tax, Service Tax, Custom and Excise Duties, VAT and Anti-Dumping
Duties, and the organizations provide services in all these related fields.

In the recent year, the Indian government has undertaken significant reform of
indirect taxation system. This includes the initiation of a region-based and state-level
VAT on goods. However, it may be noted that as taxes still forms a barrier to inter-state
trading in order to attain a secured market for the activities related to services and goods
Chapter 2 Indirect Tax 2-2

more reform is needed. Some of the reforms that can be introduced for a better indirect
taxation system in India are -

 The serialized set of Indirect Taxes so far activated at the central and state
levels should be amalgamated and treated as a single tax.

 The integrated Indirect Tax should be neutral at all levels such that chances of
fraudulence would be minimized.

 The Central Sales Tax, which obstructs easy trading between different states,
is being under the process of termination that would help to abolish the control
measures on the inter-state trade.

By the year 2011 the Indian government has planned to activate a goods and service
tax [GST} neutral at all levels in order to fulfill these objectives. The government can
undertake either an introduction of a national VAT or a system, which would permit both
a state VAT, or a central VAT. Along with this if the government also can incorporate a
central VAT that can be rebated, on the trade across the boundary lines, then there would
be minimum chances of fraudulence.
Chapter 2 Indirect Tax 2-3

EXAMPLES OF INDIRECT TAXES

CENTRAL EXCISE DUTY:

An excise or excise tax (sometimes called a duty of excise or a special tax)


may be defined broadly as an inland tax on the production for sale; or sale,
of a specific good or narrowly as a tax on a good produced for sale, or
sold, within the country. Excises are distinguished from customs duties,
which are taxes on importation. Excises, whether broadly defined or
narrowly defined, are inland taxes, whereas customs duties are
border taxes. Being an indirect tax as noted in the next paragraph, clearly
Chapter 2 Indirect Tax 2-4

explains that it can not be a tax on a product someone has produced for
their own consumption. e.g: A loaf of bread, a bottle of beer. It is not a
consumption tax, but a form of sales tax. As an individual can not pass the
tax on to the buyer as they are not selling it and no sale took place as they
are clearly not buying it off themselves.

An excise is an indirect tax, meaning that the producer or seller who pays
the tax to the government is expected to try to recover the tax by raising
the price paid by the buyer (that is, to shift or pass on the tax). Excises are
typically imposed in addition to another indirect tax such as a sales
tax or VAT. In common terminology (but not necessarily in law) an excise
is distinguished from a sales tax or VAT in three ways: (i) an excise
typically applies to a narrower range of products; (ii) an excise is typically
heavier, accounting for higher fractions (sometimes half or more) of the
retail prices of the targeted products; and (iii) an excise is
typically specific (so much per unit of measure; e.g. so many cents per
gallon), whereas a sales tax or VAT is ad valorem, i.e. proportional to
value (a percentage of the price in the case of a sales tax, or of value added
in the case of a VAT). Typical examples of excise duties are taxes
on gasoline and other fuels, and taxes on tobacco and alcohol (sometimes
referred to as sin tax)

Excise tax is notable for the vagueness of its definition "a tax levied
on certain goods and commodities produced or sold within a country and
on licenses granted for certain activities". The formula "produced or sold"
is applicable to both domestic and foreign products. But the word "certain"
is not further explained in the definition — or even in the etymology,
according to which the word excise is derived from the Dutch accijns,
which is presumed to come from the Latin accensare, meaning simply "to
tax".
Chapter 2 Indirect Tax 2-5

It would be impossible to give a general formula predicting which goods


are subject to excise. Lists of such goods are readily provided by
governments, and from each list one may be able to infer the motives for
grouping such goods together; however, no explicit formula appears to be
provided by any one government.

The Central Excise duty is levied in terms of the Central Excise Act, 1944
and the rates of duty, ad valorem (on value) or specific, are prescribed
under the Schedule I and II of the Central Excise Tariff Act, 1985. The
taxable event under the Central Excise law is ‘manufacture’ and the
liability of Central Excise duty arises as soon as the goods are
manufactured. The Central Excise Officers are also entrusted to collect
other types of duties levied under Additional Duties (Goods of Special
Importance) Act, Additional Duties (Textiles and Textiles Articles) Act,
Cess etc.

CUSTOMS DUTY:

Customs Duty is a type of indirect tax levied on goods imported into India
as well as on goods exported from India. Taxable event is import into or
export from India. Import of goods means bringing into India of goods
from a place outside India. India includes the territorial waters of India
which extend upto 12 nautical miles into the sea to the coast of India.
Export of goods means taking goods out of India to a place outside India.

In India, the basic law for levy and collection of customs duty is Customs
Act, 1962. It provides for levy and collection of duty on imports and
exports, import/export procedures, prohibitions on importation and
exportation of goods, penalties, offences, etc.
Chapter 2 Indirect Tax 2-6

The Constitutional provisions have given to Union the right to legislate


and collect duties on imports and exports. The Central Board of Excise &
Customs (CBEC) is the apex body for customs matters. Central Board of
Excise and Customs (CBEC) is a part of the Department of Revenue under
the Ministry of Finance, Government of India. It deals with the task of
formulation of policy concerning levy and collection of customs duties,
prevention of smuggling and evasion of duties and all administrative
matters relating to customs formations. The Board discharges the various
tasks assigned to it, with the help of its field organizations namely the
Customs, Customs (preventive) and Central Excise zones,
Commissionerate of Customs, Customs (preventive), Central Revenues
Control Laboratory and Directorates. It also ensures that taxes on foreign
and inland travel are administered as per law and the collection agencies
deposit the taxes collected to the public exchequer promptly.

In board since the terms customs duty means all coastal duties which
includes import duty, export duty and transit duty. since import duty
figures mainly in Customs Tariff, hence customs duty is understood as
import duty.

SERVICE TAX:

Service Tax is levied on taxable services provided to any person by the


person rendering such service or responsible for collecting the service tax.
Tax on goods and services is a composite once, usually levied with
reference to Value Added Tax System. Since the person responsible for
collecting the service tax is also consuming taxable goods, he gets rebate
on taxes paid on such commodities. In India tax on goods is distinct and
different from tax on services. The nature and extent of service tax in India
is discussed in Service Tax Manual. Service Tax was introduced in India
Chapter 2 Indirect Tax 2-7

in 1994 by Chapter V of the Finance Act, 1994. It was imposed on a initial


set of three services in 1994 and the scope of the service tax has since been
expanded continuously by subsequent Finance Acts. The Finance Act,
extends the levy of service tax to the whole of India, except the State of
Jammu & Kashmir.

The Central Board of Excise & Customs (CBEC) under Department of


Revenue in the Ministry of Finance, deals with the task of formulation of
policy concerning levy and collection of Service Tax. In exercise of the
powers conferred, the Central Government makes service tax rules for the
purpose of the assessment and collection of service tax. The Service Tax is
being administered by various Central Excise Commissionerates, working
under the Central Board of Excise & Customs. There are six
Commissionerates located at metropolitan cities of Delhi, Mumbai,
Kolkata, Chennai, Ahmedabad and Bangalore which deal exclusively with
work related to Service Tax. Directorate of Service Tax at Mumbai over
sees the activities at the field level for technical and policy level
coordination.

CENTRAL SALES TAX:

Sales Tax is levied and collected from registered dealer on sale price of the
goods. In the case of Central Sales Tax is on different, except that it is
levied on inter-state sales. The registered dealer pays tax under the Act on
all sales of goods other than electrical energy effected by him in course of
inter-State trade or commerce.

A sale or purchase of goods shall be deemed to take place in the course of


inter-state trade or commerce if such sale or purchase occasions the
movement of goods from one State to another or is effected by a transfer
Chapter 2 Indirect Tax 2-8

of document to title to the goods during the movement from one State to
another. Liability to Central Sales Tax is not dependent liability to Sales
Tax in the appropriate State.

VALUE ADDED TAX [VAT]

VAT is a multi-stage tax levied at each stage of the value addition chain,
with a provision to allow input tax credit (ITC) on tax paid at an earlier
stage, which can be appropriated against the VAT liability on subsequent
sale. VAT is intended to tax every stage of sale where some value is added
to raw materials, but taxpayers will receive credit for tax already paid on
procurement stages. Thus, VAT will be without the problem of double
taxation as prevalent in the present tax laws Presently VAT is followed in
over 160 countries. The proposed Indian model of VAT will be different
from VAT as it exists in most parts of the world. In India, VAT will
replace the existing state sales tax system.

One of the many reasons underlying the shift to VAT is to do away with
the distortions in our existing tax structure that carve up the country into a
large number of small markets rather than one big common market. In the
present sales tax structure tax is not levied on all the stages of value
addition or sales and distribution channel which means the margins of
distributors/ dealers/ retailers et al are not subject to sales tax at present.
Thus, the present pricing structure needs to factor only the single-point
levy component of sales tax and the margins of manufacturers and dealers/
retailers etc, are worked out accordingly. Under the VAT regime, due to
multi-point levy on the price including value additions at each and every
resale, the margins of either the re-seller or the manufacturer would be
reduced unless the ultimate price is increased.
Chapter 2 Indirect Tax 2-9

The States have reiterated their commitment to introduce Value Added


Tax (VAT) from April 1, 2003, after the Centre agreed to compensate
them for any revenue loss due to the introduction of this new taxation
measure by up to 100 per cent.

The States, on their part, have decided that all their VAT legislation would
have common provisions in respect of all important matters and a simple
VAT law will replace the existing plethora of State laws such as those on
sales tax, turnover tax, purchase tax, entry tax, and the like.

The VAT by the States would have two basic rates of 10 per cent and 12.5
per cent, which would be revenue neutral rates for most items.. The two
basic rates have been selected so that States, which have lower sales tax
rates, could raise it to 10 per cent while those levying higher rates of 17-18
per cent would have to lower them to 12.5 per cent. Over time, the VAT
rates would be merged into one uniform rate. It has also been decided to
phase out Central State Tax (CST) within three years with the introduction
of VAT as this causes distortions in internal trade and impeded
development of a common market

MERIT OF INDIRECT TAXES

 CONVENIENCE IN ASSESSMENT & RELATIVE DIFFICULTY IN


EVASION – The tax is required to be assessed by the assessee him self on
appropriate forms and is submitted to the concerned officers who checks it and
if not found in order then explanation/ demands are raised in terms of
Act/Rules. The records of the assessee are periodically audited and
genuineness and truthfulness is reconfirmed. In this system it is difficult to
evade the tax.
Chapter 2 Indirect Tax 2-
10
 INCLUSION OF TAX IN THE PRICE – Since it is a indirect tax the
assessee is entitled to increase the price of goods by adding the tax in the value
thus, the burden of tax is transferred is shouldered by the purchaser.

 MAY NOT BE REGRESSIVE IF LEVIED ON AD-VALORUM BASIS –


the tax is levied on ad-valorem basis on every value addition the tax is levied
progressively.

 DIFFICULT TO EVADE – If attempted is made to evade the tax the result is


counterproductive because of ad- valorem rates and CENVAT system.

 TAXES ON DRINKS, NARCOTICS & TOBACCO, SERVE A SOCIAL


PURPOSE BY DISCOURAGING THEIR CONSUMPTION – Tax rate on
such items is more in percentage thus, making the drinks, narcotics, & tobacco
dearer.
Chapter 2 Indirect Tax 2-
11

DEMERIT OF INDIRECT TAXES

 Regressive Character.

 Do not create social Consciousness as payment of tax is not felt by the payer.

 Government is not certain about the proceeds of these taxes.

 Burden of Indirect taxes can be shifted forward or backward as such


consumers have to bear the ultimate burden of tax.

 Can be evaded by methods as Smuggling, Falsification of Account etc.


Chapter 2 Indirect Tax 2-10

ADMINISTRATION

The Indirect Taxes are administered by the Central Board of Excise and Customs (CBEC)
or Board) through its field offices, the Central Excise Commissionerate. For this purpose,
the country is divided into 10 Zones and a Chief Commissioner of Central Excise
Department head each of Zone. There are total 61 Commissionerate in these Zones
headed by Commissioner of Central Excise. Divisions and Ranges are the subsequent
formations, headed by Deputy/Assistant Commissioners of Central Excise and
Superintendents of Central Excise.

Central Sales Tax is levied by the Central Government but the tax so levied is collected
by the appropriate state i.e. the State in which the registered dealer is located. When the
registered dealer is located in more than one State, then each places of business is treated
as separate entity for purpose of levy and collection of the Central Sales Tax.
Chapter 2 Indirect Tax 2-11

INDIRECT TAX REFORM IN INDIA

TOWARDS TAXING THE VALUE-ADDED: FROM


CENTRAL EXCISE TO CENVAT: -

The current generation of reforms of indirect taxes leading the system


towards a value added tax started with the introduction of MODVAT from
March 1, 1986 with reference to specified Chapters of the Central Excise
Tariff Act, 1985. At first, the coverage was limited to 37 out of 91
Chapters. From March 1, 1987, all commodities except petroleum
products, textiles, tobacco, cinematographic films and matches were
covered. In the MODVAT system, early in the nineties, full rebate on the
excise tax paid on capital goods was allowed instead of setting up a system
of annual depreciation related deductions. With effect from 1995-96, the
entire manufacturing chain was brought under MODVAT.
Chapter 2 Indirect Tax 2-12

The central government change MODVAT to CENVAT in 1996-97. The


CENVAT covers value added in the case of production and sale of goods
up to the stage of ‘manufacturing’. Compared to MODVAT, CENVAT
had fewer rates. The taxation space up to the value added in the production
of goods is common between the centre and states. While the tax structure
was thus simplified, continuation of several surcharges and cesses
continued to complicate the system. These are listed below:

a) Special Excise Duty,


b) National Calamity Contingent Duty,
c) Education Cess,
d) Secondary and Higher Education,
e) Cess on Motor Spirit,
f) Cess on High Speed Diesel Oil,
g) Surcharge on Motor Spirit, and
h) Surcharge on Pan Masala and Tobacco Products.
Chapter 2 Indirect Tax 2-13

TOWARDS TAXING THE VALUE ADDED: FROM SALES TAX TO


STATE VAT

State taxes include state sales taxes, the Central Sales Tax (CST) assigned
by the central government to the states, motor vehicle tax, state excise
duties, entertainment taxes. The structure of sales tax, prior to reforms
undertaken in late nineties was characterized by high tax rates, multiplicity
of tax rate and exemptions, lack of uniformity in defining the tax base
across states, large number incentives, and cascading of taxes. During
reforms of sales taxes prior to the introduction of state VAT, most states
had agreed to phase out the incentive related exemptions, and implement
floor rates. There are several minor taxes imposed by the States on the
sale, purchase, storage and movement of different goods.
Chapter 2 Indirect Tax 2-14

Apart from the general sales tax, most states levied an additional sales tax
or a surcharge. In addition, the states levy luxury tax as also an entry tax
on the sale of imported goods. All these practices led to heterogeneity in
structure, as well as rates, causing diversion of trade as well as shifting of
manufacturing activity from one state to another. Further, widespread
taxation of inputs led to vertical integration of firms, encouraging
production of more and more of the inputs needed rather than purchasing
them from ancillary industries. This system taxation of goods became non-
neutral, interfering with the producers' choice of inputs as well as with the
consumers' choice of consumption, thereby leading to severe economic
distortions.

With the initiative of Empowered Committee of the state Finance


Ministers, states initiated indirect tax reforms in the late nineties. As a first
step, they reduced the rate categories in the case of sales taxes, reduced
exemptions, and introduced floor rates. There were tangible revenue
benefits after these changes, which facilitated, under the guidance of the
Empowered Committee, the implementation of state level VAT.

The State-VAT recommended by the Empowered Committee of state


Finance Ministers was elaborated in a White Paper brought out by the
Government of India. The main features of the scheme suggested by the
Empowered Committee were:

a) uniform schedule of rates of VAT for all states, making the system
simple and uniform and prevent unhealthy tax competition among
states;

b) the provision of input tax credit meant for preventing cascading


effect of tax;

c) the provision self assessment by dealers aimed at reducing


harassment; and
Chapter 2 Indirect Tax 2-15

d) the zero rating if exports aimed at increasing the competitiveness of


Indian exports.

As per the basic principles of VAT, the State-VAT provides that for all
exports made out of the country, tax paid within the state will be refunded
in full. Units located in Special Economic Zone (SEZ) and Export
Oriented Units (EOUs) are to be granted either exemption from payment
of input tax.

The most important part of the VAT scheme relates to the tax rates. Under
the VAT system covering about 550 goods, only two basic VAT rates of 4
and 12.5 percent are to apply plus a specific category of tax-exempted
goods and a special VAT rate of 1 percent only for gold and silver
ornaments.

Under the exempted category, the Empowered Committee placed 46


commodities comprising of natural and unprocessed products in the un-
organized sector, items that are legally barred from taxation and items
which have social implications. Under the state-VAT, there is the proposal
to give flexibility to the states to select a set of maximum of 10
commodities States for exemption from a list of goods specified by the
Empowered Committee, which are of local social importance for the
individual States without having any inter-state implications.

The rest of the commodities in the list are common for all the States.
Under 4 percent VAT rate category, the largest number of goods (about
270) were placed, common for all the States, comprising of items of basic
necessities such as medicines and drugs, all agricultural and industrial
inputs, capital goods and declared goods. The remaining commodities,
common for all the States, will fall under the general VAT rate of 12.5
percent
Chapter 2 Indirect Tax 2-16

It was proposed that VAT on AED items relating to sugar, textile and
tobacco, because of initial organizational difficulties, will not be imposed
for one year after the introduction of VAT and till then the existing
arrangement will continue.

EXPANDING THE TAX BASE: SERVICE TAX.

The service tax was levied for the first time in 1994-95 budget. Since then
its rate has been progressively increased and the number of services under
the service tax net has also been increased year after year (Table 2.6.3.1)

Service Tax was introduced from 1st July 1994

Union Number of Cumulative


budget Service Number
s of
Introdu Service
ced s
1994-95 3 3
1996-97 3 6
1997-98 9 15
1998-99 11 26
2001-02 15 41
2002-03 10 51
2003-04 7 58
2004-05 7 65
2005-06 15 80
2006-07 12 92
2007 -08 6 98
2008-09 4 102
2009-10 4 106
2010-11 8 114
Table 2.1 - Taxation of Services
Chapter 2 Indirect Tax 2-17

REDUCING THE TAX RATE: LOWERING DEPENDENCE ON INDIRECT


TAXES

Reducing the tax rates as well as the number of rate categories was a key
objective of the reform. In the case of CENV AT, most of the products
used to attract excise duties at the rate of 14 percent until recently. As per
an announcement in December 2008, the core Cenvat rate has been
brought down to 10 percent. Some products also attract special excise
duty/and an additional duty of excise at the rate of 8 percent above the
Cenvat rate. In addition, there is a 2 percent education and 1 percent higher
education cess
Chapter 2 Indirect Tax 2-18

applicable on the aggregate of the duties of excise. Excise duty is levied on


ad valorem basis or based on the maximum retail price in some cases

In 2005, the core Cenvat rate was kept at 16 per cent for a majority of the
items. There were two more rates: a demerit rate of 24 per cent and a
concessional rate of 8 per cent. Effectively, there were several other rates
of excise duty that continue to be applied on different items, subject to
their end- use. With the 200809 budget, the core Cenvat rate was brought
down to 14 percent. This has now been brought down to 10 percent. The
adoption of the state VAT also led to rationalization and some reduction in
the tax rates. The rate of the central sales tax was also gradually brought
down.

Reduction of indirect tax rates led to a fall in the share of indirect taxes in
total taxes. This was compensated by a rise in the direct tax revenues so
that the overall tax revenue relative to GDP except for a few initial years
of reforms did not fall. It may be noted that the rate reduction led to higher
tax buoyancy in the case of direct taxes and fall in tax buoyancy in the case
of indirect taxes. However, it has reduced the dependence of overall tax
revenues on indirect taxes thereby facilitating the move to the next stage of
reforms towards GST where the risk of revenue shock to the system is less
now than used to be the case.

Table 2.2 – Share of Indirect Taxes in Total Tax Revenue

Reduction of indirect tax rates led to a fall in the share of indirect taxes in
total taxes. This was compensated by a rise in the direct tax revenues so
Chapter 2 Indirect Tax 2-19
that the
Chapter 2 Indirect Tax 2-20

overall tax revenue relative to GDP except for a few initial years of
reforms did not fall. It may be noted that the rate reduction led to higher
tax buoyancy in the case of direct taxes and fall in tax buoyancy in the case
of indirect taxes (Appendix Table A2). However, it has reduced the
dependence of overall tax revenues on indirect taxes thereby facilitating
the move to the next stage of reforms towards GST where the risk of
revenue shock to the system is less now than used to be the case.

UNFINISHED REFORMS

While the system of taxation is thus characterized by fragmentation and


overlaps in the case of goods, the taxation of services remains separated
and disjointed. The service tax is levied by the central government.
Taxation of goods by either tier of government may cascade into taxation
of services and vice versa since goods are needed in the production and
sale of services and services are needed in the production and sale of
goods. The nature of a modem economy is such that it is often difficult to
draw lines between goods and services as these are embedded into each
other. Considering the value added of goods and services taken together in
the overall Indian economy as providing a comprehensive tax base, there
are three kinds of segmentations that take place in India under the existing
arrangements: segmentation of goods from services, segmentation of
central jurisdiction vis-a-vis state jurisdictions, and segmentation of
production/manufacture from sale. These artificial divisions for purposes
of taxation lead to various distortions, administrative and compliance costs,
and inefficiencies. These are also not consistent with prevailing tax
practices in the modem economies of the world who have implemented a
value added tax regime including federal countries.

Thus, even after the introduction of the principle of taxation of value added
in India, its application has remained piecemeal and fragmented. Several
problems continue with each segment of the system of taxation of goods
and services as summarized below.
Chapter 2 Indirect Tax 2-21

1. In the case of Cenvat, the issues relating to defmition of


manufacturing and methodology of valuation remain causing
difficulties in implementation of the tax.

2. The problem of multiple rates remains although the tax rate


structure is simpler than what it used to be. This leads to various
classification disputes.

3. In the case of services taxation, problems relate to distinguishing


between a good and a service. The distinction between the two is
often blurred.

4. Exclusion of services from the tax base of the states potentially


erodes their tax- buoyancy in a growing economy.

5. Cascading has not been fully eliminated as there is cross cascading


between State VAT, Cenvat, and central services tax.

6. The Central sales tax continues to cause artificial inter-state border


boundaries and violating the destination based principle of taxation
of goods and services.

7. Many of these problems can be addressed by extending the scope


of taxation of services for the states and the scope of taxation of
goods up to the retail stage for the centre.
Chapter 2 Indirect Tax 2-22

MERGER OF INDIRECT TAXES I.E. GST

Before parting and to bring an end to this article we summarize that GST is a harmonized
consumption tax system, whose introduction will bring an end to a varied number of
Indirect taxes presently being levied by Central Government and State Government. The
proposed date of Introduction of GST has been announced by the Government to
1st April, 2011. Till now Government has not yet issued any Draft of GST model or
various provisions to be applied, all we can do is to wait for the Draft to release. Till then
we can only predict the outlook of the GST model in India and nothing can be said with
utmost certainty. However so far the proposal is to merge following taxes collected by
Chapter 2 Indirect Tax 2-23

Centre and State Government and to announce a composite rates of tax to be collected
and one point to be called as GST.

Central Taxes State Taxes


Central excise duty Value Added Tax/ Sales tax
Additional excise duties Entertainment tax (unless it is levied on
local bodies)
Service tax Luxury tax
Excise duty under Medicinal & ToiletriesTax on lottery, betting and gambling
Preparation Act
Countervailing duties (on imports in lieu ofEntry tax not in lieu of Octroi
excise duty)
Additional duty of Customs (levied onState surcharges and cesses in so far as
imports in lieu of value added tax or centralthey relate to supply of goods and
sales tax) services
Surcharges and Cesses**
Chart 2.3 – Marger of indirect Taxes into GST

SUMMARY

Indirect Tax or the tax that is levied on goods or services rather than on persons or
organizations are of different types in India like Excise Duty, Customs Duty, Service Tax,
and Securities Transaction Tax. In India, there are a series of Tax laws and regulations in
order to control the indirect taxation, which can be either law, made by the central
government or even can be state specific laws. As a result these taxes are an important
part of the total cost of material sold. It is thus essential to make appropriate planning for
such payments, collection and payment of taxes in input, input services & collection of
the said taxes on sale of goods and services and payment of such taxes to the credit of
Government of India.
Chapter 3

GOODS AND SERVICE TAX [GST]

INTRODUCTION

Indirect taxes on goods and services at the state level constitute 85 percent of own tax
revenue of the state governments of which sales tax alone accounts for 61percent. A
change in regime in recent times from cascading types sales taxes to taxes based on input-
tax credit within taxation of goods, as well as the adoption of a uniform rates of tax, has
resulted in buoyant revenues. However, the reform agenda is far from complete. The
proposed GST regime constitutes the next step towards comprehensive reforms of
indirect taxes in India. It would be the final step or a step in the right direction, depending
on how the country chooses to define the constituents of this new regime. Decisions on
the design of the proposed tax are not yet in the public domain. In this context, the
objective of this paper is twofold: First, to identify the likely form of the proposed tax and
the contentious issues that need a resolution before the tax can be implemented
effectively. Second, given the importance of indirect taxes in the portfolio of the states,
since any change would not affect all states uniformly, an attempt would be made to
project the likely impact of one particular design of GST on states. While these estimates
can at best be tentative, they will highlight the fact that the impact is differential across
states and these differences would have to be taken into account in designing the
proposed assignment of tax powers between the centre and the states.

The paper is organized as follows. Section 2 sets out the contours of a feasible design of
VAT in India. It also takes on board the various alternatives proposed. Section 3 looks at
the issues that need resolution and the options available for resolving the same. Section
4 provides estimates of the rates of tax that would ensure that the regime is revenue
neutral. It also illustrates the differential impact across states, under one configuration.
Chapter 3 Goods and Service Tax 3-2

This section works with the assumption that there is only one rate of tax under the new
regime.

GOODS AND SERVICE TAX

GOODS AND SERVICE TAX(GST) is a comprehensive value added tax on Goods and
Services. It is collected on value added at each stage of sales and purchase in the supply
chain without state boundaries. It would integrate all taxes currently levied in India by
central and state governments on goods and services like excise duty, service tax, state
VAT/Sales tax, entry tax/octroi, state excise duty, countervailing custom duty, luxury
tax, tax on consumption/sale of electricity, entertainment tax etc.

GST is a unified tax on goods and services aimed at replacing the multiple tax system
currently being followed by the Centre and States. GST is a multi-stage consumption tax
imposed on a broad range of goods and services. It is a tax on transactions and end-
customers who consume the goods or services bear the final cost of the tax. The
underlying principle is that the GST will have a simple structure and goods as well as
services will be taxed at a uniform rate. It is aimed to be a simple, nation-wide.

GST is a tax on goods and services with comprehensive and continuous chain of set-off
benefits from the producer’s point and service provider’s point up to the retailer’s level. It
is essentially a tax only on value addition at each stage, and a supplier at each stage is
permitted to set-off, through a tax credit mechanism.

GST – A BACKDROP

In India, VAT was introduced at the Central level for select commodities in terms of
MODVAT with effect from March 1, 1986, and in a step-by-step manner for all
commodities in terms of CENVAT in 2002-03. Subsequently, after Constitutional
Amendment empowering the Centre to levy taxes on services, these service taxes were
also added to CENVAT in 2004-05. The concept of Goods and Services Tax or GST was
Chapter 3 Goods and Service Tax 3-3

mooted by Dr. Vijay Kelkar, former Finance Secretary in 2004. The Kelkar Task Force
had suggested a comprehensive Goods and Services Tax (GST) based on VAT (value
added tax) principle. VAT was introduced in India from April 1, 2005 with a view to
substituting sales tax with many falling states in line from that date onwards. Afterwards,
the remaining states had fallen in line. Now, all States and Union Territories implemented
Value Added Tax in lieu of sales tax and VAT has been an unqualified success in raising
the tax revenue for the States. The rate of growth of tax revenue has nearly doubled from
the average annual rate of growth in the pre-VAT five-year period after the introduction
of VAT.

After VAT, the next logical step is GST. GST is an improvement over VAT. The
implementation of GST is a step towards a comprehensive indirect tax reform in the
country. The groundwork for implementation of GST with effect from April 1, 2010, was
started way back in 2007 after the then Finance Minister, P.Chidambaram, announced
GST rollout while presenting the Union Budget 2007-08 in Parliament. France
introduced GST in 1954 being the first country to introduce it. As of now, it is prevalent
in more than 140 countries, including, Canada, Australia, the UK, China, Germany, New
Zealand and Singapore. Most countries introduced a single GST while Brazil & Canada
have a dual GST.
Chapter 3 Goods and Service Tax 3-4

HIGHLIGHTS OF THE GST IN INDIA

The following are the highlights on Goods and Services Tax in India” announced by the
Empowered Committee on State Finance Minister in New Delhi on November 10, 2009
in the presence of Union Finance Minister, Pranab Mukherjee (the committee’s chairman
and West Bengal finance minister Asim Dasgupta released the document in New Delhi):

1. The Empowered Committee has agreed to phase out CST (central sales tax –
at present at a rate of two per cent) upon introduction of GST (Goods and
Services Tax) on the understanding that the States would be adequately
Chapter 3 Goods and Service Tax 3-5

compensated, by the Centre, for any revenues loss on account of phasing out
of CST.

2. DUAL GST: A dual GST structure is recommended. The two components are:
Central GST (CGST) to be imposed by the Centre and State GST (SGST) by
the States. Rates of GST would be decided later.

3. The date of implementation of GST will also be decided later

4. Separate acts will be enacted at the Centre and the States to implement CGST
and SGST respectively.

5. Since the Central GST and State GST are to be treated separately, taxes paid
against the Central GST shall be allowed to be taken as input tax credit (ITC)
for the Central GST and could be utilized only against the payment of Central
GST. The same principle will be applicable for the State GST.

6. Cross utilization of ITC between the Central GST and the State GST would
not be allowed except in the case of inter-State supply of goods and services
under the IGST (Integrated GST) model. IGST would consist of both the
Central GST (CGST) and the state GST (SGST).

7. A uniform threshold of annual gross turnover of Rs 10 lakh is proposed for all


goods and services for SGST applicable for all States and Union Territories.
Below this threshold limit, State GST is not applicable. The threshold limit for
Central GST may be kept at Rs 1.5 crore for goods and Central GST may be
kept at higher levels for services.

8. Each taxpayer would be allotted a PAN-linked taxpayer identification number

9. The following Central Taxes should be, to begin with, subsumed under the
Goods and Services Tax:
Chapter 3 Goods and Service Tax 3-6

(i) Central Excise Duty


(ii) Additional Excise Duties
(iii) Excise Duty levied under the Medicinal & Toiletries
Preparation Act
(iv) Service Tax
(v) Additional Customs Duty, also known as Countervailing
Duty (CVD)

(vi) Special Additional Duty of Customs - 4% (SAD)


(vii) Surcharges, and
(viii) Cesses.

10. Following State taxes and levies would be, to begin with, subsumed under
GST:

(i) VAT / Sales tax


(ii) Entertainment tax (unless it is levied by the local bodies).

(iii) Luxury tax


(iv) Taxes on lottery, betting and gambling.
(v) State Cesses and Surcharges in so far as they relate to supply
of goods and services.
(vi) Entry tax not in lieu of octroi

11. Some Taxes kept out of GST purview:

a. Alcoholic Beverages: They will be kept out of GST.

b. Crude oil, diesel, petrol and ATF: They will be kept out of GST. States
will be free to levy taxes on them.

12. Decision is yet to be taken on certain taxes:


Chapter 3 Goods and Service Tax 3-7

a. Purchase Tax: (Usually imposed by Punjab and Haryana on buyers of


food grains): The decision to subsume this under GST will be decided later
in consultation with GOI.

b. Natural Gas: A final view will be taken later in consultation with GOI.

13. Tobacco Products: They will be subjected to GST with input tax credit (ITC)

14. Taxation of Services: Both the Centre and States will have concurrent power
to levy tax on all goods and services. For inter-State transactions an innovative
model of Integrated GST will be adopted by appropriately aligning and
integrating CGST and SGST.

15. GST Rate Structure: It has been decided to adopt a two-rate structure – a lower
rate for necessary items and goods of basic importance and a standard rate for
goods in general. There will also be a special rate for precious metals and a list
of exempted items. The GST rates will be decided later.

16. Exports: They would be zero-rated, meaning exporters of goods and services
need not pay GST on their exports. GST paid by them on the procurement of
goods and services will be refunded. Exports are “zero rated’ as in competitive
international markets one cannot export taxes!

17. Imports: Both CGST and SGST will be imposed on imports of goods and
services into the country

18. The administration of GST shall be divided into states and Centre with a
proposition to have uniform compliance procedures across states under the
respective laws.

19. Constitutional Amendments: The implementation of GST requires some legal


and constitutional changes. The government may have to bring out an
Chapter 3 Goods and Service Tax 3-8

Integrated Goods and Services Act replacing the existing acts governing a
plethora of taxes. A Joint Working Group (JWG) was set up on September 30,
2009 to address these issues and prepare the necessary draft constitutional
amendments. The States, at present, do not have the powers to levy a tax on
supply of services; while the Centre does not have power to levy tax on the
sale of goods. For the GST to be introduced at the State level, it is essential
that the States should be given the power of levy of taxation of all services.
This power of levy of service taxes has so long been only with the Centre. A
Constitutional Amendment will be made for giving this power also to the
States.

20. Adequate compensation to States: It would be essential to provide adequately


for compensation for loss that might emerge during the process of
implementation of GST for the next five years. This issue may be
comprehensively taken care of in the recommendations of the Thirteenth
Finance Commission.

21. IT Infrastructure: This has to be expedited at the level of Centre and States.

22. The spirit of fiscal federalism must be kept in mind always. This spirit of co-
operative federalism is the essence of GST and the only feature that would
ensure that a national market with free movement of goods and services
across State boundaries develops, in the true sense.
Chapter 3 Goods and Service Tax 3-9

ISSUES TO BE DECIDED YET.

One interpretation from the First Discussion Paper of November 10, 2009, is that Octroi
seems to have been kept out the GST diluting the spirit behind introduction of GST.
Many experts infer that octroi, which is at present applicable on entry of goods in
specified areas, may not be subsumed into GST and would continue to be levied by local
bodies.
Chapter 3 Goods and Service Tax 3-
10
 The rates of CGST and SGST have not been specified in the discussion paper

 Also, the probable date of implementation date has also not been specified in
the discussion paper. Many experts feels that the date may get postponed to
April 1st , 2011 instead of the original April 1st, 2010.

 The discussion paper has not suggested any threshold limit of annual gross
turnover (below which GST will not be made applicable) for Central GST on
services; while the threshold limit for CGST on goods has been kept at Rs 1.5
crore.

 The process of consensus build-up is underway on GST rates and


compensation formula for possible revenue loss for states

ADMINISTRATION OF THE TAX

If the tax bases are successfully harmonised, even with some variation in the tax rates
across states, it is possible to pool the resources of the tax administrations so as to
improve tax administration. There is no significant advantage in implementing two
completely disjointed tax administrations for such a tax regime. The important question
however is to what extent can and should there be unification of administration. To begin
with, it is important to understand the gains from unification or integration. Dealing with
two tax administrations adds to compliance costs for the tax payer two returns, two sets of
officials, and potentially two audits. Some unification therefore would make the transition
more acceptable. From the point of view of tax administration, the information flowing
from the taxpayer to a unified administration would be more reliable than to two separate
administrations. Resources can be conserved by not duplicating routine tasks like
registration and returns processing.

Having made a case of some unification in administration, it is useful to discuss what


extent of unification is feasible and/or desirable. In principle, it is possible to imagine a
Chapter 3 Goods and Service Tax 3-
11
single tax administration for this new regime. The regime can be in the form of an
independent revenue administration which implements the tax laws of both levels of
government. Or it could be a part of either level of government, which takes
responsibility to collect revenues on behalf of the other and transfers the same. Such
regimes exist in Canada for instance. Such a proposal would face one important question
what happens to the existing tax administrations? Once again it is possible to subsume
existing tax administrations within this new arrangement. Even with this problem out of
the way, it is difficult to arrive at a consensus on such a proposal since there is some
perceived autonomy with respect to tax administration as well.

The minimum desirable level of integration is one covering registration, returns filing,
database generation, and management. This level of integration would allow the tax
administrations to function efficiently and gain from each other’s expertise. A further
degree of integration could be one where there is a common audit for both the taxes. This,
as argued earlier, would ensure that the compliance cost for the tax payer is minimized.
Since the revenue interests of different tax administrations would be different, it is
possible that some state governments would perceive a given case as a significant revenue
risk which the central tax administration might not. To allow for these differences, the tax
departments could have the autonomy to choose cases for audit, subject to the condition
that the audit would cover both taxes and would therefore apply for both levels of
government. A common procedure for choosing case for audit therefore would need to be
developed.

Between these two extremes, any intermediate position should be acceptable to the
taxpayer. It is however, important to mention that segregation of units by size or
economic activity into groups to be administered by one or the other administration
would hinder effectiveness of administration. It would constitute an artificial segregation,
and depending on the perceived strength and weakness of the underlying administrations,
there would evolve an incentive to align oneself to one or the other. This would give rise
to definitional conflicts of turf between two levels of government, without contributing
actively to taxes or improved administration or to improved economic environment. It is
Chapter 3 Goods and Service Tax 3-10

therefore desirable to develop schemes whereby the division of functions between the
different tax administrations is not of immediate concern and relevance to the taxpayer.
Chapter 3 Goods and Service Tax 3-11

IMPACT OF GST ON INDIA INC.

It is debatable whether India Inc is ready for a rollout of GST by April 1, 2011. The
implications for India Inc are enormous. Overall, GST is expected to reduce tax incidence
for several goods and services in the country. Lesser taxes and cost means higher demand
for goods and services. GST is expected to bring in uniform indirect tax system across the
country which is easy to understand and implement. Its effective implementation will
have beneficial impact on Indian companies in the form of lower working capital needs,
better supply chain management, reduction in ware house costs, and others. Reduced
working capital requirement would result in less interest costs

 A company, like, Maruti Suzuki, is readying itself for GST rollout. The
company thinks with GST, the tax incidence on their cars will come down
substantially which means the car will be dearer and demand for their cars
would go up.

 Tax experts are of the opinion that GST will result in reduced taxes for many
goods and services

 GST is going to change the way FMCG and other manufacturing companies
do business in India. Companies have to be better prepared for its rollout and
make their processes (IT, business, etc) stronger well before GST
implementation.

 Industries, like, cement, aluminium, copper, VFY, telecom, FMCG suffer


from not only heavy taxation but also, multiple taxation and various slabs.
Once GST is implemented these sectors will be relieved of the twin problems
Chapter 3 Goods and Service Tax 3-12

of higher and multiple taxation. It will have a salutary impact on the


operations of these companies.

 The impact on FMCG sector will be from a different perspective also. After
GST, the need for maintaining several warehouses across the states will be
removed. This is big scope for FMCG companies to restructure their
operations, logistics and ERP systems in a big way.

 In the existing regime, companies set up several warehouses in many states to


avoid certain taxes. With the introduction of GST, companies need not resort
to such practice of setting up warehouses in many states.

 Once GST is introduced, several bottlenecks in the supply chain can be


removed and companies will save substantial costs

 A corollary of the reorganization on the part of FMCG sector will be felt on


the logistics sector. This entire supply chain will undergo a thorough overhaul
and this will create huge opportunities, for integrated logistics players in India.
The dynamics involved in this massive exercise are yet to fully appreciated or
analysed in the investor community. However, industry veterans, like, Adi
Godrej, have been expressing the readiness of their companies for the GST
rollout.

 The implementation of GST across the Centre and States and UTs presupposes
the existence of a robust information technology (IT) services. This is a great
opportunity for IT and IT-related companies, especially, in the medium-sized
IT players.

 The operations of NBFCs too will undergo as they too suffer from various
forms of service taxes. It is hoped that the GST rollout will create tremendous
scope for NBFCs to ease their burden of multiple taxes.
Chapter 3 Goods and Service Tax 3-13

BENEFICIARIES AFTER GST?

The effective implementation of GST is expected to benefit the government, industry,


traders, companies, end-consumers, lawyers, accountants, IT service providers, etc.

IMPACT OF GST ON ECONOMY

Finance Commission, says the introduction of GST would be the single biggest measure
after the elimination of licensing in 1991. In fact, this could also provide the requisite
stimulus to the economy during the present economic slow down. GST once introduced
will create a common market across the length and breadth of the country. Effective
implementation of a unified GST with minimum exemptions will give a fillip to the GDP
growth. As per the rough estimates of Dr. Vijay Kelkar, the economic value of the GST
reforms in India will be to an extent of USD 500 billion, or roughly 50 per cent of India’s
GDP. The introduction of GST is expected to have a salutary impact on total tax
collections, employment and fiscal deficit. The 13th Finance Commission, that was set
up in November 2007 (award period: 2010-15), is reviewing the GST structure and
deciding on the sharing of taxes between the Centre and States. State finances would be
shaped by the recommendations of the Commission.

GST WORK AT THE GROUND LEVEL.

Stage of Purcha Value Value at Rate of GST Input Net GST =


supply chain se additio which GST on tax GST on
value n supply of outpu credi output –
of goods and t t input tax
input services credit
made to next
stage
Rs. Rs. Rs. Rs. Rs. Rs. Rs.
Manufacturer 200 80 280 10 28 20 8 (28 – 20)
Wholesaler 280 60 340 10 34 28 6 ( 34 - 28)
Retailer 340 30 370 10 37 34 3 (37 – 34)
Table No.3.1 GST work at the ground level
Chapter 3 Goods and Service Tax 3-14

As shown in the above example, let us assume a manufacturer buys raw materials at a
cost of Rs 200. While buying she pays a GST of Rs 20 at the assumed rate of 10 per cent.
During the manufacturing process, she adds value to the tune of Rs 80 and converts the
raw material into a finished good and sells it for Rs 280 and pays a GST of Rs 28 on the
finished product at the rate of 10 per cent. Effectively, here her net GST would be only Rs
8 (28 – 20) as she avails Rs 20 as input tax credit (which she is entitled while buying raw
materials). Likewise in the entire chain till retailer the same principle applies down the
line. The wholesaler buys the finished product for Rs 280 and adds value Rs 60. and sells
it for Rs 340 to the retailer and pays GST of Rs 34 on the product; however, the
wholesaler’s net GST would only be Rs 6 (34 – 28) after deducting the input tax credit. In
the case of retailer, he buys it for Rs 340 and adds a value of Rs 30 and sells it for Rs 370
and in the process his effective GST would be only Rs 3 (37 – 34). To put it simply, the
tax payer is only paying tax on the value addition and not on the entire value of finished
product; except the end-consumer.
Chapter 3 Goods and Service Tax 3-15

MERITS OF GST

 Only the incremental value added at each stage of value addition gets
taxed

 The producer gets input tax credit except at the hands of the final
consumer

 It avoids tax on tax and tax incidence is reduced for all players involved

 It reduces transaction costs for tax payers benefiting the traders and
industry

 More players will come under tax net as it gets widened with GST
ensuring better compliance
Chapter 3 Goods and Service Tax 3-16

 Due to the input tax credits, the prices for end-consumers may come down
as traders and service providers may pass on the benefit of lower taxes to
end-users

 GST may cleanse the present tax system of red tape, delays, corruption and
leakages

 The effective rollout of GST is expect to usher in a single and common


market across the country

PRE-REQUISITES FOR SUCCESSFUL IMPLEMENTATION OF GST.

The following are the prerequisites for an effective rollout of GST:

 It needs to have minimum number of GST rates and minimum exemptions so


as to achieve widest possible tax base.

 The rates of CGST and SGST are needed to be moderate.

 The rates of tax of SGST and exemptions from SGST are uniform throughout
the country.

 The input credit chain is seamless covering the entire value chain from
manufacturing to retail without breaks regardless of whether goods or services
are supplied within a State or across State boundaries.

 The tax treatment of goods and services is similar.

 The Central and State levies are fully neutralized in the case of exports (out of
India).

 The procedures are simple and harmonized between the Centre and the States.

 Removal of distorting state taxes such as entry tax, octroi, high stamp duties
etc by subsuming them in the GST.
Chapter 3 Goods and Service Tax 3-17

 Amongst the administrative actions that are critical for the success of GST is
the creation of a strong Information Technology Infrastructure both for the
Centre and the States.

GST – EXPECTATIONS

1) Withdrawal of Check Post

2) Limited number of rates of taxes

3) Abolition of Works Contract Tax

4) Input Tax credit may be available on Invoice system like Cenvat and
VAT.

5) Adjustment of Input tax credit on Central GST against output tax of


State GST and Vice versa

6) Cross utilization of credits between Goods and Services

7) Carry forward of accumulated Input Tax Credit (VAT) and Cenvat


Credit under GST system on the day of introduction of GST

8) Exporters may be allowed to procure materials without payment of GST-


Abolition of Refund System.

9) Existing exemptions be continued;

10) The tax benefits already enjoying by the EOU, SEZ, Soft ware
Technology Park would continue to be available in the GST regime as
well.

11) All area based exemptions schemes already in force may be converted
into post-tax cash refund schemes.

12) Introduction of self assessment system under dual GST;


Chapter 3 Goods and Service Tax 3-18

13) Single Return system to cover both Central and State GST.

14) Simple legislation for both State GST and Central GST-. Uniform
legislation for State GST

15) Special Additional Duty (SAD) on imports may be replaced by State


GST and Central GST

16) Dispute Resolution: The disputes with regard to questions of facts at the
first stage may be undertaken by the respective authority. Further stages
of appeal and issues relating to questions of law may be dealt with by a
joint entitry comprising the Centre and states. This would ensure
uniformity and fairness in decision making.

17) Units in Special Economic Zones may be relieved of the burden of all
embedded taxes, whether central or states. Supplies made to SEZ units
may also be kept outside the purview of GST.

18) There should be a common and uniform threshold limit of exemption for
small tax payers applicable to all states.

19) There should be a common and uniform threshold limit of exemption for
availing composition scheme amongst all states.

20) The authority to amend the common exempted list and the common
composition scheme, uniform threshold limit may be rest with a joint
authority of Central and State Governments to ensure that no single State
or Central Government amends either to these unilaterally.

21) There should be a common and uniform list of exempted goods;

22) Octroi and Entry tax should be brought within the ambit of GST

23) Taxes on Tobacco products should be subjected to GST with Input Tax
Credit facility;

24) Alcoholic beverages should be brought under GST with ITC benefits;
Chapter 3 Goods and Service Tax 3-19

25) Petroleum products should be subjected to GST with ITC benefits. If


there is specific administrative problem, all products excepting Crude,
Motor spirit and HSD, all petroleum products including ATF should be
brought within the limit of GST.

EFFECTIVE DATE OF GST ROLLOUT.

Government of India originally proposed to introduce the new tax system from April 1,
2010. The Finance Minister had expressed government’s commitment to implement the
GST regime, however, due to some practical difficulties which are yet to be addressed the
Finance Minister reinforcing his commitment to bring the regime but due to issues raised
by some of the state governments pertaining to compensation for the revenues the states
which may have to forego as a result of the rollout of GST. However, some experts are
suggesting the implementation date may get postponed till April 1st, 2011, due to a variety
of reasons. Even the Union Finance Minister, some days back, hinted at the possibility of
a postponement by a few months.
Chapter 3 Goods and Service Tax 3-20

EXPERIENCE OF GST IN OTHER COUNTRIES.

More than 150 countries have introduced GST in some form. It has been a part of the tax
landscape in Europe for the past 50 years and is fast becoming the preferred form of
indirect tax in the Asia-Pacific region. It is interesting to note that there are over 40
models of GST currently in force, each with its own peculiarities. Goods and Service Tax
is a Consumption Based Destination Tax France was the first country which introduced a
comprehensive goods and service tax Regime in 1954.

In Australia the GST (Goods and Service tax) is a 10% on most of the goods and Services
transaction. It replaced the previous Federal wholesale system and designed to phase out a
number of various State and Territory Government taxes, duties and levies such as
banking taxes.

While countries such as Singapore and New Zealand tax virtually everything at a single
rate, Indonesia has five positive rates, a zero rate and over 30 categories of exemptions.
Goods and Services Tax (GST) was introduced in Singapore on 1st April 1994, at a low
3%. At the present time the rate of tax of GST in Singapore is 7% since 1st July 2007.

In Canada GST is imposed at 5% on supplies of goods or services made in Canada and


include most products, except certain politically sensitive essentials such as groceries,
residential rent, and medical services, and services such as financial services. The GST
replaced a hidden 13.5% Manufacturers' Sales Tax (MST). The GST also replaced the
Federal Telecommunications Tax of 11%.

At the same time, it must be noted that GST is a more structured and transparent form of
indirect taxation. It has proven itself as the most efficient and effective method of
providing revenues that governments need, while encouraging economic growth and
efficiency.
Impact on Manufacturing Sector(JEANS)

Historically, India is being seen as an agrarian country. However, the gap in GDP contribution from agriculture
sector and non-agricultural sectors have been continuously increasing. The manufacturing sector has emerged as
one of the high growth sectors in India. Programs like ‘Make in India’ are launched to make India a global
manufacturing hub. The Government of India has set an ambitious target of increasing the contribution from
manufacturing sector to 25% of Gross Domestic Product (GDP) by 2025, from current 16%.4 Manufacturing
sector deals with production of goods and services, so it comes under the indirect tax regime. A change in
indirect tax regime, therefore, impacts the whole sector.
However, the sector is marked with concerns ranging from declining exports and labor issues to lack of
infrastructure. In addition to this, it is burdened with compliance of complex indirect taxation system.
Multiple legislations have resulted into burgeoning compliance and administrative costs, valuation disputes
and increasing difficulty of doing business. As per The World Bank, India ranks at 130 in terms of ease of doing
business.5 This calls for a change in the current indirect tax structure which can do away with the complexity of
the existing tax structure and give a strategic boost to the sector. Deemed as a solution to this, Goods and
Services Tax (GST) has been proposed as one tax for one nation and is being looked upon to have a beneficial
impact on several sectors including manufacturing sector.
1. Goods and Services Tax (GST)

The Goods and Services Tax (GST) is a comprehensive Value Added Tax (VAT) levied on goods and
services. Its main purpose is to replace all the multiple taxes levied under the current tax structure by a single
nation-wide tax. GST will be collected on the value added at each stage on purchase or sale of goods and services
based on input tax credit method but without any state boundaries6. GST will be levied at every stage of
distribution chain. While current taxes are production based taxes, GST is a consumption based tax. As GST,
will cover most of the goods and services, it will be levied in four slabs
– 5%, 12%, 18% and 26%. About 80 items are to be exempted from GST. These includes food
items, petroleum products and alcohol.

2. Key Features ofGST

GST in current state is widely different from current tax structure. Few of the key features of GST are listed as:

Dual GST

Government of India has proposed a Dual GST regime. GST will have two components: Central GST (CGST)
to be levied by Central Government and State GST (SGST) to be levied by State Government. However, the
basic regulations governing the tax like chargeability, classification of goods, definition of taxable event etc.
would be uniform across all statutes.
GST on allTransactions

GST will be applicable on all transaction of goods and services except for exempted goods and services. The CGST
and SGST will be levied on all transactions of goods and services made up to the final consumption by the
consumer. In such format, transfer of goods from one warehouse to other warehouse would also be taxable
under GST Law. Thus, this will cause major supply chain changes of manufacturing firms. This is further
discussed later.
Consumption or Destination based Tax

GST will be charged on the basis of consumption or destination as opposed to the traditional taxes which are
production based. Thus, revenues from GST will flow to the state where consumption takes place and not the
producing state. Such a system leads to disincentives for states where production has already been setup. In
order to compensate the producer states, GOI has allowed state governments to levy 1% production tax in
addition to SGST.

Input Tax Credit

Liabilities of SGST and CGST will be calculated on the basis of input credit method. This means, the credit will
be available for tax paid on all immediate purchases of goods and services on the basis of suppliers’ invoice. In
manufacturing sector, a good pass through multiple stages before being converted into the final product.
Under current tax regime, this results into cascading effect wherein a good is taxed on its final value which
already has a portion of tax in it and not on the value added at each stage. Thus, leading to overall increase in
price of the final product.

Administration of GST

The administration of GST is distributed as per SGST and CGST – States will administer SGST while Central
Government will administer CGST. Respective governments will have the jurisdiction over the entire value chain
and on all the taxpaying entities on the basis of described thresholds. However, there is no clear guidelines on
how the existing tax departments will be modified to replace traditional taxes by GST.
Impact on BusinessSide

One of the largest tax reforms, India has seen, is on the verge of being implemented and will impact businesses
whether big or small. In order to understand what this means, we spoke to Mr. Akshat Agarwal, director of an
export oriented textile unit & Mr. Umesh Joshi, Head of replenishment at Britannia to understand what this
reform would mean for the manufacturing sector and how it would impact their businesses.
The industry as a whole is very enthusiastic about the implementation of the GST as it will finally end the
cascading effect of taxes which has plagued the country for generations. Also, cross credits settlements
between the state government and the central government is one of the celebrated moves of the GST which
was not possible in the current regime. What this also means is that it would result in lowering of overall costs for
the manufacturers which coupled with application of tax on the cost at factory rather than on MRP will further
help the manufacturers lower prices. But all this depends on which slab the goods will fall under. The
manufacturing sector is still not clear under which slab their goods will fall and with just three months for the
implementations it has the left these manufacturers worried. On discussion with Mr. Umesh Joshi we learnt
that reworking the pricing cannot be done overnight and usually takes about three to four months especially
in case of fast moving consumer goods as the product quantity is usually adjusted to keep the product at a
certain price level and hence entails manufacturing setup and packaging changes. For Mr. Agarwal, the lead time
for his product ranges between three to six months and the laid-back attitude of the government has him worried as
he is unable to give his international clients the price of the product. There is no clarity from the governments
end as to what will happen to the current duty drawback schemes once the GST is implemented which is very
important in order to determine the pricing of the product in a highly competitive business.
With respect to the supply chain changes, we stand to understand that the manufacturers operating from one
single state have nothing to worry about. Manufacturers operating from multiple states will now need to pay tax
even on stock transfers. Though this GST paid would be made available as credit, but this would entail locking of
the working capital till these goods are sold further down the supply chain. Apart from this the manufacturing
sector have set up their warehouses based on the tax incentives they get in a state. Now decisions may need to
be made on economic efficiency point of view. Mr. Umesh Joshi explained to us that for products such as food
items it would make more sense to have multiple warehouses and manufacturing setups in various states as it
reduces their distance from the end consumer and hence their costs. This would be true for any low value
product. But for high value products it would make more sense now to use economies of scale and operate from
one roof in one state. The key hindrance between state transfer is the 1% IGST which the bill dictates. This 1%
additional tax may hinder the second option and make it feasible for some manufacturers to set up their
manufacturing units closer to the point of consumption.
One of the key changes that would be required is the change of the ERP systems to make it compliant with the
GST. This would entail both manpower and monetary costs for the manufacturers. Also, there is not much clarity
on when these updated modules would be available so that the manufacturers can train their staff much ahead of
the implementation in order to ensure a smooth transition. A key point of the bill is that, the credit to the
manufacturer will be transferred only when the vendor has sold the goods to files the tax return and both their
invoices match. By doing this the manufacturers will need to choose trustworthy vendors otherwise it would
result in blocking of working capital for the manufacturer. Also, these vendors will need to setup their own
GST network in order for the system to work smoothly.
In terms of already existing long term contracts, the manufacturers will need to renegotiate them in terms of
price, advance, taxes etc. to make them GST complaint which again adds to the many challenges that the
manufacturing sector will face for this implementation. For example, the recipient of an advance needs to ensure
that the sender pays the GST on the advance otherwise the recipient shall be liable for it.
On the question of future capital investments, the thoughts they shared with us were very much in sync. Up
until now, the states had attracted investment solely based on the tax incentives they were able to devise
(sometimes even overnight) but now they will need to do some ground work in terms of infrastructure
development to attract future investments. Thus, this puts all the states on the same level playing field in terms of
attracting future investments. For the investment that has already been made based on the tax incentives that were
offered, once the GST is implemented, such incentives would not be possible as there will be a shift to
consumption tax and hence tax would be collected in the state of consumption and hence the manufacturer will
not be able to claim refund under the tax incentive they were offered. The manufacturing sector will need to rework
their return on investments based on these changes and at the same time may need to negotiate some type of
deal with the government as there has been no clarification in this regard form the government.
3. Impact on GovernmentSide

The government is all set to roll out the GST in the upcoming months. While the activity is focused mainly on
improving different aspects of business side, government functioning and implementation with regard to
taxation is likely is to be affected as well. Also, there are many challenges that the government needs to tackle
in order to have successful implementation of India’s largest tax reform till date.
To understand the impact on government side, we had an interaction and follow up discussion with Mr. K
Balamurugan, Indian Revenue Service, Customs & Central Excise. He provided a candid view of GST, its
origins, implementation, and challenges. We also discussed about the impacts on the manufacturing sector.
GST: The Journey So Far

GST is the much-needed fiscal reform needed in the country. Many opponents of GST give the argument
that it is a regressive tax, effecting the poor as well as the rich. However, studies have shown that indirect taxes
could be the best way to bring tax equality. The split of tax revenue in India is 50- 50 between direct and indirect
taxes. The long-term aim is to push this more towards the realm of indirect taxes. This step promises to
increase the governments tax revenue.
The foundation of GST was laid down in 2007 by Mr. Chidambaram. The initiative had a twofold story the DTC
(Direct Taxes Code) & GST (Goods and Services Tax). While the former has died a political death, the latter
promises to shine presently.
There is a plethora of indirect taxes in India such as VAT, customs, central excise, service tax and many more. GST
envisions to unify them under one umbrella. It will be a value-added tax, at every point of value addition.
The concept is not new to the world. It dates back to 1950’s. In the 1960’s the success of VAT was
evangelized by IMF and lead to widespread adoption. Over 150 countries have adopted indirect taxes in one form
or the other. There is however a dark side to this story. In every country where GST was introduced, the
immediate impact was a dip in growth and political instability. Almost every party which bought out these
changes in their respective country, lost power soon after.
Thus, it is a great challenge for the central government to make this shift. This problem is further aggravated
by the conflict in interests of different state governments. Take for example Karnataka, a state which has invested
heavily into developing manufacturing capabilities and receives tax revenues on business originating from its
state. As per GST, all the tax in for of production tax and cross border transport is gone and the state in which the
product is sold will be collecting the net taxes.
The major debate on reaching a consensus on this bill is thus the revenue sharing between different states and
center. It has been stipulated that the center will compensate the state for lost revenue over a period of 5 years to
bring them on board.
GST: Challenges Ahead

Indian constitution 101st amendment act paved the way for implementation of GST under the GST council. It
also brings with it a mandated deadline of September 2017 when states will stop receiving tax revenues if they
are not through GST. This fact has led to different states and political parties resolving their issues on revenue
sharing in the past few months at a fast pace.
The biggest challenge to GST implementation is Invoice matching. As and when a good moves through the
supply chain from manufacturer -> warehouse -> wholesaler -> retailer -> end customer; the invoice number
will move with the good and will be tracked at each point of value addition. At every point of transaction, the
invoices will be matched to enable tax credit transfers which will make evasion difficult. To perform this
humongous task, it calls for a solid IT infrastructure. Introducing GSTN (Goods and Services Tax Network), a 49-
51 split organization between Infosys and GOI. Currently, about 60% of the project is complete and work is
going on at a fast pace. GSTN network will check and make sure that only after the taxes are paid on a good, that
the corresponding tax credits will be passed on to the manufacturer.
GST will ensure greater tax discipline among traders and India’s tax to GDP is bound to increase because of
this. However, for a section of retailers who were avoiding taxes, this would come as a huge blow and may
cause public unrest. It is believed that the GST fiscal reform would take a 10-year stabilization period and would
see an initial dip in growth. The burnt will be the highest in the year 2019 and thus, GST has also now become a
political bet.
Leading account keeping software vendor, Tally has come up with GST match facility on its systems. In a broad
sense, the accounting and tax filing practice will become easier and give a boost to MSMEs by reducing
middlemen and improving transparency via automatic returns facilitated by GSTN.
In a city like Bangalore where 30 thousand businesses are registered but only 6 thousand filing their taxes, GST
brings a promise of widening the tax net and could potentially lead to lower tax rates in the future. All the data
regarding businesses will be stored on the cloud and brings with it data security issues.
It is important to note that many sectors are free from the ambit of GST and it is not so uniform as it was
promised to be. Road taxes, real estate stamp duty, liquor taxes and taxes on petroleum products will continue to
persist on their own. With the amendment act hanging with the deadline of September 2017 and the recent
fiasco of demonetization effecting the economy; it has indeed become a tricky way ahead for GST.
This shift will force firms to change their strategy in terms of distribution. New business agreements will be
framed among various parties of the supply chain taking into consideration the implications of GST. The whole
exercise was championed by the multi-national companies who wanted simpler tax reforms. Will the
investments now rise as we move ahead with GST? Will the supply chain get smarter and integrated and be
fueled by credit growth? Will the honest retailers who pays his taxes on time be incentivized by the
manufacturers? Only time will tell.
The Consumer Perspective: Effects of GST on the society

Apart from business advancement and ease of doing business, end consumers of the manufactured goods will
also be impacted in ways which are speculative as of now.
There is a general expectation among consumers with the cascading effect of tax gone with GST, prices will see a
downward trend. The GST is constructed in such a way that it will lead to substantial benefits and savings in costs
that would accrue to the end consumer. However, that may not be the case for all goods. The estimated GST on
all commodities is expected to be in the range of 17% to 19%. For the purchase of most goods there are two
components of taxes levied to the end consumer:
 Standard Excise Duty: 12.5%
 VAT: 12.5% to 15% depending on the State tax laws
Thus, the effective tax rate of goods is about 25% to 28% due to cascading effect of
taxes as discussed earlier. The final prices of goods will thus be cheaper under GST
rate. FMCG products, automobiles and other goods will see a decrease in final
prices.
However, for goods like textiles, edible oil, low value footwear, the tax rates in the
current system is different.
 Standard excise duty: 0%
 VAT: 5% (in most States)
 Non-creditable taxes: 3% to 4%

The effective tax rate is about 8 to 9%. The current GST rate of 18% would mean
almost a doubling effect on current prices of these goods. Even if a slab of 12% is
applied, it will lead to a considerable hike in prices. Services would see a price hike
in general due to increase in taxes.
In spite of the savings on costs for businesses, it is up to them to pass on the
benefits to the end consumers and hence it needs to be ensured by the government
that the benefits are indeed transferred to the consumer. The government has
introduced the ‘anti-profiteering’ clause in the GST bill to ensure this.
In the long run, improvements in supply chain efficiencies will reduce the production
cost for the firms which in turn will give a headroom for reduction of prices
The introduction of GST will also make tax systems more transparent for the
consumers. Earlier there would be a lot of Cess and taxes applied. That confused the
consumer. Now, they will be able to clearly see the amount they are paying as tax
without any ambiguity.
CONCLUSION

The implementation of GST in India in the form of a comprehensive value added tax is
contingent on several key decisions. While there is clarity that the tax would be in the
form of a dual VAT, that is the only detail about the tax that is available in the public
domain. Presuming that the country is going to witness considerable tax reform, it is only
fair on the taxpayers that the details be worked out well in advance so that preparations
for a smooth transition can be made.

This paper attempts to identify some of the potential contours of the tax. One of the key
issues that needs to be resolved is the treatment of inter-state transactions in goods and
services. The existing consensus of zero-rating by itself would not be adequate to address
the potential concerns of evasion in such transactions. Zero-rating with pre-payment
appears to be a superior alternative. The related issue concerns taxation of services which
span more than one tax jurisdiction. International experience points towards self-
assessment in the case of registered taxpayers and taxation in the jurisdiction of the
supplier in other cases, with some revenue sharing among the member states. Some of the
details need to be worked out before the tax on services can be implemented at the state
level. A second concern relates to the need to integrate tax administration at the two
levels in order to maximise on the efficiency of administration. While there are options
available, a final choice needs to be made, once again

Apart from these design issues, one important concern relates to the rate of tax. It is
believed and correctly so, that if the rate of tax is “too high”, it induces non-compliance.
In discussions on VAT in India, a rate of 20 percent has often been proposed as a feasible
rate. Section 4 demonstrates that with the informal sector accounting for 30 percent of
economic activity in taxed transactions, a rate of 20 percent with non-rebatable excises of
10 percent on a few selected commodities would be required to generate the target
revenue. If the non-rebatable excises are assigned to the union government, this translates
into about 14 percent rate for the states and 6 percent for the centre. It may be mentioned
that in deriving this rate, all agricultural commodities were considered to be exempt. This
should mitigate the regressivity normally associated with VAT regimes. The above is
however a conservative estimate since a number of activities currently taxed have been
assumed to be exempt for the purposes of arriving at these estimates. Any expansion in
the tax base to include some of the activities would allow for a lower rate of tax to be
implemented. Further, as observed earlier, the share of informal activities in total as
proxied by the share of unregistered manufacturing in total GDP from manufacturing is
registering some decline in recent times. If this trend persists, there is scope for
considering lower rates of tax.

Finally, the impact of the tax on different states would be different. Careful assignment of
tax powers is crucial for the new regime to be acceptable. In the absence of the same,
transition to the new regime would require some other revenue transfers. With the new
regime, instruments for the same would be limited, and can generate perverse incentives
and/or unstable finances for some of the governments involved
Chapter 3 Goods and Service Tax 3-20

2.1 SUMMARY

Before parting and to bring an end to this article we summarize that GST is a harmonized
consumption tax system, whose introduction will bring an end to a varied number of
Indirect taxes presently being levied by Central Government and State Government. The
proposed date of Introduction of GST has been announced by the Government to be
1st April, 2011. Till now Government has not yet issued any Draft of GST model or
various provisions to be applied, all we can do is to wait for the Draft to release. Till then
we can only predict the outlook of the GST model in India and nothing can be said with
utmost certainty.

Further we would bring in light that the Finance Ministers categorical statement in
Parliament regarding GST implementation on April 1, 2010 clearly indicates the
Governments clear and incessant intention towards bringing this tax regime by its due
date. Accordingly, based on indications, as also on the basis of our subsequent
interactions with senior Government Officials, we believe that the April 1, 2011 timeline
for introduction of the dual GST will be duly met and we must welcome this new levy as
this is the future of forthcoming India.