Analysis of Goods and Services Tax in India

Abstract
In India, there exist a number of indirect taxes that are either levied by the Central
Government or by the state government such as Excise Duty, Custom Duty, Service Tax,
Sales tax, Stamp Duty, Octroi and many more. There have been various attempts of
reforming the indirect tax structure for making tax system simple, stable and burdensome. In
this process of reform we have already implement vat and service tax. For further significant
improvement the next logical step towards a comprehensive indirect tax reforms in the
country will be to implement Goods and Services Tax (GST). GST is a tax on goods and
services with comprehensive manner. It is a multi-tier tax where ultimate burden of tax fall
on the consumer of goods or services. It is called as value added tax because at every stage
tax is being paid on value addition.

The present research paper is an attempt to study concept of goods and service tax,
how it works and its advantages to Indian economy.

Page | 1

Analysis of Goods and Services Tax in India

Introduction
Tax policies play an important role on the economy through their impact on both
efficiency and equity. A good tax system should keep in view issues of income distribution
and, at the same time, also endeavour to generate tax revenues to support government
expenditure on public services and infrastructure development.

The introduction of Goods and Services Tax (GST) would be a very significant step in
the field of indirect tax reforms in India. By amalgamating a large number of Central and
State taxes into a single tax, it would mitigate cascading or double taxation in a major way
and pave the way for a common national market. From the consumer point of view, the
biggest advantage would be in terms of a reduction in the overall tax burden on goods, which
is currently estimated at 25%-30%. Introduction of GST would also make our products
competitive in the domestic and international markets.

It will lead to the abolition of taxes such as Octroi, Central Sales Tax, State level
Sales Tax, Entry Tax, Stamp duty, Telecom License Fees, Turnover Tax, Tax on
Consumption or Sale of Electricity, etc. It will also improve government's fiscal health as the
tax collection system would become more transparent, making tax evasion difficult. CAG
Mr. Vinod Rai in his inaugural address to the National Conference on GST put forth the
concept as "An integrated scheme of taxation that does not discriminate between goods and
services and is a part of the proposed tax reforms that centre on evolving an efficient and
harmonized consumption tax system in the country."

Page | 2

Analysis of Goods and Services Tax in India

Objectives

To understand the concept of goods and service tax

To understand how GST will work in India

To understand the benefits of GST over the current taxation system in India

To understand effect of GST on Indian Economy

Research methodology

The study focuses on extensive study of Secondary data collected from various books,
National & international Journals, government reports, publications from various websites
which focused on various aspects of Goods and Service tax.

Page | 3

Analysis of Goods and Services Tax in India

Understanding Taxation System in India

India is a federal country and both Centre and States have their own rights to collect
taxes. Each state is independent in levying and collecting taxes. The taxation powers are
defined clearly in the Indian Constitution. Centre collects all the direct taxes (income tax,
corporate taxes etc) along with the Indirect taxes like Service Tax, Excise duty and Customs
duty. The States collect indirect taxes like VAT on goods, CST and Local Taxes. These
revenues states keep with themselves. Earlier instead of VAT, States had sales taxes on
various goods. Now states have replaced sales taxes with VAT. Each state has adopted its
own structure of VAT with different duties and structure.

In an earlier taxation system, people paid taxes at various levels. There was no system
of getting a rebate on the taxes paid previously while paying the inputs. This is also called as
cascading effect. Ideally the taxes should be based on value addition and the producer should
pay taxes on whatever value he adds to the product. In the absence of such a system,
producers ended up paying much higher taxes. Higher taxes are a barrier for business and
discourage business activity. The businesses instead spend time trying to save taxes leading
to distortions and a parallel economy. A large number of enterprises prefer to stay out of the
taxation system and avoid paying taxes. High taxes also lead to lobbying activities where
producers of a certain sector ask the government to lower/waiver taxes for their sector. This
also leads to multiple taxation rates for multiple products and further increases inefficiency in
the system.

Page | 4

Analysis of Goods and Services Tax in India

A Value Added Taxation system is seen as a way to negate this cascading effect. VAT
taxes goods at each stage and on the value addition done by the enterprise.

GST is an extended version of Value Added Tax (VAT) and aims to cover all goods
and services. VAT covers mostly goods and GST covers all goods and services. GST is an
attempt to get rid of weaknesses in the VAT structure.

With a GST in place, all these indirect taxes should be merged into one tax. Ideally,
these taxes will be collected by the Centre which will then be transferred to the States via a
rule/formula.

This will require changes in the constitution as Centre can only tax goods at
production stage and on Services. The States can only tax sale of goods. Hence, States cannot
tax services and Centre cannot tax sales of goods. The States cannot also tax imports. All this
needs to be changed with the GST and hence would require amendments in the Indian
Constitution. That is the reason why the 115th Constitution Amendment Bill has been
introduced

Hence, implementation of GST was always seen as a concern for States as they
surrender their powers to tax. This is a very difficult issue and as a result numbers of
discussions have followed between the stakeholders.

Page | 5

Analysis of Goods and Services Tax in India

Brief history about GST in India

The idea of moving towards the GST was first mooted by the then Union Finance
Minister Shri P. Chidambaram in his Budget for 2006-07. Initially, it was proposed that GST
would be introduced by 1st April, 2010.

The Empowered Committee of State Finance Ministers (EC) which had formulated
the design of State VAT was requested to come up with a roadmap and structure for the GST.
Joint Working Groups of officials having representation of the States as well as the Centre
were set up to examine various aspects of the GST and draw up reports specifically on
exemptions and thresholds, taxation of services and taxation of inter-State supplies. Based on
discussions within and between it and the Central Government, the EC released its First
Discussion Paper (FDP) on the GST in November, 2009. This spells out the features of the
proposed GST and has formed the basis for discussion between the Centre and the States

Since then, discussion being held between Central and State Government to consensus
on certain conflicting issues. However, till today no final agreement has been made between
Central and State Government.

However, Central Government in view of implementing GST from 1st April, 2016 all
over India by agreeing all the States by making certain modifications in proposed GST.

Page | 6

Analysis of Goods and Services Tax in India

What is GST?
GST is a comprehensive indirect tax on manufacture, sale and consumption of goods
and services at national level. The GST is expected to replace all the indirect taxes in India.
At the centre's level, GST will replace central excise duty, service tax and customs duties. At
the state level, the GST will replace State VAT. Integration of goods and services taxation
would give India a world class tax system and improve tax collections. It would end the long
standing distortions of differential treatments of manufacturing and service sector.

Page | 7

Analysis of Goods and Services Tax in India

Why GST?
GST is similar to VAT in terms of the value-added approach. The question that comes
to mind is -India already has VAT then why should someone go for GST? Moreover, it seems
to be very complicated and a difficult exercise, then what are the reasons? The key problems
of current taxation system for Goods and Service in India are as follows:

Taxation at manufacturing:
CENVAT is levied on goods manufactured or produced in India which gives rise to
definitional issues as to what constitutes manufacturing, and valuation issues for determining
the value on which the tax is to be levied.

Exclusion of Services from state taxation:

Exclusion of Services from state taxation has posed difficulties in taxation of goods
supplied as part of a composite works contract involving a supply of both goods and services,
and under leasing contracts, which entail a transfer of the right to use goods without any
transfer of their ownership.

Tax Cascading:
Oil and gas production and mining, agriculture, wholesale and retail trade, real estate
construction, and range of services remain outside the ambit of the CENVAT and the service
tax levied by the Centre. The exempt sectors are not allowed to claim any credit for the
CENVAT or the service tax paid on their inputs. Similarly, under the State VAT, no credits
are allowed for the inputs of the exempt sectors, which include the entire service sector, real
property sector, agriculture, oil and gas production and mining. Another major contributing
Page | 8

Analysis of Goods and Services Tax in India

factor to tax cascading is the Central Sales Tax (CST) on inter-state sales, collected by the
origin state and for which no credit is allowed by any level of government.

Interstate Sales Tax (CST):

Though it is an important source of revenue for states it is seen as very burdensome
by businesses. The companies make goods in one state but on distribution inside the country,
end up paying taxes in each state. They are supplying goods within the country and should
just be taxed at one place.

Inclusion of Services in VAT system:

Production of goods is because of both physical production and services. But Services
are taxed only by Centre and that too is done selectively. The Services need to be taxed at
State level and integrated with the Goods.

International Standard:
GST is becoming an international standard and it is important India also has one.
There are many factors before international companies while choosing a country for its
business and taxation system is one very important factor. With other countries having GST
and India not having one, the companies are likely to opt for former ahead of India for
locating their businesses. Likewise Indian companies may also prefer to increasingly set their
bases in other countries where tax system is more efficient.

Page | 9

Analysis of Goods and Services Tax in India

Silent features of GST

The GST system is based on the same concept as VAT. Here, set-off is available in
respect of taxes paid in the previous level against the GST charged at the time of sale. The
GST model has some aspects which are as follows:

Two Components:
GST will be divided into two components, namely, Central Goods and Service Tax and State
Goods and Service Tax. However, the basic features of law such as chargeability, definition
of taxable event and taxable person, measure of levy including valuation provisions, basis of
classification etc. would be uniform across these statutes as far as practicable.

Merger of various taxes:

GST will lead merger of various taxes levied by Central and State Governments. The
taxes that merged into GST are as follow:
Central Taxes

State Taxes

Central excise duty

Value Added Tax/ Sales tax

Additional excise duties,

Entertainment tax (unless it is

Service tax,

Excise duty under Medicinal &

levied on local bodies)

Gambling

Toiletries Preparation Act

Tax on lottery, betting and

Countervailing duties (on imports in

Luxury tax

lieu of excise duty)

Entry tax not in lieu of Octroi

Additional duty of Customs (levied

State surcharges and cesses in so far

Page | 10

Analysis of Goods and Services Tax in India

Central Taxes

State Taxes

on imports in lieu of value added tax

as they relate to supply of goods and

or central sales tax)

service

Entry tax in lieu of Octroi

(Included in revised bill)

Dual GST:
The Central GST and the State GST would be levied simultaneously on every
transaction of supply of goods and services except the exempted goods and services, goods
which are outside the purview of GST and the transactions which are below the prescribed
threshold limits. Further, both would be levied on the same price or value unlike State VAT
which is levied on the value of the goods inclusive of CENVAT. While the location of the
supplier and the recipient within the country is immaterial for the purpose of CGST, SGST
would be chargeable only when the supplier and the recipient are both located within the
State.

Rate:
There will be two tax rates for SGST lower rate for necessary and basic importance
items and a standard rate for all other goods. Further, there will be a special rate for precious
metals and a list of exempted items. Rates charged across all states and the central level will
be uniform along with the regulations, definitions and classifications. However, as per latest
development, it has been agreed to include a floor rate with bands to allow States the freedom
to have a high or low rate.

Page | 11

Analysis of Goods and Services Tax in India

Threshold limit:
Threshold exemption is built into a tax regime to keep small traders out of tax net. This
has three-fold objectives:
a) It is difficult to administer small traders and cost of administering of such traders is
very high in comparison to the tax paid by them.
b) The compliance cost and compliance effort would be saved for such small traders.
c) Small traders get relative advantage over large enterprises on account of lower tax
incidence.

The present threshold prescribed in different State VAT Acts below which VAT is not
applicable varies from State to State. The existing threshold of goods under State VAT is Rs.
5 lakhs for a majority of bigger States and a lower threshold for North Eastern States and
Special Category States. A uniform State GST threshold across States is desirable and,
therefore, the Empowered Committee has recommended that a threshold of gross annual
turnover of Rs. 10 lakh both for goods and services for all the States and Union Territories
may be adopted with adequate compensation for the States (particularly, the States in NorthEastern Region and Special Category States) where lower threshold had prevailed in the VAT
regime. Keeping in view the interest of small traders and small scale industries and to avoid
dual control, the States considered that the threshold for Central GST for goods may be kept
at Rs.1.5 crore.

Applicability:
GST will be applicable to all Goods and Services sold or provided in India, except
from the list of exempted goods which fall outside its purview.

Page | 12

Analysis of Goods and Services Tax in India

Payment:
GST will be charged and paid separately in case of Central and State level.

No Inter System Tax Input Credit:

The facility of Input Tax Credit at Central level will only be available in respect of
Central Goods and Service tax. In other words, the ITC of Central Goods and Service tax
shall not be allowed as a set-off against State Goods and Service tax and vice versa.

Inter-state GST:
The Empowered Committee has accepted the recommendations of the Working
Group of concerned officials of Central and State Governments for adoption of IGST model
for taxation of inter-State transaction of Goods and Services. The scope of IGST Model is
that Centre would levy IGST which would be CGST plus SGST on all inter-State transactions
of taxable goods and services. The inter-State seller will pay IGST on value addition after
adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State
will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer
will claim credit of IGST while discharging his output tax liability in his own State. The
Centre will transfer to the importing State the credit of IGST used in payment of SGST. The
relevant information will also be submitted to the Central Agency which will act as a clearing
house mechanism, verify the claims and inform the respective governments to transfer the
funds.

Page | 13

Analysis of Goods and Services Tax in India

GST on Imports:
The GST will be levied on imports with necessary Constitutional Amendments. Both
CGST and SGST will be levied on import of goods and services into the country. The
incidence of tax will follow the destination principle and the tax revenue in case of SGST will
accrue to the State where the imported goods and services are consumed. Full and complete
set-off will be available on the GST paid on import on goods and services.

PAN linked Taxpayer Identification Number:

Each taxpayer would be allotted a PAN linked taxpayer identification number with a
total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing
PAN-based system for Income tax facilitating data exchange and taxpayer compliance. The
exact design would be worked out in consultation with the Income-Tax Department.

Need of compensation during implementation of GST:

Despite the sincere attempts being made by the Empowered Committee on the
determination of GST rate structure, revenue neutral rates, it is difficult to estimate accurately
as to how much the States will gain from service taxes and how much they will lose on
account of removal of cascading effect, payment of input tax credit and phasing out of CST.
In view of this, 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. The payment of this compensation will need to be ensured in terms of special
grants to be released to the States duly in every month on the basis of neutrally monitored
mechanism.

Page | 14

Analysis of Goods and Services Tax in India

How does GST work?

Suppose there is a Paper manufacturer. He purchases raw materials and machinery on
which he pays certain percentage of tax.
Purchase

Particulars

(In Rs Lakh)

Tax Rate (%)

Tax (In Rs Lakh)

Raw Material

200

10%

20

Machinery

400

10%

40

Total Input Tax paid

60

Now suppose he produces Papers worth Rs 800 lakh and adds Rs 200 lakh as profit.
He sells all the goods to sole distributor in India. The manufacture will have to pay taxes on
selling his papers. Now in a traditional system, he would pay the tax on the entire Rs 1000
Lakh and get no input credit. So he pays a total tax of Rs 160 Lakh Rs 60 Lakh on Input
and Rs 100 Lakh on Sales. This is called cascading effect and a producer pays the tax on each
economic transaction. The end result is much higher taxes by the producer leading to lack of
incentives by the producer.
However with a GST system, the producer gets an input tax credit of Rs 60 Lakh. As
he had paid Rs 60 Lakh on the inputs, it gets deducted from the tax bill. On net basis, the
Producer pays Rs 100 Lakh of taxes.
Sale

Tax Rate

Without GST

With GST

(In Rs Lakh)

(%)

Tax (In Rs Lakh)

Tax (In Rs Lakh)

10%

100

100

Less: Input Tax

60

Tax Paid

100

40

160

100

Particulars
Sales
(Cost 800 + Profit 200)
Total Output Tax

Total Tax paid (Input

Tax + Output Tax)

1000

Page | 15

Analysis of Goods and Services Tax in India

Now let us see the books of the all India distributor. Lets say he pays Rs 50 lakh to
the transport provider for transporting goods from manufacturer to the distributors godown.
He pays service tax on the same. Hence total value of his goods becomes Rs 1050 Lakh. His
input tax payable is Rs 105 Lakh.

Particulars

In Rs Lakh

Tax Rate (%)

Tax (In Rs Lakh)

Goods Purchase

1000

10%

100

50

10%

Transportation
Charge

Total Input Tax paid

105

The Distributor sells the papers to the consumers. The same input tax output tax
calculation applies here as well. Without a GST system he pays a total of Rs 235 Lakh as
taxes. With a GST system he pays Rs 130 Lakh as total taxes, a total saving of Rs 51 lakhs.

Without GST

With GST

Tax (In Rs

Tax (In Rs

Lakh)

Lakh)

130

130

Less: Input Tax

105

Tax Paid

105

25

235

130

Particulars

Sales (Cost 1050+

Profit 250)
Total Output Tax

Purchase
(In Rs Lakh)

Tax Rate (%)

1300
10%

Total Tax paid

(Input Tax +
Output Tax)

Page | 16

Analysis of Goods and Services Tax in India

Benefits of GST
The implication of GST assures a single taxation system in the entire country for all
goods and services making tax compliance easier and more effective. The belief that trade
and industry will benefit from implementation of GST is widely accepted. Because the GST
will give more relief to industry, trade and agriculture through a more comprehensive and
wider coverage of input tax set off and service tax in subsuming of several Central and State
taxes in the GST and phasing out CST. The transparent and complete chain of set-off which
will result in widening of tax base and better tax compliance may also lead to lowering of tax
burden on an average dealer in industry, trade and agriculture. It will also boost up economic
unification of India. The major benefits of implementation of GST as follows:

To Economy:
It will simplify India's tax structure, broaden the tax base, and create a common
market across states. This will lead to increased compliance and increase India's tax-to gross
domestic product ratio. According to a report by the National Council of Applied Economic
Research, GST is expected to increase economic growth by between 0.9 per cent and 1.7 per
cent. Exports are expected to increase by between 3.2 per cent and 6.3 per cent, while imports
will likely rise 2.4-4.7 per cent.

To Corporate:
It will be beneficial for India Inc. as the average tax burden on companies will fall.
Reducing production costs will make exporters more competitive.

To Exporters:
The subsuming of major Central and State taxes in GST, complete and comprehensive
setoff of input goods and services and phasing out of Central Sales Tax (CST) would reduce
Page | 17

Analysis of Goods and Services Tax in India

the cost of locally manufactured goods and services. This will increase the competitiveness of
Indian goods and services in the international market and give boost to Indian exports.

To Industry:
Manufacturing sector in India is one of the highly taxed sectors in the world. A
complex and high taxation structure has the tendency to render products uncompetitive in the
international market or consume large portions of the cost arbitrage available in
manufacturing set-ups in low cost economies such as India. GST when enforced would
eliminate complexities in the present taxation structure and consequently prevent the loss of
nearly 50% of the advantage of lower manufacturing costs that India has over the western
nations.

To Centre and State:

Approximately Rs 900 billion a year of profits are predicted by the government with
the implementation of GST as it is speculated to bring about raise in employment, promotion
of exports and consequently a significant boost in overall economic growth.

To Common Consumer:
With the introduction of GST, all the cascading effects of CENVAT and service tax
will be more comprehensively removed with a continuous chain of set-off from the
producers point to the retailers point than what was possible under the prevailing CENVAT
and VAT regime. Certain major Central and State taxes will also be subsumed in GST and
CST will be phased out. Other things remaining the same, the burden of tax on goods would,
in general, fall under GST and that would benefit the consumers.

Page | 18

Analysis of Goods and Services Tax in India

Challenges in Implementation of GST

The actual challenge before the Finance Minister is not of drafting a model GST but
of its proper implementation and smooth transition from the prevailing system. The
challenges which the Government has to face in introducing GST are as follows:

Legislative Challenge:
The Constitution provides for delineation of power to tax between the Centre and
States. While the Centre is empowered to tax services and goods upto the production stage,
the States have the power to tax sale of goods. The States 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. Thus, the Constitution does not vest express power either in the Central or State
Government to levy a tax on the supply of goods and services. Moreover, the Constitution
also does not empower the States to impose tax on imports. Therefore, it is essential to have
Constitutional Amendments for empowering the Centre to levy tax on sale of goods and
States for levy of service tax and tax on imports and other consequential issues.

Inclusion of Goods and Services:

The first issue major issue of implementation of GST is to the inclusion of taxes
within the ambit of GST. The bone of contention relates to inclusion of purchase taxes on
food grain, taxes on motor spirit and high-speed diesel (GSD), and octroi or entry tax in lieu
thereof. The foodgrain surplus states have been levying the purchase tax, the burden of which
is exported to non-residents.

Page | 19

Analysis of Goods and Services Tax in India

The states are reluctant to bring motor spirit and high speed diesel within the ambit as
presently the tax is levied at a floor rate of 20% and the states derive about 35% of their sales
tax collections from these petroleum products.

Rationalization of GST rate:

Another issue to be decided is the rates of central and state GSTs to be levied. It is
expected that the tax rates would be revenue neutral. This implies that in the short term, there
would not be any revenue loss or gain, but over time the revenue productivity is expected to
increase due to better compliance of the tax and increased productivity of the economy.
Rates charged across all states and the central level will be uniform along with the
regulations, definitions and classifications for effective implementation of GST However, due
to dispute between Central and State Government, it has been agreed to include a floor rate
with bands to allow States the freedom to have a high or low rate.

Rationalization of threshold and exemption limits:

To get the full benefits of GST, it is necessary to rationalize threshold limit and
exemption limits. However, there are dispute between Central Government and State
Government regarding finalizing of threshold limit. State Governments are in view of to keep
the threshold limit at as low as possible to avoid revenue loss to state.

Place of Supply:
One of the main challenges in introducing in GST is defining the place of supply in
respect of certain services and intangible properties. In the existing tax regime, place of
supply is not a big issue because service is taxed by the Centre and the place of levy does not

Page | 20

Analysis of Goods and Services Tax in India

affect revenue receipts. In GST, however, the place of supply will have to be clearly defined
to avoid disputes among states in case of interstate transactions.

Time of Supply:
Time of supply will explain the point at which tax would be levied invoice date, due
date or payment date. Currently, different taxes are levied by the Centre and the states at
various stages. These variations will be eliminated in GST.

Rapid increase in Assesses:

The dual GST model will widen the tax net by taxing every economic supply in the
distribution network. This will lead to rapid increase in assesses. It will require some of the
businesses to restructure their distribution network to reduce additional tax burden on the
consumer with a view to be price competitive. Though it will generate revenue in a neutral
and transparent way, the Government will have to ensure that the ultimate consumer is not
burdened with tax beyond his capacity.

In addition to above Government have to decide regarding

Dispute settlement procedure and machinery

Building IT (Information technology) infrastructure to capture the full benefits of

GST

Training of tax administrators and assesses

Protecting and balancing the present and future revenues of the Centre and the States

Safeguarding the interests of less developed states with lower revenue potential

Page | 21

Analysis of Goods and Services Tax in India

Impact of GST on Indian Economy

The studies assessing impact of GST are limited as the design of GST was not clear
till the First Discussion Paper. Thirteenth Finance Commission has undertaken a study with
NCAER, a Delhi based think-tank on cost-benefit analysis of GST regime in India. The
highlights of the report were:

Medium term gains:

GST could to increase Indias GDP somewhere within a range of 0.9% to 1.7%. The
comparable dollar value increment is estimated to be between $9.5 billion and $18.6
billion respectively.

Long term gains:

The additional gain in GDP, originating from the GST reform, would be earned
during all years in future over and above the growth in GDP which would have been achieved
otherwise. It estimates present value of total gain in GDP between $325 billion and $637
billion. This is nearly 30-60% of the size of Indian economy currently!

Export gains:
GST will lower the overall tax inputs in supply chain of goods and services leading to
lower prices of Indian goods and services. This will increase the competitiveness of Indian
goods and services in the international market and give boost to Indian exports. The
uniformity in tax rates and procedures across the country will also go a long way in reducing
the compliance cost. These gains are expected to vary between 3.2 % - 6.3% with
corresponding absolute value range between $5.4 billion - $10.7 billion, respectively. Imports
Page | 22

Analysis of Goods and Services Tax in India

are expected to gain somewhere between 2.4 and 4.7% with corresponding absolute values
$6.9 billion and $13.6 billion, respectively.

Others:
GST would lead to efficient allocation of factors of production. The overall price level
would go down. It is expected that the real returns to the factors of production would go up.
NCAER results show gains in real returns to land ranging between 0.42 and 0.82 per cent.
Wage rate gains vary between 0.68 and 1.33%. The real returns to capital would gain
somewhere between 0.37 and 0.74%. Kelkar adds that GST could help add productive
employment of as much as 4 to 5 million. Barring impact on economy, GST could help the
consumers as well. The lower taxation will lead to lower prices of goods and services.

However, going by the above international experiences there could be two additional
problems.

Inflation:
Most of the international case studies show an inflation spurt in initial months of GST
implementation. In main reason for spurt in prices of goods which consumers thought would
become expensive after the GST. Much of blame for inflation is accorded to the various
regulatory bodies and uncertainty over the new tax regime. The inflation situation stabilizes
as implementation gains pace and is understood by consumers and producers. In Indias case
inflation could be critical as unlike developed countries, India has far more inefficiencies in
supply chain in local markets. The Indian GST reform is far larger in scale compared to
above economies of developed countries. These rigid inefficiencies along with higher
information asymmetry on probable impact of GST could push inflation higher in initial days

Page | 23

Analysis of Goods and Services Tax in India

of implementation. Indian economy is already plagued with persistent high inflation and this
new reform could further test inflation further.

Tax Revenue Shortfall:

RBI in the State Finances Report (2010-11) said the revenue implications of GST are
likely to vary across states. The Centre and the States are still discussing various aspects of
GST like taxation rates, revenue sharing model between Centre and States etc. As there is
still uncertainty over the final blueprint of GST, it is difficult to estimate the impact of GST
on state finances. The report points that VAT led to improvement in tax revenue for most
states. However, just like VAT there could be some short-falls in revenues in some states
over a short term.

The central government has already proposed a Rs 50,000 Cr fund to help the states
which suffer from the short-fall. However, a higher shortfall could lead to both Centre and
States to borrow more from the markets. This will be critically watched as it has further
ramifications on fiscal deficits, interest rates and inflation.

Page | 24

Analysis of Goods and Services Tax in India

Conclusion
Tax policies play an important role on the economy through their impact on both
efficiency and equity. A good tax system should keep in view issues of income distribution
and, at the same time, also endeavour to generate tax revenues to support government
expenditure on public services and infrastructure development.GST will give more relief to
industry, trade and agriculture through a more comprehensive and wider coverage of input
tax set-off and service tax set-off, subsuming of various Central and State taxes in the GST.
The transparent and complete chain of set-offs which will result in widening of tax base and
better tax compliance may also lead to lowering of tax burden on an average dealer in
industry, trade and agriculture. The subsuming of major centre and state taxes would reduce
the cost of locally manufactured goods and services. This is likely to increase the
competitiveness of Indian goods and services in the international market and to boost Indian
exports.
GST is expected to bring many benefits to the Indian economy. Though, all these
benefits are based on the assumption that overall taxation structure is less bureaucratic and
cumbersome than present. The implementation is going to be crucial so that the promised
benefits are realized.
The Government also needs to be weary of inflation spurts in initial implementation
phase of GST as pointed by experiences from international economies. Ideally, one should be
first easing all these state-wide inefficiencies and then implement GST. However given the
challenges in India, the policymakers are hoping GST will help ease these inefficiencies and
eliminate them over a period of time.

Page | 25

Analysis of Goods and Services Tax in India

References
The Empowered Committee Of State Finance Ministers (2009, November 10), First
Discussion Paper On Goods and Services Tax In India
http://www.cbec.gov.in/deptt_offcr/gst-status-18032014.pdf
http://www.empcom.gov.in/content/188_1_PhasingoutofCST.aspx
Abisheka Rastogi (2009), Illustrated Guide to Goods and Services Tax (GST)
http://www.taxmanagementindia.com/wnew/detail_rss_feed.asp?ID=1226
www.goodsandservicetax.com
M.Govinda Rao (2014), GST in India: Challenges and prospects, extracted from
http://www.livemint.com

/Opinion/

FtsFwtT50bMOc9HjHlJOLJ/

GST-in-India-

Challenges-and-prospects.html
Sherry (2007), Goods & Service Tax (GST) in India - A move towards tax reforms, Service
Tax Today
Verma A(2008), Goods and Service Tax: eagerly awaited in India, Service Tax Today

CA Rajat Mohan (2013, August 13), Goods and Services Tax (GST) - A step forward,
extracted from
http://articles.economictimes.indiatimes.com/2013-08-13/news/
41374977_1_servicestax-state-gst-goods-and-services/2
http://www.india-briefing.com/news/indian-gst-deal-paves-tax-reforms-8938.html/#sthash.
JMziiv64.dpuf
http://gstindia.com/news.php
http://www.thehindu.com/news/national/gst-rollout-will-signal-that-india-is-open-tobusiness-montek/article5505058.ece

Page | 26