GST

The Value Added Tax had been introduced with a view to take care of the various
anomalies present in the tax structure. In the pre VAT era, the traders used to juggle
with multiple tax regimen ranging from manufacture till the goods and services
were purchased for consumption. This also led to problems with respect to hitting
the revenue earnings from one large source- Exports- which too became almost non
competitive.
The VAT, nevertheless has, since its introduction, presented its own unique set of
problems with the powers that be at the State as well as Centre wracking their
brains to come up with a mutually acceptable solution. To cite a instance, a number
of Central taxes including customs duty, surcharge were excluded from Central
Value Added Tax (CENVAT) while at the State level entertainment and luxury taxes
(indirect taxes ) were excluded from VAT.
All of us are aware that GST was to be introduced from 2010.which would lead to
unification of taxes concerning goods and services. Ideally, it would have taken care
of the problems of the way the tax system had been configured but due to
numerous above cited instances it could not see the light of the day.
One major reason that it is still not implemented in its entirety is due to lack of
consensus among the States and Centre on issues concerning fiscal autonomy at
the State level. Another underlying reason till now had been political with various
political parties enjoying power at the Centre as well at the State.
It is not that the reasons are political alone. It is more to do with the financial
arithmetic involved as a large number of states do not have any real source of
revenue with their dependence on the financial largesse of the Centre.
In addition, GST in India is not an entirely new initiative, but it is to address the
implementation problems concerning VAT with the end result of benefits to the
economy and more smooth functioning.
In the present State-level VAT system, there is a problem of what we may call tax
overlapping between Centre and State taxes. The problem is nothing but the
Central Value Added Tax or CENVAT on certain commodities remains included in the
value of goods to be taxed under State VAT. In Indian Constitution, taxes upon goods
and services can be classified under three lists, namely Union List, State List and
Concurrent List. Now, certain taxes can be levied either by the Centre or the State.
The underlying problem nevertheless is of goods repeatedly being taxed, also called
the cascade effect (once by Centre and then by State (the concurrent list ones)).
This also adds on to administrative cost . This CENVAT Tax Element in State-level
Tax needs to be removed.

For GST to be effective 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 may have
to be made for giving this power also to the States

As pointed out by Mahesh Purohit, (Currently the President and Director Foundation
for Public Economics and Policy Research, New Delhi) under the present system of
VAT, services should also come under its net. In his words, Historically, Indias
indirect tax system is unique given that under the Constitution, the Union
government has the authority to impose a broad spectrum of excise duties on
production or manufacture while States are assigned the power to levy tax on the
sale of goods. Due to this dichotomy of authority under the Constitution, India has
been rather slow in the adoption of VAT. Today, India has adopted a model of dual
VAT, replacing Union excise duty with CENVAT and sales tax with State VAT. From an
economic stand point, there is hardly any difference between the taxation of
commodities and that of services. Therefore, under this system of dual VAT, it is of
paramount importance that in addition to goods, services also come under its net.
The exclusion of services causes many administrative problems and paves the way
for evasion of tax.
GST attempts to rectify that. Under the Goods and Services Tax, each manufacturer
needs to pay a GST, which is the difference of the output tax and input tax.
Hence, it can be said, GST is a comprehensive value added tax levied on goods and
services. Under the GST regime, goods and services will not be differentiated as
they move from the manufacturer downwards.
For GST to be effective, 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.(In fact, the most important objective of this new initiative is to
amend certain aspects of the Constitution of India in order to make it very clear
which objects to be taxed by the States and Centre. Unless such amendments are
made it would be difficult to operate GST in an optimal manner).
GST also attempts to address the evasion of taxes as it will do away with CST. Why?
There would be a continuity in set offs from the manufacturer till the
products/services reach the end consumer. All the taxes would automatically come
under the umbrella of the GST. This would, in turn lead to lesser records being
maintained (what the government is going to do with the surplus manpower , as a
result, can be addressed in another article).
A major boost in the arm would be the increased flows of revenues as a result both
at the Centre and consequently the States share as a result.

This will have favourable impact on the prices of product increasing the demand for
goods and benefit to the consumers. Thus GST will bring down inflation in the prices
of manufactured goods.
Once the production and supply chain costs reduce, it will have an impact on price
and availability of raw material leading to lower costs of production and increased
efficiency. It is expected that rational GST structure would reduce the production
costs by an approximate 10% .
GDP growth as a result is expected to increase by 1.4 to 1.6% and help aim at the 8
to 9% GDP growth target.

GST at the State level can be justified for the following reasons

Additional power of levy of taxation of services for the States

Removal of the cascading burdens of CENVAT and service taxes
Inclusion of a number of taxes in the GST

In a nutshell, the GST, once it gets implemented would address the following issues
plaguing the economic development:

Competitiveness of indigenous goods & services

Fragmentation of market resulting in inefficient production/ distribution
models
Creates economic distortions
High compliance and administration cost
High selective tax incidence suppresses demand
Increases litigation, uncertainty and harassment
Tax inefficiencies influence policy of protectionism leading to high cost
economy

The Central GST and State GST needs to be paid to the accounts of the Centre and
the States separately, which is still at the elementary stage of being sorted out.
A PAN-linked taxpayer identification number with a total of 13/15 digits would be
generated for each tax payer. This would link the GST with PAN-based system for
Income tax, thereby leading to greater tax collections as well as data exchange. As
a result there will be far greater information sharing between the Centre and the
States than it is happening currently.
However, the services agenda is still lacking. Focus is still on sorting out product
related issues only. In addition a few important sectors like oil and gas, real estate
are still out of its ambit. The list of items is still ambiguous. How will each state treat

the goods and services tax in the case of flow of products across multiple states is
still to be sorted out .
Finally there is the issue of revenue loss and inclusion/exclusion of state taxes that
continues to be key points of discussion in the corridors of power.
GST once it is fully implemented would greatly help to create a single Indian
national market in which there is free flow of trade of goods and services. This as a
result of the theory of competitive advantage will aid the different states in India to
specialize in production and manufacture of services with a distinct cost advantage
thereby leading to increased efficiency which will help accelerate the growth
engine.