GST VS.

VAT
IN THE FINAL SUBMISSION OF DRAFT IN THE SUBJECT OF-

LEGAL METHODS AND RESEARCH METHODOLOGY

SUBMITTED TO- SUBMITTED BY-

Mr VIJYANT SINHA NAME- ARIDAMAN RAGHUVANSHI

TEACHER ASSOCIATE ROLL NO. 2013

COURSE- BB.A LL.B (Hons.)

SEMESTER-1ST
Contents
INTRODUCTION.....................................................................................................................................4
1.2 CHARACTERISTICS OF TAX............................................................................................................4
1.3 CONSTITUTIONALLY ESTABLISHED SCHEME OF TAXATION.........................................................5
1.4 MEANING OF DIRECT & INDIRECT TAX.........................................................................................7
1.5 DIRECT TAX..................................................................................................................................7
1.6 INDIRECT TAX...............................................................................................................................7
1.7 TAXATION IN INDIA......................................................................................................................8
INDIRECT TAX.........................................................................................................................................9
2.1 INDIRECT TAX...............................................................................................................................9
2.2 EXAMPLES OF INDIRECT TAXES....................................................................................................9
2.3 MERIT OF INDIRECT TAXES......................................................................................................12
2.4 DEMERIT OF INDIRECT TAXES....................................................................................................13
2.6 INDIRECT TAX REFORM IN INDIA................................................................................................13
2.7 MERGER OF INDIRECT TAXES I.E. GST........................................................................................15
VALUE ADDED TAX (VAT)..................................................................................................................15
3.1 History.......................................................................................................................................16
3.2 VAT in India................................................................................................................................16
3.3 What is Value Added Tax (VAT)..................................................................................................16
3.4 Cascading effects of taxation.....................................................................................................17
3.4 The basic principle of VAT..........................................................................................................17
3.5 Advantages of application of VAT...............................................................................................17
3.6 VAT AND ITS EFFECT...................................................................................................................19
(i) VAT Effect on Inflation:-.......................................................................................................19
(ii) Effects of VAT on Distribution:-................................................................................................19
(iii) VAT Effect on Economic Growth.............................................................................................20
3.7 KEY ISSUES RELATING TO VAT.....................................................................................................20
GOODS AND SERVICE TAX (GST).........................................................................................................21
4.1 Introduction to GST....................................................................................................................21
4.2 Background of Goods and Service Tax Outside India................................................................22
4.3 Historical Background of Goods and Service Tax in India :.........................................................23

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 4.4 Application and functioning of GST............................................................................................24
4.5 Process of implementation and Roadmap...............................................................................26
4.6 Advantages of GST.....................................................................................................................28
Taxes subsumed-..............................................................................................................................28
4.7 Disadvantages of GST.................................................................................................................30
4.8 Impact of GST on the economy..................................................................................................31
4.9 Impact of GST on Different Sectors............................................................................................31
4.10 EXPERIENCE OF GST IN OTHER COUNTRIES.............................................................................33
CONCLUSION AND SUGGESTION.........................................................................................................36
BIBLIOGRAPHY.....................................................................................................................................36

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INTRODUCTION

1.1 MEANING OF TAX

Tax is compulsory monetary contribution to state’s revenue within its territorial limit 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.

1.2 CHARACTERISTICS OF TAX

1. It is a compulsory contribution. Even though a tax is paid willingly, in a sense it is a

compulsory contribution. It only means that no one can refuse to pay a tax, on the general
ground that he doesn’t derive any benefit from certain state services. A tax is levied on the
basis of same predetermined criteria such as equity. Seligman emphasizes that compulsory
contribution is enforced without reference to special benefits conferred. 2. The fact that tax is
a contribution implies the notion of a sacrifice involved on the part of the contributor.

3. Tax payment is a personal obligation. Prof Lutz rightly point out that the obligation to pay
tax is a personal responsibility of the taxpayer. This personal obligation to contribute to the
states support is universal and applies to all. This does not mean that all taxes must be levied
on persons or objects of taxation. As a matter of fact, taxes are actually based on a great
variety of material things as well as non-material and intangible form of wealth. The meaning
is that the primary obligation to pay the tax is a personal obligation.

4. A tax is levied according to certain legal requirements.

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5. The amount of tax is not fixed with reference to the exact benefit which a taxpayer receives
from public service. In other words there is no element of quid-pro-quo in the payment of tax.

6. A tax is paid out of the income of the taxpayer.

7. The power of taxation is mainly to be used for collecting revenue to the state. Writers like
Prof. Lutz are of the opinion that the modern concept of taxation emphasizes positively that it
should be used for the purpose of providing public revenue and that it apparently does not
give a positive sanction to the use of the taxing power for the accomplishment of ulterior
objects

1.3 CONSTITUTIONALLY ESTABLISHED SCHEME OF TAXATION

Article 268- Duties levied by the Union but collected and appropriated by the States.

Article 268(A)-Service tax levied by Union and collected and appropriated by the Union and
the States.

Article 269- Taxes levied and collected by the Union but assigned to the States.

Article 269(A)- Levy and collection of goods and services tax in course of inter-State trade
or commerce.

Article 270- Taxes levied and distributed between the Union and the State.

Article 272- Taxes which are levied and collected by the Union and may be distributed
between the Union and the States.

Article 279(A)- Goods and Services Tax Council.

Article 246- Extent of laws made by Parliament and by the Legislature of States.

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

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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
No Parliament
.
1 Taxes on income other than agricultural income (List I, Entry 82)

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

3 Duties of excise on tobacco and other goods manufactured or produced in India
except
(i) alcoholic liquor for human consumption, and (ii) opium, Indian hemp and other
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)
5 Taxes on capital value of assets, exclusive of agricultural land, of individuals and
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)
8 Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on
railway fares and freight (List I, Entry 89)
9 Taxes other than stamp duties on transactions in stock exchanges and futures
markets (List I, Entry 90)
10 Taxes on the sale or purchase of newspapers and on advertisements published therein
(List I, Entry 92)
11 Taxes on sale or purchase of goods other than newspapers, where such sale or
purchase
takes place in the course of inter-State trade or commerce (List I, Entry 92A)
12 Taxes on the consignment of goods in the course of inter-State trade or commerce
(List
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 taxation

List II – State List

S
No State Legislature
.
1 Land revenue, including the assessment and collection of revenue, the maintenance
of land records, survey for revenue purposes and records of rights, and alienation of
revenues (List II, Entry 45)

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2 Taxes on agricultural income (List II, Entry 46)
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)
7 Duties of excise for following goods manufactured or produced within the State (i)
alcoholic liquors for human consumption, and (ii) opium, Indian hemp and other
narcotic drugs and narcotics (List II, Entry 51)
8 Taxes on entry of goods into a local area for consumption, use or sale therein (List
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)
11 Taxes on advertisements other than advertisements published in newspapers and
advertisements broadcast by radio or television (List II, Entry 55)
12 Taxes on goods and passengers carried by roads or on inland waterways (List II,
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)
18 Taxes on luxuries, including taxes on entertainments, amusements, betting and
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.

1.4 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.

1.5 DIRECT TAX

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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.

1.6 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 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.

1.7 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.
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

8
INDIRECT TAX

2.1 INDIRECT TAX

Indirect tax can be defined as a type of tax where the incidence and impact of taxation does
not fall on the same entity. It is collected by the government from an intermediary such as a
retailer or a manufacturer. The eventual tax amount is paid by the buyer of the goods and
services. To put it simply, indirect taxes are those taxes that can be shifted from one
individual to another. It is not levied directly on the income of the taxpayer, but is levied on
the expenses incurred by them. Some examples of indirect taxes include sales tax,
entertainment tax, excise duty, etc.

In the past, 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. Despite
this reforms taxes formed a barrier to inter-state trading in order to attain a secured market for
the activities related to services and goods more reform was needed. Some of the reforms that
was introduced by GST for a better indirect taxation system in India are –
The serialized set of Indirect Taxes so far activated at the central and state

9
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.

From 2017, the Indian government has activated a goods and service tax [GST} neutral at all
levels in order to fulfill these objectives.

2.2 EXAMPLES OF INDIRECT TAXES

2.2.1 CENTRAL EXCISE DUTY:

Goods are traditionally categorized based on their purpose and area of use,
with certain goods meant to be produced and consumed locally. Goods and
products which are manufactured and consumed within India have to pay
an indirect tax to the government, with this tax being called Central Excise
Duty. While the tax is paid by the manufacturer, the onus of additional
payment for a product to account for this duty/tax falls on the consumer.
Excise duty can be levied only on certain products which are mentioned in the
First and Second Schedule of the Central Excise Tariff Act, 1985 and other
goods are not covered under the ambit of excise duty.

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)

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2.2.2 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 of goods into India 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.
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.

2.2.3 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 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

11
 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.

2.2.4 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 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.

2.2.5 VALUE ADDED TAX [VAT]:

Value added tax or VAT is an indirect tax, which is imposed on goods and
services at each stage of production, starting from raw materials to final
product. VAT is levied on the value additions at different stages of production.
VAT is widely applied in the European countries. However, now a number of
countries across the globe have adopted this tax system.
The States introduced 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, 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

12
 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
percent, which was revenue neutral rates for most items. The two basic rates
was 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

2.3 MERIT OF INDIRECT TAXES

CONVENIENCE IN ASSESSMENT & RELATIVE DIFFICULTY IN

EVASION – The tax is required to be assessed by the assesse himself 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.

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.

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2.4 DEMERIT OF INDIRECT TAXES

 Indirect taxes raise prices. But the price should rise by the exact amount of tax only.
In practice, we find that the buyers pay prices by larger amount than the tax.
Dishonest sellers can easily cheat the buyers by charging larger amount than the
actual tax

 Indirect taxes are collected from the producers, wholesaler, shopkeepers, exporters,
importers etc. So every source of tax yield has to be properly guarded. So, huge staff
has to be maintained to check accounts, to detect smuggling, to prevent unlicensed
production etc. So the cost of collection of indirect tax is very high.

 They do not develop civic- consciousness, because often the tax-payer does not even
know that he is paying a tax. The tax is concealed in the price.

 They discourage industries if raw materials are taxed.

2.6 INDIRECT TAX REFORM IN INDIA

2.6.1 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.

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

14
 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.

2.6.2 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.
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;

15
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

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

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 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.
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.

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

VALUE ADDED TAX (VAT)

3.1 History
VAT was first introduced in France as taxe sur la valeur ajoutee or TVA. In 1954, the French
economist, Maurice Laure, the joint director of the French tax authority, the Direction generale des

16
impost, initiated the concept of VAT, which came into effect on April 10, 1954. Initially introduced for
large businesses of France, with the passage of time, VAT was employed for all business sectors of
the country. In France, value added tax is considered to be one of the major sources state finance

3.2 VAT in India

India first introduced VAT in 1986. It was introduced only at federal level known originally as
MODVAT (modified value added tax). The principal object was to allow manufacturers to
obtain a reimbursement of the excise duties paid on goods. Initially confined to raw materials
and components, the scope of MODVAT was subsequently extended to include capital goods
in 1994.Finally after 14 years vat was implemented. Let us have a glance on the history of vat
up till April 2005 and reasons why it could not be implemented before. Economic reforms
were on a priority by the government since 1991. But it is to be noted that, VAT was
introduced in India in the year 1976, in respect of Central Excise. However, it was restricted
only up to the Excise Duties, and was known as Modvat (modified value added tax). The
coverage of Modvat gradually increased and covered various other chapters. The importance
& need of VAT in the sales tax structure of India was recognized by the taxation authorities.
But the reason why the proposal of VAT took a long time is because VAT in its simplest form
cannot be adopted in India where there are various authorities who can levy the taxes (e.g.:
State/ Central/ Municipality) There are various reasons why the implementation can take
time. It is the policies, the framework, the commodities, the taxation rate, changing from a
multiple point tax to a single point tax, etc and all such details had to be worked upon.
Moreover, in the then existing sales tax regime, it is the states that collect the taxes, that too at
different rates.

3.3 What is Value Added Tax (VAT)

VAT is a simple transparent tax collected on sales of goods. The states and union territories of
India have decided to implement VAT in place of sales tax and a number of other state taxes.
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 120 countries. 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

17
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 reseller or the manufacturer would be reduced unless the ultimate price is increased

3.4 Cascading effects of taxation

3.4 The basic principle of VAT

The Value Added Tax system has its origin in the West European countries. Generally, taxes
are levied on the selling price of the product. Today raw material passes through a number of
stages and processes until it reaches the ultimate stage. For instance, steel ingots are made in
a steel mill, which are then rolled into plates in a rerolling unit and after this a third
manufacturer will make furniture from these plates. Thus, output of the first manufacturer
becomes the input of the second manufacturer, who carries out further processing and
supplies it to the third manufacturer. This process continues till the final product emerges.
The product then goes to the wholesaler who in turn will sell it to the retailer and he will
finally turn it to the consumer

3.5 Advantages of application of VAT

18
In its purest form, VAT is a tax that is levied on the value added along different stages of production
and distribution of a commodity or service. Therefore, it is a tax on the sum total of value added, i.e.,
equal to the value of a commodity or service. In this sense, it should be equivalent to a retail sales tax
that is collected only at the retail stage. But the retail sales tax is difficult to collect because there are
too many retailers of various sizes. The VAT, instead, can be collected at earlier stages of production
in fragments and can end at the retail stage. But the total collected from the VAT should be exactly the
same as if collected only from the retailers of the commodity concerned.

(i) Eliminates cascading effects :-

The VAT is preferred because the VAT minimizes distortions. The simple excises or the turnover taxes
results in the unintended effect of (i) taxing an output (together with its input content) more than once;
as well as (ii) applying a tax on the earlier paid input tax leading to cascading. It causes producers to
move their capital or resources away from the production of one output to another one which does not
suffer from cascading. The VAT, because it gives credit for input tax earlier paid, avoid the distortion
as represented by misallocation or redirection of resources from one economic activity to another.
Therefore, it does not alter producers’ decisions to produce particular commodities which, in general,
should reflect the demands from consumers. However, for this benefit to occur, the VAT must give
credit for raw materials and capital goods.

(ii) Eases administration:-

Although there are feasible options limiting the impact of cascading, the utility of multipoint VAT
goes much beyond that. Arresting cascading could be considered important to a regime of VAT.
Nevertheless, the institution of VAT in fact should be conceived also as an instrument of tax
administration – an administration that checks evasion through a self monitoring feature, and an
account based audit system that is regarded as superior to the system of physical verification. The
latter already having fallen into disrepute for causing distress to tax filer’s needs to be eventually
abandoned as its positive impact on revenue yield remains questionable. An account-based audit
should not only tighten the tax net but raise revenues through a wider acceptability of a tax
administration in the public eye.

(iii) Improves International competitiveness:-

Since VAT has the potential for eliminating cascading, it is possible to design the VAT in a manner
that will ensure that exports are free from any tax burden (zero-rating). Further, such adjustments
under the VAT structure are also WTO consistent. As a result the competitiveness of exports in
international markets is enhanced. Even though exports are generally exempt from sales tax and the
burden of input tax embedded in the exports is sought to be eliminated through the duty drawback

19
mechanism, nevertheless, the process is cumbersome and the effect is not fully realised. As export
competitiveness can be adversely influenced by then tax factor, the capacity to zero rate easily and
accurately is an important aspect of the VAT .

(iv) Imparts Transparency:-

Another positive aspect of the VAT is its simplicity and transparency, which commodity taxes usually
lack. The VAT tends to collect the quantum of tax payable at every stage of transaction. Both
producers and consumers, who ultimately bear the tax burden, are fully aware of the tax liability,
which is not as easily ascertainable in other forms of commodity taxation.

(v) Buoyant Source of Revenue:-

When faced with chronic budget deficits and growing expenditures, governments have been turning to
tax reform as a way to raise revenues. Governments seek sources that are income elastic and not
sensitive to changes in prices of particular goods or income sources. Since the VAT permits a
relatively larger coverage in as much as it is possible to extend it to value addition at all stages in the
production-distribution chain, the potential for raising resources efficiently is generally higher.

3.6 VAT AND ITS EFFECT

(i) VAT Effect on Inflation:-

In considering the introduction of VAT, countries are often concerned that it would cause an
inflationary spiral. However there is no evidence to suggest that this is true. A survey of OECD
countries that introduced VAT indicated that VAT had little or no effect on prices. In cases where there
was an effect it was a one time effect that simply shifted the trend line of the consumer price index
(CPI). To guard against any unforeseen price effects the authorities may consider a tighter monetary
policy stance at the introduction of VAT.

(ii) Effects of VAT on Distribution:-

Value added tax is widely criticized as being regressive with respect to income that is its burden falls
heavily on the poor than on the rich. This emanates from the fact that consumption as a share of
income falls as income rises. Hence a uniform VAT rate falls heavily on the poor than the rich. This
criticism is valid when VAT payments are expressed as a proportion of current income. However if,

20
following the premise that welfare is demonstrated by the level of consumption rather than income,
consumption is used as the denominator the impact of VAT would be proportional. A proportional
burden would also be demonstrated if lifetime income rather than current income is used. A lifetime
income concept considers the fact that many income recipients are only temporarily at lower income
brackets as their earnings increase.

(iii) VAT Effect on Economic Growth

Economic growth can be facilitated through investment by both government and the private sector.
Savings by both parties are required in order to finance investment in a non-inflationary manner.
Compared to other broadly based taxes such as income tax VAT is neutral with respect to choices on
whether to consume now or save for future consumption. Although VAT reduces the absolute return
on saving it does not reduce the net rate of return on saving. Income tax reduces the net rate of return
as both the amount saved as well as the return on that saving are subject to tax. In this regard VAT
may be said to be a superior tax in promoting economic growth than income tax. Since VAT does not
influence investment decisions on firms, by increasing their costs, its effects on investment can be
said to be neutral.

3.7 KEY ISSUES RELATING TO VAT

(i) Cascading Impact (Tax on Tax):

The current tax system involves multi layered taxes levied by central, state governments, and local
authorities at multiple points in the supply chain.
 State VAT paid on inputs in one state is not available for set off if the output is sold in another state.
 Excise duty on alcohol is levied by state governments; hence, CENVAT credit in respect of excise
duty paid on inputs to central government is not available for set-off in case of excise duty payable to
state governments.
 Excise duty paid on manufacturing is not allowed to be set off against state VAT payable on sale of
goods and vice versa.
 With the service industry, wherein the major cost other than employees is the infrastructure cost.
Companies are charged VAT on purchase of infrastructure goods; however, VAT is not allowed to be
set off against service tax liability levied on services rendered. However, service tax payable can be
set off against excise duty and vice versa. Examples: Infrastructure, telecom, logistics

(ii) Regional Differences in Tax Rates:

 There is no uniformity in the rate of tax charged on goods.

 Breaches the motive behind implementation of VAT

 Results in differential prices of goods amongst states and diversion of trade from costlier states to
cheaper ones.

21
There are many items on which the rate of tax differs from state to state, of which, some are listed
below:

(iii) Complex Tax Structure:

 Current taxation involves multiple tax laws, rules and administrative procedures.
 An assessee with pan-India operations has to deal with multiple tax laws at the state level, along
with various other taxes levied by the central government and local authorities.
 These issues discourage investments by organised sector and are also a huge disincentive for
voluntary compliance, which is to a great extent responsible for high effective tax rates

(iv) Double Taxation:

 Globally, the distinction between goods and services is clear with all intangibles defined as
services; however, in India, intangibles are further classified as goods or services.

 The distinction between goods and services is increasingly getting blurred with development in
technology and services getting bundled with goods.

 The current constitutional framework gives autonomy to states to levy tax on sales of goods.

 However, states are precluded to levy tax on services that fall under the jurisdiction of the Centre.

 With increasing share of services in tax revenues, state authorities often define the ambiguous
transactions under the ambit of goods and charge state VAT, whereas central government levies
service tax on the same transaction.

 Examples: Sale of advertisement (media industry) and standard software (IT industry) is classified
as sale of goods and charged to the state VAT by many state governments, whereas, the same
transaction is taxed as service by the central government.

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 GOODS AND SERVICE TAX (GST)

4.1 Introduction to GST

GST (goods and service tax) is a comprehensive tax levy on manufacture, sale and consumption of
goods and service at a national level.
‘G’ – Goods
‘S’ – Services
‘T’ – Tax
GST is a tax on goods and services with value addition at each stage having comprehensive and
continuous chain of set-of benefits from the producer’s/ service provider’s point up to the retailer’s
level where only the final consumer should bear the tax.” Through a tax credit mechanism, GST is
collected on value-added goods and services at each stage of sale or purchase in the supply chain.
GST is paid on the procurement of goods and services can be set off against that payable on the
supply of goods or services. But being the last person in the supply chain, the end consumer has to
bear this tax and so, in many respects, GST is like a last-point retail tax.
GST is a major indirect tax reform in India which takes VAT to its logical conclusion. GST would
avoid burden of multiple taxation (tax on tax) with a cascading effect. GST seeks to rule out cascading
tax effect. Once it introduced, CST will also be removed.
The proposed model of GST and the rate- A dual GST system is planned to be implemented in India
as proposed by the Empowered Committee under which the GST will be divided into two parts:
 State Goods and Services Tax (SGST)
 Central Goods and Services Tax (CGST)
 Integrated Goods and Services Tax (IGST)
Both SGST and CGST will be levied on the taxable value of a transaction. All goods and services,
leaving aside a few, will be brought into the GST and there will be no difference between goods and
services. The GST system will combine Central excise duty, additional excise duty, services tax, State
VAT entertainment tax etc. under one banner.

4.2 Background of Goods and Service Tax Outside India

Goods and Service also known as the value added tax (VAT) or harmonized sales tax. Following are
some successfully implemented GST models in other countries:

(i) France:

a. Rate of GST 19.6%

b. France was the first country to introduced GST in 1954.
Worldwide, almost 150 countries have introduced GST in one or the other form since now. Most of

23
the countries have a unified GST System. Brazil and Canada follow a dual system vis a vis India is
going to introduce. In china, GST applies only to goods and the provisions of repairs, replacements
and processing services.

(ii) Australia:

a. Rates of GST 10%

b. GST is administrated by the tax office on behalf of the Australian Government, and is appropriated
to the states and territories.
c. Every company whose turnover exceeds $ 75000 is liable for registration under GST and in
default 1/11th of the income and some amount is form of penalty.

(iii) Canada:

a. GST is imposed at 5% in Part ix of the excise tax act. GST is levied on goods and service made
in Canada except items that are either exempt or zero rated.
b. When a supplier makes a zero rated supply, he is eligible to recover any GST paid on purchases
but the supplier who makes a supply of exempt goods he is not eligible take input tax credit on
purchases for the purpose of making the exempt goods and services.

(iv) New Zealand:

a. Rate of GST 12.5%

b. Exceptions are rent collected on residential rental properties, donations and financial services.

4.3 Historical Background of Goods and Service Tax in India :

(i) Amaresh Baghchi Report , 1994 suggests that the introduction of Value Added Tax will act as
root for implementation of Goods and Service Tax in india.

(ii) Ashim Dasgupta, 2000 empowered committee, which introduces VAT system in 2005 ,
which has replaced old age taxation system in India.

(iii) Vijay Kelkar Task Force 2004, it strongly recommended that the integration of indirect taxes
in to the form of GST in India.

(iv) Announcement of GST to be implemented by 1st April , 2010 After successfully

implementation of VAT system in India and suggestion various committees and task forces on GST,
the union government first time in union budget 2006-07 announced that the GST would be
applicable from 1st April 2010.

(v) The Government has formed various joint working groups of state finance ministers to study
the impact of GST various states.

(vi) The empowered committees of state finance ministers after various meetings reached on
amicable formula for implementation of GST in India.

(vii) Task force of finance ministers has submitted their report in December 2009 on structure of
GST in India.

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(viii) In August , 2013 Standing committee on Finance tabled its report on GST Bill.

(ix) In December, 2014 revised constitution Amendment bill was tabled in Parliament.

(x) On June 14, 2016 , the ministry of finance released draft model law on GST in public domain
for views and suggestions .

(xi) GST bill passed in Rajya Sabha on 3rd August , 2016 the constitution amendment (122nd ) bill
2014 was passed by Rajya Sabha with concern amendments.
a. The changes made by Rajya Sabha were unanimously passed by Lok Sabha. 9
b. After the passage of amendment bill in Rajya Sabha and the charges subsequently ratified and
passed by the lok sabha unanimously, the bill was adopted by a majority of state Legislatures where
in approval by at least 50% of the state Assemblies was required.
c. The final step to the constitution (122nd ) amendment bill, 2014 becoming an act was taken when
the Honorable President of India gave his final assent on September 8, 2016.

(xii) In 2017 – Four GST related bills become act to following Presidents assent and passage in
parliament:

a. Central GST Bill.

b. Integrated GST Bill .
c. Union Territory GST Bill.
d. GST (compensation to states ) Bill.
(xiii) In 2017 GST Council finalizing the GST Rules and GST Rates.
(xiv) When GST is Applicable – Modi Govt. Want to applicable GST Bill from 1st July 2017, Due
to a some legal Problems GST Bill is not applicable before 1st July 2017 .

4.4 Application and functioning of GST

In keeping with the federal structure of India, it is proposed that GST be levied concurrently by the
Centre (CGST) and the States (SGST). It is expected that the base and other essential design features
would be common between CGST and SGST, across SGSTs for the individual States. Both CGST and
SGST would be levied on the basis of the destination principle. Thus, exports would be zero-rated,
and imports would attract the tax in the same manner as domestic goods and services. Inter-State
supplies within India would attract an Integrated GST (aggregate of CGST and the SGST of the
Destination State). GST is a consumption based tax/levy. It is based on the “Destination principle.”
GST is applied on goods and services at the place where final/actual consumption happens. GST is
collected on value-added goods and services at each stage of sale or purchase in the supply chain.
GST paid on the procurement of goods and services can be set off against that payable on the supply
of goods or services. The manufacturer or wholesaler or retailer will pay the applicable GST rate but
will claim back through tax credit mechanism.
But being the last person in the supply chain, the end consumer has to bear this tax and so, in many
respects, GST is like a last-point retail tax. GST is going to be collected at point of Sale.

25
The GST is an indirect tax which means that the tax is passed on till the last stage wherein it is the
customer of the goods and services who bears the tax. This is the case even today for all indirect taxes
but the difference under the GST is that with streamlining of the multiple taxes the final cost to the
customer will come out to be lower on the elimination of double charging in the system. The current
tax structure does not allow a business person to take tax credits. There are lot of chances that double
taxation takes place at every step of supply chain. This may set to change with the implementation of
GST.
So, how is GST Levied? GST will be levied on the place of consumption of Goods and services. How
does GST operate?

 Case 1: Sale in one state, resale in the same state.

In the example illustrated below, goods are moving from Mumbai to Pune. Since it is a sale within a
state, CGST and SGST will be levied. The collection goes to the Central Government and the
State Government as pointed out in the diagram. Then the goods are resold from Pune to Nagpur. This
is again a sale within a state, so CGST and SGST will be levied. Sale price is increased so tax liability
will also increase. In the case of resale, the credit of input CGST and input SGST (Rs. 8) is claimed as
shown; and the remaining taxes go to the respective governments.

26
 Case 2: Sale in one state, resale in another state.
In this case, goods are moving from Indore to Bhopal. Since it is a sale within a state, CGST and
SGST will be levied. The collection goes to the Central Government and the State Government as
pointed out in the diagram. Later the goods are resold from Bhopal to Lucknow (outside the state).
Therefore, IGST will be levied. Whole IGST goes to the central government. Against IGST, both the
input taxes are taken as credit. But we see that SGST never went to the central government, still the
credit is claimed. This is the crux of GST. Since this amounts to a loss to the Central Government, the
state government compensates the central government by transferring the credit to the central
government.

 Case 3: Sale outside the state, resale in that state.

In this case, goods are moving from Delhi to Jaipur. Since it is an interstate sale, IGST will be levied.
The collection goes to the Central Government. Later the goods are resold from Jaipur to Jodhpur
(within the state). Therefore, CGST and SGST will be levied. Against CGST and SGST, 50% of the
IGST, that is Rs. 8 is taken as a credit. But we see that IGST never went to the state government, still
the credit is claimed against SGST. Since this amounts to a loss to the State Government, the Central
government compensates the State government by transferring the credit to the State government.

27
It is proposed that the CGST will subsume central excise duty (Cenvat), service tax, and additional
duties of customs at the Central level; and value-added tax, central sales tax, entertainment tax, luxury
tax, octroi, lottery taxes, electricity duty, state surcharges related to supply of goods and services and
purchase tax at the state level.

4.5 Process of implementation and Roadmap

On 1st July 2017 at midnight, the President of India, Sir Pranab Mukherjee and Prime
Minister Sir Narendra Modi launched GST all over India including Jammu & Kashmir.
However, there have been many changes made to the rates of GST, the latest being on 18th
January 2018.
In a short span of time, all the states approved their State GST (SGST) laws. Union territories
with legislatures, i.e., Delhi and Puducherry, have adopted the SGST Act and the other 5
union territories without legislatures have adopted the UTGST Act.
The idea of moving towards the GST was first mooted by the then Union Finance Minister in
his Budget for 2006-07. The talks of ushering in GST took concrete shape with the
introduction of Constitution (122nd Amendment) Bill, 2014. The Bill was passed by the
Parliament on 8 August 2016. This was followed by the ratification of the Bill by more than
15 states. On 12 April 2017, the Central Government enacted four GST bills:
 Central GST (CGST) Bill
 Integrated GST (IGST) Bill
 Union Territory GST (UTGST) Bill
 The GST (Compensation to States) Bill
In a short span of time, all the states approved their State GST (SGST) laws. Union territories
with legislatures, i.e., Delhi and Puducherry, have adopted the SGST Act and the other 5
union territories without legislatures have adopted the UTGST Act.

28
The GST Council, a recommendatory body consisting of representatives of Central as well as
state governments, has met on several occasions and taken important decisions relating to tax
rate structure, exemptions, rules, composition scheme etc. Over the period, the Council has
recommended a reduction in the tax rates of various goods and services. It is also considering
the various issues faced by trade and industry and endeavoring to simplify the new tax regime
and ease compliance.
On the compliance front, all registered persons have to file monthly returns in Form GSTR-
3B (containing a summary of outward and inward supplies) by the 20th of the succeeding
month. Additionally, an invoice-wise return of outward supplies needs to be submitted in
Form GSTR-1 by the 10th of the succeeding month. Taxpayers with turnover upto INR 1.5
crores can file Form GSTR-1 on quarterly basis. The Government has suspended the
requirement of filing Form GSTR-2 (containing details of inward supplies) and GSTR-3 (a
consolidated statement of inward and outward supplies).
The GST Council has approved a simplified GST return format wherein the taxpayers will be
required to file only one monthly return. Input tax credit will be available based on invoice
details of outward supplies uploaded by the supplier. Taxpayers having turnover below INR 5
crores will have an option to file return on quarterly basis.
Under GST, there is a provision for the person in charge of a conveyance to carry electronic
way bill (e-way bill) if the consignment value exceeds INR50,000. E-way bill can be
generated through various modes such as web (online), Android app, SMS using Bulk Upload
Tool and API-based site-to-site integration. The e-way bill system has become effective for
inter-state as well as intra-state movement of goods.
GST has been a major transition in the Indian tax framework. It has evolved significantly
from the time of its inception. It is expected that Government’s pro-active measures and
industry’s active participation, will make it a truly “Good and Simple Tax” in the times to
come

29
4.6 Advantages of GST

GST has been envisaged as a more efficient tax system, neutral in its application and distributional
attractive. The advantages of GST are:

 The tax structure will be made lean and simple.

 The entire Indian market will be a unified market which may translate into lower business costs. It
can facilitate seamless movement of goods across states and reduce the transaction costs of
businesses.

 It is good for export oriented businesses. Because it is not applied for goods/services which are
exported out of India.
 In the long run, the lower tax burden could translate into lower prices on goods for consumers.
 The Suppliers, manufacturers, wholesalers and retailers are able to recover GST incurred on input
costs as tax credits. This reduces the cost of doing business, thus enabling fairer prices for consumers.
 It can bring more transparency and better compliance.
 Number of departments (tax departments) will reduce which in turn may lead to less corruption.
 More business entities will come under the tax system thus widening the tax base. This may lead to
better and more tax revenue collections.
 Companies which are under unorganized sector will come under tax regime.
 Wider tax base, necessary for lowering the tax rates and eliminating classification disputes.
 Elimination of multiplicity of taxes and their cascading effects.
 Rationalization of tax structure and simplification of compliance procedures.
 Harmonization of Centre and State tax administrations, which would reduce duplication and
compliance costs.

Taxes subsumed-

GST would replace most indirect taxes currently in place such as:

30
Central Taxes State Taxes

 Central Excise Duty  Value Added Tax

[including additional excise
 CentralSales Tax( Levied by
duties, excise duty under
the Centre and collected by the
the Medicinal and Toilet
States )
Preparations (Excise
Duties) Act, 1955]  Octroi and Entry Tax
 Service tax  Purchase Tax
 Additional Customs Duty  Luxury Tax
(CVD)
 Taxeson lottery, betting &
 Special Additional Duty of Gambling
Customs (SAD)
 State cesses and surcharges
 Central surcharges and
 Entertainment tax (other than
Cesses
the tax levied by the local
bodies)

You may wonder why this tax reform is so important for the country and how it will help the
common man. Here’s how:

 Destination principle: Accordingly, imports would be subject to GST, while exports would
be zero-rated. In the case of inter-State transactions within India, the State tax would apply in
the State of destination as opposed to that of origin.

 Simpler tax structure: As multiple taxes on a product or service are eliminated and a single
tax comes into place, the tax structure is expected to be much simpler and easier to
understand. Paperwork will become simpler and there will be a reduction in accounting
complexities for businesses. A simple taxation regime can make the manufacturing sector
more competitive and save both money and time. Experts opine that the implementation of
GST would push up GDP by 1%-2%.

 Increased tax revenues: A simpler tax structure can bring about greater compliance, thus
increasing the number of tax payers and in turn tax revenues for the Government. The current
state of the Indian economy demands fiscal consolidation and reduction in fiscal deficit. A
recent report by CRISIL states that GST is the country’s best bet to achieve fiscal
consolidation. As there is not
much scope to reduce Government expenditure, increasing tax revenues is the best alternative
to improve the fiscal health.

 Competitive pricing: GST will eliminate all other forms of indirect taxing. This will
effectively mean that the tax paid by the final consumer will come down in most cases.
Lower prices will help in

31
boosting consumption, which is again beneficial to companies. The biggest positive of GST is
that goods and services will be taxed on a common basis.

 Boost to exports: When the cost of production falls in the domestic market, Indian goods
and services will be more price-competitive in foreign markets. This can bode well for
exporters, who compete with manufacturers abroad facing a lower cost structure.

 Reduces transaction costs and unnecessary wastages:A single registration and a single
compliance will suffice for both SGST and CGST provided government produces effective IT
infrastructure
and integration of states level with the union.

 Eliminates the multiplicity of taxation: The reduction in the number of taxation applicable
in a chain of transaction will help to reduce the paper work and clean up the current mess that
is brought by existing indirect taxation laws.
 One Point Single Tax: They would be focus on business rather than worrying about their
taxation that may crop at later stages. This will help the business community to decide their
supply chain, pricing modalities and in the long run helps the consumers beinggoods
competitive as price will no longer be the function of tax components but function of sheer
business intelligence and innovation.
 Reduces average tax burdens:- The cost of tax that consumers have to bear will be certain
and it is expected that GST would reduce the average tax burdens on the consumers.
 Reduces the corruption:-As the no. of taxes reduces so does the no of visits to multiple
department reduces and hence the reduction in corruption.
 There is no doubt that in production and distribution of goods, services are increasingly
used or consumed and vice versa. Separate taxes for goods and services, which is the present
taxation system, requires division of transaction values into value of goods and services for
taxation, leading to greater complications, administration, including compliances costs. In the
GST system, when all the taxes are integrated, it would make possible the taxation burden to
be split equitably between manufacturing and services.
 In all cases except a few products and states, there would be uniformity of tax rates across
the states

4.7 Disadvantages of GST

 Critics have argued that the GST is a regressive tax, which more pronounced effect on
lower income earners, meaning that the tax consumes a higher proportion of their income,
compared to those earning large incomes.

 A study commissioned by the Curtin University of Technology, Perth in 2000 argued that
the introduction of the GST would negatively impact the real estate market as it would add up
to 8
percent to the cost of new homes and reduce demand by about 12 percent.
 India has opted for a dual-GST model. Critics claim that CGST, SGST and IGST are
nothing but new names for Central Excise/Service Tax, VAT and CST and hence GST brings
nothing new to the table. The concept of value-add has never been utilised in the levy of
service as the Delhi High Court is attempting to prove in the case of Home Solution Retail

32
while under Central Excise the focus is on defining and refining the definition of manufacture
instead of focusing on value additions. The Revenue can be very stubborn when it comes to
refunds as the Maharashtra Government proves and software entities that applied for refunds
on excess service tax paid on inputs discovered.

4.8 Impact of GST on the economy

GST is a game-changing reform for the Indian Economy, as it will bring the net appropriate
price of the goods and services. The various factors that have impacted Indian economy are:
Increases competitiveness
The retail price of the manufactured goods and services in India reveals that the total tax
component is around 25-30% of the cost of the product. After implementation of GST, the
prices have gone down, as the burden of paying taxes has been reduced to the final consumer
of such goods and services. There is a scope to increase production, hence, competition
increases.
Simple Tax Structure
Calculation of taxes under GST is simpler. Instead of multiple taxation under different stages
of supply chain, GST is a one single tax. This saves money and time.
Economic Union of India
There is freedom of transportation of goods and services from one state to another after
GST. Goods can be easily transported all over the country, which is a benefit to all
businesses. This encourages increase in production and for businesses to focus on PAN-India
operations.
Uniform Tax Regime
GST being a single tax, it has made it easier for the taxpayer to pay taxes uniformly.
Previously, there used to be multiple taxes at every stage of supply chain, where the taxpayer
would get confused, which a disadvantage.
Greater Tax Revenues
A simpler tax structure can bring about greater compliance, this increases the number of tax
payers and in turn the tax revenues collected for the government. By simplifying structures,
GST would encourage compliance, which is also expected to widen the tax base.
Increase in Exports
There has been a fall in the cost of production in the domestic market after the introduction
of GST, which is a positive influence to increase the competitiveness towards the
international market.

4.9 Impact of GST on Different Sectors

1. Consumer Goods & Services
The GST rates for the FMCG industry is set at 18-20%. While most are happy with the
introduction of GST, the ones who are heavily affected are opposed.
2. Transportation
The rates for cabs has been lowered to 5% and for air travel also. So, this is a welcome
move for those in this sector.

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3. E-Commerce
Post GST, e-commerce operators collect 1% of the net value of the taxable supplies,
which is called Tax Collected at Source (TCS).
4. Entertainment & Hospitality Sector
This sector was affected as this sector falls in the 28% category. Movie tickets, hotel
rates will now be costlier.
5. Financial Products and Services
The, financial services such as funds and insurances, (Non-Banking Financial Company)
are most impacted.
6. Start-Ups
GST has a positive influence towards start-ups. It had got both advantages and
disadvantages for start-ups. However, as a start-up, already facing the stress of a new
business, the question of how the new GST will impact your business, must be difficult
for you.
7. Inflation and Economic Activity
GST is a Inflationary measure. However, the rise in the tax rate on services to 18% is
expected to raise inflation.
8. Stock Transfer
Post the introduction of GST, tax is levied on branch transfers and input tax can be
claimed later.
9. Export of Goods & Services
At all stages of the supply chain there is no tax, post GST. Moreover, the availability of
input credits is welcomed.
10. Gold and Gold Jewellery Prices
Post GST the tax rate was set to 18% initially then brought down to 5% tax rate
11. Rent
Since the implementation of GST the exemption limit for renting out commercial
property is Rs. 20 lakhs and there is not GST on house rent.

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Summary of key business impacts:

Sourcing  Inter-Stateprocurement has proved viable

 This has open opportunities to consolidate
suppliers/vendors
 Additional duty/CVD and Special Additional
duty, components of customs duty to be replaced.
Distribution Changes in tax system has warrant changes
in both procurement and distribution.
 Current arrangements for distribution of finished
goods is no longer optimal with the
removal of the concept of excise duty on
manufacturing
 Current network structure and product flows has
been need review and possible alteration
Pricing and  Tax savings resulting from the GST structure
profitability would require repricing of products
 Margins or price mark-ups would also need to
be re-examined

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Cash flow  Removal of the concept of excise duty on
manufacturing can result in improvement in
cash flow and inventory costs as GST would
now be paid at the time of sale/supply rather
than at the time or removal of goods from the
factory.
System changes  Potential changes to accounting and IT systems
and transaction in areas of master data, supply chain
management transactions, system design
 Existing open transactions and balances as on
the cut-off date need to be migrated out to
ensure smooth transition to GST
 Changes to supply chain reports (e.g., purchase
register, sales register, services register), other
tax reports and forms (e.g., invoices, purchase
orders) need review
 Appropriate measures such as training of
employees, compliance under GST, customer
education, and tracking of inventory credit are
needed to ensure smooth transition to the GST
regime

4.10 EXPERIENCE OF GST IN OTHER COUNTRIES

New Zealand:
GST in New Zealand was introduced in 1986 at a rate of 10%. However the rates were
changed twice later – 12.5% in the year 1989 and 15% in 2010 in a move to mobilize higher
revenue while removing distortions in the tax structure.

This led to adoption of GST at single rate with food included in the GST base at the full rate.
Such broad-based the tax net and also reduced both compliance and administrative costs. At
present, the country is highest tax productive nations among OECD countries.

Canada:
Canada introduced GST in the form of a multi-level VAT in 1991 on supplies of goods and
services purchased in the country – included almost all products except certain essentials like
groceries, residential rent and medical services.

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Once implemented, the bill led to new processing operations and techniques to verify the
accuracy of the returns submitted by small entrepreneurs. However, Canada imposes their
own sales tax besides GST – this has created price distortions in the country.

Singapore:
The country introduced the bill in April 1194 at a tax rate of 3% to make it acceptable to the
public and to minimize inflation. The government committed not to raise tax for next 5 years
which came in as a important decision in reviving consumer spending.

Also, Singapore introduced a compensation scheme under the GST which provided support
to the needy and underprivileged.

However, in initial stage of GST, the country faced uptick in inflation to 3.1% in 1994 from
2.3% in 1993. But after that it moderated below 2% between 1995 – 1996.

Austrailia:
Though the GST concept was first seeked in the year 1975, it was implemented in Austrailia
after 25 years on July 2000 at a tax rate starting at 10%.

Austrailia also replaced a range of existing taxes like the wholesale sales tax (WST), debit
tax, financial institutions duty, and stamp duty on shares, leases, mortgages and cheques.

However, the10% tax rate led to low GST revenue productivity from a tax collection
standpoint.

Malaysia:
GST in this country has been imposed in the year 2015, after a 26 years of debate over its
potential merits and shortcomings. It was introduced at a standard rate of 6% - which is
relatively low compared to VAT rates in other ASEAN countries.
After implementation of GST, the cost of doing business in Malaysia reduced as the tax
burden was transferred from manufacturers to consumers. Yet, the country has seen low
revenue productivity in terms of tax collection

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CONCLUSION AND SUGGESTION

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BIBLIOGRAPHY

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