Goods & Services Tax (GST) – One Na on One Tax

September 1, 2016

Why in News?

• GST (one hundred and twenty-second-122 cons tu onal amendment) bill has finally, been passed in
the Lok sabha and the Rajya sabha.
• It heralds the first significant step towards the indirect tax reform in India in the last thirty years

What is GST?

• It is a tax levied when a consumer buys a good or service. It is meant to be a single, comprehensive tax
that will subsume all the other smaller indirect taxes on consump on like service tax, etc.
• It is a single tax on the supply of goods and services, right from the manufacturer to the
end consumer
• This is how it is done in most developed countries. More than 160 countries have implemented this
system of taxa on.
• GST does not tax or get into the specific commodi es.

Mechanism of GST:

Stage 1

• Let’s consider a manufacturer of gears.

• Let’s say he buys raw material worth Rs 100, a sum that includes a tax of Rs 10.
• With the raw materials, he manufactures a gear
• In the process of crea ng the gear, the manufacturer adds value to the materials he started out with.
• Let us take this value added by him to be Rs 30.
• The gross value of his good would, then, be Rs 100 + 30, or Rs 130.
• At a tax rate of 10%, the tax on output (the gear) will then be Rs 13.
• But under GST, he can set off this tax (Rs 13) against the tax he has already paid on raw material/inputs
(Rs 10). This setoff is also called as input credit. This forms the crux of GST.
 • Therefore, the effec ve GST incidence on the manufacturer is only Rs 3 (13 – 10).

What is Input Credit (set off)?

• “Input Tax Credit” is an aggregate total amount of tax paid by a registered dealer on the total
purchases made by him within the State from other dealers.

Salient features of Input tax credit:

• It can be adjusted against the tax payable by the purchasing dealer on his sales.
• It is available for purchase of goods made within the state by a registered dealer from another
registered dealer.
• It is allowed for both manufacturers and traders
• Even for stock transfer/consignment transfer/branch transfer of goods out of the State, input tax paid
in excess of 2% will be eligible for tax credit
• In case of common goods used for taxable goods and tax free goods, ITC is allowed propor onately to
the extent the purchases are used for the purpose of taxable goods.
• Thus, credit rela ng to the goods used in manufacture of exempted goods has to be reversed.

Stage 2

The next stage is that of the good passing from the manufacturer to the wholesaler.

• The wholesaler purchases it for Rs 130, and adds on value (which is basically his ‘margin’) of, say, Rs
20.
• The gross value of the good he sells would then be Rs 130 + 20 — or a total of Rs 150.
• A 10% tax on this amount will be Rs 15.
• Under GST, he can set off the tax on his output (Rs 15) against the tax on his purchased good from
the manufacturer (Rs 13).
• Thus, the effec ve GST incidence on the wholesaler is only Rs 2 (15 – 13).

Stage 3

• In the final stage, a retailer buys the gear from the wholesaler.
• To his purchase price of Rs 150, he adds value, or margin, of, say, Rs 10.
• The gross value of what he sells, therefore, goes up to Rs 150 + 10, or Rs 160.
• The tax on this, at 10%, will be Rs 16.
• But by se ng off this tax (Rs 16) against the tax on his purchase from the wholesaler (Rs 15), the
retailer brings down the effec ve GST incidence on himself to Re 1 (16 –15).
• Thus, the total GST on the en re value chain from the raw material/input suppliers (who cannot
claim any tax credit since they haven’t purchased anything themselves) through the manufacturer,
wholesaler and retailer is, Rs 10 + 3 +2 + 1, or Rs 16.
• Credits of input taxes paid at each stage will be available in the subsequent stage of value addi on,
which makes GST essen ally a tax only on value addi on at each stage.
• The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-
off benefits at all the previous stages.
Brief chronology of evolu on of taxa on regime in India:

• GST was first recommended by the Kelkar commi ee task force.

• A brief chronology outlining the major milestones on the proposal for introduc on of GST in India is as
follows:

YEAR 1986:

• Jha Commi ee first introduced value added taxa on in India.

• This was called as MODVAT (modified VAT).
• The foremost objec ve of MODVAT was:
• Removal of cascading burden,
• Ra onaliza on and,
• Avoiding double taxa on.
• It was renamed as CENVAT later. However CENVAT was VAT levied on central excise du es only.
• State level VAT/sales tax and interstate tax were not altered.

Salient Features of VAT and CENVAT

• VAT reduces tax erosion, because a seller pays VAT on his sales but gets refund of VAT paid by him on
previous purchase (Input Credit).
• A retailer pays VAT, but is refunded (through the mechanism of (input credit) VAT paid by him on
goods purchased by him from the wholesale dealer.
• He cannot claim refund unless he shows a receipt.
• CENVAT applies only to manufacturing stage and does extend down to distribu on stage ll retail sale
of goods.
• CENVAT mechanism extends for set off credit only amongst central excise duty and services tax into
level of produc on.
• CENVAT does not extend to value addi on by the distribu on trade below stages of manufacturing.
• Manufacturers cannot claim set off against other central taxes and du es like addi onal excise
du es surcharges.

2015

• Based on the recommenda ons of Asim Das Gupta commi ee, State level VAT was introduced.
• This replaced sales tax, turnover tax, and surcharge on sales tax at state level.
EVOLUTION OF GST

• In 2003, the Kelkar Task Force on indirect tax had suggested a comprehensive Goods and Services Tax
(GST) subsuming central, state taxes, and interstate taxa on based on VAT principle.
• A proposal to introduce a Na onal level Goods and Services Tax (GST) by April 1, 2010 was first mooted
in the Budget Speech for the financial year 2006-07.
• Since GST involves reform/ restructuring of not only indirect taxes levied by the Centre but also the
States, an Empowered Commi ee of State Finance Ministers (EC) was cons tuted for designing a road
map for the same.
• The first a empt to pass GST was made in 2011 by introducing the Cons tu on (115th Amendment)
Bill in the Lok Sabha, which lapsed due to dissolu on of 15th Lok Sabha.
• The Bill was again introduced as 122nd cons tu on amendment bill and now stands passed by both
Lok Sabha and Rajya Sabha.
• Today it stands passed by both the houses of Parliament, pending approval from more than 50 per
cent of the states.

Current Indirect Taxa on Structure that GST will Subsume:

Table represen ng taxa on under different regimes

SHORTCOMINGS IN THE PRESENT TAX STRUCTURE AND NEED FOR GST

Tax Cascading:

• The most significant contribu ng factor to tax cascading is the par al coverage by Central and State
taxes.
• The exempt sectors are not allowed to claim any credit for the Cenvat or the Service Tax paid on their
inputs.

Levy of Excise Duty on manufacturing point:

• The CENVAT is levied on goods manufactured or produced in India. Limi ng the tax to the point of
manufacturing is a severe impediment to an efficient and neutral applica on of tax. Taxable event at
manufacturing point itself forms a narrow base.
• For example, valua on as per excise valua on rules of a product, whose consumer price is Rs. 100/-, is,
say, Rs. 70/-. In such a case, excise duty as per the present provisions is payable only on Rs.70/-, and
not on Rs.100/-.

Complexity in determining the nature of transac on:

• Goods and services are currently taxed separately.

 • Inability of States to levy tax on services With no powers to levy tax on incomes or the fastest growing
components of consumer expenditures, the States have to rely almost exclusively on compliance
improvements or rate increases for any buoyancy in their own-source revenues
• VAT applies at manufacturing stage (CENVAT) as well as Sales stage (State level VAT).Therefore, there is
a duality of taxa on
• Input credit set off is not available against different taxes. For eg: set off not available for CENVAT
against state VAT
• Different tax rates are levied across different states. Hence, it can some mes increase the cost of
produc on and lead to uncompe ve prices.
• Intra state transac on gets input credit set off but not inters state transac on. Therefore, a retailer or
whole sole merchant is subject to duality of taxes
• Likewise as CENVAT, State VAT covers only sales. Sellers can claim credit only against VAT paid on
previous purchase.
• Centre cannot impose taxes on goods beyond manufacturing (excise) or primary import (customs)
stage. Centre only can tax services. State has no powers to tax services. State has exclusive domain of
taxes on consump on.

• A er Passing of GST bill, the States and the union Government have to adopt model GST Laws
• Expected roll out of GST is 1st April 2017

Salient features of the GST Bill:

• No differen a on between good and services tax. One rate for both goods and services
• Simultaneous power upon Parliament and the State Legislatures to make laws governing goods and
services tax;
• Tax will be levied on every supply of goods and services.
• Subsumes most of the Indirect taxes at state and central level (barring few excep ons listed below)
• Keeping in mind the federal structure of India, there will be two major components of GST – Central
GST (CGST) and State GST (SGST). Both Centre and States will simultaneously levy GST across the value
chain.

•
• Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect
the State Goods and Services Tax (SGST) on all transac ons within a State.

• The Central GST and the State GST would be levied simultaneously on every transac on of supply of
goods and services except on exempted goods and services, goods which are outside the purview of
GST and the transac ons 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
Central Excise.

• Cross u liza on of credit of CGST between goods and services would be allowed. Similarly, the facility
of cross u liza on of credit will be available in case of SGST.
• However, the cross u liza on of CGST and SGST would not be allowed except in the case of inter-State
supply of goods and services under the IGST model which is explained below
• In case of inter-State transac ons, the Centre would levy and collect the Integrated Goods and Services
Tax (IGST) on all inter-State supplies of goods and services under Ar cle 269A (1) of the Cons tu on.
• The IGST would roughly be equal to CGST plus SGST. The IGST mechanism has been designed to ensure
seamless flow of input tax credit from one State to another.
• The inter-State seller would pay IGST on the sale of his goods to the Central Government a er adjus ng
credit of IGST, CGST and SGST on his purchases (in that order).
• The expor ng State will transfer to the Centre the credit of SGST used in payment of IGST.
• The dealer who imports would claim credit of IGST while discharging his output tax liability (both CGST
and SGST) in his own State.
• The Centre will transfer to the impor ng State the credit of IGST used in payment of SGST. Since GST is
a des na on-based tax, all SGST on the final product will ordinarily accrue to the consuming State.
• Producing versus consuming states.
• Major manufacturing states like Gujarat and Maharashtra will lose a substan al amount of tax
revenue, earlier accruing from interstate taxes (like Central sales tax), due to implementa on of
a des na on based GST.
• Such states will be completely compensated (100% of the losses) for the loss of revenue up to 5
years.
• 1% addi onal tax for Integrated Goods and service tax (IGST) tax for 2 years was proposed
However this provision was deleted in the amended bill passed in Rajya Sabha.
• Similarly, the demand for cons tu onal cap on the rate of GST has also been done away with.

• The input tax credit of CGST would be available for discharging the CGST liability on the output at each
stage.
• Similarly, the credit of SGST paid on inputs would be allowed for paying the SGST on output.
• No cross u liza on of credit would be permi ed.
• Centre & State to have concurrent powers to make laws on goods and services. Only centre can levy
IGST (Intersect Supply of Goods and Services) and imports.
• Law made by parliament in rela on to GST will not override state laws on GST.
• Input tax credit set off will be accessible across Intra and Inter-state transac ons as GST will be one
single tax at central and state level.
 • The Central GST and the State GST would be levied simultaneously on every transac on of supply of
goods and services except on exempted goods and services, goods which are outside the purview of
GST and the transac ons 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 Central Excise
• Alcohol for human consump on has been exempted from purview of GST.

Taxing the imports under GST:

• The Addi onal Duty of Excise or CVD and the Special Addi onal Duty or SAD presently being levied on
imports will be subsumed under GST.
• IGST will be levied on all imports into the territory of India.
• Unlike in the present regime, the States where imported goods are consumed will now gain their share
from this IGST paid on imported goods.

Major features of the proposed registra on procedures under GST:

• Exis ng dealers: Exis ng VAT/Central excise/Service Tax payers will not have to apply afresh for
registra on under GST.
• New dealers: Single applica on to be filed online for registra on under GST.
• The registra on number will be PAN based and will serve the purpose for Centre and State.
• Unified applica on to both tax authori es.
• Each dealer to be given unique ID GSTIN.
• Deemed approval within three days.
• Post registra on verifica on in risk based cases only.

Major features of the proposed returns filing procedures under GST:

• Common return would serve the purpose of both Centre and State Government.
• There are eight forms provided for in the GST business processes for filing for returns. Most of the
average tax payers would be using only four forms for filing their returns.
• These are:
• Return for supplies
• Return for purchases
• Monthly returns and
• Annual return
 • Small taxpayers: Small taxpayers who have opted composi on scheme shall have to file return on
quarterly basis.
• Filing of returns shall be completely online. All taxes can also be paid online.

Major features of the proposed payment procedures under GST:

• Electronic payment process- no genera on of paper at any stage

• Single point interface for challan genera on- GSTN
• Ease of payment – payment can be made through online banking, Credit Card/Debit Card, NEFT/RTGS
and through cheque/cash at the bank
• Common challan form with auto-popula on features
• Use of single challan and single payment instrument
• Common set of authorized banks
• Common Accoun ng Codes

THE GST COUNCIL:

The Federalism debate:

• The most discussed consequence of the passage of GST bill is the fiscal federalism.
• The proponents of the GST bill are posi ve about the centre-state rela ons in this context of passage
of the GST bill.
• It actually accelerates the reconfigura on of centre-state fiscal rela ons already underway.
• The experts argue that, States would become key stakeholders in the na onal economy, which was
quite rare in the present scheme of things.
• An important feature of the new tax framework is the crea on of the GST Council. The way it has been
designed, the Union government has only one-third say in decisions taken by the GST Council, while
the rest is accounted for by the states; and all decisions have to be carried by a three-fourth majority.
• Hence, this clearly indicates that centre and states need to co-operate with each other to ensure a
smooth func oning of the tax administra on. This, clearly is a double whammy for the states, which
have their fiscal autonomy enhanced due to the increase in un ed funds from net indivisible pool of
taxes ( from 32percent to 42percent), as a result of the 14th Finance Commission.
• However, the opponents of the GST argue that, the vo ng pa ern in GST council is not completely
based on economics. The purpose of the GST Bill is to concentrate on manufacturing and achieve
excellence so that the same product is not manufactured locally with sub-op mal efficiency in every
state for tax reasons.
• That being the case, it is natural there are going to be only a few manufacturing states while the rest
will be consuming states.
• To have a council where the manufacturing state has one vote whereas all other states, likely
consumers, also have a vote each is unfair.
• Of course consumers will vote in their own interests.
• “Make in India” Programme is focused for strengthening and protec ng the domes c industry from
foreign import. Likewise, state governments have to protect local industry and employment. For this
objec ve lesser sales tax and other incen ves is needed for helping local producers. But the right of
state governments for variable taxa on will end with the introduc on of GST regime.
• Further, economists argue that taxa on powers are not only a measure of resource mobilisa on. It
could be used as a tool to control and restrict the consump on of some goods for social good.
• ( For example, Tobacco products generally a racts huge tax rate as a measure to control the
consump on on health grounds. Here tobacco producing States argue for lesser taxes for maximum
sales and the Consumer States will demand for a leverage for fixing higher taxes.)
• Health concerns ra fy the higher rate of tax on tobacco. Now, this can be a tricky situa on for the
centre as to whose interests it should protect.
• Likewise, if a state government needs an addi onal resource mobilisa on for facing a natural calamity,
it cannot decide for any special levy.
• Swachh bharat and other Central schemes can only be decided and used by the Central Government.
• The GST will take away the rights of states to decide taxes according to their socio-economic situa ons.
The situa on in Kerala is quite different than the situa on in Tamil Nadu or Assam or Bihar or West
Bengal. Each state has its own socio-economic-poli cal reasons to decide the type of tax to be levied.
 • Therefore, the experts argue that the veto power given to centre in the GST council is undemocra c.
They opine for a more flexible weights based vo ng pa ern and reduc on in the weightage of the
centre’s vote.
• Hence, there has to be more consensus on the structure, pa ern and working of the GST council.
• The term ‘Coopera ve Federalism’, sums up the ideology that would successfully define this evolu on:
Together they stand and divided they will fail.
• In this, the recommenda ons of FFC, GST and other policies on the anvil are only stepping stones.
Evolving ins tu ons such as the GST Council and the revived Inter-State Council will be cri cal in
overseeing this transi on with minimal hindrances; state chief ministers are already equal partners in
the governing council of NITI (Na onal Ins tu on for Transforming India) Aayog, which has replaced
the Planning Commission.

Advantages of GST

For business and industry

Easy compliance:

• A robust and comprehensive IT system would be the backbone of the GST regime in India. Therefore,
all tax payer services such as registra ons, returns, payments, etc. would be available to the taxpayers
online, which would make compliance easy and transparent.

Uniformity of tax rates and structures:

• Indirect tax rates and structures would be uniform across the country, thereby increasing certainty and
ease of doing business. In other words, GST would make doing business in the country tax neutral,
irrespec ve of the choice of place of doing business.

Removal of cascading:

• A system of seamless tax-credits throughout the value-chain, and across boundaries of States, would
ensure that there is minimal cascading of taxes. This would reduce hidden costs of doing business.

Improved compe veness:

• Reduc on in transac on costs of doing business would eventually lead to an improved compe veness
for the trade and industry.

Gain to manufacturers and exporters:

 • The subsuming of major Central and State taxes in GST, complete and comprehensive set-off of input
goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of locally
manufactured goods and services.
• This will increase the compe veness of Indian goods and services in the interna onal 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.
• Further, due aboli on of mul ple taxa on, the warehousing prac ces adopted by large industrial
houses are expected to come down. This would boost ancillary units, especially in manufacturing, as
the large industrial houses will freely contract out the fabrica on to vendors due to reduc on in
opera onal cost as a result of GST.
• This will provide the adequate thrust and driving force for the success of Make in India and Skill India.

For Central and State Governments

Simple and easy to administer:

• Mul ple indirect taxes at the Central and State levels are being replaced by GST. Backed with a robust
end-to-end IT system, GST would be simpler and easier to administer than all other indirect taxes of the
Centre and State levied so far.

Be er controls on leakage:

• GST will result in be er tax compliance due to a robust IT infrastructure. Due to the seamless transfer
of input tax credit from one stage to another in the chain of value addi on, there is an in-built
mechanism in the design of GST that would incen vize tax compliance by traders.

Higher revenue efficiency:

• GST is expected to decrease the cost of collec on of tax revenues of the Government, and will
therefore, lead to higher revenue efficiency.

For the consumer

Single and transparent tax propor onate to the value of goods and services:

• Due to mul ple indirect taxes being levied by the Centre and State, with incomplete or no input tax
credits available at progressive stages of value addi on, the cost of most goods and services in the
country today are laden with many hidden taxes. Under GST, there would be only one tax from the
manufacturer to the consumer, leading to transparency of taxes paid to the final consumer.

Relief in overall tax burden:

 • Because of efficiency gains and preven on of leakages, the overall tax burden on most commodi es
will come down, which will benefit consumers.

GST rate:

• Although a GST council is expected to work towards fixing a GST rate, it will be quite challenging to
reach a consensus on the uniform rate of taxa on. The challenge is further compounded by the lack of
precedent on this front earlier.
• Producing and consuming states might have different viewpoints regarding rate of taxa on.

(For example producing states like Gujarat and Maharashtra might want low taxa on on manufacturing of
co on tex les related goods, and consump on states like Haryana, U ar Pradesh might want high rate of
taxa on on retail sales of these goods leading to conflict).

Compensa on to States:

• The revenue foregone by the states as a result of transi on to GST will be compensated by the Union
government. However, there is no fixed formula or method on reaching an exact figure.
• The nego a ons may have poli cal overtones and could be a challenging task for the union
government.

Accoun ng Systems:

• The cadre of Chartered accountants, Tax consultants, Tax bureaucracy and the like need to be trained
on a new accoun ng system. This will require a lot of technological and ins tu onal capacity building

• The retailers, whole sale merchants, small general store owners and the various stakeholders also need
to transit towards a new system of accoun ng. This system may pose significant challenges specifically
to small traders as they generally are not used to a robust account keeping system.

Other challenges:

• Cess ( educa on, Krishi Kalyan, Swatch Bharat) and surcharges charged by centre are currently not part
of GST. States might have an issue over this.
• Further, GST will not apply to Petroleum crude, High speed diesel, Motor spirit (petrol), Natural gas,
Avia on turbine fuel. These have a very high inter-connec vity with both manufacturing and service
costs which might hinder seamless applica on of GST across sectors.

Other Useful Links:

h p://pib.nic.in/newsite/PrintRelease.aspx?relid=148240
h p://www.livemint.com/Opinion/p5RIBhny9PWFntm1PDCfeL/GST-Reordering-of-centrestate- es.html

h p://www.thehindu.com/opinion/op-ed/gst-good-for-business-snag-for-federalism/ar cle7279180.ece

Approach to the Civil Services Examina on:

In mains focus will be on effect of GST on Indian economy, federal structure (centre-state rela ons) and
analysis of the new Indirect taxa on structure.

GS Paper II:

• Indian Cons tu onal amendments

• Func ons and responsibili es of the Union and the States, issues and challenges pertaining to the
federal structure, devolu on of powers and finances up to local levels and challenges therein.
• Parliament and State Legislatures – structure, func oning, conduct of business, powers & privileges
and issues arising out of these.

GS Paper III:

• Indian Economy and issues rela ng to planning, mobiliza on of resources, growth, development and
employment.
• Government Budge ng.

Prac ce Ques on:

• GST represents a paradigm shi in the federal rela ons between centre and states. Cri cally discuss.
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