Introduction: The Goods and Service Tax Bill or GST Bill, officially known as The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014, proposes a national VAT to be implemented in India from April 2016. 'Goods and Services Tax' would be a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India, to replace taxes levied by the Central and State governments. GST would be levied and collected at each stage of sale or purchase of goods or services based on the input tax credit method. This method allows GST-registered businesses to claim tax credit to the value of GST they paid on purchase of goods or services as part of their normal commercial activity. Taxable goods and services are not distinguished from one another and are taxed at a single rate in a supply chain till the goods or services reach the consumer. Administrative responsibility would generally rest with a single authority to levy tax on goods and services. Exports would be zero-rated and imports would be levied the same taxes as domestic goods and services adhering to the destination principle.

The introduction of Goods and Services Tax (GST) would be a significant step in the reform of indirect taxation in India. Amalgamating several Central and State taxes into a single tax would mitigate cascading or double taxation, facilitating a common national market. The simplicity of the tax should lead to easier administration and enforcement. From the consumer point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods, which is currently estimated at 25%-30%. As India is a federal republic GST would be implemented concurrently by the central government and by state governments. After GST come into force.

How will the GST work?

Example--let us suppose that GST rate is 10%, with the manufacturer making value addition of ₹30 on his purchases worth ₹100 of input of goods and services used in the manufacturing process the manufacturer will then pay net ₹10 as GST paid on his inputs i.e ITC from gross GST of ₹13. The manufacturer sells the goods to the wholesaler. When the wholesaler sells same goods after making addition of ₹20, he pays net GST of only ₹2 after set of ITC of ₹13 from the gross GST ₹15 to the manufacturer. Similarly when retailer sells the same goods after value addition ₹10 he pays net of GST 1 after set of ₹15 from his gross GST ₹16 paid to wholesaler. Thus manufacturer, wholesaler and retailer have to pay only ₹6(3+2+1) as GST on value addition along the entire value chain from the producer to retailer, after setting of GST paid at the earlier stages.

Concept of GST(Goods and Services Tax)

GST is an integrated scheme of taxation that does not discriminate between goods and services and is a part of the proposed tax reforms that centre on evolving an efficient and harmonized consumption tax system in the country. GST is expected to replace the plethora of indirect taxes including service tax, central excise duty, additional excise and customs duties, central surcharges and cesses, state VAT, state sales tax, entertainment tax not levied by local bodies, luxury tax, taxes on lottery, betting and gambling, tax on advertisements and state cesses and surcharges related to supply of goods and services. As these taxes have been ineffective and have suffered from a litany of infirmities, including exemptions and multiple rates, GST is expected to transform the labyrinthine patchwork of taxes to a lean, streamlined process.

Main features of GST
  • One levied by the Central Govt (hereinafter referred to as Central GST), and the other levied by the State Govt (hereinafter referred to as State GST) ,rates for which would be prescribed appropriately, reflecting revenue considerations and acceptability.
  • The Central GST and the State GST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services, goods which are outside the purview of GST.
  • A two-rate structure a lower rate for necessary items and goods of basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items.
  •  The GST will also be levied on import of goods and services into the country.
  •  The administration of the Central GST to the Centre and for State GST to the States would be given. This would imply a reduction in unhealthy competition among the centre and the states over tax revenue that was prevalent earlier and an increase in harmonious functioning between them.
Benefits of GST:

a.The implication of GST assures a single taxation system in the entire country for all goods and services making tax compliance easier and more effective.

b. It will assist in better conformity and revenue resilience

c. It will boost up economic unification of India

d. It will certainly reduce the tax burden for consumers

e. It will evade the cascading effect in Indirect tax regime. For instance, when a paper making company produces registers, the Central Government charges an excise duty on them as they leave the factory. Whereas on the lower end of the supply chain i.e. at the retail level, VAT is charged, without giving credit of the excise duty levied earlier. But in GST system, both Central and state taxes will be collected at the point of sale. Both components (the Central and state GST) will be charged on the manufacturing cost.

f. It will result in cost competitiveness of goods and services in Global market

g. It will bring uniformity in tax rates with only one or two tax rates across the supply chain

h. It will result in a simple, transparent and easy tax structure; merging all levies on goods and services into one GST

i. It will increase tax collections due to wide coverage of goods and services

j. It will result in a good administration of tax structure

k. It will result in increased tax collections due to wider tax base and better conformity

l.It will reduce transaction costs for taxpayers through simplified tax compliance

Long Term Strategy: 

It would lead to a higher output, more employment opportunities, and economic inclusion. Initially however, it is likely cause high inflation rates, administrative costs, and face stiff oppositions from states due to loss of autonomy.

Key problems:

The key problems in the current taxation system in India can be categorized into: 

a.Exclusion of Services from state taxation has posed difficulties in taxation of goods supplied as part of a composite works contract involving a supply of both goods and services, and under leasing contracts, which entail a transfer of the right to use goods without any transfer of their ownership. Though these problems have been addressed by amending the Constitution to bring such transactions within the purview of the State taxation, services per se remain outside the scope of state taxation powers.

b.Taxation at Manufacturing Level i.e. CENVAT is levied on goods manufactured or produced in India which gives rise to definitional issues as to what constitutes manufacturing, and valuation issues for determining the value on which the tax is to be levied which through judicial proceedings has been observed to be a severe impediment to an efficient and neutral application of tax

c. Cascading Tax - Oil and gas production and mining, agriculture, wholesale and retail trade, real estate construction, and range of services remain outside the ambit of the CENVAT and the service tax levied by the Centre. The exempt sectors are not allowed to claim any credit for the CENVAT or the service tax paid on their inputs. Similarly, under the State VAT, no credits are allowed for the inputs of the exempt sectors, which include the entire service sector, real property sector, agriculture, oil and gas production and mining. Another major contributing factor to tax cascading is the Central Sales Tax (CST) on inter-state sales, collected by the origin state and for which no credit is allowed by any level of government.

d. Complexity- In spite of the improvements made in the tax design and administration over the past few years, the systems at both central and state levels remain complex. The systems suffer from substantial compliance gaps, except in the highly organized sectors of the economy. The implementation of GST would be a positive step towards "a strong single taxation system wherein various Central and State statutes will be subsumed into one comprehensive enactment"

The states want petroleum, alcohol and tobacco to be kept out of the purview of the GST. Seen as key to facilitating industrial growth and improving the business climate in the country, the GST bill needs to be passed by a two-thirds majority in both houses of parliament and by the legislatures of half of the states in the country to become law. By subsuming most indirect taxes levied by the central and state governments such as excise duty, service tax, VAT and sales tax, the Goods and Services Tax proposes to facilitate a common market across the country, leading to economies of scale and reducing inflation through an efficient supply chain.

In an Diametric View-For Better Under Standing


If we calculate the total tax that the producer has to pay in this case, it would be 120 lakhs(INR 50 lakhs on procurement and INR 70 lakhs on sales). Now if you have a GST framework in place, the total tax that the producer pays is INR 70 lakhs. How?

The producer had initially paid an input tax of INR 50 lakhs. Now when he goes on to sell his batch for INR 700 lakhs, he gets a tax credit of INR 50 lakhs. Thus, he pays INR 20 lakhs in the form of taxes for the final transaction. This adds up to just INR 70 lakhs for the producer. The GST hence, reduces the tax burden on producers. The biggest benefit of such a system is that it would contain various indirect taxes currently levied on various participants in the supply chain. Reducing such taxes would lower the overall production cost and  increase the output of the economy in the long run.

That sounds great but why GST when we already have VAT..? isn't the VAT framework similar to that of GST..? VAT regulations and rates generally vary across states. There is a tendency, as has been observed, that states may resort to undercutting of rates to attract more investors. This generally leads to a loss of revenue to both the state and centre. GST would introduce uniform taxation laws across states and different sectors. The taxes would be divided between the state and centre, based on a formula that would be acceptable to both. Also, it would be easier to supply goods and services uniformly across the country, as no additional taxes would have to be paid across different states.Currently, no tax credits are provided for interstate transactions. So do we as consumers get goods at a cheaper price? Probably not, and it is here that the GST has been attacked by the opposition.

Since taxes are distributed across the chain, the consumer prices are likely to rise to maintain the current tax revenue levels. The government has justified this by saying it would provide tax cuts across various brackets. This isn't entirely satisfactory. First, the tax paying population isn't too significant a number to begin with and second, the tax payer is likely to get a meager tax cut for the GST he would pay for all the goods or services he purchases.

Present Indirect Taxes Link to GST:

a. Excise duty: Central Excise Duty is levied by the Central Government under the Central Excise Act, 1944. The levy is on all goods manufactured and produced in India, which are specified in the schedule to the Central Excise Tariff Act subject to certain exemptions. The effective rate may vary from product to product though most goods are subject to excise duty at 12.5% (without education cess).If VAT is added then this rate for RNR products would be 27%.

Link to Proposed GST

The concepts of cenvat credit, dispute resolution, removal and valuation on intrinsic value under this law may find a place in GST. Also the principle of trusting the tax payer while having the checks and balances of audit rather than suspecting all businessmen would hopefully be adopted.

b.Custom Duty: Customs duties are levied by the Central Government under the Customs Act, 1962. The levy gets attracted on all specified goods imported into and exported from India, which are specified in the schedule to the Customs Tariff Act.The customs duties are levied on assessable value and the total customs duty ordinarily would amount to an average of 28% (subject to cenvat credits) on the value of goods imported. If VAT is added then this rate for NRN products would be total of 40%.

Link to Proposed GST

Basic Customs duty would continue but the additional duty of customs (CVD) and special additional duty (SAD)would get subsumed into GST as an IGST. The Classification under customs which is based on the harmonised System of Nomenclature would be adopted under GST.
c.CST: The rate of CST is 2% against the declaration in Form C and in case the said declaration is not provided by the buyer, they are subject to tax at the rate specified in the local VAT law.  Form C is allowed to be issued by the buyer when he purchases the goods for use in manufacture or for resale or for use in telecommunication network or in mining or in generation or distribution of power.

Link to Proposed GST

The principles of interstate sales, sales in the course of export/ import with required changes for supplies would be a part of the GST. The aspects of valuation in some parts would also be adopted. The origin based tax of 1% is being proposed akin to CST for a limited period of 2 years to get States to agree to entry tax subsuming.

d.Value Added Tax (VAT): Value Added Tax (VAT) is levied by the State Governments on transfer of property in goods from one person to another, when such transfer is for cash, deferred payment or other valuable consideration.  VAT is also payable on certain transactions that are deemed to be sale such as transfer of right to use goods, hire purchase and sale by installments, works contract and sale of food and drink as a part of rendering of any service.

Link to Proposed GST

The supplies of goods and importantly services would now be available to the States as SGST. States would also get apportioned part of the IGST for stock transfers which would suffer IGST.

e.Service Tax: Service tax is levied all activities as defined other than those specified in the negative list and those specifically exempted.  Service tax is presently taxed at 14% (Revised). Ordinarily, service tax is payable by the service provider, except in specified cases where a reverse charge and joint charge has been put in place.

Link to Proposed GST

The principles of point of taxation to decide when the GST is payable may be followed. Further the Place of Provision of Services Rules would be tweaked into place of supply rules to decide the State where the service is destined or deemed to be provided. States would get the SGST part of all services consumed in the State whether provided from outside to the State or that which is provided and consumed in the State itself.

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