GOODS AND SERVICES TAX

The Goods and Services Tax Bill or GST Bill, officially known as The Constitution (One
hundred and Twenty-Second Amendment) Bill, 2014, proposes a national Value added tax to
be implemented in India from June 2016. GST 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. Goods and services tax 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 and 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 rates and imports would be levied the same taxes as domestic goods
and services adhering to the destination principle.
The introduction of 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 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 %.
The need for GST
Let me begin by elaborating the concept of cascading effect of taxes. It is also logically,
referred to as taxes on taxes. It is simple to illustrate say A sells goods to B after charging
sales tax, and then B resells those good to C after charging sales tax. While B was computing
his sales tax liability, he also included the sales tax paid on previous purchase, which is how
it becomes a tax on tax.

Price = 100
+ tax@10%
= 110

Purchase
price 110
+tax@10%
= 121

Purchase
price 121
+tax@10%
= 133

This was the case with the sales tax few years ago. At that time, a VAT system was
introduced whereby every next stage dealer used to get credit of the tax paid at earlier stage
against his tax liability. This reduced an overall liability of many traders and also helped to
reduce inflationary impact this had on the prices.
Similar concept came in the duty on manufacture The Central Excise Duty much before it
came for sales tax. The CENVAT credit scheme (earlier known as MODVAT) was also a
welcome move by trade and industry where credit of excise duty paid at the input stages was
allowed to be set-off against the liability of excise on removal of goods. With effect from
2004, this system was extended to Service tax also. Moreover, cross utilisation of credit
between excise duty and service tax was also permitted. To a huge extent, the problem of
cascading effect of taxes is resolved by these measures.
However, there are still problems with the system that have not been solved till date. We
shall talk about these problems now.
The credit of input VAT is available against Output VAT. In the same manner, the credit of
input excise/service tax is available for set-off against output liability of excise/service tax.
However, the credit of VAT is not available against excise duty and vice versa. VAT is
computed on a value which includes excise duty, and no CENVAT credit is allowed for it.
This shows that there is tax on tax!
Excise duty and service tax are levied by Central Government, while the VAT is levied by
the State Government, which is one of the reasons why such a cross-utilisation of credits was
not allowed. However, this does not constitute a valid reason that justifies the cascading
effect of taxes. For the people, it makes no difference is a tax is levied by the Centre or the
State a tax is a tax, and there is a tax on tax. The GST is introduced to combat this
problem, among many others.

PRESENT SYSTEM OF INDIRECT TAXES

Let us first understand the various indirect taxes that are presently levied by the Central and
State Governments.
Ref.

Tax

Levy By

Nature (Levied on)

Can be set-

Covered by

off against

GST

Central Excise

Centre

Manufacture

1,2

Yes

Service Tax

Centre

Providing Services

1,2

Yes

CVD under

Centre

Additional Import Duty

1,2

Yes

customs

(compensating excise)

Customs

Centre

Import

No

SAD under

Centre

Additional Import Duty

1,2

Yes

customs

(compensating sales
tax)

CST

Centre

Inter-State Sales

Yes

VAT

State

Sales within a state

Yes

The GST shall subsume all the above taxes, except the Basic Customs Duty that will continue
to be charged even after the introduction of GST. Other indirect taxes, such as stamp duties
etc. shall also continue. India shall adopt a Dual GST Model, meaning that the GST would be
administered both by Central and the State Governments. This makes it the first of its kind in
India.
DUAL GST MODEL
We begin by stating the dual GST model and the taxes levied on each kind of transaction. See
these abbreviations before we understand them
SGST State GST, collected by the State Government.
CGST Central GST, collected by the Central Government.
IGST Integrated GST, collected by the Central Government.
(The names may change in the actual law, or purpose is only to understand their nature)

Transaction

New System

Old system

Comment

Sale within the

SGST and

VAT &

Under the new system, a transaction of sale

state

CGST

Excise/ST

within the state shall have two taxes, SGST

which goes to the State, and CGST
which goes to the Centre

Sale outside the

IGST

state

CST &

Under the new system, a transaction of sale

Excise/ST

from one state to another shall have only

one type of tax, the IGST which goes to
the centre

These are the taxes that shall be levied under the new system of GST. How this shall operate,
and how can we have cross utilisation of credits can be seen as follows
HOW GST OPERATES?
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.
A (Mumbai)
Sale Price = 100

SGST@8% = 8
CGST@8% = 8
B (Pune)
Sale Price = 200

SGST@8% = 16 Input SGST = 8

CGST@8% = 16 Input CGST = 8
C (Nagpur)

Since Input Tax Credit comes from the same government to whom
the output tax goes, there is no question of credit transfer within
the two governments. (See the next two illustrations)

Case 2 Sale in one state, resale in another state

In this case, 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. Later the goods are resold from Pune to Lucknow
(outside the state). Therefore, IGST will be levied. Whole IGST goes to the Central
Government.
Again 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.
A (Mumbai)
Sale Price = 100

SGST@8% = 8
CGST@8% = 8
Transfer of
credit: SGST

B (Pune)
Sale Price = 200

IGST@16% = 32 SGST & CGST = 16

C (Lucknow)

SGST was claimed as credit against IGST, but the amount of SGST
never went to the Central government, hence the exporting state
transfers the credit amount (Rs 8) to the Central Government.

Case 3 Sale Outside the state, resale in that state

In this case, goods are moving from Delhi to Pune. Since it is an interstate sale, IGST will be
levied. The collection goes to the Central Government. Later, the goods are resold from Pune
to Nagpur (within the state). Therefore, CGST and SGST will be levied.
Against CGST and SGST, 50% of IGST, which 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 Stat
Government by transferring the credit to the State Government.
A (Delhi
Sale Price = 100

IGST@16% = 16
Transfer of
credit: IGST

B (Pune)
Sale Price = 200

SGST@8% = 16 IGST (8) = 8

CGST@8% = 16 IGST (8) = 8
C (Nagpur)

IGST was claimed as credit against SGST, but the amount of IGST
never went to the State government, hence the Central Government
transfers the credit amount (Rs 8) to the Importing State

ADVANTAGES OF GST
Other advantages of GST are as follows:

Reduction in prices: Due to full and seamless credit, manufacturers or traders do not
have to include taxes as a part of their cost of production, which is a very big reason
to say that we can see a reduction in prices. However if the government seeks to
introduce GST with a higher rate, this might be lost.

Less compliance and procedural cost: Instead of maintaining big records, returns
and reporting under various different statutes, all assesses will find comfortable under
GST as the compliance cost will be reduced. It should be noted that the assessees are,
nevertheless, required to keep record of CGST, SGST and IGST.

Move towards a Unified GST: Internationally, the GST is always preferred in a

unified form (that is, one single GST for the whole nation, instead of the dual GST
format). Although India is adopting Dual GST looking into the federal structure, it is
still a good move towards a Unified GST which is regarded as the best method of
Indirect Taxes.

RESTRICTIONS FOR GST

For its successful implementation, we must be cautious about a few aspects:

It is required that all the states implement GST together and that too at the
same rates. Otherwise, it will be really cumbersome for businesses to comply
with the provisions of law. Further, GST will be very advantageous if the rates are
same, because in that case, taxes will not be factor in investment location
decisions, and people will be able to focus on profitability.

For smooth functioning, it is important that the GST clearly sets out the taxable
event. Presently, the CENVAT credit rules, The Point of Taxation Rules are
amended/introduced for this purpose only. However, the rules should be more
refined and free from ambiguity.

The GST is destination based tax, not the origin one. In such circumstances, it
should be clearly identifiable as to where the goods are going. This shall be
difficult in case of services, because it is not easy to identify where a service is
provided, thus this should be properly dealt with.

IMPACTS OF GST
1. Consumers
GST will impact the most important agents of our economy, that is, the consumers in
both, a positive and a negative manner.
Advantages:

The assumed rate of GST is about 16-17%. This is much lesser when
compared with the current rate of taxation, which is 35-40% effectively
now.

Introduction of GST will lead to reduction in price of the product, which is

caused to increase the demand of goods in the economy.

There will be a unique price of the product throughout the country. It

means that in every state, due to uniform tax structure, goods will be
priced uniformly and there will be less inconsistency.

Current tax pattern involves calculation as well as tabulation of various

indirect taxes. GST can reduce much paperwork as it is less complicated
than the current pattern.

Fall in prices implies increase in demand which further implies that the
manufacture will increase their production of goods at a larger scale which
is going to lead to increase in employment in the country.

Disadvantages:

GST is going to adversely affect the service sector. Services, which are
presently being taxed only by the centre, will be now taxed both by the centre
and the states, which will lead to increase compliance costs due to increased
compliances.
Moreover, Service Tax rate is expected to be at a much higher level. As
consumers, we are going to face the increased bills of telephone, cost of dining
in hotels, air travel cost and mostly all the services consumed.

2. Textiles
Textile industry, for the purpose of taxation, has been divided into 9 broad categories,
namely:

Cotton

Woollen

Silk

Artificial Silk

Synthetic Fibre

Khadi and Handlooms

Jute, hemp and mesta textiles

Carpet weaving

Readymade garments

Miscellaneous textile products

Current tax rates vary from 4% to 12% on the basis of these categories. Further, unorganised players
dominate the textile sectors, who are given tax exemptions on the basis of their scale of operations.
Key concerns for the textile sector are:

Composite mills are taxed at a higher rate than the power looms discouraging integration of
production.

Dispute over fabric versus garment classification: E.g. Sarees

Differential rates of tax for cotton and manmade fibre:

Zero duty for cotton fibre whereas excise of nearly 12.5% on manmade fibre segment.

Currently, taxation is production based, which leads to blocked input taxes which results in higher
cost of production.
GST implementation will lead to uniform rate of tax which will result in:

Blocked input taxes will be eliminated as GST is a consumption tax.

Integration of production will be encouraged to increase efficiency and level-playing field

will be provided to all textile segments.

Lot of local state taxes which are levied on the borders of states which inhibit free movement
of goods will be removed, making movement of goods easier.

Explicit subsidy schemes will not be required as zero rating on exports under GST will boost
exports.

Net impact: Positive

3. Roads
Road construction sector is currently exempt from the purview of excise and service tax and there
are no major implications of GST on toll and annuity based road projects. With the implementation
of single point tax system, compliance costs are expected to be reduced as the processes are
expected to be streamlined.
Net impact: Neutral

4. Real Estate
Reduction in property prices as a result of GST Currently, developers pay various non-creditable
taxes like excise duty, customs duty, CST, entry tax, etc. on the procurement side, and the buyers
pay service tax and VAT on purchase of residential units when booked prior to their completion.
GST will replace these multiple taxes with a single tax and will also ensure smooth flow of credits
through the supply chain.
Thus, it is expected construction cost incurred by the developers will get reduced by GST and
thereby help in reducing the level of Property Prices.
But, high GST rates might offset any possible gains on incremental credits.
It will also improve the investor sentiments resulting in improved inflow of foreign funds in the
sector.
Net impact: Positive
5. Engineering, Capital Goods and Power Equipment
In this sector, the companies are involved simultaneously in manufacturing of goods and rendering
of services. For example, a company does manufacturing of transmission towers and also EPC of
entire transmission lines. Here, EPC players pay service tax and manufacturers pay excise duty at
present. Introduction of GST would combine it into a single tax so that credit is available at all
stages and double taxation is avoided. Domestic players will become cost competitive through this.
Tax range is much wider in this sector; going up to around 30% depending on the basket of goods
provided in the EPC contract and any GST below 30% could improve cost competitiveness of the
players.
Thus, introduction of GST is expected to improve the prospects of engineering, capital goods and
power equipment (ECPE) sector by simplifying the structure.
Net impact: Positive
6. Hotels
Depending on the final GST rate, impact for the hotel sector is more likely to be neutral.
Restaurants and hotels are mainly subject to service tax, VAT, luxury tax. If GST is capped at
around 18%, the impact is likely to be neutral. This is because service tax payable by hotels is
around 8.7% and luxury tax around 8-12% (depending on state and type of service) and restaurants
have to pay Service tax at 5.6% and VAT at 12-14.5% which adds up to about 18%, thus having
neutralising effect on GST.
Net impact: Neutral

What is stopping GST Bill from being passed from the Rajya Sabha?
There are various demands by the Congress party, who have a majority in Rajya Sabha which is blocking
the passage of GST Bill from the Upper House, in respect of the legislation:
1. Capping GST rate to 18%.
2. Scrap the proposed 1% additional levy (over and above GST) for manufacturing states.
This was demanded by manufacturing states who argued that they needed to be compensated for the
investment they had made in improving their manufacturing capabilities, to which the Centre had
agreed.
3. To change the composition of the GST Council the body which decides the various nitty-grittys
like rates of tax, period of levy of additional tax, special provisions, etc.
Proposed Composition 2/3 from states and 1/3 from Centre.
What Congress wants Centres share to be reduced to one-fourth.
Currently, the GST Bill is yet to be passed from Rajya Sabha. The finance minister is hopeful of getting it
passed in the 2nd part of Budget Session to begin from April 25th. To summarize, GST Bill will be huge
reform in the tax structure which will help in reducing compliances, bring uniformity and smoothness,
reduce tax evasions and soften the impact of indirect taxes on final consumers.