Migration to an Integrated Goods and Service Tax Regime: A Model in the

Indian Context

Dr. Tanuj Nandan 1

Achyut Mishra 2

Anant Mishra 3

Pradeep Agarwal 4

Vimal Kumar Singh 5

INTRODUCTION:

Modern economies have several economic and social objectives that require public
spending. This in turn must be financed through taxation. Taxation may appear to be an
illiberal provision on economic activity, and therefore, careful consideration must be given to
its design. The distribution of the impact of taxation across the population raises issue of
equity, or fairness which must be given substantial weight even if it entails cost in terms of
economic efficiency. Governments are often faced with trade-offs between the equity and
efficiency objectives of tax policy.

As the global marketplace expands, tax laws and regulations are changing faster and
becoming more complex. New rules and requirements are emerging almost daily and tax
decisions are under more scrutiny than ever before.

2009 was a challenging year for the tax department and corporate houses alike,
reflecting the turbulent economic environment. The key pressure and challenges facing the
tax function may be identified in the theme: to accomplish more using fewer resources.
Perhaps more than ever before, tax authorities were called upon to elevate their efforts to
contribute to better cash management, tax planning, and improved operational efficiencies
and effectiveness- and to do this on a global scale amidst an ever-changing regulatory
environment and significant resource constraints. Regardless of whether a business operates
in Canada or anywhere else around the world, it is imperative that the business understands
1
Associate Professor, School of Management Studies, MNNIT Allahabad
2
Incharge, International Marketing, National Engineering Industries Ltd., Jaipur
3,4,5
Students, MBA II Year, School of Management Studies, MNNIT Allahabad
how changes in tax laws and regulations may it and the stakeholders involved. KPMG (2010)
brings out the crux of tax management thus: Effective tax advice and planning that is tailored
to your business can help you adapt and respond quickly to these changes—and help give you
a competitive edge.

Tax system in India

The Indian tax system has undergone different stages of evolution. Further
reformation of the tax system is critical to the achievement of economic growth inclusive of
fiscal consolidation, which on its part stabilizes the market and conditions surrounding
business transactions. Minimizing distortions can be an efficient means of providing stable
and predictable situations for conducive operations in the given conditions. In many
developing countries, tax policy was used as principal instrument to correct fiscal imbalances
(Ahmed & Stern, 1991). The transition from centralized planning to market required wide
ranging tax reforms and an important reason for this was internationalization of economic
activities. Globalization emphasized the need to minimize both efficiency and compliance
costs of tax system. A lot has been done in this regard since the economic reforms of 1990;
considerable distance has yet to be covered for making the tax system broad based,
productive and efficient. Lopsided revenue generation as per tax regime in India has, in the
past, contributed to efficiency costs. Reforms in the sales tax have only just begun, and in
some ways, the current implementation of VAT system across different states has left a
vacant space for more. The recent reforms in tax administration have brought in a lot of hope
in improving revenue productivity and improving horizontal equity, and hopefully, that will
provide the elbow room necessary for calibrating future reforms (Rao & Rao, 2006). Richard
Bird(1993), reviewing the three volume Report of the Tax Reform Committee, discovers
reforms that have taken place in the Indian tax system had been broadly in conformity with
international trends and advice proffered by the expert groups and was in tune with
international best practices.

Taxes consist of direct tax or indirect tax, and may be paid in money or as its labour
equivalent (often but not always unpaid labour). A tax may be defined as a "pecuniary burden
laid upon individuals or property owners to support the government […] a payment exacted
by legislative authority. A tax "is not a voluntary payment or donation, but an enforced
contribution, exacted pursuant to legislative authority" and is "any contribution imposed by
government […] whether under the name of toll, tribute, tillage, gable, impost, duty, custom,
excise, subsidy, aid, supply, or other name." Black's Law Dictionary, p. 1307 (5th ed. 1979).
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 (Shukla, 2010).

Value Added Tax and Goods & Services Tax

Indirect tax system has undergone numerous changes aimed towards the
amalgamation of modern technical formulations so as to take care of changing business
complexities. Sales tax and other indirect taxes have evolved around the globe to promulgate
a single line agenda of taxation. The current hot cake, the Goods and Services Tax is the
result of numerous developmental happenings in different parts of the world. Norms for VAT
and GST are being developed across the world whereby a well-knit system can prosper for
the betterment of trade and commerce. VAT has been a result of such evolutions and this has
further led to more demands out of the system. Value added tax (VAT) avoids the cascade
effect of sales tax by taxing only the value added at each stage of production. For this reason,
throughout the world, VAT had been gaining favour over traditional sales taxes. In principle,
VAT applies to all provisions of goods and services. VAT is assessed and collected on the
value of goods or services that have been provided every time there is a transaction
(sale/purchase). The seller charges VAT to the buyer, and the seller pays this VAT to the
government. If, however, the purchaser is not an end user, but the goods or services
purchased are costs to its business, the tax it has paid for such purchases can be deducted
from the tax it charges to its customers. The government only receives the difference; in other
words, it is paid tax on the gross margin of each transaction, by each participant in the sales
chain. In many developing countries such as India, sales tax/VAT is key revenue sources as
high unemployment and low per capita income render other income sources inadequate. Like
Value Added Tax (VAT), GST is a tax on domestic consumption. It is paid when money is
spent on goods or services, including imports. It is not paid when money is saved and
invested in productive capability.
 The story has changed a lot and this has got its own history; in the 1960s and 1970s,
the GST or VAT was not widely used, as countries still relied to a large extent on direct taxes
such as corporate and personal income taxes to generate revenue to fund government
expenditures. However, as international trade and investment flows increased and talents
became more mobile across borders, countries with high direct taxes suffered an outward
migration of talented people to lower tax countries. In addition, high income taxes reduced an
individual’s willingness to work, save and invest. High corporate taxes discouraged initiative
and drove businesses elsewhere. Ad hoc indirect taxes which were consequently imposed
heavily and unequally on different parts of the economy have stifled economic activities.
Wholesale and turnover taxes caused cascading (when a tax was levied on the price of a
product whose input had already been taxed), so that by the time the product reached the
consumer, the effective tax on the product was many times the nominal rate. All these
resulted in a worldwide trend towards lower direct taxes and a more even distribution of the
tax burden between direct income and broad-based indirect taxes on consumption such as the
GST. This form of VAT has since surfaced in almost all recent tax reform exercises held,
including in Japan (1989), Pakistan (1990) and Finland (1991). VAT is now a condition for
entry into the European Union and some form of VAT is now in force in more than 55
countries (Pheng and Loi, 1994).

Goods and Services Tax: OECD Recommendations

The Organization for Economic Co-operation and Development (OECD) established in 1961
brings together the governments of countries committed to democracy and the market
economy from around the world to:

• Support sustainable economic growth

• Boost employment
• Raise living standards
• Maintain financial stability
• Assist other countries' economic development
• Contribute to growth in world trade

The Organization provides a setting where governments compare policy experiences, seek
answers to common problems, identify good practice and coordinate domestic and
international policies. OECD has given its directives to the world economies for proper
channelization of the direct and indirect tax system all over the globe. GST has been
operative in various nations all over the globe and for the same different models and methods
have been adopted by respective authorities for effective implementation. We will now like to
see through the GST as progressing in some of the countries. Limited to less than ten
countries in the late 1960s it has now been implemented by about 136 countries; and in these
countries (including OECD member countries) it typically accounts for one-fifth of total tax
revenue. The recognized capacity of VAT to raise revenue in a neutral and transparent
manner drew all OECD member countries (except the United States) to adopt this broad
based consumption tax. Its neutrality of principle towards international trade also made it the
preferred alternative to customs duties in the context of trade liberalization (OECD, 2009).

The recent global economic crisis had an impact on business activities and policies
and has also resulted in the reduction in corporate taxes. In some parts of the world it has
stopped altogether. As the recession is forcing many governments to reassess their long-term
tax policies, indirect taxes are becoming an increasingly potent tool for national governments,
with higher rates and a broader base high on the agenda. A recent statement from the OECD
gives clear support to this view. The OECD, called on major countries to avoid using the
economic crisis as an excuse to avoid needed policy changes, said Canada would benefit
from a tax-reform initiative that would see the government increase its top consumption tax,
the GST. The increased revenue flows would, in turn, allow the government to slash taxes on
corporations and individuals -- breaks that are more likely to stimulate economic activity. The
OECD called on Canada to make sure it implements the Agreement on Internal Trade, which
requires provinces to remove labour mobility barriers by next month. The report said Canada
could go further by following the more robust liberalization agreement signed in 2006 by the
governments of British Columbia and Alberta, called the Trade, Investment and Labour
Mobility Agreement.

OECD Norms: Application to International Transactions

For the international trade in goods there is a commonly held principle that exports should
be exempted and imports should be taxed. This is relatively simple to apply, although even
herein, complexities of globalization mean that problems can arise. However, for the
international trade in services and intangibles there are no such commonly held principles.
Thus, the variations by governments in the application of consumption taxes to this
increasing trade have led to obstacles to business activity and distortions of competition
significant enough to justify the design of common principles. There is also a shared view,
held both by governments and businesses that the neutrality principle described above should
be kept as an objective in the design and implementation of VAT/GST Guidelines. The
following principles aim mainly at ensuring that transactions are taxed only once and in a
single, clearly defined jurisdiction in order to avoid uncertainties, double taxation or
involuntary non-taxation.

As per the Ottawa Framework Conditions, endorsed by Ministers in October 1998, the
development of e-commerce in the late 1990s led governments to adopt several principles in
the field of consumption taxes. Although they were designed in the context of e-commerce
taxation, they remain valid for the more global interaction of consumption tax systems and
broadly reflect the philosophy of the existing tax rules in most countries. In addition, the
Ottawa Framework Conditions specify that the taxation principles that guide governments in
relation to conventional commerce should not be different than those applicable to electronic
commerce. These principles can be summarized as follows:

• Neutrality: Taxation should seek to be neutral and equitable between forms of

commerce. Business decisions should be motivated by economic rather than tax
considerations. Taxpayers in similar situations carrying out similar transactions
should be subject to similar levels of taxation.

• Efficiency: Compliance costs for taxpayers and administrative costs for the tax
authorities should be minimized as far as possible.

• Certainty and simplicity: The tax rules should be clear and simple to understand so
that taxpayers can anticipate the tax consequences of a transaction, including knowing
when, where and how the tax is to be accounted.

• Effectiveness and fairness: Taxation should produce the right amount of tax at the
right time. The potential for tax evasion and avoidance should be minimized while
keeping counter-acting measures proportionate to risks involved.

• Flexibility: The systems for taxation should be flexible and dynamic to ensure that
they keep pace with technological and commercial developments.

Rules for the consumption taxation of cross-border trade should result in taxation in
the jurisdiction where consumption takes place and international consensus should be sought
on circumstances under which supplies are held to be consumed in a jurisdiction. As regards
value added taxes, an additional principle can be established from the general functioning of
those taxes: except where explicitly designed, i.e. when several operations are explicitly
exempted (input taxed) like financial services, or excluded from the application of the value
added taxes, like operations not effected for consideration, the tax burden should not lie on
taxable business but on the final consumer (CPAT – OECD, 2006).

International Models of GST:

There exist various models of GST. Each model has its own advantages and disadvantages.

Australian Model

In Australia GST is a federal tax, collected by the Centre and distributed to the states. But
India is a diverse country and it is not possible that states may permit the Centre to gather all
the taxes while they become just spending institutions.

Canadian Model

The GST in Canada is dual between the Centre and the states and has three varieties:

(i) Federal GST and provincial retail sales taxes (PST) managed separately and
followed by the largest majority.

(ii) Joint federal and provincial VATs administered federally (Harmonious Sales Tax-
HST) and

(iii) Separate federal and provincial VAT administered provincially (QST)- only for
Quebec, as it is like a breakaway province.

The first variety is fundamentally the Canadian model, which is similar (though not the same)
to the existing situation in India.

GST in Australia

The idea for a broad-based consumption tax was first proposed by then federal
treasurer Paul Keating at the 1985 Tax Summit but was dropped at the behest of then Labour
Prime Minister Bob Hawke after pressure from the ACTU, welfare groups and business,
which did not like its association with proposals for capital gains and fringe benefits taxes. It
was introduced by the Federal Government with the A New Tax System (Goods and Services
Tax) Act 1999, taking effect from July 1 2000. The basic premise of the new tax was to
broaden the tax base, which was heavily biased toward the provision of services.
Prior to the GST, Australia operated a Wholesale Sales Tax (WST) which imposed a tax on
wholesales of goods. The WST was implemented in the 30's when Australia had an economy
dominated by goods. Over the years however, Australia's economy evolved to be more
services based, and the GST served to strip the unfair tax advantage that service providing
businesses had over suppliers of goods.

The GST is levied at a flat rate of 10% on most goods and services, apart from GST
exempt items, and input taxed goods and services. The legislation was passed on 28 June
1999 as A New Tax System (Goods and Services Tax) Act 1999. It gained assent on 8 July
1999 and came into operation on 1 July 2000. The preceding months before the GST became
active saw a spike in consumption as consumers rushed to purchase goods that they perceived
would be substantially more expensive with the GST. Once the tax came into effect,
consumer consumption and economic growth declined such that by the first fiscal quarter of
2001, the Australian economy recorded negative economic growth for the first time in more
than 10 years. Consumption soon returned to normal however (ABC NEWS 24).

GST in Singapore

Singapore is an amalgamation of 63 islands, and is the smallest country in Southeast

Asia. Despite the small geographic size of the nation, Singapore economy is one of most
prosperous in the world, with a strong international trade link. Singapore economy is a
capitalist mixed economy, with minimal government intervention in the market. The Goods
and Services Tax (GST), to be pegged at 3 per cent across the board for the first five years,
was introduced by the Singapore Government on 1 April 1994. Later it was increased to 4%
on 1 January 2003, and 5% on 1 January 2004. It was raised again to 7% on 1 July 2007.
While this may just be another tax for many businesses, the rules and regulations governing
the mechanism of this tax are entirely different from what companies and individuals have so
far experienced from corporate and personal income tax respectively.

GST is a transaction-based tax, it is levied at every stage of the business process and
will finally be borne by the end consumers. Businesses registered for GST purposes become
in essence the tax collecting agents for the Inland Revenue Authority of Singapore (IRAS).
The introduction of GST had involve some sensitive initiatives on the part of the tax authority
to educate the public and businesses about the new tax as well as to react, with understanding,
to the concerns of taxpayers over taxes already paid before the changeover. To a large extent,
apart from understanding the working mechanism of GST, there are also problems
concerning contract prices and continuous supplies that will complicate the changeover.

GST in Canada

Canadians minted and implemented a sales tax system that no one in their right mind
would have designed from scratch. Nonetheless, more by accident than design, Canada ended
up being a bold innovator in sales tax policy and administration in several important respects.
VAT did not come to Canada quickly or quietly. Its gestation period was long and its birth in
1991 was politically painful. Indeed, in its early years the GST was the most heartily disliked
tax in Canada. Some selected macroeconomic variables, including various neutrality
measures, aggregate consumer price changes, economic growth effects, tax yield effects, and
current account balance effects. It is concluded that not only was the GST highly successful
in raising tax revenues, but it was also significant in terms of growth effects, price effects,
current account effects, and the effect on the budget balance.

For years, the Canadian federal government has encouraged provinces with PST
regimes to harmonize these taxes with the GST. In 1992, Quebec adopted the Quebec Sales
Tax (QST), also a value-added tax but separate from the GST. While the QST is similar to
the GST, there are several differences between the two systems. For example, financial
services are QST-zero-rated (as opposed to GST-exempt) and the QST is generally
administered separately from the GST. In 1997, New Brunswick, Nova Scotia, and
Newfoundland and Labrador were the first provinces to adopt the HST (Atlantic HST), which
is a value-added tax with federal and provincial components. The 13 percent Atlantic HST
applies at the same rate in all three provinces, generally uses the same tax base and rules as
the GST and is administered by one tax authority, the Canada Revenue Agency. Until earlier
this year, the remaining provinces with PST systems publicly showed little interest in sales
tax harmonization. One of the reasons for these provinces’ reluctance to adopt an HST was
the concern that the broader GST tax base would increase the tax burden for consumers by
taxing goods not historically subject to PST. However, B.C. and Ontario have signed
individual agreements with the federal government that appear to provide flexibility to
respond to the provinces’ concerns. For example, B.C. and Ontario have announced measures
that will alleviate some of the tax burden to consumers in the form of point-of sale rebates on
certain items specific to their provinces that are not available under the GST or the Atlantic
HST (Bain, 2009 for KPMG).
GST Systems

Many countries have a unified GST system. However, countries like Brazil and
Canada follow a dual system wherein GST is levied by both Federal and State or provincial
Governments. In India, a dual GST is being proposed wherein a Central Goods and Services
Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value
of a transaction. The Centre and the State will each legislate, levy and administer the Centre
and State GST separately.

However it was recently indicated by the Government that the tax rates will be
triplicate in nature as regards the goods are concerned. Lower rates will be charged on
necessary and mass consumed goods and services, on the contrary a higher rate of GST will
be charged for goods of luxurious nature and in between the two there will exist a normal rate
structure for the goods not falling among the two.

There are three recognized systems for GST worldwide:

a) Invoice System

b) Payment System

c) Hybrid System

(a) Invoice System: In this system the GST (Input) can be claimed on the basis of
acknowledgement of invoice, put aside the matter whether payment is cleared or not. The
GST (Output) is accounted for when invoice is raised. Here the time of receipt of payment
keeps no value. It may be considered as mercantile system of accounting. In our country
prevailing system of sales tax on goods is an invoice system of VAT and it bears no value for
taxpayer if he follows the cash basis of accounting or mercantile basis of accounting. This
system has both the advantages & disadvantages. The benefit can be derived from this system
is that the input credit is claimed without clearing payment. The disadvantage of the invoice
system is that the payment for GST has to be made without receiving the payment.

(b) Payment System: In this system the GST (Input) can be claimed at the time of making the
payment for purchases and the GST (Output) is accounted for when the payment is cleared.
In payment system, it has no value whether the assessee is preserving the accounts on cash
basis or not. This system has both the advantages & disadvantages. The advantage is that no
sooner the payment for the goods and/or services is received the Tax (output) should not be
deposited. The disadvantage is that the GST (input) cannot be acclaimed without releasing
the payment. The Taxes on services in India are based on this payment system as the service
tax is to be paid on receipt basis and further CENVAT credit is only permissible when
payment of the service is made.

(c) Hybrid System: In this system GST (Input) can be claimed at the time of receiving invoice
and GST (Output) is accountable on the ground of payment, if allowed by the law. In some
countries the dealers have to put their option for this system or for a reversal of this system
before adopting the same.

Proposed Models of GST in India

Kelkar-Shah Model

This model of a unified GST, is based on a grand bargain to merge central excise,
service tax and state VAT into one common base. Two different rates of tax are to be levied
by the Centre and the states. The collection may be by the Centre. This is like the HST model
in Canada.

Bagchi-Poddar Model

This model, just like Kelkar-Shahs, envisages a combination of central excise, service
tax and VAT to make it a common base of GST to be levied both by the Centre and the states
separately. This means that the Central Excise Act 1944 may be abolished and the goods tax
may be only on the sale of goods. It may merge in it the service tax.

The difference between the Bagchi-Poddar and Kelkar-Shah models is that in the
former, the collection is at two levels, by the Centre and the states, while in the latter the
collection is only by the Centre. So while the Kelkar-Shah model is like the Canadian HST,
the Bagchi-Poddar one is like the Quebec model. Although the model says that it is based on
the Quebec model, it is actually not fully so as this model envisages collection both by the
Centre as well as the states, whereas the Quebec model envisages collection only by the state
of Quebec. The Bagchi-Poddar model also clearly envisages that a Constitutional amendment
is necessary to bring the taxing powers on goods and services under the concurrent list and to
abolish the present division of taxing powers between the Centre and the states.
The Practical Model

The same result with no upheaval/without upsetting the present setup can be achieved
by a dual VAT or parallel GST at the central as well as the state levels. At the central level
we can have, as we have now, a combination of Cenvat and Service Tax. At the state level we
can have VAT alone without Service Tax. There is no need to combine Cenvat and VAT
which envisages the complete abolition of Central Excise Act, which gives the power to the
Centre to charge tax on manufacture. At the Centre the merging of Cenvat and Service Tax
has been already done to a large extent by allowing interchangeability of input credit for both
goods and services. The rate of tax can be made 14 per cent for both goods and services in the
next Budget or the one after that. At the state level, VAT can be perfected by abolishing CST
and allowing inter-changeability of input credit between states. This will work
administratively as well as revenue-wise (Mukhopadhyay, 2009).

GST for India

Designing of an effective GST model which can replace the existing system of
cascading tax system, in a federal economic system of India, has been a challenging task
before the Empowered committee of State Finance Ministers. The need for upholding the
powers of Central and State governments in their taxation matters and consolidating the
States revenues to the pre-GST level had been a major bottleneck. Many countries in the
world have a single unified GST system i.e. a single tax applicable throughout the country.
However, in federal countries like Brazil and Canada, a dual GST system is prevalent
whereby GST is levied by both the federal and state or provincial governments. Both, the
Empowered committee of State Finance Ministers and Thirteenth Finance Commission in
their respective reports have suggested for a dual model of GST under which the Central
taxes will be replaced by Central GST and State taxes by State GST. The administration of
both the taxes will be born by the Central and State revenue authorities respectively. This
dual model is supposed not only to provide a flawless indirect tax regime which is practical to
be implemented but also to cater to the conflicting interests of the Central revenue and State
revenue agencies (Sethi, 2009).

In Canada, the Harmonized Sales Tax (HST) combines the Goods and Services Tax
(GST) and Provincial Sales Tax (PST) into a single sales tax. This changes the PST from a
cascading tax system, which has been abandoned by most economies throughout the world,
to a value added tax like the GST. GST is levied on supplies of goods or services made in
Canada and include most products, except certain politically sensitive essentials such as
groceries, residential rent, and medical services, and services such as financial services.
Businesses that purchase goods and services that are consumed, used or supplied in the
course of their “commercial activities” can claim “input tax credits” subject to prescribed
documentation requirements. This avoids “cascading”. In this way, the tax is essentially
borne by the final consumer. Exported goods are exempted (“zero-rated”), while individuals
with low incomes can receive a GST rebate calculated in conjunction with their income tax.
Canadian economy faced the similar challenges, as are now faced by Indian system, while
introduction of GST in 1991. Being a federal administrative system, the GST had to be
introduced with dual base giving the provinces equal base in the tax revenue. The
introduction of GST was made to eliminate the cascading effects of present provincial taxes
and decrease the effective rate of taxes. At the initial stage, the conversion of indirect tax
system by introduction of GST resulted in elimination of “Manufacturing Sale Tax” and
relaxation in exports. Over the period of 20 years since the introduction of GST, the tax
regime has come of age in Canada. In 1997, the GST was converted in to Harmonized Sales
Tax there by giving the regime a dual base. The provinces of Nova Scotia, New Brunswick
and Newfoundland and Labrador and the Government of Canada merged their respective
sales taxes into the Harmonized Sales Tax (HST). In those provinces, the current HST rate is
13%. HST is administered by the federal government, with revenues divided among
participating governments according to a formula. All other provinces continue to impose a
separate sales tax at the retail level only, with the exception of Alberta, which does not have a
provincial sales tax. Ontario proposed in its 2009 Budget to harmonize its 8% retail sales tax
with the GST effective July 1, 2010. In July, 2009, the province of British Columbia
announced plans to also merge the PST and GST effective July 1, 2010. In PEI and Quebec,
the provincial taxes include the GST in their base. The three territories of Canada (Yukon,
Northwest Territories and Nunavut) do not have territorial sales taxes. The government of
Quebec administers both the federal GST and the provincial Quebec Sales Tax (QST). It is
the only province to administer the federal tax (Sethi, 2009).

Canadian model is considered to be a suitable base for GST implementation because

of various reasons. Indian economy is based on federal administrative system. In order to
implement a tax regime which would replace the existing indirect taxes both at the Center
and State level, there is a need for dual model so that the revenue and administrative interests
are not over hauled at any level. As has been discussed above the dual model of GST has
been successfully implemented only by few economies in the world. Canadian dual model is
considered to be a thriving structure as it successfully completed its underlying objectives. In
order to uphold the interests of Center and State, a dual model like that of Canada is required.

Existing Taxes & GST

First Discussion Paper GST implementation must be operated for better formulation
of the whole system of taxation and a variety of existing taxes have to be subsumed in this
course. Going through successful implementation of the GST system in different parts of the
world, EGOM has come up with following findings in the first discussion paper on GST.
While identifying the levies to be subsumed, the principles of fairness should be kept in
mind. Taxes or levies to be subsumed should be primarily in the nature of indirect taxes,
either on the supply of goods or on the supply of services. Taxes or levies to be subsumed
should be part of the transaction chain which commences with import/ manufacture/
production of goods or provision of services at one end and the consumption of goods and
services at the other. The subjugation should result in free flow of tax credit in intra and inter-
State levels. The taxes, levies and fees that are not specifically related to supply of goods &
services should not be subsumed under GST. Revenue fairness for both the Union and the
States individually would need to be attempted (Singh, 2009).

On application of the above principles, it is recommended that the following Central

Taxes should be, to begin with, subsumed under the Goods and Services Tax:

• Central Excise Duty

• Additional Excise Duties

• The Excise Duty levied under the Medicinal and Toiletries Preparation Act

• Service Tax

• Additional Customs Duty, commonly known as Countervailing Duty (CVD)

• Special Additional Duty of Customs - 4% (SAD)

• Surcharges, and

• Cesses.
Following State taxes and levies would be, to begin with, subsumed under GST:

• VAT / Sales tax

• Entertainment tax (unless it is levied by the local bodies).

• Luxury tax

• Taxes on lottery, betting and gambling.

• State Cesses and Surcharges, as they relate to supply of goods and services.

• Entry tax not in lieu of Octroi.

As of now, the indirect tax structure in India is based upon a combination of Value Added
Tax and transaction based tax. The introduction of GST in India is favoured for the inbuilt
mechanism that the system has to eliminate the cascading effect of currently levied taxes. As
discussed above, the GST in Canada was introduced to eliminate the cascading effects of
Manufacturing Sales tax and Provincial taxes. Therefore, Canadian model can provide a base
for eliminating the cascading effect.

With growing tax base, there is a need for simplified tax compliance structure. It is
warranted not only to eliminate the procedural bottlenecks but also to lower the transaction
costs which again act as price inflator. In Canada, the administration of GST is governed by
Central Revenue Agency which in turn gives the due credit of its GST revenue to province.
This has resulted in simpler compliance procedure and reduced transaction costs as
administration of the regime is at one level and not multiple levels. The Department of
revenue in its comments on first discussion paper has suggested for centralized administration
of GST in India. Therefore, Canadian model can be taken as a suitable base.

The proposed GST has a pre-defined object to widening the indirect tax base, on one
hand, by introducing the service tax in the State level taxes and on the other, by bringing
maximum goods and services under the indirect tax net. GST in Canada covers all the
transactions of purchase and sale of goods and provision for services expect for exports,
politically sensitive essentials such as groceries, residential rent, and medical services, and
services such as financial services. Therefore this model can provide for the scope of Indian
model (Sethi, 2009).
Conclusion

While going through the GST models as practiced around the globe and based on the
international norms it is very much needed for a proper and globally recognized frame of
work to be followed in India. The international aspects as seen in various models and systems
being adopted in different parts of the world effective model for the GST implementation in
India should be done for broadening the base of indirect tax structure and also to save against
the tax evasion and other by-passing being done at different levels of operation. Canandian
model of GST has got teeth for proper action in Indian scenario as it has got its roots
embedded to the federal system of governance. Sethi (2009) has opined similar thoughts and
the First Discussion Paper on the issue dealt with this in detail whereupon a dual system has
been proposed for GST implementation in India.

The models of GST suggested in the reports of Empowered committee of State

Finance ministers and Task force of thirteenth finance commission are to an extent based
upon the Canadian model. But there is still a scope for adoption of certain aspects from
Canadian model such as Centralized administration of tax regime, exemptions to financial
and medical services and residential rent and provision for input credit of GST for lower
income groups to nullify the cascading tax in true sense. So for effective and efficient
formulation of GST in India wherein proper affect can be given to the same the operating
authorities should apply it keeping the Canada Model as the central pivot and applying the
philosophy of quasi-federal structure of government system as promulgated in the basic
structure of our Constitution.
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