COMPENDIUM ON GST

Genesis
The idea of moving towards GST was first mooted by the then Union Finance Minister in his
Budget speech for 2006-07. The introduction of the Goods and Services Tax (GST) is a very
significant step in the field of indirect tax reforms in India. By amalgamating a large number of
Central and State taxes into a single tax, GST will mitigate ill effects of cascading or double
taxation in a major way and pave the way for a common national market. From the consumer's
point of view, the biggest advantage would be in terms of reduction in the overall tax burden on
goods, which is currently estimated to be around 25%-30%. It would also imply that the actual
burden of indirect taxes on goods and services would be much more transparent to the
consumer. Introduction of GST would also make Indian products competitive in the domestic and
international markets owing to the full neutralization of input taxes across the value chain of
production and distribution. Studies show that this would have a boosting impact on economic
growth. Last but not the least, this tax, because of its transparent and self-policing character,
would be easier to administer. It would also encourage a shift from the informal to formal
economy. The government proposes to introduce GST with effect from 1st July 2017.

LEADING UPTO GST

What’s it like in today’s mixed scenario?

Currently, we have Value-Added Tax (VAT) systems both at the central and state levels. But the
central VAT or CENVAT mechanism extends tax set-offs only against central excise duty and
service tax paid up to the level of production. CENVAT does not extend to value addition by the
distributive trade below the stage of manufacturing; even manufacturers cannot claim set-off
against other central taxes such as additional excise duty and surcharge.

Likewise, state VATs cover only sales. Sellers can claim credit only against VAT paid on
previous purchases. The VAT also does not subsume a host of other taxes imposed within the
states such as luxury and entertainment tax, octroi, etc.
Once GST comes into effect, all central- and state-level taxes and levies on all goods and
services will be subsumed within an integrated tax having two components: a central GST and a
state GST.

This will ensure a complete, comprehensive and continuous mechanism of tax credits. Under it,
there will be tax only on value addition at each stage, with the producer/seller at every stage able
to set off his taxes against the central/state GST paid on his purchases. The end-consumer will
bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the
previous stages.

The Goods and Service Tax Council: (hereinafter referred to as, “GSTC”) comprises of the
Union Finance Minister, the Minister of State(Revenue) and the State Finance Ministers to
recommend on the GST rate, exemption and thresholds, taxes to be subsumed and other
matters. One-half of the total number of members of GSTC form quorum in meetings of GSTC.
Decision in GSTC are taken by a majority of not less than three-fourth of weighted votes cast.
Centre has one-third weightage of the total votes cast and all the states taken together have two-
third of weightage of the total votes cast.
All decisions taken by the GST Council has been arrived at through consensus. The option of
exercising a vote has not been resorted to till date.
To ensure smooth roll-out of the GST, various Committees and Sectoral groups has been formed
comprising of members from both Centre and States.

Salient features of GST

The salient features of GST are as under:
 COMPENDIUM ON GST

 (i)GST is applicable on ‘supply’ of goods or services as against the present concept on the
manufacture of goods or on sale of goods or on provision of services.
 (ii) GST is based on the principle of destination-based consumption taxation as against the
present principle of origin-based taxation.
 (iii) It is a dual GST with the Centre and the States simultaneously levying tax on a common
base. GST to be levied by the Centre would be called Central GST (CGST) and that to be levied
by the States would be called State GST (SGST).
 (iv) An Integrated GST (IGST) would be levied an inter-state supply (including stock transfers) of
goods or services. This shall be levied and collected by the Government of India and such tax
shall be apportioned between the Union and the States in the manner as may be provided by
Parliament by Law on the recommendation of the GST Council.
 (v) Import of goods or services would be treated as inter-state supplies and would be subject to
IGST in addition to the applicable customs duties.
 (vi) CGST, SGST & IGST would be levied at rates to be mutually agreed upon by the Centre and
the States. The rates would be notified on the recommendation of the GST Council. In a recent
meeting, the GST Council has decided that GST would be levied at four rates viz. 5%, 12%, 16%
and 28%. The schedule or list of items that would fall under each of these slabs has been worked
out. In addition to these rates, a cess would be imposed on “demerit” goods to raise resources
for providing compensation to States as States may lose revenue owing to the implementation of
GST.
 (vii) GST would replace the following taxes currently levied and collected by the Centre:-
o a) Central Excise Duty
o b) Duties of Excise (Medicinal and Toilet Preparations)
o c) Additional Duties of Excise (Goods of Special Importance)
o d) Additional Duties of Excise (Textiles and Textile Products)
o e) Additional Duties of Customs (commonly known as CVD)
o f) Special Additional Duty of Customs(SAD)
o g) Service Tax
o h) Cesses and surcharge in so far as they relate to supply of goods and services.
 (viii) State taxes that would be subsumed within the GST are:-
o a) State VAT
o b) Central Sates Tax
o c) Purchase Tax
o d) Luxury Tax
o e) Entry Tax (All forms)
o f) Entertainment Tax and Amusement Tax (except those levied by the local bodies)
o g) Taxes on advertisements
o h) Taxes on lotteries, betting and gambling
o i) State cesses and surcharges in so far as they relate to supply of goods and services.
 (ix) GST would apply on all goods and services except Alcohol for human consumption.
 (x) GST on five specified petroleum products (Crude, Petrol, Diesel, ATF & Natural Gas) would
by applicable from a date to be recommended by the GSTC.
 (xi) Tobacco and tobacco products would be subject to GST. In addition, the Centre would have
the power to levy Central Excise duty on these products.
 (xii) A common threshold exemption would apply to both CGST and SGST. Tax payers with an
annual turnover not exceeding Rs.20 lakh (Rs.10 Lakh for special category States) would be
exempt from GST. For small taxpayers with an aggregate turnover in a financial year upto 50
lakhs, a composition scheme is available. Under the scheme a taxpayer shall pay tax as a
 COMPENDIUM ON GST

percentage of his turnover in a State during the year without benefit of Input Tax Credit. This
scheme will be optional.
 (xiii) The list of exempted goods and services would be kept to a minimum and it would be
harmonized for the Centre and the States as well as across States as far as possible.
 (xiv) Exports would be zero-rated supplies. Thus, goods or services that are exported would not
suffer input taxes or taxes on finished products.
 (xv) The laws, regulations and procedures for levy and collection of CGST and SGST would be
harmonized to the extent possible.
The whole GST system will be backed by a robust IT system. In this regard, Goods and Services
Tax Network (GSTN) has been set up by the Government. It will provide front end services and
will also develop back end IT modules for States who opted for the same.
Benefits

 For Business and Industry

1. Easy compliance as one tax to be paid
2. Creation of one market which will facilitate Ease of Doing Business iin India
3. Removal of cascading taxes which will lower price, thereby boosting demand, a shot in
the arm for the beleagured corporate sector
4. Improve competitiveness as the transaction cost for doing business would reduce.
Also, now the most competitive good will sell across the country irrespective of the
location where it is manufactured.
5. All the above advantages are expected to provide a boost to the ambitious Make in
India programme of the government
 For Consumers
1. No cascading burden of taxes which would moderate inflation
2. More transparency in taxation regime and easier to understand for the customers
3. Lower Tax rates will follow from GST covering all goods and services, with tax only on
value addition and set-offs against taxes on inputs/previous purchases. Right now, we
have more tax on fewer items; with GST, there will be less tax on more items. Ideally,
no good or service should be tax-exempt, as this will break the input tax chain
 For government
1. The new taxation regime will be easier to administer for the government
1. The input tax credit system creates a mechanism for self policing
2. Dual monitoring by centre and states will lead to tax competition and cooperation
between centre and states. On the flip side, corporates fear two sources of
interface with tax department
2. Better control on leakages due to lesser evasion. Biggest benefit is that it will
disincentivise tax evasion. If you don’t pay tax on what you sell, you don’t get credit for
taxes on your inputs. Also, you will buy only from those who have already paid taxes on
what they are supplying. Result: a lot of currently underground transactions will come
over ground.
3. Higher revenue efficiency
1. More money to spend on welfare expenditure
2. Since, GST is a destination based tax, poorer states which have low level of
manufacturing and services industry are expected to benefit

GST and its impact on Fiscal Federalism

The Constitutional provisions with respect to Fiscal Federalism has two major imbalances
1. Vertical Imbalance –The mismatch between expenditure and revenue requirements. The
centre possessed more revenue but less expenditure whereas the vice versa is true for
states
2. Horizontal Imbalance – There is disparity in revenue accrued by the states
So far, states also had autonomy in deciding tax rates for those items falling in the state list, as
well as deciding VAT rates.
 COMPENDIUM ON GST

With the advent of GST, following issue is likely to crop up in Fiscal Federalism
 States will lose their autonomy in deciding taxation rates based on their expenditure plan. In
GST regime, rates will be decided by GST Council. However, as per the GST Bill, the
Council will fix the “floor rate along with bands”. This will leave some autonomy for the
states to tinker with the tax rates to suit themselves.
 There is also the issue of states having the ability to impose sin tax on goods such as fast
food (done in Kerala recently)

Other Issues with GST

 Deciding a Revenue Neutral Rate – A revenue neutral rate is one which does not lead to a
fall in tax revenues. It is also to be ensured that the rates are not fixed too high as to lead to
inflation. In the report by Arvind Subhramaniam, he has suggested creating 3 bands with a
RNR OF 16%.
 Deciding the exemption limit below which traders will not come under GST regime
 Readying the IT infrastructure for administration of GST
 Devising an effective mechanism to deal with dual policing by centre and state to administer
and implement GST
 Compensation to states- Parliament will provide for compensation to states for revenue
losses arising out of the implementation of the GST, on the GST Council’s
recommendations. This would be up to a five year period.
o Revenue of all taxes subsumed in GST by the State for 2015-16 as the base.
Assumption of 14% Annual Growth Rate.
o Compensation to be provided through Cess. Cess only on few specified luxury
and demerit (sin) goods.
 DESTINATION VS ORIGIN TAX: There are several implications of this, discussed as
below:
 Firstly, destination based GST would be very much beneficial for the states which
consume more goods / services than they produce. The more they consume the
more revenue they get from inter-state trade but such benefits that come via
increased consumption are not good for overall economy of the state.
 Secondly, the destination based tax may not be very encouraging for the states
which produce these goods because nothing will accrue to them.
 Thirdly, to discourage consumption, some states might put restriction on inter-
state movement of goods. Such move might adversely affect the economy.

The move from origin based to destination based indirect tax regime would lead to drop in
revenues of some states. This was the reason that some states such as Gujarat have opposed
GST, which is a destination based tax. The central government has promised to compensate
such states for a period of five years.
There are counter arguments to the revenue loss concept of producer states. The increased
exports will increase the income of the producer state and the increased income may increase
the consumption and thereby the revenue of the state will improve.

 Defined treatment for E-commerce operators

Earlier to GST regime, supplying goods through e-commerce sector was not defined. It had
variable VAT laws. Let us look at this example:
Online websites (like Flipkart and Amazon) delivering to Uttar Pradesh had to file a VAT
declaration and mention the registration number of the delivery truck. Tax authorities could
sometimes seize goods if the documents were not produced.
Again, these e-commerce brands were treated as facilitators or mediators by states like Kerala,
Rajasthan, and West Bengal which did not require them to register for VAT.
 COMPENDIUM ON GST

All these differential treatments and confusing compliances have been removed under GST. For
the first time, GST has clearly mapped out the provisions applicable to the e-commerce sector
and since these are applicable all over India, there should be no complication regarding the inter-
state movement of goods anymore.

 Improved efficiency of logistics

Earlier, the logistics industry in India had to maintain multiple warehouses across states to avoid
the current CST and state entry taxes on inter-state movement. These warehouses were forced
to operate below their capacity, giving room to increased operating costs.
Under GST, however, these restrictions on inter-state movement of goods have been lessened.
As an outcome of GST, warehouse operators and e-commerce aggregators players have shown
interest in setting up their warehouses at strategic locations such as Nagpur (which is the zero-
mile city of India), instead of every other city on their delivery route.
Reduction in unnecessary logistics costs is already increasing profits for businesses involved in
the supply of goods through transportation.

 Unorganized sector is regulated under GST

In the pre-GST era, it was often seen that certain industries in India like construction and textile
were largely unregulated and unorganized.
Under GST, however, there are provisions for online compliances and payments, and for availing
of input credit only when the supplier has accepted the amount. This has brought in
accountability and regulation to these industries
 IMPACT on GOODs and SERVICES: Broadly, services are expected to become costlier
under the GST regime, as the expected GST rate would be higher than the existing
service tax rate of 15%. Clearly, the GST is expected to bring down prices of
indigenously manufactured goods on account of current effective indirect taxes (central
excise @ 12.5%, State VAT @ 5%-15% etc.) being higher as compared to recommended
lower GST rate @ 5% and standard GST rates @ 12% and 18%. Thus, price of certain
category of goods may come down depending on the effective rate of indirect taxes being
paid at present and the tax brackets under which goods are classified under the GST.
Whether the GST will be beneficial to the poor or not only time can tell. Prices of
vegetables and fruits are likely to rise under the GST regime and services such as eating
at restaurants will get more expensive. What will likely get cheaper are items such as
clothes, as cascading taxes at various stages of manufacturing would no longer apply to
them.
Conclusion
The indirect taxes are considered regressive compared to direct taxes, which are typically
proportional to the ability to pay. It’s because the poor and the working classes spend a greater
proportion of their income on essential consumption compared to the classes that are better off.
In light of such scenario government needs to strengthen the social protection measures to
neutralize the effects of regressive tax regime. Based on the experience of tax reform and the
complexities involved, it is important to underline three important issues. First, given that there
are 32 actors in the negotiations (29 states, two Union Territories with legislatures and the central
government), it would take considerable time to finalize the structure and operational aspects of
the tax. It would be unrealistic to expect a “flawless” GST. In fact, such a GST structure does not
exist in any country where both the centre and states are empowered to levy the tax. The
structure that should emerge must be based on the consensus reached and it is necessary to
ensure that the fundamental, sound features of the tax are not compromised. Finally, for the
above reason, it is important to consider the GST reform as a process rather than an event.
Once the basic features of the tax are implemented, it would be necessary to improve the
structure and operational aspects of the tax over time.