Tidal

power

K. SHASHI KUMAR NAIDU

15117041
M. Manoj Kumar
15117046
MIN-343: power plants
Content
− Overview on Indian Economy
− Tax structure in India
− Short comings in Tax system

− Tax cascading
− Value Added Tax
− Problems with VAT
− Goods and services Tax
− GST model in India
− Various GST rates
− Advantages and Disadvantages of GST

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Indian Economy
The economy of India is the sixth largest in the world measured by nominal
GDP and third largest by Purchasing Power Parity(PPP). The country is classified as
newly industrialized country, and one of the G-20 major economies, with an average
growth rate of approximately 7% over the last two decades. India's economy
became the world's fastest growing major economies in the last quarter of 2014,
surpassing People’s Republic of China. However, the country ranks 141st in per capita
GDP (nominal) with $1723 and 123rd in per capita GDP (PPP) with $6,616 as of 2016.

The long-term growth prospective of the Indian economy is positive due to

its young population, corresponding low dependency ratio, healthy savings and
investment rates, and increasing integration into the global economy. India topped
the World Bank’s growth outlook for the first time in fiscal year 2015–16, during
which the economy grew 7.6%. Growth is expected to have declined slightly to 7.1%
for the 2016–17 fiscal year. According to the IMF, India's growth is expected to
rebound to 7.2% in the 2017–18 fiscal and 7.7% in 2018–19.

Sectors of Indian Economy

Historically, India has classified and tracked its economy and GDP in three
sectors: agriculture, industry and services. Agriculture includes crops, horticulture,
milk and animal husbandry, aquaculture, fishing, sericulture, aviculture, forestry
and related activities. Industry includes various manufacturing sub-sectors. India's
definition of services sector includes its construction, retail, software, IT,
communications, hospitality, infrastructure operations, education, health care,
banking and insurance, and many other economic activities

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Agriculture- 18%
Industry-24%
Services-58%

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Tax structure in India

Taxes in India are levied by the Central and State governments. Some minor
taxes are also levied by the local authorities such as municipalities. The authority to
levy tax is derived from the Constitution of India which allocates the power to levy
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.

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Direct Tax
A Direct tax is a kind of charge, which is imposed directly on the taxpayer
and paid directly to the government by the persons (juristic or natural) on whom it
is imposed. A direct tax is one that cannot be shifted by the taxpayer to someone
else. Some important direct taxes imposed in India are as under:

 Income Tax
 Wealth Tax
 Corporation Tax
 Property Tax
 Gift Tax
 Inheritance Tax

Indirect Tax
An indirect tax is a tax collected by an intermediary (such as a retail store)
from the person who bears the ultimate economic burden of the tax (such as the
customer). An indirect tax is one that can be shifted by the taxpayer to someone else.
An indirect tax may increase the price of a good so that consumers are actually
paying the tax by paying more for the products. Some important indirect taxes
imposed in India are as under:

 Customs Duty
 Central Excise Duty
 Service Tax
 Sales Tax
 Value Added Tax

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Short comings in present tax system
 Multiplicity of taxes:
Taxes by Union Government, State Governments and the
local governments have resulted in difficulties and harassment to the tax
payer. He has to contact several authorities and maintain separate
records for each of them.

 Dominance of Indirect taxes:

Central government revenues from indirect and direct
taxes were in the ratio of 74:26 respectively in 1994-95. In the same year
the ratio for State government was 83:17. It is well known that indirect
taxes are more burdensome to the poor than the wealthy.

 Complexity:
A provoking feature of the Indian tax system is its
complexity. Both direct and indirect tax laws are complex. This
provides enough scope for avoiding and evading taxes.

 Imbalance in tax system:

Excessive emphasis on indirect taxes has resulted in the
glaring imbalances of nearly 100% citizens affected by indirect taxes but
hardly 1% of the population coming under the purview of direct taxation.

 Administrative inefficiency and corruption:

A baneful feature of the Indian tax system is the lack
of administrative efficiency. Corruption exists in the administrative

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 machinery from top to bottom. Such a system encourages the spirit of
corruption among the tax payers also.

Tax Cascading
A cascade tax or cascading tax is a turnover tax that is applied at every stage
in the supply chain, without any deduction for the tax paid at earlier stages. Such
taxes are distorting in that they create an artificial incentive for vertical integration.
Value Added Tax (VAT) is introduced to overcome this effect.

Ex:-

Producer/ Cost of Value of Tax Selling Tax

Manufacturer Input Output rate price Burden
including
Tax

A - 100 10 % 110 (100+ 10

10% of 100)

B 110 150 10 % 165 (150 + 15

10% of 150)

C 165 200 10 % 220(200+ 20

10% of 200)

In the above example, a tax of 10 % is levied on producer A. Now the

input of producer B is the output of Producer A. Producer B is purchasing product
from A for Rs.110 and converting it to another product of worth Rs.150. For producer
B Tax of Rs.15 (10% of 150) is levied. But previously a tax of Rs.10 is already levied
while the product is in hands of A. So, tax on producer B is levied twice. Similarly,
thrice in case of producer C. This is called cascading effect of tax.

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Value Added Tax (VAT)
A value-added tax (VAT), is a type of general consumption tax that is
collected incrementally, based on the surplus value, added to the price on the work
at each stage of production, which is usually implemented as a destination-based
tax, where the tax rate is based on the location of the customer.

There are two main methods of calculating VAT: the credit-invoice or

invoice-based method, and the subtraction or accounts-based method. Using the
credit-invoice method, sales transactions are taxed, with the customer informed of
the VAT on the transaction, and businesses may receive a credit for VAT paid on
input materials and services. The credit-invoice method is the most widely
employed method, used by all national VATs except for Japan. Using the subtraction
method, at the end of a reporting period, a business calculates the value of all taxable
sales then subtracts the sum of all taxable purchases and the VAT rate is applied to
the difference. The subtraction method VAT is currently only used by Japan.

Value-added taxation in India was introduced as an indirect Value added

tax (VAT) into the Indian taxation system from 1 April 2005. The existing general
sales tax laws were replaced with VAT Act 2005 with associated rules. A few states
(Gujarat, Tamil Nadu, Madhya Pradesh, Chhattisgarh, Jharkhand, Uttarakhand and
Uttar Pradesh) opted to stay out of this system during its initial introduction but
adopted it later. As of June 2014 VAT has been implemented in all states and union
territories of India except Andaman and Nicobar Islands and Lakshadweep.

The main purpose for introducing VAT is to overcome the cascading effect of the
previous tax. VAT is applied on value added to the price on work at each stage of
production.

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Ex :- Description of VAT overcoming the Cascading effect

Producer/ Cost of Value of Tax Selling Tax

Manufacturer Input Output rate price Burden
including
Tax

A - 100 10 % 110 (100+ 10

10% of 100)

B 110 150 10 % 165 (150 + 15

10% of 150)

C 165 200 10 % 220(200+ 20

10% of 200)

In this example, the ‘Value added’ by the producer B is only Rs.50. In VAT
system tax at second stage will be levied on this value-added amount. So, tax burden
on producer B will be only Rs.5 (10% of 50) unlike the previous system where tax
burden was Rs.15

Problems with VAT

 Regressive:
One disadvantage of VAT is that it can be regressive. That is, the
poorest members of society may end up spending more of their income on
VAT than the wealthiest. This occurs because poor people have less to spend
overall, so they need to spend a larger proportion of their total income to buy
what they need than wealthy people. This can be compensated for by
charging lower rates of VAT, or no VAT at all, on basic necessities such as
groceries, clothes and energy bills.

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 Administrative costs:
VAT makes the tax system more complicated, as businesses need to
keep track of how much of each products' purchase and sale price is made up
of VAT. For small businesses in particular, this need for extensive records can
prove costly. This disadvantage can be compensated for by allowing small
businesses to calculate VAT on a flat rate. For example, in the U.K.,
businesses with an annual turnover of $245,000 or less qualify for the flat rate
scheme. Instead of keeping track of VAT for all purchases and supplies, these
businesses pay the government a flat rate of between 5 percent and 14.5
percent on all taxable turnover

 Inflation:
Higher VAT rates may lead to higher rates of inflation, as the cost
of goods and services rises. Businesses may also take advantage of the
introduction or raising of VAT levels to raise prices. For example, if VAT rises
1 percent, a business might add 3 percent to the cost of its goods, on the
assumption that people will attribute all of the rise to the increase in VAT.
This also leads to higher inflation and increases in the cost of living. To
counter this, governments need to time VAT rises carefully and consider
offsetting VAT rises with reductions in income tax.

 Harder on Labor:
VAT affects small, labor-intensive businesses to a greater extent than
capital-intensive businesses. This is because small, labor-intensive businesses,
such as home repair, have a higher ratio of value added to selling price than
capital-intensive businesses, which are much larger. This can be

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 compensated for by allowing some labor-intensive businesses to charge a
lower rate of VAT. For example, the European Commission allows countries
in Europe to apply lower VAT rates to businesses such as bicycle repair, home
repair and hairdressing.

Goods and Services Tax (GST)

Goods and Services Tax (GST) is an indirect tax which was introduced in
India on 1 July 2017 and was applicable throughout India which replaced multiple
cascading taxes levied by the central and state governments. It was introduced
as The Constitution (One Hundred and First Amendment) Act 2017, following the
passage of Constitution 122nd Amendment Act Bill. The GST is governed by a GST
Council and its Chairman is the Finance Minister of India. Under GST, goods and
services are taxed at the following rates, 0%, 5%, 12% ,18% and 28%. There is a special
rate of 0.25% on rough precious and semi-precious stones and 3% on gold. In
addition, a cess of 22% or other rates on top of 28% GST applies on few items like
aerated drinks, luxury cars and tobacco products. GST was initially proposed to
replace a slew of indirect taxes with a unified tax and was therefore set to
dramatically reshape the country's 2 trillion-dollar economy. It is to be noted that
France was the first country to implement GST.

History
The reform process of India's indirect tax regime was started in 1986
by Vishwanath Pratap Singh, Finance Minister in Rajiv Gandhi’s government, with
the introduction of the Modified Value Added Tax (MODVAT).
Subsequently, Manmohan Singh, then Finance Minister under of P V Narasimha
Rao, initiated early discussions on a Value Added Tax at the state level. A single
common "Goods and Services Tax (GST)" was proposed and given a go-ahead in 1999

PAGE 11
during a meeting between then Prime Minister Vajpayee and his economic advisory
panel, which included three former RBI governors IG Patel, Bimal Jalen and C
Rangarajan. Vajpayee set up a committee headed by the then finance
minister of West Bengal, Asim Dasgupta to design a GST model.

Finance Minister Arun Jaitley introduced the GST Bill in the Lok Sabha, where the
BJP had a majority. In February 2015, Jaitley set another deadline of 1 April 2016 to
implement GST. In May 2016, the Lok Sabha passed the Constitution Amendment
Bill, paving way for GST. However, the Opposition, led by the Congress, demanded
that the GST Bill be again sent back to the Select Committee of the Rajya Sabha due
to disagreements on several statements in the Bill relating to taxation. Finally, in
August 2016, the Amendment Bill was passed. Over the next 15 to 20 days, 18 states
ratified the GST Bill and the President Pranab Mukherjee gave his assent to it.

A 21-members select committee was formed to look into the proposed GST
laws. State and Union Territory GST laws were passed by all the states and Union
Territories of India except Jammu & Kashmir, paving the way for smooth rollout of
the tax from 1 July 2017. There was to be no GST on the sale and purchase of
securities. That continues to be governed by Securities Transaction Tax (STT).

GST model in India

India adopted a dual GST model, meaning that taxation is administered by
both the Union and State Governments. Transactions made within a single state are
levied with Central GST (CGST) by the Central Government and State GST (SGST)
by the State governments. For inter-state transactions and imported goods or
services, an Integrated GST (IGST) is levied by the Central Government. GST is a
consumption-based tax, therefore, taxes are paid to the state where the goods or
services are consumed not the state in which they were produced. IGST complicates
tax collection for State Governments by disabling them from collecting the tax owed

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to them directly from the Central Government. Under the previous system, a state
would only have to deal with a single government in order to collect tax revenue

Central GST
Under GST, Central GST is a tax levied on Intra State supplies of both goods
and services by the Central Government and will be governed by the CGST Act.
SGST will also be levied on the same Intra State supply but will be governed by the
State Government.

This implies that both the Central and the State governments will agree on
combining their levies with an appropriate proportion for revenue sharing between
them. However, it is clearly mentioned in Section 8 of the GST Act that the taxes be
levied on all Intra-State supplies of goods and/or services but the rate of tax shall
not be exceeding 14%, each.

State GST
Under GST, State GST is a tax levied on Intra State supplies of both goods
and services by the State Government and will be governed by the SGST Act. As
explained above, CGST will also be levied on the same Intra State supply but will be
governed by the Central Government.

Integrated GST
Under GST, Integrated GST is a tax levied on all Inter-State supplies of
goods and/or services and will be governed by the IGST Act. IGST will be applicable
on any supply of goods and/or services in both cases of import into India and export
from India.

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Various GST Rates
A GST council has been set up to decide issues relating to GST. There’s a
fitment committee of the council comprising of tax officials of the central and state
governments which determines the methodology to decide the rates of GST. The
fitment committee decides upon GST rates in a fashion to keep these rates close to
tax incidence during the VAT, Service Tax and excise duty regime.

For example, services like Air-conditioned restaurants where both VAT and
service tax were levied are now taxed at the rate of 18%, while those on which only
12.5% VAT or 14% Service tax was levied have been brought down to 12%. The tax
rates have been decided so that their impact on inflation and government revenues
would be neutral.

Once tax rates on goods and services are decided, the fitment committee
puts up a report for consideration before the GST Council which finalizes the rates
in its meetings. Under GST, goods and services are taxed at the following rates, 0%,
5%, 12% ,18% and 28%. There is a special rate of 0.25% on rough precious and semi-
precious stones and 3% on gold. In addition, a cess of 22% or other rates on top of
28% GST applies on few items like aerated drinks, luxury cars and tobacco products.

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Table showing various GST rates and Products & Services

GST rates Products and Services

0%  Goods - Milk, Fruits, Vegetables, Bread, Salt, Curd, Natural

Honey, Bangles, Handloom, Flour, Eggs, Stamps, Printed books
and Newspapers.
 Services - All hotels and lodges who carry a tariff below Rs.
1,000 are exempted from taxes under GST.

5%  Goods - Skimmed milk powder, fish fillet, frozen vegetables,

coffee, coal, fertilizers, tea, spices, pizza bread, kerosene,
agarbatti, insulin, cashew nuts, lifeboats
 Services - Small restaurants along with transport services
like railways and airways

12 %  Goods - Frozen Meat products, Butter, Cheese, Ghee, Pickles,

Sausage, Fruit juices, Tooth powder, Umbrella, Instant food
mix, Cell phones, Sewing machine, Man-made yarn
 Services - All Non-AC hotels, Business class Air ticket

18 %  Goods - Soaps, Shampoo & Toothpaste, Yarn, Preserved

Vegetables, Tractors, Ice Cream, Sauces, Soups, Mineral water,
some Diesel Engine parts and Pump parts
 Services - All those AC hotels which serve liquor, IT and
Telecom services and financial services along with branded
garments

28 %  Goods - Deodorants, chewing gum, Sunscreen, Pan Masala,

Dishwasher, Weighing Machine, Vacuum Cleaner, Shavers,
Automobiles, Hair clippers, Motorcycles.
 Services - Tobacco products, Fireworks, Five-star hotels,
Racing and Gambling

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Previous Tax system vs GST

Previous Tax system GST system

Product sold from Mumbai Product sold from Mumbai
to Nagpur(Intra-state) to Nagpur(Intra-state)

PRICE = Rs.1000 PRICE = Rs.1000

VAT @ 10% = Rs.100 CGST @ 5% = Rs.50

IGST @ 5% = Rs.50
Total Price = Rs.1100 Total Price = Rs.1100

Product sold from Nagpur Product sold from Nagpur

to Chennai(Inter-state) to Chennai(Inter-state)
Cost = Rs.1000 Cost = Rs.1000
Profit = Rs.1000 Profit = Rs.1000
Selling Price = Rs.2100 Selling Price = Rs.2100

Central Sales Tax @ 10% = Rs.210 IGST @ 10% = Rs.110

= Rs.210 - (CGST+SGST)
Total Cost = Rs.2310 Total Cost = Rs.2210

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Advantages of GST
 Simplicity at its Best
Goods and Service Tax (GST) will replace the existing form of
indirect tax in the nation. It will prove a substitute for the 17 indirect laws
pertaining to the nation and will subsidized it with the new GST Tax. That
shall come across as a simpler term to envision.

 Boosting of Revenue
Think of it, with the new GST in the nation, there won’t be more of an
evasion as what is happening with the current tax laws. Such simpler term of
taxation will make more suppliers in a mood to pay the tax amount which in
turn marks the boost in revenue levels.

 Lesser cost of Logistics and Inventory

As the GST tax will mark the end of 17 other indirect laws, there won’t
be much of logistics and inventory costs as of now. Also, the slow movement
across the state levels of goods carrier will be stopped with the transit speed
increasing tenfold.

 Regulating the Unorganized sector

Certain industries in India like construction and textile are largely
unregulated and unorganized. GST has provisions for online compliances
and payments, and availing of input credit only when the supplier has
accepted the amount, thereby bringing accountability and regulation to
these industries
 Lesser number of compliances
Also, the current tax regime has excise VAT and service tax, each of
which have their own returns and compliances. GST will unify all these,
thereby reducing the number of returns and the time spent for tax
compliances. There are about 11 returns under GST, out of which 4 are basic
returns which apply to all taxable persons under GST. There are fears that

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 the number of returns will increase after GST. But the main GSTR-1 will be
manually populated. But GSTR-2, GSTR-3, GSTR-4 will be auto-populated.

Disadvantages of GST
 Increased cost due to Software purchase
Businesses have to either update their existing accounting or ERP
software to GST-compliant one or buy a GST software so that they can keep
their business going. But both the options lead to increased cost of software
purchase and training of employees for an efficient utilization of the new
billing software.
 Increase in Operational cost
As we have already established that GST is changing the way how tax
is paid, businesses will now have to employ tax professionals to be GST-
complaint. This will gradually increase costs for small businesses as they will
have to bear the additional cost of hiring experts.
 SMEs will have higher tax burden
Smaller businesses, especially in the manufacturing sector will face
difficulties under GST. Earlier, only businesses whose turnover exceeded
Rs.1.5 crore had to pay excise duty. But now any business whose turnover
exceeds Rs.20 lakh will have to pay GST.
However, SMEs with a turnover up to Rs.75 lakh can opt for the
composition scheme and pay only 1% tax on turnover in lieu of GST and enjoy
lesser compliances. The catch though is these businesses will then not be able
to claim any input tax credit. The decision to choose between higher taxes or
the composition scheme (and thereby no ITC) will be a tough one for many
SMEs.

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References
 https://en.wikipedia.org/wiki/Taxation_in_India

 https://en.wikipedia.org/wiki/Goods_and_Services_Tax_(India)

 https://accountlearning.blogspot.in/2012/01.html

 http://www.investopedia.com/terms/g/gst.asp

 https://bizfluent.com/info.html

 https://cleartax.in/s/benefits-of-gst

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