GST (Goods and Service Tax)

Steps Ahead
1 GST has been passed by Rajya Sabha.
2 Changes made to the bill in Rajya Sabha will have to be approved by the Lok
Sabha (either in a special session or winter session)
3 The bill needs to be ratified by a majority of the states (15/29)
4 It will be sent to the President for his assent.
5 A GST Council comprising representatives from the States and the Centre will
be setup
6 Council will help codify central GST and State GST laws which would be passed
by Parliament and State Assemblies
7 GST Network, the IT backbone of GST, to facilitate online registration, tax
payment and return filling would be introduced
8 GST network will create an online portal. The portal will begin migrating data
on existing taxpayers under the current VAT/ excise/ Service Tax regimes.
9 All business will be given a GST identification no. a 15-digit code comprising
their states code and 10 character PAN
Government is already enabling "master trainers" who would train accountants,
lawyers and tax officers on the new system.
Detail
Assume there is a soap manufacturer
that procures raw materials at 500 lakhs
per batch. The manufacturer keeps his
operating profits at 100 lakhs and
encumbers a processing cost of 50 lakhs.
The flow would look something like this:
If we calculate the total tax that the
producer has to pay in this case, it would
be 120 lakhs(50 lakhs on procurement
and 70 lakhs on sales).
Now if you have a GST framework in place, the total tax that the producer pays
is 70 lakhs. How?
The producer had initially paid an input tax of 50 lakhs. Now when he goes on to sell
his batch for 700 lakhs, he gets a tax credit of 50 lakhs. Thus, he pays 20 lakhs in
the form of taxes for the final transaction. This adds up to just 70 lakhs for the
producer.

The tax paid on sale within state can be claim against tax paid on sale
outside state in GST system, which is not in present tax system.

The credit of CGST cannot be taken against SGST and credit of SGST cannot
be taken against CGST but both credits can be taken against IGST.
The final 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 main reason to implement GST is to abolish the cascading effect on tax. A
product on which excise duty is paid can also be liable for VAT. Suppose a product A
is manufactured in a factory. As soon as it releases from factory, excise duty has to
be paid to central government. When that product A is sold in same state then VAT
has to be paid to state government. Also no credit on excise duty paid can be taken
against output VAT. This is termed as cascading effect since double tax is levied on
same product.
Parliament and state legislatures will have concurrent powers to make laws on GST.
It will have two component
Central GST - levied
by the Centre

State GST - levied

by the State

Integrated GST - Can be

levied only by the Centre

The tax collect would be divided between the Centre and the State in a manner to
be provided by the Parliament on the recommendation of the GST council.
1.
2.
3.
4.

Functions of GST Council :

Recommend rates of
tax
Period of levy of
additional tax
Principles of supply
Special provisions to
certain states etc.

Members of GST
Council :
1.
Union Finance
Minister - Chairman
2.
Union Minister of
State of Finance
3.
State Finance
Ministers

GST will subsume all indirect taxes currently levied except custom duty.
Central Indirect

Taxes Imposed by States

Taxes
1.

Central
Excise duty
2.
Additional
Excise duty
3.
Additional
Custom Duty
(Countervailing duty
CVD)
4.
Service tax

1.

Value Added Tax

(VAT) / Sales Tax
2.
Octroi and entry
tax
3.
luxury tax
4.
State Cess /
Surcharge
5.
Purchase Tax
6.
Entertainment Tax

The final consumer will bear only the GST charged by the last dealer in the supply
chain, with set-off benefits at all the previous stages. It will be levied on
consumption rather than production. Only potable alcohol is proposed to be
excluded from the GSTs ambit and petroleum products are set to be pegged at a
0% rate till such time as the proposed GST Council reaches an agreement with the
States and the Centre on an acceptable framework for taxation.
It seeks to address challenges with the current indirect tax regime by
broadening Eliminating
the tax
cascading of
base
taxes

Increasing Reducing economic distortions

complianc caused by inter-state variations in
e
taxes.

Who will pocket taxes?

Intra State Seller collects both CGST & SGST from the buyer
Transaction CGST - deposited with Central Govt.
s
SGST - deposited with State Govt.
Inter State Integrated Goods and Service Tax (IGST) shall be levied on
Transaction Inter State transactions of goods and services which are
s
based on destination principle. Tax gets transferred to state
where supply originates.

Then

Now

Capping of GST rate

GST rate would not be capped and

would be introduced in the form of
finance bill which would require a
simple majority to amend it.

An additional tax of 1% on supply

of goods was to be levied by the
Centre on inter-State trade or
commerce

This provision is deleted

GST council may decide upon

modalities to resolve disputes

GST council shall establish a

mechanism to adjudicate any disputes

Parliament may, by law, provide

for compensation to States for

Parliament shall, by law, provide for

compensation to States for any loss.

any loss of revenues up to 5

years.
The additional 1% tax levied on goods that are transported across states dilutes the
objective of creating a harmonised national market for goods and services. Interstate trade of a good would be more expensive than intra-state trade, with the
burden being borne by retail consumers. Further, cascading of taxes will continue.
The Cabinet removed from the Bill the contentious provision for a 1% additional tax
levy by manufacturing States and introduced a guarantee of 100% compensation to
States for five years to make good any revenue loss incurred by them due to the
introduction of the Goods and Services Tax.
Advantages
1 It will lead to a uniform, seamless market across the country and will facilitate
"Make in India" by making India one common market.
2 GST will increase the resources available for poverty alleviation and
development. This will happen indirectly as the tax base(total amount of assets
or revenue that a government can tax) becomes more buoyant and as the
overall resources of the Central and State governments increase.
3 It will eliminate multiple taxes on firms, help ease of doing business.
4 It will be a uniform rate, will check evasion, and boost growth rates.
5 It will reduce logistics costs for firms due to elimination of inter-state taxes
6 Capital goods prices could fall by 12-14% boosting GDP growth by 0.5%.
7 It will reduce black money because need for the financial documentation will
increase. In fact, a significant part of the black economy will enter the tax-paid
economy.
8 It will facilitate more streamlined supply chain management.
9 It will make our producers more competitive against the imports.
10 National GDP growth can go up by 1% point on sustained basis.
11 The structure of claiming input tax credit is linked to having proof of taxes paid
at an earlier stage in the value chain, this creates interlocking incentives for
compliance between vendor and customer. No more questions from a vendor:
Would you like that with receipt or without receipt? Because of this inherent
incentive, the total taxes paid, and hence collected, may go up significantly.
This provides buoyancy to the GST.
12 The extensive nature of countervailing duty exemptions that favours imports
over domestic production in the present system will be replaced by negative
protection favouring imports and favouring domestic manufacturing.
13 Dual monitoring structure of the GST by States and Centre.
(Critics and taxpayers have viewed the dual structure with some anxiety,
fearing two sources of interface with the tax department and hence two
potential sources of harassment. But dual monitoring should also be viewed as
creating desirable tax competition and cooperation between State and Central
authorities. Even if one set of tax authorities overlooks and/or fails to detect
evasion, there is the possibility that the other overseeing authority may not.)
1 It is a long term strategy leading to a higher output, more employment
opportunities, and economic boom.

The advantages with the GST depend on a change in perception of the stakeholders
on two fronts: one, the GST needs to emerge as a regime which is easier to comply
with when compared to the other regimes in existence at present. Two, the
administration should be perceived as being more vigilant so that evasion becomes
more difficult in the GST that in the present regime.
For the GST regime to be successful, it is important to not only reduce the costs of
compliance within the system but also to make more effective the costs associated
with evasion so as to induce a behavioral shift.
Disadvantage
1 GST is an indirect tax. By their very nature, indirect taxes are regressive
because they affect the poor more than the rich. Indias ratio of indirect to
direct tax collection is 65:35, which is exactly the opposite of the norm in most
developed countries. Indias ratio of direct tax to GDP is one of the lowest in
the world, and it badly needs to expand the direct tax net. Only 4 per cent of
India pays income tax, but practically all Indians pay indirect taxes in one form
or the other. Direct tax rates have been falling, and indirect tax rates rising. For
instance, service tax (an indirect tax) used to be 5% in the 1990s and is now
more than 15%. The Swachh Bharat cess, or frequent increase in excise duty
on petrol and diesel are all recent examples of regressive indirect tax. Unless a
rate cap is adopted, the GST rate could easily drift higher, further hurting
Indias income inequality. To meet their fiscal needs, it is always tempting for
governments to tweak indirect taxes higher, since the work of expanding the
direct tax net is so much harder. This temptation must be curbed with a rate
cap
2 Tax litigation. Approximately Rs.1.5 lakh crore is stuck in litigation related to
Central excise and service taxes. On the other hand the State-level VAT is
administered in a way that empowers tax officials to dispose of cases quickly.
Disputes involving Central taxes go through an appeal and tribunal process,
and can drag on for years. But empowered staff under the Sales Tax
Commissioner can dispose of valid grievances of State-level VAT payers much
faster. This difference is called the review versus revise approach to tax
disputes. It is important that the GST approach leans towards the more
efficient State-level model.
3 Governance within the GST Council. It is a de facto council of States, along with
representatives from the Union Finance Ministry. It seems that one State will
get one vote, irrespective of its size. This seems unfair. An economically larger
State, contributing a bigger chunk of the GST pie, should have a greater say.
Similarly, the special needs of smaller States should also be heeded.
4 State's Autonomy - India will be a unique large democracy that adopts a
nationwide GST, with virtually no taxing powers to the States. In the United
States, the States have power to impose sales and income taxes. Within the
European Union (EU), each member country retains fiscal autonomy, and also
the freedom to breach the fiscal deficit of 3 per cent of GDP. Indeed virtually all
members of the EU have breached that limit. In India, what if a State wants to
undertake a special spending programme to respond to a State-specific
situation, such as a
disaster?
Ex. In 1982, the Chief Minister of Tamil Nadu upgraded a midday meal scheme
which his opponents criticised as being an empty promise and fiscally reckless.

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2
3

4
5
6

In response he raised taxes on goods (not possible in a GST regime), and made
the programme so successful that it is praised to this day, not just in India but
also around the world. It achieved the double objective of better nutrition for
children and better school attendance.
Similarly in the drought crisis year of 1972, the Maharashtra government
imposed a profession tax on city dwellers (not possible under the GST) to fund
an innovative programme
called the rural Employment Guarantee Scheme (EGS), which three decades
later was acknowledged nationally as the inspiration behind the National Rural
Employment Guarantee Act.
The central excise is payable up to the stage of Manufacturing but now GST is
payable up to the stage of sale.
Majority of dealers are not covered with the central excise but are only paying
VAT in the state. Now all the Vat dealers will be required to pay Central Goods
and service tax.
The calculation of RNR (Revenue Neutral Rate) is very difficult and further
Govt. wants to enhance its revenue hence rate of Tax will be a problem. As per
the News reports the proposed rate for State GST is 12% and Central GST is
14% Plus Govt. wants to impose 1% CST at the initial stage of GST on the
interstate sale of Goods and services. So the normal rate of overall tax will be
26%. This rate is very high comparing to the fact that small and medium
Industries are at present not covered by the central excise and most of the
Goods such as agricultural products are out of the preview of the Central
Excise.
VAT regime also began with a pledge of uniformity but devolved overtime as
each state formulated different tax events, rates and exemption.
The voting pattern within the GST council , with centre's vote carrying 1/3
weighable of the total vote cast and a state vote a collective of 2/3 weightage.
Each state irrespective of the size, representation and GDP contribution will
command an equal vote(This structure militates against the basic structure of
representative form of democracy)

Potential Implementation Problems:

1 Uniform GST rate? GST if set at 18%
It will be lower than the current
24-26% tax on goods

But it will be higher than the current

15% effective tax on services

CPI inflation will go up by 20-70 bps in the year of implementation due to costlier
services. Because service sector make up of 60% of our GDP. Higher taxes will hit
service sector which will hurt our growth.
Global experience of the transition to a GST regime suggests that the first 1 or 2
years see a negative impact of higher inflation and a temporary dip in growth before
the economic fruits of a common national market kick in. The impact of this will take
another two years to show on the ground, but the country should not lose patience.
When the VAT regime was implemented, for two years, the States incurred heavy
losses, after that, every year, most States have seen a 15-20 per cent growth in
revenue. The impact of GST will also unspool similarly.
1 Amendment to the GST departs from the consensus arrived at the Empowered
Committee of State Finance Ministers, much to the detriment of the interest of
the state. Amendment deprives States of the share of IGST revenue of

unclaimed B2C(Business to Consumer) and B2G(Business to Government)

transactions.
Tasks Ahead
Setting of a proposed revenue-neutral standard rate - which could have a far
reaching cost and price implications for producers as well as consumers. These
would also have revenue ramification for the government.
The empowered committee of finance ministers uses a concept called Revenue
Neutral Rate or RNR. The RNR is that uniform rate which when applied will leave all
States with the same revenue as before. So no State should lose out by signing up
to the GST. But this approach is faulty, since unless
we try it for a year (or more) we wont be able to gauge the buoyancy of the GST. In
trying to assuage the fears of States, the calculation of the RNR has been loaded by
every possible existing tax (like entry tax, octroi, etc.). This has caused the RNR to
steadily escalate upward. At one point, the National Institute of Public Finance and
Policy mentioned 26%. The higher the RNR (and hence GST rate), the more is its
inflationary impact. A better approach is to keep the GST rate low initially, and
promise to fully reimburse losing States by the end of the year. Everyone may be in
for a pleasant surprise by GST buoyancy. But this tax buoyancy will stop working
beyond a certain threshold(like say 18 or 20%). The focus on the RNR is selfdefeating.
A high rate of tax is not considered desirable for voluntary self-compliance.
Cooperative Federalism
The adoption of the GST is an iconic example of cooperative federalism. It
represents a national consensus, an outcome of a grand bargain struck together by
29 States and 7 Union Territories with the Central government. The States agreed to
give up their right to impose sales tax on goods (VAT), and the Centre gave up its
right to impose excise and services tax. In exchange they will each get a share of
the unified GST collected nationally.
Recommendations by the Committee head by Economic Advisor Arvind
Subramanian
1 It want a dual rate structure: 17-18% Standard GST rate and a 12% low rate
goods
2 Dropping of the 1% additional tax on inter-state sales
3 Opposes inclusion of GST rate in the Constitution
4 Wants a range for revenue-neutral rate (RNR) of 15-15.5% for the proposed
Goods and Services Tax (GST)
5 40% for demerit goods like luxury car, aerated beverages, pan masala and
tobacco. For precious metal, it recommended a range of 2-6%.
6 Would determine how the standard rate would be divided between the
Centre and states. Ex. it said that a standard rate of 17% would lead to rates
at the Centre and states of 8% and 9% respectively.
7 It has excluded real estate, electricity, alcohol and petroleum products while
calculating the tax rate as some states have expressed reservations against
giving up tax control on the lucrative items. But CEA panel has suggested that
these would be brought under the GST ambit soon.