GST Answers to Some Basic Questions

August 2017
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Copyright @2017 Centre for Budget and Governance Accountability (CBGA)

Author
Malini Chakravarty

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 Contents
Introduction page 2

Question 1. What is GST? page 3

Question 2. How is GST different from page 7

the previous indirect tax system?

Question 3. Why did India adopt a model page 10

with dual GST?

Question 4. What are the reasons for having multiple page 12

tax rates? What are the possible
advantages and disadvantages of having
multiple tax rates?

Question 5. Why have some goods/services been kept page 14

outside the ambit of GST and what could be
the repercussions?

Question 6. What are the possible impacts of page 16

GST on different stakeholders?
Introduction
The Goods and Services Tax (GST), one of the
most ambitious tax reforms to have been
initiated in India, is now a reality and it is
important that its different aspects are
understood properly. While many of its
implications will be known with the passage of
time, we present answers to some basic
questions that many may have.

2
Q
1
What is GST?

You, I and everyone pay taxes when we purchase some goods

and services. Some of us also pay income taxes when we earn
above a certain threshold. The latter is known as direct taxes
since we cannot shift the burden of the tax to another person
or entity. The former is known as indirect taxes since the
burden of taxes can be shifted, say, from businesses to the
final consumer.

Until now we had a number of indirect taxes that were levied

on various goods and services, beginning from the stage of
production to final sale. So for example, there were taxes for
manufacturing of goods (Central Excise Duty), on sale of
goods (Sales Tax), on services provided by service providers
(Service Tax), and so on.

The Goods and Services Tax (GST) subsumes almost all such
indirect taxes (except for some taxes levied by municipalities
and gram panchayats) and replaces them by one indirect tax:
the GST.

3
 What is GST?

TAXES SUBSUMED UNDER GST

Central Taxes State Taxes

1. Central Excise Duty 1. State VAT/ Sales tax
2. Additional Excise Duties 2. Central Sales Tax
3. Excise Duty levied under the 3. Entertainment tax (other
Medicinal and Toiletries than those levied by local
Preparation Act bodies, such as
municipalities)
4. Service Tax
4. Purchase Tax
5. Additional Customs Duty,
commonly known as 5. Luxury Tax
Countervailing Duty (CVD)
6. Taxes on lottery, betting and
6. Special Additional Duty of gambling
Customs
7. Taxes on Advertisements
7. Surcharges and cesses (In
8. Entry Tax (All forms)
India, cess is applied on a
specific commodity or service 9. State Cess and Surcharges
and is imposed as an addition (to the extent these taxes
to an existing tax. The revenue relate to supply of goods
that is raised from it is also and services).
meant to meet certain
specified objectives, such as
Swachh Bharat cess.
Surcharge is an additional
charge levied on any tax, but
revenue from surcharge can be
spent for any purposes).

4
 What is GST?

GST will be levied on the value added (explained below) at different stages through
which a product passes until it reaches its final destination – the consumer. Since
the final tax is to be paid by the end consumer and collected at the destination, GST is
a destination-based tax on consumption.

GST, though a single tax, comprises two components: a central GST (CGST) and a
State GST (SGST), for transactions taking place within a State. Likewise, for
transactions within a Union Territory (UT) without legislation, GST comprises the
CGST and a Union Territory GST (UGST). For inter-State supply of goods and
services, the Integrated GST (IGST) will be levied and the revenue generated would
be collected by the Centre.

GST and its Components

Intra-State Transactions Inter-State Transactions

Central GST State GST Integrated GST

(CGST) (SGST) (IGST)

This means that of, say, a 12 percent GST, 6 percent goes to the Centre and the other
6 percent goes to the State (or the Union Territory).

6%
CGST
12%
GST 6%
SGST/UGST

5
 What is GST?

Salient features of the GST model adopted in India

± The Goods and Services Tax Council, of which the Union finance minister and the
finance ministers of all States are members, decides the rules, the rates, threshold
limit, etc.
± GST is to be levied on all goods and services, except for goods and services that are
exempt; alcoholic liquor for human consumption, real estate, electricity that do not fall
within the ambit of the GST; and the transactions which are below the prescribed
threshold limit
± Petroleum and petroleum products are outside the purview of GST for the time being
but shall be subject to the levy of GST at a later date notified on the recommendation of
the Goods and Services Tax Council
± Manufacturers, traders or service providers whose annual turnover is less than Rs. 20
lakh (Rs. 10 lakh in the case of northeastern and special category states) need not
register for GST
± Traders who carry out inter-State transactions will have to register for GST even if their
annual turnover is below Rs. 20 lakh
± Manufacturers, traders and restaurants whose aggregate turnover in the preceding
financial year did not cross Rs. 75 lakh (Rs. 50 Lakh in some States) can opt for the
Composition scheme. Under the Composition scheme eligible entities need not pay tax
at normal rate but can pay at a prescribed percentage of her/his turnover every quarter.
The tax rates under this scheme are as follows: for traders - 1% of the turnover; for
manufacturers - 2% of the turnover; and for restaurants - 5% of the turnover
± Imports will continue to attract Customs Duty, which is not subsumed in GST. Imports
will also attract IGST, as they are being treated at par with inter-state movement of
goods and services
± Exports are zero rated, which means no tax will be levied on them
± The administration of the Central GST would be with the Centre and that for State GST
with the States
± The Central GST and State GST are to be deposited into the accounts of the Centre and
the States separately
± Those depositing the tax would need to submit periodical returns to the concerned GST
authorities
± Compensation will be provided to the States for a period of first five years if there is any
loss of revenue compared to the pre-GST period, arising on account of implementation
of the Goods and Services Tax

6
Q 2
How is GST different from the
previous indirect tax system?

Simplifies the indirect tax system

With regard to the system of indirect taxes, before the passage of the GST Bill, the
Constitution of India clearly demarcated the taxation powers of the government at
different levels– the Centre, States and Local Bodies. Thus, the Centre had the power
to levy taxes on manufacture of goods (except alcoholic liquor for human
consumption, opium, narcotics etc.), imports and services, but not on sale of goods.
The States on the other hand had the right to levy taxes on sale of goods but not on
services or imports. For inter-state movement of goods there was Central Sales Tax,
which was levied by the Centre but the revenue was collected by the State from where
the goods were being supplied. In addition to these there were a number of other
taxes that were levied. The tax rates also varied from state to state.

This division of taxes had given rise to a complex maze of taxes. The complexity of
taxes, in turn, made tax compliance harder for tax payers as well as provided
opportunities for tax evasion.

GST, by bringing almost all Centre and State level taxes and levies on various goods
and services, under one umbrella, into a single tax, has the potential to make the
taxation system simpler. So, instead of different kinds of taxes levied depending on
whether a good is at the stage of manufacture or distribution, now only GST will be
levied at all stages.

7
 How is GST different from the
previous indirect tax system?

Reduces ‘cascading effect of taxes’

The large number of taxes also meant that a product
was taxed several times beginning from the stage of
production to the final sale of the good. So, taking
the example of a bar of soap, first Central Excise
Duty was levied at the factory gate, then sales tax
levied when the bar of soap moved from
manufactures to wholesalers, then again State VAT
and some other taxes when it reached the retail
shop. Thus, at every stage of the supply chain, some
tax or the other was levied, leading to “cascading” of Value added is the
taxes, i.e. tax levied on the price of a product include difference between the
the taxes paid in earlier stages. The cascading of sale price of a firm's
taxes in turn added to the cost of products. product and the cost of
raw materials consumed
To reduce the problem of cascading of taxes, the in production.
Value Added Tax (VAT) was introduced both at the
Or, price of finished
level of the Centre and States at different points of
product (100) - cost of
time. The idea behind the VAT is that it is a tax levied
raw material (50) = Value
only on the 'value added' at each of stage of a supply
added (50).
chain with the provision to set-off taxes paid on
inputs.

To ensure that only the value added at each stage of

the supply chain is taxed, the mechanism of Input
Tax Credits (ITC) was brought in, by which taxes
already paid on inputs could be deducted from the
taxes to be paid on the price of the output.

However, a major problem with VAT was that the

provision of setting-off taxes was not available
across the entire supply chain. Thus, for example,
sellers could claim ITC only against State VAT paid

8
 How is GST different from the
previous indirect tax system?

on previous purchases, but not against Central

Excise Duty or Service Tax already embedded in The cost of inputs or raw
the product. This meant that Central VAT materials used in the
(CENVAT) on certain commodities remained process of production/
included in the value of goods taxed under State supply includes the taxes
paid by the supplier of the
VAT. Because the same set of goods was being
raw material. The system
taxed repeatedly – once by the Centre and then
of Input Tax Credit (ITC)
by the State - it did not fully remove the
ensures that taxes already
cascading burden of taxes.
paid on inputs can be
GST is also a tax like the VAT, with the difference deducted from the taxes
that under GST the mechanism of ITC will be to be paid on the price of
available at every stage of the supply chain the output. In short, the
beginning from production to final retail sales of ITC means that when
both goods and services. Thus, unlike earlier paying tax on the output,
the supplier can subtract
whereby ITC for Central VAT was not allowed
or set-off the taxes
against State VAT, GST removes such
already paid on inputs.
restrictions and allows for seamless flow of ITC
across the entire value chain. GST, therefore,
with its system of comprehensive and
continuous mechanism of tax credits can
significantly reduce the problem of 'cascading'
of taxes”.

9
Q
3
Why did India adopt
a model with dual GST?

The Constitution of India provides for fiscal federalism

in keeping with the quasi-federal nature of the country.
In accordance with the spirit of fiscal federalism, both
the Centre and the States have been assigned the
powers to levy and collect taxes through appropriate
legislation. Both the levels of Government have
distinct responsibilities to perform, for which they
need to raise resources. As is known, States in any
case face paucity of resources and need to depend on
transfers from the Centre to perform responsibilities
according to the division of powers prescribed in the
Constitution. Adopting a model with a single GST,
instead of a dual GST, would have meant that all taxes
would have been collected by the Centre and then
distributed among the States. This would have
increased centralisation of taxes and would not have
been acceptable both on the grounds of the
Constitutional provision and on revenue
considerations. Hence, a dual GST is according to the
Constitutional requirement of fiscal federalism.

10
 Why did India adopt
a model with dual GST?

The GST can in fact impact fiscal federal relations in the country in different ways.
One view is that the GST brings about a fundamental reordering of fiscal federal
relations of India to one of cooperative federalism. On one hand both the Centre and
the States have had to give up their exclusive domain of taxation. On the other hand,
both have gained access to some taxes that they did not have earlier. Also, the
structure of the GST Council is such that States, which have a two-thirds vote share
in the Council, are critical partners in decision making. While the Centre has the veto
power with one-third vote share, it would still need the support of a number of States
to reach a three-fourths majority needed for passing through a decision. So,
Constitutionally, the Centre and the States are evenly matched as one cannot take
any decision without the support of the other.

The other view is that GST, in particular the feature of having a uniform tax rate
across the whole country, reduces the autonomy of the States to tax as they like in
order to meet the specific revenue needs of their States, without prior approval of the
GST Council. Given this background, a dual GST seems to have been adopted to
protect federalism and ensure that tax administration and collection stays with the
States as well as with the Centre.

11
Q 4
What are the reasons
for having multiple tax rates?
What are the possible advantages
and disadvantages of having
multiple tax rates?

According to some experts, an 'ideal' GST has only one or two rates, apart from a zero
rate, and very few exemptions. A number of developed countries have a single GST
rate. India has, however, adopted a GST model with multiple tax rates for different
categories of goods and services.

There are five broad GST slabs/rates that are to be levied on different categories of
goods and services. These are:

0%
(the exempted category)
5% 12% 18% 28%

In addition to these there are two more tax rates of:

± 0.25%on unworked diamonds, precious and semi-precious stones; and

± 3% on gold, silver, coin, etc.

Further, cesses are to be levied over and above the peak rate on certain goods such
as tobacco and related products, aerated beverages, luxury cars etc.

12
 What are the reasons for having multiple tax rates?
What are the possible advantages and disadvantages of having multiple tax rates?

A GST model with multiple rates was decided upon to ensure that the transition to
GST does not:

± Result in large decline in revenue collections from the current levels;

± Or, lead to high levels of inflation.

If, for instance, only one or two high tax rates were chosen for all goods, it could have
led to a large number of mass consumption goods being taxed at higher rates than at
present, pushing up prices. Also, since GST is an indirect tax, it would have adversely
affected the poor most. Having a low single rate or few low rates too would have been
problematic as it could have led to a significant decline in revenues.

The advantages of having multiple rates are that:

± It helps to maintain revenue collections.
± It can help keep a check on prices of goods and services.

The disadvantages of having multiple rates are that:

± The tax system becomes more complicated, diluting the objective of GST to
simplify taxation, at least to some extent.
± It also opens up the possibility of classification disputes among various goods
and services as well as leave scope for tax evasion.

13
Q
5
Why have some goods/services
been kept outside the ambit of GST and
what could be the repercussions?

As mentioned earlier, a number of crucial goods/services have

been kept out of the ambit of GST. While alcohol for human
consumption, electricity, real estate will remain out of GST,
petroleum products are out of GST temporarily and the GST
Council will decide when to bring it under GST. Until then, all these
will continue to be covered by Central Excise Duty and VAT.

Reasons for not including in GST:

One of the main reasons for keeping these goods/services out of
GST is that tax collected from these forms anywhere between 40%
- 50% of the total tax revenue earned by various States. Since it is
not clear how GST will impact State revenue, these have been left
out of the ambit of GST so that States and the Centre have the
leeway to raise additional resources through these.

14
 Why have some goods/services
been kept outside the ambit of GST and
what could be the repercussions?

Possible repercussions:

Keeping these out of the GST, however, can dilute several purported benefits of GST

± For instance, petroleum products are what is known as “universal

intermediaries”, as they affect costs of all goods and services either because
these need to be transported or because petroleum products come in as direct
inputs. Therefore, if taxes on these are increased in order to raise revenue, it can
lead to an increase in prices of all other goods and services.

± Both alcohol and real estate are known generators of black money. So keeping
them out of the purview of GST means that the possibility of reducing
suspicious transactions will be that much less.

15
Q
6
What are the possible impacts
of GST on different stakeholders?

How GST will affect various stakeholders such as the government

(including State governments), businesses and consumers is difficult
to foresee clearly at this point of time and hence we discuss some of
the possible impacts.

Government
For the government, one of the main issues is how the adoption of GST
would impact tax revenue.

At the overall level, it is expected that revenue collection will go up

with the implementation of GST. This is because GST is expected to
improve compliance as each transaction will have to be uploaded
online to avail the benefit of ITC. The chain of tax credits in turn would
make it difficult to conceal all transactions. Also, it is believed that
businesses/dealers/retailers will have fewer incentives to evade taxes
as they know that they can offset the tax paid at one stage in the next
stage. This should then help bring more number of people/enterprises
in the tax net, including those that were not paying taxes earlier. The
combination of improved compliance and a larger number of
people/enterprises paying taxes is expected to improve revenues.

16
 What are the possible impacts
of GST on different stakeholders?

For the Central government, doing away with specific cesses such as the Swachh
Bharat cess, Krishi Kalyan cess (a major chunk of which is imposed and collected
from services), could result in a significant loss of revenue from these sources. At the
same time, it will now get access to a part of the indirect tax revenue generated by
States.

For State governments the impact of GST on revenue may depend on their level of
economic prosperity

Given that GST is a destination-based consumption tax, the revenue earned on

supply of goods and services goes to the State where the final sale happens. As a
result, there are apprehensions that producing States from where goods and
services originate could lose revenue. This is particularly so because of the
withdrawal of the Central Sales Tax (CST) on inter-state movement of goods which
that the producing States collected and kept. So, unlike earlier, whereby
Maharashtra would earn the tax revenue for goods produced in Maharashtra, under
the GST regime Bihar will earn the tax revenue if the final consumption takes place in
Bihar.

It is, however, not clear, how much the States such as Bihar, Uttar Pradesh, that are
net consumers (that is they import goods and services from other states more than
they export) stand to gain. This is owing to the fact that producing States are also
more prosperous because of more economic activity and generally have higher
levels of consumption as well. By the same logic, poorer States with lower
purchasing power are likely to have lower levels of consumption; hence the gain in
tax revenue may not be much.

At the same time, the producing States will now also get to tax services, which they
could not earlier. Since consumption of services increases with purchasing power,
the better-off States may gain more than poorer States.

17
 What are the possible impacts
of GST on different stakeholders?

Businesses

It is expected that GST will increase compliance and a number of businesses, which
earlier did not have to pay taxes, will now come under the tax net. Other than this, the
impact of GST may be very different for big business houses on the one hand and
small and marginal enterprises on the other.

For big businesses, the move to a uniform tax rate can help:

± Make the supply chain more efficient;

± Reduce transportation time and hence costs for inter-state movement of goods
and services; and

± Reduce overall costs of business because of reduction of cascading of taxes.

For other small businesses (many of which are in the informal sector), the GST
provides the benefit of not having to pay taxes under GST if their annual turnover is
less than Rs. 20 lakh (Rs. 10 lakh in the case of northeastern and special category
states). This is to help small businesses avoid the challenges of having to file regular
returns, maintain invoices and others documents. There is still possibility of small
businesses facing some other challenges:

± Small firms (those below the threshold) may be pushed to register under GST by
their clients. This is because clients of small firms will not be able to get ITC for
things supplied by firms which do not register themselves in the GST Network.

± But conforming to the compliance requirements under GST – paying the

required taxes, hiring people to file returns periodically, the need to use
information technology, etc. – can increase their costs and even make many of
them unviable.

18
 What are the possible impacts
of GST on different stakeholders?

Consumers

The impact of GST on consumers will depend significantly on:

± How tax rates differ from the present rates

For consumers GST may be a mixed bag in terms of the impact it has on prices of
goods. A number of basic consumption goods such as unbranded food products, like
food grains, pulses, fruits, vegetable, etc. along with education and health care
services, have been kept in the zero tax bracket with other items being placed at tax
rates of 5 per cent, 12 per cent and 18 per cent and 28 per cent. Thus, taxes may be
lower for some goods and for some others it might go up.

When it comes to services, which form a large chunk of GDP, since tax on several
services is set to rise their prices may also go up.

± Whether reduction in costs are passed on to the consumers

There is evidence from the days of VAT that decline in costs arising out of ITC are not
necessarily passed on to the consumers in the form of lower prices. To counter this
problem, the GST Bill has introduced the Anti-profiteering clause, to ensure that
gains made by manufacturers— either because of a lower tax rate or higher input tax
credits, or both— are passed on to the consumers. It remains to be seen how this
clause is implemented and what impact it has on prices.

± Whether costs/prices of products left out of the ambit of GST increase

Another aspect to be taken into account is the price implication of keeping several
petroleum products (which act as universal intermediates), electricity, out of the
purview of GST. For example, in the case of the final output of petroleum products
which are out of the GST, the amount of GST that petroleum companies will pay on
their inputs (such as hiring of rigs and purchase of equipment and services for crude
oil production and refining) cannot be offset against the tax levied on the final
products. Any increase in cost of these industries will be passed on to the consumers
and hence can pose an inflationary threat.

19
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