Synopsis

One of the most widely debated issues in Indian Public Finances in current
times is undoubtedly the proposed Goods and Services Tax (GST). Perceived
as the ‘biggest tax overhaul since independence’ GST promises to fuel overall
economic growth and increase tax revenue of the government to a great
extent by removing all the impediments that the financial system had been
hitherto subject to. This short note starts off by providing a somewhat
candid analysis of the present system of VAT which has been in effect since
2005 and then goes to explore certain critical issues related to GST, its
prospects and problems and how it can usher in a new era of government
finances of the country.

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 ABSTRACT

This paper is an analysis of what the impact of GST (Goods and Services Tax)
will be on Indian Tax Scenario. Here stated with a brief description of the
historical scenario of Indian taxation and its tax structure. Then the need
arose for the change in tax structure from traditional to GST model. GST has
be detailed discuss in this paper as the background, silent features and the
impact of GST in the present tax scenario in India. The Goods and Services
Tax (GST) is a value added tax to be implemented in India, the decision on
which is pending. GST is the only indirect tax that directly affects all sectors
and sections of our economy. Ignorance of law is no excuse but is liable to
panel provisions, hence why not start learning GST and avoid the cost of
ignorance. Therefore, we all need to learn it whether willingly or as
compulsion. The goods and services tax (GST) is aimed at creating a single,
unified market that will benefit both corporate and the economy. The changed
indirect tax system GST-Goods and service tax is planned to execute in India.
Several countries implemented this tax system followed by France, the first
country introduced GST. Goods and service tax is a new story of VAT which
gives a widespread setoff for input tax credit and subsuming many indirect
taxes from state and national level. The GST Implementation is not yet
declared by government and the drafting of GST law is still under process and
a clear picture will be available only after announcement of Implementation.
India is a centralized democratic and therefore the GST will be implemented
parallel by the central and state governments as CGST and SGST
respectively. The objective will be to maintain a commonality between the
basic structure and design of the CGST, SGST and SGST between states .In
this article, I have started with the introduction, in general of GST and have
tried to highlight the objectives the proposed GST is trying to achieve.
Thereafter, I have discussed the possible challenges and threats; and then,
opportunities that GST brings before us to strengthen our free market
economy.

Keywords: Indirect Taxes, Federal Tax Structure, Goods and Service Tax
(GST).

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 INTRODUCTION

“All [state] activities depend first on the Treasury.

Therefore, a King shall devote his best attention to it.”

Kautiliya: The Arthashastra [2. 8. 1, 2]

Optimization of equity and efficiency in the system of taxation is a pre-

requisite of social and financial growth. Models of taxation should aim, on
one hand, at preventing adverse effects of taxes and on the other hand,
enhancing the rate of growth of tax revenue by promoting natural
compliance and making taxation system broad based. India as world’s one
of the biggest democratic country follow the federal tax system for levy and
collection of various taxes. Different types of indirect taxes are levied and
collected at different point in the supply chain. The centre and the states are
empowered to levy respective taxes as per the Constitution of India. The
Value Added Tax (VAT) when introduced was considered to be a major
improvement over the pre-existing Central excise duty at the national level
and the sales tax system at the State level. Now the Goods and Services Tax
(GST) will be a further significant breakthrough - the next logical step -
towards a comprehensive indirect tax reform in the country. Understanding
the need, an announcement was made by Shri P. Chidambaram, the then
Union Finance Minister in the Central Budget (2007-2008) to the effect that
GST would be introduced from April 1, 2010 and that the Empowered
Committee of State Finance Ministers, on his request, would work with the
Central Government to prepare a road map for introduction of GST in India.

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 OBJECTIVES

 To understand the concept of GST.

 To the evolution of GST in India.
 To study the Modus Operandi of tax collection in GST regime.

Considering the above objectives the scope of the study is extended only for
implementation of GST levy and collection and it’s impact on Revenue of the
Government both at Central and State level.

RESEARCH METHODOLOGY

The research is an exploratory research and the data collection is done

mainly form the secondary data sources such as statistical data available on
the official web site of Finance Ministry of India, the books published on
GST and various contemporary news articles, journals and papers. The data
so collected is used for understanding the present tax structure and for
calculating the tax structure in the GST regime along with credit provisions.

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 CHAPTER 1: HISTORY OF GST

1.1 What is Tax?

The word tax is derived from the Latin word ‘taxare’ meaning to
estimate. 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, impost, duty, custom, excise, subsidy, aid, supply, or
other name.”1 The first known system of taxation was in Ancient
Egypt around 3000 BC - 2800 BC in the first dynasty of the Old
Kingdom. Records from that time show that the pharaoh would
conduct a biennial tour of the kingdom, collecting tax revenues from
the people. Other records are granary receipts on limestone flakes and
papyrus. Early taxation is also described in the Bible.It finds its
references in many ancient books like 'Manu Smriti' and 'Arthasastra'.
The Islamic rulers imposed jizya.2
It was later on abolished by Akbar. However, Aurangzeb, the
last prominent Mughal Emperor, levied jizya on his mostly Hindu
subjects in 1679. Reasons for this are cited to be financial stringency
and personal inclination on the part of the emperor, and a petition by
the ulema .3 The period of British rule in India witnessed some
remarkable change in the whole taxation system of India.
Although, it was highly in favour of the British government and
its exchequer but it incorporated modern and scientific method of
taxation tools and systems. In 1922, the country witnessed a
paradigm shift in the overall Indian taxation system. Setting up of
administrative system and taxation system was first done by the
Britishers. Broadly, there are two types of Taxes viz. Direct4 and

1 http://goodsandservicetax.com/gst/showthread.php?69-CHAPTER-X-Goods-and
Services-Tax-Theway-forward (last accessed on 25th August 2014)
2http://www.thehindubusinessline.com/todayspaper/to-others/tp

taxation/article2286103.ece (last accessed on 25th August 2014)

3http://finmin.nic.in/workingpaper/gst%20reforms%20and%20intergovernmental%20cons

iderations%20in%20india.pdf (last accessed on 20 August 2014)

4 http://economictimes.indiatimes.com/topic/GST (last accessed on 22nd August 2014)

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 Indirect taxes5. Taxes in India are levied by the Central Government
and the State Governments. Some minor taxes are also levied by the
local authorities such as Municipality or Local Council. The authority
to levy tax is derived from the Constitution of India which allocates the
power to levy various taxes between Centre and State.6

1.2 Value Added Tax:

VAT is a system of indirect taxation, which has been introduced
in lieu of sales tax. It is the tax paid by the producers, manufacturers,
retailers or any other dealer who add value to the goods and that is
ultimately passed on to the consumer. VAT has been introduced in
India to ensure a fair and uniform system of taxation. VAT enhances
competitiveness by removing the cascading effect of taxes on goods
and makes the levy of tax simple and self-regulatory, ensuring
flexibility to generate large revenues. The cascading effect is brought
about by the existing structure of taxation where inputs are taxed
before a commodity is produced and the output is taxed after it is
produced.
This causes an unfair double-taxation. However, in VAT, a set-
off is given for input tax (tax paid on purchases). This results in the
overall tax burden being rationalized and a fall in prices of goods. VAT
makes the tax structure simple, hassle-free and export-oriented. The
integration of VAT with Tally will help you in the smooth functioning
of your business and eliminate the complications that might otherwise
arise in VAT.
1.3 The Arrival of GST:
The Constitution Bill, 2011 amends the Constitution to give the
central and state governments the concurrent power to make laws on
the taxation of goods and services. The amendment allows for the
introduction of a goods and services tax. If Vat is a significant
improvement over the local sales tax system, then the Goods and

5 http://www.moneycontrol.com/news-topic/gst/ (Last Accessed on 21st August 2014)

6 Girish Garg, (2014) “Basic Concepts and Features of Goods and Service Tax in India”
International Journal of Scientific Research and Management, Vol. 2 (2) p. 542

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 Services Tax will be a major breakthrough towards a comprehensive
indirect tax reform in the country. Despite the success of VAT, there
are still certain shortcomings in the structure of VAT both at the
Central and at the State level. The GST at the Central and at the State
level will thus give more relief to industry, trade, agriculture and
consumers through a more comprehensive and wider coverage of
input tax set-off and service tax setoff, inclusion of several taxes in the
GST and phasing out of CST.7

7
Gupta Nishita, (2014) “Goods and Service Tax: It’s Impact on Indian Economy” International Research Journal
of Commerce Arts and Science, Vol. 5 (3) p. 127

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 CHAPTER 2: GOODS AND SERVICE TAX

2.1 What is GST:

World over in almost 150 countries there is GST or VAT, which
means tax on goods and services. Under the GST scheme, no
distinction is made between goods and services for levying of tax. In
other words, goods and services attract the same rate of tax. GST is a
multi-tier tax where ultimate burden of tax fall on the consumer of
goods/ services. It is called as value added tax because at every stage,
tax is being paid on the value addition. Under the GST scheme, a
person who was liable to pay tax on his output, whether for provision
of service or sale of goods, is entitled to get input tax credit (ITC) on
the tax paid on its inputs.

2.2 Objectives of GST:

One of the main objectives of GST would be to eliminate the
cascading impact of taxes on production and distribution cost of
goods and services. The exclusion of cascading effects i.e. tax on tax
will significantly improve the competitiveness of original goods and
services which leads to beneficial impact to the GDP growth. It is felt
that the GST would serve a superior reason to achieve the objective of
streamlining indirect tax regime in India which can remove cascading
effects in supply chain till the level of final consumers only when all
such above mentioned indirect taxes are completely included in GST.
It is understood that alcohol, tobacco and petroleum products will not
be enclosed by GST as alcohol and tobacco are considered as Sin
Goods, and governments do not like to allow free trade on these
property.

2.3 How will it work in India:

The GST system is based on the same concept as VAT. Here,
set-off is available in respect of taxes paid in the previous level against

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 the GST charged at the time of sale. The GST model has some aspects
which are as follows:
 Components: GST will be divided into two components, namely,
Central Goods and Service Tax and State Goods and Service
Tax.
 Rate: Rates charged across all states and the central level will
be uniform along with the regulations, definitions and
classifications.
 Applicability: GST will be applicable to all Goods and Services
sold or provided in India, except from the list of exempted goods
which fall outside its purview.
 Payment: GST will be charged and paid separately in case of
Central and State level.
 Input Tax credit: The facility of Input Tax Credit at Central
level will only be available in respect of Central Goods and
Service tax. In other words, the ITC of Central Goods and
Service.

2.4 Salient Features of GST:

Salient features of the proposed model are as follows:
I. the GST shall have two components: one levied by the
Centre (referred to as Central GST), and the other levied
by the States (referred to as State GST). Rates for Central
GST and State GST would be approved appropriately,
reflecting revenue considerations and acceptability.
II. The Central GST and the State GST would be applicable
to all transactions of goods and services made for a
consideration except the exempted goods and services.
III. The Central GST and State GST are to be paid to the
accounts of the Centre and the States individually.
IV. Since the Central GST and State GST are to be treated
individually, taxes paid against the Central GST shall be
allowed to be taken as input tax credit (ITC) for the

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 Central GST and could be utilized only against the
payment of Central GST.
V. Cross utilization of ITC between the Central GST and the
State GST would not be permitted except in the case of
inter-State supply of goods and services.
VI. Ideally, the problem related to credit accumulation on
account of refund of GST should be avoided by both the
Centre and the States except in the cases such as
exports, purchase of capital goods, input tax at higher
rate than output tax etc.

2.5 Benefits of GST:

Some of the main benefits of GST are as:
I. GST provide comprehensive and wider coverage of input
credit setoff, you can use service tax credit for the
payment of tax on sale of goods etc.
II. CST will be removed and need not pay. At present there is
no input tax credit available for CST.
III. Many indirect taxes in state and central level included by
GST, You need to pay a single GST instead of all
IV. Uniformity of tax rates across the states
V. Ensure better compliance due to aggregate tax rate
reduces.
VI. By reducing the tax burden the competitiveness of Indian
products in international market is expected to increase
and there by development of the nation.
VII. Prices of goods are expected to reduce in the long run as
the benefits of less tax burden would be passed on to the
consumer.

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 CONCLUSION

GST is the most logical steps towards the comprehensive indirect tax
reform in our country since independence. GST is leviable on all supply of
goods and provision of services as well combination thereof. All sectors of
economy whether the industry, business including Govt. departments and
service sector shall have to bear impact of GST. All sections of economy viz.,
big, medium, small scale units, intermediaries, importers, exporters,
traders, professionals and consumers shall be directly affected by GST. One
of the biggest taxation reforms in India – the Goods and Service Tax (GST) --
is all set tointegrate State economies and boost overall growth. GST will
create a single, unified Indian market to make the economy stronger.
Experts say that GST is likely to improve tax collections and Boost India’s
economic development by breaking tax barriers between States and
integrating India through a uniform tax rate. Under GST, the taxation
burden will be divided equitably between manufacturing and services,
through a lower tax rate by increasing the tax base and minimizing
exemptions.

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 REFERENCES
BOOKS:
 Rastogi,Abhishek.A & Kumar,Aditya., 2009, Good And Service Tax,
New Delhi, Taxmann Publication.Pvt.Ltd.
 Chatterjee, Timir .Baran.,2008, An Introductory Study on Goods and
Service Tax, New Delhi,Nabhi Publication.
 Mohan, Rajat., 2010, Illustrated Guide to Goods & Service Tax, New
Delhi,Nabhi Publication.
 Rastogi, Abhishek A & Kumar, Aditya.,2009, Illustrated Guide to Goods
& Service Tax (GST), New Delhi,Nabhi Publication.
 Garg, Rakesh.,2009, Introduction to Goods and Services Tax, New
Delhi,Nabhi Publication.

JOURNALS:
 R. Muralidharan ,2007,Service Tax on Goods Transport Agencies ,
Service Tax Journal, Manupatra,p5-6.
 Makarenko, Jay,2007, The Goods and Services Tax: Overview &
History, Economy, Trade & Finance, p12-16.
 Poddar, Satya and Ahmed (2009): “GST Reforms and
Intergovernmental Considerations in India”, Working Paper No.
1/2009-DEA, Department of Economic Affairs, Ministry of Finance,
Government of India.
 Roychowdhury, Punarjit (2011): “West Bengal Public Finances: An
Analytical Perspective”, mimeo, Centre for Training and Research in
Public Finance and Policy, India.

WEBLIOGRAPHY:
 http://www.indiataxes.com/Information/VAT/Introduction.htm
 http://articles.economictimes.indiatimes.com/2013-08-
13/news/41374977_1_servicestax state-gst-goods-and-services/2

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 http://www.taxmanagementindia.com/wnew/detail_rss_feed.asp?ID=
1226
 www.goodsandservicetax.com
 The Empowered Committee Of State Finance Ministers (2009), First
Discussion Paper On Goods and Services Tax In India, November 10
2009.

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