Analysis of Goods and Services Tax in India

Abstract

In India, there exist a number of indirect taxes that are either levied by the Central

Government or by the state government such as Excise Duty, Custom Duty, Service Tax,

Sales tax, Stamp Duty, Octroi and many more. There have been various attempts of

reforming the indirect tax structure for making tax system simple, stable and burdensome. In

this process of reform we have already implement vat and service tax. For further significant

improvement the next logical step towards a comprehensive indirect tax reforms in the

country will be to implement Goods and Services Tax (GST). GST is a tax on goods and

services with comprehensive manner. It is a multi-tier tax where ultimate burden of tax fall

on the consumer of goods or services. It is called as value added tax because at every stage

tax is being paid on value addition.

The present research paper is an attempt to study concept of goods and service tax,

how it works and its advantages to Indian economy.

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 Analysis of Goods and Services Tax in India

Introduction

Tax policies play an important role on the economy through their impact on both

efficiency and equity. A good tax system should keep in view issues of income distribution

and, at the same time, also endeavour to generate tax revenues to support government

expenditure on public services and infrastructure development.

The introduction of Goods and Services Tax (GST) would be 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, it would mitigate cascading or double taxation in a major way

and pave the way for a common national market. From the consumer point of view, the

biggest advantage would be in terms of a reduction in the overall tax burden on goods, which

is currently estimated at 25%-30%. Introduction of GST would also make our products

competitive in the domestic and international markets.

It will lead to the abolition of taxes such as Octroi, Central Sales Tax, State level

Sales Tax, Entry Tax, Stamp duty, Telecom License Fees, Turnover Tax, Tax on

Consumption or Sale of Electricity, etc. It will also improve government's fiscal health as the

tax collection system would become more transparent, making tax evasion difficult. CAG

Mr. Vinod Rai in his inaugural address to the National Conference on GST put forth the

concept as "An integrated scheme of taxation that does not discriminate between goods and

services and is a part of the proposed tax reforms that centre on evolving an efficient and

harmonized consumption tax system in the country."

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 Analysis of Goods and Services Tax in India

Objectives

 To understand the concept of goods and service tax

 To understand how GST will work in India

 To understand the benefits of GST over the current taxation system in India

 To understand effect of GST on Indian Economy

Research methodology

The study focuses on extensive study of Secondary data collected from various books,

National & international Journals, government reports, publications from various websites

which focused on various aspects of Goods and Service tax.

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 Analysis of Goods and Services Tax in India

Understanding Taxation System in India

India is a federal country and both Centre and States have their own rights to collect

taxes. Each state is independent in levying and collecting taxes. The taxation powers are

defined clearly in the Indian Constitution. Centre collects all the direct taxes (income tax,

corporate taxes etc) along with the Indirect taxes like Service Tax, Excise duty and Customs

duty. The States collect indirect taxes like VAT on goods, CST and Local Taxes. These

revenues states keep with themselves. Earlier instead of VAT, States had sales taxes on

various goods. Now states have replaced sales taxes with VAT. Each state has adopted its

own structure of VAT with different duties and structure.

In an earlier taxation system, people paid taxes at various levels. There was no system

of getting a rebate on the taxes paid previously while paying the inputs. This is also called as

cascading effect. Ideally the taxes should be based on value addition and the producer should

pay taxes on whatever value he adds to the product. In the absence of such a system,

producers ended up paying much higher taxes. Higher taxes are a barrier for business and

discourage business activity. The businesses instead spend time trying to save taxes leading

to distortions and a parallel economy. A large number of enterprises prefer to stay out of the

taxation system and avoid paying taxes. High taxes also lead to lobbying activities where

producers of a certain sector ask the government to lower/waiver taxes for their sector. This

also leads to multiple taxation rates for multiple products and further increases inefficiency in

the system.

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 Analysis of Goods and Services Tax in India

A Value Added Taxation system is seen as a way to negate this cascading effect. VAT

taxes goods at each stage and on the value addition done by the enterprise.

GST is an extended version of Value Added Tax (VAT) and aims to cover all goods

and services. VAT covers mostly goods and GST covers all goods and services. GST is an

attempt to get rid of weaknesses in the VAT structure.

With a GST in place, all these indirect taxes should be merged into one tax. Ideally,

these taxes will be collected by the Centre which will then be transferred to the States via a

rule/formula.

This will require changes in the constitution as Centre can only tax goods at

production stage and on Services. The States can only tax sale of goods. Hence, States cannot

tax services and Centre cannot tax sales of goods. The States cannot also tax imports. All this

needs to be changed with the GST and hence would require amendments in the Indian

Constitution. That is the reason why the 115th Constitution Amendment Bill has been

introduced

Hence, implementation of GST was always seen as a concern for States as they

surrender their powers to tax. This is a very difficult issue and as a result numbers of

discussions have followed between the stakeholders.

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 Analysis of Goods and Services Tax in India

Brief history about GST in India

The idea of moving towards the GST was first mooted by the then Union Finance

Minister Shri P. Chidambaram in his Budget for 2006-07. Initially, it was proposed that GST

would be introduced by 1st April, 2010.

The Empowered Committee of State Finance Ministers (EC) which had formulated

the design of State VAT was requested to come up with a roadmap and structure for the GST.

Joint Working Groups of officials having representation of the States as well as the Centre

were set up to examine various aspects of the GST and draw up reports specifically on

exemptions and thresholds, taxation of services and taxation of inter-State supplies. Based on

discussions within and between it and the Central Government, the EC released its First

Discussion Paper (FDP) on the GST in November, 2009. This spells out the features of the

proposed GST and has formed the basis for discussion between the Centre and the States

Since then, discussion being held between Central and State Government to consensus

on certain conflicting issues. However, till today no final agreement has been made between

Central and State Government.

However, Central Government in view of implementing GST from 1 st April, 2016 all

over India by agreeing all the States by making certain modifications in proposed GST.

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What is GST?

GST is a comprehensive indirect tax on manufacture, sale and consumption of goods

and services at national level. The GST is expected to replace all the indirect taxes in India.

At the centre's level, GST will replace central excise duty, service tax and customs duties. At

the state level, the GST will replace State VAT. Integration of goods and services taxation

would give India a world class tax system and improve tax collections. It would end the long

standing distortions of differential treatments of manufacturing and service sector.

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 Analysis of Goods and Services Tax in India

Why GST?

GST is similar to VAT in terms of the value-added approach. The question that comes

to mind is -India already has VAT then why should someone go for GST? Moreover, it seems

to be very complicated and a difficult exercise, then what are the reasons? The key problems

of current taxation system for Goods and Service in India are as follows:

Taxation at manufacturing:

CENVAT is levied on goods manufactured or produced in India which gives rise to

definitional issues as to what constitutes manufacturing, and valuation issues for determining

the value on which the tax is to be levied.

Exclusion of Services from state taxation:

Exclusion of Services from state taxation has posed difficulties in taxation of goods

supplied as part of a composite works contract involving a supply of both goods and services,

and under leasing contracts, which entail a transfer of the right to use goods without any

transfer of their ownership.

Tax Cascading:

Oil and gas production and mining, agriculture, wholesale and retail trade, real estate

construction, and range of services remain outside the ambit of the CENVAT and the service

tax levied by the Centre. The exempt sectors are not allowed to claim any credit for the

CENVAT or the service tax paid on their inputs. Similarly, under the State VAT, no credits

are allowed for the inputs of the exempt sectors, which include the entire service sector, real

property sector, agriculture, oil and gas production and mining. Another major contributing

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 Analysis of Goods and Services Tax in India

factor to tax cascading is the Central Sales Tax (CST) on inter-state sales, collected by the

origin state and for which no credit is allowed by any level of government.

Interstate Sales Tax (CST):

Though it is an important source of revenue for states it is seen as very burdensome

by businesses. The companies make goods in one state but on distribution inside the country,

end up paying taxes in each state. They are supplying goods within the country and should

just be taxed at one place.

Inclusion of Services in VAT system:

Production of goods is because of both physical production and services. But Services

are taxed only by Centre and that too is done selectively. The Services need to be taxed at

State level and integrated with the Goods.

International Standard:

GST is becoming an international standard and it is important India also has one.

There are many factors before international companies while choosing a country for its

business and taxation system is one very important factor. With other countries having GST

and India not having one, the companies are likely to opt for former ahead of India for

locating their businesses. Likewise Indian companies may also prefer to increasingly set their

bases in other countries where tax system is more efficient.

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Silent features of GST

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 the GST charged at the time of sale. The

GST model has some aspects which are as follows:

Two Components:

GST will be divided into two components, namely, Central Goods and Service Tax and State

Goods and Service Tax. However, the basic features of law such as chargeability, definition

of taxable event and taxable person, measure of levy including valuation provisions, basis of

classification etc. would be uniform across these statutes as far as practicable.

Merger of various taxes:

GST will lead merger of various taxes levied by Central and State Governments. The

taxes that merged into GST are as follow:

Central Taxes State Taxes

 Central excise duty  Value Added Tax/ Sales tax

 Additional excise duties,  Entertainment tax (unless it is

 Service tax, levied on local bodies)

 Excise duty under Medicinal &  Tax on lottery, betting and

Toiletries Preparation Act Gambling

 Countervailing duties (on imports in  Luxury tax

lieu of excise duty)  Entry tax not in lieu of Octroi

 Additional duty of Customs (levied  State surcharges and cesses in so far

on imports in lieu of value added tax as they relate to supply of goods and

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 Analysis of Goods and Services Tax in India

Central Taxes State Taxes

or central sales tax) service

 Entry tax in lieu of Octroi

(Included in revised bill)

Dual GST:

The Central GST and the State GST would be levied simultaneously on every

transaction of supply of goods and services except the exempted goods and services, goods

which are outside the purview of GST and the transactions which are below the prescribed

threshold limits. Further, both would be levied on the same price or value unlike State VAT

which is levied on the value of the goods inclusive of CENVAT. While the location of the

supplier and the recipient within the country is immaterial for the purpose of CGST, SGST

would be chargeable only when the supplier and the recipient are both located within the

State.

Rate:

There will be two tax rates for SGST– lower rate for necessary and basic importance

items and a standard rate for all other goods. Further, there will be a special rate for precious

metals and a list of exempted items. Rates charged across all states and the central level will

be uniform along with the regulations, definitions and classifications. However, as per latest

development, it has been agreed to include a floor rate with bands to allow States the freedom

to have a high or low rate.

Threshold limit:

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 Analysis of Goods and Services Tax in India

Threshold exemption is built into a tax regime to keep small traders out of tax net. This

has three-fold objectives:

a) It is difficult to administer small traders and cost of administering of such traders is

very high in comparison to the tax paid by them.

b) The compliance cost and compliance effort would be saved for such small traders.

c) Small traders get relative advantage over large enterprises on account of lower tax

incidence.

The present threshold prescribed in different State VAT Acts below which VAT is not

applicable varies from State to State. The existing threshold of goods under State VAT is Rs.

5 lakhs for a majority of bigger States and a lower threshold for North Eastern States and

Special Category States. A uniform State GST threshold across States is desirable and,

therefore, the Empowered Committee has recommended that a threshold of gross annual

turnover of Rs. 10 lakh both for goods and services for all the States and Union Territories

may be adopted with adequate compensation for the States (particularly, the States in North-

Eastern Region and Special Category States) where lower threshold had prevailed in the VAT

regime. Keeping in view the interest of small traders and small scale industries and to avoid

dual control, the States considered that the threshold for Central GST for goods may be kept

at Rs.1.5 crore.

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:

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 Analysis of Goods and Services Tax in India

GST will be charged and paid separately in case of Central and State level.

No Inter System Tax Input 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 tax

shall not be allowed as a set-off against State Goods and Service tax and vice versa.

Inter-state GST:

The Empowered Committee has accepted the recommendations of the Working

Group of concerned officials of Central and State Governments for adoption of IGST model

for taxation of inter-State transaction of Goods and Services. The scope of IGST Model is

that Centre would levy IGST which would be CGST plus SGST on all inter-State transactions

of taxable goods and services. The inter-State seller will pay IGST on value addition after

adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State

will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer

will claim credit of IGST while discharging his output tax liability in his own State. The

Centre will transfer to the importing State the credit of IGST used in payment of SGST. The

relevant information will also be submitted to the Central Agency which will act as a clearing

house mechanism, verify the claims and inform the respective governments to transfer the

funds.

GST on Imports:

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 Analysis of Goods and Services Tax in India

The GST will be levied on imports with necessary Constitutional Amendments. Both

CGST and SGST will be levied on import of goods and services into the country. The

incidence of tax will follow the destination principle and the tax revenue in case of SGST will

accrue to the State where the imported goods and services are consumed. Full and complete

set-off will be available on the GST paid on import on goods and services.

PAN linked Taxpayer Identification Number:

Each taxpayer would be allotted a PAN linked taxpayer identification number with a

total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing

PAN-based system for Income tax facilitating data exchange and taxpayer compliance. The

exact design would be worked out in consultation with the Income-Tax Department.

Need of compensation during implementation of GST:

Despite the sincere attempts being made by the Empowered Committee on the

determination of GST rate structure, revenue neutral rates, it is difficult to estimate accurately

as to how much the States will gain from service taxes and how much they will lose on

account of removal of cascading effect, payment of input tax credit and phasing out of CST.

In view of this, it would be essential to provide adequately for compensation for loss that

might emerge during the process of implementation of GST for the next five years. This issue

may be comprehensively taken care of in the recommendations of the Thirteenth Finance

Commission. The payment of this compensation will need to be ensured in terms of special

grants to be released to the States duly in every month on the basis of neutrally monitored

mechanism.

How does GST work?

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 Analysis of Goods and Services Tax in India

Suppose there is a Paper manufacturer. He purchases raw materials and machinery on

which he pays certain percentage of tax.

Purchase
Particulars Tax Rate (%) Tax (In Rs Lakh)
(In Rs Lakh)
Raw Material 200 10% 20
Machinery 400 10% 40
Total Input Tax paid 60

Now suppose he produces Papers worth Rs 800 lakh and adds Rs 200 lakh as profit.

He sells all the goods to sole distributor in India. The manufacture will have to pay taxes on

selling his papers. Now in a traditional system, he would pay the tax on the entire Rs 1000

Lakh and get no input credit. So he pays a total tax of Rs 160 Lakh – Rs 60 Lakh on Input

and Rs 100 Lakh on Sales. This is called cascading effect and a producer pays the tax on each

economic transaction. The end result is much higher taxes by the producer leading to lack of

incentives by the producer.

However with a GST system, the producer gets an input tax credit of Rs 60 Lakh. As

he had paid Rs 60 Lakh on the inputs, it gets deducted from the tax bill. On net basis, the

Producer pays Rs 100 Lakh of taxes.

Sale Tax Rate Without GST With GST

Particulars
(In Rs Lakh) (%) Tax (In Rs Lakh) Tax (In Rs Lakh)
Sales
1000
(Cost 800 + Profit 200)
Total Output Tax 10% 100 100
Less: Input Tax 0 60
Tax Paid 100 40
Total Tax paid (Input
160 100
Tax + Output Tax)

Now let us see the books of the all India distributor. Let’s say he pays Rs 50 lakh to

the transport provider for transporting goods from manufacturer to the distributors’ godown.

He pays service tax on the same. Hence total value of his goods becomes Rs 1050 Lakh. His

input tax payable is Rs 105 Lakh.

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 Analysis of Goods and Services Tax in India

Particulars In Rs Lakh Tax Rate (%) Tax (In Rs Lakh)

Goods Purchase 1000 10% 100
Transportation
50 10% 5
Charge
Total Input Tax paid 105

The Distributor sells the papers to the consumers. The same input tax output tax

calculation applies here as well. Without a GST system he pays a total of Rs 235 Lakh as

taxes. With a GST system he pays Rs 130 Lakh as total taxes, a total saving of Rs 51 lakhs.

Without GST With GST

Purchase
Particulars Tax Rate (%) Tax (In Rs Tax (In Rs
(In Rs Lakh)
Lakh) Lakh)
Sales (Cost 1050+
1300
Profit 250)
Total Output Tax 10% 130 130
Less: Input Tax 0 105
Tax Paid 105 25
Total Tax paid
(Input Tax + 235 130
Output Tax)

Benefits of GST

The implication of GST assures a single taxation system in the entire country for all

goods and services making tax compliance easier and more effective. The belief that trade

and industry will benefit from implementation of GST is widely accepted. Because the GST

will give more relief to industry, trade and agriculture through a more comprehensive and

wider coverage of input tax set off and service tax in subsuming of several Central and State

taxes in the GST and phasing out CST. The transparent and complete chain of set-off which

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 Analysis of Goods and Services Tax in India

will result in widening of tax base and better tax compliance may also lead to lowering of tax

burden on an average dealer in industry, trade and agriculture. It will also boost up economic

unification of India. The major benefits of implementation of GST as follows:

To Economy:

It will simplify India's tax structure, broaden the tax base, and create a common

market across states. This will lead to increased compliance and increase India's tax-to gross

domestic product ratio. According to a report by the National Council of Applied Economic

Research, GST is expected to increase economic growth by between 0.9 per cent and 1.7 per

cent. Exports are expected to increase by between 3.2 per cent and 6.3 per cent, while imports

will likely rise 2.4-4.7 per cent.

To Corporate:

It will be beneficial for India Inc. as the average tax burden on companies will fall.
Reducing production costs will make exporters more competitive.

To Exporters:
The subsuming of major Central and State taxes in GST, complete and comprehensive

setoff of input goods and services and phasing out of Central Sales Tax (CST) would reduce

the cost of locally manufactured goods and services. This will increase the competitiveness of

Indian goods and services in the international market and give boost to Indian exports.

To Industry:

Manufacturing sector in India is one of the highly taxed sectors in the world. A

complex and high taxation structure has the tendency to render products uncompetitive in the

international market or consume large portions of the cost arbitrage available in

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manufacturing set-ups in low cost economies such as India. GST when enforced would

eliminate complexities in the present taxation structure and consequently prevent the loss of

nearly 50% of the advantage of lower manufacturing costs that India has over the western

nations.

To Centre and State:

Approximately Rs 900 billion a year of profits are predicted by the government with

the implementation of GST as it is speculated to bring about raise in employment, promotion

of exports and consequently a significant boost in overall economic growth.

To Common Consumer:

With the introduction of GST, all the cascading effects of CENVAT and service tax

will be more comprehensively removed with a continuous chain of set-off from the

producer’s point to the retailer’s point than what was possible under the prevailing CENVAT

and VAT regime. Certain major Central and State taxes will also be subsumed in GST and

CST will be phased out. Other things remaining the same, the burden of tax on goods would,

in general, fall under GST and that would benefit the consumers.

Challenges in Implementation of GST

The actual challenge before the Finance Minister is not of drafting a model GST but

of its proper implementation and smooth transition from the prevailing system. The

challenges which the Government has to face in introducing GST are as follows:

Legislative Challenge:

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 Analysis of Goods and Services Tax in India

The Constitution provides for delineation of power to tax between the Centre and

States. While the Centre is empowered to tax services and goods upto the production stage,

the States have the power to tax sale of goods. The States do not have the powers to levy a

tax on supply of services while the Centre does not have power to levy tax on the sale of

goods. Thus, the Constitution does not vest express power either in the Central or State

Government to levy a tax on the ‘supply of goods and services’. Moreover, the Constitution

also does not empower the States to impose tax on imports. Therefore, it is essential to have

Constitutional Amendments for empowering the Centre to levy tax on sale of goods and

States for levy of service tax and tax on imports and other consequential issues.

Inclusion of Goods and Services:

The first issue major issue of implementation of GST is to the inclusion of taxes

within the ambit of GST. The bone of contention relates to inclusion of purchase taxes on

food grain, taxes on motor spirit and high-speed diesel (GSD), and octroi or entry tax in lieu

thereof. The foodgrain surplus states have been levying the purchase tax, the burden of which

is exported to non-residents.

The states are reluctant to bring motor spirit and high speed diesel within the ambit as

presently the tax is levied at a floor rate of 20% and the states derive about 35% of their sales

tax collections from these petroleum products.

Rationalization of GST rate:

Another issue to be decided is the rates of central and state GSTs to be levied. It is

expected that the tax rates would be revenue neutral. This implies that in the short term, there

would not be any revenue loss or gain, but over time the revenue productivity is expected to

increase due to better compliance of the tax and increased productivity of the economy.

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Rates charged across all states and the central level will be uniform along with the

regulations, definitions and classifications for effective implementation of GST However, due

to dispute between Central and State Government, it has been agreed to include a floor rate

with bands to allow States the freedom to have a high or low rate.

Rationalization of threshold and exemption limits:

To get the full benefits of GST, it is necessary to rationalize threshold limit and

exemption limits. However, there are dispute between Central Government and State

Government regarding finalizing of threshold limit. State Governments are in view of to keep

the threshold limit at as low as possible to avoid revenue loss to state.

Place of Supply:

One of the main challenges in introducing in GST is defining the place of supply in

respect of certain services and intangible properties. In the existing tax regime, place of

supply is not a big issue because service is taxed by the Centre and the place of levy does not

affect revenue receipts. In GST, however, the place of supply will have to be clearly defined

to avoid disputes among states in case of interstate transactions.

Time of Supply:

Time of supply will explain the point at which tax would be levied invoice date, due

date or payment date. Currently, different taxes are levied by the Centre and the states at

various stages. These variations will be eliminated in GST.

Rapid increase in Assesses:

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The dual GST model will widen the tax net by taxing every economic supply in the

distribution network. This will lead to rapid increase in assesses. It will require some of the

businesses to restructure their distribution network to reduce additional tax burden on the

consumer with a view to be price competitive. Though it will generate revenue in a neutral

and transparent way, the Government will have to ensure that the ultimate consumer is not

burdened with tax beyond his capacity.

In addition to above Government have to decide regarding

 Dispute settlement procedure and machinery

 Building IT (Information technology) infrastructure to capture the full benefits of

GST

 Training of tax administrators and assesses

 Protecting and balancing the present and future revenues of the Centre and the States

 Safeguarding the interests of less developed states with lower revenue potential

Impact of GST on Indian Economy

The studies assessing impact of GST are limited as the design of GST was not clear

till the First Discussion Paper. Thirteenth Finance Commission has undertaken a study with

NCAER, a Delhi based think-tank on cost-benefit analysis of GST regime in India. The

highlights of the report were:

Medium term gains:

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 Analysis of Goods and Services Tax in India

GST could to increase India’s GDP somewhere within a range of 0.9% to 1.7%. The

comparable dollar value increment is estimated to be between $9.5 billion and $18.6

billion respectively.

Long term gains:

The additional gain in GDP, originating from the GST reform, would be earned

during all years in future over and above the growth in GDP which would have been achieved

otherwise. It estimates present value of total gain in GDP between $325 billion and $637

billion. This is nearly 30-60% of the size of Indian economy currently!

Export gains:

GST will lower the overall tax inputs in supply chain of goods and services leading to

lower prices of Indian goods and services. This will increase the competitiveness of Indian

goods and services in the international market and give boost to Indian exports. The

uniformity in tax rates and procedures across the country will also go a long way in reducing

the compliance cost. These gains are expected to vary between 3.2 % - 6.3% with

corresponding absolute value range between $5.4 billion - $10.7 billion, respectively. Imports

are expected to gain somewhere between 2.4 and 4.7% with corresponding absolute values

$6.9 billion and $13.6 billion, respectively.

Others:

GST would lead to efficient allocation of factors of production. The overall price level

would go down. It is expected that the real returns to the factors of production would go up.

NCAER results show gains in real returns to land ranging between 0.42 and 0.82 per cent.

Wage rate gains vary between 0.68 and 1.33%. The real returns to capital would gain

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somewhere between 0.37 and 0.74%. Kelkar adds that GST could help add productive

employment of as much as 4 to 5 million. Barring impact on economy, GST could help the

consumers as well. The lower taxation will lead to lower prices of goods and services.

However, going by the above international experiences there could be two additional

problems.

Inflation:

Most of the international case studies show an inflation spurt in initial months of GST

implementation. In main reason for spurt in prices of goods which consumers thought would

become expensive after the GST. Much of blame for inflation is accorded to the various

regulatory bodies and uncertainty over the new tax regime. The inflation situation stabilizes

as implementation gains pace and is understood by consumers and producers. In India’s case

inflation could be critical as unlike developed countries, India has far more inefficiencies in

supply chain in local markets. The Indian GST reform is far larger in scale compared to

above economies of developed countries. These rigid inefficiencies along with higher

information asymmetry on probable impact of GST could push inflation higher in initial days

of implementation. Indian economy is already plagued with persistent high inflation and this

new reform could further test inflation further.

Tax Revenue Shortfall:

RBI in the State Finances Report (2010-11) said the revenue implications of GST are

likely to vary across states. The Centre and the States are still discussing various aspects of

GST like taxation rates, revenue sharing model between Centre and States etc. As there is

still uncertainty over the final blueprint of GST, it is difficult to estimate the impact of GST

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 Analysis of Goods and Services Tax in India

on state finances. The report points that VAT led to improvement in tax revenue for most

states. However, just like VAT there could be some short-falls in revenues in some states

over a short term.

The central government has already proposed a Rs 50,000 Cr fund to help the states

which suffer from the short-fall. However, a higher shortfall could lead to both Centre and

States to borrow more from the markets. This will be critically watched as it has further

ramifications on fiscal deficits, interest rates and inflation.

Conclusion

Tax policies play an important role on the economy through their impact on both

efficiency and equity. A good tax system should keep in view issues of income distribution

and, at the same time, also endeavour to generate tax revenues to support government

expenditure on public services and infrastructure development.GST will give more relief to

industry, trade and agriculture through a more comprehensive and wider coverage of input

tax set-off and service tax set-off, subsuming of various Central and State taxes in the GST.

The transparent and complete chain of set-offs which will result in widening of tax base and

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 Analysis of Goods and Services Tax in India

better tax compliance may also lead to lowering of tax burden on an average dealer in

industry, trade and agriculture. The subsuming of major centre and state taxes would reduce

the cost of locally manufactured goods and services. This is likely to increase the

competitiveness of Indian goods and services in the international market and to boost Indian

exports.

GST is expected to bring many benefits to the Indian economy. Though, all these

benefits are based on the assumption that overall taxation structure is less bureaucratic and

cumbersome than present. The implementation is going to be crucial so that the promised

benefits are realized.

The Government also needs to be weary of inflation spurts in initial implementation

phase of GST as pointed by experiences from international economies. Ideally, one should be

first easing all these state-wide inefficiencies and then implement GST. However given the

challenges in India, the policymakers are hoping GST will help ease these inefficiencies and

eliminate them over a period of time.

References

The Empowered Committee Of State Finance Ministers (2009, November 10), First

Discussion Paper On Goods and Services Tax In India

http://www.cbec.gov.in/deptt_offcr/gst-status-18032014.pdf

http://www.empcom.gov.in/content/188_1_PhasingoutofCST.aspx

Abisheka Rastogi (2009), Illustrated Guide to Goods and Services Tax (GST)
  

http://www.taxmanagementindia.com/wnew/detail_rss_feed.asp?ID=1226
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 Analysis of Goods and Services Tax in India

www.goodsandservicetax.com

M.Govinda Rao (2014), GST in India: Challenges and prospects, extracted from

http://www.livemint.com /Opinion/ FtsFwtT50bMOc9HjHlJOLJ/ GST-in-India-

Challenges-and-prospects.html

Sherry (2007), Goods & Service Tax (GST) in India - A move towards tax reforms, Service

Tax Today

Verma A(2008), Goods and Service Tax: eagerly awaited in India, Service Tax Today

CA Rajat Mohan (2013, August 13), Goods and Services Tax (GST) - A step forward,
extracted from http://articles.economictimes.indiatimes.com/2013-08-13/news/
41374977_1_servicestax-state-gst-goods-and-services/2

http://www.india-briefing.com/news/indian-gst-deal-paves-tax-reforms-8938.html/#sthash.

JMziiv64.dpuf

http://gstindia.com/news.php

http://www.thehindu.com/news/national/gst-rollout-will-signal-that-india-is-open-to-

business-montek/article5505058.ece

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