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

 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

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.

 The Indian Constitution clearly defined

the powers
of Centre and States to
collect various taxes.
Centre collects all the direct taxes like
Income tax 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. States
keep these revenues with themselves.

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.

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

Union Finance Minister Shri P. Chidambaram

in his Budget for 2006-07 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,

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.

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 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.

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?

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 factor to tax
cascading is the Central Sales Tax (CST) on interstate sales, collected by the origin state and for

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.

Two Components :
GST will be divided into two components, namely,
Central Goods and Services Tax and State Goods
and Services Tax.

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.

Applicability:
GST will be applicable to all Goods and Services

Merger of various taxes :

Central Taxes

Central excise duty

Additional excise duties,
Service tax,
Excise duty under Medicinal &
Toiletries Preparation Act
Countervailing duties (on imports in
lieu of excise duty)
Additional duty of Customs (levied
on imports in lieu of value added tax
or central sales tax)

State Taxes
Value Added Tax/ Sales tax
Entertainment tax (unless it is
levied on local bodies)
Tax on lottery, betting and
Gambling
Luxury tax
Entry tax not in lieu of Octroi
State surcharges and cesses in so far
as they relate to supply of goods and
service
Entry tax in lieu of Octroi
(Included in revised bill)

 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.
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.

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

Threshold limit:
Threshold exemption is built into a tax regime to
keep small traders out of tax net .
The present threshold prescribed in different State
VAT Acts below which VAT is not applicable varies
from State to State.
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

No Inter State Tax Input Credit:

The facility of Input Tax Credit at Central level will
only be available in respect of Central Goods and
Service tax.

Inter-state GST:
The scope of IGST Model is that Centre would levy
IGST which would be CGST plus SGST on all interState 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

GST on Imports:
The GST will be levied on imports with necessary
Constitutional Amendments.
PAN linked Taxpayer Identification Number:
Each taxpayer would be allotted a PAN linked
taxpayer identification number with a total of
13/15 digits.
Need
of
compensation
during
implementation of GST:
Despite the sincere attempts being made by the
EC on the determination of GST rate structure, 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

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

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:
GST 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

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. GST will make Indian product competitive
in international market.

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

To Common Consumer:
With the introduction of GST, all the cascading
effects of CENVAT and service tax will be removed.
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.

Legislative Challenge:
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

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.
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

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

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

Thirteenth Finance Commission has undertaken a

study with NCAER (National Council for Applied
Economic Research), a Delhi based think-tank on costbenefit analysis of GST regime in India. The highlights
of the report were:
Medium term gains:
GST could to increase Indias GDP somewhere
within a range of 0.9% to 1.7%. The comparable dollar
value increment is estimated to be between Rs. 54
billion and Rs.150 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
Rs.19500 billion and Rs.38220 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

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.

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 the product 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 Indias case inflation could be critical as unlike
developed countries, India has far more inefficiencies

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 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.

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 better tax
compliance.
It 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