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Goods and services Tax report

Macro Economics (Indian Institutes of Management)

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Monika/PGP/22/277
Goods and Services Tax
Introduction

Any economy in the world needs a satisfactory tax regime which is responsible for the
economic growth of the country. Developing country like India, has an advantage of high
demographic dividend however we haven’t been able to take the proper benefit of it. To reach
the vision becoming of developed country we need a suitable environment for the social and
economic growth. Therefore, we need a transparent, fair taxation system which isn’t complex
to administer.

The main reason for this is that the tax system should be reasonable and non - discriminatory
in respect of both the direct taxes payable by individuals and the indirect taxes payable by co
mpanies and industries, in order to make them more tax - compliant and to increase the numb
er of people in the tax net, in order to help the government in the implementation of develop
ment projects.

To ensure the economic growth, India implemented its biggest indirect taxation reform, called
Goods and Services Tax on 1st July 2018. GST is a unified tax which is going to simply the
complex structure of indirect taxes in India and it is expected to robust the India’s 2.4 trillion-
dollar economy.

NEED FOR GST LEGISLATION

In the economy, tax collection is measured by Tax-GDP ratio which helps understand how
much tax is being collected by the government. India has the lowest tax-GDP ratio amongst in
BRICS Countries despite having high growth. Indirect Tax-GDP ratio is just 11.6 therefore
there is a need to improve the ratio. Direct taxes are the progressive taxes and they are paid
according to ability of the taxpayer. Whereas indirect taxes are regressive, means rich and poor
are subject to the same tax rate which is unfair and GST addresses this particular problem.
GST tax reform has simplified the sharing of financial resources and revenue from the tax
system between the Centre and the State. Furthermore, GST has removed this cascading effect
as the tax is calculated only on the value-addition at each stage of the transfer of ownership.

Various different tax rates in VAT tax laws create demarcation in states thereby creating tariff
and non-tariff barriers also obstructing free flow of trade in the country. This is not beneficial
for economic growth of the country as it establishes high compliance cost for the taxpayers.

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What is GST?

Goods and Services Tax (GST) is a comprehensive multi-stage and destination based indirect
tax on manufacture, sale, and consumption of goods and services throughout India. GST will
be levied on every value addition stage of any goods or services. GST had been established by
the 101st constitutional amendment act and there is GST council, chaired by finance minister
of India to decide upon any matter related to GST. GST was implemented nationally, for states
and center.

Components of GST
There are 3 components of GST – CGST, SGST and IGST

• Central GST (CGST)- GST to be levied by the central government.

• State GST (SGST)- GST to be levied by states and Union Territories with legislature.
• Integrated GST (IGST)- GST levied by central government on inter-state supply of
goods and services to ensure that the credit chain is not disrupted. Apart from the
applicable custom duties, import of goods and services would be treated as inter-state
supplies and would therefore be subject to IGST.

GST council will handle the matter when it comes to deciding rates of CGST,IGST and SGST
with consensus of states and the center.

The following taxes were subsumed with implementation of GST and currently levied by the
center

1. Central Excise Duty

2. Duties of Excise (Medicinal and Toilet Preparations)
3. Special Additional Duty of Customs (SAD)
4. Service Tax
5. Cesses and surcharges applicable so far related to goods and services.
6. Additional Duties of Excise (Textiles and Textile Products)
7. Additional Duties of Excise (Goods of Special Importance)
8. Additional Duties of Customs (commonly known as CVD)

The following taxes were subsumed with implementation of GST and currently levied by the
state Central Sales Tax

1. State VAT
2. Purchase Tax
3. Entry Tax (All forms)
4. Luxury Tax
5. Taxes on advertisements
6. Entertainment Tax
7. State cesses and surcharges applicable so far related to supply of goods or services.
8. Taxes on lotteries, betting and gambling

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Tax Slabs

There are mainly five tax slabs Under GST - 0%, 5%, 12%,18% and 28%. Petroleum products
and alcohol do not come under GST tax slabs; however, they are taxed by respective state
governments. There are two more GST rates of 0.25 per cent for rough diamonds, precious
stones and 3 per cent for gold, silver. 28% is the highest rate for luxury goods. A Cess, ranging
from 1 to 15 per cent, is levied on demerit and luxury goods over and above the highest rate of
28 per cent. The gain from collected cess are expected to compensate state government for first
five years after GST implementation to recover the losses.

Pushkar/PGP/22/268

Indirect Taxes in India – The indirect taxes are imposed on goods/services. The seller or
service provider is liable to pay the indirect tax but onus ultimately goes to the consumers and
finally goes to the government, it is called as indirect tax. Hence, an indirect tax is collected by
an intermediary from the person who bears the ultimate economic burden of the tax. It may be
noted that the burden of indirect tax is transferred not in the form of taxes but as a part of the
price of such goods/ services.

Benefits of indirect taxes

Convenient-
Indirect taxes are not burdened by taxpayers because they are only paid when they make purc
hases. In addition, it is convenient for state authorities because taxes are collected directly at f
actories or ports, saving both time and effort.

Easy collection – Indirect taxes are easy to collect for state authorities and they exclude the
possibility of tax evasion. These taxes are collected automatically at stage of selling and
purchasing of goods and services.

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Equitable - Indirect tax is directly proportionate to the prices of the goods and services.
Therefore, people purchasing luxury items pay higher taxes and vice versa.

Disadvantages of indirect taxes

Regressive – All taxes are not impartial. few taxes, like imposed on salt, are regressive because
the same amount of tax is paid by consumer irrespective of his economic status.

Uncertain – Tax on essential goods and services are only certain. Goods having elastic demand
do not have predictable taxes and may not be beneficial for the authorities in term of revenue.

Not industry-friendly – it increases the cost of goods due to imposing tax on every stage,
Called cascading effect.

Value added tax (VAT) in India

The value added tax (VAT) in India is a state level multi-point tax on value addition which is
collected at different stages of sale with a provision for set-off for tax paid at the previous stage
i.e., tax paid on inputs. It is to be levied as a proportion of the value added (i.e. sales minus
purchase). VAT system is more transparent, uniform and less prone to tax evasion VAT is a
consumption tax because it is borne ultimately by the final consumer. VAT is not a charge on
companies. It is charged as a percentage of price, which means that the actual tax burden is
visible at each stage in the production and distribution chain.

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Shortcoming in present structure

Tax Dropping The most significant contributing factor to tax cascading is the partial coverage
by
Central and State taxes Sectors that are exempted are not allowed to claim credit for the
CENVAT or the Service Tax paid on the inputs.
Levy of Excise Duty on manufacturing point The CENVAT is imposed on goods
manufactured or produced in India. For an effective and equitable tax, restricting the tax to the
point of manufacturing is a severe obstruction.
They are complex in nature when it comes to determining the transaction between sales Vs
services.
States are unable to levy taxes on services
They do not have the power to collect income taxes or the fastest - growing constituents of co
nsumer spending, the States must rely almost exclusively on improvements in compliance or
rate increases for any flexibility in their own revenue.
There are no uniform rates and provisions

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Impact of GST in taxation system –

1. GST eradicated the cascading effect as the tax is calculated only on the value-addition
at each stage.
2. The present state of affairs of differing tax rates in numerous states obstructs
cooperative political orientation.
3. GST is anticipated to extend the mobilization of resources offered for property
alleviation and development of the country as got wind by the Prime Minister, Narendra
Modi. This can turn up in 2 ways: (a) directly the resources offered to the poorer states
will increase substantially; (b) indirectly because the assets becomes additional
buoyant.
4. Effective administration – is going to be enhanced due to common rates for goods and
services across centre and states and increase compliance also make sure the better
management in tax collection in states. It also provides the fiscal autonomy to the states
by giving the power of imposing additional excise duties on certain goods such as
tobacco, alcohol
5. Previous complicated tax regime was complex as it divided the country into various
economic zones but GST will help the India to become a one common national market.
6. GST can take away the custom duties applicable on exports. The nation’s
competitiveness foreign markets will increase on account of lower costs of transaction.
in
7. GST can offer credit for the taxes paid by producers within the merchandise or services
chain. This is expected to encourage producers to shop for stuff from completely
different registered dealers and is hoped to herald additional vendors and suppliers
beneath the compass of taxation.
8. Tax evasion will be difficult now as GST provide the structure of getting monitored at
dual stage by both centre and state
9. There will be reduction in prices of goods as taxes would now be exempted from the
production cost and at the same time it will put better goods and services within the
reach of a bigger range of the world and per se increase the living standards of the
country.

Sumit Kumar PGP/22/273

Criticism of GST:
While the Goods and Services Tax (GST) was introduced in India as a game changing economic reform
which would help the whole country become a single unified market, it has been surrounded by a lot of
criticism and controversies. Let’s look at some of the concerns:
1. Negative impact on small businesses:
The exemption threshold under GST is reduced. Under GST, a person with an annual turnover
of less than `20 lakh is exempted from registration. This directly impacts lakhs of manufacturers
who enjoyed a small scale industry (SSI) exemption (up to a turnover of `1.5 crore) from
payment of excise duty in the earlier tax regime. It is estimated that around 90% of the indirect
tax revenue comes from taxpayers with an annual turnover of more than 1.5 cr. So, this
reduction in exemption threshold is not going to generate much tax revenue for the government.

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Also, the cost involved in collecting tax from small tax payers is too high and disproportionate
to their revenue.
Reverse charge mechanism: It is the liability of the recipient of goods or services or both to
pay the tax. The GST act requires the registered unit to first pay tax on behalf of the unregistered
vendor or supplier. This is an anti-tax-evasion measure to ensure that transactions by
unregistered people don’t escape tax. Large businesses often transact with small unregistered
businesses. In such business environments, it is the liability of the registered large business to
pay tax on behalf small unregistered vendor or supplier. The large businesses are already facing
a lot of challenges to cope with the changes due to implementation of GST. In such
circumstances, the large businesses may not want to transact with the small businesses.
As per the GST act, under composition scheme, the registered taxpayers with an annual
turnover of upto 75 lakhs are offered certain benefits such as less compliance and low tax rate.
This scheme may look like a support for small businesses. However, under this scheme, the
dealers cannot supply their products through online platforms. These dealers cannot supply their
products outside their state of registration.

2. Input tax credit: Input tax credit reduces the tax paid on inputs from taxes to be paid on output.
To reap the benefits of input tax credit, the dealer has to produce the tax invoice, duly filed
returns and the collected tax must be passed on to the government. Hence, the buyer cannot
avail the ITC unless the tax is passed on the government by the supplier. Some businesses face
cash crunch and hence they default in payment of tax. In such circumstances, the buyers may
ask for bank guarantees from suppliers. This leads to more complicated compliance
requirement.

3. Compliance challenges: The businesses have to file three returns per month and one annual
return (total of 37 returns in a year). The process of registration is also complicated with so
many forms to fill up. The businesses have to register in all the states of operation. These tough
compliance requirements can be fulfilled using the services of accountants, which again
increases the compliance cost. The higher compliance cost leads to higher tax evasion
rate.

4. Classification conundrum: Presently there are four tax rates and the correct
classification of items under these four rates is difficult. Also, in GST Harmonious
System Classification (HSN) code is used, which is difficult to adapt for the traders
because HSN is based on international practices and Indian items are difficult to
classify.

5. Regional economic divergence: Before implementation of GST, the experts suggested

that GST will lead to regional economic convergence because of greater economic
integration among states and boost in inter-state trade and labour mobility. However,
research shows that there hasn’t been a convergence post GST implementation.

6. Degree of inequality: GST is an indirect tax and is levied at the same rate on the poor
and rich. Hence, an attempt to increase the tax to GDP ratio by increasing the indirect
tax would lead to higher inequality among the rich and the poor.

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7. Ceding state autonomy: Under the current GST scheme, the state government has no
say in deciding the tax rate. It is centrally decided by the GST council. Thus, the state
governments have become a mere tax collecting agency of their own taxes. Since, the
state governments are not allowed to decide on their SGST, the fiscal autonomy of the
state is also being compromised.

Recommendations:
1. If government wants to increase tax to GDP ratio, then the focus should be on direct
tax as the direct taxes are proportional to the income of a person and reduces the
inequality between poor and the rich.
2. State government should have the freedom to decide on the rate of SGST so that
the financial autonomy is there with the state government.
3. While claiming Input Tax Credit, the matching of invoices should be delayed for a
few months till the system becomes more stable.
4. Introduction of offline utility and customer complaints redressal platform to reduce
the burden on online platform.
5. Simplification of registration and return forms for small businesses.
6. More active involvement of state revenue department in curbing misinformation
spread in tier 2 and tier 3 cities.
7. Improvement in the lifeline of GST i.e., GSTN.

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References:
1. Praveen Chakravarty, Vivek Dahejia. 24 Jun, 2017, Will GST Exacerbate Regional Divergence,
Economic & Political Weekly
2. Surajit Das, 04 Mar, 2017, Some Concerns Regarding the Goods and Services Tax, Economic
& Political Weekly
3. Sudipto Banerjee, Sonia Prasad, 23 Sep, 2017, Small Businesses in the GST Regime, Economic
& Political Weekly
4. Arun Kumar, 18 Jul, 2015, Macroeconomics Aspects of Goods and Services Tax, Economic &
Political Weekly
5. http://mofapp.nic.in:8080/economicsurvey/pdf/032042_Chapter_02_ENGLISH_Vol_01_201
7-18.pdf
6. https://www.insightsonindia.com/2018/07/05/insights-into-editorial-focus-on-simplifying-the-
gst-structure/
7. https://www.pwc.in/india-services/indirect-tax/365-days-of-the-gst-a-historic-journey.html
8. https://en.wikipedia.org/wiki/Goods_and_Services_Tax_(India)
9. http://www.iosrjournals.org/iosr-jbm/papers/Conf.18010-2018/Volume%201/9.%2037-40.pdf

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