Tactful Management Research Journal Vol. 2 | Issue. 10 | July 2014 ISSN :2319-7943

Impact Factor : 1.5326 (UIF) ORIGINAL ARTICLE

GOODS AND SERVICE TAX – Panacea For Indirect Tax System In India. Pinki1 , Supriya Kamna2 and Richa Verma3 1

Assistant Professor, Ramjas College, University of Delhi, Assistant Professor, Shivaji College, University of Delhi, 3 Assistant Professor, Ramjas College, University of Delhi, 2

Abstract: Goods and services tax is India's most ambitious indirect tax reform plan, which aims to stitch together a common market by dismantling fiscal barriers between states. Intention to implement this was declared in 2008 and it was supposed to be in existence from April 2010 but due to political and state government autonomy issues the federal government has been unable to make it a law. Over the past few decades, the worldwide trend has been for the introduction of a multi-stage GST system. Today, almost 90% of the world's populations live in countries with GST, including China, Indonesia, Thailand and Singapore. In this paper we have focused on explaining the concept of GST and why it should be implemented in India. Also we have discussed the various barriers to its implementation and how it can be overcome. KEYWORDS: Comprehensive tax, Liberalisation, tax base, Integrated Goods and Service tax, Built in credit mechanism, federal character. BACKGROUND The indirect tax system in India has undergone extensive reforms for more than two decades. Liberalisation of the Indian economy in 1992 forced the government to undertake indirect tax reforms so that the Indian industry can face international competition and economic growth can be accelerated. Peak rate of customs duty was gradually reduced from 300 per cent to 10 per cent. Excise duty was gradually reduced from peak rate of 220 per cent to 16 per cent and simplified 2 rate structure was introduced. The government's revenue requirement was met by reduction in tax exemption, introduction of service tax in 1994 and also significantly higher tax collection due to accelerated economic growth. Reduction in the tax rate also improved tax compliance and investment climate. Tax administration was improved and modernised. After achieving major success in central tax reforms and reaping its benefits in the form of higher economic growth and revenue expansion, it was realised that without undertaking tax reforms at the state level, the Indian economy will remain fragmented and the industry cannot derive significant gains. This led to the introduction of uniform VAT at state level in 2005 replacing multi rate sales tax. The state VAT design is based largely on the blueprint recommended in a 1994 report of the National Institute of Public Finance and Policy, prepared by a team led by late Dr. Amaresh Bagchi (hereinafter, the “Bagchi Report”). In recommending a state VAT, the Bagchi Report clearly recognized that it would not be the perfect or first best solution to the problems of the domestic trade tax regime in a multigovernment framework. However, the team felt that this was the only feasible option within the existing framework of the Constitution and would lay the foundation for an even more rational regime in the future. The introduction of uniform VAT by all 29 Indian states in India's federal structure was a watershed moment in the history of tax reform in India. It was a major step forward towards making India a one common economic market. But even after these reforms, indirect tax structure in India is still a highly Please cite this Article as : Pinki1 , Supriya Kamna2 and Richa Verma3, “GOODS AND SERVICE TAX – Panacea For Indirect Tax System In India.” : Tactful Management Research Journal (July ; 2014)

GOODS AND SERVICE TAX – Panacea For Indirect Tax System In India.

fragmented and distortionary tax structure characterized by multiple tax rates, barriers to interstate trade, and cascading of taxes, which realised the need of further and more comprehensive reform in this structure. Buoyed by the success of the State VAT, the Centre and the States are now embarked on the design and implementation of the perfect solution alluded to in the Bagchi Report. As announced by the Empowered Committee of State Finance Ministers in November 2007, the solution is to take the form of a 'Dual' Goods and Services Tax (GST), to be levied concurrently by both levels of government. GST Goods and Services Tax (GST) is a comprehensive tax levy on manufacture, sale and consumption of goods and services at a national level. GST is similar to the VAT system which is a value added tax on the goods with a input tax credit mechanism but GST also includes services. GST would be applicable on supply of goods or services as against the present concept of tax on the manufacture or on sale of goods or on provision of services. GST is a valued added tax on goods and services that is paid by the final consumer while the retailer will be taking credit of the tax he has paid while buying goods for retailing. So in this all the services of retailer or the chain behind him is taxed apart from the actual value of production of that good. This can be better understood with the help of an example, suppose that there is a chain of manufacturer, wholesale dealer and the retailer and GST is 10%. Suppose the manufacturer purchases the inputs worth Rs.100 for producing a good worth Rs.140. He will pay net GST of Rs.4 by taking the tax credit of Rs.10 on the inputs. Similarly the wholesaler who buys this good and sells it for Rs.150 will pay net GST of Rs.1 and the retailer who sells it for Rs.170 will pay net GST of Rs.2 by taking the tax credit for his purchase which comes out to be Rs.15. GST would be a destination based tax as against the present concept of origin based tax .It is proposed to be implemented as a dual GST with the Centre and the States simultaneously levying it on a common base. The GST to be levied by the Centre would be called Central GST (CGST) and that to be levied by the States would be called State GST (SGST) and the rate at which it would be levied be mutually agreed upon by the Centre and the States. Credit of CGST paid on inputs may be used only for paying CGST on the output and the credit of SGST paid on inputs may be used only for paying SGST. In other words, the two streams of input tax credit cannot be mixed except in specified circumstances of inter-State sales. GST would apply to all goods and services barring a few to be specified and this list of exempted goods and services would be kept to a minimum and it would be harmonized for the Centre and the States as far as possible. Tobacco and tobacco products would be subject to GST. In addition, the Centre could continue to levy Central Excise duty and the States to levy sales tax / VAT. A common threshold exemption would apply to both CGST and SGST. Dealers with a turnover below it would be exempt from tax. A compounding option (i.e.to pay tax at a flat rate without credits) would be available to small dealers below a certain threshold. The threshold exemption and compounding provision would be optional. An Integrated GST (IGST) would be levied on inter-State supply of goods or services. This would be collected by the Centre so that the credit chain is not disrupted. Accounts would be settled periodically between the Centre and the State to ensure that the SGST used for payment of IGST is transferred to the destination State where the goods or services are eventually consumed. Likewise import of goods or services would be treated as inter-State supplies and therefore, would be subject to IGST in addition to the applicable customs duties. And exports would be zero-rated. The following taxes currently levied and collected by the Centre be subsumed by with the implementation of GST: a. Service Tax b. Central Excise duty c. Duties of Excise (Medicinal and Toilet Preparations) d. Additional Duties of Excise (Textiles and Textile Products) e. Additional Duties of Excise (Goods of Special Importance) f. Additional Duties of Customs (commonly known as CVD) g. Special Additional Duty of Customs (SAD) h. Cesses and surcharges State taxes that would be subsumed within the GST are: a. State VAT b. Central Sales Tax Tactful Management Research Journal | Volume 2 | Issue 10 | July 2014

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c. Entertainment Tax (not levied by the local bodies) d. Entry Tax (other than those in lieu of octroi) e. Luxury Tax f. Taxes on advertisements g. Taxes on lotteries, betting and gambling h. State cesses and surcharges insofar as they relate to supply of goods or services NEED FOR GST India's economic growth this year has fallen sharply and there is stagnation in Indian exports. One of the main reasons for this situation is the inefficient domestic indirect tax structure. The complex tax structure discourages economy of scale and efficiency in the supply chain which has adverse impact on economic growth. In the present global economic scenario, there is an urgent need to replace the existing tax structure by rational Goods and Service Tax covering all tradable goods and services. By the integration of goods and services taxation India will get a world class tax system and tax collections will also improve. It would end the long standing issue of differential treatment of manufacturing and service sector. GST will make Indian economy competitive and accelerate its growth. It will eliminate the cascading effect of taxes from cost of products. It is expected that a rational GST structure will reduce overall cost of indigenous products and services by about 10 per cent resulting in higher exports and reduced inflationary impact. A simplified GST structure will reduce litigation and compliance cost. Inbuilt check through the credit mechanism will improve tax compliance, widen tax base which will lead to higher tax: GDP ratio and buoyancy in tax revenue. Implimentation of GST is expected to boost GDP growth by at least 1% apart from attracting higher investment for future growth. The indirect tax reform has to address following aspect to realize full economic potential of India: Multiplicity of taxes: Taxes by Union Government, State Governments and the local governments have resulted in difficulties and harassment to the tax payer. He has to contact several authorities and maintain separate records for each of them. Lack of co-ordination: Our Federal Finance system allows Union and States levy taxes independently at different rates. There is no coordination between the taxes to allow a well organized, planned and coordinated tax system to evolve. Bias in incidence of taxes: According to indirect taxation enquiry committee, “The burden of the urban households was distinctly higher than the rural households in the corresponding expenditure class”. Urban population is taxed far higher than the rural rich. Complexity and corruption: A provoking feature of the Indian tax system is its complexity. Both direct and indirect tax laws are highly complex. This provides enough scope for avoiding and evading taxes. Lack of built-in elasticity: Income from taxation does not increase automatically in India in proportion to increase in National income. Hence, the government is compelled to increase taxes every year to maintain a constant tax income ratio. Administrative inefficiency and corruption: A baneful feature of the Indian tax system is the lack of administrative efficiency. Corruption exists in the administrative machinery from top to bottom. Such a system encourages the spirit of corruption among the tax payers also. DIFFERENT MODELS OF GST 1. Concurrent dual GST: Under this model, the tax is levied concurrently by the Centre as well as the States. States would collect the State GST from all of the registered dealers. To minimize the need for additional administrative resources at the Centre, States would also assume the responsibility for administering the Central GST for dealers with gross turnover below the current registration threshold of Rs 1.5 crores under the central Excise (CENVAT). They would collect the Central GST from such dealers on behalf of the Centre and transfer the funds to the Centre. Procedures for collection of Central and State GSTs would be uniform. There would be one common tax return for both taxes, with one copy given to the Central authority and the other to the relevant State authority. At a broad conceptual level, this model has a Tactful Management Research Journal | Volume 2 | Issue 10 | July 2014

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lot to commend itself. It strikes a good balance between fiscal autonomy of the Centre and States, and the need for harmonization. 2. National GST: Under this option, the two levels of government would combine their levies in the form of a single national GST, with appropriate revenue sharing arrangements among them The tax could be controlled and administered by the Centre, States, or a separate agency reporting to them. There are several models for such a tax. Australia is the most recent example of a national GST, which is levied and collected by the Centre, but the proceeds of which are allocated entirely to the States. A single national VAT has great appeal from the perspective of establishment and promotion of a common market in India. However, the States may worry about the loss of control over the tax design and rates. The States may also be apprehensive that the revenue sharing arrangements would over time become subject to social and political considerations, deviating from the benchmark distribution based on the place of final consumption. The Bagchi Report also did not favor this option for the fear that it would lead to too much centralization of taxation powers. 3. State GSTs: Under this option, the GST would be levied by the States only. The Centre would withdraw from the field of general consumption taxation. It would continue to levy income taxes, customs duties, and excise duties on selected products such as motor fuels to address specific environmental or other policy objectives. The loss to the Centre from vacating this tax field could be offset by a suitable compensating reduction in fiscal transfers to the States. This would significantly enhance the revenue capacity of the States and reduce their dependence on the Centre. The USA is the most notable example of these arrangements, where the general sales taxes are relegated to the states. There would be significant hurdles in adopting this option in India. First, it would seriously impair the Centre's revenues. The incremental revenues from the transfer of the Centre's tax room would benefit the higher-income states, while a reduction in fiscal transfers would impact disproportionately the lower-income states. In particular, it would be impractical to bring inter-state services within the ambit of the State GST without a significant coordinating support from the Centre. The GST model proposed to be introduced in India is dual GST structure which is compatible with India's federal structure. It would integrate most of the existing indirect taxes currently levied by federal and state governments on tradable goods and services such as excise duty, service tax, state VAT/ sales tax, countervailing custom duty, luxury tax, and entertainment tax etc except basic customs duty on import. . In India, GST will be levied by both centre and state on the same tax base at pre-determined tax rates, at each stage of supply chain. Input tax credit will also be allowed on the same basis. Thus, a tax payer will simultaneously pay Central GST and State GST separately on transactions at each level of value addition. BENEFITS OF PROPOSED GST GST will bring about a change in the tax system by redistributing the burden of taxation equitably between manufacturing and services. GST will enable broadening of the tax base, which will further result in reduction in effective rate of tax. It will reduce distortions by applying the destination principle for levy of taxes. It will foster a common market across the country, reduce compliance costs and promote exports. It can provide a fiscal base for local bodies to enable them to fulfill their obligations. It will facilitate investment decisions being made on purely economic concerns independent of tax considerations. - It will boost up economic unification of India; it will assist in better conformity and revenue resilience; it will evade the cascading effect in Indirect tax regime. - In GST system, both Central and state taxes will be collected at the point of sale. Both components (the Central and state GST) will be charged on the manufacturing cost. - It will reduce the tax burden for consumers. - It will result in a simple, transparent and easy tax structure; merging all levies on goods and services into one GST. - It will bring uniformity in tax rates with only one or two tax rates across the supply chain. - It will result in a good administration of tax structure. - It may broaden the tax base. - It will increase tax collections due to wide coverage of goods and services. - It will result in cost competitiveness of goods and services in Global market. - It will reduce transaction costs for taxpayers through simplified tax compliance. - It will result in increased tax collections due to wider tax base and better conformity.

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CHALLENGES TO THE IMPLIMENTATION OF GST States reluctance to implement GST: Under GST the taxes would be levied on the basis of Destination Principle (i.e. taxed in state where goods/service is sold/rendered) and State govts are fearful of losing money. Some food grains producing states and mineral rich states get considerable revenue from the Purchase tax which is a tax on the agriculture produce purchased from the farmers. These states want to exclude the purchase tax from the GST. Purchase tax is same as sales tax but is deposited to the government by the purchaser instead of the seller. Most of this produce is exported to other states. So these states believe that revenue generated from purchase tax is in fact exporting the tax burden on the local population to the other states and so is not regressive for their state. 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. Though Central government has put forward a tax revenue sharing program, but States aren't entirely convinced about it. Legislative challenge/ federal character: With the federal structure of the Indian constitution the implementation of uniform policies is a very delicate issue. Indian constitution demarcates the power of the Union and State Governments to independently impose and collect taxes within their domain. The tax rates and tax base is determined by them based on revenue requirement and socio political considerations. Any change in the taxation powers of federal or state governments requires amendment to the Indian constitution. This can be done only if Indian Parliament approves such amendment by two third majority of its members present and it is also to be ratified by more than 50% of the 29 State legislative assemblies. The Amendment Bill has already been introduced in the Parliament; however the legal process is time consuming and will require support of Parliament and state assemblies. And obtaining consensus of all the states is not an easy task. Administratively only one system of taxation would have been much better but due to federalstate issue about sharing of power the GST is supposed to have three components which are central GST, state GST and interstate GST. Infrastructure: IT infrastructure is a key component for success of GST. Without a well-designed and well-functioning IT system, the benefits of GST will remain elusive. IT infrastructure will play a huge role in interstate GST. Inter-state GST(IGST) will be collected by the centre and passed on to the states. It will have to be transferred electronically. In case of VAT , the centre had a broad IT infrastructure in place, but it was a major issue with the states . The centre's online tax payment application ACES will be tweaked a bit to take care of the GST but computerization of states is the biggest concern. The major responsibilities of IT infrastructural requirement will be shared by the Central Government through the use of its own IT infrastructure facility. The issues of tying up the State Infrastructure facilities with the Central facilities as well as further improvement of the States' own IT infrastructure, including TINXSYS, is now to be addressed expeditiously and in a time bound manner. Rates of tax: Within the broad structure of a consumption-type, destination-based, credit-invoice GST. Ideally, the tax should be levied comprehensively on all goods and services at a single rate to achieve the objectives of simplicity and economic neutrality. But the decision of tax rate is very delicate and country specific. In India the Empowered Committee has decided to adopt a two-rate structure –a lower rate for necessary items and goods of basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items.Till now there has been no official announcement regarding GST rates in India. GST rate should be such rate which generates the same revenue to the state and centre as generated in the current tax structure. If the GST rate is above the revenue neutral rate(RNR) it will create burden on consumers as goods and services will be costlier and if GST rate is below RNR then it will not be beneficial for our economic development as centre and state will not have the sufficient revenue to invest. This RNR for GST shall be unique for each state depending upon their prevailing taxes, taxpayer base and list of exempt items. About 80% of the states have written that their calculation indicate that a RNR would be in the range of 18-20%. Tactful Management Research Journal | Volume 2 | Issue 10 | July 2014

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Some States seem to be in favour of a band of rates in the GST regime - in line with the practice adopted by the European Union and perhaps elsewhere - in order to have flexibility in the rate structure. Adoption of a band of rates is undesirable since the resultant differential tax rates between neighbouring tax jurisdictions create tax arbitrage opportunities and encourage clandestine trade. But at the end the tax structure should be simple and should have minimal rates. Effective credit mechanism: The success of dual GST model will depend on effective credit mechanism to avoid cascading effect of multi-stage taxation in the supply chain. The credit mechanism is the lifeline of GST. As far as Central GST is concerned, there is no difficulty in giving credit of Central GST anywhere in India as is evidenced by success of the present CENVAT scheme. But, in case of State GST presently there are issues in giving credit in relation to inter-State transactions. Items kept out of GST: Based on the first discussion paper and subsequent comments and recommendations by the Thirteenth Finance Commission and Department of Revenue, the following are envisaged to be kept outside the GST framework. Levies on petroleum products Levies on alcoholic products Taxes on lottery and betting Basic custom duty and safeguard duties on import of goods into India Entry taxes levied by municipalities or panchayats Entertainment and Luxury taxes Electricity duties/taxes Stamp duties on immovable properties Taxes on vehicles Consequently, the taxation on the above products would continue as is currently prevalent. Such exclusion will continue to have multiple taxes thereby distorting the tax structure. Such a move is likely to result in cascading of taxes and will continue to have negative impact on cost of product in India where these are used and will create tax barrier in making India a common and competitive market and also add to the production cost if these are levied on inputs. In due course the existing rates of such local taxes can be increased by states leading to fragmentation of market. CONCLUSION: The concept of GST was proposed in India few years back. Its implementation is still in progress but with the arrival of new Government we can hope for its speedy review and application in real world. “As far as BJP is concerned, we are in favour of the GST. Nobody should have any doubts regarding it,” Mr Modi said addressing an event. The new Government is in favour of GST and it is very much justifiable because we saw in this paper, that the concept of GST have many positive implications. If we sum up few we can easily say that GST will make Indian tax system least complicated and most efficient. India has huge diversified market and they are under numerous as well as different kinds of surveillance. Due to clear bifurcation of power between Centre and State, State enjoys full autonomy in fixing the tax rate. Generally, it is observed that State has tendency to escalate tax rates in order to raise their revenues. To cope up with this disparity of rates among the states for same goods or services GST is proposed. There are many benefits of GST for Centre and State as well as customers. For example, With India being second fastest growing sector in services the roles of taxes in service sector has increased. Earlier only Centre had the authority to collect taxes on services but now with GST even States will play a significant role in collection of service tax. Now another aspect may arise where initially the tax share of State may decrease but gradually over the years with broadening of tax base(due to GST) the revenue for the States will increase. Now the main question arises as to when it is the right time to introduce GST. I would say sooner the better but before its implementation or any further processing Government should be very clear with the fact that for smooth working of GST, the Information Technology/ Infrastructure should also be properly developed throughout India. It is further observable that the core aim of GST is to eliminate the multi fold tax rules. But under GST it is proposed that multiple tax rates will be applicable, which makes it a square one. Also, few items will not come under the purview of GST which will defeat the main purpose of introducing GST as the cascading effect will remain imbibed.

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Pinki Assistant Professor, Ramjas College, University of Delhi,

Supriya Kamna Assistant Professor, Shivaji College, University of Delhi,

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