DR.

RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY,

LUCKNOW

TAXATION

PROJECT

INDIAN TAX STRUCTURE AND

TAX REFORMS WITH GST

SUBMED BY: SUBMITTED TO:

HARDIK ANAND Mr.BHANU PRATAP SINGH

B.A. LL.B. ASST. PROFESSOR

ENROLLMENT NO.: 160101073 RMLNLU

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 ACKNOWLEDGEMENTS

I would like to express my sincere gratitude and indebtedness to Prof. BHANU PRATAP
SINGH for his enlightening lectures on Law of Taxation. I would also like to express my
sincere gratitude to our teaching staff for guiding me the path towards gaining knowledge. I
would also like to thank Symbiosis Law School, Hyderabad, library for the wealth of
information therein. I would like to thank Library Staff as well for their co-operation.

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 ABSTRACT

Tax structure in India is a three tier federal structure. The central government, state
governments, and local municipal bodies make up this structure. Article 256 of the
constitution states that “No tax shall be levied or collected except by the authority of law”.
Hence, each and every tax that is collected needs to backed by an accompanying law. Under
the Indian Taxation law the structure or the system of taxation is divided mainly into two
taxes that are commonly known as Direct taxes and Indirect taxes, direct taxes are those taxes
in which the burden to deposit the taxes are on the assesses themselves (for example income
tax imposed on the income earned by an individual is to be paid by him only ) and indirect
taxes are those taxes wherein the burden to pay the tax is shifted to someone else this tax is
usually imposed on the goods and services which then results in higher prices of such goods.
A few examples of indirect taxes in India include service tax, central excise and customs
duty, and value added tax (Before the GST reform). In India taxes are imposed by the Central
Government and by the State Government ,apart from them some small imposing powers are
also rested with the local authorities such as the local government and the Municipal
authorities .For the past decades both the central government and the state government have
undertaken many policy reforms and have also worked on the different recommendations
made by different committees(Raja Chelliah & Vijay Kelkar Committees) from time to time
to simplify the process of taxation in India , the GST reform is one such reform which aims to
eradicate all these complex multiple indirect tax problems that are being faced by the people
of India . In this research project all the above mentioned aspects will be discussed
thoroughly .

Keywords – Indian Tax Structure, Tax reforms, Raja Chelliah & Vijay Kelkar Committees,
GST reform, Direct and Indirect Taxes.

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 INTRODUCTION

The tax structure in India

Tax structure in India is a three tier federal structure. The central government, state
governments, and local municipal bodies make up this structure. Article 256 of the
constitution states that “No tax shall be levied or collected except by the authority of law”.
Hence, each and every tax that is collected needs to backed by an accompanying law. Under
the Indian Taxation law the structure or the system of taxation is divided mainly into two
taxes that are commonly known as Direct taxes and Indirect taxes, direct taxes are those taxes
in which the burden to deposit the taxes are on the assesses themselves (for example income
tax imposed on the income earned by an individual is to be paid by him only ) and indirect
taxes are those taxes wherein the burden to pay the tax is shifted to someone else this tax is
usually imposed on the goods and services which then results in higher prices of such goods.

“Over the last few years, the Central and many State Governments have undertaken various
policy reforms and process simplification towards great predictability, fairness and
automation. This has consequently lead to India’s meteoric rise to the top 100 in the World
Bank’s Ease of Doing Business (EoDB) ranking in 2017. The Goods & Services Tax (GST)
reform is one such reform to ease the complex multiple indirect tax regime in India”

Major Central Taxes-

 Income Tax
 Central Goods & Services Tax (CGST)
 Customs Duty
 Integrated Goods & Services Tax (IGST)

Major State Taxes-

 State Goods & Services Tax (SGST)

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  Stamp Duty & Registration

Direct Tax-

“Direct Tax is levied directly on individuals and corporate entities. This tax cannot be
transferred or borne by anybody else. Examples of direct tax include income tax, wealth tax,
gift tax, capital gains tax”

“Income tax is the most popular tax within this section. Levied on individuals on the income
earned with different tax slabs for income levels. The term ‘individuals’ includes individuals,
Hindu Undivided Family (HUF), Company, firm, Co-operative Societies, Trusts.”

Indirect Tax-

“Indirect taxes are taxes which are indirectly levied on the public through goods and services.
The sellers of the goods and services collect the tax which is then collected by the
government bodies”

 Value Added Tax1 (VAT)– A sales tax levied on goods sold in the state. The rate
depends on the government.
 Octroi Tax– Levied on goods which move from one state to another. The rates depend on
the state governments.
 Service Tax– Government levies the tax on service providers.
 Customs Duty– It is a tax levied on anything which is imported into India from a foreign
nation.

GST is one of the biggest indirect tax reforms in the Country.

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Previously ,now it does not exists anymore

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“GST is a comprehensive indirect tax levied on manufacture, sale and consumption of goods
as well as services at the national level. It has replaced all indirect taxes levied on goods and
services by the Central and State Governments”2

“GST regime was implemented from 1st July 2017, and India has adopted the dual GST
model in which both the Centre and States levy taxes:”3

GST has three components-

 “CGST-Stands for Central Goods and Services Act. The central government collects
this tax on an intrastate supply of goods or services”
 “SGST:Stands for State Goods and Services Tax. The state government collects this
tax on an intrastate supply of goods or services”
 “IGST:Stands for Integrated Goods and Services Tax. The central government
collects this for inter-state sale of goods or services”

INDIA’s TAX SYSTEM PRIOR TO REFORMS (1991)

 “The 0trends0 in 0tax 0revenues presented0 in table 1 present three distinct phases.
In the first, right from the 1970s to mid-1980s, 0 there has0 been0 a steady 0increase
0in the 0tax-GDP ratio in keeping with the buoyant economic conditions and
acceleration in the growth rate of the economy”

2
Goods kept outside the GST –Alcohol for human consumption(i.e., not for commercial use)”and Petrol and
petroleum products (GST will apply at a later date), i.e., petroleum crude, high-speed diesel, motor spirit
(petrol), natural gas, aviation turbine fuel

3
https://www.investindia.gov.in/taxation

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 “The tax ratio, which was about 11 per cent in 1970-71, 0increased steadily to
14.6 per0 cent in 01980-81 (table 1). The ratio continued to0 increase steadily0
during the early 1980s (chart 1). 0In 0addition to the economy attaining a higher
growth path, the 0buoyancy in tax revenues was fuelled by the progressive
substitution of 0quantitative0 restrictions with tariffs following initial attempts at
economic liberalization in the 1980s. The economic 0recession 0following the0
severe drought 0of 1987 resulted in stagnation in revenues in the second phase0
until 1992-93”
 “Following 0the 00economic crisis 0of 01991 and 0the 0subsequent 0reforms in
0the tax 0system, particularly reduction in tariffs, actually0 caused a 0decline in the
tax ratio. Overall, it is seen that the tax ratio which reached the0 peak of about 17
per cent in 1987-88, 0 declined thereafter to 13.9 per cent in 1993-94 and0 gradually
0recovered0 to 14.6 per cent in 1997-98”
 0Overall, 0the level 0of tax revenues, although reasonable as compared to the
average tax level in developing countries, is 0clearly inadequate from0 the
viewpoint of resource 0requirements of the economy0. In terms of0 composition of
tax revenue, there has been av steady 0decline in the share of direct taxes from 21
0per cent in 1970-71 to about 14 per cent in 1990-91. After thev introduction of tax
reforms in 1992, 0 the revenue from direct taxes has Table 1. Level and composition
of taxes0 in India (per cent) Tax 1970-71 ,1980-81 ,1990-91, 1995-96, 1996-97,
1997-98 , 100 Per cent Direct0Indirect Chart .
 “Trends 0in 0direct and indirect taxes Chart 2. The0 shares of direct0 and indirect0
taxes grown faster than 0revenue from other 0taxes as well as GDP and0
consequently, the 0share of 0direct taxes0 increased by0 almost ten0 percentage
points 0to 24 per cent 0on 1997-98. 0An 0increase0 was0 seen in both 0corporate
0income and individual0 income 0taxes 0though0, taxes0 on agricultural land and
incomes have continued to decline. In fact, 0although the agricultural sector0
contributes0 over 030 per cent of GDP, its contribution to tax revenues 0is just about
0half 0a per cent. The fastest growth of revenues was in respect of customs during
the period0 from 1970 until 1992-93, when import duties were significantly reduced.
Some observers attribute this lopsided development0 of the tax system0 to the Direct
Indirect 0Total Per cent of GDP0 incentives 0arising from 0the constitutional
0arrangement of devolving revenue from0 personal0 income 0tax and0 union excise

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 0duties to 0states (see Burgess and Stern 1993 and Joshi and Little 1996). It is 0also
0seen 0that 0even 0after0 reforms0 were 0initiated0 in 1992-93, although the share0
of revenue0 from import duties has declined due0 to reduction0 in tariffs0, the
decline0 in the share 0of 0revenue 0from 0union0 excise duties 0has been much
faster4

 In the era of 1990s the tax system of India saw major reforms as till now the
changes and the steps that were taken did not give some fruitful results . in India the
tax structure is a three-tier federal structure that is the central government, the state
government and the local bodies .

 The tax system has to adjust to the requirements of a market economy to ensure
international competitiveness.

Report of the Tax Reform Committee (TRC)

“The tax reform was made into force as a part of the structural reform process after the 1991
crisis related to the economy of the country to have the best practices the tax reform
committee they adopted a mixture of economic practices and mixture of wisdom for
recommending tax reforms in the country, (0Raja Chelliah Committee) The Government
appointed a TRC under Raja Chelliah to make recommendations in regard to India’s tax
system.”

The Committee has suggested far 0reaching changes in the tax system with a two-fold
objective:

(i) To remove the defects that were present at that time, and

(ii) To make the tax system more productive

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Asia-Pacific Development Journal Vol. 7, No. 2, December 2000 64

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 0The report that TRC made was inform of three parts , the first part of the final
report was regarding the neglected attitudes relating to administration and the
enforcement of both the taxes that are indirect and direct taxes on the other hand the
2nd part was for the dealing with the restructure of the existing tariff structure in
keeping the dynamic structure of the Indian economy while making these
recommendations the things that were kept in mind before passing any
recommendations were that , firstly that the tax base should be broaden secondly the
marginal tax rates should be reduced thirdly the there should be a reduce in the rate
differentiation
 and lastly that measures should be taken to make the administration and
enforcement of the tax system more effective.

 “The reforms were to be implemented in such a way that they would turn out to be
beneficial in the medium and the long run for our country. That’s why the main area
of the TR was to”
1. “Take measures by which there would be decrease in the shares of the trade tax
when it comes to total tax revenues”
2. “By introducing value added taxes which would result in increase of the domestic
consumption taxes”
3. “And lastly by increasing the contribution of the not direct taxes that are the direct
tax”

 The TRC recommended a number of measures to broaden the base of all taxes by
minimizing exemptions and concessions, drastic simplification of laws and
procedures, building a proper information system and computerization of tax
returns, and a thorough revamping and modernization of the administrative and
enforcement machinery. It also recommended that the taxes on domestic production
should be fully converted into a value added tax, and this should be extended to the
wholesale level in agreement with the states, with additional revenues beyond the
post-manufacturing stage passed on to the state governments. In the case of customs,
the TRC recommendations were the weakest. The TRC recommended tariff rates of

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 5, 10, 15, 20, 25, 30 and 50 to be achieved by 1997-98. The tariff rate was to vary
directly with the stage of processing of commodities, and among final consumer
goods, with the income elasticity of demand (higher rates on luxuries).
 “Excessive rate differentiation (seven rates) and according varying degrees of
protection depending on the stage of processing has been severely criticized by Joshi
and Little (1996, p. 74) when they state, “….this is a totally unprincipled principle,
for it has no foundation in economic principles”. In addition to continued
complexity, the proposed tariff structure creates very high differences in effective
rates and provides a higher degree of protection to inessential commodities”
 “The TRC recommendation also falls much short of developing a co-ordinate
domestic trade tax system in the country. This, in a sense, is understandable, as it
had no mandate to go into the state level taxes. However, the Committee was aware
of the serious problems of avoidance and evasion in respect of sales taxes levied by
the states predominantly at the manufacturing stage. Therefore, it did recommend
the extension of the central VAT to the wholesale stage with the revenues from the
extended levy assigned to the state’s”5

SHORTCOMINGS AND CHALLENGES

 After several years after the tax reforms there still remained many problems which
were yet to be tackled one of these problem was that how should the productivity of
the tax system should be improved? And secondly that still the tax ratio has not met
with the pre reform levels that were expected by the TRC, “Reforms in excise
duties have not reached the stage of achieving a simple and transparent
manufacturing stage VAT”6.

 A major difficulty in evolving a destination based retail stage VAT at the state level
arises from the fact that the states do not have the power to levy tax on services. As
mentioned earlier, the states can levy sales taxation of only goods. Taxation of
services is not assigned to either the centre or the state, but the former levies taxes
on selected services based on power to levy taxes on residual items. Proper levy of

5
Asia-Pacific Development Journal Vol. 7, No. 2, December 2000 64
6
Bagchi, A, 1994. “India’s tax reform: a progress report”, Economic and Political Weekly, vol. XXIX, 22 October,
pp. 2809-2815.

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 goods and services tax would, therefore, require an amendment of the Constitution.
The central government can use this as a leverage to persuade the states to reduce
and eventually eliminate the taxation on inter-state sales so that a levy of destination
based VAT becomes a reality

Vijay Kelkar Committee

 “The latest committee regarding the direct tax reforms in India came with the
recommendations of the Task Force on Direct & Indirect Taxes under the
chairmanship of Vijay Kelkar (2002). recommendations of this task force were in
regard to the direct taxes related to increasing the income tax exemption limit,
rationalization of exemptions, abolition of long term capital gains tax, abolition of
wealth tax etc”

DIFFERENCE BETWEEN GST & PREVIOUS YEAR TAX

STRUCTURE

Before the introduction of GST there was a tax system in India by the name VAT (Value
Added Tax). VAT was introduced in 2005 and implemented in the year 2014. But VAT was
eventually substituted by GST (Goods and Services Tax). VAT had certain advantages over
the tax system that prevailed much earlier. They are :

1) VAT minimises tax evasion.

2) VAT was based on the value, not on the price of the product.
3) VAT was simpler as compared to the previous tax systems
4) There was more tax paying participants after the introduction of VAT.
5) VAT was charged at every production point and acts as an disincentive from
operating in Black Market.

Though there were many advantages there had been certain disadvantages as well. They are :

1) Different states had their own VAT rates, which made it very complicated.

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 2) Different states had their own VAT Laws.
3) VAT was based on full billing system and it seemed to be expensive.
4) Calculating VAT at every stage proved to be tedious.
5) VAT increased compliance cost.

During the period of VAT there were certain tax systems which were Excise duty and Service
duty, Luxury tax etc. Thus in order to tackle this situation there was a need for introduction of
new Tax system which would be common for all and reduce all the complications and
confusions and be more stricter than ever before.

Thus, on July 1st 2017, GST was introduced replacing the other indirect taxes and became the
only common Tax in the nation.

The GST proved to be a boon in the matters of Cascading Tax system.

 During the time VAT the tax was levied on every step of sale. This made the
consumer to pay tax for the product for which the tax was applied already.
 Under VAT there were certain exceptions for the state in North East. But in VAT
there is no exemption and GST counsil will introduce Investment Refund Scheme.
 Under VAT tax was collected separately for import of goods. But in GST this tax is
subsumed in SGST itself.
 Under VAT the tax was applied at the place of manufacture or selling place or the
place where the service is rendered. This leads to tax application in every step. But in
GST the tax will be applied on the place of consumption.
 Under the old taxation system, the central taxes applicable were custom duty/central
excise duty, central sales tax on commodities and services, surcharge and cesses. The
state taxes included state VAT, WCT, entertainment tax, luxury tax, tax on gambling,
betting and lottery, sales tax deducted at source, and surcharge and cesses. Under
GST, all the central and state taxes will be subsumed and a single tax will be levied on
all commodities and services apart from motor spirit, petroleum, natural gas and high-
speed diesel.
 The registration under VAT is a decentralised process under central and state
authorities. Under GST there is uniform registration according to the PAN entity.
 VAT varied from state to state. But GST is common throughout the nation.

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  Under VAT disallowance of inputs or input services utilised in exempted
commodities or services, were not allowed. Under GST there are no such
disallowances.
 VAT was applicable foe sale of goods. GST is applicable for Goods and Services.
 The mode of payment was offline. But GST can be paid online if it exceeds 10,000.
 Under VAT, the seller state used to collect the revenue. But under GST the consumer
state collects the Tax.
 In GST the flow of credit is seamless.
 Under VAT, the tax collected will go to the state. But under GST , the revenue
collected is bifurcated between the state and the Central govt.

The GST has proved to be a revolutionary change in the field of Taxation. One Nation One
Tax is made possible because of the introduction of GST and eliminated the concept of Tax
on Tax.

TYPES OF GST

The GST has subsumed all the indirect taxes and made it come under one cloud. Here, it
composes of two rates. If the transaction is intra-state( within the state), CGST and SGST is
applicable or CGST and UGST in case of U.T.

If the transaction is inter-state ( with states), then CGST and IGST will be applicable.

There are four types of GST:

 Central Goods and Services Tax

 State Goods and Services Tax
 Integrated Goods and Services Tax
 Union Territory Goods and Services Tax

1) CGST full form is Central Goods and Services Tax.

CGST refers to the Central GST tax that is levied by the Central Government of India on any
transaction of goods and services tax taking place within a state. It is one of the two taxes

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charged on every intrastate (within one state) transaction, the other one being SGST (or
UTGST for Union Territories). CGST replaces all the existing Central taxes including
Service Tax, Central Excise Duty, CST, Customs Duty, SAD, etc. The rate of CGST is
usually equal to the SGST rate. Both taxes are charged on the base price of the product. See
the example below to understand it better.

 e.g. – In the example above, when Suresh sales a product to Pradeep in the same state
(Rajasthan), he has to pay two taxes. CGST is for the central government while SGST
is for the state. The rate of CGST is 9%, same as SGST. After the application of
CGST (9% of Rs 10,000), the final cost of the product will become Rs 11,800.

2) SGST full form is State Goods and Services Tax

SGST (State GST) is one of the two taxes levied on every intrastate (within one state)
transaction of goods and services. The other one is CGST.  SGST is levied by the
state where the goods are being sold/purchased. It will replace all the existing state
taxes including VAT, State Sales Tax, Entertainment Tax, Luxury Tax, Entry Tax,
State Cesses and Surcharges on any kind of transaction involving goods and services.
The State Government is the sole claimer of the revenue earned under SGST. Let’s
understand this with an example.

e.g. – Suresh from Rajasthan wants to sell some goods to Pradeep in Rajasthan. The
product, originally priced at Rs 10,000, will attract GST at 18% rate comprising of
9% CGST rate and 9% SGST rate. The SGST tax amount here is Rs 900 (9% of Rs
10,000) which is fully claimed by the Rajasthan State Government. The rate of the
product after SGST will be Rs 10,900.

3) IGST full form is Integrated Goods and Services Tax.

Integrated GST (IGST) is applicable on interstate (between two states) transactions of
goods and services, as well as on imports. This tax will be collected by the Central
government and will further be distributed among the respective states. IGST is
charged when a product or service is moved from one state to another. IGST is in
place to ensure that a state has to deal only with the Union government and not with
every state separately to settle the interstate tax amounts. Let’s try to understand IGST
with an example.

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 e.g., – Ramesh is a manufacturer in Rajasthan who sold goods worth Rs 10,000 to
Suresh in Rajasthan. Since it is an interstate transaction, IGST will be applicable here.
Let’s assume the GST rate is 18% for the particular item. So, the IGST amount
charged by the Central Government will be Rs 1800 (18% of Rs 10,000), and the
refined rate of the product will be Rs 11,800.

4) UTGST full form is Union Territory Goods and Services Tax.

The Union Territory Goods and Services Tax, commonly referred to as UTGST, is the
GST applicable on the goods and services supply that takes place in any of the five
Union Territories of India, including Andaman and Nicobar Islands, Dadra and Nagar
Haveli, Chandigarh, Lakshadweep and Daman and Diu. This UTGST will be charged
in addition to the Central GST (CGST) explained above. For any transaction of
goods/services within a Union Territory: CGST + UTGST

The reason why a separate GST was implemented for the Union Territories is that the
common State GST (SGST) cannot be applied in a Union Territory without
legislature. Delhi and Puducherry UTs already have their own legislatures, so SGST is
applicable to them.

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 CONCLUSION

“While paying taxes may not be a pleasant feeling, however, it is prudent to understand that
tax paid by every single individual contributes towards the country’s administration and
resources required for its economic progress”

“It promotes savings as well as investments. If an individual makes certain set of investments,
a part amount of the same would be tax exempted, thereby enabling him or her to pay
reduced amount of taxes”

“Paying tax also works as a proof that you are not only disciplined in filing your tax returns
but also helps at the time of loan application. This is because at the time of purchasing a
home loan, the bank requires proof of whether the applicant has filed his or her taxes
regularly” By implementing GST on goods and services, the Indian government is looking at
improving the economy by eliminating the cascading system of tax and streamlining the
business process in India. Similar to every other type of tax, GST also has provisions to give
the benefits of tax credits. The credits will be applicable to the subsequent taxes on the same
product or service. All three IGST, SGST and CGST credits are usable against each other.
Any IGST credit will be first used to deal with IGST tax, then CGST, and then to set off
SGST. Every concept has both positive and negative aspects. Just on the basis of some
negative aspects, a system cannot be just torn out which has many big long term advantage.
Thus the GST should be widely accepted and supported

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 BIBLIOGRAPHY

 Ahmad, Ehtisham and Nicholas Stern, 1991. The Theory and Practice of Tax Reform in
Developing Countries (Cambridge, University Press).
 Bagchi, A, 1994. “India’s tax reform: a progress report”, Economic and Political Weekly,
vol. XXIX, 22 October, pp. 2809-2815.
 Bird, R.M., 1989. “Administrative dimension of tax reform in developing countries”, in
Malcolm Gillis, ed., Tax Reform in Developing Countries (London, Duke University Press).
_______ , 1993. “Tax reform in India”, Economic and Political Weekly, vol. XXVIII, 11
December, pp. 2721-2726.
 Burgess, Robin and Nicholas Stern, 1993. “Tax reform in India”, Working Paper No. 45,
STICERD, London School of Economics.
 Dasgupta, Arindam and Dilip Mookherjee, 1998. Incentives and Institutional Reform in
Tax Enforcement (Oxford University Press).
 Harberger, Arnold, 1990. “Principles of taxation applied to developing countries: what have
 Oxford University Press.

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