MADE BY : HIMANSHU KUMAR

& KRISHNA SAHU (MAIMS)

SUBMITTED TO: SAURABH
KHARBANDA SIR (RELIGARE
SECURITIES LTD.)
Executive Summary
The differential multiple tax regime across sectors of production leads to
distortions in allocation of resources thus introducing inefficiencies in the
sectors of domestic production. While indirect taxes paid by the producing
firms get offsets under state VAT and CENVAT, the producers do not receive
full offsets particularly at the state level. The multiplicity of taxes further adds
the difficulty in getting full offsets.

The Joint Working Group of the Empowered Committee of the State

Finance Ministers submitted its report on the proposed Goods and
Services Tax (GST) to the Finance Minister in November 2007. A dual GST,
one for the Centre and other for the states, was to be implemented by 1
April 2010. The new system would replace the state VAT , CENVAT, and
some other taxes.
 INDIAS TAX REGIME
In India the power for taxation has been divided between centre and state
under article 246 of the constitution. As per the said article the centre has
power to tax under list I of the Schedule VII of the constitution, the state can
tax under list II of the schedule and both can make law under list III of the
schedule.
Prior to the introduction of VAT in the Centre and in the States, there was a
burden of multiple taxation in the pre-existing Central excise duty and the
State sales tax systems. Before any commodity was produced, inputs were
first taxed, and then after the commodity got produced with input tax load,
output was taxed again. This was causing a burden of multiple taxation (i.e.
tax on tax) with a cascading effect.
It is in this background that attempts were made by the States to introduce a
harmonious VAT in the States, keeping at the same time in mind the issue of
sovereignty of the States regarding the State tax matters.
The States started implementing VAT beginning April 1, 2005. After
overcoming the initial difficulties, all the States and Union Territories have
now implemented VAT.
Benefits of GST
Benefits for centre:
As per the existing taxation system the centre does not has power to tax on production of
goods. The power to levy tax on sales rests with state except in case of inter state sales.
Therefore, introduction of GST would empower centre to tax sales also.

Benefits of GST for Centre:

Increase in GDP

Increase in exports

Power to tax after production down to distribution point

Ensures better compliance and prevent tax evasion

Benefits to state:
There is no uniformity in rate of taxes among the states. Even after introduction of VAT
there are different rates of tax in different states. Therefore, there was rate war among
states. GST will lead to uniformity in tax rates. Other benefits for state are:-

Benefits for states

Will get power to tax services
Will reduce rate wars, therefore, outflow of investment to other states due to rate war will be
prevented

Introduction of comprehensive system of reliefs including set off of CENVAT and service
taxes
Increase in revenue due to broadening of tax base
Removal of burden of CST
Benefits to industry

Will provide comprehensive input tax credit, the service tax can be set off with sales tax.

No need to pay CST

Many central and state indirect taxes will be subsumed in GST, therefore, a single tax is to be
paid.

Uniformity in tax procedure throughout the country.

Reduced tax burden will increase competitiveness of Indian products in foreign markets.
Benefits to consumer
Reduced tax burden will be passed on to consumers in form of reduced prices.
Better compliance and increased tax revenue will enable the government to spend more on
welfare.

The GST at the Central and at the State level will thus give more relief to industry,
trade, agriculture and consumers through a more comprehensive and wider
coverage of input tax set-off and service tax set-off, subsuming of several taxes in
the GST and phasing out of CST. With the GST being properly formulated by
appropriate calibration of rates and adequate compensation where necessary, there
may also be revenue/ resource gain for both the Centre and the States, primarily
through widening of tax base and possibility of a significant improvement in tax
compliance.
Comparing the present rates of tax and the proposed GST.

Goods from producer to wholesaler Present taxes (Rs.) GST (Rs.)

Cost of production 80,000 80,000

Producers margin of profit 20,000 20,000

Producers price 1,00,000 1,00,000

Central Excise duty at 14% 14,000 Nil

VAT at 12.5% 14250 Nil

Central GST at (expected rate )12% Nill 12,000

State GST at (expected rate) 8% Nill 8,000

Total Price 1,28,250 1,20,000

Goods from wholesaler to retailer Present taxes (Rs.) GST (Rs.)

 Overview of GST
WHAT IS GOODS AND SERVICE TAX ?
Goods and Service Tax is a tax on goods and services, which is leviable at each point of sale or
provision of service, in which at the time of sale of goods or providing the services the seller or service
provider can claim the input credit of tax which he has paid while Purchasing the goods or procuring
the service.

HOW WILL IT WORK?

GST will be paid at each step till final distribution stage. It will be charged by
dealers(manufacturer, trader and service provider) on the price of goods and services. While GST is
paid at each step in the supply chain of goods and services, the paying dealers dont actually bear the
burden of the tax because GST is an indirect tax and ultimate burden of the GST has to be taken by the
last Customer. This is because they include GST in the price of the goods and services they sell and
can claim credits for the most GST included in the price of goods and services they buy. The cost of
GST is borne by the final consumer, who cant claim GST credits, i.e. input credit of the tax paid.
Systems of GST
Type of System Input Credit Output Tax

Invoice system On receipt of invoice On issue of invoice

Payment system On making payment On making payment
Hybrid At the option of dealer to be At the option of dealer to be
declared in advance declared in advance

(a) Invoice System: In the invoice system, the GST (Input) is claimed on the basis of invoice and it is claimed when the invoice is received, it is immaterial
whether payment is made or not. Further the GST (Output) is accounted for when invoice is raised. Here also the time of receipt of payment is immaterial. One
may treat it as mercantile system of accounting. In India the present system of sales tax on goods is an invoice system of VAT
and here it is immaterial whether the taxpayer is following the cash basis of accounting or mercantile basis of accounting. The advantage of invoice system is that
the input credit can be claimed without making the payment. The disadvantage of the invoice system is that the GST has to be paid without receiving the payment.
(b) Payment System: In the payment system of GST, the GST (Input) is claimed when the payment for purchases is made and the GST (Output) is accounted for
when the payment is
made. In this system, it is immaterial whether the assessee is maintaining the accounts on cash basis or not. The advantage of cash invoice system is that the Tax
(output) need not be deposited until the payment for the goods and/or services is received. The disadvantage of the payment system is that the GST (input) cannot
be claimed without making the payment.
The Taxes on services in India are based on this payment system since service tax is payable on receipt basis and further Cenvat credit is only allowable when
payment of the service is made
(c) Hybrid System: In hybrid system the GST (Input) is claimed on the basis of invoice and GST (Output) is accounted for on the basis of payment, if allowed by
the law. In some countries the dealers have to put their option for this system or for a reversal of this system
before adopting the same.
 Salient features of the GST model proposed in
India
Salient features of the GST model proposed in India:

Rate Structure
The GST shall have two components: one levied by the Centre (hereinafter referred to as
Central GST), and the other levied by the States (hereinafter referred to as State GST). Rates for
Central GST (CGST) and State GST ( SGST) would be prescribed appropriately, reflecting
revenue considerations and acceptability. This dual GST model would be implemented through
multiple statutes (one for CGST and SGST statute for every State). 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.
The proposed rate structure is as follows:
A lower rate for essential structure.
Standard rate for general goods.
Special rates for precious metals.
For services their shall be single rate for SGST and CGST.
 Applicability
The Central GST and the State GST would be applicable to all transactions of goods and
services made for a consideration except the exempted goods and services, goods which are
outside the purview of GST and the transactions which are below the prescribed threshold
limits.
The Central GST and State GST are to be paid to the accounts of the Centre and the States
separately. It would have to be ensured that account-heads for all services and goods would
have indication whether it relates to Central GST or State GST (with identification of the State to
whom the tax is to be credited).
Input Credit
Since the Central GST and State GST are to be treated separately, taxes paid against the
Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and could
be utilized only against the payment of Central GST. The same principle will be applicable for
the State GST.
Ideally, the problem related to credit accumulation on account of refund of GST should be
avoided by both the Centre and the States except in the cases such as exports, purchase of
capital goods, input tax at higher rate than output tax etc. where, again refund/adjustment
should be completed in a time bound manner.
 Administration
The administration of the Central GST to the Centre and for State GST to the States would be
given. This would imply that the Centre and the States would have concurrent jurisdiction for
the entire value chain and for all taxpayers on the basis of thresholds for goods and services
prescribed for the States and the Centre.
The taxpayer would need to submit periodical returns, in common format as far as possible, to
both the Central GST authority and to the concerned State GST authorities.
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.

Keeping in mind the need of tax payers convenience, functions such as assessment,
enforcement, scrutiny and audit would be undertaken by the authority which is collecting the
tax, with information sharing between the Centre and state
Taxes to be subsumed under GST
The following taxes levied at centre will get subsumed under GST:-
i.Central Excise Duty
ii.Additional Excise Duties
iii.The Excise Duty levied under the Medicinal and Toiletries Preparation Act
iv.Service Tax
v.Additional Customs Duty, commonly known as Countervailing Duty (CVD)
vi.Special Additional Duty of Customs - 4% (SAD)
vii.Surcharges, and
viii.Cesses.
The following State taxes and levies would be, to begin with, subsumed under
GST:
i. VAT / Sales tax
ii. Entertainment tax (unless it is levied by the local bodies).
iii. Luxury tax
iv. Taxes on lottery, betting and gambling.
v. State Cesses and Surcharges in so far as they relate to supply of goods and
services.
vi. Entry tax not in lieu of Octroi.
Taxes to be kept out of purview of GST
Purchase tax: Some of the States felt that they are getting substantial revenue from Purchase Tax
and, therefore, it should not be subsumed under GST while majority of the States were of the view that
no such exemptions should be given. The difficulties of the foodgrain producing States was appreciated
as substantial revenue is being earned by them from Purchase Tax and it was, therefore, felt that in
case Purchase Tax has to be subsumed then adequate and continuing compensation has to be
provided to such States. This issue is being discussed in consultation with the Government of India.
Tax on items containing Alcohol: Alcoholic beverages would be kept out of the purview of GST.
Sales Tax/VAT could be continued to be levied on alcoholic beverages as per the existing practice. In
case it has been made Vatable by some States, there is no objection to that. Excise Duty, which is
presently levied by the States may not also be affected.
Tax on Tobacco products: Tobacco products would be subjected to GST with ITC. Centre may be
allowed to levy excise duty on tobacco products over and above GST with ITC.
Tax on Petroleum Products: As far as petroleum products are concerned, it was decided that the
basket of petroleum products, i.e. crude, motor spirit (including ATF) and HSD would be kept outside
GST as is the prevailing practice in India. Sales Tax could continue to be levied by the States on these
products with prevailing floor rate. Similarly, Centre could also continue its levies. A final view whether
Natural Gas should be kept outside the GST will be taken after further deliberations.
GST on Export and Import
GST on Export
Zero Rating of Exports
Exports would be zero-rated. Similar benefits may be given to Special Economic Zones (SEZs).
However, such benefits will only be allowed to the processing zones of the SEZs. No benefit to the
sales from an SEZ to Domestic Tariff Area (DTA) will be allowed.
GST on Imports:
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.
Special Industrial Area Scheme
After the introduction of GST, the tax exemptions, remissions etc. related to industrial incentives should
be converted, if at all needed, into cash refund schemes after collection of tax, so that the GST scheme
on the basis of a continuous chain of set-offs is not disturbed. Regarding Special Industrial Area
Schemes, it is clarified that such exemptions, remissions etc. would continue up to legitimate expiry
time both for the Centre and the States. Any new exemption, remission etc. or continuation of earlier
exemption, remission etc. would not be allowed. In such cases, the Central and the State Governments
could provide reimbursement after collecting GST.
Roadblock to implementation of GST
Bringing about an integration of all taxes levied on goods and services in a federal polity with sharp
distribution of legislative powers is a Herculean task to say the least. The Constitution of India, 1950
demarcates taxing powers in a two-tier structure wherein levies on production and international imports are
with the Union and post- production levies rest with the states. The Centre levies duties of excise on
manufactures and import/countervailing duties on international imports apart from levying a tax on services
under various taxing and the residuary entry in the Union List. The states levy VAT on goods sold or
entering in the state under various entries of the state list. Even if all Union-level levies are integrated into
a single levy and all state level levies culminate in a single State level levy; this may still have two levies
and the resultant cascading and administrative burdens may nevertheless remain to an extent, though this
may go a long way in harmonising levies. A harmonised, integrated and full fledged GST calls for the
following:
(1)Constitutional Amendments: Implementation of GST calls for effecting widespread amendments in
the Constitution and the various constitutional entries relating to taxation. As per provisions of Article
368 of the constitution , the bill for amendment is to be passed by majority of the members of both
houses and two third of the members present and voting. Also, the amendment is to be approved by
fifty percent of the state legislative assemblies.In the current scenario it is difficult to visualise
constitutional amendments of such far reaching implications going through, more so in view of the fact
that sharing of legislative powers is such an essential element of our federal polity and it may be
perceived to be a basic feature of the Constitution;
 (2)Integration of Services: Services have to be appropriately integrated in the tax network;
(3)Design and structure of GST: No less significant is the issue of an appropriate design and structure
of GST. For instance, how the issue of inter-state movement of goods and services may be addressed.
The phasing out of CST may go a long way in addressing the issue of inter-state trade and commerce
in goods but the crucial issue regarding services originating in one state and being consumed in other
state still remains;
(4)Resources Sharing: Another contentious issue that is bound to crop up in this regard is the manner
of sharing of resources between the Centre and the states and among the states inter se as also the
basis of their devolution
(5)Flow of Goods and Services: Apart from all these, there has to be a robust and integrated MIS
dedicated to the task of tracking flow of goods and services across the country and rendering accurate
accounting of levies associated with such flow of goods and services; and
(6)Determination of Revenue Neutral Rate (RNR): At present States are charging VAT rates 0%, 4%,
12.5% and 20% besides other levies and thus the average rate of tax comes to 17%. Similarly, Centre
is charging Central Excise duty @ 14%, CST 2%, Service Tax 10%. The combined effect of all the
taxes taken together comes to an average rate of tax @ 27.5%. The proposed GST rate is mooted @
20% both for the Central GST @ 12% and the State GST @ 8%. Assuming that the States may agree
on the implementation of GST based on compensation being given to them like what was decided at
the time of introduction of VAT i.e. 1st April, 2005, the Centre may suffer loss while satisfying the needs
of about 30 states.
 SUGGESTIONS FOR EFFECTIVE
IMPLEMENTATION of GST
Some suggestions for better administrative machinery to handle the implementation of Goods and
Services Tax Act in India are:

Standardization of systems and procedures.

Tax relief in case of branch transfer
Well defined procedures in case of Job works
Uniform dispute settlement machinery.
Adequate training for both tax payers and tax enforcers.
Re-organization of administrative machinery for GST implementation.
Building information technology backbone the single most important initiative for GST
implementation.
Uniform Implementation of GST should be ensured across all states (unlike the staggered
implementation of VAT) as many issues might arise in case of transactions between states who comply
with GST and states who are not complying with GST.
THANK YOU