DEFECTS IN THE OLD INDIRECT TAX REGIME AND ITS

SOLUTION IN THE FORM OF GST: AN ANALYSIS

Submitted to: DR. Rana Navneet Roy

Faculty, Indirect Tax

Abhinav Tandi
SEMESTER X
BATCH XV
ROLL NO. 05
B.A. LL.B (Hons.)

Date of Submission: 20 june 2020

HIDAYATULLAH NATIONAL LAW UNIVERSITY

Atal Nagar – 492002 (C.G.)
 CERTIFICATE OF ORIGINALITY

This is to certify that Mr. Abhinav Tandi, Roll Number-05, student of Semester- X, Section C of B.A.
LL.B.(Hons.), Hidayatullah National Law University, Atal Nagar (Chhattisgarh) has undergone
research of the project work titled “Defects in the old indirect tax regime and its solution in the form
of GST: an analysis”, in partial fulfillment of the subject Indirect Tax. His performance in research
work is up to the level.

Place: Atal Nagar ……………………………………

Date: 20 June2020 Dr. Rana Navneet Roy

(Faculty- Indirect Tax)

Hidayatullah National Law University,

Raipur, Chhattisgarh
 ACKNOWLEDGEMENTS

Thanks to the Almighty who gave me the strength to accomplish the project with
sheer hard work and honesty.

This research venture has been made possible due to the generous co-operation of
various persons. To list them all is not practicable, even to repay them in words is beyond the
domain of my lexicon.
May I show my deep gratitude to the venerated Faculty-in-charge Mr. Rana Navneet
Roy for his kind gesture in allotting me such a wonderful and elucidating research topic. Sir,
your sincere and honest approach have always inspired me and pulled me back on track
whenever I went astray.

Last, but by no means the least, I would like to thank all the members of HNLU
family in general and my blooming and charismatic friends in particular for their
wholehearted co-operation throughout the odyssey.

Abhinav Tandi

Semester: X

Section: C

Roll No: 05
 CONTENTS

INTRODUCTION 1
STATEMENT OF PROBLEM 2
AIM AND OBJECTIVES 2
CONCEPTUAL FRAMEWORK 2
RESEARCH QUESTIONS 2
SCOPE OF STUDY 2
RESEARCH METHODOLOGY 3
HISTORY OF GST 4
TAXES SUBSUMED BY GST 6
DEFECTS IN THE OLD REGIME AND ITS SOLUTION IN THE
FORM OF GST 8
CONCLUSION 13
BIBLIOGRAPHY 14
 1

TITLE
Defects in the Old Indirect Tax Regime and its Solution in the Form of GST: An Analysis

INTRODUCTION
India has a federal tax structure, thus both union as well as the states have the power of
taxation. These co-existing powers of taxation led to a complex taxing procedure with a
number of taxes. This led to various problems such as non-compliance of tax statutes,
exploitation of loopholes, made harder for the authorities to catch offenders, etc. There was
also the problem of cascading effect of Taxation (tax on tax) on items due to taxes being
levied both by the union and the states on the same item but in different capacities..

In order to simplify the tax structure in India Goods and Services Tax (GST) was levied by
the union government on 1st July 2017 through an act of Parliament. GST is a
comprehensive, multi-stage, destination-based tax that is levied on every value addition. It is
an indirect tax levied on the supply of goods and services. Under the GST regime, the tax is
levied at every point of sale. In the case of intra-state sales, Central GST and State GST are
charged. Inter-state sales are chargeable to Integrated GST.

With an aim of simplifying tax structure in India, GST proposes to remove the geographical
obstacles for trading, and transforming the entire nation to „One Common Market Place.‟
While it is believed that the „One Nation- One Tax‟ regime is paving path towards a better
economy of our country, questions related to how is this reform going to be any better than
the earlier tax transformations India has seen over the past years (VAT-Service Tax-Excise),
is a matter of concern. How is the new tax structure going to effect the consumer and the
impact it will have on various sectors? We de-code this myth by listing down key differences
between GST and the previous tax structure.

Goods and Services Tax (GST) is an indirect tax (or consumption tax) imposed in India on
the supply of goods and services. GST is imposed at every step in the production process, but
is meant to be refunded to all parties in the various stages of production other than the final
consumer.

This project seeks out the defects that existed in the earlier indirect tax regime and finds out
their redressal in the form of the new tax regime. It also provides a brief history into the
 2

enactment of the new tax regime as well as the taxes which are now subsumed by the Goods
and Services Tax.

.STATEMENT OF PROBLEM

Since independence of the country the indirect tax regime of the country is filled with many
problems. Recently Goods and Services Tax has been enacted as a new indirect tax
abolishing the earlier regime. Thus, it becomes necessary to determine the problems that
existed in the older regime as well as their solution in the form of GST.

AIM AND OBJECTIVES OF STUDY

This research paper is concerned with a study into the problems in the earlier indirect tax
regime and its solution in the form of GST . Further the bullet points mentioned below briefly
states the objectives of this research paper.

 To have a brief understanding into the history of GST.

 To know the taxes subsumed by GST.
 To inquire into the problems in the old indirect tax regime and its solution in the form
of GST

RESEARCH QUESTIONS

 To inquire into the defects of the old tax regime?

 To inquire into the solution offered to those problems by GST?

SCOPE OF STUDY
The Scope of the project work is to find out the defects in the old indirect tax regime and
their solution in the form of Goods and Services Tax.
 3

RESEARCH METHODOLOGY
The research methodology adopted is doctrinal in nature with data obtained from primary
sources such as acts and judicial precedents and secondary sources such as books, articles,
journals etc. Appropriate reference to the source of data is provided in the form of footnotes
and bibliography.

CHAPTERIZATION
Chapter 1 – History of GST

Chapter 2 – Taxes subsumed by GST

Chapter 3 – Defects of the old tax regime and its solutions by GST
 4

History of GST

The reform of India's indirect tax regime was started in 1985 by Vishwanath Pratap Singh,
Finance Minister in Rajiv Gandhi‟s government, with the introduction of the Modified Value
Added Tax (MODVAT). Subsequently, Prime Minister P V Narasimha Rao and his Finance
Minister Manmohan Singh, initiated early discussions on a Value Added Tax (VAT) at the
state level. 1 A single common "Goods and Services Tax (GST)" was proposed and given a
go-ahead in 1999 during a meeting between the Prime Minister Atal Bihari Vajpayee and his
2
economic advisory panel. Vajpayee set up a committee headed by the Finance Minister of
West Bengal, Asim Dasgupta to design a GST model.

The Ravi Dasgupta committee which was also tasked with putting in place the back-end
technology and logistics (later came to be known as the GST Network, or GSTN, in 2015). it
later came out for rolling out a uniform taxation regime in the country. In 2002, the Vajpayee
government formed a task force under Vijay Kelkar to recommend tax reforms. In 2005, the
Kelkar committee recommended rolling out GST as suggested by the 12th Finance
Commission.3

After the defeat of the BJP-led NDA government in the 2004 Lok Sabha election and the
election of a Congress-led UPA government, the new Finance Minister P Chidambaram in
February 2006 continued work on the same and proposed a GST rollout by 1 April 2010.
However, in 2011, with the Trinamool Congress routing CPI(M) out of power in West
Bengal, Asim Dasgupta resigned as the head of the GST committee. Dasgupta admitted in an
interview that 80% of the task had been done.

In the 2014 Lok Sabha election, the Bharatiya Janata Party-led NDA government was elected
into power. With the consequential dissolution of the 15th Lok Sabha, the GST Bill –
approved by the standing committee for reintroduction – lapsed. Seven months after the
formation of the Modi government, the new Finance Minister Arun Jaitley introduced the
GST Bill in the Lok Sabha, where the BJP had a majority. In February 2015, Jaitley set

1
"Looking back at 's journey: How an idea is now near reality", Indian Express, 31 March 2017
2
"GST: A 17-year-old dream, 17 phases towards creating history", India Today, 29 June 2017
3
"Goods and Services Tax: History of India's biggest tax reform and people who made it possible", India TV, 29
Jun 2017
 5

another deadline of 1 April 2017 to implement GST. In May 2016, the Lok Sabha passed the
Constitution Amendment Bill, paving way for GST. However, the Opposition, led by the
Congress, demanded that the GST Bill be again sent back for review to the Select Committee
of the Rajya Sabha due to disagreements on several statements in the Bill relating to taxation.
Finally in August 2016, the Amendment Bill was passed. Over the next 15 to 20 days, 18
states ratified the Constitution amendment Bill and the President Pranab Mukherjee gave his
assent to it.4

A 21-member selected committee was formed to look into the proposed GST laws.5 After
GST Council approved the Central Goods and Services Tax Bill 2017 (The CGST Bill), the
Integrated Goods and Services Tax Bill 2017 (The IGST Bill), the Union Territory Goods
and Services Tax Bill 2017 (The UTGST Bill), the Goods and Services Tax (Compensation
to the States) Bill 2017 (The Compensation Bill), these Bills were passed by the Lok Sabha
on 29 March 2017. The Rajya Sabha passed these Bills on 6 April 2017 and were then
enacted as Acts on 12 April 2017. Thereafter, State Legislatures of different States have
passed respective State Goods and Services Tax Bills. After the enactment of various GST
laws, Goods and Services Tax was launched all over India with effect from 1 July 2017. 6 The
Jammu and Kashmir state legislature passed its GST act on 7 July 2017, thereby ensuring that
the entire nation is brought under an unified indirect taxation system. There was to be no
GST on the sale and purchase of securities. That continues to be governed by Securities
Transaction Tax (STT).7

4
"GST: Meet the men behind India's biggest tax reform that's been in making for 17 years", India Today, June
29, 2017
5
Nair, Remya, "Rajya Sabha panel to hear GST concerns on 16 June", Live Mint
6
"GST rollout: All except J-K pass State GST legislation", The Indian Express, 22 June 2017
7
"GST draft makes it must for companies to pass tax benefit to costumers", The Times of India, 27 November
2016
 6

Taxes Subsumed by GST

Central Excise Duty: Central Excise duty was an indirect tax levied on those goods which
are manufactured in India and are meant for home consumption. The taxable event is
'manufacture' and the liability of central excise duty arises as soon as the goods are
manufactured.8

Service Tax: A service tax is a tax that is levied by the Government of India on services that
are provided by a service provider. It is an indirect tax under the Finance Act, 1994.

Additional Duties on Excise (ADE): It was an indirect tax levied in order to provide for
Additional Duties on some specified items such as sugar, cotton and tobacco products with
the proceeds of the tax going to both the centre and the states.

Surcharge: A surcharge is a fee, charge, or tax added to the cost of a good or service.

Cess: A cess imposed by the central government is a tax on tax, levied by the government for
a specific purpose.

Countervailing duty (CVD): It is an additional import duty imposed on imported products

(by the importing country) when such products enjoy benefits like export subsidies and tax
concessions in the country of their origin (ie., where it is produced and exported).

Special Additional duty (SAD): Special Additional Duty (SAD) was the duty paid on the
imported goods. The importer could claim for the refund of the SAD after the subsequent sale
of the imported goods. It was levied at the rate of 4%.

Value Added Tax (VAT): A value-added tax (VAT) is a consumption tax placed on a
product whenever value is added at each stage of the supply chain, from production to the
point of sale. It is levied in intra state trade.

Central Excise Tax (CST): Central Excise Tax is an indirect tax levied on interstate sales.
CST is not levied at every stage of production, and not even on the sale of the goods if they

8
https://archive.india.gov.in/business/taxation/excise_duty.php
 7

are sold in the same state. Only when a manufacturer decides to take the goods to another
state does CST need to be levied.

Sales Tax: It is an indirect tax imposed on selling and purchasing of goods within India. It is
an additional amount paid over and above the base value of the product being purchased.

Luxury Tax: A luxury tax is an ad valorem tax placed on products or services that are
deemed to be non-essential or unneeded.
 8

Defects of the old tax regime and its solutions by GST

1. Separate laws
Old regime was characterized by separate laws for separate levy such as Central Excise Act
(1944), Finance Act (1994), Customs Tariff Act etc. This led to a highly complex tax
structure especially for the small manufacturers and retailers. It made harder to navigate
through the tax structure without having adequate professional help, this stressed the already
small capital of these businesses. It lead to low compliance, corruption thrived due to the
complex tax structure and made it harder to detect offenders of tax fraud.

Solution: Single Law

Central Goods and Services Tax Act, 2017 created a single indirect tax dealing with the
taxation of both goods and services thus abolishing the earlier complex law. GST created four
tier tax structure with goods and services falling under one of these slabs of 5%, 12%,18%
and 28%. Thus easing the tax structure for small businessmen and also for the customers to
understand the taxes being charged on the goods and services. From the enactment of the Act,
tax compliance in the country has gone up leading to record tax collection by the government.
It further reduced the cost of collection and of detection of fraud thus increasing the
productivity of the tax authorities.

2. Separate Tax Rates

In the older tax regime separate tax rates were levied based on the nature of the tax such as
Excise @ 12.36 %, Service Tax @ 14% and SAD @ 4%. This lead to complexity and
decreased compliance. Also the taxes were not levied based on the nature of the good or
service but rather on the nature of the tax itself.

Solution: Uniform Tax Rates

In the GST regime tax is levied based on the nature of the tax on 4 different slabs. This leads
to less tax being charged for items which are used by poorer sections of the society whereas
luxury items and services are charged at the higher slab rate thus maintaining a form of equity
which was not possible under the older regime.
 9

3. Cascading Effect
Cascading refers to tax upon tax. Due to multiplicity of taxation being levied under the old
regime there was cascading effect of taxation. The situation was made more complex by the
coexisting powers of taxation between both the union and states in the same good or service.
This led to variation on the taxation charged on producers living in different parts of the
country. This led to undue burden on some manufacturers while also providing benefits to
others as it facilitated smuggling of goods across states. On the whole it increased the burden
of taxation on the consumers and caused inflation.

It also added to increased burden on the states as they had to expend on border checks so as
to check smuggling of goods.

Solution: Input Tax Credit

Under the GST regime there is a provision of Input Tax Credit (ITC). Under this system at
the time of paying tax on output, the tax already paid on inputs can be reduced. This leads to
an end to the cascading effect to the tax.

Credit of CST and various other indirect taxes isn‟t allowed in the previous tax structure,
whereas under GST the entire concept of CST has been eliminated with introduction of
Integrated Goods and Services Tax (IGST).

Also, it helps in mapping the value generation process from the collection of raw materials to
the finished good. It also decreases tax evasion as evasion by one actor would lead to other
producers not being able to take the benefit of input credit and have to pay higher taxes.

For Example: A manufacturer buys raw materials for Rs. 100 and pays a tax of Rs. 10. After
the process of manufacture the value addition to the finished product is Rs. 30. Thus the final
rate of the finished good will be Rs. 130. Now tax for the finished good is Rs. 13. This sum of
Rs 13 can be reduced by the tax already paid by the manufacturer. Thus now the
manufacturer has to pay only Rs 3 as tax.

4. Tax Burden on Tax Payer

With the centre and states both levying taxes there was lack of co-ordination between the
taxes and thus taxes were high. This lead to decreased compliance with the tax regime and
affected the tax collection, reduced collection led the government to further increase tax rates
 10

in order to meet its expenditure. Moreover generalised taxes led to the burden being on the
general public rather than the consumer of the goods.

Solution: Shared Burden

With GST on board, tax burden has reduced significantly since all taxes are integrated, and
the burden is split equitably between manufacturing and services.

5. Tax burden on Producers

Under the earlier regime due to the cascading effect of taxes certain taxes themselves became
cost of production. This in turn unduly burdened the producers by raising the cost of
production and decreased their competitiveness with respect to other products. It also
restricted the competitiveness of the products in the international market thus leading to
reduced exports.

Solution: Burden on Consumers

The burden of taxation is now carried on to the ultimate consumers of the product by the
introduction of Input Tax Credit scheme. Thus there is decreased cost of production and
increased competitiveness of the producers and service providers in the international as well
as domestic markets.

Furthermore, the distribution of items into various slabs to be taxed separately has led to
equity being maintained as luxury items are charged higher than necessities.

6. Lack of coordination between Union and states

Pre-GST, there was no such power to both Centre and State on same subject tax matter. This
led to a struggle between the state and center in tax imposition and collection. There was lack
of coordinated approach to apply tax in a manner as to promote growth of the nation as a
whole. This lack of coordination also made tax evasion hard to detect and harder to prosecute
offenders.

Solution: Concurrent power between Union and States

With GST on board, both Centre and State are vested with the concurrent power to make
laws with respect to goods and services tax, as given in Article 246A of the Constitution. The
intra-state trade now comes under the jurisdiction of both centre and state; while inter-state
trade and commerce is “exclusively” under central government jurisdiction.
 11

This has led to taxation being used in dual capacity, using it to raise revenue for the
government as well as using the tax machinery to promote the growth of the country by
coordinated effort by the centre and states.

7. Low Compliance
Highly complex tax regime before the introduction of GST led to low compliance.
Compliance among the smaller manufacturers and service providers was almost non-existent
as it was hard to determine offenders due to multiplicity of laws and lack of cooperation
between the union and the states.

Solution: Simple procedure

Due to the simple procedure of the GST, tax compliance has gone up with record tax
collections. There being a single database, it is now harder to evade tax payment which
determining offenders is easier. Further, measures such as Input Tax Credit incentivize the
producers to maintain transparency.

8. Opaque Tax Administration

Previously, tax was levied at two stages in broad manner production and consumption, i.e.,
when product moves out of factory and also at retail outlet. While there was compliance of
the tax regime at the factories at the retail stage there was lack of compliance ranging from
the wholesalers to the smaller retailers. Due to the complex structure of the tax laws, there
was large scale exploitation of the loopholes in the system. This was further aggravated with
the help of opaque administration by the tax authorities. It evolved into a system where
everyone ranging from the smallest retailers to the wholesalers and the officials benefitted at
the cost of the exchequer.

Solution: Transparent Tax Administration

GST replaced the old complex system to a simple tax system and made it easier to comply
with the tax regime thus leading to high compliance. Features of the tax such as IGST and
ITC also made it easier to monitor and detect evasions. Due to compliance by the producers
and service providers the scope of the tax officials to profit from corruption also decreased.
Thus GST transformed an opaque system to a transparent system.

GST is to be levied only at final destination of consumption and not at various points. This
brings more transparency and corruption free tax administration.
 12

9. Low Compliance by Unorganised Sector

In the old tax regime certain industries in India like construction and textile were largely
unregulated and unorganized. Because of this there was grave problem of tax evasion in these
sectors. It also hampered the efforts of the government to organize these industries so as to
improve the conditions of the persons employed.

Solution: Input Tax Credit

Under GST, however, there are provisions for online compliances and payments, and for
availing of input credit only when the supplier has accepted the amount. This has brought in
accountability and regulation to these industries.
 13

Conclusion

The 101st Amendment Act of the Constitution of India, 2016 made provisions that made
possible the Goods and Services Tax. Under this tax both centre as well as the states work in
tandem to achieve the objective of forming a single indirect tax regime for the whole of the
country. This amendment has transformed the way businesses work in the country with great
change in the revenue generation from indirect businesses. It has addressed many defects in
the older regime which led to loss of revenue and stifled the growth of the economy and also
led to competition between the states and the Union government.

GST has subsumed a number of taxes and formed it into a composite tax structure simpler in
approach. It has connected the whole country into a single entity, an economic powerhouse.
This tax is of imperative importance and is one of the important factors which would lead the
country out from the depths of poverty and corruption. It addresses the problems of low tax
compliance, competition between centre and states, corruption in tax collection, opaqueness
of administration, tax burden, non-uniform tax structure, separate laws etc by introducing
various new initiatives like single law, uniform rates of taxation, input tax credit system, etc.

The tax as believed by experts was enacted very hastily which led to a period of slowdown
and closing of many small and medium scale industries. It is also argued that the software
and personnel requirement for the compliance of tax unduly affects small businesses as well
as the tax rates are similar to what was charged in the earlier regime.

A reform as big as GST is bound to have some problems in its implementation, the
parliament based on the recommendations of the GST council is changing the procedure as
well as the tax rates under GST. Thus the tax regime is slowly improving taking its shape in
order to make India into a developed country.
 14

BIBLIOGRAPHY

https://archive.india.gov.in/business/taxation/excise_duty.php

GST: Meet the men behind India's biggest tax reform that's been in making for 17 years,
India Today, June 29, 2017

Rajya Sabha panel to hear GST concerns on 16 June, Live Mint

GST rollout: All except J-K pass State GST legislation, The Indian Express, 22 June 2017

GST draft makes it must for companies to pass tax benefit to costumers, The Times of India,
27 November 2016

Looking back at 's journey: How an idea is now near reality, Indian Express, 31 March 2017

GST: A 17-year-old dream, 17 phases towards creating history, India Today, 29 June 2017

Goods and Services Tax: History of India's biggest tax reform and people who made it
possible, India TV, 29 Jun 2017