PRE – GST REGIME

FACULTY OF LAW
JAMIA MILLIA ISLAMIA

SUBMITTED TO SUBMITTED BY
Prof. Ekramuddin Malik Vinay Sharma
FACULTY OF LAW ROLL NO: 70
JAMIA MILLIA ISLAMIA 7 th SEMESTER
IVth year

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INTRODUCTION:
GST is the biggest reform proposed in the Tax regime of our country after Independence. It is
something that each of us must understand as it is going to affect our lives in a very significant
manner. This project deals with the Reforms needed in Indirect Tax and hurdles before Goods
and Service Tax (GST). The intent to merge the major indirect taxes, which includes Value
Added Tax (VAT), excise duty and service tax, into a generic “Goods and Service Tax” was
expressed by the government in 2006 and a international commitments were also made. The
Empowered Committee (EC) of State Finance Ministers has undertaken to design the GST
Model with similar work also undertaken by the Finance Commission independently. To set the
foundation for legislative functioning, a Constitutional Amendment Bill has also been introduced
in the Parliament.

The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014, seeks to amend
the Constitution of India to facilitate the introduction of Goods and Services Tax (GST) in the
country. The proposed amendments in the Constitution will confer powers both to the
Parliament and the State legislatures to make laws for levying GST on the supply of goods and
services on the same transaction.

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STATEMENT OF PROBLEM:

Presently, the Constitution empowers the Central Government to levy excise duty on
manufacturing and service tax on the supply of services. Further, it empowers the State
Governments to levy sales tax or value added tax (VAT) on the sale of goods. This exclusive
division of fiscal powers has led to a multiplicity of indirect taxes in the country. In addition,
central sales tax (CST) is levied on inter-State sale of goods by the Central Government, but
collected and retained by the exporting States. Further, many States levy an entry tax on the
entry of goods in local areas.
This multiplicity of taxes at the State and Central levels has resulted in a complex indirect tax
structure in the country that is ridden with hidden costs for the trade and industry. Firstly, there
is no uniformity of tax rates and structure across States. Secondly, there is cascading of taxes
due to ‘tax on tax’. No credit of excise duty and service tax paid at the stage of manufacture is
available to the traders while paying the State level sales tax or VAT, and vice-versa. Further, no
credit of State taxes paid in one State can be availed in other States. Hence, the prices of goods
and services get artificially inflated to the extent of this ‘tax on tax’.
The introduction of GST would mark a clear departure from the scheme of distribution of fiscal
powers envisaged in the Constitution. The proposed dual GST envisages taxation of the same
taxable event, i.e., supply of goods and services, simultaneously by both the Centre and the
States. Therefore, both Centre and States will be empowered to levy GST across the value chain
from the stage of manufacture to consumption. The credit of GST paid on inputs at every stage
of value addition would be available for the discharge of GST liability on the output, thereby
ensuring GST is charged only on the component of value addition at each stage. This would
ensure that there is no ‘tax on tax’ in the country.
GST will simplify and harmonize the indirect tax regime in the country. It is expected to reduce
cost of production and inflation in the economy, thereby making the Indian trade and industry
more competitive, domestically as well as internationally. It is also expected that introduction

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of GST will foster a common or seamless Indian market and contribute significantly to the
growth of the economy.
Further, GST will broaden the tax base, and result in better tax compliance due to a robust IT
infrastructure. Due to the seamless transfer of input tax credit from one stage to another in the
chain of value addition, there is an in-built mechanism in the design of GST that would
incentivize tax compliance by traders.
The Goods and Service Tax Bill1 was enacted by Lok Sabha2 but is still pending in Rajya
Sabha. In 2000, the Vajpayee Government set up a committee by the Finance Minister of the
Government of West Bengal, Asim Dasgupta, to design a model for GST and oversee IT
preparations. P. Chidambaram, the Union Finance Minister, during the Central budget of 2007-
08 announced that GST would be introduced from April 1, 2010 and the Empowered Committee
of State Finance Ministers would work with the Central Govt to prepare a road map for
introduction of GST in India. (First Discussion Paper on Goods and Services Tax) There has been
considerable speculation on the architecture, engineering and management aspects of the
proposed goods and services tax (GST) in India. The reason for this has to be found in the fact
that, so far, the stakeholders have not been taken into confidence on the deliberations in the
Empowered Committee (EC) of State Finance Ministers. (Rao, Goods and Services tax: Some
Progress towards clarity) It is to be noted that the GST will not be a new tax. It is only an
improvement over prevailing consumption tax systems at the centre and the states.

This research aims to analyse the Goods and Service Tax and the present indirect
taxation in India. There are lots of challenges in implementation of GST and in enacting the
Constitutional Amendment.

1
The Constitution (One Hundred and Twenty Second Amendment) Bill, 2014
2
Date passed on 6th May , 2015

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RESEARCH OBJECTIVES:

THE OBJECTIVES OF THIS PROJECT ARE AS FOLLOWS:

1. To understand the concept of GST.
2. To understand the evolution of GST.
3. To study salient features of GST.
4. To study about salient features of the Constitutional (122nd) Amendment Bill, 2014.
5. To study about GST Council.
6. To study about the impact of GST on Indian economy.

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RESEARCH QUESTIONS:

The questions to be raised in this project are:

1. Why GST when we had VAT?

2. What are the benefits of GST?
3. How GST will affect the business?
4. Will GST remove the limitations in Indirect tax structure in India?
5. What are the challenges before implementation of GST?
6. What were the drawbacks in pre GST system?

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SIGNIFICANCE OF THE STUDY:

There are lots of discussions and debates regarding GST. Goods and Service Tax is seen
as a complete solution to remove all the lacunae and limitations associated with the laws on
indirect taxes. GST seems to be very promising in the era of corporate liberalisation where new
tax evading techniques are adopted by business groups. GST is a simple, transparent, and
efficient system of indirect taxation. It will help in eliminating tax induced economic distortions
and gives boost to the economy.

But it is equally important to look into the implementation aspect as well if not would
negate the whole effect of GST. Thus the study on hurdles before GST is significant for a strong
policy free from loopholes.

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INDIRECT TAXES:

Indirect Taxes are the changes that are levied on goods and services by the State. Indirect Taxes
include Value Added Tax, Central Excise Duty, Customs Duty, stamp duties and expenditure tax.
The Indirect taxes are not levied on individuals but on goods and services. Customers indirectly
pay this tax in form of higher prices. Indirect Taxes are collected by an intermediary from the
person who bears the ultimate economic burden of the tax, the consumer. The intermediary
later files a tax return and forwards the tax proceeds to government from the person on whom
it is imposed.

Taxes in India are levied by the Central Government and the State Governments. Some minor
taxes are also levied by the local authorities such as Municipality or Local Council. The
authority to levy tax is derived from the Constitution of India which allocates the power
to levy various taxes between Centre and State.

LIMITATION OF E ARLIER INDIRECT TAXES

Originally, the taxes on the sale of goods were levied in terms of the respective Sales Tax or
Trade Tax enactments, and the ‘entry of goods’ was subject to tax under the respective State
Entry Tax enactments. This scenario prevailed till the reform process set in whereupon these
levies were replaced by VAT.

The levy of tax on provisioning of services was introduced for the first time in 1994 and has
been subjected to persistent vigorous legal challenges. Still lot of services remained uncovered.
The need for transition from the Sales Tax trade structure for taxing commodities to a value
added (VAT). However the shift to VAT did not put to an end to cascading realities. This is
because Parliament has maintained its own VAT model and also the State Legislatures their
own, there was no linkage between the two and thus the credit of duties paid on
manufacture are not available towards adjustment on duties payable on sale of goods. Input
set-off available to the manufacturers.

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Thus it is evident that the transition to VAT did not remedy the issue of non-creditable duties
and the consequent cascading effect requiring further reform in the area and
consequently GST arose.

Service tax was introduced in 1994. Current service tax rate is 10.30%. The scope of service tax
has since been expanded continuously by subsequent Finance Acts and now nearly 109
services are covered. But there are many service sectors which are out of purview of Central
Government which can generate more revenue to Government.

Despite of existence of multiple taxes like Excise, Customs, Education Cess, Surcharge,
VAT, Service Tax etc. GDP of India is much lower than GDP of countries like USA, China and
Japan. India has miles to go to achieve this level.

Therefore, the Indirect Taxes are therefore urgently required to be rationalized and unified. If
the GST is introduced it would certainly increase the volume of tax collection. The
implementation of GST would ensure that India provides a tax regime that is almost similar to
the rest of the world. It will also improve the international cost competitiveness of native goods
and services.

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GOODS AND SERVICE TAX (GST):

The First Discussion Paper on Goods and Services Tax in India has been prepared
and released by the Empowered Committee of State Finance Ministers (EC).
Department of Revenue, Government of India, has sent its comments on it to the EC.
The Discussion Paper and the comments of Department of Revenue sent to Empowered
Committee are being placed here.3

Goods and Services Tax is a comprehensive indirect tax on manufacture, sale and consumption
of goods and services at national level throughout India. GST is a simple, transparent, and
efficient system of indirect taxation. It is not an additional new tax but will replace all other
indirect taxes. This system facilitates taxation of goods and services in an integrated manner. It
is a comprehensive value added tax on supply and consumption of goods and services in an
economy.

GST is levied at every stage of production-distribution chain with applicable set-offs. It will help
in eliminating tax induced economic distortions and gives boost to the economy and too the
compliance and administrative cost will be much lower.

3
. http://finmin.nic.in/GST/index.html

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SALIENT FEATURES OF GST:

 Dual GST: Both Centre and States will simultaneously levy GST across the value chain.
Tax will be levied on every supply of goods and services. Centre would levy and collect
Central Goods and Services Tax (CGST), and States would levy and collect the State
Goods and Services Tax (SGST) on all transactions within a State. The input tax credit of
CGST would be available for discharging the CGST liability on the output at each stage.
Similarly, the credit of SGST paid on inputs would be allowed for paying the SGST on
output. No cross utilization of credit would be permitted.
 Inter-State Transactions and the IGST Mechanism: The Centre would levy and collect
the Integrated Goods and Services Tax (IGST) on all inter-State supply of goods and
services. The IGST mechanism has been designed to ensure seamless flow of input tax
credit from one State to another. The inter-State seller would pay IGST on the sale of his
goods to the Central Government after adjusting credit of IGST, CGST and SGST on his
purchases (in that order). The exporting State will transfer to the Centre the credit of
SGST used in payment of IGST. The importing dealer will claim credit of IGST while
discharging his output tax liability (both CGST and SGST) in his own State. The Centre will
transfer to the importing State the credit of IGST used in payment of SGST.
 Destination-Based Consumption Tax: GST will be a destination-based tax. This implies
that all SGST collected will ordinarily accrue to the State where the consumer of the
goods or services sold resides.
 Central Taxes to be subsumed:
i. Central Excise Duty
ii. Additional Excise Duty
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. Cesses and surcharges in so far as they relate to supply of goods and services.
viii.

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  State Taxes to be subsumed:
i. VAT/Sales Tax
ii. Central Sales Tax (levied by the Centre and collected by the States)
iii. Entertainment Tax
iv. Octroi and Entry Tax (all forms)
v. Purchase Tax
vi. Luxury Tax
vii. Taxes on lottery, betting and gambling
viii. State cesses and surcharges in so far as they relate to supply of goods and services.

 All goods and services, except alcoholic liquor for human consumption, will be brought
under the purview of GST.
i. Petroleum and petroleum products have been constitutionally included as ‘goods’
under GST. However, it has also been provided that petroleum and petroleum
products shall not be subject to the levy of GST till notified at a future date on the
recommendation of the GST Council. The present taxes levied by the States and the
Centre on petroleum and petroleum products, viz. Sales Tax/VAT and CST by the
States, and excise duty the Centre, will continue to be levied in the interim period.
ii. Taxes on tobacco and tobacco products imposed by the Centre shall continue to be
levied over and above GST.
iii. In case of alcoholic liquor for human consumption, States would continue to levy the
taxes presently being levied, i.e., State Excise Duty and Sales Tax/VAT.

 GST Council: In the GST regime, a Goods and Services Tax Council is being created
under the Constitution. The GST Council will be a joint forum of the Centre and the
States. This Council would function under the Chairmanship of the Union Finance
Minister and will have Minister in charge of Finance/Taxation or Minister nominated by
each of the States & UTs with Legislatures, as members. The Council will make
recommendations to the Union and the States on important issues like tax rates,

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 exemption list, threshold limits, etc. The recommendations made by this Council will
act as benchmark or guidance to Union as well as State Governments. One-half of the
total number of Members of the Council will constitute the quorum of GST council.
Every decision of the Council shall be taken by a majority of not less than three-fourths
of the weighted votes of the members present and voting in accordance with the
following principles:-
i. The vote of the Central Government shall have a weightage of one-third of the total
votes cast, and
ii. The votes of all the State Governments taken together shall have a weightage of
two-thirds of the total votes cast in that meeting.
This is to protect the interests of each State and the Centre when the Council takes a decision
and is in the spirit of co-operative federalism.

 Floor rates of GST with band: GST rates will be uniform across the country. However,
to give fiscal autonomy to the States and the Centre, there will a provision of a tax
band over and above the rate of the floor rates of CGST, SGST and IGST. Initially, the
rates of CGST, SGST and IGST are expected to be closely aligned to the Revenue Neutral
Rates (RNR) of the Centre and the States.
 Goods and Services Tax Network (GSTN): A not-for-profit, Non-Government Company
called Goods and Services Tax Network (GSTN), jointly set up by the Central and State
Governments will provide shared IT infrastructure and services to the Central and State
Governments, tax payers and other stakeholders.
 GST Compensation cess: Due to a shift from origin based to destination based indirect
tax structure, some States might face drop in revenue in the initial years. To help the
States in this transition phase, the Centre has committed to compensate all their losses
for a period of 5 years. Accordingly, clause 19 has been inserted in the Constitution
(122nd) Amendment Bill, 2014 to provide for compensation to States by law, on the
recommendation of the Goods and Services Tax Council, for loss of revenue arising on
account of implementation of the goods and services tax for a period of five years.

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SALIENT FEATURES OF THE CONSTITUTION (122ND) AMENDMENT, 2014:
The salient features of the GST Bill as introduced in the Lok Sabha are as follows:-
i. subsuming of various Central indirect taxes and levies such as Central Excise Duty,
Additional Excise Duties, Excise Duty levied under the Medicinal and Toilet
Preparations (Excise Duties) Act, 1955, Service Tax, Additional Customs Duty
commonly known as Countervailing Duty, Special Additional Duty of Customs, and
Central Surcharges and Cesses so far as they relate to the supply of goods and
services;
ii. subsuming of State Value Added Tax/Sales Tax, Entertainment Tax (other than the
tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected
by the States), Octroi and Entry tax, Purchase Tax, Luxury tax, Taxes on lottery,
betting and gambling; and State cesses and surcharges in so far as they relate to
supply of goods and services;
iii. dispensing with the concept of ‘declared goods of special importance’ under the
Constitution;
iv. levy of Integrated Goods and Services Tax on inter-State transactions of goods and
services;
v. levy of an additional tax on supply of goods, not exceeding one per cent. in the
course of inter-State trade or commerce to be collected by the Government of India
for a period of two years, and assigned to the States from where the supply
originates;
vi. conferring simultaneous power upon Parliament and the State Legislatures to make
laws governing goods and services tax;
vii. coverage of all goods and services, except alcoholic liquor for human consumption,
for the levy of goods and services tax. In case of petroleum and petroleum products,
it has been provided that these goods shall not be subject to the levy of Goods and
Services Tax till a date notified on the recommendation of the Goods and Services
Tax Council.

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viii. compensation to the States for loss of revenue arising on account of implementation
of the Goods and Services Tax for a period which may extend to five years;
ix. creation of Goods and Services Tax Council to examine issues relating to goods and
services tax and make recommendations to the Union and the States on parameters
like rates, exemption list and threshold limits. The Council shall function under the
Chairmanship of the Union Finance Minister and will have the Union Minister of
State in charge of Revenue or Finance as member, along with the Minister incharge
of Finance or Taxation or any other Minister nominated by each State Government.
It is further provided that every decision of the Council shall be taken by a majority
of not less than three-fourths of the weighted votes of the members present and
voting in accordance with the following principles:—
a. the vote of the Central Government shall have a weightage of one-third of the total
votes cast, and
b. the votes of all the State Governments taken together shall have a weightage of two-
thirds of the total votes cast in that meeting.
c. levy of an additional non-vatable tax on supply of goods of not more than 1% in the
course of inter-State trade or commerce, for a period not exceeding 2 years, or such
other period as the GST Council may recommend, to protect the interests of the
producing/manufacturing States. This additional tax on supply of goods will be levied
and collected by the Government of India, over and above the IGST levied under the
proposed Article 269A (1). This tax shall be assigned to the States from where such
supplies originate.

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WHY GST WHEN WE HAD VAT?
GST is similar to VAT in terms of the value-added approach. The question that comes to mind is
- India already had VAT then why should someone go for GST? Moreover, it seems to be very
complicated and a difficult exercise, then what are the reasons?
• Limitations in Centre VAT system: There was CENVAT but several taxes are still out of the
ambit like surcharges, additional customs duties etc. In some goods we get input tax and not in
others, making the tax filing system complex and cumbersome.
• Limitations in State VAT system: The States also have VAT but again story was the same.
Many taxes like luxury taxes, entertainment tax etc, are not included. There was no input tax
credit in case of CENVAT paid on certain items.
• Interstate Sales Tax (CST): Though it was an important source of revenue for states it was
seen as very burdensome by businesses. The companies make goods in one state but on
distribution inside the country, end up paying taxes in each state. They are supplying goods
within the country and should just be taxed at one place.
• Inclusion of Services in VAT system: Production of goods was because of both physical
production and services. But Services are taxed only by Centre and that too was done
selectively. The Services need to be taxed at State level and integrated with the Goods VAT
system as shown in the example above.
• International Standard: GST was becoming an international standard and it is important India
also has one. There are many factors before international companies while choosing a country
for its business and taxation system is one very important factor. With other countries having
GST and India not having one, the companies are likely to opt for former ahead of India for
locating their businesses. Likewise Indian companies may also prefer to increasingly set their
bases in other countries where tax system is more efficient. Dr. Vijay Kelkar, Chairman of the
Thirteenth Finance Commission has been one of the most vehement advocates of GST in India.
In a speech he cities work of eminent tax economist Prof. Charles MClure. Mclure identifies six
characteristics of a well designed GST in a federal system.
• Uniform rate of taxation within a given jurisdiction, ideally at a single rate
• Sales would be taxed under the destination principle.

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• Low costs of compliance and administration
• Each level of government to set its own tax rate subject to agreed ceilings and/or floors
• A substantively Common tax base for Central and State governments
• Substantial Co-operation in tax administration between all levels of government
Kelkar added that first two are important for economic reasons; the third for administrative
reasons and the fourth for political reasons, the last two come into play in a system of
multilevel finance such as we have in our country. These principles should be adopted while
designing GST in India as well.

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NEED FOR GST IN INDIA:
The pre GST seems to be based on the principle, “Liberal in assessment and ruthless in
collection.” The reasons for supporting to adopt GST are:4

 Pre GST system allows for multiplicity of taxes, the introduction of GST is likely to
rationalise it.
 Many areas of Services which are untaxed. After the introduction of GST they will also
get covered.
 GST will help to avoid distortions caused by present complex tax structure and will help
in development of a common national market.
 Existing taxes, i.e., Excise, VAT, CST, Entry Tax, have the cascading effects of taxes.
Therefore, we end up in paying tax on tax. GST will replace existing taxes.
 GST will lead to credit availability on interstate purchases and reduction in compliance
requirements.
 Introducing GST will do more than simply redistribute the tax burden from one sector in
the economy to another.
 Achieves, uniformity of taxes across the territory, regardless of place of manufacture or
distribution.
 Provides greater certainty and transparency of taxes.
 Ensure tax compliance across the country.
 GST will avoid double taxation to some extent.
 The implementation of GST would ensure that India provides a tax regime that is almost
similar to the rest of world. It will also improve the International cost competitiveness of
native Goods and Services.
 GST will provide unbiased tax structure that is neutral to business processes and
geographical locations.
 If the GST is implemented in the true spirit, it will have many positive for the
stakeholders and will lead to a better tax environment.

4
First Discussion Paper on Goods and Services Tax in India (http://pib.nic.in/archieve/others/2009/nov/gst.pdf)

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IMPACT OF GST:

1. FOOD INDUSTRY

The application of GST to food items will have a significant impact on those who are living
under subsistence level. But at the same time, a complete exemption for food items
would drastically shrink the tax base. Food includes grains and cereals, meat, fish and poultry,
milk and dairy products, fruits and vegetables, candy and confectionary, snacks, prepared
meals for home consumption, restaurant meals and beverages. Even if the food is within the
scope of GST, such sales would largely remain exempt due to small business registration
threshold. Given the exemption of food from CENVAT and 4% VAT on food item, the
GST under a single rate would lead to a doubling of tax burden on food.

2. HOUSING AND CONSTRUCTION INDUSTRY

In India, construction and Housing sector need to be included in the GST tax base
because construction sector is a significant contributor to the national economy.

3. FAST MOVING CONSUMER SECTOR

Despite of the economic slowdown, India's Fast Moving Consumer Goods (FMCG) has
grown consistently during the past three-four years reaching to $25 billion at retail sales in
2008. Implementation of proposed GST and opening of Foreign Direct Investment(FDI) are
expected to fuel the growth and raise industry's size to $95 Billion by 2018.

4. RAIL SECTOR

There have been suggestions for including the rail sector under the GST umbrella to bring
about significant tax gains and widen the tax net so as to keep overall GST rate low. This will
have the added benefit of ensuring that all inter-state transportation of goods can be tracked
through the proposed Information technology network.

5. FINANCIAL SERVICES

In most of the countries GST is not charged on the financial services. Under the service
tax, India has followed the approach of bringing virtually all financial services within the ambit

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of tax where consideration for them is in the form of an explicit fee. GST also include financial
services on the above grounds only.

6. INFORMATION TECHNOLOGY ENABLED SERVICES

To be in sync with the best International practices, domestic supply of software should also
attract GST on the basis of mode of transaction. Hence if the software is transferred through
electronic form, it should be considered as Intellectual Property and regarded as a service.
And if the software is transmitted on media or any other tangible property, then it should be
treated as goods and subject to GST

7. IMPACT ON SMALL ENTERPRISES

There will be three categories of Small Enterprises in the GST regime.

1. Those below threshold need not register for the GST

2. Those between the threshold and composition turnovers will have the option to pay a
turnover based tax or opt to join the GST regime.
3. Those above threshold limit will need to be within framework of GST Possible
downward changes in the threshold in some States consequent to the introduction
of GST may result in obligation being created for some dealers. In this case
considerable assistance is desired.

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DRAWBACKS IN THE PRE GST SYSTEM:

Some of the important drawbacks in the pre GST are summarised in the following: (Rao, Goods
and Services tax: Some Progress towards clarity)

a) The list of exempted goods and services is yet to be finalised and it is quite likely that
some discretion may be allowed to individual states. This is a matter relating to the fiscal
autonomy of the states, but to the extent that there is no uniformity, both
administrative and compliance costs will be higher.
b) Two rates were proposed for the SGST, a low rate for essential items and a standard
rate for the remaining goods and services. This increases both administrative complexity
and compliance costs besides creating classification disputes. Indeed, there is
considerable evidence across the world to show that levying a GST at multiple rates
does not improve equity. First, the classification of goods and services is done according
to judgments on income elasticity of demand. Even if they are correct, in general
equilibrium terms, employment intensity of a good or service may be different from
income elasticity of demand. Thus, taxing goods and services at multiple rates instead of
a single rate may decrease rather than increase employment. Surely this is a socio-
political choice exercised by governments, but it is necessary to know the economic cost
of this decision.
c) At the state level, the proposal still leaves open the possibility of levying entry tax in
lieu of octroi as also octroi. Similarly, it does not include stamp duties and registration
fees. Furthermore, entertainment tax, if levied by local bodies will continue. Thus, while
the proposal goes a long way in unifying multiple taxes, it still leaves out some taxes.
Indeed, it is important to ensure that revenue sources of local bodies are protected. The
more rational course would be to add an additional percentage point to SGST as a local
levy and distribute the proceeds to urban and rural local governments based on their
consumption shares. Maharashtra, the only state in which municipal corporations are
allowed to levy octroi too can abolish it.

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d) This is the opportune time to correct some of the design faults that exists in the
prevailing state VAT. One of the problems with the present design is the distinction
made between inputs and outputs and levying the tax on the former at 4% and the
latter at 12.5% even as it is well known that the essential principle of VAT is providing
credit for input taxes. First, taxing inputs and outputs at different rates is unscientific
for, what is input in one use can be an output in another. Second, an 8.5 percentage
point margin of difference in the rates provides sufficient incentive to evade the output
tax. Thus, a manufacturer of steel furniture, for example, will buy his input-steel-and pay
the tax at 4%, but can suppress his output of steel furniture and evade paying the tax at
12.5% of the output value. The fact that most states do not yet have reliable
information system to match input and output transactions reduces the probability of
detection.
e) Under GST, the concept of “Declared goods” in the Goods of Special Importance Act,
does not have a place and the only criterion for rate differentiation to be followed, if at
all, is on the basis of income elasticity of demand. As mentioned above, even this need
not ensure overall equity in the general equilibrium sense; but tax design is less of a
science and more of exercising socio-political judgments. Since under GST input tax will
get the credit, there is no need to maintain a special treatment for “goods of special
importance”.
f) Another design fault in the state VAT pertains to the special cases of taxing
pharmaceuticals and works contract. At present in the case of pharmaceuticals, the
state VAT is still levied at the first point by taking stamped Maximum Retail Price (MRP)
as the retail value. Similarly, there is special treatment of works contract in which, the
value added is derived in a presumptive manner. It would be desirable to avoid breaking
the VAT chain by introducing such special cases and treat all goods and services alike
under GST.
g) There are far too many design problems in the prevailing CENVAT and a lot of work
needs to be done before a clean and scientific GST is put in place. It has too many rates;
it treats services and goods separately; it treats commodities covered under the MRP

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 differently from others. The tax refund on exports does not follow a clean zero rating
mechanism. There are various schemes to refund the excise duty paid on exports like
“Duty Draw-Back” and “Duty entitlement pass book” (DEPB) which is essentially
presumptive. A presumptive scheme is necessary when the system is complicated
and when the tax administration does not have the required information and
invariably the scheme will be adopted by the businesses only when they stand to gain
more from such a scheme than from receipt of the actual refunds. Once created, it
generates special interest groups to continue the scheme and not surprisingly,
there has been considerable pressure to continue the scheme by the businesses
even after its expiry and it had to be extended from time to time.

CHALLENGES BEFORE IMPLEMENTATION OF GST:

The main hurdle before the passing of Goods and Service Tax Act was the loss in revenue to the
State Govt. The Centre Govt has considered the demands of the states for 100 percent
compensation in the first five years, as against the earlier staggered kind of compensation.5

The April 2010 deadline for GST implementation was postponed, not because the political will
to carry through the tax reforms is lacking but for want of adequate preparation in terms of
legislative changes and gearing up the administrative machinery.

At the legislative level, two sets of changes were required. Firstly, a constitutional amendment
is required to give the Centre and State Govt, the concurrent powers to levy tax on goods and
services. This amendment will need to be passed by a special majority in Parliament and then
ratified by at least half the states before it can become law. Then the Centre and every state
will need to enact a GST Act that will replace the Central Excise Act, 1944 and the law on service
tax at the central level, and the Value Added Tax (VAT) Act and other local taxes at the state
level.

5
http://economictimes.indiatimes.com/opinion/interviews/gst-bill-on-right-track-but-still-a-long-way-to-go-
before-its-passed-mythili-bhusnurmath/articleshow/48172069.cms

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To get the constitutional amendment through before the end of the current fiscal year, the
Centre would need to introduce a bill in Parliament in the upcoming budget session and get it
passed in the winter session, such that it can be sent to states for ratification. On the new GST
Act, the empowered committee of state finance ministers and the Centre would need to agree
on the goods and services that would be outside the tax net, tax rate as well as the threshold
rate for application of the tax before a bill is introduced. They also need to decide the stage of
transaction at which the tax would be collected and incorporate that in the law. At present, the
excise is collected at the stage when goods leave the factory, the sales tax when the invoice is
raised and service tax on receipt of money.

But that may be the least of the hurdles on the path of GST implementation, even though work
on the bills is yet to begin.

To ensure that GST can be rolled out in a meaningful manner such that a common market is
created for goods and services and credits are transferred for taxes paid at the state level, it is
necessary that all states come on board. At the moment, several states have reservations about
moving to the GST regime as they are apprehensive of the losses they may suffer under the
new tax regime and the level of compensation they will get from the Centre. Unless a formula
for compensation of losses is worked out quickly, the consensus to move to GST is
inconsequential.

The implementation of VAT at the state level and then the gradual phase-out of CST were
delayed on this account in the past. That apart, delayed transfer of compensation from the
Centre, particularly in the instance of CST losses, has made states apprehensive about being
adequately compensated for their losses. So much so that some like Sushil Kumar Modi, Deputy
Chief Minister and finance minister of Bihar, want the compensation to be part of the
Thirteenth Finance Commission awards. While the Finance Commission has been given the
mandate to consider the impact of implementing GST on states revenues while finalising the
awards, it may not be possible to transfer compensation for GST losses through its awards. 6

6
http://articles.economictimes.indiatimes.com/2009-06-18/news/27640357_1_levy-tax-gst-act-centre-and-states
- News Article

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CONCLUSION AND SUGGESTIONS:

Goods and Service Tax is easily the biggest taxation reform in the country along with the
proposed Direct Tax Code. In terms of macroeconomic reforms too, it will be at tops with the
various reforms taken since 1990s. It will also serve as a useful case study for other economies
which are contemplating to implement GST. The sheer scale of GST project to bring all indirect
taxes in India under one fold is a major achievement and needs to be commended. The
proposed GST is not the desired and true form of GST. But a single indirect tax cannot be done
as India’s federal structure has to be preserved. GST is also expected to bring many benefits to
the Indian economy. Though, all these benefits are based on the assumption that overall
taxation structure is less bureaucratic and cumbersome than present. The implementation is
going to be crucial so that the promised benefits are realized.
The Government also needs to be weary of inflation spurts in initial implementation phase of
GST as pointed by experiences from international economies. Ideally, one should be first easing
all these state-wise inefficiencies and then implement GST. However given the challenges in
India, the Policy makers are hoping GST will help ease these inefficiencies and eliminate them
over a period of time.
All the shortcomings of the present taxation regime lead us to develop a new system of
Taxation for the ease of doing business and for the seamless flow of credit across the whole
supply chain. If we have been following some system that is now obsolete for years, it does not
means that we need to continue with it in the fore coming years as well.

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There is a criticism today that the proposed model of GST is fractured due to the compromises.
But the compromised model in any case would be better than no model at all. Also the bitter
truth is that a compromise often becomes necessary in Federal democracies.

The dual model will be like a joint venture between centre and the 29+ states. In order to make
this joint venture successful, one has to take all the states on the board with the compromise
this entails. Some states might revenue after introduction of GST but you cannot hold entire
country hostage because of one or two such states. One should keep in mind that an ideally
perfect GST has never been practiced in any federal democracy.

Every expert was once a beginner. No full proof can be developed in a single stroke. Over the
years things may come out to be very positive and it’s quite possible that the estimate 1-2% rise
in GDP might be too low.

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BIBLIOGRAPHY:

BOOKS REFERRED

1. Rastogi,Abhishek.A & Kumar,Aditya., 2009, Good And Service Tax, New Delhi, Taxmann
Publication.Pvt.Ltd.
2. Mohan, Rajat., 2010, Illustrated Guide to Goods & Service Tax, New Delhi,Nabhi
Publication.
3. Datey, V.S., Law and Practice, New Delhi, Taxmann’s Publication

REPORTS REFERRED

1. Empowered Committee of State Finance Ministers (2009). First Discussion Paper on

GST, Government of India, New Delhi
2. Report of Task Force on Implementation of FRBM Act, Government of India, New Delhi
3. Manupatra, Excise and Customs Reporter, An Indirect Tax Reporter
4. The Empowered Committee of State Finance Ministers, First Discussion Paper on Goods
and Services Tax in India, Nov. 10, 2009
5. Mahesh C. Purohit, Issues in the Introduction of Goods and Services Tax

WEBSITE REFERRED

1. http://www.gstindia.com/goods-st-gst-concept-impact
2. http://www.caaa.in/image/23ugsthb.pdf

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3. http://www.stcipd.com
4. http://www.lexport.in
5. http://www.desikanoon.co.in/2014/05/amendment-procedure-in-india.html
6. www.thehindu.com

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