A SHORT CASE STUDY ON

THE TEN PRINCIPLES OF

ECONOMICS:
Topic: The Goods and Services Tax initiative

Submitt ed by – Raunak Thaker, 2140866.

What is the Goods and Service Tax?
Goods and Services Tax (GST) is an indirect tax (or consumption tax) used in India on the supply
of goods and services. It is a comprehensive, multistage, destination-based tax: comprehensive
because it has subsumed almost all the indirect taxes except a few state taxes. Multi-staged as it is, the
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 and as a destination-based tax, it is
collected from point of consumption and not point of origin like previous taxes.
Goods and services are divided into five different tax slabs for collection of tax: 0%, 5%, 12%,and
18%.However, petroleum products alcoholic drinks, and electricity are not taxed under GST and
instead are taxed separately by the individual state governments, as per the previous tax system.

In keeping with the federal structure of India it is proposed that the GST will be levied
concurrently by the central government (CGST) and the state government (SGST). It is
expected that the base and other essential design features would be common between CGST
and SGSTs for individual states. The inter-state supplies within India would attract an
integrated GST (IGST), which is the aggregate of CGST and the SGST of the destination
state.
In other words, Goods and Service Tax (GST) is levied on the supply of goods and services.
Goods and Services Tax Law in India is a comprehensive, multi-stage, destination-based tax
that is levied on every value addition. GST is a single domestic indirect tax law for the entire
country.

Before the Goods and Services Tax could be introduced, the structure of indirect tax levy in
India was as follows:

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. All the inter-state sales are chargeable to the
Integrated GST.

Now, let us understand the definition of Goods and Service Tax, as

mentioned above, in detail:

Multi-stage:
An item goes through multiple change-of-hands along its supply chain: Starting from
manufacture until the final sale to the consumer.
Let us consider the following stages:
 Purchase of raw materials
 Production or manufacture
 Warehousing of finished goods
 Selling to wholesalers
 Sale of the product to the retailers
  Selling to the end consumers
Since GST is levied on all of these stages, GST can be stated as a Multi Stage Tax.

Value Addition:
A manufacturer who makes biscuits buys flour, sugar and other material. The value of the
inputs increases when the sugar and flour are mixed and baked into biscuits.
The manufacturer then sells these biscuits to the warehousing agent who packs large
quantities of biscuits in cartons and labels it. This is another addition of value to the biscuits.
After this, the warehousing agent sells it to the retailer.
The retailer packages the biscuits in smaller quantities and invests in the marketing of the
biscuits, thus increasing its value. GST is levied on these value additions, i.e. the monetary
value added at each stage to achieve the final sale to the end customer.

Here are some features of the GST levied in India:

 The power to make laws in respect of supplies during inter-state trade or commerce will remain
with the central government. The states will have the right to levy GST on intrastate transactions,
including on services.
 The administration of GST will be the responsibility of the GST Council, which will be the main
policy-making body for GST. Members of GST Council will comprise of central and state
ministers in charge of the finance portfolio.
 The threshold for levy of GST is a turnover of Rs. 1 million. For a taxpayer who conducts
business in a north-eastern state of India the threshold is Rs. 500,000.
 The central government will levy IGST on inter-state supply of goods and services. Import of
goods will be subject to basic customs duty and IGST.
 GST is defined as any tax on supply of goods and services (other than on alcohol for human
consumption).
 Central taxes such as central excise duty, additional excise duty, service tax, additional custom
duty and special additional duty, as well as state-level taxes such as VAT or sales tax, central
sales tax, entertainment tax, entry tax, purchase tax, luxury tax and octroi will be subsumed in
GST.
 A provision will be made for removing imposition of entry tax/ octroi across India.
 Entertainment tax, imposed by states on movies, theatre, etc., will be subsumed in GST, but taxes
on entertainment at panchayat, municipality or district level will continue.
 Stamp duties, typically imposed on legal agreements by states, will continue to be levied.
 The key benefits associated with GST are:
 Offers a wider tax base, necessary for lowering tax rates and eliminating classification disputes
 Eliminates the multiplicity of taxes and their cascading effects
 Rationalizes the tax structure and simplifies compliance procedures
 Automates compliance procedures to reduce errors and increase efficiency

Goods and services are divided into five different tax slabs for collection of tax: 0%, 5%,
12%, 18%. However, petroleum products, alcoholic drinks and electricity are not taxed
under GST and instead are taxed separately by the individual state governments as per
the previous tax system.

3. Objectives Of GST:
1. To achieve the ideology of ‘One Nation, One Tax’

GST has replaced multiple indirect taxes, which were existing under the previous tax
regime. The advantage of having one single tax means every state follows the same
rate for a particular product or service. Tax administration is easier with the Central
Government deciding the rates and policies. Common laws can be introduced, such as
 e-way bills for goods transport and e-invoicing for transaction reporting. Tax
compliance is also better as taxpayers are not bogged down with multiple return forms
and deadlines. Overall, it’s a unified system of indirect tax compliance.

2. To subsume a majority of the indirect taxes in India

India had several erstwhile indirect taxes such as service tax, Value Added Tax
(VAT), Central Excise, etc., which used to be levied at multiple supply chain stages.
Some taxes were governed by the states and some by the Centre. There was no unified
and centralised tax on both goods and services. Hence, GST was introduced. Under
GST, all the major indirect taxes were subsumed into one. It has greatly reduced the
compliance burden on taxpayers and eased tax administration for the government.

3. To eliminate the cascading effect of taxes

One of the primary objectives of GST was to remove the cascading effect of taxes.
Previously, due to different indirect tax laws, taxpayers could not set off the tax
credits of one tax against the other.

4. To curb tax evasion

Due to GST being a nationwide tax and having a centralised surveillance system, the
clampdown on defaulters is quicker and far more efficient. Hence, GST has curbed
tax evasion and minimised tax fraud from taking place to a large extent.

5. To increase the taxpayer base

GST has helped in widening the tax base in India. Previously, each of the tax laws had
a different threshold limit for registration based on turnover. As GST is a consolidated
tax levied on both goods and services both, it has increased tax-registered businesses.
Besides, the stricter laws surrounding input tax credits have helped bring certain
unorganised sectors under the tax net. For example, the construction industry in India.

6. Online procedures for ease of doing business

Previously, taxpayers faced a lot of hardships dealing with different tax authorities
under each tax law. Besides, while return filing was online, most of the assessment
and refund procedures took place offline. Now, GST procedures are carried out
almost entirely online. Everything is done with a click of a button, from registration to
return filing to refunds to e-way bill generation. It has contributed to the overall ease
of doing business in India and simplified taxpayer compliance to a massive extent.
The government also plans to introduce a centralised portal soon for all indirect tax
compliance such as e-invoicing, e-way bills and GST return filing.
 7. An improved logistics and distribution system

A single indirect tax system reduces the need for multiple documentation for the
supply of goods. GST minimises transportation cycle times, improves supply chain
and turnaround time, and leads to warehouse consolidation, among other benefits.
With the e-way bill system under GST, the removal of interstate checkpoints is most
beneficial to the sector in improving transit and destination efficiency. Ultimately, it
helps in cutting down the high logistics and warehousing costs.

8. To promote competitive pricing and increase consumption

Introducing GST has also led to an increase in consumption and indirect tax revenues.
Due to the cascading effect of taxes under the previous regime, the prices of goods in
India were higher than in global markets. Even between states, the lower VAT rates in
certain states led to an imbalance of purchases in these states. Having uniform GST
rates have contributed to overall competitive pricing across India and on the global
front. This has hence increased consumption and led to higher revenues, which has
been another important objective achieved.
From the case study above, we can link two of Gregory Mankiw’s principles:

1. The Standard of Living Depends on a Country's Production

The more goods and services produced in a country, the higher the standard of
living. As people consume a larger quantity of goods and services, their
standard of living will increase

As the Government levied the GST tax on most of the transactions conducted in the market, they
collected massive amount of revenue. The avg. net revenue for the year 2020 was more than Rs 5.48
lakh crore, which was more than the revised estimates (RE) of Rs 5.15 lakh crore. In 2019-20, the net
collection was over Rs 5.98 lakh crore, which is 97.8 per cent of the RE. This is one of the reasons
that India has been able to recover from most of the economical drawbacks it experienced during
the COVID-19 pandemic.

2. Markets Are Usually a Good Way to Organize Economic Activity

Adam Smith made the observation that when households and firms interact in
markets guided by the invisible hand, they will produce the most surpluses for the
economy

A continuous flow of goods and services resulted in great market stability. an economy will
comparatively work and function well if the government will leave people alone to buy and
sell freely among themselves. He suggested that if people were allowed to trade freely, self
interested traders present in the market would compete with each other, leading markets
towards the positive output. Numerous amounts of trade would result in high GST revenue
and thus increasing the national reserve. The government in turn would regulate these trades
and help grow the Indian economic market.
 Question and answers

How can GST help curb tax evasion?

The implementation of GST is going to effect direct taxes, helping in widening of

the tax base and increasing the taxes collections.
According to tax administrators, GST will help in curbing domestic black money.
Though it is a reform for indirect taxes, there are filers who understate incomes by
not reporting each and every transaction. By doing this, they save excise, VAT,
Octroi etc, and more importantly, are able to furnish under reporting of their
incomes. Since, GST will have a paper trail which can be accessed by the income
tax department such practices will discourage generation of black money in the
system.

How has GST reduced burden on the tax payers?

With the Goods and Services Tax regime completed four years ago, the Finance
Ministry on Wednesday said more than 66 crores of GST returns have been filed
so far, and lower tax rates have helped increase compliance. A nationwide GST,
which subsumed 17 local levies like excise duty, service tax, and VAT, and 13
cesses, was rolled out on July 1, 2017. For services, businesses with turnover up to
Rs 20 lakh in a year are GST exempt. A service provider having turnover up to Rs
50 lakh in a year can opt for a composition scheme for services and pay only 6 per
cent tax.It is now widely acknowledged that GST is both consumer and taxpayer-
friendly. While high tax rates of the pre-GST era acted as a disincentive to paying
tax, the lower rates under GST helped to increase tax compliance. More than 66
crore GST returns have been filed so far.

LINKS FOR REFERENCES:

Introduction to GST : https://www.lexology.com/library/detail.aspx?g=6368923a-d580-
49e4-904a-c1938c66782b
What is Goods and Services Tax: https://cleartax.in/s/gst-law-goods-and-services-tax
Effects of GST on the Indian Market : www.hindustantimes.com