TAX LAW II

PROS AND CONS OF THE GST

SUBMITTED BY:
BAHAAR SUHAIL
VII SEMESTER
REGULAR

1
 ACKNOWLEDGEMENT

Firstly, I would like to express my profound sense of gratitude towards the almighty for providing
me with the authentic circumstances which were mandatory for the completion of my project.

Secondly, I am highly indebted to Mr. Ekramuddin Malik Sir at Faculty of Law, Jamia Millia
Islamia University, New Delhi for providing me with constant encouragement and guidance
throughout the preparation of this project.

My cardinal thanks are also for my parents, friends and all teachers of law department in our
college who have always been the source of my inspiration and motivation without which I would
have never been able to unabridged my project.

2
 CONTENTS

1. Introduction

2. The Indian Taxation System - Scenario Before GST

3. Objective of GST

4. Advantages of GST

5. Disadvantages of GST

6. What can be done to minimise the disadvantages of GST

7. Conclusion

8. Bibliography

3
 INTRODUCTION

The word “tax” is derived from Latin word “taxare” meaning to estimate. A tax is not a voluntary
payment or donation, but enforced contribution, exacted pursuant to legislative authority and is
contribution imposed by the government, whether under the name of toll, tribute, impost, duty,
custom, excise, subsidy, aid, supply, or any other name (Chakraborty & Rao, 2010 ; Garg,
2014).1
Taxation was first imposed in Ancient Egypt around 3000 B.C.- 2800 B.C. during the first
dynasty of the old kingdom. Records indicate from that period that the Pharaoh would conduct a
biennial tour of the kingdom, collecting tax revenues from the people. Other data indications are
granary receipts on limestone flakes and papyrus.
Taxes are the only way for financing the public goods because of their inappropriate pricing in
the market. It can only be levied by the government, via funds collected from taxes. It is highly
important that the taxation system is designed in such an appropriate manner that it doesn't lead
to any sort of market distortions and failures in the economy. The taxation laws should be highly
competitive so that revenue can be raised in a highly efficient and effective manner.

In India, the taxation system was started in ancient times. The early taxation system’s existence
can be seen in many ancient books like Manu - Smrti and Arthasastra.
During the British empire, the entire taxation system of India was transformed. It was entirely in
favor of the British empire, but it also incorporated modern and scientific techniques of taxation
systems. Another remarkable transformation came in the year 1922 in the taxation system when
Britishers established an entirely new administrative and taxation system in India. In this system,
the taxation system was categorized in two main categories: Direct Taxes and Indirect Taxes. In
India, the taxation system is entirely controlled, imposed, and updated by Central and State
governments. The authority to levy tax is derived from the Indian Constitution, which allocates
the power to levy taxes between Central Government System and State Government System. 2

1
https://www.collinsdictionary.com/dictionary/english/tax
2
https://www.ey.com/in/en/services/ey-goods-and-services-tax-gst

4
 In early 1950s, the Central Government’s total tax revenue approximately amounted to 401
crores. During the 1990s, the tax revenue was around 68,500 crores, in 2014-15 it was 13, 64
lakh crores and recently the figures rocketed up to more than 14.6 lakh crores. In these recent
figures, 2.8 lakh crores and 2.1 lakh croreswas generated from excise duty and service tax,
respectively, by the Central Government. In total revenue, the proportion of indirect taxes was
57% in the early 1950s, 84% in 1991, 46% in 2014-15 and recently it was 34%. There is no doubt
that after new economic reforms the proportion of indirect taxes in total tax revenue is decreasing.
It implies that tax system is moving towards a progressive taxation from regressive taxation,
which is expected in developing countries. 3

In the year 2017, one of the biggest tax reforms in India, the Goods and Service Tax (GST) is all
set to integrate within the ambit of State economies and boost overall growth. This new reform
will create a single, unified Indian market to make the economy stronger. The implementation of
GST will lead to the abolition of other taxes such as octroi, Central Sales Tax (CST), State-level
sales tax/Value Added Tax, entry tax, stamp duty, telecom license fees, turnover tax, tax on
consumption or sale of electricity, taxes on transportation of goods and services, etc. Therefore,
this reform will help in avoiding multiple layers of taxation that currently exist in India. GST is
a comprehensive tax levy on manufacture, sale and consumption of goods and services at a
national level. Through a tax credit mechanism, this tax is collected on value-addition on goods
and services at each stage of sale or purchase in the supply chain. The system allows the set-off
of GST paid on the procurement of goods and services against the GST which is payable on the
supply of goods or services. However, the end consumer bears this tax as he/she is the last person
in the supply chain. Experts say that GST is likely to improve tax collections and boost India's
economic development by breaking tax barriers between States and integrating India through a
uniform tax rate. Under GST, the burden of tax collection will be divided equitably between
manufacturing and services, through a lower tax rate by increasing the tax base and minimizing
exemptions. It is expected to help build a transparent and corruption free tax administration. Final
impact of total GST will be only at the destination point, presently it is at various points (from

3
Pannu SPS (2015). ‘The Biggest Tax Reforms in India: Since from Independence’ Business Today, Nov, 28, 2015,
New Delhi.

5
 manufacturing to retail outlets) i.e. a manufacturer needs to pay tax when a finished product
moves out from a factory, and it is again taxed at the retail outlet when sold. At present excise
duty paid on the raw material consumed is being allowed as input credit only on manufactured
goods. For other taxes and duties paid for post-manufacturing expenses, there is no mechanism
for input credit under the Central Excise Duty Act.4 GST will divide the tax burden equitably
between manufacturing and services. It will be replacement of Excise Duty and other taxes. 5

The Indian Taxation System - Scenario before GST

Tax policies play a vital role in any country's progress and have a direct impact on any country's
economy in terms of efficiency and equity. A good taxation policy is that which takes care of the
entire income distribution and also generates tax revenues in such a manner for Central and State
Governments, which can lead to overall benefit in the nation's infrastructure, defence, public
amenities, people's security, and a country's exports. 6

The entire framework to impose indirect taxes comes under Constitutional provisions of India.
The taxation system varies from manufacturer to manufacturer on point of sale or level of imports
or exports. Indirect taxation based collection systems are based on origin, and are designed to
impose tax and collect the same at the event of happening of any taxable activity.

4
Anushuya Pal, NarwalKaram (2014). ‘Indian Indirect Tax Systems: Reforms and Goods and Services Tax’ Advances
in Management 7.7 (Jul 2014): 9-14.
5
Girish Garg, Basic Concepts and Features of Good and Service Tax In India, International Journal of scientific
research and management (IJSRM) Volume 2 Issue 2 Pages 542-54 2014
6
Girish Garg, Basic Concepts and Features of Good and Service Tax In India, International Journal of scientific
research and management (IJSRM) Volume 2 Issue 2 Pages 542-54 2014

6
 PRINCIPLES OF TAX SUBSUMPTION:

The various Central, State and Local levies were examined to identify their possibility of being
subsumed under GST. While identifying, the following principles were kept in mind:

 Taxes or levies to be subsumed should be primarily in the nature of indirect taxes, either on
the supply of goods or on the supply of services.

 Taxes or levies to be subsumed should be part of the transaction chain which commences with
import/ manufacture/ production of goods or provision of services at one end and the
consumption of goods and services at the other.

 The subsumption should result in a free flow of tax credit in intra and inter-State levels.

 The taxes, levies and fees that are not specifically related to supply of goods & services should
not be subsumed under GST.

 Revenue fairness for both the Union and the states individually would need to be attempted.

TREATMENT OF SPECIFIC GOODS

The Central Government tabled the 122nd Constitution Amendment Bill, 2014 (‘Bill’) on the
introduction of Goods and Services Tax (‘GST’) before the lower house of Parliament on
December 19, 2014. On analysis of the Bill, the Bill contains the following treatment for the
specific goods:

TAX ON SUPPLY OF THE ALCOHOLIC LIQUOR FOR HUMAN CONSUMPTION

As per the proposed amendment to Constitution by the Constitution (122nd Amendment) Bill,
2014, the supply of the alcoholic liquor for human consumption has been excluded from the
definition of goods and service tax. New clause 12A has been inserted in Article 366 which defines
goods and service tax as follows:

7
“Goods and services tax” means any tax on supply of goods or services or both except taxes on
the supply of the alcoholic liquor for human consumption.

Hence, the supply of the alcoholic liquor for human consumption will be out of the GST. Alcohol
products for human consumption would continue to be exclusively taxed by the States. Since the
Bill specifically excludes alcohol products from the ambit of GST, bringing it within GST at a
future date would require another constitutional amendment. CST on inter-state sales of alcohol
would also continue. It, therefore, appears that the empowerment of States to tax alcohol products
is intended to remain unaltered in the near future.

TAX ON TOBACCO PRODUCTS

Tobacco and tobacco products would be subjected to GST. However, it can be subjected to a
separate excise duty by the Centre.

TAX ON PETROLEUM CRUDE/ HIGH SPEED DIESEL/ MOTOR SPIRIT/ NATURAL

GAS/ AVIATION TURBINE FUEL
The States would continue as per the current laws to impose Value Added Tax (VAT) on
Petroleum Crude/ High-Speed Diesel/ Motor Spirit/ Natural Gas/ Aviation Turbine Fuel on intra-
state sales while inter-state sales would continue to attract Central Sales Tax (CST). These
products would be transitioned into the GST regime from a future date to be notified by the GST
Council.

It is currently unclear from the schematics of the Bill whether States would fully discontinue
collecting VAT/ CST on these products from this notified date, or whether the transition would be
gradual. The Bill however also states that these products can be subjected to an excise duty
imposed by the Centre; this levy would be imposed now and even after GST comes into force.
Such duty can be in addition to the applicable VAT or GST imposed.

8
TAX ON NEWSPAPERS AND ADVERTISEMENT THEREIN
GST would be capable of being levied on the sale of newspapers and advertisements therein. This
would give the governments the access to substantial incremental revenues since this industry has
historically been tax free in its entirety.

Limitations and Issues Pertaining to the Existing Indian Taxation System: Various taxes were
imposed on the Indian population by Central and State Governments like Central Excise, Service
Tax, VAT, etc. Before the introduction of VAT in Sales Tax and CENVAT in Central Excise and
Service Tax, the Indian Taxation System was very complex and this had cascading effects. The
tax imposed on one destination was also taxed on another destination. However, in recent times,
the taxation system has seen remarkable revolutions. 7
Many changes in taxation were implemented, that is, VAT, and implementation of Service Tax by
Central Government. In Central Excise taxation system, the government introduced CEVAT by
setting off taxes on inputs, while producing output products. With introduction of VAT based
taxation system in India, the foundation stone of GST implementation was laid. 8

The following points highlight the primary and severe issues pertaining in Indian indirect
tax structure system:

(i) The CENVAT (excise duty) was imposed on the products manufactured in India. But
issues originated regarding product valuations. The issue regarding implementation of CENVAT
only at the manufacturing level acted as a critical barrier to efficient and neutral flow of tax credit.
This led to the replacement of VAT to GST in many countries.

(ii) The Indian Constitution has distributed the taxation system between Central and State
Governments. The State government has right to impose any sort of tax on any matter or item
under the state. In Service Tax, the Central government enjoys the power to impose tax but in

7
Pinki, Supriya Kamna, Richa Verma(2014), “Good and Service Tax – Panacea For Indirect Tax System In India”,
“Tactful Management Research Journal”,Vol2, Issue 10, July2014
8
Girish Garg, (2014),“Basic Concepts and Features of Good and Service Tax in India”

9
 Work Contracts, the State government has the dominance. This sort of system creates distortions
in revenue generation and distribution for the government.9

(iii) Various things like copyrights, patents, software are not considered for taxation system by
the government. So, complexity again arose for classifying these goods under the taxation
policies.

(iv) With the booming of the service sector, the Central government has monopolistic right to
impose tax. The State Governments, on the other hand, are losing their revenue by not imposing
any tax on the service sector.10

(v) Considering CST on interstate sales of goods, no set off was allowed, which increased the
cascading effect.

(vi) For better monitoring and administration of taxes, major transformations in technology are
required, which is costly and time consuming and has to be redressed.

(vii) Lack of cross verification of returns filed under Central and State taxation systems led to
lot of discrepancies.

(viii) Under the Indirect taxation system, there were more than 15 different taxes which had to
be filled under different norms. So, it required immediate and one system regulation of filling
and calculating taxes.

(ix) The Indian taxation system was cumbersome and full of burdens and different taxes on
same products in different states led to high inflation, which had to be redressed.

9
Agogo Mawuli (2014): “Goods and Service Tax- An Appraisal”Paper presented at the the PNG Taxation Research
and Review Symposium, Holiday Inn, Port Moresby,29-30
10
A Primer on Goods and Services Tax in India, Centre for Budget and Governance Accountability, new delhi,2011

10
 Despite of the existence of multiple taxes in the Indian Economy like Excise Tax, Custom Duty,
Service Tax etc., still the GDP of India is much less as compared to the GDP of other countries
like USA - 13.84%, China - 6.99%, Japan - 4.3%, and France - 2.05%. So, the GDP data of
various countries demonstrates that there is utmost need of tax reform, that is, implementation of
Goods and Services Tax (GST) in India. 11

OBJECTIVE OF GST

One Nation, One Tax and One Market can be termed as the basic objective of the GST, in a
layman’s understanding. Central and State taxes are merged into a single tax which in return
would lessen the burden of double taxation, facilitating a common national market. The end
consumer of a good or service is the one who will be paying the GST, thus this will improve
competitiveness of original goods and services in the market which directly impact on GDP
extension of the country.GST is a target based consumption tax which goes hand in hand with
the VAT rule12.

ADVANTAGES OF GST

The current GST will bring about the following advantages to the country:

1. The GST will help in removing economic differences and bring about common national
market. The dream of one country, one act and one tax rate can be fulfilled. 13

2. It will help to make transparent and corruption free tax administration in two ways. First
relates to the self policing incentives inherent to value added tax. To claim input tax credit, each
dealer has an incentive to request documentation from the dealer behind him in the value-
added/tax chain. Provided the chain is not broken through wide ranging exemptions, especially

11
Nitya Tax Associates ,Basics of GST, Taxmann , 1 st Edition August 2016 [4] G
12
Girish Garg, (2014),“Basic Concepts and Features of Good and Service Tax in India”.
13
. GST India Economy and Policy

11
 on intermediate goods, this self-policing feature can work very powerfully in the GST. The
second relates to the dual monitoring structure of the GST- one by the States and another by the
Centre.14

3. If current GST act might have well designed and tax rate is more than ‘Revenue Neutral
Rate’ (RNR is the rate which neutralize revenue effect of state and central government due to
change in tax system, means ,the rate of GST which will give at least the same level of revenue
that is currently earned by state and central governments from indirect taxes is known as RNR)
and tax base becomes more buoyant, then, resources available for the governments will be
increase which can be used for poverty alleviation and development activities in the country and
states.

4. As production cost will decrease which can support would support to increase export from
our country.’

5. This tax will facilitate ‘Make in India’ by making one India. The current structure unmakes
India, by fragmenting Indian markets along state lines. These distortions are caused by three
features of the current system: The Central Sales Tax on inter- State sales of goods; numerous
intra- State taxes; and the extensive nature of countervailing duty exemptions that favours
imports over domestic production.

6. In a single action; the GST will rectify all these distortions: the GST would be eliminated;
most of the other taxes would be subsumed into the GST; and because the GST would be applied
in imports, the negative protection favouring imports and disfavouring domestic manufacturing
would be eliminated.

7. As taxable sale limit is brought down i.e. only ₹10 lakhs, it is expected that tax base will
be comprehensive in the country. (It was 1.5 crore for excise duty). It will also diversify tax

14
AartiSaxena,Overview of Proposed Goods and Services Tax (GST) Regime in India, Deputy

12
 system and put equal burden on goods and services. These are the main advantages of upcoming
GST.

8. While a new business is starting in India, businesses previously have to get VAT
registration from the State’s Sales Tax Department at first. Since, each State had different
procedures, forms and fees for VAT registration, it was very tough for businesses which are
operating in multiple States to obtain and maintain compliance with VAT regulations. With the
accomplishment of GST in India, the procedure for GST registration is centralized and uniformed
similar to service tax registration. Under GST rule, business would no longer have to attain
multiple VAT registration – as a single GST registration would be valid across India. The
procedure for GST registration would also be uniformed, thereby civilizing the easiness of
starting a new business in India.15

9. Previously, VAT registration and VAT payment is compulsory in India once a business
crosses a yearly earnings of 5 lakhs in some States and 10 lakhs in a few other States. The multiple
VAT legislation enacted by each State creates bewilderment and complexities. 16 Once GST is
imposed in India, businesses with revenue of less than 10 lakhs per annum would not have to
index for GST nor collect GST again. Further, businesses whose annual sales turnover of 10
lakhs to 50 lakhs may have to pay GST only at a lesser rate. Therefore, once GST is rolled out,
thousands of start-ups and small businesses currently having annual sales earnings of 5 lakhs –
10 lakhs would be absent of the tax and they should be relief from collection and filing of GST
returns. Currently, businesses like restaurant or computer services which sell goods and provide
services as a package basis have to execute both VAT and service tax regulations. This creates
more intricacy and difficulty for the businesses. They estimate tax on different rates for different
items. With the accomplishment of GST this dissimilarity between goods and services will be

15
Dasgupta S. The historic GST has become a reality, Article from Economic Times, 2017.
16
P. chaurasia, S. Singh, P. Kumar Sen (2016), “ Role of Goods and Service Tax in the growth of Indian economy”,
“ International journal of science technology and management”, vol.5, issue 2, February 2016.

13
 conquer.17 Further rising of invoices will be easier for businesses as one rate would be adopted
for all goods and services.

DISADVANTAGES OF GST

More than 160 countries of the world have implemented GST. Regarding India, eminent
economists have always been very optimistic about its positive effects on the economy. However,
each country where GST has been implemented experienced inflation for next 3 to 5 years. Some
possible disadvantages of GST are as following:

1. Critics say that GST would affect negatively on the real estate market. It would add up to
8 percent to the cost of new homes and reduce demand by about 12 percent.

2. Some Economist says that CGST, SGST and IGST are nothing but new names for Central
Excise/Service Tax, VAT and CST and hence GST brings nothing new for which we should
cheer.18
3. As GST brought small traders in the tax net, it will difficult to small traders to compete
with strong / big traders Their survival can become something difficult.

4. There is need of various expositions (Monthly, annually, total 37 expositions are required
as per present situation) are complicated would difficult to the traders and at the same time I. T.
infrastructural support with safety and reliability is required. 19

17
Sunitha, G. & Sathischandra, P. 2017. Goods and Services Tax (GST): As a new path in Tax reforms in Indian
economy. International Journal of Research in Finance and Marketing.7(3): 55- 66.
18
M. Sehrawat, U. Dhanda (2015), “GST in India: A key tax reform”, “International journal of research
granthaalayah”, vol.3, issue 12, December 2015.
19
Dr. R. Vasanthagopal (2011). “GST in India: A Big Leap in the Indirect Taxation System”, International Journal of
Trade, Economics and Finance, Vol. 2, No. 2, April 2011.

14
 5. As GST is on purchasing/consumption, its revenue will go to state in which article sold or
service is rendered instead of produced. Means, state from which resources are used to produce
goods will not receive tax revenue. For instance, Andhra Pradesh and Telangana are producing
cement that is sold in other states of the country, they will get revenue. 20

6. As octroi or Local Body Tax is abolished, its monetary compensation for Urban Local
Bodies should be done properly from the concern State Government. But, experience in our
country is not satisfactory because even after 73rd and 74th constitutional amendments States are
supposed to appoint State Finance Commissions. Nevertheless, all states have not appointed State
Finance Commissions regularly. Therefore, Corporations like Brihanmumbai will loss the strong
source of revenue. 21

7. Drawback in GST regime for businessmen is filling of Tax return. Under current Vat laws,
in case of most of the states, quarterly returns are to be submitted, in addition, a yearly return is
required, while service tax laws ask for submission of two half yearly returns and a yearly return.
In GST law, one would require to file not less than 37 returns for a fiscal year. This includes
several files such as monthly outward supplies return, monthly inward supplies return, monthly
summary returns and one annual return etc.

20
GovindaRao, Goods and Services Tax in India: Challenges and prospects, Topics: Macroeconomic Policy, 25th
Aug, 2014
21
Kumar, N. 2014. Goods and Service Tax in India-A Way Forward. Global Journal of Multidisciplinary Studies.
3(6).

15
 WHAT CAN BE DONE TO MINIMISE THE DISADVANTAGES OF THE
GST?

Even though, GST is one of the revolutionary reforms about indirect taxes in the country after
independence there are some possibilities that can effect on the public interest and the common
predetermined objectives of the Governments.22 We should take care of following things:

1. GST should not increase the vertical imbalances of resources and responsibilities among
governments, particularly for Urban Local Bodies. Hope, finance commissions will take
sufficient care of it.23

2. If GST led to regional imbalance of development, there should be legal provision to correct
the same.

3. Reliable I. T. infrastructure, trained man power and tax payers’ attitude should be changed.

4. The definition of goods and services should be clear otherwise it would lead to conflicts.

22
Secretary (State Taxes), Department of Revenue, Ministry of Finance, Government of India
23
Rathod, M. (2017). An Overview of Goods and Service Tax (Gst) In India. Journal of Commerce and Management,
1-6

16
 CONCLUSION

It is encouraging that when GST was introduced in New Zealand in 1987, it resulted in 45%
higher revenue than expected, mainly due to improved compliance. The same can be expected
from this reform in India.
GST is the most logical steps towards the comprehensive indirect tax reform in the country since
independence. All sectors of economy whether the industry, business including Govt.
departments and service sector shall have to bear impact of GST. All sections of economy viz.,
big, medium, small scale units, intermediaries, importers, exporters, traders, professionals and
consumers shall be directly affected by GST. GST will create a single, unified Indian market to
make the economy stronger. Experts say that GST is likely to improve tax collections and Boost
India’s economic development by breaking tax barriers between States and integrating India
through a uniform tax rate. Under GST, the taxation burden will be divided equitably between
manufacturing and services, through a lower tax rate by increasing the tax base and minimizing
exemptions.
However, there seem to be some crucial drawbacks in this ‘reform’ as discussed above in this
paper. Will this reform be a bane or a boon for this country’s economic system? The GST was
implemented in country in April 2017 and in my opinion, it is too soon to answer this question.

17
 REFRENCES

BOOKS REFERRED:

1. Dr. Vinod K. Singhania, Students’ Guide To GST & Customs Law, 2nd Edition (2018),
Taxmann Publications Pvt. Ltd.
2. Taxmann’s GST Manual – (February 2018 Edition – by Taxmann (Author, Contributor)
3. Indirect Tax Laws : PART I : GOODS & SERVICES TAX (GST) PART II : CUSTOMS LAW
by M.Com(Gold Medallist) LL.B, MBA, FCA, FCMA, CIPM S K Mishra

WEBSITES REFERRED:

1. https://taxguru.in/goods-and-service-tax/registration-gst-complete-provisions-analysis.html
2. https://cleartax.in/s/cgst-rules-chapter-3-registration
3. https://economictimes.indiatimes.com/what-is-the-advantage-of-taking-registration-in-
gst/articleshow/58590624.cms
4. https://taxguru.in/goods-and-service-tax/gst-registration-applicability-advantages-conditions-
procedures.html

18