ECONOMICS BY PRATHAM SIR

PUBLIC FINANCE (GE) (CBCS)

For GE Hons. Sem 4 & BA Sem 6
UNIT-2
Current Issues of India’s Tax System
– Notes by Pratham Sir

Concept – 1
GST – Meaning & Features
Meaning : The introduction of the Goods and Services Tax (GST) is a very significant step
in the field of indirect tax reforms in India. By combining a large number of Central and
State taxes into a single tax, GST has removed the problem of cascading or double taxation.
The motto of GST is – One Nation, One Tax, One Market. GST has came into the effect
from 1st July 2017.

Features of GST
1. Single Tax Structure: The basic aim of GST is to replace multiple taxes with a single
tax and make the price of goods or services uniform across the country. However, in
doing so, some goods or services became cheaper, while some became costly.
2. Consumption-Based tax: The Goods and Services Tax is not received by the state
in which the goods have been manufactured, but by the state in which the goods or
services have been consumed.
3. Applicable on Supply of Goods and Services: Earlier, the taxes were charged on
the basis of ‘tax on the manufacture or sale of goods or on the provision of services;
however, the Goods and Services Tax is charged on the basis of Supply of Goods and
Services.
4. Dual GST : It is the structure of Dual GST. The GST levied by the Centre is called
Central GST (CGST) and that levied by the states is called State GST (SGST).
5. 5. Same GST Rates throughout the country: The motto of GST is One Nation One
Tax One Market. Under the GST regime, the GST rates are same throughout the
country. Earlier, the rates of VAT/Sales Tax were different in the States.
6. Payment of GST: The taxpayers can make payment of GST through different modes,
like Internet Banking, NEFT (National Electronic Funds Transfer)/RTGS (Real Time
Gross Settlement), and debit/credit cards.
7. Input Tax Credit : Input Tax credit is the amount that a registered Tax payer can
claim for the GST paid on inputs (i.e., Raw materials, capital Goods etc.) that are used
 ECONOMICS BY PRATHAM SIR
in producing or supplying goods and services. ITC removed the problem of Cascading
effect that was exist in old Tax system.
8. Composition Scheme : Composition Scheme is a simple and easy scheme under GST
for taxpayers. Small taxpayers can get rid of tedious GST formalities and pay GST at
a fixed rate of turnover. This scheme can be opted by any taxpayer whose turnover is
less than Rs. 1.5 crore.
9. GST Rates : GST rates in India for various goods and services is divided into four
slabs: they are at present 0% (nil-rated), 5% , 12% , 18% , & 28% GST. The GST
rates for various products have been revised several times by the GST council since
the inception of the Goods and Services Tax (GST).
10.Taxes not subsumed under GST : Custom Duty, Stamp Duty, Vehicle Tax, Excise
on Liquor, Tax on sale & Consumption of Electricity, Entry tax & Toll,
Entertainment tax and road tax.

Concept – 2
Proposed Model of GST
(Some Concerns regarding the GST – Surajit Das, 4 March 2017)
The goods and services tax (GST) is nothing but an ad valorem sales tax on all goods and
services with input tax credit.
According to the current proposal, There would be a variation in the GST rates for different
commodities or services, the tax rate for any particular commodity or service would be
uniform across all the states.
The input tax credit (ITC) ensures that the producer does not pay tax on the material input
of production. Therefore, there is no payment of tax on the already paid tax, what is called
the “cascading effect”.
Almost all other indirect taxes—except custom duty collected by the central government,
and duty on petroleum, electricity, and alcohol, levied by the state governments—are
supposed to be subsumed under the GST to simplify the tax system and to relieve producers
and suppliers from paying multiple indirect taxes.
Both the central and the state governments would levy GST on the same tax-base on all the
transactions of commodities and services and there would be two rates, the Central Goods
and Service Tax (CGST) and the State Goods and Service Tax (SGST) respectively, for an
understanding of revenue sharing.
The rates have to be decided by a centrally empowered authority—the GST council—
constituted by representatives from the states, and headed by the union finance minister.
 ECONOMICS BY PRATHAM SIR
The council will ensure that the revenue receipts as proportion to the respective tax-bases
(sales) do not decline for the central and the state governments, that is, the GST rates should
be at least made revenue neutral.
This tax reform has rightly been described by the government as “the single biggest tax
reform measure undertaken since independence to usher in a new era”.
The following claims have been made by the Present and Past Central Govt of National
Democratic Alliance (NDA) and United Progressive Alliance (UPA) regarding the GST.
1) It enhance growth and reduce inflation
2) Shift the tax burden from producers and suppliers to the final consumers
3) Integrate the national and international market
4) Improve tax compliances
5) Mitigate the cascading effect of taxation
6) Be a win-win situation in terms of revenue for both centre and the states
7) Be good for both producers and consumers
8) Be beneficial for both taxpayers and tax administration
9) Make for a simpler and more transparent tax system

Concept – 3
Advantages/gains/objective of GST
Q. What are the objectives/Advantages/Gains of implementation of GST?
Q. What are the claims have been made by the Present and Past Central Govt of
National Democratic Alliance (NDA) and United Progressive Alliance (UPA)
regarding the GST?
Ans :
1) It enhance growth and reduce inflation
2) Shift the tax burden from producers and suppliers to the final consumers
3) Integrate the national and international market
4) Improve tax compliances
5) Mitigate the cascading effect of taxation
 ECONOMICS BY PRATHAM SIR
6) Be a win-win situation in terms of revenue for both centre and the states
7) Be good for both producers and consumers
8) Be beneficial for both taxpayers and tax administration
9) Make for a simpler and more transparent tax system

Concept – 4
Controversy Regarding RNR
Any change in the tax reforms may result in a deficit in the amount of revenue collected by
the country. Therefore there must be a method through which the changes in these system
does not affect the revenue collections by the govt.
Revenue neutral rate(RNR) is the tax rate which ensures that the revenue collected by the
new tax regime is same as that the collected by the previous one. The new tax rates are
designed according to the RNR. RNR is one of the most important considerations as no
government would like to face losses in revenue due to a tax reform.
Calculation of RNR = Revenue of Both (Central & State Govt) / Taxable GDP
Example: let us consider an example suppose in India people’s income of the whole year is
Rs. 2,00,000 Crore, now to collect Rs. 20,000 Crores as taxes the Government levied tax
@10%. When due to some tax reforms (like GST) the government provides exemption of
Rs. 40,000 Cores on Income of the people. Then to collect Rs. 20,000 Crores, the
government will charge @12.5% instead of @10% earlier. Now in this case rate @12.5%
will be Revenue Neutral Rate.
Bhaskar and Nath (2015) mention that the report of the National Institute of Public Finance
and Policy (NIPFP) has preliminarily determined the RNR as 27%.
Following the format in the Report of the 13th Finance Commission, Kavita Rao suggested
that the RNR will be more than 23%
Chief economic advisor (CEA) of Ministry of Finance advised that RNR should be 19%
Therefore, there is a huge confusion regarding the RNR.
RNR has to be even higher for compensating for the revenue loss
If the actual GST rate is less than the RNR, the combined indirect tax revenue of the centre
and the states would come down as a proportion of GDP and if the actual rate is higher than
the RNR, there would be revenue gain.
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It ranges over 16% to 27% over the world.
In India, the committee led by Dr Arvind Subramaniam suggested an RNR from 15% to
15.5%. But now we are end up with 11.6%.
RNR is kept slightly high to ensure no loss in the revenue generation.

Concept – 5
Changes occur Due to implementation of GST
a) System Updates : Businesses have had to make changes in their systems to operate
under the GST regime. Businesses have tried making their systems online in order to
generate invoices, file returns, claim ITC etc.
b) Accounting System : Firms across India had a transition from the multiple layers of
taxation such as excise, sales tax, VAT, service tax etc. to the GST due to which
business have needed the appropriate software for all GST Compliances.
c) Manpower Training : Everyone have had to be trained in the manner in which the
businesses would run in the GST regime.
d) Pricing : Prices of Various goods and services have changed even after the
implementation. Some prices have risen while some fallen.
e) Input Tax Credit : It means that at the time of paying the tax on output, producer or
the trader can reduce the tax that has already been paid on the inputs. In order to claim
ITC, one must have a tax invoice of purchase or debit note issued by the registered
dealer.
f) Transparency : The overall transparency of businesses in India has been improving.
From Govt. entities to private firms to the whole of informal sector is being covered
under the GST regime.
The requirement of tax invoice of purchase or debit note issued by registered dealer
to claim ITC, the spread of awareness to consumers etc. have all improved the
transparency.
 ECONOMICS BY PRATHAM SIR
Concept – 6
Challenges/problems in Designing & implementation of GST
a) Estimation of GST Base and Revenue Neutral Rate : This was a challenge faced
in the initial designing of the GST. By RNR, the tax rate which ensures that the
revenue collected by the new tax regime is same as that the collected by the previous
one.
b) Revenue Consideration under GST : The GST subsumed both Central and states
indirect taxes. It was a great challenge for the GST council to decide as to which taxes
would be subsumed and what rates would be applicable and how would such rates be
estimated.
c) Non-inclusion of Goods under GST : The current system of GST does not include
– (a) alcoholic liquor for human consumption, (b) electricity, (c) real estate and (d)
petroleum products. Petroleum products and natural gas have been postponed to an
unspecified future date. This means that these products are still being double taxed
and the complicated multiple taxes still exist in case of these products.
d) Administrative Challenges : Under the GST system, it is dual taxation – CGST &
SGST. CGST is administered by the Central Board of excise and custom (CBEC) and
the SGST administered by the State Commercial Tax Department of the respective
states. Initially, there were administrative issues that were faced which have been
reducing over the months.
 ECONOMICS BY PRATHAM SIR
Past Paper’s Questions (Delhi University)
Name of Course : B.Com (Hons.) / BA (Hons.) / Bsc (Hons) (CBCS) Generic Elective

May 2017
Q1. Discuss the major changes you visualize to occur in the indirect tax structure in
India when the country migrated from the past indirect tax system to the existing
Goods and Service tax regime. Briefly discuss the important features of the GST. (15)
Ans : Concept – 5 & Concept – 1

May 2018
Q1. Discuss the major changes you visualize to occur in the indirect tax structure in
India when the country migrated from the past indirect tax system to the existing
Goods and Service tax regime. Briefly discuss the important features of the GST. (15)
Ans : Concept – 5 & Concept – 1

May 2019
Q1. Discuss the proposed model of GST in India. Examine complex issue pertaining
to the determination of base, revenue neutral rates and administration of GST in India.
(5+10)
Ans : Concept – 2, concept – 4 and concept - 6

May 2020
No Exam Due to COVID
May 2021 (BA Prg.)
Q1. Discuss the challenges in designing and implementation of Goods and Services
Tax in India.
Ans : Concept – 6

May 2022
Q1.What are the gains from the implementations of GST? What are the distortions
associated with GST? (15)
Ans : Concept- 3 and Concept – 6