The Next Big Reform – GST
Anuj Arora, ACS, Group Addl. General Manager, AL, Nafees Group, New Delhi and
Saurabh Gupta, Sr. Manager, Finance, PVR Ltd., New Delhi.
The laws relating to levy of indirect taxes are proposed to be comprehensively reformed
and restructured with a view to usher in the goods and services tax in place of the
e-mail : different levies as at present. How it is proposed is briefly portrayed in this brief article.
Goods and Services Tax (GST) is a part of the proposed tax
reforms that center round evolving an efficient and harmonized
consumption tax system in the country. Presently, there are
parallel systems of indirect taxation at the central and state levels.
Each of the systems needs to be reformed to eventually harmonize
them. The goods and service tax (GST) is proposed to be a
comprehensive indirect tax levy on manufacture, sale and
consumption of goods as well as services at a national level.
Integration of goods and services taxation would give India a
world class tax system and improve tax collections.
WHAT IS GST
GST is a broad based and a single comprehensive tax levied
on goods and services consumed in an economy. GST is levied
at every stage of the production-distribution chain with
applicable set offs in respect of the tax remitted at previous
stages. It is basically a destination based tax on consumption
of goods and services with an input credit mechanism across
the value chain. To put at a single place, GST may be defined
as a tax on goods and services, which is leviable at each point
of sale or provision of service, in which at the time of sale of
goods or providing the services the seller or service provider
may claim the input credit of tax which he has paid while
purchasing the goods or procuring the service. It will subsume
most indirect taxes (currently levied on both goods and
services) under a single umbrella.
It is seen as the panacea for removing the ill-effects of the
current indirect tax regime, prevalent in the country. If adopted
and implemented, GST may neutralise the existing problem
of taxes being levied on top of taxes. For instance, when a
shoe company produces a pair of shoes, the Central Government
charges an excise duty on them as they leave the factory. At
the retail level, the state where the outlet is located, charges
VAT (different states charge different rates of VAT) without
giving credit on the excise duty levied earlier (the state tax is
levied on top of a Central tax). In the GST system, both Central
and state taxes may be collected at the point of sale. Both
components (the Central and state GST) may be charged on
the manufacturing cost.
This system is basically designed to simplify current level
indirect tax system. It integrates the union excise duties, customs
duties, service tax and state VAT into a single levy known as
GST. GST may be rightly termed as national level VAT on
goods and services with only one difference that in this system
not only goods but also services are involved and the rate of
tax on goods and services are generally the same.
PRIMARY OBJECTIVES OF GST
Some of the primary objectives of the GST based taxation are:
1. Ensuring availability of input credit across the value
2. Minimising cascading effects of taxation.
3. Simplification of tax administration and compliance.
4. Harmonisation of tax base, laws and administration
procedure across the country.
5. Minimising tax rate slabs to avoid classification issues.
6. Prevention of unhealthy competition among states.
7. Increasing the tax base and raising compliance.
8. Minimum Floor rates of tax, generally not exceeding
9. Zero rating of exports and interstate sales of goods and
supply of services.
10. Taxing of capital Goods and Inputs whether goods or
services relatable to manufacture at lower rate, so as to
reduce inventory carrying cost and cost of production.
11. A common law and procedure throughout the country
under one single administration.
GST is one of the widely accepted indirect taxation system
prevalent in more than 150 countries across the globe.
Globally, GST has been structured as a destination based
comprehensive tax levied at a specified rate on sale and
consumption of goods and services within a country. It
facilitates creation of national tax standards with consumers
paying uniform rates of GST, thereby enabling flow of seamless
credit across the supply chain. In Countries where GST has
been adopted, producers (Manufacturers, wholesalers, retailers
and service providers) charge GST at the specified rate on
price of the goods and services and claims input credits for
GST included in the price paid by them on procurement of
goods and services (raw material). Technically, sellers or
service providers collect GST from their customer (who may
or may not be their final consumer) and prior to depositing
this with the exchequer, deduct the tax (GST) paid by them.
The ultimate cost is borne by the final consumer who cannot
claim GST credit. In the sense, it is and indirect tax – not
borne by manufacturers and service providers. The net effect
is that the seller or service provider charges GST but does not
retain it and pays GST but receives a credit for it, making him
a pseudo collecting agent for the government. On most of the
goods and services, the tax rate is uniform, but depending
upon the circumstances in a country, certain goods and services
can be declared ‘exempted’ or charged at lower rate.
There are several models of GST, each with its own merit and
demerit. A look at some of the models in circulation:
(1) Australian Model: In Australia GST is a federal tax,
collected by the Centre and distributed to the states. But
India is a heterogeneous country and there is no chance
that states may allow the Centre to collect all the taxes
while they become just spending institutions;
(2) Canadian Model: The GST in Canada is dual between
the Centre and the states and has three varieties:
(i) Federal GST and provincial retail sales taxes (PST)
administered separately - followed by the largest
(ii) Joint federal and provincial VATs administered
federally (Harmonious Sales Tax - HST); and
(iii) Separate federal and provincial VAT administered
provincially (QST) – only for Quebec as it is like a
breakaway province. The first variety is
fundamentally the Canadian model, which is similar
(though not the same) to the existing situation in
(3) Kelkar-Shah Model: This model of a unified GST, is
based on a grand bargain to merge central excise, service
tax and state VAT into one common base. Two different
rates of tax are to be levied by the Centre and the states.
The collection may be by the Centre. This is like the
HST model in Canada;
(4) Bagchi-Poddar Model: This model, just like Kelker-
Shahs, envisages a combination of central excise, service
tax and VAT to make it a common base of GST to be
levied both by the Centre and the states separately. This
means that the Central Excise Act 1944 may be abolished
and the goods tax may be only on the sale of goods. It
may merge in it the service tax.
To put this in legal lingo, the taxable event for the GST may
be the act of sale of goods and services. The concept of
manufacture may simply vanish. The difference between the
Bagchi-Poddar and Kelker-Shah models is that in the former,
the collection is at two levels, by the Centre and the states,
while in the latter the collection is only by the Centre. So
while the Kelkar-Shah model is like the Canadian HST, the
Bagchi-Poddar one is like the Quebec model. Although the
model says that it is based on the Quebec model, it is actually
not fully so as this model envisages collection both by the
Centre as well as the states, whereas the Quebec model
envisages collection only by the state of Quebec.
The Bagchi-Poddar model also clearly envisages that a
Constitutional amendment is necessary to bring the taxing
powers on goods and services under the concurrent list and to
abolish the present division of taxing powers between the Centre
and the states.
Speeds up economic union of India;
Better compliance and revenue buoyancy;
Replacing the cascading effect [tax on tax] created by
existing indirect taxes;
Tax incidence for consumers may fall;
Lower transaction cost for final consumers;
By merging all levies on goods and services into one,
GST acquires a very simple and transparent character;
Uniformity in tax regime with only one or two tax rates
across the supply chain as against multiple tax structure
as of present;
Efficiency in tax administration;
Will result in widening tax base and increased revenue
to the Centre and State;
The Next Big Reform – GST
Increased tax collections due to wide coverage of goods
and services; and
Improvement in cost competitiveness of goods and
services in the international market.
ROADMAP FOR GST IN INDIA
Last year the Union Finance Minister had proposed that India
should move towards a national level GST in the Union Budget
2006-07, with the Centre and states sharing revenue. He had
further proposed to set April 1, 2010 as the date for introducing
GST. The replacement of the cascading and narrowly-based
local sales tax with state VAT is the most important tax reform
in Independent India. VAT had been introduced on April 1,
2005. Although the dual system of VAT is a good beginning
in the reform of commodity taxes in India, in a modern
economy, separate taxation of goods and services is not viable.
Though the dual VAT (CENVAT and state VAT) removes
some of the weaknesses in the Union excise duties and local
sales tax (at the state level), it cannot be the last stage of reforms
in commodity taxes in India, as dual VAT in a federal structure
will continue to have some cascading effect. To avoid such
cascading effect as well as reduce the transaction cost for
manufacturers, it is important that taxes on commodities and
services are reassigned in such a way that the powers to levy
both these taxes are assigned to the states.
This requires the Centre to withdraw from the field of these
taxes for revenue purposes to allow the states levy a
comprehensive state GST covering all goods and services. The
levy of dual VAT causes vertical tax externality due to taxation
of the same base by the two tiers of government. It is important
to note the vertical imbalance in the assigned taxation powers
under the Indian Constitution. In the sharing of revenues
between the Centre and states, states get only 35%. To remove
this imbalance, it is important to rethink about the taxation
powers, especially those related to GST. For this reason, the
dual VAT cannot be adopted as a long-term reform measure
for domestic trade taxes in a federal structure in India. Thus a
comprehensive state GST would be the most appropriate
reform. In India, there are governments at different levels
with constitutionally assigned fiscal responsibilities. Fiscal
responsibilities are shared by three levels of government –
central, state and local. Thus a tax reform by governments at
one level can have fiscal consequences for the governments at
Therefore, a tax reform requiring the introduction of VAT in
a federation should have the following objectives: it should
be revenue neutral between the governments;
the tax base should be uniform across the country; the
provincial and local governments should have the
autonomy to set tax rates;
the tax should be relatively simple to administer and to
achieve complete compliance; and
taxes on the international flows of goods should be based
on uniform rules across the country.
The aim of commodity tax reform in India should be a
comprehensive VAT covering value added by all business
enterprises from the manufacturing to the retailing activities.
The tax should be consumption based and follow the tax credit
method to compute the net tax liability of a business firm.
The tax liability of international and inter-state flows has to
be computed by using the destination principle. A more
appropriate reform in India would be to impose a
comprehensive state GST like in European Union (EU). That
would require the Centre to withdraw from the field of VAT.
The power to levy VAT rests only with the states. This scheme
will avoid duplication by taxing authorities. Since state GST
is a comprehensive VAT, including all goods and services
(replacing both CENVAT and state VAT), its rate will be
adjusted. The Centre would be compensated of this loss arising
giving up collecting VAT by authorising the levy of sumptuary
excises on a few select commodities.
HURDLES IN IMPLEMENTATION OF GST IN
Bringing about an integration of all taxes levied on goods and
services in a federal polity with sharp distribution of legislative
powers is a herculean task to say the least. The Constitution of
India, 1950 demarcates taxing powers in a two-tier structure
wherein levies on production and international imports are
with the Union and post- production levies rest with the states.
The Centre levies duties of excise on manufactures and import/
countervailing duties on international imports apart from
levying a tax on services under various taxing and the residuary
entry in the Union List. The states levy VAT on goods sold or
entering in the state under various entries of the state list.
Even if all Union-level levies are integrated into a single levy
and all state level levies culminate in a single State level levy;
this may still have two levies and the resultant cascading and
administrative burdens may nevertheless remain to an extent,
though this may go a long way in harmonising levies. A
harmonised, integrated and full fledged GST calls for the
(1) Implementation of GST calls for effecting widespread
amendments in the Constitution and the various
The Next Big Reform – GST
constitutional entries relating to taxation. Such
amendments may virtually transform the Indian federation
into an economic Union much along the lines of the
European Union. The various levies of the Union and the
states are also to be harmonised. In the current scenario it
is difficult to visualise constitutional amendments of such
far reaching implications going through, more so in view
of the fact that sharing of legislative powers is such an
essential element of our federal polity and it may be
perceived to be a basic feature of the Constitution;
(2) Services have to be appropriately integrated in the tax
(3) Constitutional amendments required for implementing
GST is just one of the major road blocks. No less
significant is the issue of an appropriate design and
structure of GST. For instance, how the issue of interstate
movement of goods and services may be addressed.
The phasing out of CST may go a long way in addressing
the issue of inter-state trade and commerce in goods but
the crucial issue regarding services originating in one
state and being consumed in other state still remains;
(4) Another contentious issue that is bound to crop up in
this regard is the manner of sharing of resources between
the Centre and the states and among the states inter se as
also the basis of their devolution;
(5) Apart from all these, there has to be a robust and
integrated MIS dedicated to the task of tracking flow of
goods and services across the country and rendering
accurate accounting of levies associated with such flow
of goods and services; and
(6) Finally, the contentious issue of taxing financial services
and e-commerce is to be appropriately addressed and
From the above discussions, the advantages may be evidently
laid out that is the increasing proximity of our tax system to the
global tax system. In a way, it may boost our economy and
enable us to compete at the global front. As a result, even our
system may match the international phenomenon. This is the
biggest advantage of such a system. But every system has its
own intricacies embedded at the initial stages. Lower incidence
of tax, reduced prices, a move towards the global concept,
reducing cost of tax compliance, better revenue collection, an
efficient and harmonised consumption tax system in the country
all this looks good on the card, but is it really so easy to
implement? It does seem increasingly a big challenge but it is
still a very real goal in the eyes of both the Central and State
Government circles, regardless of the political persuasion of
the parties in power. This is very positive thing in itself but the
point is whether there is enough time to get the job done. There
really now needs to be a strong and focused push so that the
April 2010 deadline on the introduction of GST is met. Keeping
the various constitutional, technological, procedural and political
barriers, the job seems easier said than done.
Few critics do not even hesitate in remarking that such a system
is the old wine served in a new bottle. Thus, the careful
appraisal of the recommendation is needed. Various scholars
must roll their think tank towards the future system, as it may
play a crucial role.
The Next Big Reform – GST