GOODS AND SERVICES TAX

INTRODUCTION

The introduction of the Goods and Services Tax in India may be considered as the most
important financial reform ever in the history of our country. In the midnight of 30th June 2017,
the joint session of Parliament was convened to proclaim the transition of the whole country
towards the new indirect tax regime applicable with effect from 1st July 2017. With the motto
'one nation, one tax, one market', the country moved towards a single GST. As a result, all the
check posts and barriers in the movement of goods from one state to another were removed. GST
thus replaced the multiple tax structure prevailed in different states and union territories.

In fact, the introduction of GST in India has a long history. The earlier system of indirect
taxation was bifurcated mainly into two as taxes imposed by the Centre and those imposed by the
State governments or Union territories. As a result, the indirect tax structure in the country
during the pre-GST period was so complex with multiple taxes, tax rates, tax authorities,
assessment procedures and modes of payment of tax. During that period, imposition of tax on
manufactured goods was the right of the Government of India. Further, tax on services, imports
and exports were all belonged to the Union list. Therefore, the State governments did not have
any role in the levy and collection of such taxes. At the same time, the right to impose tax on sale
of goods was a matter of State list. Thus, during the pre-GST period, the Union Government did
not have any role or share in taxes imposed by the State governments on intra-state sale of goods.

In addition to the above, there were different taxes imposed at different stages of movement of
goods or provision of services. Almost all the indirect taxes levied by the Central Government
and different state governments were abolished and replaced by single GST across the country
with effect from 1.7.2017.

Basic Customs Duty (BCD) on imported goods is the only indirect tax which prevails even after
the introduction of GST. There are some items like Alcohol for human consumption and
Petroleum products still outside the purview of GST. Similarly, tobacco products are subject to
excise duty and GST.

History of Implementation of GST in India

Since any product or service in the country was subject to a bundle of taxes as mentioned above,
the domestic industries were struggling to compete with imported products and services from
other countries. People were paying huge amount of tax in different names and at different
stages, making the cost of living dearer day by day. Further, the manufacturers, service providers,
importers and traders were subject to multiple tax regulations and procedures. As a result, the
bureaucratic interferences were also very high. It is only a matter of simple logic that tax evasion
will be more when there are more number of taxes.

The idea of moving towards a single GST was mooted for the first time in the finance bill for the
year 2006-07. Initially, it was proposed that GST would be introduced from 1st April, 2010. The
Empowered Committee of State finance ministers was requested to frame a roadmap and
structure for the GST system. Joint Working Groups of officials with representatives of the States
and the Centre were set up to examine the various aspects of the proposed system of GST. Based
on discussions with the Central Government, different State governments and experts, the
Empowered Committee released its 'First Discussion Paper on GST', in November, 2009.

Constitution Amendment

The GST system required merger of many taxes earlier collected by the Centre and the States. It
also required sharing of power between the Centre and the States. Therefore, it was essential to
amend the Constitution of India, to implement the Goods and Services Tax instead of all other
indirect taxes. Thus, as a mandatory requisite for the implementation of GST, the constitution of
India was amended in August 2016.

The Constitution Amendment had the following objectives.

● To include the levy and collection of GST in the concurrent list of the Constitution.
● To enable the tax collected by the Union to be shared between the Union and the States.
● To create a constitutional body called the GST Council for the administration of GST.

For the smooth implementation of GST in the country, the following Acts and Rules were
passed.

(1) The Central Goods and Services Tax Act

(2) The Integrated Goods and Services Tax Act
(3) The Union Territory Goods and Services Tax Act
(4) The Compensation Act
 (5) The Central Goods and Services Tax Rules
(6) The Integrated Goods and Services Tax Rules

In addition to the above, all the state governments passed their respective State GST Acts, which
were exactly the copy of the CGST Act passed at the Centre. This is because of the reason that
there cannot be any contradictory provisions in the Acts.

Tax Cascading

Under multiple tax system, the tax on raw materials and finished products may be subjected to
tax again. For example, when sales tax is imposed on a price including excise duty, there is ‘sales
tax’ on ‘excise duty component’ of the product. Thus the customer is forced to pay tax on tax.
This is quite common if there are different taxes collected at different stages by different
authorities. The incidence of tax on tax is commonly described as 'tax cascading'. When the raw
materials or finished products pass through different hands, stages and states, the tax cascading
effect will be very high.

As a result of tax cascading the prices of final products escalate / increase illogically, without any
correlation to the cost of production. The Goods and Services Tax system has been devised as a
scientific method of levying and collecting tax on goods and services, completely eliminating the
chances of tax cascading.

Tax Pyramiding

Under sales tax system, a seller collects tax from the buyer at the specified rates. When the buyer
sells the purchased goods to another one, he collects from the second buyer a price which
includes the cost plus tax already paid plus profit. Since the second seller has included the tax
paid in the sales price, it is practically difficult to separate the cost element and the tax
component in the price after the second sale. In other words, tax becomes part of the cost and this
process will continue until the product is finally sold. As a result, at each stage of sale, tax
component becomes part of the cost of the product. The process of tax component becoming part
of the cost of product is called 'tax pyramiding'.

Value Addition

For tax purposes, the term 'value addition' simply means 'expenses' plus 'profit of the seller. In
other words, 'value addition' means 'sales' minus 'purchases'. GST is a system of Value Added
Tax. Under GST system, tax paid on purchases (Input tax) is deducted from tax collected on
sales (Output tax) to arrive at tax on value addition.

Input Tax Credit (ITC)

The essence of Goods and Services Tax system lies in providing set-off for the input tax paid
earlier by a registered supplier. Tax paid on input is credited to the account of the supplier and
the amount so credited is allowed to be deducted from his output tax liability. In other words,
input tax credit means allowing set off of tax paid on inward supplies against the tax collected on
outward supplies. Therefore, a dealer or supplier has to remit, only the balance of output tax
collected during the relevant period, after claiming input tax credit for the period. This method of
tax is also known as 'tax credit method' because every supplier in the distribution channel gets
credit for the tax already paid by him.

It may be noted that input tax credit is allowed period-wise, not product-wise. In other words, a
dealer can claim credit for the tax paid by him during a specified period against the tax collected
on sales effected by him during the period. Therefore, a dealer can claim input tax credit even for
goods remaining unsold at the end of the month. Similarly, he may not be able to claim credit for
the entire tax paid during the period, if his output tax collection is less than the tax paid by him.

Components of GST

During the pre-GST system, the state in which sale takes place had the right to levy and collect
tax. Therefore, manufacturing states were able to collect huge amount of sales tax, during the
pre-GST period. Conversely, under GST system, the state in which consumption takes place is
eligible to get half share of tax collected. The GST levied and collected at the time of supply of
goods or services is shared equally by the Central Government and the concerned State
Government or Union Territory to which the goods or services move. Basically, GST has four
components namely 'Central Goods and Services Tax' (CGST), 'State Goods and Services Tax
(SGST), 'Union Territory GCT' (UTGST) and 'Integrated Goods and Services Tax (IGST).

(1) Central GST (CGST)

That part of GST collected at the time of supply and payable to the Central Government is called
the Central GST. For example, if the rate of GST is 12% then half of the tax collected (6%) is the
Central GST which belongs to the Government of India.
(2) State GST (SGST)

That part of GST collected at the time of supply and payable to the State of the consumer, or the
State to which the supply takes place, is called the State GST. For example, if the rate of GST is
12%, then half of the tax collected is CGST which belongs to the Government of India. The
other half belongs to the concerned State Government which is called SGST. For example, a
dealer in Kerala sells a product worth 30,000 to a customer or another dealer in Kerala. If the rate
of tax is 28%, GST collected will be 8,400. Half of the tax is 'CGST payable to the Union
Government while the other half is 'SGST payable to the State of Kerala. Thus, 4,200 will go to
the account of Government of India and 4,200 to the account of Government of Kerala.

(3) Union Territory GST (UTGST)

Instead of State GST, there is 'Union Territory GST (UTGST) in the case of Union territories.
The GST collected in Union Territories will be bifurcated into two as CGST and UTGST. Since
the Union territories are under the administration of the Centre, the entire GST collected from
such territories belong the Government of India. However, for GST billing and other purposes,
both the CGST and UTGST are separately levied and collected.

(4) Integrated Goods and Services Tax (IGST)

In the case of inter-state supplies, the Integrated Goods and Services (IGST) is levied by the
Central Government. IGST is nothing but the sum of Central GST and State GST. For example,
when a dealer in Kerala sells a laptop to a dealer or customer in Tamilnadu, the tax collected is
Integrated GST. If it is a sale to a customer (B2C) the Tamilnadu Government get half share of
IGST collected and the remaining half will go to the account of the Central Government.

Major Features of Goods and Services Tax

The important features of the GST system are as follows.

i) GST is a consumption based tax

With the introduction of GST, the tax collected is shared between the Centre and the State to
which the supply occurs or where the consumer resides. Therefore, GST is described as a
destination based tax or consumption based tax.

ii) Method of levy and collection of taxes

The method of levy and collection of the tax has been considerably changed under GST system.
With the help of information and communication technology, the tax collection, administration
and sharing of tax have become more transparent, speedy and error-free, without giving much
chances to the intermediaries to evade tax or escape from tax obligations and compliance of law.

iii) Concurrent jurisdiction by the Centre and the States

With the introduction of new tax regime, the Centre and States now enjoy concurrent jurisdiction
over indirect taxes. States get share of 'tax on services while the Centre gets share of tax on sale
of goods'. Both the Centre and states can now regulate, monitor and control the levy, collection
and administration of tax on sale of goods or supply of services.

iv) Integrated GST on inter-state trade and imports

Inter-state sales are now under the purview of Integrated Goods and Services Tax (GST).
Integrated GST is levied and collected by the Government of India.

v) Compensation for five years

Since GST is a destination based tax, the manufacturing states are likely to face sharp decline in
their tax revenue. In order to avoid such a situation and also to compensate the states which will
have to bear losses due to the introduction of the consumption based taxation, the 'Goods and
Services Tax (Compensation) Act' has been passed. Accordingly, the entire loss of any state due
to the implementation of GST will be compensated by the Central Government for a period of
five years. It is expected that after five years, all the states will start making gains so that the
compensation mechanism need not be required after five years.

vi) Exports and supplies to Special Economic Zones are zero-rated

All the exports from India and supplies to Special Economic Zones have been categorised as
zero-rated. Hence there is no tax on goods or services exported from India or supplied to special
economic zones. At the same time, the exporters as well as suppliers to special economic zones
are eligible to get input tax credit for GST paid by them.

vii) Electronic filing of return and payment of tax

The transaction details of a registered supplier during a month must be filed electronically in the
form of a monthly return. In addition, the annual transaction summary must be filed
electronically in the form of an annual return. Further, electronic filing of returns by different
classes of persons within the prescribed time limit is mandatory. Payment of tax is possible only
through digital channels like internet banking, debit/ credit card and National Electronic Funds
Transfer (NEFT) / Real Time Gross Settlement (RTGS).

viii)Centre-State settlement of accounts

Accounts are settled between the Centre and the State periodically and ensure that the credits
belonging to different states and the centre are transferred appropriately. As a result, the
Centre-state relationship becomes more cordial and co-operative.

ix) System of self-assessment

A system of self-assessment of the taxes payable by the registered person has been envisaged
under GST law. This reduces the chances of bureaucratic interventions. However, audit and
inspection of business places will be conducted in order to verify the compliance of provisions of
law.

x) Wide application of technology

A huge electronic network has been set up at national level which is called Goods and Services
Tax Network (GSTN). It aims to smoothen tax collection, ensure compliance of law by the
manufacturers, traders, service providers and the customers. The periodic returns and documents
uploaded by millions of registered persons are processed by the GST network instantly. GSTN
helps to reduce the chances of error, fraud or tax evasion.

xi) GST Council

Earlier, the state governments had freedom to determine the rate of tax on sale of goods. With the
introduction of GST system, the power to determine the rate of tax on goods and services has
been delegated to the GST Council. The GST Council is a constitutional body. It is chaired by
the Union Finance Minister. All the state finance ministers are members of the GST Council. It
can take a decision only if there is three-fourth majority. As result, neither the Central
Government nor any State Government can decide the rate of GST.

Taxes Merged into Goods and Services Tax

With the introduction of GST system, the following taxes were subsumed into GST.

1) Taxes levied and collected by the Centre earlier, merged with GST includes Central Excise
Duty, Customs Duty, Service Tax and cesses and surcharges related to supply of goods or
services.

2) Taxes levied and collected by the States earlier, merged with GST includes State VAT, Central
Sales Tax, Purchase Tax, Luxury Tax, Entry Tax (All forms), Entertainment Tax (Except those
levied by the local bodies), Taxes on advertisements, Taxes on lotteries, betting and gambling
and State cesses and surcharges related to supply of goods or services

Goods Outside GST

At present, the following goods are outside the purview of GST regime. i) Alcohol for human
consumption. ii) Specified petroleum products (Crude, Petrol, Diesel, ATF & Natural gas)

Rates of GST

The details of the GST rate structure presently prevailing in the country are as follows.

i) Exempted supplies

A large number of items have been exempted from the purview of GST. Most of the farm
products, live animals, live chicken, live fish, eggs, honey, puja articles, hearing aids, slate
pencils, etc., belong to the category of exempted goods.

ii) On items other than exempted, GST is levied at the rates of 0.25%, 3%, 5%, 12%, 18% and
28%

Major Advantages of GST System

The major advantages of GST system can be briefed as follows.

1. Input tax credit is allowed to every intermediary

Input tax credit is allowed to every intermediary in the supply chain. Therefore, the tax burden is
transferred to the final consumer. At every stage of supply, value addition alone is subject to tax.

2. Elimination of multiple taxes, tax cascading and tax pyramiding

Elimination of multiple taxes, tax cascading and tax pyramiding help to reduce the prices of large
number of products and services. The chances of tax evasion and violation of law are more when
there are multiple tax laws, rates, and procedures. Unification and streamlining of tax rates and
procedures will help to improve compliance of law and reduction of tax evasion.

3. Exports from India are made zero rated

Since exports from India are made zero rated, Indian products became more competitive in the
international market. This will lead to more export, trade and manufacturing activities leading to
more employment. Similarly, imports are subject to a minimum tax of basic customs duty plus
IGST so that imports also become cheaper.

4. Single national market

After unification of rates, laws and procedures under GST, prices of goods and services are same
across the country. Thus the whole country became a single national market.

5. Elimination of check posts

Elimination of check posts at state borders has enabled hasslefree movement of raw-materials
and finished products. This has avoided unwanted delay in transportation. Under GST law, goods
can be transported with an electronic way-bill which is sufficient to monitor the movement of
goods from anywhere, without much physical verification. Electronic way-bill is not required for
transportation of goods of value up to 50,000, so that small dealers and consumers are not at all
affected.

6. Online submission of transaction details and documents

Online submission of transaction details, documents and returns helps to avoid delay in tax
collection and related procedures. Since the details of movement of goods and supply of services
up to the consumption stage can be observed from the digital data, chances of tax evasion, errors
and fraud are very low.

7. Elevated the Indian taxation system to international levels

With wide application of information and communication technology, GST system has elevated
the Indian taxation system to international levels and norms. This has improved the overall
investment climate in the country because uncertainty in tax laws is a major concern of investors.

8. No personal interference by officers

The different processes like registration, returns, refunds, tax payments, etc., are simplified and
digitalised under the GST regime. All the interactions are through the common GSTN portal. As
a result, the interference of tax officials will be minimum which would reduce bureaucratic
corruption to a great extent.
9. Tax exemption for essential basic items

A large number of products, especially agricultural commodities, have been either exempted
from tax or included in the lower tax bracket of 5%. Similarly, small scale business firms with
turnover up to Rs. 40 lakh need not take registration. Moreover, businesses with turnover limit
up to 1.5 crore can opt for composite tax scheme and need not follow the provisions of GST law.
They can pay composite tax of 1% based on turnover and file quarterly return.

10. Elimination of black money

Black money is nothing but untaxed income. Evasion of both direct and indirect taxes lead to
accumulation of black money. Under GST system, every transaction is digitally recorded and
monitored so that it is very difficult for the intermediaries to evade tax. Further, payment for
transaction value exceeding Rs. 2 lakh is possible only through banking channels. Now it is
practically impossible to carry on big businesses using liquid currency. GST thus helps to reduce
black money in the hands of unscrupulous businessmen.

Arguments against the GST System

Though the new system of taxation has the above-mentioned merits, it has been criticised from
different corners on different grounds. The following are the major criticisms levelled against the
new method of taxation.

1. Lesser role to Governments

Under the GST regime, the state governments do not have much role in determining tax rates and
procedures. Every decision relating to indirect taxes are taken by the GST council. The only
option for the state governments is to raise the matter before the council in which 75% majority
is required for passing a resolution.

2. Difficult for small businesses

Small dealers who are unregistered and those who opt for composition scheme are likely to be
affected by GST. They will not get input tax credit like GST dealers. Since the goods purchased
or services received by them are subjected to tax, the selling price of goods will include tax paid
by them. Naturally, the price in such small firms will be more than the price of the same product
charged by a GST registered dealer. This is because of the reason that a registered person gets
input credit for the entire tax paid by him.
3. Fully digitalised

The GST system is fully dependent on digital technology. Hence all the risks associated with the
IT applications are prevalent in the tax collection and administration.

4. Time required to become familiar with GST

Manufacturers, dealers and service providers will have to get acquainted with the new system
and will have to incur certain expenses for accounting software, computers, expert staff, etc. The
customers also would be unhappy with the system because their purchase invoices will reflect
huge amount of tax, upto 28% GST.

5. Frequent changes in law, rates and forms

Being a new law, there are amendments in the law, rates of tax, type of returns, etc. Further
modifications are also required in GST Act and Rules until the system gets stabilised. Frequent
notifications, circulars, rate changes and software updation cause much confusions and
difficulties to all in one way or the other.

6. Delay in getting input tax credit and refund

The Act and Rules provide for allowing input tax credit and refund instantly but there are lot of
delay and confusions on all these matters. As a result of such delay, huge amounts of working
capital of dealers, services providers and exporters are getting blocked for long time.

In fact, the above mentioned criticisms are not the demerits of the GST system. They are the
practical difficulties associated with the implementation of a new system. In a vast country like
India, majority of the people are not familiar with the technological applications. It is quite
natural that they will have lot of apprehensions and anxieties, whenever a new system is
introduced.

GST Council

The Goods and Services Tax Council, is a constitutional body responsible for monitoring the tax
matters relating to supply of goods and services in the country. The composition of the GST
council is as follows.

a. The Union Finance Minister as the Chairperson;

b. The Union Minister of State in charge of Revenue or Finance as Member;

c. The Minister in charge of Finance or Taxation or any other Minister nominated by each State
Government as Members.

The Union Finance Minister is the chairperson of the GST council. The members of the Goods
and Services Tax Council shall choose one amongst themselves to be the vice-chairperson of the
Council for such period as they may decide.

Functions of the Council

The following are the important functions of the GST council.

The Goods and Services Tax Council shall make recommendations to the Union Government
and also to the State Governments on the following matters.

(a) Taxes, cesses and surcharges to be levied

(b) The goods and services that may be subjected to, or exempted from GST

(c) GST laws, principles of levy, apportionment of GST levied on supplies in the course of
inter-state trade and the principles that govern the place of supply

(d) The threshold limit of turnover below which GST shall not be applicable

(e) The rates of GST applicable for goods and services

(f) Any special rate or rates for a specified period, to raise additional resources during any
natural calamity or disaster

(g) Special provisions with respect to the States of Arunachal Pradesh, Assam, Manipur,
Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand.

(h) Any other related matter as the Council may decide.