Goods and Services Tax: Challenges of Complex and overlapping tax structure

Kishore Kumar Behera

Roll no:- BC23-057
+3 2nd year
Abstract
The Goods and Services Tax (GST), implemented in India on July 1, 2017, has emerged as a
transformative reform to address the complex and overlapping tax structure that previously
burdened the economy. Under the old system, businesses faced multiple indirect taxes such as
excise duty, VAT, service tax, and octopi, leading to inefficiencies, cascading taxes, and
compliance challenges. This fragmented structure hindered economic growth and created barriers
to interstate trade.
GST has provided a comprehensive solution by unifying these taxes into a single, destination-
based system. It eliminated the cascading effect of taxes through the input tax credit mechanism,
reduced compliance complexities with a digital tax framework, and fostered a seamless national
market. By simplifying taxation and promoting transparency, GST has enhanced ease of doing
business, reduced costs, and boosted economic efficiency. This project explores how GST has
addressed these challenges, proving to be a panacea for India’s economic transformation.
Introduction
The Goods and Services Tax (GST), implemented on July 1, 2017, represents one of the most
significant tax reforms in India’s economic history. Designed as a comprehensive, multi-stage, and
destination-based tax, GST replaced the complex and overlapping tax structure that had plagued
the Indian economy for decades. Before GST, businesses operated under a fragmented taxation
regime characterized by numerous central and state-level taxes such as excise duty, service tax,
VAT, octopi, and central sales tax. This multiplicity of taxes created inefficiencies, compliance
burdens, and a cascading tax effect, which increased costs for businesses and consumers alike.
GST was introduced to unify India’s diverse tax system, simplify compliance, and eliminate the
cascading effect of taxes. By subsuming multiple indirect taxes under a single umbrella, GST
streamlined the tax structure, ensuring transparency and ease of doing business. It established a
uniform tax rate across the country, fostering the development of a unified national market and
facilitating seamless interstate trade.
Moreover, GST introduced a digital framework for tax administration, reducing human intervention,
minimizing errors, and improving transparency. The inclusion of mechanisms such as input tax
credit ensured that taxes are levied only on the value addition, reducing the overall tax burden.
In this context, GST has been a panacea for the Indian economy, addressing the inefficiencies of
the previous tax system and laying the foundation for economic growth, increased
competitiveness, and fiscal consolidation. Its implementation marks a decisive step toward a
modern and robust tax framework.
Benefits of GST
1. Elimination of Cascading Taxation: GST removes the cascading effect of taxes by allowing
seamless input tax credit across goods and services.
2. Simplification of Tax Structure: It unifies multiple indirect taxes into a single tax system,
making compliance easier.
3. Boost to Economic Growth: GST enhances tax efficiency, which can lead to increased GDP
growth.
4. Ease of Doing Business: It reduces the tax burden on businesses and simplifies inter-state
trade.

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 5. Encouragement of Digital Transactions: GST promotes transparency through mandatory
digital filings and payments.
6. Reduction in Logistics Costs: The removal of interstate checkpoints under GST minimizes
transportation delays.
7. Broader Tax Base: It ensures more businesses come under the tax net, increasing
government revenue.
8. Promotes Competitive Pricing: Lower overall tax burden under GST reduces the cost of
goods and services.
Literature Review
The implementation of GST in India has been widely studied for its impact on simplifying the
country’s tax structure and promoting economic growth. Scholars and policy analysts highlight that
the pre-GST era was marked by a fragmented tax regime with multiple indirect taxes leading to
inefficiencies, tax cascading, and administrative challenges. Studies emphasize that GST, by
unifying these taxes into a single framework, has streamlined compliance, reduced costs, and
fostered a unified national market. Research also underscores the role of GST in boosting
transparency, minimizing tax evasion, and improving ease of doing business, marking it as a
pivotal economic reform.
Objective of the Study
1. To explore the complexities and inefficiencies of the pre-GST tax structure in India.
2. To analyze how GST has simplified the taxation system by unifying multiple taxes under
one umbrella.
3. To assess the impact of GST on reducing the compliance burden and operational costs for
businesses.
4. To evaluate how GST has facilitated smoother interstate trade and promoted the
development of a unified national market.
5. To examine the role of GST in fostering economic growth, transparency, and efficiency in
the Indian economy.
Here are the five most vital challenges addressed by GST and the corresponding solutions that
significantly impact the Indian economy.
1. Complex and overlapping tax structure
2. Barriers to interstate trade
3. Tax evasion & lack of transparency
4. High tax due to cascading taxes
5. Fragmented Economy
Highlighted Challenges of Complex and Overlapping Tax Structures in India
India’s taxation system before the implementation of the Goods and Services Tax (GST) was
riddled with complexities, inefficiencies, and inconsistencies. This not only burdened businesses
but also slowed economic growth and created obstacles for both domestic and foreign
investments. Here is an in-depth look at the challenges:
1. Cascading Tax Effect

• One of the most significant problems of the earlier tax regime was the cascading tax effect,
where taxes were levied on previously taxed amounts. For example:
• Manufacturers paid excise duties on goods produced.
• The same goods were then subject to VAT at the state level.
• Services used in production incurred service taxes. Since there was no seamless system to
claim credits for taxes paid at earlier stages, this “tax on tax” inflated costs, making goods
and services expensive for end consumers.

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 2. Multiplicity of Taxes
• The existence of numerous taxes at both the central and state levels created confusion and
redundancy. Businesses had to comply with:
• Central-level taxes like excise duty, service tax, and customs duties.
• State-level taxes like VAT, entry tax, luxury tax, and octroi . The lack of harmonization
between these taxes led to inefficiencies and increased compliance burdens.

3. Fragmented Markets
The tax system discouraged free movement of goods across state borders. Interstate trade was
subject to central sales tax (CST), entry taxes, and various state-specific levies. These taxes,
coupled with physical checkpoints at borders, resulted in delays, increased transportation costs,
and inefficiencies in supply chains.
4. Lack of Uniformity
Tax rates and rules varied widely across states. This created an uneven playing field where
businesses operating in one state might face lower or higher taxes compared to their competitors
in other states. Such discrepancies discouraged investments in certain regions, further
exacerbating regional economic imbalances.
5. Compliance Burden
Businesses, particularly small and medium enterprises (SMEs), faced the daunting task of filing
multiple tax returns and maintaining separate records for each type of tax. This not only increased
compliance costs but also required businesses to allocate significant resources for tax
management.
6. Evasion and Black Market Economy
The complexity and loopholes in the taxation system provided opportunities for tax evasion. Many
businesses under-reported revenues or operated in the informal economy to avoid taxes, resulting
in significant revenue losses for the government. The lack of transparency also made enforcement
difficult.
7. Impact on Economic Growth
High costs due to cascading taxes and inefficiencies discouraged entrepreneurship and stifled
growth. The fragmented nature of the market also reduced India’s competitiveness in global
markets, affecting exports and foreign investment.
GST: The Comprehensive Solution
The introduction of the Goods and Services Tax (GST) on July 1, 2017, marked a watershed
moment in India’s economic reforms. Designed as a “one nation, one tax” system, GST addressed
the challenges of the earlier regime by streamlining indirect taxation. Here’s how GST emerged as
a game-changing solution:
1. One Tax, One Nation
GST subsumed multiple central and state-level taxes into a single tax, applicable nationwide. This
unification eliminated redundancies, creating a seamless and efficient tax structure.
2. Input Tax Credit (ITC)
A critical feature of GST is the availability of input tax credit, which ensures that businesses are
taxed only on the value they add. Taxes paid on raw materials or services used in production can
be offset against the tax liability on final goods or services. This eliminated the cascading tax effect
and reduced the overall tax burden on businesses and consumers.

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 3. Digital Compliance Framework
The Goods and Services Tax Network (GSTN) introduced an entirely digitalized platform for tax
filing, return submission, and tax payments. Key features include:
• GSTR filings: Businesses submit monthly, quarterly, or annual returns through a unified
online portal.
• e-Way bills: These track the movement of goods across states, reducing tax evasion and
ensuring transparency.
• Invoicing system: Standardized invoicing prevents under-reporting and builds an audit trail.

4. Uniform Tax Rates

GST ensures uniformity in tax rates across states, fostering a level playing field. Goods and
services are now taxed under four primary slabs: 5%, 12%, 18%, and 28%. While some essential
items are exempt or taxed at lower rates, luxury goods attract higher rates. This balance ensures
fairness while maintaining revenue neutrality.
5. Ease of Doing Business
The simplification of the tax structure has made compliance easier for businesses. The elimination
of checkpoints and entry taxes has reduced logistics costs and transit times, boosting supply chain
efficiency. Additionally, foreign investors find India’s unified market more attractive.
6. Support for SMEs

• To alleviate the compliance burden on small businesses, GST introduced:

• Composition Scheme: A simplified tax scheme for businesses with turnover below a
specified threshold, allowing them to pay a fixed rate without detailed record-keeping.
• Exemptions for very small businesses, enabling them to operate without registering under
GST.

7. Boost to Interstate Trade

GST removed the tax barriers that fragmented the Indian market. Businesses can now transport
goods across states without worrying about entry taxes or CST. The reduction in logistics costs
has particularly benefited sectors like e-commerce, manufacturing, and agriculture.
8. Revenue Growth and Transparency
By bringing more businesses into the tax net and minimizing evasion through digital monitoring,
GST has led to higher tax compliance. The system has also increased transparency, making it
easier for the government to track transactions and enforce laws.
9. Impact on the Economy

• GST has contributed significantly to India’s economic growth by:

• Lowering the cost of goods and services through reduced tax incidence.
• Enhancing competitiveness in global markets.
• Encouraging formalization of businesses, thus expanding the tax base.
Addressing Initial Challenges
While GST has transformed India’s tax landscape, its implementation was not without challenges.
Key issues included:
• Technical glitches: Initial technical problems in the GSTN system led to delays and
confusion.

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 • Compliance complexity: Businesses, especially SMEs, faced difficulties in adapting to the
new system and filing frequent returns.
• Rate rationalization: Critics argued that multiple tax slabs complicated the “one nation,
one tax” philosophy.
To address these issues, the government has undertaken various measures, including:
• Simplifying the return filing process.
• Introducing quarterly filing options for small businesses.
• Rationalizing tax rates by reducing the number of items in the highest slab.
Conclusion
The implementation of GST has been a landmark reform for India’s economy, addressing the
deep-rooted inefficiencies of the pre-existing tax system. By creating a unified tax regime, GST
has simplified compliance, eliminated cascading taxes, and fostered economic integration. The
reform has made doing business in India easier, enhanced transparency, and contributed to higher
revenue collection.
While the transition to GST posed initial hurdles, continuous improvements and stakeholder
engagement have ensured its success. Moving forward, further refinements, such as the inclusion
of petroleum products under GST and more rate rationalization, can enhance its efficacy.
GST is not just a tax reform but a structural shift that reflects India’s aspiration to build a modern,
efficient, and competitive economy. It has laid the foundation for sustained growth and
development, aligning India’s tax system with global best practices.
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