Goods and Services Tax

RESEARCH METHODOLOGY
SUBJECT: Law of Taxation II

TOPIC: Goods and Services Tax

RESEARCH METHODOLOGY: Keeping the objectives in mind, material was collected

with the help of different books and then it was compiled to make the theoretical part of the
project. Secondary sources were also utilized in order to complete the objective.

RESEARCH TOOLS: The research of this project was carried with the help of the Internet
and Library of Chanakya National Law University.

FOOTNOTING STYLE: In whole of my project uniform footnoting style is adopted

inconformity Chanakya National Law University, Patna footnoting style.

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TABLE OF CONTENTS
S. No.

PARTICULARS

PAGE No.

1.

Introduction

2.

Salient features of GST model

3.

Why GST is introduced?

4.

How GST works

5.

Inter-state transaction of goods and services

10

6.

Systems of GST

12

7.

GST and Constitutional Discrepancies

15

8.

Advantages of GST

15

9.

Disadvantages of GST

16

10.
11.

Conclusion
Bibliography

17
18

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INTRODUCTION
The Finance Ministry of India placed the One Hundred and Fifteenth Constitutional
Amendment Bill in the Lok Sabha on 22nd March, 2011. This Amendment Bill is hugely
significant as it introduces the Goods and Service Tax (GST) in the Indian Constitution.
Introduction of GST marks the most significant reform in Indian tax system and easily one of
the most important economic reforms in India. The Bill still has a long journey to make
before it is included in the Constitution as it would now be discussed in upcoming
Parliamentary sessionsThe Finance Minister in the FY 2011-12 Union Budget has proposed
to introduce GST by April 1, 2012. This is the third such timeline proposed by the Finance
Minister after missing two previous dates. It will be interesting to see whether GST is finally
introduced in 2012. This project is an attempt to understand GST and the impact of GST on
Indian economy. The paper will start with a snapshot of the current taxation system in India
and how GST will change the taxation system.
Goods and Services Tax is a tax on goods and services, which will be levied 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 can claim the input credit of tax which he has paid
while purchasing the goods or procuring the service. This is because they include GST in the
price of the goods and services they sell and can claim credits for the most GST included in
the price of goods and services they buy. The cost of GST is borne by the final consumer,
who cant claim GST credits, i.e. input credit of the tax paid. In particular, it would replace
the following indirect taxes:
At Central level: Central Excise Duty, Service Tax, Additional Excise Duties, CVD
(levied on imports in lieu of Excise duty), SAD (levied on imports in lieu of VAT), Excise
Duty levied on Medicinal and Toiletries preparations, Surcharges and cesses, Central Sales
Tax
At State level: VAT/Sales tax, Entertainment tax (unless it is levied by the local
bodies), Luxury Tax, Taxes on lottery, betting and gambling, Entry tax not in lieu of Octroi,
Cesses and Surcharges.

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SALIENT FEATURES OF THE GST MODEL
The GST shall have two components: one levied by the Centre (hereinafter referred to
as Central GST), and the other levied by the States (hereinafter referred to as State GST).
Rates for Central GST and State GST would be prescribed appropriately, reflecting revenue
considerations and acceptability. This dual GST model would be implemented through
multiple statutes (one for CGST and SGST statute for every State). However, the basic
features of law such as chargeability, definition of taxable event and taxable person, measure
of levy including valuation provisions, basis of classification etc. would be uniform across
these statutes as far as practicable.
The Central GST and the State GST would be applicable to all transactions of goods
and services made for a consideration except the exempted goods and services, goods which
are outside the purview of GST and the transactions which are below the prescribed threshold
limits.
The Central GST and State GST are to be paid to the accounts of the Centre and the
States separately. It would have to be ensured that account-heads for all services and goods
would have indication whether it relates to Central GST or State GST (with identification of
the State to whom the tax is to be credited).
Since the Central GST and State GST are to be treated separately, taxes paid against
the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST
and could be utilized only against the payment of Central GST. The same principle will be
applicable for the State GST. A taxpayer or exporter would have to maintain separate details
in books of account for utilization or refund of credit. Further, the rules for taking and
utilization of credit for the Central GST and the State GST would be aligned.
Cross utilization of Income Tax Credit between the Central GST and the State GST
would not be allowed except in the case of inter-State supply of goods and services under the
IGST model which is explained later.
Ideally, the problem related to credit accumulation on account of refund of GST
should be avoided by both the Centre and the States except in the cases such as exports,
purchase of capital goods, input tax at higher rate than output tax etc. where, again
refund/adjustment should be completed in a time bound manner.

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To the extent feasible, uniform procedure for collection of both Central GST and State
GST would be prescribed in the respective legislation for Central GST and State GST.
The administration of the Central GST to the Centre and for State GST to the States
would be given. This would imply that the Centre and the States would have concurrent
jurisdiction for the entire value chain and for all taxpayers on the basis of thresholds for
goods and services prescribed for the States and the Centre.
The taxpayer would need to submit periodical returns, in common format as far as
possible, to both the Central GST authority and to the concerned State GST authorities.
Each taxpayer would be allotted a PAN-linked taxpayer identification number with a
total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing
PAN-based system for Income tax, facilitating data exchange and taxpayer compliance.
Keeping in mind the need of tax payers convenience, functions such as assessment,
enforcement, scrutiny and audit would be undertaken by the authority which is collecting the
tax, with information sharing between the Centre and the States.

WHY GST IS INTRODUCED

A product or service passes through many stages till it reaches the final consumer.
Governments at Central and State level have, as and when the need arose, introduced many
indirect taxes on various taxable events in this value chain (such as Excise duty on
manufacture, VAT on sale etc). As these taxes are levied on different taxable events they
have their limitations. To illustrate further, lets take an example of Excise Duty. Excise duty
is levied on manufacture and it fails to tax the value addition at distribution level.
Additionally, at present, goods suffer two levies (Excise and VAT) whereas taxable
services suffer only one levy i.e. service tax. This leads to distortion: distortion arises
because the relative prices of services would be lower as compared to goods. Even, as current
tax system treats goods and services differently, in certain cases there is double taxation
(software being one of such case where the industry has taken conservative stand and both
VAT and Service Tax is being currently levied). Also, there are restrictions on availment of
credit such as a service provider cannot avail credit of VAT and a trader cannot avail credit of
Service tax.

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The above lacunas affect free flow of goods and services. Additionally, it brings
uncertainty in the trade which is not good for the economy as a whole. GST is now being
projected as a solution to all these problems.

HOW GST WORKS

Generally, the dealers registered under GST (Manufacturers, Wholesalers and
retailers and service providers) charge GST on the price of goods and services from their
customers and claim credits for the GST included in the price of their own purchases of
goods and services used by them. While GST is paid at each step in the supply chain of goods
and services, the paying dealers dont actually bear the burden of the tax because GST is an
indirect tax and ultimate burden of the GST has to be taken by the last customer.
This is because they include GST in the price of the goods and services they sell and
can claim credits for the most GST included in the price of goods and services they buy. The
cost of GST is borne by the final consumer, who cant claim GST credits, i.e. input credit of
the tax paid.
The GST can be divided into following sections to understand it better:
1. Charging Tax:
The dealers registered under GST (Manufacturers, Wholesalers and Retailers and Service
Providers) are required to charge GST at the specified rate of tax on goods and services that
they supply to customers. The GST payable is included in the price paid by the recipient of
the goods and services. The supplier must deposit this amount of GST with the Government.
2. Getting Credit of GST:
If the recipient of goods or services is a registered dealer (Manufacturers, Wholesalers and
Retailers and Service Providers), he will normally be able to claim a credit for the amount of
GST he has paid, provided he holds a proper tax invoice. This input tax credit is setoff
against any GST (Out Put), which the dealer charges on goods and services, which he
supplies, to his customers.

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3. Ultimate Burden of Tax on Last Customer:
The net effect is that dealers charge GST but do not keep it, and pay GST but get a credit for
it. This means that they act essentially as collecting agents for the Government. The ultimate
burden of the tax falls on the last and final consumer of the goods and services, as this person
gets no credit for the GST paid by him to his sellers or service providers.
4. Registration:
Dealers will have to register for GST. These dealers will include the suppliers, manufacturers,
service providers, wholesalers and retailers. If a dealer is not registered, he normally cannot
charge GST and cannot claim credit for the GST he pays and further cannot issue a tax
invoice.
5. Tax Period:
The tax period will have to be decided by the respective law and normally it is monthly
and/or quarterly. On a particular tax period, which is applicable to the dealer concerned, the
dealer has to deposit the tax if his output credit is more than the input credit after considering
the opening balance, if any, of the input credit.
6. Refunds:
If for a tax period the input credit of a dealer is more than the output credit then he is eligible
for refund subject to the provisions of law applicable in this respect. The excess may be
carried forward to next period or may be refunded immediately depending upon the provision
of law.
7. Exempted Goods and Services:
Certain goods and services may be declared as exempted goods and services and in that case
the input credit cannot be claimed on the GST paid for purchasing the raw material in this
respect or GST paid on services used for providing such goods and services.
8. Zero Rated Goods and Services:
Generally, export of goods and services are zero-rated and in that case the GST paid by the
exporters of these goods and services is refunded. This is the basic difference between Zero
rated goods and services and exempted goods and services.

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9. Tax Invoice: Tax invoice is the basic and important document in the GST and a dealer
registered under GST can issue a tax invoice and on the basis of this invoice the credit (Input)
can be claimed. Normally a tax invoice must bear the name of supplying dealer, his tax
identification nos., address and tax invoice nos. coupled with the name and address of the
purchasing dealer, his tax identification nos., address and description of goods sold or service
provided.

INTER-STATE TRANSACTIONS OF GOODS AND SERVICES (IGST)

The scope of IGST Model is that Centre would levy IGST which would be CGST
plus SGST on all inter-State transactions of taxable goods and services with appropriate
provision for consignment or stock transfer of goods and services. The inter-State seller will
pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his
purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment
of IGST. The Importing dealer will claim credit of IGST while discharging his output tax
liability in his own State. The Centre will transfer to the importing State the credit of IGST
used in payment of SGST. The relevant information will also be submitted to the Central
Agency which will act as a clearing house mechanism, verify the claims and inform the
respective governments to transfer the funds. The major advantages of IGST Model are:
a) Maintenance of uninterrupted ITC chain on inter- State transactions.
b) No upfront payment of tax or substantial blockage of funds for the inter-State seller or
buyer.
c) No refund claim in exporting State, as ITC is used up while paying the tax.
d) Self monitoring model.
e) Level of computerization is limited to inter-State dealers and Central and State
Governments should be able to computerize their processes expeditiously.
f) As all inter-State dealers will be e-registered and correspondence with them will be by email, the compliance level will improve substantially.
g) Model can take Business to Business as well as Business to Consumer transactions into
account.

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GST ADMINISTRATION
The Centre and the States would have concurrent jurisdiction for the entire value chain and
for all taxpayers on the basis of thresholds for goods and services prescribed for the States
and the Centre
GST Legislation
A separate legislation would be drafted for Central GST. Each State would have its own
legislation to levy and collect SGST.
The basic features of law such as chargeability, definition of taxable event and taxable
person, measure of levy including valuation provisions, basis of classification etc. would be
uniform across these statutes as far as practicable.
Accounts and GST Credit
The Central GST and State GST are to be paid to the accounts of the Centre and the States
separately. It would have to be ensured that account-heads for all services and goods would
have indication whether it relates to Central GST or State GST (with identification of the
State to whom the tax is to be credited).
Full input credit system would operate in parallel for the Central GST and the State GST.
Taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for
the Central GST and could be utilized only against the payment of Central GST. The same
principle will be applicable for the State GST.
A taxpayer or exporter would have to maintain separate details in books of account for
utilization or refund of credit. Further, the rules for taking and utilization of credit for the
Central GST and the State GST would be aligned.
Cross utilization of input tax credit for goods and services would be allowed. However, no
credit between CGST and SGST would be permitted, except in the case of inter-State supply
of goods and services under the IGST model.
Credit Accumulation
The White Paper on GST states that refund/adjustment of accumulated credit should be
completed in a time bound manner.

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However, ideally, the problem related to credit accumulation on account of refund of GST
should be avoided by both the Centre and the States except in the cases such as exports,
purchase of capital goods, input tax at higher rate than output tax etc.
Collection Procedures
To the extent feasible, uniform procedure for collection of both Central GST and State GST
would be prescribed in the respective legislation for Central GST and State GST.
Periodical Returns /PAN Based ID
The taxpayer would need to submit periodical returns, in common format as far as possible,
to both the Central GST authority and to the concerned State GST authorities.
Each taxpayer would be allotted a PAN-linked taxpayer identification number with a total of
13/15 digits. This would bring the GST PAN-linked system in line with the prevailing PANbased system for Income tax, facilitating data exchange and taxpayer compliance.
Assessment & Scrutiny
Functions such as assessment, enforcement, scrutiny and audit would be undertaken by the
authority which is collecting the tax, with information sharing between the Centre and the
States.

SYSTEMS OF GST
Internationally, there are three systems in vogue:
(a) Invoice System
(b) Payment System
(c) Hybrid System
(a) Invoice System: In the invoice system, the GST (Input) is claimed on the basis of invoice
and it is claimed when the invoice is received, it is immaterial whether payment is made or
not. Further the GST (Output) is accounted for when invoice is raised. Here also the time of
receipt of payment is immaterial. One may treat it as mercantile system of accounting. In
India the present system of sales tax on goods is an invoice system of VAT and here it is
immaterial whether the taxpayer is following the cash basis of accounting or mercantile basis
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of accounting. The advantage of invoice system is that the input credit can be claimed
without making the payment. The disadvantage of the invoice system is that the GST has to
be paid without receiving the payment.
(b) Payment System: In the payment system of GST, the GST (Input) is claimed when the
payment for purchases is made and the GST (Output) is accounted for when the payment is
made. In this system, it is immaterial whether the assessee is maintaining the accounts on
cash basis or not. The advantage of cash invoice system is that the Tax (output) need not be
deposited until the payment for the goods and/or services is received. The disadvantage of the
payment system is that the GST (input) cannot be claimed without making the payment. The
Taxes on services in India are based on this payment system since service tax is payable on
receipt basis and further Cenvat credit is only allowable when payment of the service is
made. In some countries, this system is also adopted for small traders to keep them away
from the complexities of the Invoice system, which is purely a mercantile system.
(c) Hybrid System: In hybrid system the GST (Input) is claimed on the basis of invoice and
GST (Output) is accounted for on the basis of payment, if allowed by the law. In some
countries the dealers have to put their option for this system or for a reversal of this system
before adopting the same.

GST AND PRESENT SYSTEM OF VAT

In principle, there is no difference between present tax structure under VAT and GST as far
as the tax on goods is concerned because GST is also a form of VAT on Goods and services.
Here at present the sales tax, with an exception of CST, is a VAT system and in case of
service tax the system also has the Cenvat credit system hence both sales tax and service tax
are under VAT system in our country. At present the goods and services are taxed separately
but in GST the difference will be vanished.
All the states have their own VAT Laws comprising VAT acts and VAT rules and these acts
and rules are formulated on the basis of White Paper on VAT issued by the empowered
committee of states Finance Ministers on VAT headed by Dr. AsimDas Gupta, the Finance
Minister of West Bengal.
Due to the fact that the taxpayers are already using the Vatable sales tax and service tax
system there may be a possibility that GST will be a matter of settlement between the Centre

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and the states and like VAT, the possibility of any resistance from the tax payers is somewhat
less.
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. A harmonised, integrated and full fledged GST calls for
the following hurdles in its successful implementation in India:
Implementation of GST calls for effecting widespread amendments in the Constitution and
the various constitutional entries relating to taxation. 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; services have
to be appropriately integrated in the tax network;
One of the other major issues concerned is the appropriate designing and structuring of GST
in India. The issues involved includes, how the issue of inter-state movement of goods and
services may be addressed, taxes on services originating in one state and being consumed in
other state etc;
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;
Finally, apart from all these, there has to be a robust and integrated Management Information
System 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.

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GST AND CONSTITUTIONAL DISCREPANCIES
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. For its
implementation the Finance Ministry resorted to a constitutional amendment to allow States
to tax services as recommended by the G.C. Srivastava Committee. Earlier G.C. Srivastava
Committee on service tax had recommended either bringing services in the concurrent list or
allowing States to tax services on the lines of the Central Sales Tax Act. Before the
amendment, the power to levy tax on services is not mentioned either in the Union List or
State List contained in the Schedule VII of the Constitution. With the then constitutional
framework the only option is to invoke entry 97 of the Union List which has been vested with
residuary powers to levy any tax not mentioned in the State List or the Concurrent List. The
Central Government had invoked the entry 97 and taxed various services. Entry 97 which
reads as Any other matter not enumerated in List II or List III including any tax not
mentioned in either of those lists.
The 95th Constitutional Amendment Bill for the inclusion of services for levying
service tax has been approved by the Cabinet and passed by both Houses of the Parliament.
By this amendment, the Bill proposed to insert a new entry 92C, and a new article 268A to
enable the levy by the Union, but collected and appropriated by the States and to frame a law
to determine how the proceeds of tax would be shared with the States.
The Empowered Committee has reached an agreement on the basic structure of GST
in keeping with the principle of fiscal federalism enshrined in the Constitution of India.

ADVANTAGES OF IMPLICATION OF GST IN INDIA

It will boost up economic unification of India; it will assist in better conformity and
revenue resilience; it will evade the cascading effect in Indirect tax regime.

In GST system, both Central and state taxes will be collected at the point of sale. Both
components (the Central and state GST) will be charged on the manufacturing cost.

It will reduce the tax burden for consumers;

It will result in a simple, transparent and easy tax structure; merging all levies on
goods and services into one GST.

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It will bring uniformity in tax rates with only one or two tax rates across the supply
chain;

It will result in a good administration of tax structure;

It may broaden the tax base;

It will increase tax collections due to wide coverage of goods and services.

It will result in cost competitiveness of goods and services in Global market.

It will reduce transaction costs for taxpayers through simplified tax compliance.

It will result in increased tax collections due to wider tax base and better conformity.

DISADVANTAGES OF IMPLEMENTATION OF GST

Not using the correct accounting method.

Incorrectly claiming GST credits on bank fees

Incorrectly claiming GST credits on government charges --such as land tax, council
rates, water rates.

Incorrectly claiming a GST credit on the 'total cost' of a business insurance policy.

Because there's a stamp duty component in the premium which is not subject to GST,
a GST credit cannot be claimed on this portion of the payment.

Not remitting GST on some government grants and incentives which are received
inclusive of GST

GST is not paid on the sale of cars and equipment including the trade of motor
vehicles.

Incorrectly claiming GST credits on wages and superannuation payments.

Incorrectly claiming GST credits on GST-free purchases such as basic food items,
exports and some health services.

Incorrectly claiming the full amount of GST credits on entertainment expenses where
the business has elected for fringe benefits tax purposes to use the 50/50 split method,
in which case only 50% of the input tax credits can be claimed.

Claiming the entire GST credits on a car purchased for more than the luxury car limit.

Sole traders and partnerships are not apportioning input tax credits and making
adjustments to expenditure that's partly private and partly business use .

Incorrectly claiming an upfront GST credit on assets financed through a commercial

hire purchase (CHP).

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While an up-front GST credit is available for businesses accounting for GST using the
accruals or invoice basis,

Incorrectly claiming GST credits on payments for Yellow Pages advertising. If the
business chooses to pay for the cost of advertising by instalments,

CONCLUSION
This system is basically structured to simplify current indirect tax system in India. It
integrates the union excise duties, customs duties, service tax and state VAT into a single
point levy i.e. GST. It may be rightly termed as a national level VAT on goods and services
with one of the differences that it also covers Service under its scope. The introduction of
GST will certainly change the Federal system of Governance in our country in which states
also have the right to collect taxes on goods.
Integration of goods and services taxation would give India a world class tax system and
improve tax collections. It would end the long standing distortions of differential treatments
of manufacturing and service sector. GST will facilitate seamless credit across the entire
supply chain and across all States under a common tax base.
GST will bring more transparency into the system and enhance competitiveness as well as
efficiency of the manufacturing sector and its overall governance. Implementation of GST
would create a level playing field for domestic manufacturers and help them to compete
better with their global counterparts. GST would aid manufacturers in accessing seamless
credit across the entire supply chain. A well-designed GST is the most graceful method to get
rid of distortions of the existing process of multiple taxation. Therefore, all taxes on goods
and services levied by Central and state governments should be included under GST.
Input tax is the tax paid on purchases by a registered dealer in course of his business for
resale; use in the execution of works contract; use in processing or manufacturing; where
such goods; directly goes into the composition of the finished products, are used as packing
materials for packing of goods for sale, are consumables directly used in the process of
manufacturing, are capital goods used directly in the process of manufacturing.

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BIBLIOGRAPHY
Books:

Indirect Tax Reforms: Challenge and Response By V. S. Krishnan First edition 2006.

Taxation Law V. Balachandran, S. Thothadri vol.1 2013.

Web Sources:

http://taxguru.in/goods-and-service-tax/goods-services-tax-gst-model-for-india.html

http://www.icai.org/resource_file/96521595-1601.pdf

http://www.icai.org/resource_file/96521595-1601.pdf

http://ntnonline.net/G.S.T sudhir kumar.pdf

http://www.icai.org/resource_file/15962conceptpaper.pdf

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