PUBLIC FINANCE

MODULE 4
GOODS & SERVICES TAX (GST)
Goods and Services Tax (GST) is an indirect tax levied on the supply of goods
and services. GST is a single tax on the supply of goods and services, right from
the manufacturer to the consumer. The tax came into effect through the
implementation of One Hundred and First Amendment Act, 2016 of the
Constitution of India by the Indian Government.
The Goods and Services Tax Act was passed in the Parliament on 29th March
2017. The Act came into effect on 1st July 2017. France was the first country to
implement the GST in 1954, and since then an estimated 160 countries have
adopted this tax system in some form or another.

4 MAIN CHARACTERISTICS
• Comprehensive
• Multi-stage
• Destination-based
• Levied on every value addition
BACKGROUND
Earlier the system of indirect taxation mainly included
• Sales tax
• Excise duty
• Service tax

SALES TAX
Sales tax was levied for all sales during production till consumption of goods.
But the problem was that it had cascading effect ie tax on tax. To solve this issue
VAT or Value added tax was brought in which levied tax only on value added
during each stages of production. See the table of different production stages
and taxation pattern from producer to consumer.
STAGES OUTPUT OF SALES TAX VALUE ADDED VAT
EACH STAGE (10%)
PRODUCER Rs 10,000 Rs 1000 Rs 10,000 Rs 1000
(FARMER)
MANUFACTURIN Rs 20,000 Rs 2000 Rs 10,000 Rs 1000
G UNIT
(INDUSTRY)
WHOLE SALER Rs 25,000 Rs 2500 Rs 5,000 Rs 500
RETAILER Rs 30,000 Rs 3000 Rs 5,000 Rs 500
CONSUMER Rs 8500 Rs 3000
(TOTAL)

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Hence the VAT charges only for the value added at each stages of production
and the end consumer is benefitted.

EXCISE DUTY
Excise duty was levied on manufacturing. Similar to sales tax, cascading effect
was there for excise duty also. Consider the manufacturing of an automobile.
Hence at each stage of manufacturing there will be taxation leading to cascading
effect thereby increasing the tax burden on final customers. To remove this
MODVAT or Modified VAT was introduced. It applied only to central
manufacturing taxes and was not applicable to States.

SERVICE TAX
For the production of above automobile, the company might have outsourced its
design or some other service to other companies. The Government levies taxes
on these services. Also the manufacturing company has to pay separate taxes to
Government for salaries of workers and other services availed. To solve this
problem of cascading effect due to service taxes along with excise duty,
CENVAT or Central VAT was introduced which included both excise duty and
service taxes.
 So in a nutshell, to remove cascading effect following taxes were replaced
accordingly.
 Sales tax - replaced with VAT
 Excise duty and Service tax - replaced with CENVAT
Still many problems existed. Apart from the above mentioned expenditures other
expenses were also there.
 Electricity for production
 Fuel for transportation
 Advertisement of product
 Import of raw materials
 Service tax on communication items
For all these transactions the Central as well as State Governments at some
point has already levied tax but not included in the production cost ie, cascading
effect still persists. Also the Central VAT and State VAT didn’t compensate each
other for same product as both belong to different tax regimes. States levied
VAT differently depending on product along with cess and surcharges. Thus the
production cost increased leading to forgery of false invoices by merchants to
avoid taxes. GST was thus introduced to cater to all these above said issues.

WHY GST ?
 Covers both goods and services
 Covers most (not all) Union and State indirect taxes
 Most cess and surcharges are terminated
 Credits of input taxes paid at each stage will be available in the subsequent
stage of value addition, which makes GST essentially a tax only on value
addition at each stage
 The final consumer will thus bear only the GST charged by the last dealer in
the supply chain, with set-off benefits at all the previous stages
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 IMPACTS OF GST
IMPACT OF GST ON BUSINESS AND INDUSTRY
 Easy compliance: A robust and comprehensive IT system would be the
foundation of the GST regime in India. Therefore, all tax payer services such as
registrations, returns, payments, etc. would be available to the taxpayers
online, which would make compliance easy and transparent.
 Uniformity of tax rates and structures: GST will ensure that indirect tax rates
and structures are common across the country, thereby increasing certainty
and ease of doing business. In other words, GST would make doing business
in the country tax neutral, irrespective of the choice of place of doing
business.
 Removal of cascading: A system of seamless tax-credits throughout the
value-chain, and across boundaries of States, would ensure that there is
minimal cascading of taxes. This would reduce hidden costs of doing
business.
 Improved competitiveness: Reduction in transaction costs of doing business
would eventually lead to an improved competitiveness for the trade and industry.
 Gain to manufacturers and exporters: The subsuming of major Central and
State taxes in GST, complete and comprehensive set-off of input goods and
services and phasing out of Central Sales Tax (CST) would reduce the cost of
locally manufactured goods and services. This will increase the competitiveness
of Indian goods and services in the international market and give boost to
Indian exports. The uniformity in tax rates and procedures across the country
will also go along way in reducing the compliance cost.

IMPACTS OF GST ON CONSUMERS

 Single and transparent tax proportionate to the value of goods and services:
Due to multiple indirect taxes being levied by the Centre and State, with
incomplete or no input tax credits available at progressive stages of value
addition, the cost of most goods and services in the country today are laden
with many hidden taxes. Under GST, there would be only one tax from the
manufacturer to the consumer, leading to transparency of taxes paid to the
final consumer.
 Relief in overall tax burden: Because of efficiency gains and prevention of
leakages, the overall tax burden on most commodities will come down, which will
benefit consumers.

IMPACTS OF GST ON CENTRAL AND STATE GOVERNMENTS

 Simple and easy to administer: Multiple indirect taxes at the Central and State
levels are being replaced by GST. Backed with a robust end-to-end IT system,
GST would be simpler and easier to administer than all other indirect taxes of
the Centre and State levied so far.
 Better controls on leakage: GST will result in better tax compliance due to a
robust IT infrastructure. Due to the seamless transfer of input tax credit from
one stage to another in the chain of value addition, there is an in-built

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 mechanism in the design of GST that would incentivize tax Compliance by
traders.
 Higher revenue efficiency: GST is expected to decrease the cost of collection
of tax revenues of the Government, and will therefore, lead to higher revenue
efficiency.

IMPACTS OF GST ON TRADERS

 Reduction in multiplicity of taxes
 Mitigation of cascading/ double taxation through input tax credit
 More efficient neutralisation of taxes especially for exports
 Development of common national market
 Simpler tax regime
 Fewer rates and exemptions
 Distinction between Goods & Services no longer required

IMPACTS OF GST ON OVERALL INDIAN ECONOMY

• Create unified common national market for India, giving a boost to Foreign
investment and “Make in India” campaign
• Boost export and manufacturing activity and leading to substantive economic
growth
• Help in poverty eradication by generating more employment
• Uniform SGST and IGST rates to reduce the incentive for tax evasion

GST ADMINISTRATION
Since India is federal country, Centre Government and State Government both
have powers to levy taxes. Both Centre and States will simultaneously levy GST
across the value chain. Tax will be levied on every supply of goods and
services. GST will be divided into two components:
• CGST which is levied by Central Government
• SGST which is levied by State Government on all transactions within a State.
There will be one more type of GST is Integrated GST (IGST). IGST will be levied
on inter-state transactions. Since, there are chances that people will get
confused in case of transactions between two persons of two different States and
there will be difficulty setting off dues of taxes between two States, thus IGST will
be levied by Centre. Now, Centre will apportion the State’s portion of GST from
IGST to relevant State.

INPUT TAX CREDIT

Input credit means at the time of paying tax on output, you can reduce the tax
you have already paid on inputs.
• Say, you are a manufacturer –
• Tax payable on output (final product) is Rs 450
• Tax paid on input (purchases) is Rs 300
• You can claim Input credit of Rs 300 and you only need to deposit Rs 150 in
taxes. Input Credit Mechanism is available to you when you are covered under
the GST Act.
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Which means if you are a manufacturer, supplier, agent, e commerce operator,
aggregator or any of the persons registered under GST, You are eligible to claim
Input credit for tax paid by you on your purchases.
 The input tax credit of CGST would be available for discharging the CGST
liability on the output at each stage.
 Similarly, the credit of SGST paid on inputs would be allowed for paying the
SGST on output.
 No cross utilization of credit would be permitted.

GST IDENTIFICATION NUMBER

Under GST, every registered taxable person is assigned a unique identification
number for every state he is registered in. This number is known as GSTIN which is
a state-wise PAN-based 15 digit number.

GST TAX SLABS

The country has, since launching the GST on July 1, 2017, implemented five
different tax rates.
• A zero percent tax rate applies to certain foods, books, newspapers,
homespun cotton cloth and hotel services under Rs. 1000.
• Five percent tax rates will be applied to apparel below Rs. 1000, packaged
food items, footwear under Rs. 500, etc.
• The next rate — 12 percent — applies to apparel over Rs. 1000, frozen
meats, cutlery, sugar, biodiesel, etc.
• An 18 percent tax rate applies to certain luxury items including makeup,
pastries, swimming pools, footwear costing more than Rs. 500, etc.
• The final bracket, taxing goods at 28 percent, applies to luxury products and
those deemed “sinful” including sunscreen, ceramic tiles, bidis (Indian
cigarettes), cars, motorcycles, etc.

THE SIX ITEMS MOVED FROM 28% TO 18%

 Pulleys, gear boxes and transmission shafts used in farming
 Monitors and tvs up to screen size of 32 inches
 Power banks of lithium ion batteries
 Retreaded tyres and accessories for carriages for disabled
 Digital cameras and video game consoles and sports requisites
 Movie tickets costing over rs 100
The remaining items in 28% slab are either luxury, sin or goods used by the
economically stronger strata of the society except cement and automobile
parts. Only 28 items remain in the 28% slab. New GST return filing system will
come into effect from July 1, 2019.

28% GOODS
• 13 items of automobile parts,
• 8 items of cement industry

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• Sin or demerit items - Pan Masala, tobacco products or tobacco substitutes,
all goods containing added sugar.
• Luxury items - pneumatic tyres of rubber, internal combustion piston engine,
Air-conditioning machines, Dish washing machines, Road tractors, Motor
cars and other motor vehicles, Aircrafts for personal use, Lottery authorized
by State Governments.
• Actionable claim in the form of chance to win in betting, gambling, or horse
racing.

GST EXEMPTIONS
• Services supplied by banks to basic savings
• Pradhan Mantri Jan-Dhan Yojana (PMJDY)
• Sale of completed flats does not attract GST since it is a transfer of property
• Music books and vegetables (uncooked or cooked by steaming or boiling in
water)
• IIM courses
GOODS KEPT OUTSIDE THE GST
There are certain activities which are items not covered under GST. They are
beyond the scope of GST, i.e., GST will not apply on them. These are classified
under Schedule III of the GST Act as “Neither goods nor services”.
 Alcohol for human consumption.
 Petrol and petroleum products (GST will apply at a later date) viz. Petroleum
crude, High speed diesel, Motor Spirit (petrol), Natural gas, Aviation turbine fuel.
 Services by an employee to the employer in relation to his employment.
 Court/Tribunal Services including District Court, High Court and Supreme
Court.
 Duties performed by:
• The Members of Parliament, State Legislature, Panchayats, Municipalities
and other local authorities
• Any person who holds a post under the provisions of the Constitution
• Chairperson/Member/Director in a body established by the Government or
a local body and who is not an employee of the same.
 Services of a funeral, burial, crematorium or mortuary including transportation
of the deceased.
 Actionable Claims (other than lottery, betting and gambling) - means claims
which can be enforced only by a legal action or a suit, example a book debt,
bill of exchange, promissory note.

States to go for ‘Option 1’ to meet GST compensation shortfall

 Under the GST Compensation to States Act, 2017, States were guaranteed
payment for any loss of revenue in the first five years of GST implementation
from July 1, 2017.
 The shortfall is calculated assuming a 14% annual growth in GST collections
by States over the base year of 2015-16.

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 The total GST revenue shortfall for the current fiscal (2020-21) was estimated
at ₹ 3 lakh crore, of which compensation cess collection was estimated at ₹
65,000 crore, leaving a compensation deficit of ₹ 2.35 lakh crore.
 Of this ₹ 2.35 lakh crore, ₹ 97,000 crore has been estimated as shortfall on
account of GST implementation, while the rest is being estimated as the
impact of the pandemic.
 In August 2020, the Centre gave two options to the States — either borrow ₹
97,000 crore from a special window, or borrow ₹ 2.35 lakh crore from the
market.
 The options have since been revised to ₹ 1.10 lakh crore and ₹ 1.83 lakh
crore, respectively.
 Under the terms of Option 1, besides getting the facility of a special window for
borrowings to meet the shortfall arising out of GST implementation.
 The States are also entitled to get unconditional permission to borrow the
final instalment of 0.5% of Gross State Domestic Product (GSDP) out of the
2% additional borrowings permitted by the Centre, under Atma Nirbhar
Abhiyaan on 17th May 2020.
 This additional borrowing by the States will not be accounted for as a part of
the State’s debt for purposes of its overall debt calculation, and the repayment
of the principal and interest on these borrowings will be done from the
Compensation Fund by extending the period of cess collections beyond
2022.
 Under Option 2, the States can sell debt in the market to raise the entire ₹ 1.83
lakh crore shortfall but with the terms of the borrowing being far less
favourable.
 Crucially, here the interest cost would have to be borne by them with only the
principal being serviced by the Compensation Fund.

Special window for borrowing

 Centre would borrow from the market and then act as an intermediary to
arrange back-to-back loans to pay the GST compensation shortfall of ₹ 1.1
lakh crore to State Governments.
 This arrangement will not reflect in the fiscal deficit of the Centre, and will
appear as capital receipts for State Governments.

GST COUNCIL
Goods & Services Tax Council is a constitutional body for making
recommendations to the Union and State Government on issues related to
Goods and Service Tax. As per Article 279A of the amended Constitution, the
GST Council which will be a joint forum of the Centre and the States, shall consist
of the following members.
1. The Union Finance Minister, will be the Chairperson.
2. The Union Minister of State in charge of Revenue of Finance.
3. The Minister in charge of finance or taxation or any other Minister
nominated by each State government, as members.

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FEATURES OF GST COUNCIL
 GST Council office is set up in New Delhi
 Revenue Secretary is appointed as the Ex-officio Secretary to the GST
Council
 Central Board of Excise and Customs (CBEC) is included as a permanent
invitee (non-voting) to all proceedings of the GST Council
 Create a post for Additional Secretary to the GST Council
 Create four posts of commissioner in the GST Council Secretariat (This is at
the level of Joint Secretary)
 GST Council Secretariat will have officers taken on deputation from both the
Central and State Governments.
 One-half of the total number of Members of the Goods and Services Tax
Council shall constitute the quorum at its meetings.
 Every decision of the Goods and Services Tax Council shall be taken at a
meeting, by a majority of not less than three-fourths of the weighted votes of
the members present and voting, in accordance with the following principles,
namely:
(a) the vote of the Central Government shall have a weightage of one third
of the total votes cast, and
(b) the votes of all the State Governments taken together shall have a
weightage of two-thirds of the total votes cast, in that meeting.
• The Goods and Services Tax Council shall establish a mechanism to
adjudicate any dispute -
(a) between the Government of India and one or more States; or
(b) between the Government of India and any State or States on one side
and one or more other States on the other side; or
(c) between two or more States, arising out of the recommendations of the
Council
The cabinet also provides funds for meetings the expenses (recurring and
nonrecurring) of the GST Council Secretariat. This cost is completely borne by
the Central Government.

FUNCTIONS
• The Goods and Services Tax Council shall make recommendations to the
Union and the States on—
• the taxes, cesses and surcharges levied by the Union, the States and the local
bodies which may be subsumed in the goods and services tax;
• the goods and services that may be subjected to, or exempted from the goods
and services tax;
• model Goods and Services Tax Laws, principles of levy, apportionment of
Goods and Services Tax levied on supplies in the course of inter-State trade or
commerce under Article 269A and the principles that govern the place of supply;
• the threshold limit of turnover below which goods and services may be
exempted from goods and services tax;
• the rates including floor rates with bands of goods and services tax;

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• any special rate or rates for a specified period, to raise additional resources
during any natural calamity or disaster;
• special provision with respect to the States of Arunachal Pradesh, Assam,
Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura,
Himachal Pradesh and Uttarakhand; and
• any other matter relating to the goods and services tax, as the Council may
decide.
GOODS AND SERVICES TAX NETWORK (GSTN)
 GSTN is a nonprofit organisation formed for creating a sophisticated
network, accessible to stakeholders, Government and taxpayers to access
information from a single source (portal).
 The Company has been set up primarily to provide IT infrastructure and
services to the Central and State Governments, tax payers and other
stakeholders for implementation of the Goods and Services Tax (GST).
 The portal is accessible to the Tax authorities for tracking down every
transaction, while taxpayers have the ability of connect for their tax returns.
 Government on September, 2018 cleared a proposal to convert GSTN into a
Government-owned company. The new modification in the ownership
orientation of GSTN aims to permit the Centre to own a 50% stake in the GST
Network and the remainder will be held by the States on a pro-rata basis in
the new entity. This modification in is expected to yield better result in terms of
facilitation of compliance towards the novel taxation laws.
 The GSTN software is developed by Infosys Technologies and the
Information Technology network that provides the computing resources is
maintained by the National Informatics Centre

E-WAY BILL
 An e-Way Bill is an electronic permit for shipping goods. It was made
mandatory for transport of goods from 1st June 2018.
 It is required to be generated for every inter-state and intra-state movement
of goods and the threshold limit of Rs 50,000.
 It is a paperless, technology solution and critical anti-evasion tool to check
tax leakages and clamping down on trade that currently happens on a cash
basis.
 A unique e-Way Bill Number (EBN) is generated either by the supplier,
recipient or the transporter. The EBN can be a printout, SMS or written on
invoice is valid.
 The GST/Tax Officers tally the e-Way Bill listed goods with goods carried with
it. The mechanism is aimed at plugging loopholes like overloading,
understating etc. Each e-way bill has to be matched with a GST invoice.
 The official mobile app can be used for generating an e-way bill, with
powerful features for easy generation and for maintaining records. The e-
way bill can also be generated or cancelled through an SMS.
 Transporter ID and PIN Code are now made compulsory.

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 TAXES SUBSUMED UNDER GST
CENTRAL TAXES
• Central Excise Duty
• Duties of excise (medicinal and toilet preparations)
• Additional Duties of excise (goods of special importance & textile and textile
products)
• Additional Duties of customs (Countervailing Duty)
• Special Additional Duty of Customs(SAD)
• Services tax
• Cesses and surcharges related to supply of goods or services
STATE TAXES
• State VAT
• Central Sales tax
• Purchase tax
• Luxury tax
• Entry tax (all forms)
• Entertainment tax and Amusement Tax (not levied by the local bodies)
• Taxes on advertisements
• Taxes on lotteries, betting and gambling
• State cesses and surcharges so far as they relate to supply of goods and
services
While subsuming State level taxes, the Central Government has guaranteed all
State Governments 14 percent annual growth in revenues for the next five
years, a compensation that will be financed by cesses on demerit goods
(tobacco, luxury cars, aerated beverages, etc). 2015-16 has been taken as base
year for calculating compensation.
RELATED ARTICLES IN THE CONSTITUTION
• 246A - State GST
• 269A - IGST
• 279A - IGST Council
• 270 - Central GST

GST COMPLIANCE
• The revenue department is planning to integrate e-way bill with NHAI's FASTag
mechanism and Logistics Data Bank (LDB) services, to facilitate faster
movement of goods and check GST evasion. This will improve operational
efficiencies across the country's logistic landscape.
• Lack of harmonisation under the 'track and trace' mechanism in terms of
sharing information among different agencies is affecting the ease of doing
business.
• It is also impacting the logistic costs of the companies.
• The proposal also help in preventing goods and services tax (GST) evasion by
unscrupulous traders who take advantage of the loopholes in the supply chain.

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• E-way bill system was rolled out for moving goods worth over Rs 50,000 from
one state to another or within the state.
• The National Highways Authority of India (NHAI) has put in place the FASTag
system for collection of toll electronically on national highways. FASTag is a
device that employs Radio Frequency Identification (RFID) technology for
making toll payments directly from the prepaid or savings account linked to
it. It is affixed on the windscreen of the vehicle and enables the commuter to
drive through toll plazas without stopping for cash transactions.
• Integration of e-way bill with FASTag will help revenue authorities track the
movement of vehicles and ensure that they are travelling to the same
destination as the transporter or the trader had specified while generating the e-
way bill.
• It will also help the suppliers locate the goods through the e-way bill system.
Transporters, too, would be able to track their vehicles through SMS alerts that
would be generated at each toll plaza.
• Central Board of Indirect Taxes and Customs is the agency that verify
compliance and check evasion.
• The Government has also set up the Directorate General of GST Intelligence
(DGGSTI) to investigate cases of tax evasion and conduct search and seizure
operations under the GST Act.

GST'S FUTURE COURSE IN INDIA

Initial difficulties faced in implementation of GST were quickly resolved because of
the flexibility shown by the GST council in correcting course. The experience of
other countries where GST was introduced shows that all of them faced some
teething troubles for the initial two to three years. Different suggestions for future
course are
1. STABILISING REVENUE BOTH FOR STATES AND CENTRE
• While States are already comfortable because of the compensation
mechanism in which 14% incremental growth rate of revenue is assured,
the Centre still needs to worry about its revenue.
• GST revenue is undoubtedly going to get a major boost when the new system
of return filing in which there will be perfect matching of invoices for
availing input tax credit is implemented.
2. INCLUSION OF MORE ITEMS
• Initiatives to bring all excluded items into GST one by one in the next three
to five years should be taken. This includes five petroleum products,
electricity, real estate and alcohol in that sequence. Among the petroleum
products, the two items which can easily be brought into GST are natural
gas and aviation turbine fuel (ATF).
• Exclusion of certain items from GST creates distortions such as cascading
of tax and reversal of input tax credit. Since tax on diesel and petrol gives
substantial revenue to States and Centre, it is obvious that bringing them
into the GST net will be a difficult decision.

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 • The items of electricity duty and potable alcohol, on which at present only
States have the power to impose levies, can also be brought into the GST
net by imposing only State GST on them. But inclusion of these items will help
in removing input tax credit blockages; it will be both more efficient for
industry and more affordable for consumers. By bringing petrol, diesel and
potable alcohol into GST, the rate at which these items are sold to
consumers will be common across States.
3. RATIONALISATION OF RATE STRUCTURE
• When the scope for revenue increases it can be shifted from a four slab
structure to a three slab structure, and gradually to a two slab structure.
• Multiplicity of slabs creates classification disputes and duty inversions,
necessitating blockage of funds and refunds. Also, modest rates result in
better compliance.
4. INPUT TAX CREDIT ISSUES
• In the present GST system there are certain items where input tax credit is
not allowed which breaks the chain. Some of these sectors are restaurants,
transport vehicles, oil or gas pipelines, telecom tower.
• Exclusion of items from availing input tax credit results in accumulated
credit and has a cascading effect.
• The single simplified return proposed by the GST council in its July meeting
could help mitigate these issues as input tax credit can be claimed only on
tax declared and paid by the vendor.
5. ANTI-TAX EVASION MEASURES
• A major reason behind this lower compliance is the dilution of the anti-tax
evasion measures in-built into the GST system due to technical issues in
the GSTN and inability of taxpayers to adapt to the complicated process.
• The next stage of GST rollout, improving tax collections needs to start at the
earliest by addressing the technical challenges at the GSTN and beginning a
fresh phase of educating the taxpayers and helping them refurbish their
systems to move on to the new returns.
• Bringing back the reverse-charge mechanism to expand the tax-net further
and effective supervision of e-way bill usage are other means through
which GST collections can be improved.
GST FACTS FOR PRELIMS AND MAINS
• No GST for five energy commodities -- crude oil, natural gas, petrol, diesel,
and aviation turbine fuel (ATF).
• The Goods and Services Tax (GST) Council was set up on September 15,
2016, as the country’s first ‘federal institution’.
• More than 96 percent of the decisions taken by GST Council have already been
implemented through 294 notifications issued by the Central Government.
• Under GST, the tax levied on consumption of goods or rendering of service is
split 50:50 between the Centre and the State.
• A cess is levied on top of these taxes on sin and luxury goods which make up
for the compensation kitty used to make good of any revenue shortfall faced
by States on implementation of GST.
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 KEY BENEFITS OF THE GST
1. GST is a transparent tax and also reduce number of indirect taxes.
2. GST will not be a cost to registered retailers therefore there will be no hidden
taxes and the cost of doing business will be lower.
3. Benefit people as prices will come down which in turn will help companies as
consumption will increase.
4. There is no doubt that in production and distribution of goods, services are
increasingly used or consumed and vice versa.
5. Separate taxes for goods and services, which is the present taxation system,
requires division of transaction values into value of goods and services for
taxation, leading to greater complications, administration, including
compliances costs.
6. In the GST system, when all the taxes are integrated, it would make possible the
taxation burden to be split equitably between manufacturing and services.
7. GST will be levied only at the final destination of consumption based on VAT
principle and not at various points (from manufacturing to retail outlets). This
will help in removing economic distortions and bring about development of a
common national market.
8. Increased demand and consumption of goods.
9. GST will also help to build a transparent and corruption free tax
administration.
10. Presently, a tax is levied on when a finished product moves out from a factory,
which is paid by the manufacturer, and it is again levied at the retail outlet
when sold.
11. GST is backed by the GSTN, which is a fully integrated tax platform to deal
with all aspects of GST.
12. Furthering Co-operative Ferderalism - Nearly all domestic indirect tax
decisions to be taken jointly by Centre and States.
13. Boosting revenues, investment, and medium term economic growth
• Investment will be stimulated, because scope of input tax credit for capital
purchases will increase
• Tax base will expand through better compliance
• Embedded taxes in exports will be neutralized
14. Eliminating tax bias against manufacturing/reducing consumer tax burden
 By rectifying breaks in the supply chain and allowing easier flow of input
tax credits, GST will substantially eliminate cascading (paying taxes at each
stage on value added and taxes at all previous stages, such as with the
Central Sales Tax)
15. Furthering ‘Make in India’ by eliminating bias in favour of imports (“negative
protection”) - Will make more effective and less leaky the domestic tax levied on
imports (IGST, previously the sum of the countervailing duty and special
additional duty), which will make domestic goods more competitive
16. Creating a common market - Will eliminate most physical restrictions and taxes
on inter-state trade.
17. Control of black money circulation as the system normally followed by traders
and shopkeepers will be put to a mandatory check.
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18. Self-policing: Invoice matching to claim input tax credit will deter non-
compliance and foster compliance. Previously invoice matching existed only
for intra-state VAT transactions and not for excise and service taxes nor for
imports.
19. Simplifying complex tax structure and unifying tax rates across the country
• 8-11 central excise duty rates times 3-5 State VAT rates itself applied
differentially across states to be consolidated into the GST’s 6 rates, applied
uniformly across states (one good, one Indian tax)
• Other taxes and cesses of the States and the Centre subsumed in the GST
CHALLENGES AHEAD
 Upon the introduction of GST, the Government introduced the unique matching
concept for taxpayers to claim input tax credit. However, due to technical
challenges, the matching concept could not take off.
 Refunds under GST were another area of concern where taxpayers, especially
exporters, faced lot of challenges in filing their refund claim application due to
technical difficulties.
 The introduction of GST has also brought in some new and unique concepts
which were never heard of in the history of the Indian taxation system. These
include anti-profiteering provisions, which require a taxpayer to pass on the
GST benefit to the end customers by way of commensurate reduction in the
price of goods and services. While this concept has been borrowed from the
Australian GST law to keep the inflation in the country under control, the
Indian GST law does not provide enough clarity on the granularity of data to be
used for the computation of revised prices.
 Alcohol, petroleum and energy products, electricity, and some of land and
real estate transactions are outside the GST base but are taxed by the Centre
and/or States outside the GST.
 Health and education are outside the tax net altogether, exempted under the
GST and not otherwise taxed by the Centre and States.
 Keeping electricity out undermines the competitiveness of Indian industry
because taxes on power get embedded in manufacturer’s costs, and cannot
be claimed back as input tax credits.
 Inclusion of land and real estate and alcohol in GST will improve transparency
and reduce corruption; keeping health and education completely out is
inconsistent with equity because these are services consumed
disproportionately by the rich.
 Moreover, the tax on gold and jewellery products—items that are
disproportionately consumed by the very rich-at 3 percent is still low.
 The multiplicity of rates was a response to meeting a variety of objectives,
including the need to keep rates down for a number of essential items to
protect poorer sections from price rises.

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 PREVIOUS YEAR QUESTIONS
1. Consider the following items: (2018)
1. Cereal grains hulled
2. Chicken eggs cooked
3. Fish processed and canned
4. Newspapers containing advertising material
Which of the above items is/are exempted under GST (Goods and Services
Tax)?
(a) 1 only (b) 2 and 3 only (c) 1, 2 and 4 only (d) 1, 2, 3 and 4

2. What is/are the most likely advantages of implementing ‘Goods and Services Tax
(GST)’? (2017)
1. It will replace multiple taxes collected by multiple authorities and will thus
create a single market in India.
2. It will drastically reduce the ‘Current Account Deficit’ of India and will enable it
to increase its foreign exchange reserves.
3. It will enormously increase the growth and size of economy of India and will
enable it to overtake China in the near future.
Select the correct answer using the code given below:
(a) 1 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

3. Which one of the following is not a feature of Value Added Tax? (2011)
(a) It is a multi-point destination-based system of taxation
(b) It is a tax levied on value addition at each stage of transaction in the
production-distribution chain
(c) It is a tax on the final consumption of goods or services and must ultimately be
borne by the consumer
(d) It is basically a subject of the Central Government and the State governments
are only a facilitator for its successful implementation

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