axoacademy

GST Certification Course

Study Material

Chapter 1
What is GST?
 Module 1

Chapter 1: What is GST?

1. Old Regime of Indirect Tax in India
In the light of the shortcoming of VAT in the States and CENVAT in the Centre, Government
of India introduced the comprehensive tax regime on Goods and Services, globally known as
VAT and GST. GST, as the name suggests Goods and Services Tax is a tax applicable on
“Taxable supply”, unlike old regime of tax on manufacturing, Sales, Services. Since India is a
Federal Country, there are two components of GST called as CGST (Central GST levied and
collected by Centre) and SGST (State GST levied and collected by States) which is applicable
simultaneously on taxable supply whether it is of goods and services on each stage with a
benefit of set off the earlier tax paid. Yes, credit of CGST for output liability of CGST is
available seamless irrespective of Intra-state or Inter-state supplies likewise for SGST. Though
there is restriction to claim set off of cross functional credit i.e. use of CGST credit for SGST
and vice versa. In case of Inter-state supplies, a combined tax of CGST and SGST i.e. IGST
is leviable with set off available for both in the chain of IGST then CGST and finally SGST
from the IGST liability payable. GST as practice worldwide will be a destination based tax i.e.
right on SGST will be there for State where the goods or services will be finally
consumed.

From Europe to the rest of the world, the Goods and Service tax quickly spread and becoming
what has been described as an unparalleled tax phenomenon. This is the most important event
in the evolution of tax structure in the last half of the 20th century. Thus, due to its
overwhelming popularity and its undeniable appeal in its pure form, GST has applied around
the world to the different degrees. GST provides a continuous chain of set off from the
original producer’s point and service- provider’s point up to the retailer’s level, and thus,
eliminates the burden of tax cascading. Further, it subsumes various Central and State taxes
which were not covered by State VAT and CENVAT. In that way, GST give relief to the
Central and States level as well as to trade, industry and agriculture. Beside this, GST provides
more comprehensive and wide coverage to tax set-off.

1.1. Why GST was needed in India?

The introduction of GST not only include comprehensively more indirect Central taxes and
integrate goods and service taxes for the purpose of set-off relief, but also leads to revenue gain
for both the Central and State through widening of the dealer base by capturing value addition
in the distributive trade and increased compliance. In the GST, both the cascading effects
of CENVAT and Service tax are removed with set-off, and a continuous chain of set-off from
the original producer’s point and service provider’s point upto the retailer’s level is
established. This multiple tax levels features of GST is the fundamental change from the
earlier single stage sales tax/excise, while, the earlier system allows for multiplicity of taxes
being collected through an inefficient and non-transparent system, the introduction of GST is
likely to rationalize it and thereby plug the loop holes in this system This will enable the
government to stop pilferage and rationalize the overall taxation regime. While earlier
many areas were either under-taxed or non-taxed or over-taxed, the GST will help reduce
overall tax burden of many organizations.
Introduction of an integrated Goods and Services Tax (GST) to replace the existing

© TAXO Academy | Study Material Chapter 1: What is GST? Page 1 of 10

 multiple tax structures of Central and State taxes is not only desirable but imperative in the
emerging economic environment. Increasingly, services are used or consumed in production
and distribution of goods and vice-versa. Separate taxation of goods and services often
requires splitting of transactions value into value of goods and services for taxation, which
leads to greater complexities, administration and compliances costs.

Further, Indian economy is getting more and more globalized. In recent times, number of Free
Trade Agreements (FTAs) has been signed, which will allow imports into India duty free or at
very low duties. Hence, there was need to have a nation- wide simple and transparent system
of taxation to enable the Indian industry to compete not only internationally, but also in the
domestic market. Integration of various Central and State taxes into a GST system makes
it possible to give full credit for inputs tax collected. GST being a destination-based
consumption tax based on VAT principle, will also greatly help in removing economic
distortions caused by present complex tax structure and will help in development of a common
national market. This is the essence of GST, and that is why GST is not simply VAT plus
service tax but an improvement over the previous system of VAT and disjointed service tax.
The introduction of GST along with prudent accounting policies, transparency and supported
by a robust electronic controls will bring down the peak rates of taxation and enhance revenue
growth. In simple words, introduction of the Value Added Tax (VAT) at the Central and the
State level has been considered to be a major step – an important breakthrough – in the sphere
of indirect tax reforms in India. If the VAT is a major improvement over the sales tax system,
then the Goods and Services Tax (GST) is indeed a further significant improvement –
the next logical step – towards a comprehensive indirect tax reforms in the country.

On the reading of the same, it can be said that the various issues may it be contemporary or
emerging with time, which earlier system of Indirect Taxes in India was suffering with. To
overcome those issues and making Indian economy more vibrant and competitive, we were
required a change through new GST regime. The aim of the new taxation regime discussed
in short as under:
(a) No cascading of taxes
(b) Reduced compliance cost
(c) Seamless flow of credit
(d) Less wastage of time and effort to comply
(e) Few number of taxes
(f) Transparent and corruption free
(g) Supportive to compete at domestic and International Market
(h) Buoyancy in tax collection both for Central and State
(i) Tax impact on inflation should be minimal

2. BENEFITS OF GST IN INDIAN INDIRECT TAX SCENARIO

From France (1954) to the rest of the world, the Goods and Service tax (globally VAT) quickly
spread and becoming what has been described as an unparalleled tax phenomenon. This is the
most important event in the evolution of tax structure in the second half of the 20th century.
Thus, due to its overwhelming popularity and its undeniable appeal in its pure form, GST
(globally VAT) has applied around the world to the different degrees.
Following the same, the Finance Ministry of India after a long debate since 2006 has placed the
122nd (One Hundred and Twenty Second) Constitutional Amendment Bill in the Lok Sabha on
19th December, 2014. This Amendment Bill is largely significant as it is to introduce the
Goods and Service Tax (GST) in the Indian indirect taxation system. Introduction of GST

© TAXO Academy | Study Material Chapter 1: What is GST? Page 2 of 10

 in Indian taxation system marks the most significant taxation change since independence.
GST in India is a ‘destination based consumption tax’ levied on goods and services
consumed in Indian economy. It is being levied on each point of sale and provision of service
which is called as taxable supply in GST regime against the manufacture, sale or provision of
service. GST have its two components in the Indian taxation system i.e. Central GST (CGST)
and State GST (SGST). The CGST and SGST will be levied and collected by the Central
and State Governments respectively. GST has subsumed all the major indirect taxes in India
except Custom duty. Through this chapter, we are trying to understand the benefits/advantages
of GST in the Indian taxation system i.e. to the Central, State Governments, traders,
manufacturers and the consumers. The same can be discussed as under:

2.1. GST benefits to Traders and Manufacturers

 Tax Cascading: A tax is levied at each point of transaction from the stage of manufacture
up to the sale to final consumer. In India, taxes were multi-layered as the Central
Government was levying taxes like excise duty, service tax and central sales tax and State
Governments were levying taxes like VAT/sales tax, entry tax, state excise, octroi etc. This
dual levy by the governments at certain occasion was resulted in cascading effects of taxes.
Cascading of tax occurs when each successive transfer is being taxed inclusive of
previous tax levied. This is the biggest problem was prevailing in indirect tax structure of
India. We already discussed the concept of cascading through an illustration on page 11 of
this chapter. Based on the regime of GST wherein both the taxes i.e. CGST and SGST are
being levied on Base Value of Goods and Services, there is no cascading impact. Further with
introduction of IGST (Integrated Goods and Service Tax) on Inter-state Supply unlike in
earlier regime wherein CST credit was not available to the buyer of goods in another State,
credit flows from one state to another and buyer can use IGST credit against his output
liability of IGST, CGST or SGST. Comparative impact of GST on cascading and pricing of
product is illustrated below:

Earlier System Post Goods and

(In Rupees) Service Tax
(In Rupees)
Cost To Manufacturer A 100.00 100.00
(Delhi)
Margin of A 10.00 10.00
A’s Price 110.00 110.00
Excise Duty (12.5% of Rs. 13.75 Nil
110) 123.75
VAT (12.5% of Rs. 123.75) 15.47 Nil
Central GST (9% of Rs. 110) Nil 9.90
State GST (9% of Rs. 110) Nil 9.90
Total Price 139.22 129.80
# 18% GST (9% CGST, 9% SGST)
In the above example the VAT is levied on the amount inclusive of Excise Duty and this is
cascading of tax which is proved below:
VAT on Price (Inclusive of Excise Duty (12.50% of 123.75)) 15.47
VAT on the A’s Price (12.50% of 110.00) 13.75
Tax Cascading 1.28

© TAXO Academy | Study Material Chapter 1: What is GST? Page 3 of 10

 This is just one example of the tax cascading effect which shows that the major reason
for the cascading of taxes in Indian Indirect tax structure was the levy of the State government
taxes over the Central Government levies. Under the GST regime both the Central GST as well
as State GST are levied simultaneously on base price which removed this tax cascading from
the taxation structure. In another illustration we will witness the removal of cascading effect
which was there in earlier system due to non-availability of CST credit in Interstate trade.

Illustration of Inter State Production and Sale of Goods

Earlier System Post Goods and
(In Rupees) Service Tax
(In Rupees)
Cost To Manufacturer A (Delhi) 100.00 100.00
Margin of A 10.00 10.00
A’s Price 110.00 110.00
Excise Duty (12.5% of Rs. 110) 13.75 Nil
123.75
CST (2% on Rs. 123.75) 2.475 Nil
Cost of Purchase for B (In Haryana) 126.225
IGST (18% of Rs. 110) Nil 19.80

Total Price 126.225 129.80

* IGST =18%
In the above example the CST is levied on the amount inclusive of Excise Duty
and this is cascading of tax which is proved below:
CST on Price (Inclusive of Excise Duty (2% of 123.75) 2.475
CST on the A’s Price (2% of 110.00) 2.20
Tax Cascading 0.275
“For CST, there is no availability of credit of Rs. 2.475 paid on the
transactions in present structure.”

Double Taxation: Double taxation means a transaction being taxed twice.

In the earlier tax structure there are various instances of double taxation where an amount is
taxed twice under different taxes. For example, we can take the case of the restaurants where
Service tax was charged at 40% of the Food bill value under the Valuation Rules and the
Value Added Tax was also to be levied and that too on 100% of the Food bill. Here, it can
be said that 40% of the value of the bill was getting taxed twice both under Service tax as
well as State VAT. It can be illustrated with the following example of food in a restaurant:

Particulars Earlier System (In Rupees)

Bill of Food item 1000.00
Service tax to be levied on (40% of Rs. 400.00
1000)
Service Tax (at the rate of 14.50% of Rs. 58.00
400)

© TAXO Academy | Study Material Chapter 1: What is GST? Page 4 of 10

 Particulars Earlier System (In Rupees)
VAT (12.5% of Rs. 1000) 125.00
Total Bill amount to be paid 1183

In the above example, taxes were levied twice on the amount of Rs. 400 out of the total bill of
Rs. 1000 known as double taxation which is prevalent in the earlier tax structure and leads to
higher payment of tax by assesse. Under the Goods and Service tax, there is a single levy with
two components applicable simultaneously. Hence, it helps in eradicating the double taxation
issue. Another illustration of double tax can be software, where though simultaneous
liabilities were not prescribed in any law, still, since no clarity was available for exact nature
of activity both to the Central and State tax Authorities used to levy duties on the transaction
related to software. To explain further, in case of maintenance job under Works Contract, where
both the elements of service and sale of goods were involved, Service tax was levied on
70%, whereas VAT at State level ranging from 80% to 100% amounting to even taxation on
170% value on a transaction of Rs. 100/-.

Under GST, double taxation would get minimized as there are HSN based classification of each
taxable supply and will attract CGST and SGST without much doubt of being ‘goods’ or
‘services’ as the rates for the ‘Taxable Supply of Goods’ as well as ‘Taxable Supply of Services’
would be same.
 Common National Market for the Products: Under the earlier tax structure there were
various taxes levied by the State Governments at various rates. This differentiation in tax
rates in states resulted in different prices of a single product in different states of the country.
For example, if we purchase bread in Delhi, its price is Rs. 20 but for other State its price may
be Rs. 19. This price difference may have couple of reasons. Apart from varied cost structure,
different taxes and variation of tax rate may be the reasons for the same. In GST, though there
are four rates of taxes, but for a particular product rate of CGST and SGST is uniform across
the country. Say, the rate of necessity item like wheat, rice etc., the rate of SGST and CGST is
same across the country.
 No Entry Tax in GST regime will save Cost and Time: Since the Goods and Service tax
has subsumed entry tax as well, it not only act for the cost saving but also a time saver for the
business community especially for the transport sector. Due to entry barrier/check post
mechanism to collect entry tax at each State level, transport vehicles had to wait on an average
5-7 hours on the road at the time of Inter-state travel. Certain study reports for these tax
formalities in India revealed that when a transport vehicle is moving around 240 Kilometer in
day, countries adopted GST achieving more than 400 kilometer journey, which will not only
save substantial time but also cost coupled with travel time, wear and tear of vehicle,
preservation of perishable goods and so on. In regime of GST, entry tax subsumed into main
levy and there are no entry barrier. Tax rates under the GST are being finalized keeping in view
of kitty of entry tax lost by States and thus, vehicle are free to move from one State to another.
Further, in the earlier scenario credit of entry tax is available only in few States which was further
enhancing the cost of production, whereas in GST regime subsumation of entry tax into main
levy enables the buyer to claim the set off of entire IGST paid for output liabilities of IGST,
CGST and SGST.
 Goods and Services become Competitive: Under the earlier format of taxation there
were number of tax issues which result in increase of cost of production, such as cascading of
taxes, double taxation, no input tax credit of certain taxes e.g. Central Sales tax, which make
the goods and services uncompetitive both in the domestic as well as in the international market.
Under GST, all these issues are being taken care and with efficient allocation of resources,
goods and services are expected to get more competitive advantage which would give a boost
to the Indian products in international market.
 Input Tax Credit Chain: If there is a chain of transaction and tax levy on each point of
transfer with Input Tax Credit (ITC) of tax paid on previous limb then this would reduce the
© TAXO Academy | Study Material Chapter 1: What is GST? Page 5 of 10
 cost of production and this is what exactly is expected under the new GST regime. If tax
paid at each stage would be available as ITC for the other stage, then it will also help in
reducing the cost of goods and services for the final consumers. An illustration can better
explain the concept:

© TAXO Academy | Study Material Chapter 1: What is GST? Page 6 of 10

 Illustration
M/s ABC a Consulting firm right now charges 14.5% service tax on its services but if he
purchases a bottle of water on which he paid VAT then, in earlier scenario he cannot claim
Input Tax Credit (ITC) for the same against its service tax liability but in GST in the same
condition the M/s ABC will pay CGST and SGST on purchase of water bottle and will claim
Input Tax Credit (ITC) for the same against its CGST and SGST liability on its output services.
Old regime Situation:
Purchase Services
Water Bolettle
Bott
Water Consulting Client
Firm Tax Collection
Authority
VAT Service Tax

(No Credit of VAT for the payment of Service Tax)

GST Regime:
Purchase Services

Water Bottle Chartered Client

Accountant Tax Collection
Authority
CGST & SGST CGST & SGST

(Availability of CGST credit for the payment of CGST and

SCGST credit for the payment of SGST)

This chain will help in reducing the tax burden for the M/s ABC in this example. There were
various transactions in which input tax credit was not available for the tax paid on input
which then added to the cost and makes it expensive for the consumer. This non availability
also leads to the increase in tax burden of the producer and manufacturer.

o Interstate Transactions: In earlier regime, in most of the cases Input Credit chain broke in
case of Inter-state transactions. In GST there is be a national levy and Input Credit chain in the
Inter-state transaction would not break. Under GST, Integrated GST is levied on Inter-state
transactions and the credit of the same is available for the payment of tax on the next stage
of transfer

© TAXO Academy | Study Material Chapter 1: What is GST? Page 7 of 10

 which keeps the credit chain intact in Inter-state transaction. In the earlier system of Central
Sales Tax (CST) this advantage was not available. It is illustrated by following example:
Earlier Situation:
Manufacturer (Delhi) (In Rupees)
Cost to 80.00 Distributor (Mumbai) (In Rupees)
manufacturer Cost (Inclusive of 114.75
Margin (25%) 20.00 CST and excise)
Excise 12.5% 12.50 Margin (13.29%) 15.25
CST (2% of 2.25 VAT (12.5% on 16.25
112.50) 130)
Final Price 114.75
Final Price 146.25
In the example the Excise Duty and Central Sales Tax (CST) paid by the distributor
on purchase is included in his cost thereby increases the cost as no credit is available
for the payment of CST.

GST regime: Distributor (Mumbai) (In Rupees)

Cost to 100.00
Manufacturer (Delhi) (In Rupees) Distributor

Cost to 80.00 Margin (13.29%) 13.29

manufacturer CGST (9%) 10.19
Margin (25%) 20.00 SGST (9%)
10.19
IGST (18% of 18.00
100)

Under the GST regime, Inter-state sales transactions between two dealers would be cost
comparable with stock transfers/branch transfers. According to the Act passed by parliament,
Centre would levy IGST (which would be weighted average mean of CGST plus SGST across
states) on all Inter-state transactions of taxable 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. Similarly, the importing dealer will claim credit of IGST while discharging
his output tax liability in his own State for CGST and SGST. This will result in Inter-state sales
transaction becoming tax neutral when compared to Intra-state sales. India would become one
single common market no longer divided by state borders.

o Input Tax Credit to all: In the earlier Central VAT (CENVAT) the value addition at the
level below the stage of manufacturer was not included which keep the benefits of the
comprehensive Input Tax Credit and Service tax set off out of the reach of the dealers but the
new taxation structure covers all the levels of production and distribution under the scope.

© TAXO Academy | Study Material Chapter 1: What is GST? Page 8 of 10

 o Reduced Compliance Cost: In earlier regime there were over 15 Legislations in indirect tax
structure including both Central and State Acts with each Legislation having different definitions,
rules and requirements and the Assessee had to comply with all those which was making the
compliance cost for the Assessee very high. Implementation of GST in India witnesses several
Central and State taxes get subsumed, which will enable traders and manufacturers to comply one
tax rather many.
o Common exemptions between Central and State Governments: In earlier regime, the
exemptions given by the Central and the State Governments being different which leads to different
prices of single goods in the different states. There were various conditional exemptions, area based
exemptions, threshold limit under the Excise Act. Similarly, there were various exemptions available
under State VATs, Service tax and other taxes. In past these exemptions were not mutually respected
by State Acts. To illustrate, area based exemptions under the Excise Act say in Baddi (Himachal
Pradesh) was not available under the VAT, which means that the Assessee operating from there were
bearing the burden of State VAT though they are exempted from Excise duty. Reciprocal issues of
exemption in VAT but not in Central levy can also be witnessed. These differentiations in
exemptions under different Acts resulted in a complex tax structure. In the GST regime, common
exemptions list is being introduced i.e. exemptions will be common between the Central and the States
i.e. for CGST and SGST, which will make the rates of duty same all over India and remove this
anomaly and consequential impacts.
o Interpretational issues got minimized: As it is a known fact that there were more than fifteen
Acts with different definitions, regulations, rules, and requirements. That leads to interpretational
issues of definitions; like, we can take an example of the concept of manufacturing, job work, Works
Contract etc. These terms were majorly defined by the judgments of the Supreme Court and High
Courts. Still there were various controversies regarding the definitions of these concepts. In GST
regime, there is a single terminology called as “taxable Supply”. This will help in reducing the
number of interpretational disputes. Further, when there is a single regime of GST, clarification on
various terms used in different law will also reduce. Say in earlier scenario, the definition of room
rent of hotel was different for Service tax, VAT and Luxury Tax but in GST there is a single definition
of room rent of hotel as all other taxes get subsumed into GST.

2.2. GST Benefits for Consumers

 Reduction in prices of the products: In earlier regime, lots of taxes were imposed on the
products from inception to final sale and input credit for those taxes were partially available. Further
credit of Service tax was not available at all. Due to that practice, there was an increase in cascading
effect thereby increase in the cost of production as well as price for the consumers. In GST, there is
enhanced transparency as well as rationalization of tax structure because of the continuous chain of set
off, this leads to reduction in the prices of the products at consumer level. In the case of primary food
articles under earlier tax structure purchase tax as well as sales tax was levied which consequently
increase the prices of primary goods but in GST it gets subsumed into a single levy which helps in
making the prices of the essential goods reduced.
 Employment Opportunities: It is expected that after the implementation of GST, products
become more competitive globally, and also, manufacturing sector of India would definitely get
benefit from the economies of scale which in turn will increase the employment opportunities. The
implementation of GST will also witness the increase in the real return from factors of
production land, labour and capital because of efficient allocation of the factors. This real return
would in turn increase the return of small and landless farmers which will not only increase
employment opportunities but also leads to reduction in the poverty level.

© TAXO Academy | Study Material Chapter 1: What is GST? Page 9 of 10

 2.3. GST benefits to the Central and State Governments
 Increase in the Gross Domestic Product (GDP): As per the report of the Task Force on Goods
and Services Tax Thirteenth Finance Commission, the study shows that implementation of GST
across goods and services is expected, ceteris paribus, to provide gains to India’s GDP somewhere
within a range of 0.9 to 1.7 per cent.
 Increase in the Exports of the country: It is expected that after the implementation of GST across
India, the cost of production will reduce significantly and when the cost of production falls in the
domestic market due to continuous chain of set off from producer’s point to consumer’s point, Indian
goods and services will be more price-competitive in foreign markets. This can bode well for
exporters, who compete with manufacturers abroad facing a lower cost structure.
 Results in widening of tax base and increased revenue to the governments: The implementation
of GST would result in chain of transactions from manufacturer to consumer which would in turn
bring all the buyers and sellers in the tax chain and thereby result in the increase in tax base
for the government. There are various other major factors on which the tax base of the government
depends, these are the threshold limit for payment of tax, exclusions and exemptions on different
products sectorial or otherwise. As for the threshold, it is the limit above which the manufacturer,
trader etc. will have to register under VAT/GST. So, in order to capture wider tax base, the threshold
limit should be as low as possible which is already kept at 20 Lakh in new regime. In case of
exemptions, there are very limited exemptions under GST which would itself bring all the exempted
sectors in the GST regime. All earlier exemptions are already withdrawn and rest will go away
with some sunset clause. Even it is decided that exemption from day one will not be available but the
industry opted for exemption in old regime will be entitled for refunds of duties paid. And in case of
exclusions, under GST the only exclusion provided in the Amendment Act is Alcoholic Liquor for
human consumption which means the new regime is proposed to have broad base. Along with this
the tax base of the State Governments will increase widely with the inclusion of the tax on services
and manufacturing while of the Central Government with the tax on sale.
 Divisible pool of State Government will increase: The divisible pool is that portion of gross tax
revenue which is distributed between the Centre and the States. The divisible pool consists of all
taxes, except Surcharges and Cess levied for specific purpose, net of collection charges. In the new
tax regime, as GST subsumed all the Cess and Surcharges and the rate of GST have been decided on
the basis of historical tax collection which includes these Cess and Surcharges that means the tax
collection from these additional levies will add on to the divisible pool in the GST regime.
 Reduction in the ‘Administration Cost’: Earlier in indirect taxes structure on the one hand
when Assessee had to follow lot of compliances, on the other hand, the Central and State
Governments had to manage the administrative machinery for managing taxable and enforcement
jurisdiction, which capture lot of resources in terms of time and money. Poor automation process
inflates the agony. As GST subsumed all the major indirect taxes, the administration would become
easier because the Assessee has to comply with a single tax structure and this is similar for the
government as well. The government would manage with a single national level network as
e-governance will replace the age old conventional system of tax management.
 Improved Tax Policies: There is a saying that good tax policy is good tax administration. As
discussed, earlier there were different indirect taxes which were imposed by the Central and State
Governments. Further, for those taxes, an Assessee had to follow various complex compliances. Hence,
there was a significant scope of improvisation in the tax policies which would ultimately help in
tax collection efficiency and this improvisation is expected through implementation of GST in India.
Under GST regime, automation of tax infrastructure will make the system simpler for the government
and also helps in reducing tax evasion as every transfer need to be automated in order to claim ITC. In
other words, GST in India will help in increase collection efficiency of the State Governments and
improve tax administration across India.

© TAXO Academy | Study Material Chapter 1: What is GST? Page 10 of 10