JAMIA MILLIA ISLAMIA

FACULTY OF LAW

TAX LAW-II PROJECT

TOPIC :-) Major Defects in the structure of Indirect
Taxes prior to GST

Submitted To
Mr. Qaseem Haider Naqvi

Faculty of Law
Jamia Millia Islamia

Submitted By
Abdul Karim
Roll No. – 03
Student Id: 201904923

B.A.LL. B (Self Finance),

7th Semester

Batch: - 2019-24

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INDEX

Introduction
• Overview of Indirect Tax
• Different Types of Indirect Taxes
Cascading Effect of Taxes
Comparison between Previous Tax and GST

• Drawbacks of VAT
• Why was GST Introduced?

What are its Benefits Over VAT?

What are the Differences between GST and VAT

Pre and Post GST India

Conclusion

Bibliography

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Introduction

Indirect tax is something that a manufacturer pays to the Government of his country. The
burden of tax payment is on end consumer as they are the ones purchasing the products.
Unlike , these are levied on materialistic goods.
Indirect tax is a tax that can be passed on to another individual or entity. Indirect tax is generally
imposed on suppliers or manufacturers who pass it on to the final consumer.

Examples of an Indirect Tax

Excise Duty, Customs Duty, Entertainment Tax, Service Tax, Sales Tax, Gross Receipts
Tax and Value-Added Tax (VAT) are examples of Indirect taxes.

Overview of Indirect Tax

There are many indirect taxes applied by the government of India. Taxes are levied on
manufacture, sale, import and even purchases of goods and services. These laws aren't also
well-defined Acts from the government, rather orders, circulars and notifications are given out
by relevant government bodies to this end. As such, it can be cumbersome trying to understand
every feature of indirect taxes in India.
Indirect taxes are touted to be streamlined following the introduction of the uniform Goods and
Services Tax (GST). The points below will help you understand more about the types of
indirect taxes and where they are applicable from a consumer's perspective.

In 2017, the Goods and Services Tax (GST) replaced several State and Central indirect taxes.
Some of those taxes before GST were:
• VAT
• Service tax
• Sales tax
• Entry tax
• Excise duty tax, etc.
Levying GST eliminated the cascading effect of taxes on the Indian economy.

Different Types of Indirect Taxes

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There are different types of indirect tax in India. However, after the implementation of GST,
all these indirect taxes were bundled into one singular tax for the citizens of India. We will
have a look at the different types of indirect tax in India:
1. Service Tax: This tax is levied by an entity in return for the service provided by them.
The service tax is collected by the Government of India and deposited with them.
2. Excise Duty: When any product or good is manufactured by a company in India, then
the tax levied on those goods is called the Excise Duty. The manufacturing company
pays the tax on the goods and in turn recover the amount from their customers.
3. Value Added Tax: Also known as VAT, this type of tax is levied on any product sold
directly to customer and are movable. VAT consists of Central Sales Tax which is paid
to the Government of India State Central Sales Tax which is paid to the respective State
Government.
4. Custom Duty: This a tax levied on the goods imported to India. Sometimes, Custome
Duty is also levied on products which are exported out of India.
5. Stamp Duty: This is a tax levied on the transfer of any immovable property in a state
of India. The state government in whose state the property is located charges this type
of tax. Stamp tax is also applicable on all legal documents too.
6. Entertainment Tax: This tax is charged by the state government and is applicable on
any products or transactions related to entertainment. Purchasing of any video games,
movie shows, sports activities, arcades, amusement parks, etc. are some of the products
on which Entertainment Tax is charged.
7. Securities Transaction Tax : This tax is levied during the trading of securities through
Indian Stock Exchange.

Cascading Effect of Taxes

Cascading tax effect simply means "tax on tax". This happens when a product is taxed at every
stage of its production before it is sold to the final customer. At every stage, a new tax is
imposed on the already taxed product so its value keeps increasing. So, the final customer has
to pay a higher price because of all the taxes involved.

Comparison between Previous Tax and GST

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In 2005, Value Added Tax (VAT) was introduced into the Indian taxation system. It is an
indirect tax.

• Introduced to make India a single integrated market.

• VAT replaced sales tax.
• It's a consumption tax levied on a product anytime it adds value to the supply chain.
• Calculated using the product's price minus any prior taxable expenses of items utilized
in the product.
• In 2014, VAT was introduced in all states and union territories except Andaman and
Nicobar Islands and Lakshadweep Islands.

Drawbacks of VAT

• Under the VAT system, it was not viable to claim Input Tax Credit (ITC) on services.
• Cascading Effect of taxes.
• Various states have different VAT rates.
• CST input cannot be subtracted from VAT and vice versa.
• Every state has its VAT legislation.
• Multiplicity of taxes.

Why was GST Introduced?

• Former Prime Minister Late Shri Atal Bihari Vajpayee formed a committee to write the
GST law in 2000. This committee proposed the concept of "one nation, one tax".
• A task force known as the “Kelkar Task Force” was formed in 2004 to strengthen the
taxation system by implementing GST.
• However, the implementation of GST was first postponed in 2008 and later failed in
2010 as the government took no concrete steps.

What are its Benefits Over VAT?

• The primary goal of implementing the GST system was to simplify India's tax structure.
Doing this would eliminate the tax system's complexity before GST, which suffered
from various multi-dimensional issues.
• The complexity of taxation and its cascading impact was an important reason for
changing the old taxing system on goods and services.

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 • The former tax structure featured many taxes, including excise duty on manufactured
goods, Wealth Tax, Sales Tax, VAT, Central Sales Tax, Import and Export Taxes,
Service Tax, Luxury Tax, and plenty of others, all of which produced a lot of
complications and inadvertent tax distribution.

The disadvantages are better explained through the following example:

Let us suppose a consultant provides services to his clients.

Under VAT regime/Before GST: The consultant would have charged 15% service tax on
services of Rs. 75,000. So, his output tax was Rs. 75,000 x 15% = Rs.11,250. Then, if he
purchased office supplies for Rs. 25,000 by paying 5% as VAT, it would cost Rs. 22,000 x 5%
= Rs. 1,250. He had to pay Rs. 11,250 output service tax without getting any deduction of Rs.
1,250 VAT already paid on stationery. His total tax outflow is Rs. 12,500

After GST Implementation: GST on service of Rs. 75,000 @18% = Rs. 13,500. Now, subtract
GST on office supplies (Rs. 25,000 x 5%) = Rs. 1,250. Therefore, the net GST liability to pay
is Rs. 12,250

Implementation of the GST removed various geographical hardships for trading and business,
and the entire nation came under a single taxing system. This can be understood from the table
below :

Taxes included from earlier tax regime into the Taxes excluded from the earlier
current GST framework: tax regime:

Service Tax Electricity Duty

VAT/Sales Tax Toll Tax

Central Sales Tax Alcohol consumption

Entertainment Tax Property Tax

Luxury Tax Countervailing Duty

Lottery Tax

Entry Tax

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 Tax on Lottery

The Different Components of GST

The structure of GST has three important components:

CGST – The Central Government levies it on intra-state sales of the product

SGST – The state Government collects it after an intra-state sale

IGST – The Central Government of India collects it from an inter-state transaction

What are the Differences between GST and VAT

Parameter GST VAT

On the sale of Products (separate tax

What does it tax? Both goods and services
for services)

When is the tax

On the supply of goods and services At the time when goods are sold
applicable?

Each state has different rates and

Tax rate and laws Uniform tax rates across India
laws

Who has After collection, the tax is confined

After collection, tax is equally shared by the
authority over to the state in which the sale takes
state and central government
taxes place

returns are filed either on the 10th,

Returns should be filed on every 20th day of
Tax return filed 15th, and 20th of the next month for
the next month for the previous month
the previous month

Online and offline payment choices available Only offline payment

Payment Methods (Online payment is compulsory if the GST
payable is more than Rs. 10,000)

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 Input tax credit benefit is available which
No input tax credit benefit exists on
Input tax credit means a taxpayer can claim the credit on the
customs duty paid
supplies received

Compliances for the movement of

Compliances for A similar set of compliances for the
goods between states differ from one
goods moved movement of goods between different states
state to another.

Who collects the

State where the consumer resides The state where the seller resides
tax?

Concerning different taxes, these are the following differences between VAT and GST

Parameter VAT GST

Under the Finance Act, the centre imposes Depending on the regulations
Service Tax service tax on a list of services on a governing Place of Supply, the
provision/payment basis. State GST absorbs service tax.

Except for certain products, all others are taxed State GST absorbs this tax under
State VAT
under VAT. itself

Under GST, the excise duty is

Excise duty will be charged until the product is
Excise Duty replaced by Central GST, and tax
manufactured under VAT.
will be levied upto the retail level.

Under VAT, the government levies a separate

Basic Customs Duty Same tax levied as before GST.
tax on imports.

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 The central government levies a separate tax Under GST, this duty is absorbed
Special Additional Duty
on imports under VAT. by State GST.

Entry tax will not be collected

Certain governments apply an entry tax on under the GST, but an extra 1
Entry Tax inter-state transfers that are considered as percent will be collected as a tax on
imports in the local region under the VAT. the inter-state supply of specific
commodities.

When it comes to inter-state transfers

including C-Forms, CST is charged at a This tax will be imposed under
Central Sales Tax reduced rate of 2 percent under VAT. GST, however, dealers will be
Otherwise, the full rate applies, which varies eligible for full credit.
from 5 to 14.5 percent.

Tax on Export of
Commodities and Under VAT, this tax is not required. No change.
Services

Tax on Inter-State This tax will be imposed under

Under VAT, this tax is not required against
Transfer of Commodities GST; however, dealers will be
Form F.
to Agent or Branch eligible for full credit.

Set-offs between State GST

Set-off of service tax and excise charge is
Cross Set-Off of Levy (SGST) and Central GST(CGST)
allowed under VAT.
are not permitted under GST.

Under GST, this tax may be

Tax on Transfer of This tax is normally excluded under VAT;
imposed unless TIN of the
Commodities to Agent or however, its applicability depends on state
transferor and transferee is the
Branch processes.
same.

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 There are a few non-creditable items and There would be no such
Disallowance of credit on
services that are subject to VAT and CENVAT disallowance under GST unless the
certain items
requirements. GST Council permits it.

Disallowance of inputs or Unless the GST Council selects a

input services utilized in list of things that come under the
Not permitted under VAT
exempted commodities Negative List, there would be no
or services such disallowance under GST.

There is a credit available between service tax Credit is granted under GST on the
Cascading Effect and excise duty under VAT, but no set-off entire amount of taxes paid up to
against VAT on excise duty. the merchant.

The national excise barrier is Rs.1.5 crore,

According to the GST Council's
Threshold limits for levy while the VAT barrier varies from Rs.5 lakh to
proposals, the State GST will vary
of tax Rs. 20 lakh depending on the state. The service
from Rs.10 lakh to Rs.20 lakh.
tax threshold is Rs.10 lakh.

Certain government entities, non-profit

Levy of tax on NGOs and
organizations, and public sector undertakings No changes under GST.
government bodies
will be subject to VAT.

There would be no such

Certain regions, such as the North-East, will be
Exemptions
eligible for VAT exemptions.
exemptions under GST, and the
GST Council may establish an
Investment Refund Scheme for
specific zones.

Pre and Post GST India

In the pre-GST era

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CENVAT

• CENVAT (excise duty) is imposed on products made in India, but only at the
manufacturing level.
• It was a critical obstacle to an efficient and neutral flow of tax credits.
• This resulted in the replacement of VAT for the GST in many countries.

Division of central and state tax:

• The Constitution divides the tax system between central and state governments.
• The state government had the right to impose any tax on affairs or objects of the state.
• In the case of services tax, the central government can collect taxes. Yet, the state
government dominates in employment contracts.
• This structure created obstacles for the central government's income generation and
distribution.

Not accounting for variables:

• The tax system does not consider various things like copyrights, patents, software.
• As a result, there were complications in classifying these goods under tax policy.

Central Monopoly

• With the boom in the service sector, the central government has monopoly in collecting
taxes.
• The state governments lost their income by not imposing taxes on the service sector.

Offsetting

• Offsetting was not allowed under the CST for interstate sales of products.
• This increased the cascading impact.

Need for Technology

• Better tax control and administration requires considerable technology upgrades.

• The implementation is both costly and time-consuming.

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Irregularities in the files

• The tax returns filed under federal and state tax systems had flaws due to no cross-
checking.

Multiple Categories

• The indirect tax system includes 15 different taxes payable based on different
standards.
• This required immediate and systematic regulation of the filling and calculation of
taxes

Complex Systems

• The taxation system in India before GST was complex and needed fixing.
• Different taxes on the same products in different countries resulted in high inflation.

In the Post-GST era

In a bid to solve the issues under the previous tax structure, GST benefited India in the
following ways:

Increase in Revenue

1. According to experts, GST strengthens the economy and will raise India’s GDP in
future.
2. GST has succeeded in expanding the taxable base by standardizing the obligation
level.
3. In the long run, tax compliance will be easier.
4. An online tax system means more efficiency and accountability.
5. This leads to fewer opportunities to get away with tax fraud.

Simplifying Tax Filing for businesses

1. Business owners realized that the shift to the new GST system takes time, money, and
management.
2. The procedure of submitting GST returns will become simpler in the long run.

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 3. All major indirect taxes are now unified.
4. Thus, separate departments dedicated to maintaining vast tax documents are no longer
required.
5. As a start-up, one will no longer need to register for certain taxes such as VAT and
Service Tax.

Making Certain Items More Affordable

1. As a private taxpayer, one will notice that the price of certain items has decreased.
2. This includes the reduction in the tax on private cars by around 5-6 percent.
3. With a 5 percent levy, air transport and economy class travel became somewhat
cheaper.
4. The cost of eating out has remained stable. It depends on the type of establishment
though. Whether the place has air conditioning, sells alcohol, and if it has a revenue of
less than Rs.50 lakh per year are important factors.
5. Unprocessed grains such as rice and wheat, unprocessed milk, vegetables, fish, meat,
and unbranded flours are exempted from GST.

Conclusion

After looking at Old Tax Vs GST, we discover that the implementation of GST on products
and services has made a significant improvement to the current tax structure. Regular taxpayers
and businesses across the country have benefitted from the changes. However, there are still
certain areas that need to be considered and improved under GST in future.

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Bibliography

Books

• Atal kumar, Taxation laws

• Monica Singhania, Student guide to income tax
• HC Mahrotra, Income tax law and Account

Website

https://www.bankbazaar.com/tax/indirect-tax.html

https://www.krayonnz.com/user/doubts/detail/61c9f09c0f6b030040d54e7b/what-were-
the-major-defects-in-the-structure-of-indirect-taxes-before-GST-regime

https://khatabook.com/blog/differences-between-gst-and-previous-tax-structure/

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