Chapter 1: Introduction To GST 1
TAX
It is a compulsory charge levied by the government. Taxes are of two types:
a) direct Tax & b) Indirect tax
DIRECT AND INDIRECT TAXES
Taxes are broadly classified into direct and indirect taxes.
Direct Taxes:
• A direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly
to the Government by the persons on whom it is imposed.
• A direct tax is one that cannot be shifted by the taxpayer to someone else. E.g. income tax.
Indirect Taxes:
• An indirect tax is one that can be shifted by the taxpayer to someone else.
• Its incidence is borne by the consumers who ultimately consume the product or the service,
while the immediate liability to pay the tax may fall upon another person such as a
manufacturer or provider of service or seller of goods.
• They are regressive in nature because they are not based on the principle of ability to pay.
• Indirect taxes are levied on consumption, expenditure, privilege, or right but not on income
or property.
E.g. GST, Custom Duty
FEATURES OF INDIRECT TAXES
• An important source of revenue : Indirect taxes are a major source of tax revenues for
Governments worldwide and continue to grow as more countries move to consumption
oriented tax regimes. In India, indirect taxes contribute more than 50% of the total tax revenues
of Central and State Governments.
• Tax on commodities and services : It is levied on commodities at the time of manufacture or
purchase or sale or import/export thereof. Hence, it is also known as commodity taxation. It
is also levied on provision of services.
• Shifting of burden : There is a clear shifting of tax burden in respect of indirect taxes. For
example, GST paid by the supplier of the goods is recovered from the buyer by including the
tax in the cost of the commodity.
• No perception of direct pinch: Since, value of indirect taxes is generally inbuilt in the price of
the commodity, most of the time the tax payer pays the same without actually knowing that he
is paying tax to the Government. Thus, tax payer does not perceive a direct pinch while
paying indirect taxes.
• Inflationary: Tax imposed on commodities and services causes an all-round price spiral. In
other words, indirect taxation directly affects the prices of commodities and services and
leads to inflationary trend.
• Wider tax base : Unlike direct taxes, the indirect taxes have a wide tax base. Majority of the
products or services are subject to indirect taxes with low thresholds.
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• Promotes social welfare : High taxes are imposed on the consumption of harmful products
(also known as ‘sin goods’) such as alcoholic products, tobacco products etc. This not only
checks their consumption but also enables the State to collect substantial revenue.
• Regressive in nature : Generally, the indirect taxes are regressive in nature. The rich and the
poor have to pay the same rate of indirect taxes on certain commodities of mass
consumption. This may further increase the income disparities between the rich and the poor.
CONCEPT OF GST
• GST is a value added tax levied on manufacture, sale and consumption of goods and services.
• GST offers comprehensive and continuous chain of tax credits from the producer's
point/service provider's point upto the retailer's level/consumer’s level thereby taxing only
the value added at each stage of supply chain.
• The supplier at each stage is permitted to avail credit of GST paid on the purchase of goods
and/or services and can set off this credit against the GST payable on the supply of goods
and services to be made by him. Thus, only the final consumer bears the GST charged by the
last supplier in the supply chain, with set-off benefits at all the previous stages.
• Since, only the value added at each stage is taxed under GST, there is no tax on tax or
cascading of taxes under GST system. GST does not differentiate between goods and
services and thus, the two are taxed at a single rate.
Why India Needed GST
Following reasons demanded implementation of GST:
• Double taxation of a transaction as both goods and services
• Non-inclusion of several local levies in State VAT such as luxury tax, entertainment tax, etc.
• Cascading of taxes on account of (i) levy of Non-VATable CST and (ii) inclusion of CENVAT
in the value for imposing VAT.
• Non-integration of VAT & service tax
• No CENVAT after manufacturing stage
Position Before GST
Particulars A Manufacturer B C D E
Delhi Manufacturer Trader Trader Trader
Delhi Kanpur Bhopal Bhopal
Input 1000 2000 4590 5100 6000
Processing 500 1000 - - -
Profit 500 1000 410 900 1000
Selling Price 2000 4000 5000 6000 7000
Excise @12.5% 250 500 - - -
Total 2250 4500 5000 6000 7000
Vat @4% 90 - - 240 280
CST @2% - 90 100 - -
Invoice price 2340 4590 5100 6240 7280
Position After GST 3
Particulars A B C D E
Manufacturer Manufacturer Trader Trader Trader
Delhi Delhi Kanpur Bhopal Bhopal
Input 1000 2000 4000 4500 5400
Processing 500 1000 - - -
Profit 500 1000 500 900 1000
Selling Price 2000 4000 4500 5400 6400
GST @ 12% 240 480 540 648 768
Invoice price 2240 4480 5040 6048 7168
Particulars A B C D E
Manufacturer Manufacturer Trader Trader Trader
Delhi Delhi Kanpur Bhopal Bhopal
Output Tax 240 480 540 648 768
Liability
Input Tax Credit - 240 480 540 648
Net Tax Liability 240 240 60 108 120
FRAMEWORK OF GST AS INTRODUCED IN INDIA
Dual GST
• India has adopted a Dual GST model in view of the federal structure of the country.
• Centre and States simultaneously levy GST on taxable supply of goods or services or both, which
takes place within a State or Union Territory. Thus, tax is imposed concurrently by the Centre and
States, i.e. Centre and States simultaneously tax goods and services.
• GST is a destination based tax applicable on all transactions involving supply of goods
and services for a consideration subject to exceptions thereof. GST in India comprises of:
On intra-State supplies of taxable goods and/or services
a) Central Goods and Services Tax (CGST) - levied and collected by Central Government,
b) State Goods and Services Tax (SGST) - levied and collected by State
Governments/Union Territories with Legislatures and
c) Union Territory Goods and Services Tax (UTGST) - levied and collected by Union
Territories without Legislatures.
Inter-State supplies of taxable goods and/or services are subject to Integrated Goods and
Services Tax (IGST). IGST is the sum total of CGST and SGST/UTGST and is levied by
Centre on all inter-State supplies.
BENEFITS OF GST
GST is a win-win situation for the entire country. It brings benefits to all the stakeholders of industry,
Government and the consumer. The significant benefits of GST are discussed hereunder:
Benefits to economy
(i) Creation of unified national market: GST aims to make India a common market with common
tax rates and procedures and remove the economic barriers thus paving the way for an
integrated economy at the national level.
(ii) Boost to ‘Make in India' initiative: GST gives a major boost to the ‘Make in India' initiative of 4
the Government of India by making goods and services produced in India competitive in
the national as well as international market. This will create India as a ― Manufacturing
hub.
(iii) Enhanced investment and employment: The subsuming of major Central and State taxes in
GST, complete and comprehensive setoff of input tax on goods and services and phasing
out of Central Sales Tax (CST) reduces the cost of locally manufactured goods and
services and increases the competitiveness of Indian goods and services in the
international market and thus, gives boost to investments and Indian exports. With a boost
in exports and manufacturing activity, more employment is generated and GDP is
increased.
Simplified tax structure
(i) Ease of doing business: Simpler tax regime with fewer exemptions along with reduction
in multiplicity of taxes under GST has led to simplification and uniformity. The uniformity
in laws, procedures and tax rates across the country makes doing business easier.
(ii) Certainty in tax administration: Common system of classification of goods and
services ensures certainty in tax administration across India.
Easy tax compliance
(i) Automated procedures with greater use of IT: There are simplified and automated
procedures for various processes such as registration, returns, refunds, tax payments. All
interaction is through the common GSTN portal, therefore, less public interface between
the taxpayer and the tax administration.
(ii) Reduction in compliance costs: The compliance cost is lesser under GST as multiple record-
keeping for a variety of taxes is not needed, therefore, there is lesser investment of
resources and manpower in maintaining records. The uniformity in laws, procedures and tax
rates across the country goes a long way in reducing the compliance cost.
Advantages for trade and industry
(i) Benefits to agriculture and Industry: GST has given more relief to industry, trade and
agriculture through a more comprehensive and wider coverage of input tax set-off and
service tax set-off, subsuming of several Central and State taxes in the GST and phasing out
of CST. The transparent and complete chain of set-offs which results in widening of tax
base and better tax compliance also leads to lowering of tax burden on an average dealer in
industry, trade and agriculture.
(ii) Mitigation of ill effects of cascading: By subsuming most of the Central and State taxes
into a single tax and by allowing a set-off of prior-stage taxes for the transactions across
the entire value chain, it helps in mitigating the ill effects of cascading, improving
competitiveness and improving liquidity of the businesses.
(iii) Benefits to small traders and entrepreneurs: GST has increased the threshold for GST
registration for small businesses. Further, single registration is needed in one State. Small
businesses have also been provided the additional benefit of composition scheme. With
the creation of a seamless national market across the country, small enterprises have an
opportunity to expand their national footprint with minimal investment.
Constitutional Provisions regarding GST.
The Constitution of India is the Supreme law in India. The Parliament can make law only with regard to
the matters which are allowed as per the constitution otherwise the law made by parliament shall be
called Ultra vires i.e. it is not enforceable. The constitution consists of a preamble, 25 parts containing 5
448 articles and 12 Schedules.
India has a three-tier federal structure, comprising the Union Government, the State Governments and
the local Government. The power to levy taxes and duties is distributed among the three tiers of
Governments, in accordance with the provision of the Indian Constitution.
Power to levy taxes emerges from the Constitution of India.
Article 265: No tax shall be levied or collected except by authority of Law.
Article 245: Subject to the provisions of the Constitution, Parliament may make laws for the whole or
any part of the territory of India, and the Legislature of a State may make laws for the whole or any part
of the State.
Article 246: It gives the respective authority to Union and state Governments for levying tax and such
authority is given in Seventh Schedule of Indian Constitution and there are three list in Seventh
Schedule.
1. Union List – If any matter is mentioned in Union List, parliament can make law with regard
to such matter. (there are 97 entries)
2. State List – If matter is mentioned in State List, State legislature, can make law with regard
to such matter. (there are 66 entries)
3. Concurrent List – If matter is mentioned in Concurrent List, both of the government can
make law with regard to such matter. (there are 47 entries)
Some of the important entries in the Union List are as given below:
82. Taxes on income other than agricultural income.
83. Duties of customs including export duties.
84. Duties of excise on following goods manufactured or produced in India, namely
(a) petroleum crude;
(b) high speed diesel;
(c) motor spirit (commonly known as petrol);
(d) natural gas;
(e) aviation turbine fuel; and
(f) tobacco and tobacco products.
Some of the important entries in State List are as given below:
46. Taxes on agricultural income
51. Duties of excise on alcoholic liquors for human consumption; opium, Indian hemp and other
narcotic drugs.
53. Taxes on the consumption or sale of electricity.
54. Taxes on sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol),
natural Gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale
in the course of international trade or commerce of such goods.
Amendment in the Constitution for the purpose of GST
(Constitution (101st Amendment) act, 2016)
Article 246A: Power to make laws with respect to Goods and Services Tax:
1. This article grants power to Centre and State Governments to make laws with respect to GST
imposed by Centre or such State for Intra state supply.
2. Centre has the exclusive power to make laws with respect to GST in case of inter-state supply of
goods / services.
3. However, in respect to the following goods, GST shall apply from the date recommended by the
GST Council.
• Petroleum crude 6
• High speed diesel
• Motor spirit (commonly known as petrol)
• Natural gas
• Aviation turbine fuel
Article 269A: Levy and collection of GST on inter-state supply
1. Article 269A stipulates that GST on supplies in the course of inter-state trade or commerce shall
be levied and collected by the Government of India and such tax shall be apportioned between the
Union and the States in the manner as may be provided by parliament by law on the
recommendations of the Goods and Services Tax Council.
2. Import of goods / services into India will also be deemed to be Inter State supply.
GST Council: Article 279A
• Article 279A of the Constitution empowers the President to constitute a joint forum of the
Centre and States namely, Goods & Services Tax Council (GST Council).
• The provisions relating to GST Council came into force on 12th September, 2016.
President constituted the GST Council on 15th September, 2016.
• The Union Finance minister is the Chairman of this Council and Ministers in charge of
Finance/Taxation or any other Minister nominated by each of the States & UTs with Legislatures
are its members. Besides, the Union Minister of State in charge of revenue or Finance is also its
member.
• The function of the Council is to make recommendations to the Union and the States on
important issues like tax rates, exemptions, threshold limits, dispute resolution etc.
• It shall also recommend the date on which GST be levied on petroleum crude, high speed
diesel, motor spirit, natural gas and aviation turbine fuel.
Taxes to be subsumed in GST
Central levies to be subsumed State levies to be subsumed
(i) Central Excise Duty & Additional Excise (i) State surcharges and Cesses in so far
Duty. as they relate to supply of goods and
(ii) Service Tax. services.
(iii) Excise Duty under Medicinal and Toilet (ii) Entertainment Tax (except those levied
Preparation Act. by local bodies)
(iv) Countervailing Duty & Special (iii) Tax on lottery, betting and gambling.
Countervailing Duty. (iv) Entry tax (All forms) & Purchase tax.
(v) Central Sales Tax (v) VAT/Sales tax.
(vi) Central surcharges and Cesses in so (vi) Luxury tax.
far as they relate to supply of goods (vii) Taxes on advertisements.
and
services.
