Report of GST

Economic Analysis:
CMRU
“APPLICATION OF GST ACT IN SHARING OF REVENUE

BETWEEN THE STATE AND THE CENTRE”
SUBMITTED BY
NAME: SWETHA Y
REG NO: 16PG06037
CLASS: MBA 1ST YEAR
BATCH: 2016-2018
SUBMITTED TO:
PROF. DHANUSHKODI
SCHOOL OF MANAGEMENT
CMR UNIVERSITY
APPLICATION F GST ACT IN SHARING OF REVENUE
BETWEEN THE STATES AND THECENTRE
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CONTENTS
SERIAL CONTENTS PAGE
NO. NO.
1 INTRODUCTION 2
2 RELAVENT STUDY 3 – 25
3 TRADE STATISTICS 26 - 33
4 KEY INDICATOR’S 34 - 36
5 CONCLUSION 37
6 BIBLIOGRAPHY 38
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INTRODUCTION:
GST (goods and service tax) is a comprehensive tax levy on manufacture, sale and
consumption of goods and service at a national level.
‘G’ – Goods
‘S’ – Services
‘T’ – Tax
GST is a tax on goods and services with value addition at each stage having comprehensive
and continuous chain of set-of benefits from the producer’s/service provider’s point up to the
retailer’s level where only the final consumer should bear the tax.” Through a tax credit
mechanism, GST is collected on value-added goods and services at each stage of sale or
purchase in the supply chain. GST is paid on the procurement of goods and services can be
set off against that payable on the supply of goods or services. But being the last person in the
supply chain, the end consumer has to bear this tax and so, in many respects, GST is like a
last-point retail tax. France was the first country to introduce GST in 1954. Worldwide,
Almost 150 countries have introduced GST in one or the other form since now. Most of the
countries have a unified GST system. Brazil and Canada follow a dual system vis-à-vis India
is going to introduce. In China, GST applies only to goods and the provision of repairs,
replacement and processing services. GST rates of some countries are given below:
Country Rate of GST
Australia 10%
France 19.6%
Canada 5%
Germany 19%
Japan 5%
Singapore 7%
New Zealand 15%
Basically, GST is a value added tax, levied at all points in the supply chain with credit
allowed for any tax paid on inputs acquired for use in making the supply. It is indirect tax that
brings most of the taxes imposed on most goods and services ,on manufacture, sale and
consumption of goods and services ,under a single domain at the national level. It would
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apply to both goods and services in a comprehensive manner with exemptions restricted to a
minimum and it is payable at the final point of consumption.
RLEVANT STUDIES:
Need for GST in India

Introduction of a GST to replace the existing multiple tax structures of Centre and State taxes
are 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 transaction values into
value of goods and services for taxation, which leads to greater complexities , administration
and compliances costs. Integration of various taxes into a GST system would make it possible
to give full credit for inputs taxes collected .GST, being a destination-based consumption tax
based on VAT principle, would also greatly help in removing economic distortions and will
help in development of a common national market. The implementation of GST will help
create a common Indian market and reduce the cascading effect of tax on the cost of goods
and services. It will impact tax structure, tax incidence ,tax computation, credit utilization and
reporting, leading to a complete overhaul of the current indirect tax system. GST will have a
far-reaching imp act on almost all aspects of business operations in a country, including
pricing of products and services; supply chain optimization; IT, accounting and tax
compliance systems. GST is expected to be a critical reform in spurring growth in the
economy. When introduced, GST will not only make the tax system simpler, but will also
help in increased compliance, boost tax revenues, reduce the tax outflow in the hands of the
consumers and make exports competitive.
It is hoped that the new Government will set forth a roadmap of the GST implementation in
the upcoming Budget. The GST or the Goods and Service Tax is a long pending indirect tax
reform which India has been waiting for, and which is hoped to iron out the wrinkles in the
existing tax system. This comprehensive tax policy is expected to be one of the most
important reforms in contributing to the India growth story. GST was first introduced in India
during 2007-08 budget sessions. On 17th December2014,the current Union Cabinet ministry
approved the proposal for introduction GST Constitutional Amendment Bill. On 19th of
December2014,the bill was presented on GST in LokSabha. The Bill will be tabled and taken
up for discussion during the coming Budget session. The current central government is very
determined to implement GST Constitutional Amendment Bill. The introduction of the GST
system is by far the most important tax reform in India. Consensus and coordination among
states is required for it to succeed. It will affect prices, business processes and investments in
all segments of the economy. It will act as a catalyst for promoting manufacturing in the
country, thereby, supporting the ‘Make in India’ program of the Government. The
Government of India is proposing to replace the current complex structure of multiple
indirect taxes in favour of a comprehensive dual Goods and Services Tax (GST) expected to
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be implemented from 1 April 2016.GST will be one of the most significant tax reforms in the
fiscal history of India.
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Justification of GST:
Despite the success of VAT, there are still certain shortcomings in the structure of VAT, both
at the Centre and at the State level.
A. Justification at the Central Level
At present excise duty paid on the raw material consumed is being allowed as input credit
only. For other taxes and duties paid for post-manufacturing expenses, there is no mechanism
for input credit under the Central Excise Duty Act.
Credit for service tax paid is being allowed manufacturer/ service provider to a limited extent.
In order to give the credit of service tax paid in respect of services consumed, it is necessary
that there should be a comprehensive system under which both the goods and services are
covered.
At present, the service tax is levied on restricted items only. Many other large number of
services could not be taxed. It is to reduce the effect of cascading of taxes, which means
levying tax on taxes.
B. Justification at the State Level
A major defect under the State VAT is that the State is charging VAT on the excise duty paid
to the Central Government, which goes against the principle of not levying tax on taxes.
In the present State level VAT scheme, Centre allowed on the goods remains included in the
value of goods to be taxed which is a cascading effect on account of Centre element.
Many of the States are still continuing with various types of indirect taxes, such as luxury tax,
entertainment tax, etc.
As tax is being levied on inter-state transfer of goods, there is no provision for taking input
credit on CST leading to additional burden on the dealers.
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WHAT IS GST ?
GST is a major indirect tax reform in India which takes VAT to its logical conclusion. GST
would avoid burden of multiple taxation (tax on tax) with a cascading effect .GST seeks to
rule out cascading tax effect. Once it introduced, CST will also be removed.
The proposed model of GST and the rate- A dual GST system is planned to be implemented
in India as proposed by the Empowered Committee under which the GST will be divided into
two parts:
 State Goods and Services Tax (SGST)
 Central Goods and Services Tax (CGST)
 Integrated Goods and Services Tax (IGST)
Both SGST and CGST will be levied on the taxable value of a transaction. All goods and
services, leaving aside a few, will be brought into the GST and there will be no difference
between goods and services. The GST system will combine Central excise duty, additional
excise duty, services tax, State VAT entertainment tax etc. under one banner.
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MODEL OF GST
The dual GST model proposed by the Empowered Committee and accepted
by the Centre will have dual system for imposing the tax. GST shall have
two components i.e.
(i) Central GST
(ii) State GST
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SUBSUMING OF EXISTING TAXES

Central Taxes to be subsumed:
i. Central Excise Duty
ii. Additional Excise Duty
iii. The Excise Duty levied under the Medicinal and Toiletries Preparation Act
iv. Service Tax
v. Additional Customs Duty, commonly known as Countervailing Duty (CVD)
vi. Special Additional Duty of Customs-4% (SAD)
vii. Cesses and surcharges in so far as they relate to supply of goods and services.
State Taxes to be subsumed:
i. VAT/Sales Tax
ii. Central Sales Tax (levied by the Centre and collected by the States)
iii. Entertainment Tax
iv. Octroi and Entry Tax (all forms)
v. Purchase Tax
vi. Luxury Tax
vii. Taxes on lottery, betting and gambling
viii. State cesses and surcharges in so far as they relate to supply of goods and services.
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FUNCTIONING OF GST
Case 1:
Sale in one state, resale in the same state. In the example illustrated below, goods are moving
from Mumbai to Pune. Since it is a sale within a state, CGST and SGST will be levied. The
collection goes to the Central Government and the State Government as pointed out in the
diagram. Then the goods are resold from Pune to Nagpur. This is again a sale within a state,
so CGST and SGST will be levied. Sale price is increased so tax liability will also increase.
In the case of resale, the credit of input CGST and input SGST (Rs. 8) is claimed as shown;
and the remaining taxes go to the respective governments.
Case 2:
Sale in one state, resale in another state. In this case, goods are moving from Indore to
Bhopal. Since it is a sale within a state, CGST and SGST will be levied. The collection goes
to the Central Government and the State Government as pointed out in the diagram. Later the
goods are resold from Bhopal to Lucknow (outside the state). Therefore, IGST will be
levied. Whole IGST goes to the central government. Against IGST, both the input taxes are
taken as credit. But we see that SGST never went to the central government, still the credit is
claimed .This is the crux of GST. Since this amounts to a loss to the Central Government, the
state government compensates the central government by transferring the credit to the central
government.
Case 3:
Sale outside the state, resale in that state. In this case, goods are moving from Delhi to Jaipur.
Since it is an interstate sale, IGST will be levied. The collection goes to the Central
Government. Later the goods are resold from Jaipur to Jodhpur (within the state). Therefore,
CGST and SGST will be levied. Against CGST and SGST,50% of the IGST, that is Rs. 8 is
taken as a credit. But we see that IGST never went to the state government, still the credit is
claimed against SGST. Since this amounts to a loss to the State Government, the Central
government compensates the State government by transferring the credit to the State
government.
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APPLICABILITY OF CGST AND SGST

The applicability of taxes is as usual there would be a prescribed limit of annual turnover,
also some goods and services are exempted under GST. Threshold for annual turnover for
goods and services would be 10 lakh for SGST and threshold of CGST for goods may be 1.5
crore and service would have a separate threshold that too will be appropriately high. It is
assumed that aggregate total of CGST & SGST would be 20%.
Impact of Goods and Service Tax
Food Industry:
The application of GST to food items will have a significant impact on those who are living
under subsistence level. But at the same time, a complete exemption for food items would
drastically shrink the tax base. Food includes grains and cereals, meat, fish and poultry, milk
and dairy products, fruits and vegetables, candy and confectionary, snacks, prepared meals
for home consumption, restaurant meals and beverages. Even if the food is within the scope
of GST, such sales would largely remain exempt due to small business registration threshold.
Given the exemption of food from CENVAT and 4% VAT on food item, the GST under a
single rate would lead to a doubling of tax burden on food
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Housing and Construction Industry in India
construction and Housing sector need to be included in the GST tax base because
construction sector is a significant contributor to the national economy.
FMCG Sector
Despite of the economic slowdown, India's Fast Moving Consumer Goods (FMCG) has
grown consistently during the past three – four years reaching to $25 billion at retail sales in
2008. Implementation of proposed GST and opening of Foreign Direct Investment (F.D.I.)
are expected to fuel the growth and raise industry's size to $95 Billion by 201835.
Financial Services
In most of the countries GST is not charged on the financial services. Example, In New
Zealand most of the services covered except financial services as GST. Under the service tax,
India has followed the approach of bringing virtually all financial services within the ambit of
tax where consideration for them is in the form of an explicit fee. GST also include financial
services on the above grounds only.
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SALIENT FEATURES OF THE GST MODEL

Salient features of the proposed model are as follows: the GST shall have two components:
one levied by the Centre (referred to as Central GST), and the other levied by the States
(referred to as State GST). Rates for Central GST and State GST would be approved
appropriately, reflecting revenue considerations and acceptability.
The Central GST and the State GST would be applicable to all transactions of goods and
services made for a consideration except the exempted goods and services.
The Central GST and State GST are to be paid to the accounts of the Centre and the States
individually.
Since the Central GST and State GST are to be treated individually, taxes paid against the
Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and
could be utilized only against the payment of Central GST.
Cross utilization of ITC between the Central GST and the State GST would not be permitted
except in the case of inter-State supply of goods and services.
Ideally, the problem related to credit accumulation on account of refund of GST should be
avoided by both the Centre and the States except in the cases such as exports, purchase of
capital goods, input tax at higher rate than output tax etc.
To the extent feasible, uniform procedure for collection of both Central GST and State GST
would be prescribed\ in the respective legislation for Central GST and State GST.
The States are also of the view that Composition/Compounding Scheme for the purpose of
GST should have an upper ceiling on gross annual turnover and a floor tax rate with respect
to gross annual turnover.
The taxpayer would need to submit periodical returns, in common format as far as possible,
to both the Central GST authority and to the concerned State GST authorities.
Each taxpayer would be allotted a PAN-linked taxpayer identification number with a total of
14/15 digits. This would bring the GST PAN-linked system in line with the prevailing PAN-
based system for Income tax, facilitating data exchange and taxpayer compliance.
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CHALLENGES
With respect to Tax Threshold
The threshold limit for turnover above which GST would be levied will be one area which
would have to be strictly looked at. First of all, the threshold limit should not be so low to
bother small scale traders and service providers. It also increases the allocation of
government resources for such a petty amount of revenue which may be much more costly
than the amount of revenue collected. The first impact of setting higher tax threshold would
naturally lead to less revenue to the government as the margin of tax base shrinks; second it
may have on such small and not so developed states which have set low threshold limit under
current VAT regime.
With respect to nature of taxes
The taxes that are generally included in GST would be excise duty, countervailing duty, cess,
service tax, and state level VATs among others.
With respect to number of enactments of statutes
There will two types of GST laws, one at a centre level called ‘Central GST (CGST)’ and the
other one at the state level - ‘State GST (SGST)’. As there seems to have different tax rates
for goods and services at the Central Level and at the State Level, and further division based
on necessary and other property based on the need, location, geography and resources of
state.
With respect to Rates of taxation
It is true that a tax rate should be devised in accordance with the state’s necessity of funds.
Whenever states feel that they need to raise greater revenues to fund the increased
expenditure, then, ideally, they should have power to decide how to increase the revenue.
With respect to tax management and Infrastructure
It depends on the states and the union how they are going to make GST a simple one.
Success of any tax reform policy or managerial measures depends on the inherent
simplifications of the system, which leads to the high conformity with the administrative
measures and policies
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BENEFITS OF GST ACT
Reduction in costs:
Due to full and consistent credit, makers or merchants don't need to incorporate expenses as a
piece of their expense of creation. which is a major motivation to say that we can see
a diminished in costs.
Fewer Taxes :
with the implementation of GST in India one of the advantages of GST bill for Taxpayers is
that they have to pay lesser taxes like Service Tax, Octroi , Excise Tax, sales tax, central
sales tax and may more.
Increase in Government Revenues:

This may appear to be somewhat unclear. In any case, even at the season of presentation of
VAT, general society incomes really went up as opposed to falling in light of the fact that
numerous individuals turned to paying expenses instead of sidestepping the same.
Notwithstanding, the legislature may wish to present GST at a Revenue Neutral Rate, in
which case the incomes won't not see a noteworthy increment in the short run. we have to see
whether this will be benefit of GST or not.
Less consistence and procedural expense:

Instead of keeping up enormous records, returns and reporting under different diverse
statutes, all assess will discover agreeable under GST as the consistence expense will be
lessened. It ought to be noticed that the assess are, by and by, required to keep record of
CGST, SGST and IGST independently. This is the main benefit of goods and services tax for
common man.
Move towards a Unified GST:

Internationally, the new taxation act is constantly favoured in a bound together frame (that
is, one single taxation for the entire country, rather than the double taxation position). In
spite of the fact that India is embracing Dual GST investigating the government structure, it is
still a decent move towards a Unified GST which is viewed as the best strategy for Indirect
Taxes.
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ADVANTAGES
GST has been envisaged as a more efficient tax system, neutral in its application and
distributional attractive. The advantages of GST are:
 The tax structure will be made lean and simple.

 The entire Indian market will be a unified market which may translate into lower
business costs. It can facilitate seamless movement of goods across states and reduce
the transaction costs of businesses.
 It is good for export oriented businesses. it is not applied for goods/services which
are exported out of India.
 In the long run, the lower tax burden could translate into lower prices on goods for
consumers.
 The Suppliers, manufacturers, wholesalers and retailers are able to recover GST
incurred on input costs as tax credits. This reduces the cost of doing business, thus
enabling fairer prices for consumers.
 It can bring more transparency and better compliance.
 Number of departments (tax departments) will reduce which in turn may lead to less
corruption.
 More business entities will come under the tax system thus widening the tax base.
This may lead to better and more tax revenue collections
 Companies which are under unorganized sector will come under tax regime.
 Wider tax base, necessary for lowering the tax rates and eliminating classification
disputes.
 Elimination of multiplicity of taxes and their cascading effects.
 Rationalization of tax structure and simplification of compliance procedures.
 Harmonization of Centre and State tax administrations, which would reduce
duplication and compliance costs.
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DISADVANTAGES
 Critics have argued that the GST is a regressive tax, which has a more pronounced
effect on lower income earners, meaning that the tax consumes a higher proportion of
their income, compared to those earning large incomes.
 A study commissioned by the Curtin University of Technology, Perth in 2000 argued

that the introduction of the GST would negatively impact the real estate market as it
would add up to 8% to the cost of new homes and reduce demand by about 12%
 India has opted for a dual-GST model. Critics claim that CGST,SGST and IGST are
nothing but new names for Central Excise/Service Tax, VAT and CST and hence
GST brings nothing new to the table.
 The concept of value-add has never been utilised in the levy of service as the Delhi
High Court is attempting to prove in the case of Home Solution Retail while under
Central Excise the focus is on defining and refining the definition of manufacture
instead of focusing on value additions.
 The Revenue can be very stubborn when it comes to refunds as the Maharashtra
Government proves and software entities that applied for refunds on excess service
tax paid on inputs discovered.
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VARIOUS BUSINESS SECTORS THAT ARISE AFTER GST

IMPLEMENTATION:-
 Real Estate Industry:
Construction and Housing sector need to be included in the GST tax base being high
tax revenue generating sector and for reduction in no. of tax legislations involved.
 FMCG Sector:
Implementation of proposed GST and opening of Foreign Direct Investment (F.D.I.)
are expected to fuel the growth and raise industry’s size.
 Rail Sector:
There have been suggestions for including the rail sector under the GST umbrella to
bring about significant tax gains and widen the tax net so as to keep overall GST rate
low. This will have the added benefit of ensuring that all inter–state transportation of
goods can be tracked through the proposed Information technology (IT) network.
 Information Technology enabled services:

At present, if the software is transferred through electronic form, it should be
considered as Intellectual Property and regarded as a service and if the software is
transmitted on media or any other tangible property, then it should be treated as goods
and this classification is full of litigation. As GST will have uniform rate for Goods
and Services and no concept of state revenue being VAT or central revenue being
service tax and hence, the reduction in litigation
 Transport Sector:
Truck drivers spend more than half of their time while negotiating check post and
tolls. At present there are more than 600 check points and more than ton types of
taxes in road sector. After the introduction of GST, the time spend by the road
transport industry in complaining with laws will reduce and service is going to be
better which will boost the goods industry and thus the taxes also.
 Impact on Small Enterprises:

There will be three categories of Small Enterprises in the GST regime.
Those below threshold limit of Rs.1.5 Crores would not be covered.
Those between the threshold and composition turnovers will have the option to pay a
turnover based tax i.e. composite tax or opt to join the GST regime.
Those above threshold limit will need to be within framework of GST. Possible
downward changes in the threshold in some States consequent to the introduction of
GST may result in obligation being created for some dealers.
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CURRENT STATUS OF INDIA’S PROPOSED GST PROGRAM :

Constitution Amendment Bill passed in the Lok Sabha (Lower House of Parliament)
• Union Finance Minister in his press conference has assured that effective peak GST rate for
India may not be 27% ,could be lower than that
• Bill now scheduled to be tabled in Rajya Sabha (Upper House of Parliament) for approval,
Parliament slated to stay in session for additional two days (till Friday 15 May 2015)to allow
time for passage of important Bills (including the Constitution Amendment Bill) Once the
Constitution Amendment Bill is passed in the Parliament, it would still need to be ratified by
a majority of the State Assemblies which is expected to occur during the Monsoon session of
respective State Assemblies (ie June-July 2015).
After the States have ratified the Bill, the Indian Constitution would be changed to allow
Centre and States similar powers to levy indirect taxes on goods and services.
Once the Constitution is amended, the GST Council (constituted under the amended
Constitution) would release the draft Model GST Bills – the Central GST Bill, the State GST
Bill and the Integrated GST Bill.
Associated Rules and Regulations are also likely to be released around the same time together
with the proposed schedule of goods and services that are to be taxed at a lower rate of GST.
If all goes well, we expect the Model GST Bills to be published for public consumption
around mid-September to early-October2015.
Also if not, the Finance Minister Arun Jaitley recently said the government is confident of the
new GST regime to roll out from the next fiscal and expressed confidence about an early
resolution of pending disputes on direct taxes front.
While expressing confidence that GST would be passed in the Rajya Sabha as well in the
next session, he said it's not necessary to implement it from April 1, 2016,itself as it is a
transactional tax and can come into effect from the first date of any other month as well.
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How will the sharing of revenue between states and centre take place under
GST?
GST is to be a destination based consumption tax. In other words when goods are sold in
Bangalore but are ultimately consumed in Chennai, Chennai would earn revenue and not
Bangalore. Therefore what is Bangalore’s gain presently would after commencement of GST
be Chennai’s gain. Now get this - there are no studies made by the GOI / States / Empowered
committee on how much every State earns by indirect tax and what is the proposed loss
which is to occur once GST is in place.
Without such empirical studies the Hon’ble Finance Minister has promised to make good if
any loss to the State Governments for a period of five years. The mechanics by which this is
to be achieved is not in the public domain. Be that as it may, it is important to ask ourselves
whether this i.e.
GST revenue would be a mode by which the Central Governments would control State
Governments. What I mean is - when some state requires compensation for its loss due to
GST being destination based consumption tax.
As an example lets assume a hypothetical situation where the Central government in all
probability would stipulate some condition precedent /s to be fulfilled for the release of
compensation. The compensation mechanism ought not to be dependent on vagaries there
bought to be a transparent mechanism for ensuring compensation to loss making states. It
should not become like grants given by central bodies which are used as a controlling
mechanism for Colleges receiving such grants. This is a serious issue on which not much
deliberation exists either by the intellectuals or by the politicians. This is as far as autonomy
is concerned. Time and tide will show how much autonomy would a loss making state enjoy
after GST.
The 122nd amendment bill to the Constitution postulates thus on the sharing of revenues:
Goods and services tax 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.
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SHARING OF GST REVENUE WITH STATES

The State Governments have not objected to the proposed formula of the Union Government
for sharing of revenue with States that would be earned as Goods and Service Tax (GST).
Under the proposed GST regime, both Centre and States will simultaneously levy GST across
the value chain. Tax will be levied on every supply of goods and services for consideration.
Centre would levy and collect Central Goods and Services Tax (CGST) and States would
levy and collect the State Goods and Service Tax (SGST) on all transactions within a State.
The Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all
inter-State supply of goods and services. The proceeds of IGST will be apportioned between
the States and the Centre, under the proposed Article 269A, as provided by Parliament by law
on the recommendations of the GST Council. Further, the CGST collected by the Central
Government as well as the Union’s share of IGST collected will be devolved to the States as
per the provisions of Article 270.
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How is the proposed GST going to change the way revenues are shared
between the centre and the stares?
Existing Revenue Sharing:
Taxes in India are levied by both central and state government on subject matters as decided
by constitution of India. Some minor taxes are also levied by local authorities. Taxation rates
are decided by governments independently. On various products both state and central
governments levy taxes, so there is a cascading of taxes.
GST:
A single rate GST will replace central excise, state VAT, entertainment tax, octroi, entry tax,
luxury tax and purchase tax on goods and services. Petroleum products will be part of GST
regime, however initially the levy on them will be at zero rate. Liquor will not be a part of
GST. A GST council is proposed, which will have two thirds of its members from states. All
decisions of council will require 75 percent of votes. For first five years states will be
compensated for their revenue losses, if any. Compensation will be 100 pc for three years,
75pc for fourth year, and 50pc for fifth year. Apart from that for first two years states where
goods are originating can levy 1pc to make up for any revenue loss. The tax rates are to be
decided by GST council.
What is the GST issue going on currently in India between centre and states?
India is as single sovereign entity where a plethora of taxes at varying rates levied by the
Centre & States have led to the fragmentation of the internal markets The introduction of
GST subsuming these multiple levies was mooted to prevent such fragmentation.
But the States do not seem willing to budge. WHY?
The concerns of states can be summarized as follows:
First, a well established source of revenue - the CST(Central Sales Tax), would be replaced
by a base which tax administration do not yet understand well, that is, services. If the uniform
tax rate is lower than existing rate, then it will hit their tax kitty. Here, while the Government
has agreed to compensate the States for any loss of revenue, there appears some trust deficit,
especially stemming from the CST compensation not been disbursed, although it was
budgeted for.
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Second, the States perceive some loss of autonomy, since the design of tax as well as the
rates of tax would afford very little scope for variation across States within the GST regime-
the potential narrow band for the standard rate would limit states' autonomy in fixing tax
rates.
How are the revenues split between state and central government? How is the
individual state's share decided?
A scheme for the distribution of revenues between the Union and the States is laid down in
articles 268 to 273. The proceeds of all the taxes levied by the State are fully retained by the
concerned States themselves while taxes in the Union list may be in part allowed to the
States.
Union List (exclusively to Union)
 Customs
 Corporation Tax
 taxes on capital value of assets
 surcharge on income tax, etc
State List (exclusively to State)
 Land revenue
 Stamp duty on items in State list
 taxes on passengers and goods carried on inland water ways
 mineral rights
 road vehicles
 advertisements
 consumption of electricity
 luxuries & amusements
 State toll tax, etc
There are some taxes & duties in the Union list, like on sale or purchase of goods & services
other than newspapers and taxes on consignment of goods shall all be levied and collected by
the Govt of India but shall be assigned to the States concerned and distributed among the
States as may be decided by Parliament by law.
 Finance Commission shall make recommendations to the President in regard to the

distribution of proceeds between The Union and the State and to suggest principles
which should govern the grants-in-aid to the States from the Consolidated Fund of
India. The President shall cause the recommendations and action taken thereon to be
laid before each House of Parliament. (articles 280-281)
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Grants-in-aid
 Article 273: Grants may be given by the Union to the states of Assam, Bihar, Orissa
West Bengal in lieu of export duty of jute and jute products.
 Article 275: Grants may be given to any State in need as may be deemed essential.
Individual State's Share
1. Firstly, the share of states in the net tax revenues of the Centre is evaluated. For this
purpose it is necessary to assess the vertical gap between the Union and the states.
The vertical gap is the difference between the normatively assessed expenditure share
and revenue capacities of the Union and the states.
2. Secondly, the horizontal sharing of vertical gap between States. Finance Commission
has used equity and efficiency as the two guiding principles while recommending
inter se shares of states in tax devolution. Criteria for Horizontal sharing are
Population, Area, Fiscal Capacity Distance (= State's average tax to comparable
GSDP ratio of all states) and Fiscal discipline (= State's own revenue to State's
revenue expenditure).
3. Recommendations on tax devolution based on the considerations of need, fiscal

deficiency and adequate incentivisation for better performance, the share for states are
given.
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IMPACT OF GST ON INDIAN ECONOMY

India has relied too much on indirect taxation because of political compulsions, an agrarian
economy, low income levels and lack of infrastructure to track personal income.
In order to simplify and rationalize indirect tax structures, government of India attempted
various tax policy reforms at different points of time. While VAT was a welcome change
during 2005, over the years, people have identified shortcomings in the structure while
levying VAT both at Central level and State level. Also, CENVAT has the limitation of non-
inclusion of several taxes such as VAT, ACD, surcharge etc. In the present state-level VAT
scheme, there is a cascading effect on account of CENVAT element. Lastly, there is lack of
integration of VAT on goods with tax on services at the state level and hence the cascading
effect of service tax.
To address such issues cited above, a comprehensive tax reform (GST is a part) having an
extensive base to kick-start the applicability of an efficient and harmonized consumption tax
system has been proposed.
While the lower house has cleared the passage of the bill, it’s still pending in the upper house.
GST has been commonly accepted around the world and more than 140 countries have
acknowledged the same which ranges between 15%- 20% in most of the countries. GST is a
value added tax which will be levied on both goods and services (except for a list of
exempted goods and services) at both the centre and state level (Central GST and State GST
respectively).
This is going to be one single tax which will be levied on the product or service which is
being sold. In effect, multiple taxes like CENVAT, central sales tax, state sales tax, octroi etc.
will be replaced by GST. This comprehensive tax will cover all stages during production to
sale and will be levied only on the value added at each stage of the process.
What will GST achieve as a policy reform measure?
Economic union of India: The debate about India as one republic union versus a federation
of states will be put to rest. Goods can easily move across the country with diffused state
boundaries and that will encourage businesses to focus on pan-India operations.
Simpler tax structure: By merging all levies on goods and services into one, GST acquires a
very simple and transparent character with less paperwork and reduction in accounting
complexities. A simple taxation regime can make the manufacturing sector more competitive
and save both money and time.
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Uniform tax regime: With only one or two tax rates across the supply chain as against
multiple tax structure at present, state specific advantages/disadvantages are gone. This
provides a fair play ground for all stakeholders and focus can be brought in to efficiency
rather than vantage points.
Greater tax revenues: A simpler tax structure can bring about greater compliance, thus
increasing the number of tax payers and in turn tax revenues for the government. By
removing cascading effect, layers of taxes and simplifying structures, the GST would
encourage compliance, which is also expected to widen the tax base.
Competitive pricing: A cursory look at the retail price of any product manufactured in India
reveals that the total tax component is roughly 25-30% of the cost of the product. GST will
effectively mean that the tax paid by the final consumer will come down in most cases and
will help in boosting consumption, which is again beneficial to companies.
Push to exports: With fall in production cost in domestic market, the competitiveness of
Indian goods in international market will increase. This bodes well for exporters, who
compete with global manufacturers which operate on very different cost structures.
Keeping all these potential benefits in account, a study by the National Council of Applied
Economic Research says that GST will boost India’s GDP growth by anywhere around 0.9%
to 1.7% and virtually every media report cites expert opinion to potentially add up to 2% to
India’s GDP.
However, there are sticky issues like taxation on inter-state services, stock transfers,
integration of few central & state taxes etc. which need attention before India makes a
decisive move.
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TRADE STATISTICS
Six concerning factors to monitor during India’s GST transition

The GST rate:
The revenue neutral rate (RNR), the rate that would allow the government to maintain current
tax revenues, is said to be 27%. The Ministry of Finance, although it concedes that 27% is too
high, has not indicated what the actual rate might be. We expect that the rate will be between
20 and 25%, a compromise that would limit revenue loss while maintaining a realistic tax
rate. Even so, India’s GST rate would still be higher than most countries’ indirect tax rates.
Exemptions:
Another concern is the list of products that will be exempted from the GST. Fuel and alcohol
will be excluded, and tobacco may also be exempted. This is because these product categories
are a subject of contention with states, which are more dependent on indirect taxes than the
central government (see graph, below.) There is no clarity regarding other products that may
be included in the list of exemptions. It is important for multinationals that the government
keep the list of exempted products to a minimum, as a larger product base will result in a
lower tax rate.
GST-Indirect Taxes(Sources: Frontier Strategy Group analysis; Reserve Bank of India)
Technological infrastructure:
Clients are also skeptical regarding the technological infrastructure needed to ensure proper
execution of GST. IT and accounting systems will undergo a complete transformation as
India shifts toward electronic filing for taxes and credits. Given that a large share of the
informal sector will now fall under the purview of GST, there is added pressure on the
government to reveal details on filing procedures and IT requirements.
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Treatment of subsidies:
Businesses are also concerned about the treatment of current tax subsidies. Companies must
be aware of any tax incentives that may be offered under the new regime, which could have
significant bottom line impact.
Place of supply rules:
Companies also need clear information on the place of supply rules, which determine
specifics regarding what events are taxed, where the tax is paid, the tax value, and who is
responsible for payment. It will be on the basis of these rules that companies will be able to
begin updating internal systems and software.
The additional 1 % tax:
The proposed 1% temporary interstate tax that the central government will impose to
compensate states is also a concern for multinationals. This additional tax will negate the
benefits of GST, distorting the common market and maintaining the status quo, under which
international trade is simpler than intra-national trade.
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What will be the impact of GST on inflation?

India’s goods and services tax (GST) dream has finally come true. However, the bone of
contention—the GST rate—remains. A revenue neutral rate (RNR) of 15-15.5%, as
suggested by a committee headed by chief economic adviser Arvind Subramanian is not
expected to impact inflation significantly.
Many economists anticipate minimal impact on consumer price inflation if the standard GST
rate is at 18%. A Nomura report estimates it to impact headline CPI (Consumer Price Index)
inflation by 20-70 basis points (bps) and core CPI by 10-40 bps in the first year of
implementation. That would be on account of higher prices of electricity, clothing and
footwear, health/medicine, and education after accounting for input taxes, it says.
If the rate is around 22%, then ministry officials project inflation to accelerate 30-70 bps.While the
debate on the GST rate is still on, the potential inflationary impact on various product categories
under two scenarios—GST rate at 18% and 22%—can be understood in the chart.
The panel looked at three scenarios. The first one with a single rate GST of 14% with no
exceptions; the second with a low rate of 12%, a standard rate of 18%, and a high rate of
35%; and the third is Scenario 2 with just the standard rate changed to 22%. The first option
is more or less ruled out. The chart shows the current tax rates on major items of consumption
and the tax rates under Scenarios 2 and 3.
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HOW GST CAN BOOST REVENUE

Revenue uncertainties have dominated discussions about the goods and services tax.This has
been especially pronounced among the states which see the movement towards the GST as a
leap in the dark.
What then are the reasons to assert that the implementation of GST will lead to revenue
buoyancy?
One can look for answers in the earlier experience of the states which implemented the value-
added tax in 2004-05 when there was a similar air of “revenue pessimism”.
The table here indicates the trends in state VAT collections for the period 2001-02 to 2008-09
(covering both the pre-VAT and post-VAT periods).
One can see from the trends that 2004-05 (the year the state VAT was implemented) was an
inflexion point when revenues went up sharply, indicating the impact of implementation of
the state VAT that replaced the retail sales tax.
Even after the implementation of the VAT the revenue momentum was maintained. The
revenue buoyancy could have been even more but for some states such as Tamil Nadu and
Gujarat that retained generous sales tax deferral schemes.
The debilitating effects of a conscious base erosion cannot be laid at the doorstep of the new
tax.
What is important is that this revenue buoyancy was achieved despite less than ideal design
features of the state VAT: high thresholds, continuance of exemptions and a non-integrated
IT system.
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GST
It would, therefore, be fair to expect that the GST, with a far better design and a fully
integrated IT system for both the Centre and the states, will deliver far greater revenue
buoyancy.
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Direct and Indirect Taxes in India
Over the last decade, the share of Direct taxes has surpassed the share of Indirect taxes in
India. The very basic inference is that the rate of growth of employment creation and tax
enforcement (bringing more tax evaders into the tax bracket) has outstripped the rate of
growth of consumption.
While governments try more and more to move toward an indirect tax system, I doubt this
trend would change in India in the near future. The introduction of GST only rejigs the
Indirect tax system, does not boost it. And the continued impetus on bringing a larger part of
the productive populace into the tax bracket would mean the growth of direct taxes is assured
for sometime to come. However it will be a great day when taxation is defined as a function
of consumption rather than productivity.
Tax what I consume, not what I produce That way the austere benefit and the spendthrift
with 5 maxed out credit cards is held accountable. The spending habits of society will then
fall in line with their incomes and savings.
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Goods and Service Tax (GST) Trends

The spread of Value Added Tax (VAT) or Goods and Services Tax (GST) system of Indirect
taxes across the globe is showing an increasing trend with more than 160 countries, including
33 of the 34 member countries of Organization for Economic Co-operation and Development
(OECD), employing VAT as the preferred form of consumption tax (refer Graph 1 below).
Malaysia is the recent country to implement GST effective 1 April 2015 and current Indian
government has announced a timeline to introduce GST in India by 1 April 2016.
Countries introduced VAT/GST for different reasons depending on their existing tax system
and in case of European Union (EU) to replace turnover taxes on account of the ease of
handling cross border-transactions, facilitating development of common market and reducing
trade and economic distortions. Another reason of countries adopting VAT/GST was to
increase revenue from general consumption to cut down rate of income taxes.
Revenue neutral approach was another reason (Norway, New Zealand etc.). Other counties
moved to VAT/GST to consolidate and modernize existing tax structure comprising of
multiple sales tax at different rates.
This increasing trend towards VAT/GST can be attributed to key factors such as
1. VAT/GST preserves neutrality by taxing the value added by each factor equally;
2. Consumption tax is large and more stable source of revenue; and
3. Potentially self-enforcing in nature
Increase in the GST Geographies
A roundup of VAT/GST structure of some of the major economies and taking stock as to rate
of tax, threshold limits,
exemptions, zero-rated transactions etc. would provide a guidance and allow legislators of
jurisdictions, planning to
introduce new tax regime or replace existing structure with revised structure, to learn from
other consumption tax
systems and adopt the best practice in laying the groundwork
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GST Rates And Threshold Limit – 2015
Observations From VAT /GST In Other Jurisdictions
Review of the VAT/GST legislations and provisions prevailing in the above mentioned
jurisdictions, a similar trend has been observed in terms of the underlying principles.
VAT/GST being destination based and therefore applicable on consumption that takes place
in the respective country/region and therefore exempts exports and taxes imports. Further,
input tax credit can be claimed for the cost of procuring and producing in case of zero-rated
supplies and cannot be claimed in case of exempted supplies.
VAT/GST reform has proved to be a robust source of tax revenue in all jurisdictions.
Notwithstanding that VAT/GST has emerged successful and supreme over the other forms of
indirect taxation, these jurisdictions are continuously working towards reforming structural
issues such as in December 2010 European Commission published a Green Paper on the
future of VAT and argued that there were “numerous shortcomings in the current VAT
system which create obstacles to the Internal Market, cause burdens for businesses and
prevent Member States from benefitting from the true potential of this tax” and also pointed
out the system is susceptible to fraud. Businesses are reported to find VAT model in
European Union very complicated on account of huge diversity in application of exemptions
and reduced rates among member states causing distortion in competitiveness and additional
compliance costs (reported to be around 11%) borne by businesses that conduct cross-border
trade when compared to those businesses that only trade domestically. In Canada, businesses
are reported to be facing challenges under GST/HST on account of interpretation issues and
multiple provinces having variety of tax rates. British Columbia, though harmonized its PST
with the GST in July 2010 re-implemented PST in 2013. Like in all other jurisdictions, even
in New Zealand and Australia the compliance cost under VAT/GST has been reported to be
relatively more burdensome for small size business entities.
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KEY CONCEPTS UNDER PROPOSED GST STRUCTURE
This chapter deals with key concepts that emerge from the GST structure proposed for India
based on the objectives behind introduction of GST in India, principles emerging from the
amendments sought in the GST Bill, various studies commissioned by Empowered
Committee, the treatment accorded to similar concepts in other jurisdictions and OECD’s
guidelines on International VAT/GST.
Taxable Event-Supply of Goods and Services
Under prevailing indirect tax structure there are multiple taxable events on account of
multiple levies at Central and State level. That is, taxable event occurs on ‘manufacturing of
goods’ in case of Central Excise laws, ‘sale of goods’ in case of Sate VAT laws,
‘supply/provision of services’ in case of Service tax laws. In addition, taxable event in case of
other state levies such as Entry Tax/Octroi etc. are on ‘entry’ to goods into a particular
jurisdiction. Therefore, the taxable event under the existing structure depends on the levy and
are defined independently without anyharmonious reference to other indirect tax legislations.
GST is envisaged to be levied on all supplies of goods and services on same taxable event by
both Centre and State governments. The term ‘supply’ is expected to be defined in the CGST,
SGST and IGST laws being prepared in this regard. It is critical that the terms ‘supply’ is
defined in the Central and State GST legislations in an identical manner to avoid the
challenge of multiple taxable events at Central and State level in GST.
GST Rate
The Kelkar Committee recommended multiple tax structure restricting the structure to three
ad valorem rates, in addition to the zero rate, such as
1.Floor Rate for goods of basic importance (with Central rate @ 6% and States @ 4%)
2.Standard Rate for supply of most goods and services (with Central rate @ 12% and States
@ 8%)
3.Higher Rate for luxury or demerit goods (with Central rate @ 20% and States @ 14%)
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Products such as cement, mineral products etc. subject to specific tax rates under current
regime of indirect taxation was recommended to be converted to ad valorem except
petroleum and tobacco products. Based on recommendation of the Kelkar Committee, and
GST structure proposed by the Empowered Committee following principles emerge:
a) GST structure to comprise of a lower rate for supply of goods and services of basic
importance (amounting to total CGST and SGCT levy of 10% as per Kelkar
Committee report), a standard rate for supply of goods and services in general
(amounting to total CGST and SGCT levy of 20% as per Kelkar Committee report), a
special rate for precious metals and a list of exempted items. During discussions with
the Select Committee, Ministry of Finance noted that certain demerit goods such as
tobacco or luxury goods may, if the GST Council so decides, be subject to higher rate
of GST. Based on a study carried out by National Institute of Public Finance (NIPF)
taking into consideration revenue collection figures of 2011-2012, a Working
Committee submitted a report to Empowered Committee, before introduction of GST
Bill, recommending a GST rate of almost 27% (CGST @ 12.77% and SGST @
13.91%) under the GST regime. However, the Union Finance Minister, during his
discussion on the GST Bill before Lower House, indicated that GST rate (including
Central GST and State GST) would be much lower than recommended rate of 27%.
At present, Empowered Committee is working out GST rate in consultation with
Chief Economic Advisor and revised study of NIPF based on revenue collection
figures for 2013-14. It is essential that the rate or the rate structure arrived at should
be one that will be acceptable, does not lead to spiraling costs and encourages
compliance.
b) As per the report of Empowered Committee, for taxation of services, single rate has
been proposed for both CGST and SGST. As per recent reports, government is considering
tax rate structure to include same standard rate for goods and services, merit rate depending
on nature of goods and service, special rates for only goods viz. metals and minerals and
lower rate for essential goods and services. However, stakeholders have expressed their view
in the deposition before Select Committee that GST rate may be kept in the range of 16-18%
for both goods and services. Not discriminating among goods and services in respect of
applicability of rates would also be essential to avoid disputes as to whether a particular
supply is of goods or services.
c) Exports and supply outside tax jurisdiction would be zero-rated including supply to Special
Economic Zones (SEZs). However, such benefits will only be allowed to the processing
zones of the SEZs.
d) Imports would be subject to GST based on the principle of destination tax principle with
necessary Constitutional Amendments. Both CGST and SGST will be levied on import of
goods and services into the country. Full and complete set-off should be made available of
the GST paid on import on goods and services.
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GST RATES IN OECD COUNTRIES
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conclusion
Implementation of GST from 1990 Tax Act and onward was not up to the mark and the
required results were not obtained. Still there is lot of room for improvement in implementing
the GST which can easily be done rather than implementing the VAT; which would create
new hurdles and unforeseen challenges in terms of tax collection. If we introduce VAT on the
pressure of IMF and ignoring our national interest then it would be a debacle for economy in
the long run. New methods of Tax evasion would prevail and the entire burden will be
forwarded to end user. Implementing the VAT would accelerate the inflation rate on rapid
pace.
All the shortcomings of the present taxation regime lead us to develop a new system of
Taxation for the ease of doing business and for the seamless flow of credit across the whole
supply chain. If we have been following some system that is now obsolete for years, it does
not means that we need to continue with it in the fore coming years as well
There is a criticism today that the proposed model of GST is fractured due to the
compromises. But the compromised model in any case would be better than no model at all.
Also the bitter truth is that a compromise often becomes necessary in Federal democracies.
The dual model will be like a joint venture between centre and the 29+ states. In order to
make this joint venture successful, one has to take all the states on the board with the
compromise this entails. Some states might lose revenue after introduction of GST but you
cannot hold entire country hostage because of one or two such states. One should keep in
mind that an ideally perfect GST has never been practised in any federal democracy.
Every expert was once a beginner. No full proof can be developed in a single stroke. Over the
years things may come out to be very positive and it’s quite possible that the estimate of 1-
2% rise in GDP might be too low.
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BIBLIOGRAPHY
1. http://goodsandservicetax.com/gst/showthread.com php?69-CHAPTER-X-Goods-and-
Services-Tax-Theway-forward
2. http://en.wikipedia.org/wiki/Goods_and_Service s_Tax_(India) accessed on 15 Jan 2014.

Girish Garg, IJSRM volume 2 issue 2feb 2014 [www.ijsrm.in] Page 549
3. http://www.taxmanagementindia.com/visitor/de tail_rss_feed.asp?ID=1226
4. http://www.gstindia.com/
5. http://www.thehindubusinessline.com/todayspaper/tp-others/tp-taxation/article2286103.ece
6.http://finmin.nic.in/workingpaper/gst%20refor
ms%20and%20intergovernmental%20considerati ons%20in%20india.pdf
7. http://economictimes.indiatimes.com/topic/GST
8. http://www.moneycontrol.com/newstopic/gst/
9. http://www.businessstandard.com/article/economy-policy/gstreform-may-be-implemented-
after-elections-ubs- 114011200205_1.html
10. http://www.ficci.com/spdocument/20238/Towar ds-the-GST-Approach-Paper-Apri-

2013.pdf
11. http://www.hotelassociationofindia.com/pdf/gst1st%20discussion%20paper.pdf
12. http://www.cbec.gov.in/resources//htdocs-cbec/gst/cea-rpt-rnr.pdf
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https://www2.deloitte.com/content/dam/Deloitte/in/Documents/tax/in-tax-gst-in-india-taking-
stock-noexp.pdf
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Report of GST

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Economic Analysis:

“APPLICATION OF GST ACT IN SHARING OF REVENUE

SERIAL CONTENTS PAGE

Country Rate of GST

New Zealand 15%

Need for GST in India

A. Justification at the Central Level

B. Justification at the State Level

 State Goods and Services Tax (SGST)

 Central Goods and Services Tax (CGST)

 Integrated Goods and Services Tax (IGST)

(i) Central GST

(ii) State GST

SUBSUMING OF EXISTING TAXES

i. Central Excise Duty

ii. Additional Excise Duty

iv. Service Tax

v. Additional Customs Duty, commonly known as Countervailing Duty (CVD)

vi. Special Additional Duty of Customs-4% (SAD)

State Taxes to be subsumed:

iii. Entertainment Tax

iv. Octroi and Entry Tax (all forms)

vi. Luxury Tax

vii. Taxes on lottery, betting and gambling

APPLICABILITY OF CGST AND SGST

Impact of Goods and Service Tax

Housing and Construction Industry in India

SALIENT FEATURES OF THE GST MODEL

With respect to Tax Threshold

With respect to nature of taxes

With respect to number of enactments of statutes

With respect to Rates of taxation

With respect to tax management and Infrastructure

BENEFITS OF GST ACT

Increase in Government Revenues:

Less consistence and procedural expense:

Move towards a Unified GST:

 The tax structure will be made lean and simple.

 A study commissioned by the Curtin University of Technology, Perth in 2000 argued

VARIOUS BUSINESS SECTORS THAT ARISE AFTER GST

 Information Technology enabled services:

 Impact on Small Enterprises:

CURRENT STATUS OF INDIA’S PROPOSED GST PROGRAM :

SHARING OF GST REVENUE WITH STATES

Existing Revenue Sharing:

But the States do not seem willing to budge. WHY?

The concerns of states can be summarized as follows:

Union List (exclusively to Union)

State List (exclusively to State)

 Finance Commission shall make recommendations to the President in regard to the

Individual State's Share

3. Recommendations on tax devolution based on the considerations of need, fiscal

IMPACT OF GST ON INDIAN ECONOMY

What will GST achieve as a policy reform measure?

Six concerning factors to monitor during India’s GST transition

GST-Indirect Taxes(Sources: Frontier Strategy Group analysis; Reserve Bank of India)

Place of supply rules:

The additional 1 % tax:

What will be the impact of GST on inflation?

HOW GST CAN BOOST REVENUE

Direct and Indirect Taxes in India

Goods and Service Tax (GST) Trends

Increase in the GST Geographies