Goods & Service Tax

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Table of Contents
1.0 Pre GST era ......................................................................................................................................... 2
1.1 Indirect Tax ..................................................................................................................................... 2
1.2 Value Added Tax (VAT) .................................................................................................................... 2
1.3 Cascading Effect of Tax .................................................................................................................... 2
1.4 Input Tax Credit (ITC) ....................................................................................................................... 3
1.5 Scope of Input Tax Credit under VAT................................................................................................ 3
1.6 Major Defects in the structure of Indirect Taxes prior to GST ........................................................... 3
2.0 Goods and Services Tax (GST) .............................................................................................................. 4
2.1 Journey of GST in India from 2000 to 2017 ...................................................................................... 4
2.2 What is GST? ................................................................................................................................... 4
2.3 Components of GST ......................................................................................................................... 5
2.4 Constitutional Provisions on GST...................................................................................................... 5
2.5 Salient Features of GST .................................................................................................................... 6
2.6 Taxes subsumed under GST ............................................................................................................. 6
2.7 Taxes not subsumed under GST ....................................................................................................... 6
2.8 Need for GST ................................................................................................................................... 6
2.9 How GST is Better than Previous Indirect Taxes ............................................................................... 7
2.10 GST Compensation Cess ................................................................................................................ 7
2.11 GST Council ................................................................................................................................... 8
2.12 Goods and Services Tax Network (GSTN)........................................................................................ 9
2.13 Reverse Charge Mechanism (RCM) ................................................................................................ 9
2.14 E-way Bill ....................................................................................................................................... 9
2.15 GST Composition Scheme ............................................................................................................ 10
2.16 QRMP Scheme ............................................................................................................................. 10
2.17 National Anti-profiteering Authority (NAA) .................................................................................. 10

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1.0 Pre GST era

1.1 Indirect Tax
• An indirect tax is a tax collected by one entity in the supply chain, such as a manufacturer
or retailer, and paid to the government; however, the tax is passed onto the consumer
by the manufacturer or retailer as part of the purchase price of a good or service.

• Thus, in case of indirect tax, the incidence (liability) of the tax is on the seller but the
burden of the tax is on the final consumer.

• Examples: Value Added Tax (VAT), Central Sales Tax, Excise Tax, Octroi, Services Tax,
etc.

1.2 Value Added Tax (VAT)

• Introduced in 2005 in India
• VAT is a multi-point system of taxation on sale of GOODS wherein a mechanism is
provided to grant credit for the tax paid on inputs. In other words, input tax paid on the
purchase of goods is rebated against output tax collected on the sales of the goods.

1.3 Cascading Effect of Tax

• Cascading Effect of Tax means charging tax on tax that magnifies the effect of
taxation.
• At the time of levying tax on goods, the total value which is inclusive of all taxes paid up
to that point is considered. As tax is charged on the entire sales value, the burden of tax
keeps on increasing at each point of sales. This is known as cascading effect of Tax.

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1.4 Input Tax Credit (ITC)

• If any registered dealer purchases goods within a particular state and pays VAT and
subsequently sells the goods in the same state, such dealer are allowed to take credit
for the input tax paid. This is known as Input Tax Credit (ITC).

• In other words, as tax is imposed at each stage on the entire sales value, the tax paid at
earlier stage is allowed to set off. This is known as ITC.

• Thus, ITC helps to eliminate the cascading effect of taxes in VAT

1.5 Scope of Input Tax Credit under VAT

• In the pre-GST era, ITC was allowed in case of VAT, Excise and Services Tax only
• ITC is allowed only to a registered dealer
• ITC will not be allowed if Central Sales Tax (CST) are paid on purchases made from
outside state (inter-state supplies)
• ITC will also not be available if the registered person purchases goods that is used to
manufacture exempted goods

1.6 Major Defects in the structure of Indirect Taxes prior to GST

Multiplicity of Indirect Taxes
• Prior to GST, the Centre imposed excise duty on the production of goods, customs duty on
imports, central sales tax on inter-state supply of goods, services tax on the sale of
services, etc. Similarly, the State Governments imposed VAT, Entertainment Tax,
Octroi, Luxury tax, etc.
• Thus, there were multiple taxes that were operating in India and all these taxes had
their own requirements. This was one of the major defects of the previous indirect tax rate
regime.

Non - Availability of cross utilization of Taxes

• Prior to GST, Central Sales Tax paid on the inter-state supply of goods was not allowed to
be taken as an Input tax credit. This led to cascading effect of taxes.

Obstructed Movement of Goods

• Under the previous regime, a lot of hindrances was created in the movement of goods from
one place to another with the imposition of entry tax, octroi, check-post tax, etc. This
restricted the free flow of trade.

Multiple Repetitive Compliances

• Due to the multiplicity of taxes, each taxes required separate registration requirement, filing
of returns, appeals, etc. This resulted in the expending of both time and money. Thus, one
of the major defects in the previous regime was higher compliance cost for the tax payers.

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2.0 Goods and Services Tax (GST)

2.1 Journey of GST in India from 2000 to 2017

Timeline
2000 A Committee was set up to draft the GST law
A Kelkar Task Force concludes GST to improve current tax structure
2004 It was the 1st to float the idea of an integrated national level goods
and services tax
In the Budget Speech for FY2007-08, the then finance minister (P.
2006
Chidambaram) announced introduction of GST from April 1, 2010
2011 Constitution Amendment Bill to enable the GST law introduced
2013 The Standing Committee tables its report on GST
GST bill (122nd CA Bill) introduced in parliament by the finance
2014
minister
2015 GST bill passed in Lok Sabha but not passed in Rajya Sabha
Amendment Model GST passed in both houses - 101st Amendment
2016
Act – that paved the way for GST in India
4 supplementary GST bills passed 1st in Lok Sabha and then in Rajya
2017
Sabha and GST was launched on 1st July 2017

2.2 What is GST?

• GST is said to be one of the most important Indirect Tax Reforms in India’s history.

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• Goods and Service Tax (GST) is an indirect tax levied on the supply of goods and
services in India right from the manufacturer to the consumer.
• It is also called consumption tax.
• The 101st Constitution Amendment Act of September 2016 was made in this regard.
• GST is a single unified tax created by amalgamating a large number of Central and State
taxes presently applicable in India.
• GST is levied at every step in the production process but refunded to all parties in the
various stages of production other than the final consumer.
• GST means any tax on supply of goods, or services, or both, except taxes on supply of the
Petroleum products such as petrol, diesel, aviation turbine fuel and alcoholic liquor for human
consumption have been kept out of GST.

2.3 Components of GST

• In India, both the Centre and the States have been assigned the powers to levy and collect
taxes.
• Both the levels of Government have distinct responsibilities to perform for which they need
to raise resources.

Components of GST
Central GST or CGST Charged by the central government
State GST or SGST Charged by the state government
Integrated GST or Charged by central government on the inter-state
IGST supply of various goods and services
Union Territory GST or GST levied by Union Territories without legislature
UTGST

2.4 Constitutional Provisions on GST

Article 246A
• This article provides power to CG / SG to make laws in order to impose GST
• Inter-state supply of G&S: Exclusive power of CG

Article 269A
• Power to levy and collection of GST on inter-state supply (IGST) has been entrusted
on the Centre
• IGST will be imposed on Imports by the Centre

Article 279A
• Formation of GST Council by the President

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2.5 Salient Features of GST

• Applicable to the whole of India
• Imposed concurrently by the Centre and States / UTs
• Destination Based Tax
• IGST on Inter-state supplies imposed by the Centre
• CGST and SGST / UTGST will be imposed on Intra-state supplies

2.6 Taxes subsumed under GST

Central Levies Subsumed State Levies Subsumed

✓ State surcharges and cesses
✓ Central Excise Duty
✓ Entertainment Tax
✓ Additional Excise Duty
✓ Tax on lottery, betting and gambling
✓ Service Tax
✓ Entry Tax (all forms) and Purchase Tax
✓ Countervailing Duties (CVD)
✓ VAT / Sales Tax
✓ Central Sales Tax
✓ Luxury Tax
✓ Central surcharges and cesses
✓ Taxes on Advertisements

2.7 Taxes not subsumed under GST

Central Taxes not subsumed State Taxes not subsumed

✓ Basic Customs Duty
✓ State Excise Duty
✓ R&D Cess
✓ Stamp Duty
✓ Export Duty
✓ Professional Tax
✓ Anti-dumping Duty
✓ Motor Vehicle Tax
✓ Safeguard Duty

2.8 Need for GST

GST is needed for the following purposes:

• To regulate and organize certain industries

• To improve efficiency of logistics
• To improve the economic growth
• To bring transparency in the taxation system
• To reduce the complexities of the tax system
• To integrate the whole nation
• To get rid of tax cascading and double taxation

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2.9 How GST is Better than Previous Indirect Taxes

For the Government:

• In the earlier Indirect Tax regime, there were many indirect taxes (like VAT, CST, Service tax,
CAD, SAD, and Excise) levied by both state and centre but GST brings all the indirect taxes
on one platform.
• GST is a destination-based tax i.e. tax is imposed at the point of consumption but previous
tax structure was origin based.
• GST also helps in better tax collections as it streamlines the tax administration, avoid
harassment of the business and result in higher revenue collection, both for the Centre and
the States.
• This law has replaced many indirect tax laws that previously existed in India.
• It integrates the country through a uniform tax rate thus help in boosting the Indian economy.
• GST will also make Indian products competitive in the domestic and international markets.

For Taxpayers:

• It is more transparent as it is designed in such way that all tax payer services such as
registrations, returns, payments, etc. would be available to the taxpayers online, which would
make compliance easy and transparent.
• It reduces harassment and corruption.
• GST avoids cascading effect (tax on tax) as the tax is calculated only on the value-add at
each stage of transfer of ownership.
• This has been beneficial for start-ups especially, as they do not have to run from pillar to post
to get different registrations such as VAT, excise, and service tax.
• It leads in reduction of manufacturing costs due to lower burden of taxes on the manufacturing
sector. Hence prices of consumer goods will be likely to come down followed by lower burden
on the common man.

2.10 GST Compensation Cess

• Under the GST regime, there is a provision for levy of GST Compensation Cess on
certain eligible sin and luxury goods

• This cess is levied to compensate states for revenue losses on account of switching to
GST for the 1st 5 years of GST implementation.

• According to the GST Act, States and UTs with Assemblies are guaranteed
compensation if the GST revenue growth is less than 14%. This amount is paid bi-
monthly.

• However, in the FY 2020-21, Covid happened. As a result, there was lower GST collection
by the states. In order to meet the shortfall, the Centre borrowed money from RBI and gave
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loans to the States, which is to be repaid by extending GST Compensation Cess

beyond 5 years.

• Hence, GST compensation cess has been extended up to the end of 2026 to meet the
shortfall.

2.11 GST Council

• GST Council is the joint forum of the Centre and the States

• It is a constitutional body

• It is the governing body of GST, which contains the following members:

▪ Union Finance Minister (as chairperson)
▪ Union Minister of States in charge of revenue or finance (as member)
▪ the ministers of states in charge of finance or taxation or other ministers as
nominated by each state’s government (as member)

• Quorum: One-half of the total number of members of the GST Council

• GST Council is an apex member committee to modify, reconcile or to procure any law or
regulation based on the context of goods and services tax in India.

• The GST council is responsible for any revision or enactment of rule or any rate changes
of the goods and services in India.

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2.12 Goods and Services Tax Network (GSTN)

• GSTN was initially registered as a non-government, not-for-profit, private limited

company under Section 25 of the Companies Act 1956, where 49% of the ownership was
with the Central and the State Government and remaining 51% with the private players
(Banks and FIs)

• However, in the 49th GSTN Board Meeting (30th June, 2022), the conversion of GSTN into
a Government Company was approved. As a result, 100% of the shareholding of GSTN is
now with the Government:
▪ 50% with Union Government
▪ 50% jointly with State Governments & UTs

• The GSTN software is developed by Infosys Technologies and the IT network that
provides the computing resources is maintained by the National Informatics Centre (NIC)

• Thus, GSTN provides IT infrastructure and services to the Central and State
Governments, taxpayers and other stakeholders for implementation of the Goods and
Services Tax (GST) in India.

• With GSTN, the tax authorities can track every financial transaction while the taxpayers
can connect for their tax returns.

2.13 Reverse Charge Mechanism (RCM)

• Normally, a seller collects the GST from the buyer and then deposits the GST amount
with the government.
• However, in case of Reverse Charge, the buyer directly pays the GST to the
Government.
• It is normally applicable when the seller of Goods and Services is not registered under
GST.

2.14 E-way Bill

• It is the Electronic Way bill for movement of goods in India
• Any GST registered person cannot transport goods in a vehicle whose value exceeds
Rs. 50,000 without an e-way bill.
• E-way Bill was introduced in order to ensure that goods being transported comply with the
GST Law. As such, it is an effective tool to track movement of goods and check tax
evasion.
• E-Way Bills are mandatory for movement of Goods both within a state (Intra-State) as well
as Inter-state.
• E-way bill has to be generated either by the send or receiver of the Goods.

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2.15 GST Composition Scheme

• Purpose: to bring simplicity and reduce compliance cost for small taxpayers

• Eligibility:
o Manufacturer of Goods, Dealers and Restaurants (not serving alcohol)
o Turnover: Less than Rs 1.5 crores (in few states - Rs 75 Lakhs)

• Concessional Tax Rate: 1-6% of total turnover every quarter

• Not compulsory – eligible person can opt for this scheme

• ITC would not be available if an eligible taxpayer opts for GST Composition Scheme

2.16 QRMP Scheme

• Govt launched Quarterly Return filing & Monthly Payment of Taxes (QRMP) scheme for
the benefit of small taxpayers under GST system

• Current Scenario: Monthly filing of GST Return is required

• Eligibility: Taxpayers (Annual turnover up to Rs 5 crores)

• Purpose: Reduce compliance burden on small taxpayers

2.17 National Anti-profiteering Authority (NAA)

• NAA was constituted by the Union Cabinet to deal with profiteering

• NAA ensures that any reduction in rate of tax or the benefit of input tax credit should
be passed on to the consumer by way of commensurate reduction in prices

• If the customer not found, then money can be deposited under Consumer Welfare
Fund

• NAA was initially constituted for 2 years – was extended until Nov 30, 2022

• From December 1, 2022 onwards – profiteering issued related to GST will be

addressed by Competition Commission of India (CCI)

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