PROS AND CONS OF GST IN INDIA

ABSTRACT
Goods and Service Tax (GST) is an indirect tax levied in India on the supply of goods and
services. GST is levied at every step in the production process, but is refunded to all parties in
the chain of production other than the final consumer. The tax came into effect from July 1, 2017
through the implementation of one Hundred and First Amendment of Constitution of India by the
Indian Government. The tax replaced existing multiple cascading taxes levied by
the central and state governments

Keywords:
Tax, Indirect tax, Goods and Service Tax (GST), India.

1. PRELUDE
Goods and Service Tax (GST) is an indirect tax levied in India on the supply of goods and
services. GST is levied at every step in the production process, but is refunded to all parties in
the chain of production other than the final consumer. In India complicated indirect tax system
is followed with imbrications of taxes imposed by union and states separately. GST will unify all
the indirect taxes under an umbrella and will create a smooth national market. Experts say that
GST will help the economy to grow in more efficient manner by improving the tax collection as
it will disrupt all the tax barriers between states and integrate country via single tax rate. France
first introduced GST in 1954 and now it is followed by 140 countries. Most of the countries
followed unified GST while some countries like Brazil, Canada follow a dual GST system where
tax is imposed by central and state both. In India also dual system of GST is proposed including
CGST and SGST.

2 .LITERATURE REVIEW

Agogo Mawuli (May 2014)1 studied, “Goods and Service Tax-An Appraisal” and found that
GST is not good for low-income countries and does not provide broad based growth to poor
countries. If still these countries want to implement GST then the rate of GST should be less than
10% for growth.

Dr. R. Vasanthagopal (2011)2studied,“GST in India: A Big Leap in the Indirect Taxation

System” and concluded that switching to seamless GST from current complicated indirect tax
system in India will be a positive step in booming Indian economy. Success of GST will lead to
its acceptance by more than 130 countries in world and a new preferred form of indirect tax
system in Asia also.

Ehtisham Ahmed and Satya Poddar (2009)3 studied, “Goods and Service Tax Reforms and
Intergovernmental Consideration in India” and found that GST introduction will provide simplier
and transparent tax system with increase in output and productivity of economy in India. But the
benefits of GST are critically dependent on rational design of GST.

Nitin Kumar (2014)4 studied, “Goods and Service Tax- A Way Forward” and concluded that
implementation of GST in India help in removing economic distortion by current indirect tax
system and expected to encourage unbiased tax structure which is indifferent to geographical
locations.

Pinki et all (July 2014)5 studied, Goods and Service Tax- Panacea For Indirect Tax System in
India” they concluded that the new NDA government in India is positive towards
implementation of GST and it is beneficial for central government , state government and as well
as for consumers in long run if its implementation is backed by strong IT infrastructure.

2.OBJECTIVE OF STUDY

The study has following objectives:

1) To know the concept of GST
2) To study the features of GST
3) To evaluate the advantages and challenges of GST
4) To furnish information for further research work on GST.
3. RESEARCH METHODOLGY

Being an explanatory research it is based on secondary data of journals, articles, newspapers

and magazines. Considering the objectives of study descriptive type research design is adopted to
have more accuracy and rigorous analysis of research study. The accessible secondary data is
intensively used for research study.

4.CONCEPT

GST is an indirect tax which will subsume almost all the indirect taxes of central government
and states governments into a unified tax . As the name suggests it will be levied on both goods
and services at all the stages of value addition. It has dual model including central goods and
service tax (CGST) and states goods and service tax (SGST). CGST will subsume
central

indirect taxes like central excise duty, central sales tax, service tax, special additional duty on
customs, counter veiling duties whereas indirect taxes of state governments like state vat,
purchase tax, luxury tax, octroi, tax on lottery and gambling will be replaced by SGST.
Integrated goods and service tax (IGST) also called interstate goods and service tax is also a
component of GST. It is not an additional tax but it is a system to examine the interstate
transactions of goods and services and to further assure that the tax should be received by the
importer state as GST is a destination based tax.

5. EMANICIPATION OF GST IN INDIA

In 2000, an empowered committee was set up by NDA government under the chairmanship of
Asim Das Gupta to design GST model. With UPA in power union finance minister, Mr.
P.Chidambaram, proclaimed the implementation of GST from April2010 in budget of 2007and
set up an empowered committee of state Finance ministers to work with center. Therefore, on 10
May 2007 empowered committee of state finance ministers, which submitted the report in Nov
2007.First detailed discussion paper on structure of GST was introduced, by empowered
committee set up Joint Working Group in Nov 2009 with the objective of generating a debate
and getting the inputs from all stakeholders 6. It suggested a dual GST Module along with a GST
council and finally in March 2011, constitution 115th amendment bill was introduced to draw up
laws for implementing GST. It includes the followings:

1) Setting up of GST COUNCIL by the president within 60 days of passage of bill. The
council will chaired by union finance minister and its members includes MoS for
revenue and finance ministers of states. It will work on GST rates, exemption limits etc.
2) Setting up of a GST Dispute Settlement Authority having three members to resolve
dispute arising among states and take action against states.
3) GST Amendment Bill was referred to parliamentary committee on finance for
evaluation.

In Aug 2013 the standing committee submitted the report and recommended that proposed
Dispute Settlement Authority should be removed and its mechanism should be given to GST
Council itself. It also recommended that GST Council should take decision by voting rather than
consensus. The representation in the GST Council should be 1/3 from central and rest 2/3 from
states. The decision in the council should be passed with more than ¾ vote representatives
present. The quorum of council is raised from proposed 1/3 to half by standing committee.But
the proposed 115 amendment bill was lapsed with dissolution of 15th Lok Sabha.On 19 Dec
2014 after making slight changes in GST Bill, NDA government redefined it in 16th Lok Sabha
as 122nd amendment of constitution. On 6 may 2015 it passed in lower house of
government.Currently, the 122nd constitutional amendment is cragfasted in Rajya Sabha where
it has to passed with 2/3rd majority in order to be implemented from 1April 20167.

6. FEATURES OF PROPOSED GST

1) It is applied to all taxable goods and services except the exempted goods and services
and on transactions below the threshold limit.

2) Exempted goods and services include alcohol for human consumption, electricity,
custom duty, real estate.[Proposed article 366(12A)]8
 3) Petroleum products [crude oil, HSD(high speed diesel),motor spirit( petrol), natural gas,
ATF(aviation turbine fuel)] are initially exempted from GST till the GST Council
announces date of their inclusion.

4) Tabaco products are included in GST along with central excise tax.

IMPOSITION AND COLLECTION OF GST

1) The power of making law on taxation of goods and services lies with both union and
state legislative assemblies. A law made by union on GST will not overrule a state GST
law.(proposed article 246A)

2) GST has two components CGST and SGST as discussed above. CGST will be collected
by central government whereas states governments will collect SGST.

3) IGST is levied on supplies in the course of interstate trade incuding imports which is
collected by central government exclusively and distributed to imported states as GST
is destination based tax. The proportion of distribution between center and states is
decided on recommendation of GST Council.(proposed article 269A)

GST COUNCIL

1) It is set up by president under article 279-A. It is chaired by union finance minister.

2) It will constitute union minister of state in charge of revenue and minister in charge of
finance or taxation or of any other field nominated by state governments. The 2/3rd
representatives in council are from states and 1/3rd from union.

3) The decision of council is made by 3/4th majority of the votes cast and quorum of
council is 50%.

4) It will make recommendations on

a) Taxes, surcharge, cess of central and states which will be integrated in GST.

b) Goods and services which may be exempted from GST

c) Interstate commerce – IGST- proportion of distribution between state and center

 d) Registration threshold limit for GST

e) GST floor rates

f) Special rates during calamities

g) Provision with respect to special category states specially north east states

5) It may also work as Dispute Settlement Authority for GST.

ADDITIONAL 1% TAX

1) Additional 1% tax on interstate taxable supply of goods which is levied by center and
directly portioned to the exporter state (origin state).

2) This tax will be charged for two years or for longer time period recommended by GST
Council.

COMPENSATION TO STATES

1) For maximum of 5 years union will compensate states for the revenue losses arising out
of GST implementation.

2) This compensation will be made on the recommendation of GST Council.

7. ADVANAGES OF GST

Under GST regime the burden of taxation will be allocated fairly between
manufacturing and services via lower tax rates resulting in increased tax base and
minimized exemptions. It is anticipated to help in establishing an effective and
transparent tax administration. It is expected to remove the cascading effects of taxes
and help in establishing of common national market. Apart from this some more
advantages of GST are listed below:

IGST- EFFECTIVE LOGISTICS

In current indirect tax system central sale tax (CST) is paid on interstate commerce of
goods. 2% standard rate of CST is levied and distributed to exporter state as it is origin
based tax. The input credit of CST can be offset with CST liabilities only. CST is paid
only on interstate commerce of goods and not on supply (transportation) of goods. So,
to avoid this tax large corporates build their own godowns in different states and
transport their goods among states without paying CST which finally leads to decrease
in cost of their product. Because of this tax dodging through warehousing by big
corporates growth of small and medium enterprises hampered and they cannot survive
in the market.

But, in proposed GST tax regime IGST is levied on interstate commerce and supply
(both) of goods and services. Due to this an effective logistics system will come up
which will prevent the tax dodging through warehousing by big corporates. This will
protect small and medium enterprises from unhealthy competition of big corporates.

ANCILLARIZATION

In present indirect tax regime all big corporates want to produce each and everything in-
house only in order to reduce CST and cascading effect of tax. But in proposed GST
system there is no CST and cascading effect which will lead to outsourcing,
subcontracting and division of labour. Because of this specialization will increase in
future which will help in reducing the cost of production. With the reduced prices
domestic goods will be more competitive in international market which will result in
increased export and help country to reduce current account deficit.

SINGLE BASE COMPUTATION

With the introduction of GST cascading effects of taxes will not exists and there will be
a single base for computation of tax for both central government and state government.
Initially state governments will lose tax revenue due to less taxable value of goods. But
in later years due to availability of cheap goods the number of taxpayers will increase
and overall tax collection of states will also boost. This increase in tax revenue will lead
to fiscal consolidation which is demanded by current state of Indian economy. As per
CRISIL recent report GST is best reckon for fiscal consolidation as there is not much
scope to cut government expenditure in India.
 EXPORT WILL BE ZERO RATE

No GST will be levied on exports because of which input credit of exporter will not be
affected and he/she can use these input credit in future. With zero rated exports,
domestic goods will be more competitive in international market and will help in
increasing exports which in turn the fulfillment of objective of 3.5% share of India in
world exports by 2020.

SIMPLE TAX STRUCTURE

As multiple indirect taxes of state and central governments on goods and services will
be replaced by a single tax, the tax structure will be hoped much simpler and easier to
interpretate. Reduction in the accounting complexities for business will make the
manufacturing sector more competitive and boost the economy by 1%-2%.

9. CHALLENGES OF GST

HIGH REVENUE NEUTRAL RATE (RNR)

RNR is the rate which neutralize revenue effect of state and central government due to
change in tax system, means ,the rate of GST which will give at least the same level of
revenue that is currently earned by state and central governments from indirect taxes is
known as RNR. As per 13 finance commission the RNR should be 12% whereas state
empowered committee demanding 26.68%. Union government is reckoning the rate
band should be 15%-20% which is very high as compare to other counties. Hungary
implemented GST from 1/4/2014 with 7% rate. Due to high RNR9

 Competitive edge of India in Asian giants will decrease and domestic industry may be
wrecking.

 Tax evasion and smuggling will increase.

 Regressive nature of indirect taxes will badly affect the purchasing power of poor
people which will have negative impact on human development index.
 So, before implementing GST, RNR should be minimized. This can be achieved by
inclusion of petrol, liquor, land, electricity within the ambit of GST which will enhance
the tax base and increase revenue of government.

COMPENSATION TO STATES

Currently, VAT is highest contributor in tax revenue of state governments. But after GST reform
this will subsumed along with surcharge and cess into GST. Due to which state governments will
occur revenue loss for sure and they will be more dependent on finance commission for tax
devolution (currently 42%). To neutralize their revenue losses states are demanding
compensation from union government. As per 14 finance commission union has to compensate
states for maximum of five years with tapering effects. For first three years 100% compensation
reduced to 75%and 50% in fourth and fifth year respectively. This compensation by union will
lead to fiscal burden and may not fulfill the fiscal deficit target of 3% by March 2017 announced
by finance minister in 2015 budget. This fiscal target must be achieved for faster economy
growth and full capital account convertibility in future.

Industrialized states will be at loss in GST regime due to its destination based feature. It will
demotivate the manufacturing industry and incite states to import more in order to increase their
tax revenue. It is not good for manufacturing industry as well as for India because boosted
manufacturing sector is the main driver of our economic growth in future. For temporarily relief
to industrialized states additional 1% tax for two years on interstate sale and supply of goods is
proposed in GST. Bit with 1% additional tax, the main objective of GST to minimize cascading
effect of taxes is fading out. So, to minimize cascading effect this additional tax at least should
not be levied on supply of interstate goods.\

REGISTRATION THRESHOLD LIMIT

At present there are different threshold limits for VAT (5 lacs), service tax ( 10 lacs) and excise
duty (1.5 crore). But for implementation of GST common threshold limit for all indirect taxes is
required. It will turn into a conflict between state and center. States want to fix the limit as 10
lacs opposing 25 lacs limit suggested by union. The lower threshold limit will broaden the tax
base and increase the revenue of government but it will also require a dandy IT infrastructure, to
address the database of increased assess, which is presently missing out in Indian states. IT
infrastructure will play a vital role in implementing IGST as union will electronically distribute
IGST to states. To grapple the data base a strong network is required which is managed by
GSTN(Goods and Service Tax Network) proposed in GST. GSTN has major responsibility to
tackle biggest challenge of IT infrastructure in a time bound manner

OTHER ISSUES

 Union government need to coordinate with 30 states for “input credit” due to transfer of
credit in SGST.

 State tax officials training and development before implementation of GST.

 Effective credit mechanism is essential for GST. Owing to CENVAT it is not a problem
but for states again it is a major challenge.

 Analysts say that real estate market will be cramped by GST and it may result in 12%
down turn in demanded of new houses because of increased cost up to 8%. (A study
commissioned by Curtin university of technology)

10. WAY FORWARD FOR IMPLEMENTATION OF GST

1) The 122nd amendment bill to be passed by upper house with 2/3rd majority and then
will be ratified by at least 50% state legislatures and will be followed by assent of
president.

2) After the bill has been passed, GSTC (GST Council) to be established.

3) GSTC to advocate GST law and procedure.

4) GST law to be introduced in parliament.

 5) GSTN (GST Network) a section- 25 company established to design IT infrastructure of
GST

11. CONCLUSION

Due to diversified environment of Indian economy, it is demand of time to implement GST.

Consumption and productions of goods and services is undoubtedly increasing and because of
multiplicity of taxes in current tax regime complexities and compliance, cost is accelerating.
Thus, a simple user friendly and transparent tax system is required which can be fulfilled by
implementation of GST. Its implementation stands for a coherent tax system, which will
colligate most of current indirect taxes and in long term it will lead to higher output, more
employment opportunities and flourish GDP by 1-1.5%. It can be used as an effective tool for
fiscal policy management if implemented successfully due to nation-wide same tax rate. It
execution will also results in lower cost of doing business that will make the domestic products
more competitive in local and international market. No doubt that GST will give India a world
class tax system by grabbing different treatment to manufacturing and service sector. However,
all this will be subject to its rational design and timely implementation. There are various
challenges in way of GST implementation as discussed above in paper. They need more
analytical research to resolve the battling interest of various stakeholders and accomplish the
commitment for a cardinal reform of tax structure in India.
11.REFRENCES

1. Agogo Mawuli (2014): “Goods and Service Tax- An Appraisal “Paper presented at the PNG
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2. Dr. R. Vasanthagopal (2011), “GST in India: A Big Leap in the Indirect Taxation System”,
International Journal of Trade, Economics and Finance, Vol. 2, No. 2, April 2011.

3. Nitin Kumar (2014), “Goods and Service Tax in India-A Way Forward”, “Global Journal of
Multidisciplinary Studies”, Vol 3, Issue6, May 2014.

4. Pinki, Supriya Kamna, Richa Verma(2014), “Good and Service Tax – Panacea For Indirect
Tax System In India”, “Tactful Management Research Journal”,Vol2, Issue 10,

July2014

5. www.gstindia.com/basics-of-gst-implementation-in-india/

6. wwww.prsindia.org/billtrack/the-constitution-122nd-amendment-gst-bill-2014-3505/

7. wwww.taxguru.in/goods-and-service-tax/goods-service-tax-gst-2.html

8. wwww.thehindu.com/bussiness/industry/ten-things-to-know-about-gst-

9. www.top10wala.in/facts-about-gst-india-advantages/