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“Just as Sardar Vallabh Bhai Patel unified India by helping several princely States subsume into a common entity, the GST will bring economic unification. If we take into consideration the 29 states, the 7 Union Territories, the 7 taxes of the Centre and the 8 taxes of the States, and several different taxes for different commodities, the number of taxes sum up to a figure of 500! Today all those taxes will be shred off to have ONE NATION, ONE TAX right from Ganganagar to Itanagar and from Leh to Lakshadweep.”

– Hon’ble Prime Minister Shri Narendra Modi on the launch of GST

India is a socialist, secular, democratic republic and follows a federal structure that includes both the Central and State-level governments. The governments at both the levels share the responsibility to manage country’s developmental needs. The primary source of income for both the government is tax. In other words, a tax is a contribution that a person makes towards the development of the country.

In India, the power to tax vest in both the Central and State governments. The power to levy and collect taxes stems from the Indian Constitution, which divides the power between the Central and the State governments.

Five years of GST - ebook by CBIC

Prior to the launch of unified tax system as GST, Indian indirect tax regime was highly fragmented. Centre and States were separately taxing goods and services. The Centre was empowered to tax goods at the production or manufacturing stage, whereas the States had the power to tax goods at distribution stage. The Centre was also empowered to levy tax on services. This structure of taxation suffered from various shortcomings.

There were multiple taxes like central excise duty, service tax, VAT, CST, purchase tax, entertainment tax etc. Additionally, there was multiplicity of rates, laws and procedures. This caused heavy compliance burden on the taxpayers. Imposition of tax-on-tax or cascading of taxes was another serious problem. For example, VAT was levied on a value that included central excise duty.

Input tax credit chain broke as goods moved from one State to another, resulting in hidden cost for the business. There were tax nakas at every inter-State border, creating bottlenecks in inter-State transport of goods. Every State was effectively a distinct market for the industry as well as consumer. Industry’s choice of locating factories or warehouses was heavily influenced by the prevailing tax regime rather than pure business considerations, making the industry uncompetitive.

Some of the primary problems with the pre-GST tax regime were:

01 Taxation at manufacturing level

Central excise duty was levied on goods manufactured or produced, limiting the taxable event at manufacturing point leading to a narrow base and posed a severe impediment to an efficient neutral application of tax.

02 Exclusion of Services

The States were precluded from taxing services. This arrangement posed difficulties in taxation of goods supplied as part of a composite works contract involving a supply of both goods and services, and under leasing contracts,which entail a transfer of the right to use goods without any transfer of their ownership.

03 Tax Cascading

Tax cascading means a tax-on-tax. Tax cascading occurred under both the Centre and the State taxes. The most significant contributing factor to tax cascading was the partial coverage by the Central and the State taxes. Under the erstwhile system, tax payable at the time of sale was levied on a value which already included the tax paid at the time of manufacture that is central excise duty. Furthermore, there were certain taxes for which input credit tax was not admissible which thus formed a part of the cost of the goods. Moreover, input tax credit in respect of CST on inter-State sale of goods was not admissible. All these taxes become a part of cost of goods thereby leading to cascading.

04 Complexity in determining the nature of transaction

The advancement in information technology had blurred the distinction between goods and services. In the present scenario, goods, services and other supplies are being packaged through as composite bundles and offered for sale to the consumers. Neither the Central nor the State government could levy tax on such bundles in a seamless manner

05 Complexity

In spite of the improvements made in the tax design and administration over the years, the tax regime remained complex. They were subject to disputes and court challenges and the process for resolution of disputes was slow and expensive. At the same time, the systems suffered from substantial compliance gaps, except in the highly organised sectors of the economy.

06 Lack of uniformity in VAT provisions and rates

The VAT structure lacked uniformity across the States which was not only confined to the tax rate but also extended to procedures, definitions, computations and exemptions.

07 Local Sale v/s Central Sale

Fixing the situs of the sale transaction that is whether the sale takes place in one State or another was a major conflict as it affects the revenue of the State. CST that is Central Sales Tax was a tax levied on inter-State sale of goods by the Central government but the power to collect and retain the CST was vested with the State government.

The advancement in information technology had blurred the distinction between goods and services. In the present scenario, goods, services and other supplies are being packaged through as composite bundles and offered for sale to the consumers. Neither the Central nor the State government could levy tax on such bundles in a seamless manner.

08 Interpretational Issues

Problems also arose in respect of interpretation of various provisions and determining the category of the commodities. To decide the nature of transaction that is whether an activity was sale or works contract; sale or service was not free from doubt.

Thus, a reform was necessary to simplify the tax structure, to facilitate free flow of goods and services throughout the country and to bring in transparency through a robust IT infrastructure.

“The complexities of the Pre GST regime formed the cornerstone for implementing the GST. Thus, GST was a positive step in shifting the Indian economy from the informal to the formal economy…

The introduction of the Goods and Services Tax (GST) was a significant step towards making India economically competitive by ushering in higher transparency, lower transaction costs and improved compliance. It was the much-needed transformation in the field of indirect tax system of the country. It was launched with the objective to streamline taxation and reduce compliance burden.

More than 17 taxes including both of the Centre and the States i.e., Central Excise duty, Additional duties of excise, Excise duty levied under Medicinal & Toiletries Preparation Act, Additional duties of customs, Service Tax, State VAT or Sales Tax, Central Sales Tax, Purchase Tax, Entertainment Tax, Luxury Tax, Entry Tax, Taxes on lottery, betting & gambling and other surcharges & cesses were subsumed into a single Goods and Services Tax (GST). Constitution was further amended to provide concurrent powers to both the Centre & the States to levy GST. The objective was to mitigate the ill effects of cascading or double taxation in a major way and pave the way for a common national market.

Since its launch, the country has witnessed digitalisation in tax compliance and improved supply chain efficiencies. It is a tax regime founded on a technology-based monitoring system with e-business processes like, e-Returns, e-Invoices, e-Way bills, etc. It was also vital to recognise the effectiveness of the Centre-State collaboration under the auspices  of the GST council, which has ensured policy implementation uniformly across States. Despite the scale of the COVID-19 crisis, the government and the industry was agile in adjusting to the “new normal” and restarting economic activity. GST has made Indian products competitive in the domestic and international markets owing to the full neutralisation of input taxes across the value chain of production and distribution.

In the words of Hon’ble Prime Minister Shri Narendra Modi, the Goods and Services Tax (GST) is “a path-breaking legislation for New India”. This revolutionary taxation system was rolled out on the midnight of 01st July, 2017 in a ceremony held in the Central Hall of Parliament. GST is not merely a tax reform but a milestone in realising Sardar Vallabhbhai Patel’s dream of building.

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April 2024