Comparative Study of GST and Earlier Indirect Taxation regime from the point of view of Business and Law

Abstract

Since the inception of the Indian Constitution the earlier In-direct taxation system has faced a jolt most because of the imposition of multiple taxes before the GST reform. The old multilayer taxation scheme imposed a scenario of double taxation along with its cascading effect which ultimately led to in equal distribution of revenues between the two tier system of government as based on the division of powers in India. The constitutional framework has given us benchmark provisions for the systematic way of imposition and collection of indirect taxes but is a fate to say that whether the provisions are truly implemented and applicable in the present scenario. The Goods and Service Tax is designed in such a way to reform the earlier taxation regime where to build a environment which can support both free and fair market competition. Both the center and the state in their unanimous decision tried to uplift the system of unified taxation system to achieve their common goal and economic development. However this paper will try to focus on how the unified system of taxation has apparently revealed the complexities and ramifications of old indirect taxation regime. The author would also lay stress on the problems of multiplicity of the taxation and cascading effects of the old indirect taxation regime. The paper will also attempt to emphasize on the comparative study of the earlier and the current indirect taxation system. The paper will also focus to some extent the benefits and drawbacks of the two phase of indirect taxation system and also the impact on the several business entrepreneurs.

Key words: Entrepreneurs, manufacturing, cascading, multi-layered, regime

Introduction

The idea of “one nation one tax” was put forward during the tenure of Former Prime Minister Late Shri Atal Bihari Vajpayee who stood up by framing a committee to draft the GST bill in the year 2000. However the idea of uniform taxation system was also strengthened by a task force called the “Kelkar Task Force” in the year 2004 with the objective to conclude GST must be implemented to improve the current law structure. However with this motto and target the Finance Minister proposed to introduce GST law from April 1, 2010 but it could not succeed ultimately as there was no concrete steps taken by the government. In addition to this the Empower Committee constituted finalized the system of Dual GST structure to have separate levy and legislation in the year 2008, but unfortunately the implementation could not be successful and thus it was postponed in the year 2010.However the government with the initiative to overcome the drawbacks of indirect taxation finally demanded the passing of the constitutional amendment (101st Amendment Bill) to enable GST law to be introduced.

The main intention behind the implementation of the GST system was to simplify the tax structure in India and also to eradicate the complexities of the earlier indirect taxes regime which suffered on account of various multi-dimensional factors. One of the main latches behind the removal of the old taxation system on goods and services was of multiplicity of taxation and its cascading effect. The previous tax structure comprised of multiplicity of taxes ranging from Excise duty on manufacturing products which also included Import and Export taxes, Sales tax, VAT, Central Sales tax, Service Tax, Wealth Tax, Luxury Tax and many others which created a lot of complexities and inadvertence in the distribution of taxes. However with the implementation of the GST various geographical hardship for trading and business were removed and the entire nation recognized a system of one taxation regime.

Flashback of the Previous Indirect Tax Regime

In connection to the old taxation regime there were separate legislations made for separate levy of taxes. For e.g. there was Central Excise Act, 1944, VAT which was within the ambit of state, service tax etc. However it will be quite interesting to discuss that how the previous tax structure, not entirely, got subsumed to the simplified GST system.

Beside it is also collateral to mention that what was the reason the government intended to merge all this forms of previous indirect taxes and levy a common tax by the name of GST i.e. Goods and Service Tax. The following taxes which are subsumed and not subsumed under Goods and Service Tax Act:

  • Subsumed in GST: Service Tax, VAT/ Sales Tax, Central Sales Tax, Entertainment Tax, Tax on Lottery, Luxury Tax, Entry Tax.
  • Not Subsumed in GST: Electricity Duty, Countervailing Duty, Toll Tax, Alcohol For Human, Property Tax.

Comparative study between GST and Earlier Indirect Taxation Regime

It is indeed a matter of surprise that the problems sustained in the earlier taxation regime has more over eradicated by the coming of the GST rules and regulations. Keeping in mind that such a reform in the taxation regime may have both advantages/disadvantages and positive/ negative impacts on the entire economy of the country. So to have a clear understanding a comparative analysis between the new and earlier system has been drawn with the help of the following sub-points-

  • Cascading effect- Input Tax Credit is one of the essential component in indirect tax system of our country. The system of input tax credit is a core essential thing by which the suppliers are able to take the credits of the inputs applied during the time of manufacturing of a particular commodity. It was recorded during the earlier indirect taxation regime that credit of central sales tax and other indirect taxes was not allowed in the previous structure. But during this current GST era the whole concept of central sales tax has been eliminated, with the introduction of GST. Lets take an illustration to have a better understanding, in the current GST regime the entire input tax levied on the manufacturing of particular product before supply of the goods or at the time of supply has to be borne by the supplier himself later on the one who is the recipient purchasing the product from the supplier have to pay the entire value added amount inclusive of GST as per the rate notified by the council to the supplier itself which makes it crystal clear that the supplier takes the input tax credit from the recipient. It is also relevant to mention that this system of availing input tax credit under the GST system is much more clear and apparent which avoid the cascading effect and the amount of tax as per the GST rate  is getting segregated between the central and state.

The problem of central sales tax previously applicable on interstate supply was not creditable and as such there was a breakdown of the input tax credit chain. Again simultaneously the manufacturers who were required to pay the excise duty on sale to dealer caused the same breakdown of chain. The cascading effect was also present in the sectors of service provider like CA professionals, solicitor firms who use to charge a hefty fees and thus the input tax credit taken and availed by then was not apparently accountable leading to in equal distribution of taxes.

However to remove the cascading effect in the year 2005, the government has launched to levy VAT  on sale of goods and services on intra-state supply to overcome the cascading effect, but to an extent VAT has eliminated the cascading effect on the state indirect taxes, while the complexities on other indirect taxes still suffered with the same problem.

  • Multiplicity of taxes-The indirect taxation system encompasses both the center and state to levy indirect taxes on goods and services which was previously arbitrary and unfair as compared from the present GST system.  The central government used to impose taxes on the following – Income tax, Basic custom duty, service tax, central excise.

Similarly the respective state governments used to levy taxes as VAT, stamp duties, land revenue, state excise duty and other local taxes.

From the context of Indian taxation regime there were multiple indirect taxes which were to be borne by the manufacturing units as input tax and finally by the end consumers. Further this were controlled by government agencies vide notifications, orders and circulars which together resulted to huge strict compliances.

However if we look at the past phases of the previous indirect taxation system, we can see that taxes by the union government, state governments and local governments has resulted to complexities and ramifications to the tax payer. In the light of the business entrepreneurs as a tax payer there was a huge compliances in maintaining separate records for each of them.

If we try to comparatively analyze the previous phase of indirect taxation and the current phase of GST regime, then we can see the system of current indirect taxation i.e. GST have subsumed the majority of taxes which were previously imposed in the name of vat sales tax , central sales tax etc and as such India witnesses a single unified structure of taxation regime which is much more clear, apparent and feasible.

  • Flexible compliance- The GST regime in India has significantly lowered the cost of computation of taxable liability, as business entrepreneurs could easily hire CA professionals to engage them in the maintenance of records and filing of returns. Moreover it has been analyzed that cost of maintenance of records for filing the compliances are flexible and cheaper as compared to the previous tax structure.
  • Input Tax Credit- In the current GST regime, the availability for claiming input tax credit is much more apparent than the old indirect taxation syste. Even it has been soothing for those registered dealer who were unregistered under the previous law engaged in supplying of work contract service to claim and enjoy ITC of inputs in stock.

Let us under the concept of input tax credit under GST system by the help of an example of manufacturer of Khaitan Fan which is being manufactured by Khaitan Company. But before its manufacturing the company has to purchase various inputs/raw materials for the purpose of making the product. Now it is to be understood from the point of view of every manufacturer who is supplying various spare parts and accessories which ultimately is required as a input for the manufacturing of the fan. So every manufacturer and service provider supplying goods or service to the company shall avail the input tax credit of GST which he has paid at first instance in addition to the value of that product. But it should be taken in account that the rate of tax is fixed for a particular product as determined by the government in consultation with GST Council and as such it is uniform tax which is separate for a separate products as determined and thus the rate does not vary from state to state/union territories Beside the center and the state can both have a share to the amount of tax equally without any further confusion as on the basis of supply of goods.

  • Composition Levy – The scheme of composition levy on goods and services under the current GST rules and regulations has brought some happiness in the small scale sectors and medium enterprises which were previously over-burdened by large number of diversified multi-dimensional taxes. The scheme of composition levy is more stringent as compared to the normal levy under the GST system. Small scale enterprises can opt for this composition levy if their business aggregate turnover does not exceed Rupees 75 Lakhs as per the current notification. This proves to be more feasible and can be tactfully managed by the small scale enterprises.

Since one of the basic characteristics of GST is a destination based tax, it has recovered the latches of uneven distribution of revenues between the two structured government as previously it was evident due to the origin based tax i.e. CST. Moreover the GST regime has also replace the earlier central taxes and duties such as excise duty, countervailing duty, central charges and other local state taxes.

  • Burden of tax is integrated and centralized- In the previous taxation regime, the tax burden on the tax payer was considerably high and increasing. The introduction of GST significantly brought a drastic change by reducing the tax burden an making it more integrated and centralized. It is also more crystal clear that the burden in a equitable manner upon the manufacturer and the consumer. Hence the imposition of GST has proved to be equalizing the rate of tax collection between the center and the state in a wise and befitting manner.
  • Concurrent power- Another distinctive feature in the current GST system is that both the center and the state has the power to levy GST on the same subject matter which was not previously present in the old indirect taxation regime. GST is basically a dual system of indirect tax governance and thus the center and the state has been empowered with the concurrent power to make laws with regard to the supply of goods and services.

Conclusion

The object and purpose behind this article was to understand the valuable benefits under the GST regime by the help of such comparative study. The intention behind this article was to acknowledge how the system of GST clarified the concept of cascading effect of the previous taxation regime. A slugfest challenge was put forward to overcome the difficulties of multi-layered taxation system which was unstable and distinct varying from states to states. The GST system has also rendered a wide elimination between the concept of goods and services which ultimately received the ambiguity of overlapping of state and central tax on same product. However strictly speaking some latches are still present in this current GST scenario which itself is again promoting discrimination between the small and medium manufacturing units and as such it requires some special attention to eradicate the existing complexities.

References

  • Difference between GST and Previous tax structure” published in Green GST, 16th June, 2017
  • Report on Tally for GST published on Sep 13, 2016
  • “GST implementation in India” by EY
  • GST LAW MANUAL, by R.K. Jain, 08 edition published by Centax , 2019.
  • GST Input Tax Credit, by V.S Datey, 07 edition published by Taxmann. 2019.

Notes : 

1 “Difference between GST and Previous tax structure” published in Green GST, 16 th June, 2017

2 Tally for GST published on Sep 13, 2016

3 “GST implementation in India” by EY

Assistant Professor of Law, Adamas University, Kolkata, West Bengal, Email: subhajit.swati555@gmail.com

Author Bio

Qualification: LL.B / Advocate
Company: Adamas University
Location: Kolkata, West Bengal, IN
Member Since: 24 Apr 2020 | Total Posts: 1

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