INTRODUCTION
According to India’s federal tax structure, taxation authority is shared between the central government and the individual states. Due to these duelling taxing authorities, the tax process has become convoluted and numerous charges have been instituted. This resulted in a number of issues, like lawbreakers being tougher to catch, tax laws being broken, and so on. When the federal government and individual states both imposed taxes on the same commodity, but in different amounts, a cascading effect of Taxation (tax on tax) on items became an issue.
The Goods and Services Tax (GST) was implemented by the union government of India on July 1, 2017, via an act of Parliament, with the aim of streamlining the country’s complex tax system. The Goods and Services Tax (GST) is a global, multi-step, destination-based tax charged on all value creation. It is a form of consumption tax assessed on the sale of tangibles. Every transaction is subject to GST taxation in a GST system. While making a purchase inside the same state, you’ll be hit with two separate sales taxes: one from the federal government and one from your state. The Integrated GST is applicable to all interstate transactions.
GST proposes eliminating geographical barriers to trading and transforming the entire country into “One Common Market Place” with the intention of streamlining India’s tax structure.
Indirectly taxed (or consumed) in the form of GST, the Goods and Services Tax is levied in India on the sale of goods and services. There is a GST charge at each and every stage of production, but it is supposed to be reimbursed to everyone who contributed to the final product other than the consumer.
The goal of this initiative is to identify shortcomings in the current indirect tax system and provide a plan to address them. It also gives some background on the new tax regime’s implementation and the previous taxes that the Goods and Services Tax replaced.
STATEMENT OF PROBLEM
Since the country’s independence, there have been numerous issues with the indirect tax policy. A new indirect tax known as the Goods and Services Tax has been passed into law, effectively doing away with the old system. To understand why GST is needed, we must first identify the issues that plagued the previous system.
AIM AND OBJECTIVES OF STUDY
This paper investigates the shortcomings of the pre-GST indirect tax structure and the merits of the GST as a potential remedy. Also, the objectives of this study paper are summarised in the following bullet points:
- To have a basic understanding of GST’s background.
- To understand which taxes GST replaced.
- Learning more about the issues with the previous indirect tax regime and the benefits of GST
RESEARCH QUESTIONS
- To investigate the problems with the previous tax system?
- To learn more about how GST can help fix these issues.
HISTORICAL BACKGROUND OF GST
Vishwanath Pratap Singh, Finance Minister in Rajiv Gandhi’s ministry, initiated indirect tax reform in India in 1985 by implementing the Modified Value Added Tax (MODVAT). The subsequent early discussions on a Value Added Tax (VAT) at the state level were launched by Prime Minister P V Narasimha Rao and his Finance Minister Manmohan Singh.1 In 1999, Prime Minister Atal Bihari Vajpayee met with his economic advisory team and recommended a single, unified “Goods and Services Tax” (GST). 2 Vajpayee appointed Asim Dasgupta, the finance minister of West Bengal, to lead a group charged with formulating a GST framework.
The Ravi Dasgupta panel, which also oversaw the implementation of supporting infrastructure like databases and supply chains (later came to be known as the GST Network, or GSTN, in 2015). Subsequently, it was revealed that this was for the purpose of implementing a nationwide standard tax rate. Vijay Kelkar was appointed to head a task force established by the Vajpayee government in 2002 to make recommendations on how to improve the country’s tax system. The 12th Finance Commission proposed implementing GST, and in 2005, the Kelkar committee recommended it be done.3
Finance Minister P. Chidambaram, who took office after the BJP-led NDA government was defeated in the 2004 Lok Sabha election and replaced by the Congress-led UPA administration, maintained the initiative in February 2006 and suggested implementing GST by April 1, 2010. However Asim Dasgupta stepped down as GST committee head in 2011 after the Trinamool Congress ousted CPI(M) from power in West Bengal. When asked about the status of the project, Dasgupta said in an interview that 80 percent of the work was completed.
The National Democratic Alliance government, which is led by the Bharatiya Janata Party, was elected in the 2014 Lok Sabha election. The GST Bill, which had been cleared by the standing committee for reintroduction before the 15th Lok Parliament was dissolved, became null and void. The GST Bill was introduced by the new Finance Minister Arun Jaitley in the Lok Sabha, where the BJP held a majority, seven months after the Modi government took office.
Jaitley extended the timeline for GST implementation to 1 April 2017 in February 2015. The Constitution Amendment Bill, which would have allowed for GST, was approved by the Lok Sabha in May of 2016. The Opposition, led by the Congress party, however, has requested that the GST Bill be brought back to the Rajya Sabha Select Committee for further examination due to differences over certain tax-related assertions in the Bill. Last but not least, in August of 2016, the Amendment Act was signed into law. The Constitutional Amendment Bill was ratified by the legislatures of 18 states during the next 15-20 days, and President Pranab Mukherjee signed it into law.4
There is a 21-person panel investigating the GST legislation. After approval by the GST Council, the Lok Sabha on March 29th passed the Central Goods and Services Tax Bill 2017, the Integrated Goods and Services Tax Bill 2017, the Union Territory Goods and Services Tax Bill 2017, and the Goods and Services Tax (Compensation to the States) Bill 2017. On April 6, 2017, the Rajya Sabha approved these bills, and on April 12, 2017, they became law. Since then, legislatures in other states have passed their own versions of goods and services tax laws. Beginning on July 1, 2017, Goods and Services Tax (GST) went into force across the entire country of India following the passage of many GST regulations. 5On 7 July 2017, the legislature of the Indian state of Jammu and Kashmir passed its own version of the Goods and Services Tax (GST) law, bringing the entire country under a single indirect taxation regime. The acquisition and selling of securities was to be exempt from GST. Securities Transaction Tax still applies to this (STT).6
TAXES REPLACED BY GST
- Central Excise Duty: Products made in India and destined for domestic consumption were subject to an indirect tax known as central excise duty. Manufacturing is the taxable event, and central excise duty must be paid once the items have been produced.7
- Service Tax: In India, services are subject to a tax known as “service tax” collected by the central government. According to the Finance Act of 1994, this is an indirect tax.
- Additional Duties on Excise (ADE): It was an indirect tax paid to the federal government and individual states to fund Added Taxes on a number of products, including sugar, cotton, and tobacco.
- Surcharge: Adding a surcharge to the original price of a product or service is a common practice in many countries.
- Cess: A cess is an additional tax imposed by the federal government.
- Countervailing duty (CVD): It’s a tax levied by the country of importation on goods that have already benefited from export subsidies and tax breaks in the country of origin (ie., where it is produced and exported).
- Special Additional duty (SAD): It was a “Special Additional Duty” (SAD) that was paid on the imported products. A SAD refund could be requested by the importer upon the successful resale of the imported items.
- Value Added Tax (VAT): Value-added tax (VAT) is a form of sales tax levied at any step in the supply chain when the final product receives an increase in price. For transactions inside the same country, this tax is applied.
- Central Excise Tax (CST): One such indirect tax is the Central Excise Tax, which is applied to all transactions between states. When sold within the same state, CST is not charged at any point in the production or distribution chain. CST is required only if the maker ships the product out of state.
- Sales Tax: This tax applies only to transactions occurring in India and is therefore an indirect tax. It’s cash paid over the item’s initial cost.
- Luxury Tax: In the form of an ad valorem tax, a “luxury tax” is levied on items and services that are not considered necessities.
FIXING THE OLD TAX SYSTEM WITH GST
1. Different laws
Several legislation, such as the Central Excise Act (1944), the Finance Act (1994), the Customs Tariff Act, etc., were in place to collect various levies during the previous government. This resulted in an overly complicated tax system, which hit small businesses most. The tax system is complex, and small firms often lack the resources to hire competent tax advisors to guide them through it. Due to the tax system’s complexity, compliance was low, corruption flourished, and tax cheats went undetected. Changes brought: One Single Law
The Central Goods and Services Tax Act of 2017 simplified the taxation of goods and services by replacing the previous set of regulations with a single indirect tax. By dividing taxes into four brackets of 5%, 12%, 18%, and 28%, GST established a tiered tax structure for a wide variety of consumer and business transactions. As a result, both small business owners and their customers will benefit from a simplified tax system. The Act’s passage has resulted in a surge in tax compliance across the country, resulting in a record amount of money being brought in to the government by way of taxation. The efficiency of the tax authorities was boosted as a result of the decreased cost of collection and the detection of fraud.
2. Different Tax Rates
In the previous tax system, rates varied depending on the type of tax being charged, such as Excise (12.36%), Service Tax (14%), and SAD (4%). As a result, things got more complicated, and fewer people were following the rules. Moreover, taxes were not imposed depending on the characteristics of the product or service being taxed.
Changes brought : Uniformity in Tax Rates
In the GST system, taxes are divided into four categories, or “slabs,” depending on their origin. In this way, the poor are able to pay less in taxes on the goods and services they use, while the rich are taxed at a greater rate on their extravagant consumption.
3. Chain reaction
Taxes that build upon one another are said to cascade. Under the previous administration, there was a snowball effect of taxes due to the proliferation of levies. Having both the federal government and individual states be able to levy taxes on the same commodity or service only added more layers of complexity to an already complicated situation. The result was various rates of taxation on producers in different parts of the country. This made cross-state smuggling possible, which benefited some people
but put an unfair burden on others in the manufacturing sector. The general effect was to raise prices and tax the consumers more.As a result, states had to spend more money on border checks to prevent commodities from being smuggled across their borders.
Changes brought: Introduction of Input Tax Credit
Input tax credits are available inside the GST framework (ITC). It allows for a refund of taxes already paid on inputs to be taken as a credit against the final tax payment on outputs. The tax’s domino effect is thereby eliminated.
In the old tax system, credits for CST and other indirect taxes weren’t possible, but with the advent of the Integrated Goods and Services Tax (GST), the very idea of CST was done away with (IGST). Also, it facilitates the mapping of the value creation process, from the procurement of inputs to the delivery of the final product. As tax evasion by one actor would prevent other producers from receiving the benefit of input credit and would force them to pay greater taxes, this measure is also effective in reducing evasion.
4. The Taxpayer’s Burden
Taxes were high because of the lack of coordination between the federal government and the individual states. This resulted in a decline in tax compliance, which in turn lowered tax revenue, forcing the government to raise taxes even further to cover its costs. Most importantly, broad-based taxes shifted the financial burden from producers to consumers.
Changes brought: Shared Burden
With GST on board, tax burden has reduced significantly since all taxes are integrated, and the burden is split equitably between manufacturing and services.
5. Tax burden on Producers
Under the previous system, certain taxes became part of the cost of production because of the snowball effect of taxation. This, in turn, placed an undue burden on producers because it increased their production costs and made their products less competitive. Exports fell as a result, because the items couldn’t compete as well in other markets.
Changes brought: Burden on Consumers
The implementation of the Input Tax Credit programme has shifted the tax burden from producers to end users. As a result, production costs have gone down, making American manufacturers and service providers more competitive on the global and domestic stages.Most importantly, by taxing luxury goods at a higher rate than essentials, the tax system has ensured that everyone pays their fair share.
6. Lack of coordination between States and Union
Before the GST, the federal government and individual states couldn’t make separate tax policy decisions on the same topic. As a result, there was friction between the federal government and the states over taxation. There was no systematic plan for implementing tax policy that would boost national development. Because of this disorganisation, detecting and prosecuting cases of tax evasion were both difficult.
Changes brought: Concurrent power between Union and States
By adopting GST, the Centre and the States exercise their concurrent competence to pass laws concerning goods and services tax under Article 246A of the Constitution. Trade inside a single state is now “jointly” governed by both the federal government and individual states, while trade between states remains “exclusively” under federal control. This has led to taxation serving a dual purpose, first as a means to fund government operations and, second, as a tool to spur economic development at the national and state levels.
7. Low Compliance
Before GST was implemented, compliance with the tax system was low because of its complexity. Because of the confusing legal landscape and the lack of coordination between federal agencies, smaller factories and service providers hardly ever complied with regulations.
Changes brought : Simple procedure
This is all because of the GST’s streamlined process, which has resulted in increased tax compliance and a surge in revenue. Having a central repository of information makes it more difficult to avoid paying taxes while simultaneously making it simpler to identify those who do so. In addition, incentives for producers to keep things honest are provided by measures like the Input Tax Credit.
8. Opaque Tax Administration
In the past, taxes were collected twice, once when a product left the factory and once when it was sold to a consumer. While the manufacturing stage saw full compliance with the tax regime, the retail stage saw widespread noncompliance from wholesalers to smaller shops. There was widespread abuse of the systemic weaknesses introduced by the tax code’s intricate design. The tax authorities’ lack of transparency only made matters worse. Over time, the system became rigged in favour of everyone from the tiniest shopkeepers to the wholesalers and the bureaucrats, at the expense of the government coffers.
Changes brought: Transparent Tax Administration
High compliance can be attributed to GST, which simplified the tax system from the previous convoluted one. The IGST and ITC provisions of the tax also made it simpler to track down and punish anyone who attempted to evade payment. As a result of increased compliance on the part of manufacturers and service providers, tax officials’ opportunities to profit from corruption have shrunk. The previous system was not transparent, but GST changed that. To avoid multiple levies, GST should be collected only at the point of consumption. Hence, tax administration will be more open and devoid of corruption.
9. Low Compliance by Unorganised Sector
Several Indian industries, including construction and textiles, were primarily unregulated and disorganised under the previous tax structure. In consequence, tax avoidance became a major issue in many fields. That made it harder for the government to improve working conditions by organising the relevant industry.
Changes brought: Input Tax Credit
However, the Goods and Services Tax (GST) system allows for electronic filing and payment, and input credit is available only once a supplier has confirmed receipt of payment. So, these sectors are now subject to oversight and control.
CONCLUSION
The Goods and Services Tax is enabled thanks to changes made by the 101st Amendment Act of the Constitution of India, 2016. It is a joint effort between the federal government and the individual states to create a uniform system of indirect taxation across the country. The indirect sector of the economy has seen significant shifts in revenue production as a result of this modification. Several problems that hampered income and slowed economic progress under the previous administration have been fixed, as has the rivalry between the states and the Union government.
The Goods and Services Tax (GST) is a composite tax that has simplified the tax system by absorbing a number of other levies. It has made the country function as one unified entity, an economic superpower. This tax is crucial, and it’s one of the main things that could pull the country out of its current economic crisis and political corruption. It introduces new initiatives like a single law, uniform rates of taxation, an input tax credit system, etc. to deal with issues like low tax compliance, competition between the centre and states, corruption in tax collection, opaqueness of administration, tax burden, non-uniform tax structure, separate laws, etc.
According to the opinions of experts, the tax was passed in a rush, causing many small and medium-sized businesses to slow down or shut down entirely. It has been stated that the tax rates are similar to those of the previous regime, and that the small business community is unfairly impacted by the software and manpower requirements for tax compliance. Considering the inevitable teething issues that will arise during the rollout of such a massive change, the GST council has recommended that the GST council and parliament work together to revise both the GST council’s proposed implementation process and the GST tax rates. This means that the tax regime is gradually developing and taking form, which will help India on its path to become a developed nation.
Notes
1 Vikraman S, “Looking Back at GST’s Journey: How an Idea Is Now near Reality” (The Indian Express March 31, 2017) <https://indianexpress.com/article/explained/looking-back-at-gsts-journey-how-an-idea-is-now-near-reality-arun-jaitley-4593103/>
2 “GST: A 17-Year-Old Dream, 17 Phases towards Creating History” (India TodayJune 30, 2017) <https://www.indiatoday.in/india/story/gst-history-arun-jaitley-tax-reform-july-1-985482-2017-06-29>
3 Ranjan A, “Goods and Services Tax: History of India’s Biggest Tax Reform and People Who Made It Possible” (English June 29, 2017) <https://www.indiatvnews.com/business/india-goods-and-services-tax-history-of-india-s-biggest-tax-reform-and-people-who-made-it-possible-388702>
4 “GST: Meet the Men behind India’s Biggest Tax Reform That’s Been in Making for 17 Years” (India Today June 29, 2017) <https://www.indiatoday.in/india/story/goods-and-services-gst-reformers-atal-bihari-asim-dasgupta-chidambaram-arun-jaitley-985352-2017-06-29>
5 “GST Rollout: All except J-K Pass State GST Legislation” (The Indian Express June 22, 2017) <https://indianexpress.com/article/business/economy/gst-rollout-all-except-jammu-kashmir-pass-state-gst-legislation-4716003/>
6 India TO, “GST Draft Makes It Must for Companies to Pass Tax Benefit to Consumers: India News – Times of India” (The Times of IndiaNovember 27, 2016) <https://timesofindia.indiatimes.com/india/GST-draft-makes-it-must-for-companies-to-pass-tax-benefit-to-consumers/articleshow/55643968.cms>
7 “Business Portal of India : Taxation : Excise Duty” <http://archive.india.gov.in/business/taxation/excise_duty.php>
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