perspective

Goods and Services Tax Unscrambled

– Understanding the new proposed tax regime in India

- Maneesha Nigam

Abstract
A lot has been said and written about the proposed Goods and Services Tax (GST). In fact, this new proposed tax reform
is touted as one of the biggest taxation reforms in India. Its impact will be widespread and in this paper, we attempt to
understand the existing tax regime, challenges with the existing regime, the new proposed GST tax, its impact, pitfalls and
roadblocks in its enactment.
 Introduction
It has been 15 years since the roadmap for implementing the most ambitious constitutional amendment related to indirect taxes in
India was conceived, aptly named Goods and Services Tax (GST). Regimes, ideologies and much of the Indian business landscape has
changed during this long 15 year period. In fact, GST will go down in history as an expensively long implementation of any reform for
a developing nation, much less a long impending tax reform. While the delay can be attributed to many reasons, it clearly shows the
narrow and short sighted outlook of the political class, distorted vision of our legislators, and the self-seeking defensive posture of our
state governments in the garb of protecting its citizens.

I am not sure when or if GST in its proposed, or any other form, will see the light of an Indian morning but I consider it important to
keep the optimism and the spirit alive. After all, despite a sub-functional system, India has shown an impressive growth – annual GDP of
close to 8% for the last 10 years making it one amongst the fastest growing economies across the globe. With this perspective, here is an
attempt to present a comprehensive analysis of this highly complicated proposed GST bill.

Comprehend your indirect taxes as they exist today

Let us first enumerate all (well almost!) Here’s a simple illustration of how the manufacturer, who passes its incidence
the indirect taxes that we currently pay to various indirect taxes are levied: on to the customers. Excise duty in India
our governments, both to the state and is a federal subject except for certain item
‘A’ is a manufacturer who sells finished
center (central taxes) for the transactions like liquor which is a state subject and the
goods to ‘B’, a wholesaler. ‘B’ further sells
that we undertake on a regular and not duty is collected by the state, not by the
the goods to ‘C’, the retailer in a different
so regular basis. This list does not include center.1
state. ‘C’ sells the goods to the final
income tax as it is a direct tax and continues
consumer ‘Me’. Each transaction in this Customs duty
to be governed by separate laws as are
cycle will attract taxes, duties or levies.
corporate taxes. Customs duty is a type of indirect tax
Tax Incident 1 levied on goods imported into India and
Indirect taxes are charges that are levied on
Manufacturer of the finished goods, ‘A’ exported from India. Taxable event is
goods and services and not on income or
will attract central excise duty. In case import into or export from India. Import
individuals. Indirect tax, though recovered
the goods were imported, customs duty of goods means bringing goods into
from the consumer, is collected and
submitted by the dealers in the chain of will also be levied on ‘A’. Further, there is a India from a place outside the country.2

the transaction. possibility of additional excise duty levy, Tax Incident 2

additional customs duty levy, commonly
Intrastate sale from ‘A’ to ‘B’ will attract state
CENTRAL TAXES known as CVD, depending on the kind of
(broad categories) STATE TAXES sales tax or VAT.
input or import.
Value Added Tax / Sales tax
Excise duty Excise duty
Sales tax
Sales Tax is a levy on the purchase and
Customs duty Entry tax - Octroi Central excise duty is an indirect tax
sale of goods in India, levied under the
Interstate sales levied on those goods which are
State cess and authority of both central legislation
(Central sales tax manufactured in India and are meant
surcharge
or CST) (Central Sales Tax) and state government
for home consumption. The taxable
Service tax Entertainment tax legislations (sales tax). The state
event is ‘manufacture’ and the liability
Stamp duty and government levies sales tax principally on
Education cess of central excise duty arises as soon as
land revenue intrastate sale of goods and the central
the goods are manufactured. It is a tax
Surcharges government levies central sales tax on
on manufacturing, which is paid by a
interstate sale of goods.

1. http://www.archive.india.gov.in/business/taxation/excise_duty.php
2. http://www.archive.india.gov.in/business/taxation/custom_duty.php

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 VAT In case of a transaction involving ‘services’ to pay Y% tax, this time on X*(1+Y)+P,
within the meaning of central board of instead of having to pay only on P, the
VAT is a multipoint destination-based
excise and customs, instead of goods, the added value thereby resulting in taxes
system of taxation, with tax being
service provider would be levied service on taxes or double taxation.
levied on value addition at each stage
tax (central tax).
of transaction in the production / • Cross utilization of tax credit:
distribution chain. The term ‘value Service tax Claiming tax credit requires meticulous
addition’ implies the increase in value filing of prescribed documents in the
Service Tax is a tax levied on services
of goods and services at each stage required format, even then no central
rendered by a person and the
of production or transfer of goods and state tax credit can be claimed
responsibility of tax payment is on the
and services. VAT is a tax on the final against each other. Hence, the tax
service provider. It is an indirect tax as it
consumption of goods or services and is credits under center and state are
can be recovered from the service receiver
ultimately borne by the consumer.3 VAT is incompatible! Additionally, no tax
by the service provider in course of his
essentially a state subject. credit would be available in respect of
business transactions. 5

Tax Incident 3 certain levies such as basic Customs

Complexities in this tax duty, CST, entry tax or Octroi, which

Interstate sale from ‘B’ to ‘C’ will attract
then becomes a cost to business
central sales tax (CST). The sale may also regime
thereby increasing the cost burden on
attract entry tax.
• Multiplicity of taxes: From the the end consumer.
CST previous illustration, it is evident that a
simple movement of goods from one • Non uniform tax rate structure: In a
Central Sales Tax is a tax levied on developing nation such as India, states
hand to another attracts multiple taxes.
interstate sale by the center but collected which offer lower indirect taxes attract
This multiplicity of taxes has rendered
by the state.
the indirect taxation landscape in India more investments resulting in greater
Octroi excessively complex that mandates development compared to states with
each dealer in the chain of transaction higher indirect taxes. These states are
Octroi is charged at the point of entry of
to maintain multiple forms, receipts able to manipulate taxes since they
goods into a local area for consumption,
and records of each transaction. The have higher consumption which helps
use, or sale. It is generally applicable to
return filing is nothing short of a hair in minimizing the impact on the state’s
goods entering urban areas, i.e., areas
pulling exercise, with cumbersome
serviced by municipalities or corporations. revenue. A uniform tax structure will
tax calculations while accounting for
It is a check post-based levy collected by give all the states a level playing field.
all the credits to be deducted on each
the local tax administration and has a
transaction.
broad tax base covering all goods brought The case for another tax
into a local jurisdiction. • Ambiguity, at times: Indirect tax is system
imposed and collected by either the
Entry tax is levied on the sale of goods In a quest to simplify payment and
center or the state and sometimes,
brought into a municipal area from other collection of taxes, regime after regime
both. There are times when the two
jurisdictions. It is an account-based levy
overlap leading to chaos and often has tried to introduce several mechanisms
collected by sales tax administration for
unnecessary litigations resulting and reforms, depleting much of the
the local governments and is applicable
in increase in compliance and government’s coffers in initiating and
to goods sold by sales tax dealers only.
administrative cost to businesses. organizing committees to study, research
Octroi or entry tax, as the case may be, is
applicable to foreign as well as domestic • Double taxation or cascading effect and recommend how simplification can
goods, with no set-off provisions.4 of taxes: Also referred as taxes on be effected and implemented. VAT was
taxes, this can be illustrated by using introduced in April 2005 to replace the
Tax Incident 4 the above example. A sells to B at X then existing general sales tax. Under VAT,
Intrastate sale from ‘C’ to ‘Me’ will further price and pays Y% as tax on it, B adds widespread reforms were introduced but
attract state sales tax or VAT. value of P and re-sells to C. Now C has were not sufficient. Thereafter a committee

3. http://www.archive.india.gov.in/business/taxation/vat.php
4. http://www.nipfp.org.in/media/pdf/books/BK_60/Chapters/2.%20Structure%20Of%20Domestic%20Trade%20Taxes%20%26%20Customs%20Duties.pdf
5. http://www.archive.india.gov.in/business/taxation/service_tax.php

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 was appointed, the Finance Ministry’s Joint and services tax will be levied on all 2. State Goods and Services Tax - SGST
Working Group, which researched and transactions except interstate sales,
3. Integrated Goods and Services Tax -
monitored the indirect tax mechanisms in which shall be governed by the
IGST (this is proposed to be the sum
several European nations and formulated a Integrated Goods and Services Tax.
of the applicable CGST and SGST)
proposal which formed the foundation for
the current proposed GST.
• Subsumed categories: GST
Levy of these taxes will be driven by the
recommends collapsing the above
kind of transaction that takes place. But
mentioned taxes and duties, and
before coming to the procedural and
The proposed GST bill: surcharges under three broad
application aspect, let us first rearrange the
Salient features categories:
current taxes under these broad categories,
• Dual GST model: Under the dual 1. Central Goods and Services Tax “subsumed” as the intelligentsia refers!
GST system, both central goods CGST
and services tax, and state goods

CGST SGST IGST

Excise duty Value Added Tax / sales tax Interstate sales tax

Customs duty including countervailing

State excise duty
duty (SVD), special additional duty (SAD)

Service tax Octroi entry tax in lieu of Octroi

Education cess Entertainment tax

Surcharges State cess and surcharge

• Taxable event will be place of sale • No cross-utilization of input tax • Service tax: Under the proposed GST,
and not place of origin: The GST credit (ITC): The GST bill prohibits not just the center but also the states
model has taken a 180 degree turn on cross-utilization of ITC between SGST have been granted the right to levy
the ‘taxable event’. Under the current and CGST. and collect service tax and the same
system, indirect taxes are collected at can be utilized for input credit against

the place of origin, whereas the GST

- Input tax credit: Input tax credit payment of tax on both goods and
is simply the credit for tax that a services. It is also proposed to have a
bill proposes the taxable event to be dealer accrues while paying taxes uniform tax rate for both goods and
the place of consumption instead of on input. For instance, the tax services. This will potentially streamline
the place of origin. This is a major shift paid by a wholesaler on purchase the process to a great extent and help
from the prevalent model and has been of goods from the manufacturer in bringing uniformity. The definition
a source of anxiety, understandably will entitle the wholesaler to claim of service tax has also been changed to
so, among some states that are credit of tax on sale of those goods include everything other than goods.
more manufacture- or production- to a dealer / retailer. So under the
centric. The concern stems from the GST, the assesse will not be able • GST council: A GST council chaired
to claim credit of input tax which by the Union Finance Minister and
apprehension of loss to the exchequer
was paid to the state to be offset ministers nominated by each state
on interstate transactions / sale.
against the tax liability to the center government as members will be
However, it is believed that this and vice versa. constituted. The decisions of the GST
model will increase the tax base and council will be made by three-fourth
consequently, result in more collection
for the state governments.

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 majority votes of the council, one-third • Taxes not under the purview of GST: services. Under consideration is
of the center, and two-third of the state. Certain taxes and duties have not providing adequate compensation
The GST will inter-alia recommend on been subsumed under any of the for the lower threshold states under
the GST rates, exemptions under the above three categories and are the VAT regime such as North-Eastern
GST, and taxes, cesses and surcharges proposed to continue to be governed states and special category states.
to be subsumed under the GST. The as per the prevalent laws and rules.
council may also function as a dispute These are stamp duty, vehicle tax, • Exemptions: Alcohol for human
consumption has been exempted,
resolution body. road and passenger tax, property tax,
as of now, from the levy of GST in
electricity duty, and basic customs and
• GST rate: Although the GST rate has
export duty.
the draft bill. This may get included
not been specifically mentioned in at a later date upon GST council’s
the draft bill, it is being speculated • GST threshold: In the interest of the recommendation. There are other
to be anywhere in the range of 18% small-scale industries and small traders, categories of goods that are being
to 24%. The critics of the draft bill a uniform state GST threshold across considered for exemption such as
are demanding an upper cap to be states is proposed. The threshold has petroleum products and tobacco,
specified lest the executive have undue been set at gross annual turnover however, under the original bill, they
powers to make changes to the rates. of INR 10 lakh, both for goods and are included under GST.

Understanding the GST operation

Let us understand the workings of the GST with an illustration:

X is a manufacturer in the state of Maharashtra and sells their goods for INR 10,000 to Y, a wholesaler in the same state. Y sells the goods to Z,
a retailer in the state of Karnataka for INR 11,000. Z resells the goods to C, consumer for INR 12,000 in the same state of Karnataka.

Let’s break this whole cycle in the following individual transactions and work the GST payable, assuming the CGST rate to be 12% and SGST
rate to be 10%. IGST will work out to be 22% (CGST+SGST).

1 2

• X to Y – Intrastate sale • Y to Z – Interstate sale

• Sale price – INR 10,000 • Sale Price – INR 11,000
• CGST @12% – 1200 • IGST @ 22% - INR 2,420
• SGST @ 10% – 1000 • Y to claim Input Tax Credit (ITC) of INR 2,200 paid at the purchase from X (above)
• Total GST – 2200 • Y’s tax liability INR 2420-2200 = INR 220 as IGST
• X will deposit the tax • Maharashtra to transfer the SGST collected on the first transaction to the centre
collected (INR 2200) in the state since the SGST input has been used to set-off the IGST.
of Maharashtra. • Tax collected by centre is CGST+SGST+IGST= 200+1000+220= 2420

3 4

• Z to C – Intrastate sale • Z’s Tax liability INR 2640-2420 • Total tax collected by:
• Sale price INR 12,000 = INR 220 • Center – INR 1540 (2200+220+220-1100)
• CGST @ 12% - INR 1440 • Z will deposit INR 120 as CGST • State of Karnataka – INR 1200 (1100+100)
• SGST @ 10% - INR 1200 and INR 100 as SGST • State of Maharashtra - INR 0
• Total GST – INR 2640 • Centre to transfer INR 1100
• Z to claim input tax credit of INR IGST input to the state of
2420 (CGST ITC = 1320 and SGST Karnataka to set-off SGST in the
ITC = 1100) same state transaction

Illustration 2

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 The benefits
• It is anticipated that with the introduction of GST, the tax liability will be reduced since the taxes on taxes or double taxation
will be completely eliminated, thus bringing down the cost of the goods and services, benefitting the consumers.

• Streamlining the process - Since under the proposed GST, a whole lot of taxes are subsumed, there would be lesser paperwork
required resulting in lower administrative cost to businesses.

• Will allow seamless utilization of input tax credit.

• Will levy a uniform rate for both goods and services across states in India, helping streamline and align tax calculations and
processes.

• Potential to stem corruption and black marketeering, since the authorities will have a better handle and can perform efficient
monitoring of tax due to the sheer simplicity of the structure and process.

• The introduction of GST will not only include comprehensively more indirect central taxes and integrate goods and services
taxes for set-off relief, but also capture certain value addition in the distributive trade.

• Will allow cross-utilization of input tax credit between goods and services.

• No refund claims would be required due to end-to-end seamless credit mechanism.

• It is anticipated that with the simplification of the process and elimination of double taxation, Indian goods will be available at
more competitive prices which should boost Indian exports and increase our foreign reserves.

Roadblocks to enactment
• Although at a concept level, all due to GST implementation. There is a
RNR can be defined as the optimum
the major political parties have proposal to allow levy of additional 1%
rate of tax which will ensure similar
demonstrated their assent to GST tax for the state of origin on interstate
revenue generation for the states
implementation, they disagree on transaction for a period of at least 2
and the center under the proposed
specific issues. And since the ruling years. It is however, feared that this
GST compared to what is being
party at the center does not enjoy a may further have a cascading effect
generated under the current regime
majority in the Upper House, the GST resulting in higher liability for the end
from the various tax levies. In
as proposed in the current form will consumer.
essence, the new tax structure should
struggle to pass. For the bill to pass in
the Rajya Sabha, it will need two-third
• The implementation itself will be have no negative revenue impact.
a humongous exercise as all the IT
votes. systems and processes will need to be
• The bill can be enacted only if 50% of synchronized. • The speculated GST rate is 20-26%.
the states in India ratify the passage
of the bill. This in itself is an enormous
• There are too many open questions
Much of the developed world that has
adopted this model has capped the
for which the center has not provided
task not just because of the differing rate at 12-18%. However, due to the
convincing answers such as the
political ideologies but as the bill does dual structure and simultaneous CGST
exemptions available under the new
not enjoy support from some states and SGST, states will get to collect less
regime, the limit for the small scale
who fear loss of revenue due to the than half of the proposed GST, which
industry, the percentage of the rate of
change in the tax collection and levy would work out to 8%-12% of SGST
tax itself, and more.
model. assuming the range of GST to be 20-
• Consensus of the states and center 26%. Therefore, any further lowering
• There are states that are demanding over revenue neutral rate (RNR) is of the tax rate may not find favor with
protection from the center for as also one of the impediments in the many states.
long as 10 years in the form of implementation of GST.
compensation for drop in revenue

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Is a Constitutional amendment necessary?
India has a federal structure with clear delineation of power to tax between the center and the states. While the center is empowered to
impose certain taxes such as excise, customs and service, the states have been empowered under the constitution to impose and collect
sales tax, octroi, purchase tax (in certain states), luxury tax, and property tax, among others. The rights of the center and states are mutually
exclusive and sacrosanct. Therefore, a constitutional amendment is essential for empowering the center to levy tax on sale of goods and the
states to levy service tax, tax on imports, and other consequential taxes.

The not so good about it

• The new system can potentially of the center. Consequently, the center • There are other proposals being
increase the gap between the more may eventually influence how the state considered for adoption such as the
developed and less developed states utilizes the money. multiple tax slabs for different items,
and ‘sin’ tax which is another unknown
since the tax will be on consumption.
• The GST model based on the taxation
category demanded by certain
• Although the total tax on the product event being “sale”, may harm the
quarters. The center is deviating and
may decrease only slightly, the states manufacturing environment in the
compromising on a lot of issues which
may lose their revenues to the center country. Since the state will not gain
were part of the original bill.
in this center-state divide of taxes. as much from the manufacturing
The problem may get compounded activity, they may not grant the much • Dealers may face a huge challenge in
in states which are governed by needed incentives and subsidies to the maintaining processes and systems of
different political parties than that manufacturing industry. both the regimes in cases of interstate
transactions between states that
present in the center, especially if
the state loses under the GST model
• Services will also be taxed at the
opt out of the GST and states that
same rate as goods, which may be
compared to the current one. With implement the GST.
much higher than the current system,
lesser revenue collections, they may
although its benefits cannot be
have to perpetually play in the hands
denied.

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 Conclusion
There are some valid points and concerns being raised by the opposition in the Parliament and several economists and scholars,
which should be addressed. It is important to establish broad consensus, more so as the states need to ratify the bill. While there
can never be a perfect system, it is imperative that all the parties arrive at an agreement to build a robust system which addresses
the many lacunae in the current system of indirect taxes. The implementation process for both governments (states and center) and
businesses will be time consuming, so even if the bill were to be passed today, it would be some years before the economy can start
reaping its true benefits. Even after the bill is passed, the enacted law will evolve and undergo several iterations and amendments.

About the Author

Maneesha Nigam
Senior Domain Delivery Manager - Legal Process Outsourcing, Infosys.

Maneesha is a law graduate with a Bachelor of Laws (LL.B) degree from the University of Delhi, and a Masters of Law (LL.M) from
Columbia University, School of Law, New York. She is admitted to the Bar, both in India and in the State of New York, USA. Prior to
joining Infosys, Maneesha was a practicing lawyer with leading law firms in India specializing in indirect taxes and anti-trust laws.

For more information, contact [email protected]

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