Chapter I

INTRODUCTION
Taxes are broadly classified as Direct and Indirect taxes. In the basic scheme of
taxation in India, it is envisaged that Central Government will get tax revenue from
income tax, excise, customs and service tax, while State governments will get tax
revenue from sales tax/value added tax, excise etc. Article 246(1) of Constitution of
India States that Parliament has exclusive powers to make laws with respect to any
matter enumerated in List I of the seventh schedule to the Constitution. Likewise
Article 246(3), the legislature of any State has exclusive power to make laws for State
with respect to any matter enumerated in List II of seventh schedule to the
Constitution.
Introduction of VAT in the States has been more challenging exercise in a federal
country like India, where each State, in terms of Constitutional provisions, have
exclusive power in levying and collecting State taxes. Before introduction of VAT, in
sales tax regime, apart from the problem of multiple taxation and burden of adverse
cascading effect of taxes, there was also no harmony in the rates of sales tax on
different commodities among the States. Not only were the rates of sales tax
numerous and different from one another for the same commodity in different States,
but there was also an unhealthy competition among the States in terms of sales tax
rates-so “rate war” called often resulting in, revenue-wise, a counter-productive
situation.
In order to avoid any unhealthy competition among the States which may lead to
distortions in manufacturing and trade, attempts have been made from the very
beginning to harmonise the VAT design in the States, keeping also in view the
distinctive features of each State and the need for federal flexibility.
The States started implementing VAT beginning from April 1, 2005. After
overcoming the initial difficulties all the States and Union Territories have now
implemented VAT. Responses of industry and also of trade have been indeed
encouraging. The rate of growth of tax revenue has nearly doubled from the average
annual rate of growth in the Pre-VAT after the introduction of VAT.
In India, a number of indirect taxes are imposed upon goods both by the Central
government and State governments e.g. excise duty is levies on goods manufactured
or produced in India; customs duty on import into India and export out of India of
goods and service tax on services provided and consumed in India. These taxes on
goods and services are levied by the Central government while VAT is imposed by the
State governments on sale of goods. Most of the States also have made provisions for
 Introduction

imposition of purchase tax when purchase is from unregistered dealers.

As the world economy slows, and increasing financial volatility and turbulence
become the “newest normal,” only a few economies have the resilience to be a refuge
of stability and the potential to be an outpost of opportunity. India is one of those few.
As oil and commodity prices continue to be soft, and in the wake of actions taken by
the government and the Reserve Bank of India, macro-economic stability seems
reasonably assured for India. This bedrock of stability coupled with reforms to
unleash the entrepreneurial energies of India can create the policy credibility and
business environment that India is indeed seizing the historic opportunity afforded by
domestic and international developments to propel the economy to a high growth
trajectory. Key amongst these reforms is the goods and services tax, 1 which has, in
some ways, been “priced” into expectations of the government’s reform program, but
not gets success.
Economic liberalization and reforms played a great role in the development of Indian
economy. In India, goods are taxable since long but till 1994 there was no tax on
services. Service tax was introduced by the then Finance Minister, Dr. Manmohan
Singh, in the year 1994-95, but only on three services. With the passing of time, the
number of services were increased year by year and presently there number are more
than hundred on which service tax is imposed. In the sphere of indirect tax reforms in
India Value added tax at the Centre and States level has been considered to be a major
step.
For nearly ten years. India has been on the verge of implementing GST. But now,
with political consensus close to being secured, the nation is on the cusp of executing
one of the most ambitious and remarkable tax reforms in its independent history.
Implementing a new tax, encompassing both goods and services, to be implemented
by the Centre, 29 States and 2 Union Territories, in a large and complex Federal
system, via a constitutional amendment requiring broad political consensus, affecting
potentially 2-2.5 million tax entities, and marshalling the latest technology to use and
improve tax implementation capability, is perhaps unprecedented in modern global
tax history.
Due to multiplicity of taxes on goods it is very difficult for a businessmen, not only to
Indian businessmen but also for multinational corporations to do trading smoothly.

1GST.
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Therefore, a new and composite tax, named Goods and Services tax is proposed by
the Central Government not only to be imposed on goods but also on services and
most of the indirect taxes which are at present imposed by the centre and State
governments on goods and services shall be subsumed either in Centre GST or State
GST, as the case may be.
To achieve these objectives an amendment in the Constitution is required and a Bill,
in the name of the Constitution (One Hundred and Twenty Second Amendment) Bill,
2014 was introduced in Parliament. Though the Bill was passed by the Lok Sabha, the
matter is still pending in Rajya Sabha. By this Bill a new Article 246A, will be
inserted which deals with taxation of goods and services by Union government as
well as State governments. The proposed Article 246A(1) may run as follows:
Notwithstanding anything contained in articles 246 and 254, Parliament, and subject
to clause (2), the Legislature of every State, have power to make laws with respect to
goods and services tax imposed by the Union or by such State. And as per Article
246A(2) Parliament has exclusive power to make laws with respect to goods and
services tax where the supply of goods, or of services, or both takes place in the
course of inter-State trade or commerce.
It is easy to overlook how ambitious the Indian GST will be, and a cross-country
comparison highlights the magnitude of ambition. According to the World Bank
report of 2015, over 160 countries have some form of value added tax, which is what
the GST would be. But the ambition of the Indian GST experiment is revealed by a
comparison with the other large federal systems i.e. European Union, Canada, Brazil,
Indonesia, China and Australia-that have a VAT. But the United States does not have a
VAT till present.
The Indian GST is expected to represent a leap forward in creating a much cleaner
dual VAT which would minimize the disadvantages or completely independent and
completely centralized systems. A common base and common rates across goods and
services and very similar rates across States and between Centre and States will
facilitate administration and improve compliance while also rendering manageable
the collection of taxes on inter-State sales. At the same time, the exceptions in the
form of permissible additional excise taxes on some goods, petroleum and tobacco for
the Centre and petroleum and alcohol for the States will provide the requisite fiscal
autonomy to the States. Indeed, even if they are brought within the scope of the GST,

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the States will retain autonomy in being able to levy top-up taxes on these goods. The
Indian GST will be the 21st century standard for VAT in federal systems. It is,
therefore, imperative to ensure that the design and implementation of this policy is
done right.
The replacement of the State sales taxes by the Value Added Tax in 2005 marked a
significant step forward in the reform of domestic trade taxes in India. Buoyed by the
success of the State VAT, the Centre and the States are now embarked on the design
and implementation of the perfect solution, Goods and Services Tax, to be levied
concurrently by both levels of the governments.
The essential details of the dual GST are still not known. Will it necessitate a change
in the constitutional division of taxation powers between the Centre and the States?
Will the taxes imposed by the Centre and the States be harmonized, and, if so, how?
What will be treatment of food, housing; and inter-State services such as
transportation and telecommunication? Which of the existing Centre and State taxes
would be subsumed into the new tax? What will be the administrative infrastructure
for the collection and enforcement of the tax? These are issues which ultimately
define the political, social, economic and legal character of the tax and its impact on
different sectors of the economy, and households in different social and economic
strata.
The important improvements made are, ‘‘the replacement of the single-point State
sales taxes by the VAT in all of the States and Union territories, reduction in the
Central Sales tax rate to 2%, from 4%, as part of a complete phase out of the tax, the
introduction of the Service Tax by the Centre, and a substantial expansion of its base
over the years, and rationalization of the CENVAT rates by reducing their multiplicity
and replacing many of the specific rates by Ad Valorem rates based on the maximum
retail price of the products. These changes have yielded significant dividends in
economic efficiency of the tax system and ease of compliance and growth in
revenues”.
The State VAT eliminated all of the complexities associated with the application of
sales taxes at the first point of sale. The consensus reached among the States for
uniformity in the VAT rates has brought an end to the harmful tax competition among
them. It has also lessened the cascading of tax i.e. tax on tax.
The design of the CENVAT and State VAT’s was dictated by the constraints imposed
by the Constitution, which allows neither the Centre nor the States to levy taxes on a
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 Introduction

comprehensive base of all goods and services and at all points in their supply chain.
The Centre is constrained from levying the tax on goods beyond the point of
manufacturing, and the States in extending the tax to services. This division of tax
powers makes both the CENVAT and the State VATs partial in nature and contributes
to their inefficiency and complexity. The principal deficiencies of the current system,
which need to be the primary focus of the next level of reforms.
The CENVAT is levied on goods manufactured or produced, in India. This gives rise
to definitional issues as to what constitutes manufacturing? And valuation issues for
determining the value on which the tax is to be levied. 1 While these concepts have
evolved through judicial rulings, it is recognized that limiting the tax to the point of
manufacturing is a severe impediment to an efficient and neutral application of tax.
Manufacturing itself forms a narrow base. Moreover, the effective burden of tax
becomes dependent on the supply chain, i.e., the taxable value at the point of
manufacturing relates to the value added beyond this point. 2 It is for this reason that
virtually all countries have abandoned this form of taxation and replaced it by multi-
point taxation system extending to the retail level.3
Australia is the most recent example of an industrialized country replacing a tax at the
manufacturing or wholesale level by the GST extending to the retail level. The
previous tax was found to be unworkable, in spite of the high degree of sophistication
in administration in Australia. It simply could not deal with the variety of supply
chain arrangements in a satisfactory manner.
The States are precluded from taxing services. This arrangement has 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.
Tax cascading remains the most serious flaw of the current tax system. It increases
the cost of production and puts Indian suppliers at a competitive disadvantage in the
International markets. It creates a bias in favour of imports, which do not bear the
hidden burden of taxes on production inputs. It also detracts from a neutral
application of tax to competing products. Even if the statutory rate is uniform, the

1Bagchi Report (1994).

2Ahmad and Stern (1984) for the definition of effective taxes and applications to India. Bagchi (1994)
provides estimates of effective excise tax rates, which are shown to vary from less than one percent to
more than 22%.
3For example, these were precisely the reasons for the replacement of the Federal Manufacturers’ Sales
Tax by the Goods and Services Tax, in 1991. See, Canada Department of Finance (1987) and Poddar
Satya and Nancy Harley (1989).
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 Introduction

effective tax rate which consists of the statutory rate on finished products and the
implicit or hidden tax on production inputs can vary from product to product
depending on the magnitude of the hidden tax on inputs used in their production and
distribution. The intended impact of government policy towards sectors or households
may be negated by the indirect or hidden taxation in a cascading system of taxes.
In spite of the improvements made in the tax design and administration, over the past
few years, the systems at both central and State levels remain complex. Their
administration leaves a lot to be rectified. They are subject to disputes and court
challenges, and the process for resolution of disputes is not only slow but also
expensive. At the same time, the systems suffer from substantial compliance gaps,
except in the highly organized sectors of the economy. There are several factors
contributing to this unsatisfactory state of affairs. The most significant cause of
complexity is, of course, policy related and is due to the existence of exemptions and
multiple rates, and the irrational structure of the levies. These deficiencies are the
most glaring in the case of the CENVAT and the Service Tax.
The complexities under the State VAT relate primarily to classification of goods to
different tax rate schedules. Theoretically, one might expect that the lower tax rates
would be applied to basic necessities that are consumed largely by the poor. This is
not the case under the State VAT. The lowest rate of 1% applies to precious metals
and jewellery, and related products- hardly likely to be ranked highly from the
distributional perspective. The middle rate of 4% applies to selected basic necessities
and also a range of industrial inputs and IT products. In fact, basic necessities fall into
three categories i.e. exempted from tax, taxable at 4%, and taxable at the standard rate
of 12.5%. The classification would appear to be arbitrary, with no well accepted
theoretical underpinning. Whatever the political merits of this approach, it is not
conducive to lower compliance costs.
Most retailers find it difficult to determine the tax rate applicable to a given item
without referring to the legislative schedules, Consumers are even less aware of the
tax applicable to various items. This gives rise to leakages and rent seeking.
Many of the administrative processes are still manual, not benefiting from the
efficiencies of automation. All this not only increase the costs of compliance, but also
undermines revenue collection.
Multiple VAT rates become a source of complexity, and disputes, for example, over
borderlines, adding to the costs of tax administration and compliance. It is for this

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reason that countries like New Zealand, Singapore, and Japan have chosen to apply
the tax at a low and uniform rate, and address any concerns about vertical equity
through other fiscal instruments, including spending programs targeted to lower-
income households.1
The basic objective of tax reform would be to address the problems and deficiency of
the current system. It should establish a tax system that is economically efficient and
neutral in its application, distributionally attractive, and simple to administer.
1.1 Hypotheses
The research work will testify the following hypothesis:
(i)The existing VAT system and Service Tax vis-à-vis GST.
(ii)A uniform State GST threshold is desirable.
(iii)Search of suitable model of GST beneficial for Indian economy.
1.2 Research Methodology
The research method adopted is basically doctrinal in nature. With the help of
materials relating to taxation of goods and services a comparative and analytical study
will be made.
A critical approach is adopted to testify the need, justification, use and utility of
proposed Goods and Services Act, 20162 and Integrated Goods and Services Act,
20163 a legislature of the Central Government.
1.3 Framework of the Research Work
For the purpose of Systematic study, the research work is broadly classified into eight
chapters. Chapter I introduces the subject matters and defines and delimits the scope,
ambit and utility of research work.
Chapter II deals with historical development of tax reform in the field of Indirect
Taxes, particularly GST. One of the biggest taxation reforms in India would be Goods
and Services tax. Under the Constitution of India there are governments at different
level with constitutionally assigned fiscal responsibilities. These fiscal responsibilities
are shared by three levels of governments i.e. Central, State and Local. Naturally, a
tax reform at one level can have fiscal consequences for the governments at another

1Canada provides a refundable tax credit, (GST Credit) lower-income households through the personal
income tax system. The credit is paid in quarterly installments and income-tested for higher-income
households.
2GST, 2016 (Proposed).
3IGST, 2016 (Proposed) for Interstate Sales or Purchase and Service.
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level. To see the GST the light of the day, the Constitution (One Hundred and Twenty
Second Amendment) Bill, 2014 was introduced in Lok Sabha by the Finance Minister
Arun Jaitley on 19th December 2014. The Bill was passed by the Lok Sabha on 6 th
May 2015. An attempt was made by the Central Government to move the Bill in
Rajya Sabha on 11th May 2015, however, members of the opposition opposed it.
Again in recent concluded winter session of Parliament i.e. December 2015 no
discussion took place regarding GST in Rajya Sabha due to this or that reasons. The
government is very much positive to introduce the Bill in the upcoming Budget
Session of Parliament i.e. last week of February 2016 and again in April 2016 but no
success.
Chapter III is a chapter which takes care of making preliminary enquiry regarding
conceptual aspect of GST and its meaning. This chapter is devoted entirely to find out
what is the meaning ascribed to the word, Goods, Services and Goods and Services.
With the help of statutory provisions and case laws an attempt will be made to find
out the ambit, limit and meaning of GST.
Chapter IV is a chapter which centered around nature and design of GST. If GST
imposed, a question will arise whether it is a levy of centre only or of States only or
of both simultaneously. With the help of the materials, an attempt will be made to find
out, out of three models, which model will be more suitable to the Indian economy.
Out of a number of indirect taxes levied by the Centrel and State governments,
mainly on goods and services, which taxe will be subsumed in GST? A search will be
made to seize the answer to these queries, is the jurisdiction of this chapter along with
other queries.
If GST introduced what would be the suitable administrative structure is the
jurisdiction of Chapter V. No legislation become effective unless there is a proper and
honest administrative machinery. In India, that is a great problem. Out of the several
administrative structure, i.e., One tier functional commissionerate or two tier
functional commissionerates or three tier Territorial commissionerate, which will be
better to meet the need of the law, is the subject matter of discussions of chapter V.
If implemented whether the goods and services tax will contribute to removing
market distortions and increase the growth of Indian economy, is a million dollar
question? The answer of this and others is the objective of chapter VI. A critical

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evaluation of proposed GST Act, 2016 and IGST Act, 2016 will find its place in this
chapter.
More than 160 countries of the world adopted GST. Chapter VII, a comparison will
be made between the GST system of other countries with Indian system of GST.
Chapter VIII is a concluding chapter. When GST will be imposed it will subsume the
most of the indirect taxes imposed on goods and services. Presently, the Central
government has the monopoly power to tax services and the State governments have
the power to tax the sale of goods. The States will have to surrender their power to tax
the goods and share with Central Government the power to tax services. This will
certainly a very tough decisions for the States. The taxes will be collected at the
central level and then it will be distributed among the States. In India, it seems that a
dual system of GST consisting of centrel GST and States GST both simultaneously is
to be adopted alongwith IGST. Dual system of GST in Canada works on the
practically harmonized base. In India too, it will require a balance between the fiscal
autonomy of the States and the need for harmonization across the States and Union
territories so that the common market of India can flourish without any tax hindrance.

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