As, all we know that Taxes in India are levied by the Central Government and the State Governments. The authority to levy a tax is derived from the Constitution of India which allocates the power to levy various taxes between the Centre and the State. Accordingly, India currently has a dual system of taxation of goods and services, in a sense that tax on activity of manufacture and provision of service is collected by Union Government and that on sale of goods is collected by State Governments. Further, in order to avoid cascading effects on the taxation of goods and services, concept of value added tax principal with input tax credit mechanism has been adopted by the Governments.
However, introduction of VAT in the States has been a more challenging exercise in a federal country like India, where each State, in terms of Constitutional provision, is sovereign in levying and collecting State taxes because there was also no harmony in the rates of sales tax on different commodities among the States. Not only the rates of sales tax were numerous but also different from one another for the same commodity in different States. Beside this, there was also an unhealthy competition among the States in terms of sales tax rates – so-called “rate war” – often resulting in, revenue-wise, a counter-productive situation. It is in this background that attempts were made by the States to introduce a harmonious VAT in the States in the form of Goods and Service Tax. The introduction of GST will not only include comprehensively more indirect Central taxes and integrate goods and service taxes for the purpose of set-off relief, but may also lead to revenue gain for both the Centre and State through widening of the dealer base by capturing value addition in the distributive trade and increased compliance. The integrated Goods and Services Tax (GST) would replace the existing multiple tax structures of Centre and State taxes in the emerging economic environment. The relevance of introduction of GST can be understood as under:
Why GST needs to be introduced in India
a. The existing State-level VAT structure also has certain weaknesses. For instance there are even now, several taxes which are in the nature of indirect tax on goods and services, such as luxury tax, entertainment tax, etc., and yet not subsumed in the VAT. After introduction of GST various taxes at State level like sales tax, entertainment tax, luxury tax etc. as well as at Centre Central Excise Duty, Service tax will be subsumed in GST which would ultimately help in removing cascading effect of the taxes.
b. As all the States are taxing same commodity by different rates i.e. there is also no harmony in the rates of sales tax on different commodities among the States. After introduction of GST, it is expected that there would be harmony in the rates of sales tax for the same commodity which would lead to remove unhealthy competition among the States in terms of sales tax rates.
c. As, the Central Excise duty does not include several Central taxes in the overall framework of CENVAT, such as additional customs duty, surcharges, etc., as a result of the same, keeping the benefits of comprehensive input tax and service tax set- off out of reach for manufacturers/dealers. The introduction of GST, both the cascading effects of CENVAT and service tax are removed with set-off, and a continuous chain of set-off from the original producer’s point and service provider’s point upto the retailer’s level is established which reduces the burden of all cascading effects.
d. Indian economy is getting more and more globalized in the recent times, a number of Free Trade Agreements (FTAs) have been signed, which will allow imports into India duty free or at very low duties. Hence, there is need to have a nation-wide simple and transparent system of taxation to enable the Indian industry to compete not only internationally, but also in the domestic market. Integration of various Central and State taxes into a GST system would make it possible to give full credit for inputs taxes collected. GST being a destination-based consumption tax based on VAT principle, would also greatly help in removing economic distortions caused by present complex tax structure and will help in development of a common national marked.
e. The introduction of GST along with prudent accounting policies, transparency and supported by a robust electronic controls will bring down the peak rates of taxation and enhance revenue growth. As a result of the same, India would be a country competiting at international level.
f. In spite of the improvements made in the current 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 desired. They are subject to disputes and court challenges, and the process for resolution of disputes is slow and 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. It is expected that introduction of GST would help in removing complexities of current tax system in terms of administration on the part of the administrator as well as in terms of compliances on the part of tax-payers.
g. In Current scenario, one of the main litigation is ‘classification of goods and services’ for the sole reason that rates of tax depends on how the goods or services are classified. In GST regime, the expectation is to avoid classification and in-turn the associated disputes. Thus, in GST regime, there should be no artificial classification, even between goods and services, to ensure that current classification issues do not crop up again. This is another reason to justify the introduction of GST in India.
h. As we knows that there are multiple exemption has been provided in the current indirect tax regime which unnecessarily leads to unbridled litigations between the department and the assessee’s. For example, The Finance Act, 1994 exempts storage and warehousing of ‘agricultural produce’. In this context, question has arisen as to whether ‘rice’ is an ‘agricultural produce’ or not? This issue was sorted out later vide Notification No. 4/2014-ST dated 17 February 2014. This is just one instance of confusion and there are numerous such issues. Thus, it is expected that in GST regime, there would be minimum possible exemptions which would in turn help in reduce confusing situations which leads to litigation.
On the reading of the same, in simple words to say, introduction of the GST at the Central and the State level has been considered to be a major step, an important breakthrough in the sphere of indirect tax reforms in India. If the VAT is a major improvement over the sales tax system, then the Goods and Services Tax (GST) will indeed be a further significant improvement, the next logical step – towards a comprehensive indirect tax reforms in the country which would ultimately increase India competitiveness globally and the industry.
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