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Understanding Goods and Services Tax # 1 Historical Background for implementation of GST in India

Goods and Services Tax - GST - By: - ARPIT HALDIA - Dated:- 13-2-2016 Last Replied Date:- 30-12-1899 - Goods and Services Tax i.e. GST has been in the news for numerous reasons during the last decade be it the game changing concept in the history of Indian Economy or which GST Approach should be preferred i.e. common GST or Dual GST or whether Indian political system has the required will and common approach for implementation of GST and discussion has gone to the extent of deciding that whether .....

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rtions and taxing consumption. Under this structure, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax essentially sticks on final consumption within the taxing jurisdiction. Therefore, the Task Force recommended the introduction of a destination based VAT type dual Goods and Services Tax (hereafter referred to as GST ). Some of the relevant extract of speech of Hon ble Finance Minister Shri Arun Jaitely while presenting the 122nd Cons .....

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a loser. It is unquestionably a very important moment because the whole process of indirect taxation in India will change once the GST itself is implemented. There will be uniformity to taxation as far as the whole country is concerned. There will be a seamless transfer of goods and services. The other important feature of this taxation is that there would be no tax on tax. It may bring inflation slightly down. Economists estimate that it has a potential to give a boost to India s GDP itself. T .....

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uestions which arises to a common mind and some of them are What is GST How it is different from present structure of Taxes at Central and State Level Is it really a magic stick which would bring about a boon as soon as it is implemented What is the impact of DUAL GST and is it really the best available option How will it be implemented Last of the many that when it will be implemented. The current article would be focusing on the Historical Background of Goods and Services Tax. How it has evolv .....

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Ministry of Finance, Government of India released in the month of March 2009 wherein it was stated that The state VAT design is based largely on the blueprint recommended in a 1994 report of the National Institute of Public Finance and Policy, prepared by a team led by late Dr. Amaresh Bagchi (hereinafter, the Bagchi Report ). This Report by Dr Amaresh Bagchi commonly referred to Bagchi Report on Reform of Domestic Trade Taxes in India: Issues and Options , National Institute of Public Finance a .....

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o a distorted structure of production, consumption and exports. This problem can be effectively addressed by shifting the tax burden from production and trade to final consumption, and from savings to consumption. The existing tax system introduces innumerable distortions resulting in inefficient resource allocation and adversely impacting GDP growth. It also provides an incentive to firms to engage in political lobbying for exemptions and favourable modifications in the tax schedule. The Indian .....

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ng cascading effect of multiple taxes and was more prone to tax evasion and avoidance. The Tax Rates were very high as the taxation base was very narrow, therefore there were political lobbying for exemptions and lowering of Tax Rates. The tax system at time was not providing a level playing field to all the market players. The neutrality principle of taxation provides that the taxes should be such that they provide a level playing field to all the market players and tax should not be a factor i .....

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ding it difficult to rationalize their tax structures, and in some states, products like automobiles are currently being taxed at the same low rate as cereals. Such competition among the States was neither desired not appropriate. The shortcomings and the suggested way out of them in various studies and reports of the leading authors would be discussed in the series of articles later on. Why then GST was not implemented in place of State VAT in the Year 2004-05 This now takes us to the all impor .....

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there was a requirement of bringing in GST, then why it was not brought in place before VAT rather than first moving to VAT from single point taxation and then moving from VAT to GST. The answer had been given in Bagchi Report as follows: Given this background, the only feasible option seems to be a dual system in which the VAT is levied by the two levels of government independently within the existing constitutional framework. This would be possible if the MODVAT now operating through excise t .....

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ffects and perhaps lay the foundation for an even more rational regime in the future. Thus, first best solution being GST was not adopted but somewhat a stop gap arrangement VAT was adopted in place to lay down the pathway for implementation of GST in future. It s hard not to imagine looking to the current stalemate in the country for implementation of GST that what would have been the situation, if the study team on the recommendation of which the current blueprint of VAT has been brought in pl .....

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Report and was discussed in detail as a possible option in the report. It would be appropriate here to refer the observation in Working Paper on GST Reforms and Intergovernmental Considerations in India for the Department of Economic Affairs Ministry of Finance, Government of India released in the month of March 2009 wherein it was stated that 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 alluded to in .....

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single point of taxation to multipoint Taxation, is now seeking to move within a period of 10 years from VAT to GST. We need to be patient and need to understand that it s no small thing and if it would have been then Bagchi Report, itself would have recommended for implementation of GST at that time. Introduction of Concept of VAT in India in the Indirect Taxes at the Central and State Level The concept of VAT was first introduced in India in Indirect Taxes in the Year 1986. The Journey of VAT .....

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ever, at present there is no seamless transfer of goods and services in the country and tax is not a mere pass through during production and distribution and is added as cost in many cases during the intermediate stage. However the concept of GST suggests that the tax should stick as a cost only at final consumption stage. Therefore, the concept of VAT in Central and State Taxes prevalent in the present scenario is limited in scope as against the concept of GST. Historical Background for Impleme .....

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propose that we set April 1, 2010 as the date for introducing GST. World over, goods and services attract the same rate of tax. That is the foundation of a GST. People must get used to the idea of a GST. Hence, we must progressively converge the service tax rate and the CENVAT rate. I propose to take one step this year and increase the service tax rate from 10 per cent to 12 per cent. Let me hasten to add that since service tax paid can be credited against service tax payable or excise duty paya .....

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progressive scheme of Taxation known as GST. This declaration was more than a whisper and laid down the first real intent for the implementation of GST. In almost all the budget speech since the year 2006-07, there has been a reference to the implementation of GST. The relevant portion of the Speech of Hon ble Finance Minister in different years is being reproduced herewith to showcase the historical background of the process and preparation for the Implementation of GST. It showcases the fact .....

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7-08 VAT, CST and a Roadmap towards GST 116. I wish to record my deep appreciation of the spirit of cooperative federalism displayed by State Governments and especially their Finance Ministers. At my request, the Empowered Committee of State Finance Ministers has agreed to work with the Central Government to prepare a roadmap for introducing a national level Goods and Services Tax (GST) with effect from April 1, 2010. Observation about GST in the Budget Speech for the Year 2008-09 CST and a Road .....

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he Goods and Services Tax with effect from April 1, 2010. Observation about GST in the Budget Speech for the Year 2009-10 82. In the course of preparation of this budget, I have had the opportunity to interact with large number of stakeholders and receive valuable inputs. Most suggestions were for structural changes in the tax system. Tax reform, like all reforms, is a process and not an event. Therefore, I propose to pursue structural changes in direct taxes by releasing the new Direct Taxes Co .....

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have reached an agreement on the basic structure in keeping with the principles of fiscal federalism enshrined in the Constitution. I compliment the Empowered Committee of State Finance Ministers for their untiring efforts. The broad contour of the GST Model is that it will be a dual GST comprising of a Central GST and a State GST. The Centre and the States will each legislate, levy and administer the Central GST and State GST, respectively. I will reinforce the Central Government s catalytic ro .....

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r cent, the only rate below the mean rate. There is a case for enhancing the rate on many items appearing in this list to 8 per cent, which I propose to do, with the following major exceptions: • food items; and • drugs, pharmaceuticals and medical equipment. Observation about GST in the Budget Speech for the Year 2010-11 26. On Goods and Services Tax, we have been focusing on generating a wide consensus on its design. In November, 2009 the Empowered Committee of the State Finance Mini .....

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2011, the indirect tax administrations at the Centre and the States need to revamp their internal work processes based on the use of Information Technology. I am happy to inform Honorable Members that project ACES - Automation of Central Excise & Service Tax, has already been rolled out throughout the country this year. This will impart greater transparency in tax administration and improve the delivery of taxpayer services. Similarly, a Mission Mode Project for computerisation of Commercial .....

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e tax to 12 per cent as it was before I introduced the third stimulus package. I am not resorting to this option to maintain the growth momentum and also to bring about a convergence in the rates of tax on goods and services. I, therefore, propose to retain the rate of tax on services at 10 per cent to pave the way forward for GST. Observation about GST in the Budget Speech for the Year 2011-12 Tax Reforms 21. The introduction of the Direct Taxes Code (DTC) and the proposed Goods and Services Ta .....

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gislation for the Central and State GST. 24. Among the other steps that are being taken for the introduction of GST is the establishment of a strong IT infrastructure. We have made significant progress on the GST Network (GSTN). The key business processes of registration, returns and payments are in advanced stages of finalisation. The National Securities Depository Limited (NSDL) has been selected as technology partner for incubating the National Information Utility that will establish and oper .....

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yments. A number of States have already started accepting Electronic Tax Returns and issuing forms required for inter-state trade. 152. In view of the healthy growth in indirect taxes in 2010-11, I had the option to roll back the Central excise duty to levels prevailing in November 2008. I have chosen not to do so for two reasons. I would like to see improved business margins translated into higher investment rates. I would also like to stay my course towards GST. I have therefore decided to mai .....

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items that are mainly in the nature of consumer goods. The remaining 240 items would be brought into the tax net when GST is introduced. 184. The actual collections of Service Tax do not reflect the full potential of this sector. While retaining the standard rate of service tax at 10 per cent, I seek to achieve a closer fit between the present service tax regime and its GST successor by: • Bringing in a few new services into the tax net to expand the tax base while ensuring that the impact .....

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ssage that honest taxpayers would be facilitated and deviants would be dealt with severely; and • Adoption of Point of Taxation rules for services which would shift the basis for tax collection from cash towards accrual basis as with Central Excise duty. 194. Many experts have argued that it will be desirable to tax services based on a small negative list, so that many untapped sectors are brought into the tax net. Such an approach will be very conducive for a nationwide GST. I propose to i .....

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er progress. 28. The structure of GST Network (GSTN) has been approved by the Empowered Committee of State Finance Ministers. GSTN will be set up as a National Information Utility and will become operational by August 2012. The GSTN will implement common PAN-based registration, returns filing and payments processing for all States on a shared platform. The use of PAN as a common identifier in both direct and indirect taxes, will enhance transparency and check tax evasion. I solicit the support o .....

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• Service Tax law is complex and sometimes avoidably different from Central Excise. We need to bring the two as close as possible in the light of our eventual goal of transition to GST. I have attempted to address both these issues this year. 159. Last year, I had initiated a public debate on the desirability of moving towards taxation of services based on a negative list. In the debate that continued for the better part of the year, we received overwhelming support for this new concept. It .....

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and shall be notified when the negative list is put into effect. These rules will also provide a possible backdrop to initiate an informed debate to assess all the issues that may arise in the taxation of inter-state services for the eventual launch of GST. 172. I propose to set up a Study Team to examine the possibility of a common tax code for service tax and central excise which could be adopted to harmonise the two legislations as much as possible at the right time. Observation about GST in .....

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overwhelming majority - are agreed that there is need for a Constitutional amendment; there is need for State Governments and the Central Government to pass a GST law that will be drafted by the State Finance Ministers and the GST Council; and there is need for the Centre to compensate the States for loss due to the reduction in the CST rate. I hope we can take this consensus forward in the next few months and bring to this House a draft Bill on the Constitutional amendment and a draft Bill 30 o .....

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GST and DTC 73. Revenues are of paramount importance. The best source of revenue is taxes and for that we need modern tax laws. I am disappointed that we have not yet been able to introduce GST. I leave it to you to answer the question, who blocked the GST when an agreement on the game-changing tax reform was around the corner? We have also got ready a Direct Taxes Code that will serve us for at least the next twenty years. I intend to place it on the website for a public discussion without part .....

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n apprehensive about surrendering their taxation jurisdiction; others want to be adequately compensated. I have discussed the matter with the States both individually and collectively. I do hope we are able to find a solution in the course of this year and approve the legislative scheme which enables the introduction of GST. This will streamline the tax administration, avoid harassment of the business and result in higher revenue collection both for the Centre and the States. I assure all States .....

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nner. 96. We need to revive growth and investment to ensure that more jobs are created for our youth and benefits of development reach millions of our poor. We need an enabling tax policy for this. I have already introduced the Bill to amend the Constitution of India for Goods and Services Tax (GST) in the last Session of this august House. GST is expected to play a transformative role in the way our economy functions. It will add buoyancy to our economy by developing a common Indian market and .....

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levy of tax on services by both the Centre and the States, it is proposed to increase the present rate of service tax plus education cesses from 12.36% to a consolidated rate of 14%. Hassle Free Business Environment: Created a non-adversarial tax regime, ending tax terrorism; Secured the political agreement on the goods and services tax (GST), that will allow legislative passage of the constitutional amendment bill; Conclusion: From the above relevant extract of budget speech of the past decade .....

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