Present system of Indirect Taxation

Central Excise Duty on goods produced by manufacturer.

Service tax on services provided by service providers

Value Added Tax (VAT) by state

Central sales Tax

Proposed system of Indirect Taxation I.e. Goods and Services Tax(GST)

Goods and Services Tax (GST) is a part of the proposed tax reforms that center round evolving an efficient and harmonized consumption tax system in the country. Presently, there are parallel systems of indirect taxation as mentioned above at the central and state levels.

In the Union Budget for the year 2006-2007, Finance Minister has proposed that India should move towards national level Goods and Services Tax that should be shared between the Central and the States. He has proposed to 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. The first step towards introducing GST is to progressively converge the service tax rate and the CENVAT rate. It seems clear that the recommended dual GST will have a central part and a State part. Further, the Central and the State GST will both consist of a goods tax and a tax on services. Thus, both taxes will apply to goods and services. Further, the Central GST and the State GST will consist of multiple rates, insofar as they relate to goods, and will comprise a single rate, insofar as they relate to services. Full input tax credits would be available in regard to the Central GST and the State GST. The two taxes will operate in parallel and throughout the supply chain

Internationally, GST is based on supplies of goods/ services, rather than on manufacture and sales, and there are fairly elaborate rules governing the time and place of supply. It is very likely that the dual GST in India would also incorporate detailed rules in relation to determination of the taxable event and also the taxing jurisdiction. On the rates again, the excise duty as well as the State VAT have multiple rates, with a typical 8 per cent/16 per cent two-rate structure for excise and a typical 4 per cent/12.5 per cent two-rate structure for the State VAT. On the services front, it is not clear as to whether the Federal and the State GST will apply on the same set of services or they will operate on a mutually exclusive basis. Also, the present rate of service tax is 10 per cent and it is a moot point as to what the single rate of the Federal and the State GST will be on services. The cumulative incidence of the excise duty and the State VAT at present works out to around 22 per cent to 24 per cent of the retail sales price. There is an expectation that under the GST, the aggregate incidence of the tax should be significantly lower. There is much debate on the likely aggregate rate of the GST and there appears to be a consensus that it may approximate 20 per cent. However, recent debate suggests that a further reduction in the aggregate rate of GST is being contemplated. It is also possible that several other design elements of the GST can undergo changes. The additional benefit, apart from the reduction in rate, of the model is that the base on which Central and the State GST will be charged will be uniform and this will ensure that there is no cascading of taxes.

This would eliminate taxes leading to cascading and distortionary effects and improve efficiency in tax administration with lower cost of compliance for taxpayers. It will also carry forward public finance reforms. An efficient, simple and buoyant tax system is essential for improving the state of public finances through better revenue collection. A buoyant source of Government revenue is of immediate importance to fund its plans on inclusive growth.