UPSC

TAXATION &
GST
ऋषीकेश बडवे
 IMPORTANT CONCEPTS
 Tax कर - Modern economics defines tax as a mode of income
redistribution.
 Incidence of tax कर भार - The point where tax looks as being
imposed is known as the incidence of tax—the event of tax
imposition.

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 Impact of Tax कराचा प�रणाम
 The point where tax makes its effect felt is known as the
impact of tax — the after effect of tax imposition.

 Direct Tax प्रत कर

The tax which has incidence and impact both at the same

point is the direct tax—the person who is hit, the same person
bleeds.
 Indirect tax अप्रत कर

 The tax which has incidence and impact at the different

points is the indirect tax—the person who is hit does not bleed
someone else’s blood
 IMPORTANT CONCEPTS

 Methods of taxation कराच्या पद्

1. Progressive Taxation System
2. Regressive Taxation System
3. Proportional Taxation System

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 Characteristics of a Good Tax System चांगल्य कर पद्धती
वैिश�े
 Fairness वाजवीपणा – economists suggest inclusion of two elements
in the tax system to make it fair namely,
 horizontal equity
 vertical equity
 IMPORTANT CONCEPTS

 Efficiency कायर्�मत
 A good tax system raises revenue with the least cost on the
taxpayers and least interference on the allocation of resources in
the economy.

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 The tax system affects the economic decisions of individuals and
groups by either encouraging or discouraging them to save,
spend, invest, etc.

 Taxes xan improve efficiency of the economy

 Double Dividend of a tax – e.g. Tax on Tobaco

 IMPORTANT CONCEPTS

 Administrative Simplicity प्रशासक�यसुलभ

 computation, filing, collection, etc

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 Flexibility लविचकता
 scope of desirable modifications in future

 Transparency पारदशर्कत
 IMPORTANT CONCEPTS
 Different Types of Taxes कराचे िविवध प्रका
 An adveloram tax मुल्यानुसरी क - is a tax which is imposed on
the basis of the value of commodity produced or sold.

 A specific tax िविश� कर - is a tax posed on the basis of specific

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attribute of commodity viz. quantity, weight, size, length, width
and any of these. e.g. Tax on cigarette in India is imposed on the
basis of length.

 Custom Duty जकात शुल् - When goods are imported or exported,

custom duty is imposed and collected by central Government

 Excise Duty उत्पादन शुल - It is tax on manufacture and is levied on

the manufacturing goods within the country. It is also called as
Cen VAT [Central VAT]
 IMPORTANT CONCEPTS

 Fringe Benefit Tax (FBT) िफ्रंज बेिनिफटॅक्

 Tax on total value of fringe benefits given by a company to it's
employees collectively like free accommodation, free transport,
education for children club membership, travelling,

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entertainment etc.
 Rate of FBT was 30%. It was abolished by govt in 2009.
 Pigovian Tax िपगोिवयन कर
 It is imposed on bodies that have negative externality.
 For example, pollution. Externality means impact of one person's
action on the well being of an outsider. For example Carbon tax.
 IMPORTANT CONCEPTS

 Minimum Alternative Tax (MAT) िकमान पयार्यी कर

 It is the tax on such companies which shows profits in their books,
distributes dividents to the shareholders and yet pay zero tax to
the govt by lawfully managing and manipulating their acts in
such a way and enjoy rebates, concessions and exemptions

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provided in income tax law so as to go scottfree and avoid tax.
 On such companies a tax is imposed called MAT on their book
profits.
 MAT is form of presumptive taxation based on presumption that
an individual or company may be earning enough to be able to pay
tax & yet not paying.
 IMPORTANT CONCEPTS
 Withholding Tax िवथहोिल्डं टॅक्
 It means withholding of tax from certain payments including
interests, salaries paid to employees professional fee, payments to
contractors etc. It is the same as TDS. (Tax Deduction at Souce)

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 Capital gains Tax भांडवली लाभ कर
 It is the tax on the gains made from buying & selling assets like
land, shares etc.

 Wealth Tax सपं �ी कर

 When income accumulates into wealth, it gets taxed after a point.
It is levied only in respect of specified non-productive asset such
as residential houses, urban land, jewellery, bullion, motors cars
etc.
 IMPORTANT CONCEPTS

 Securities transaction tax प्रितभू व्यवहा कर

 It was introduced in Budget 2004-05 . It is a tax on the value of
all the transactions of purchase of securities that take place in a

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recognized stock exchange of India.

 Cess and Surcharge उपकर आिण अिधभार

 Cess is an additional levy on tax with a specific aim. Once the
aim is achieved cess may be removed. e.g. education cess.

 Surcharge is tax on tax, imposed to reduce inequality. It is

general and thus collections from it can be used for any purpose.
 IMPORTANT CONCEPTS
 Service Tax सेवा कर
 Service tax was first imposed in 1994.
 A new tax regime, based on negative list of exempted services,
came into effect in July 2012.

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 With this, all services - except 30 activities put in negative list,
came under the tax at the increased rate of 12% Service sector
accounts for 60% of GDP in India and thus service tax is the
major source of income for govt of India.
 88th constitutional amendment (2004). amended Art. 270 &
inserted entry 92C in Union list as "taxes on services".
 Thus service tax is union subject.
 IMPORTANT CONCEPTS

 Tax Expenditure कर खचर्–

 It refers to revenue forgone as a result of exemption and
concessions.
 Some of these concessions and exemption may be justified as

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they enhance investment and generate more taxes for the
Government While some of them can distort allocation and stunt
productivity.
 They may also result into multiplicity of rates, legal
complexities, classification disputes, litigations etc.
 If these exemptions are rationalized, they can help the
government spend more on social and infrastructure & help
reduce the fiscal deficit.
 IMPORTANT CONCEPTS
 Tax Havens –
 It is a country or territory where certain taxes are levied at a
low rate or not at all.
 e.g. Switzerland, Singapore, Monaco, Hongkong etc.

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 Tax Base कर पाया - It is the value of goods, services & incomes on
which tax is imposed.
 Tax Rate कर दर - It indicate how much tax is due from each
source. Some tax system have high rates but narrow tax base, some
vice versa.
 Tax Shelters कर आश् - Any technique which allows one to legally
reduce or avoid tax liabilities. It is a way in which the tax payer
can invest his income in a particular kind of investment that gives
tax concession.
 IMPORTANT CONCEPTS

 Tax Avoidance & Tax Evasion कर चुकवेिगरी

 Tax Avoidance कर टाळणे - Some provision in tax law allow one
to save and invest in a manner that leads to reduction in taxable
income. If these provisions are used for benefits, it is called Tax

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Avoidance.

 Tax Capital Evasion कर भांडवल चुकवेिगरी - is illegal avoidance by

means of failing to report income or improperly claiming
deductions etc.

 Hidden Taxes गुिपत कर - These are the taxes that are concealed
in the price of articles that one buys. They are also called
'implicit taxes'. e.g. Indirect taxes, import duties.
 IMPORTANT CONCEPTS

 VAT System मूल्यविधर कर प्रणा

 It is a tax, imposed and collected at different points of value
addition chain, i.e., multi-point tax collection.

Need of VAT in India भारतातील मूल्यविधर कर प्रणाली गरज

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

 It Avoids cascading effect

 To bring in uniformity at the state level taxes, VAT was a
necessary step in India.
 To check large scale tax evasion.
 To minimize complexity of taxation
 IMPORTANT CONCEPTS

 Keeping all such things in mind, India started tax reform (Chelliah
Committee and Kelkar Committee) and a certain level of success has
been achieved in this area
 In the year 1996, the central government started collecting its

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excise duty on the VAT method and the tax was given a new
name—the CENVAT.
 The next proposal was to merge the states excise duty and their
sales taxes into one tax—the state VAT or VAT. This could not take
place due to states’ lack of political will
 A total number of 20 states/UTs switched over to VAT (from their
existing sales tax) in April 2005. Rest adopted it by 2008–09
 GST
 GST Goods & Services Tax वस्तू आिण सेवा क
 This is aimed at integrating the indirect taxes of Centre and
states into a single national tax— popularly known as the Single
VAT of India.

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 Historical Background ऐितहािसक पा�र्भूम
 France was the first country to introduce GST system in 1954.
 More than 140 countries have implemented the GST.
 Genesis of GST occurred during the previous NDA Government
under Atal Bihari Vajpayee Government when it set up the Asim
Dasgupta committee to design a model for GST.
 GST
 The UPA Government took the matter further and announced in
2006 that this tax would be introduced from April 1, 2010.
 The first proposal of the GST was वस्त आिण सेवा कराबाबत पिहला
प्रस् –
(i) To be collected on the VAT method (will have all the same
features of the VAT).

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(ii) To be imposed at pan-India level with uniformity in tax—
(iii) Four taxes of Centre (cenvat; service tax; stamp duty and
central sales tax) and nine taxes of the states (excise duty,
sales tax/vat; entry tax; lease tax; works contract tax;
luxury tax; turnover tax; octroi and cess) to be merged into
the GST.
(iv) To have a single rate of 20 per cent (12 per cent to flow to
Centre and 8 per cent to the states).
 However, it was not introduced.
 All the GST bills including Constitution (101st Amendment) Act
have been passed now and GST set into force from July 1, 2017
 GST
 Salient features of GST वस्त आिण सेवा कर प्रणाली वैिश�े
 GST is applicable on ‘supply’ of goods or services as
against the present concept on the manufacture of goods or on
provision of services.
 GST is based on the principle of destination-based,

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consumption taxation as against the present principle of
origin-based taxation.
 It is a dual GST with the Centre and the States
simultaneously levying tax on a common base.
 An Integrated GST (IGST) would be levied on inter-state
supply of goods or services. This shall be levied and collected
by the Government of India and such tax shall be
apportioned between the Union and the States in the
manner recommended by the GST Council.
 GST
 Import of goods or services would be treated as inter-state
supplies and would be subject to IGST in addition to the
applicable customs duties.

 CGST, SGST & IGST would be levied at rates to be mutually

agreed upon by the Centre and the States. The rates would be

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notified on the recommendation of the GST Council.

 GST Council had decided that GST would be levied at four rates viz.
0%, 5%, 12%, 16% and 28%. (Current tax slabs are - 0%, 5%, 12%,
18% and 28%)

 In addition to these rates, a cess would be imposed on

“demerit” goods to raise resources for providing compensation to
States as States may lose revenue owing to the implementation of
GST.
 GST
 GST would replace the following taxes currently levied and
collected by the Centre :-

a) Central Excise Duty

b) Duties of Excise (Medicinal and Toilet Preparations)

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c) Additional Duties of Excise (Goods of Special Importance)

d) Additional Duties of Excise (Textiles and Textile Products)

e) Additional Duties of Customs (commonly known as CVD –

Countervailing Duties)

f) Special Additional Duty of Customs(SAD)

g) Service Tax

h) Central Sales Tax

 GST
 State taxes that would be subsumed within the GST are :-
a) State VAT
c) Purchase Tax
d) Luxury Tax
e) Entry Tax (All forms)

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f) Entertainment Tax and Amusement Tax (except those levied by
the local bodies)
g) Taxes on advertisements
h) Taxes on lotteries, betting and gambling

 The whole GST system will be backed by a robust IT system.

 In this regard, Goods and Services Tax Network (GSTN) has been
set up by the Government.
 It will provide front end services and will also develop back end IT
modules for States who opted for the same.
 GST
 Tobacco and tobacco products would be subject to GST. In
addition, the Centre would have the power to levy Central
Excise duty on these products.
 The list of exempted goods and services would be kept to a
minimum and it would be harmonized for the Centre and the

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States as well as across States as far as possible.

 Commodities Not under GST वस्त आ�ण सेवा कर क�ेबाहे र�ल वस्त
• Potable alcohol
• Five petroleum products viz. petroleum crude, motor spirit
(petrol), high speed diesel, natural gas and aviation turbine fuel
• Electricity
 GST
 Principles followed in subsuming the taxes वस्त
आ�ण सेवा करामध्य इतर करांचा समावेश करण्यासाठ अवलंबण्या
येणार्य बाबी
 Firstly, the taxes should primarily indirect taxes and should

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be part of the transaction chain that commences with production
or manufacturing or import of good / service at one end and
consumption at other.

 Secondly, such replacement of taxes should result in free flow of

tax credit in intra and inter-state level.

 Thirdly, the GST should give fair revenue to both centre and
states.
 GST
 Understanding Dual GST दहु े र� वस्त आ�ण सेवा कर प्रणा
समजून घेणे
 Most of the countries have a unified GST system.
 Brazil and Canada follow a dual system where GST is levied by

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both the Union and the State governments.
 India also has dual GST where Centre and States
simultaneously levying it on a common tax base.
 The structure is as follows:
 For intra-state trade राज्यांतगर व्यापारासाठ
 The GST levied by centre is called Central GST (CGST) while
that levied by states / UTs is State GST (SGST) or UTGST.
 GST

 For inter-state trade आंतरराष्ट् व्यापारासाठ

 For inter-state supply of Goods & Services, an Integrated GST
(IGST) will be levied and administered by Centre.

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 CGST and IGST will be levied and administered by Centre; while
SGST / UTGST will be levied and administered by respective states
and UT administrations.

 The principle of fiscal federalism राजकोषीय संघराज्याच तत् has

been adapted where by centre and states have been assigned
powers to levy and collect taxes through appropriate legislations.
 GST
 Constitution 101st amendment Act, 2016 १०१ वा घटनादु�स्त कायदा,
२०१६
 This is the enabler act for GST and it amends several important
articles and schedules of the constitution of India.
 The new articles added by this amendment to Indian Constitution

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are
• Article 246-A (Special provision with respect to goods and
services tax);
• Article 269-A ((Levy and collection of goods and services tax in
course of inter-State trade or commerce) and
• Article 279A (GST Council).
 Two schedules have been changed viz.
• 6th schedule
• 7th schedule
 GST
 As per article 246-A :
 Both Union and States in India now have “concurrent
powers” to make law with respect to goods & services
 The intra-state trade now comes under the jurisdiction of both
centre and state; while inter-state trade and commerce is
“exclusively” under central government jurisdiction.

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 As per Article 269-A :
 In case of the inter-state trade, the tax will be levied and
collected by the Government of India and shared between the
Union and States as per recommendation of the GST Council.
 The article also makes it clear that the proceeds such
collected will not be credited to the consolidated fund of
India or state but respective share shall be assigned to that
state or centre.
 The reason for the same is that, If that proceed is deposited in
Consolidated Fund of India or state, then, every time there will be
a need to pass an appropriation tax.
 GST
 Thus, under GST, the apportionment of the tax revenue will take
place outside the Consolidated Funds.
 Article 279-A :
• There will be a GST council constituted by President, headed by
Finance minister as its chairman and one nominated member
from each state who is in charge of finance or taxation. GST

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Council has been discussed in detail here.
• All decisions taken at the GST council will be taken based on
voting. Process of voting is clearly articulated in detail in the
constitutional amendment bill.
 Other Changes इतर बदल
• The residuary power of legislation of Parliament under article
248 is now subject to article 246A.
• Article 249 has been changed so that if 2/3rd majority
resolution is passed by Rajya Sabha, the Parliament will
have powers to make necessary laws with respect to GST
in national interest.
 GST

• Article 250 has been amended so that parliament will have

powers to make laws related to GST during emergency
period.
• Article 268A has been repealed so now service tax is subsumed

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in GST.
• Article 269 would empower the Parliament to make GST
related laws for inter-state trade / commerce.
 GST
 GST Council वस्तू आिण सेवा कर प�रष
 It is the 1st Federal Institution of India, as per the Finance
minister.
 It will approve all decision related to taxation in the country.

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 It consists of Centre, 28 states, Delhi and Puducherry.
 Union Finance Minister is a Chairman and Representatives of
states and UTs (Mostly their Finance Ministers)
 The Centre has a 33% vote while the states account for 66%, with
any dispute needing 75% support to be resolved.
 Decisions are taken after a majority in the council.
 GST
 What is GSTN? वस्तू आिण सेवा कर जाळ
 GSTN is registered as a not-for-profit company under the
companies Act to set up and operate the information technology
backbone of the GST.
 While the Central (24.5%) and the state (24.5%) hold a combined

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stake of 49%, the remaining 51% stake is divided among five
financial institutions—LIC Housing Finance with 11% stake and
ICICI Bank, HDFC, HDFC Bank and NSE Strategic Investment
Corporation Ltd with 10% stake each.
 GSTN had awarded Infosys Ltd the contract to develop the
hardware and software for GST.
 The idea behind GSTN was to set up an entity that is equidistant
from both the Central government and the state governments, as it
will advise both the Centre and the states on the information
technology network
 GST
 Benefits of GST वस्त आिण सेवा कराचे फायदे/लाभ
 For the Consumer ग्राहकांसा
• The single and transparent tax will provide a lowering of
inflation.

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• Relief in overall tax burden.
• Tax democracy that is luxury items will be taxed more and basic
goods will be tax-free.
 For the Business Class व्यावसािय वगार्साठ
• Ease of doing business will increase due to easy tax compliance
• A common market - It’s currently fragmented along state lines,
pushing costs up 20-30%
 GST

• Logistics, inventory costs will fall – Checks at state borders slow

movement of trucks. In India, they travel 280 km a day?? compared
with 800 km in the US

• Investment boost For many capital goods. Full input tax credit

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under GST will mean a 12-14% drop in the cost of capital goods.
Expected: 6% rise in capital goods investment

• In the GST regime, a free flow of credits across transactions

decrease the tax cost for businesses.

• Uniformity of tax rate and structure, therefore, better future

business decision making and investments by the corporate.
 GST
 Indirect tax Revenue will get a boost अप्रत करास चालना िमळे ल -
• Tax Evasion check
• Broadening of tax base
• Ease of compliance
• transparency in taxation due to IT use

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• Since the cost of collection will decrease
• Inbuilt mechanism in the design of GST that would incentivize
tax compliance by traders
 Less developed states get a lift अल् िवकिसत राज्या उसळी घेता येईल -
The current 2% inter-state levy means production is kept within a
state. Under the GST national market, this can be dispersed,
creating opportunities for others
 Simple and Easy to administer सुलभ आिण सोपे कायर्चल : Because
multiple indirect taxes at the central and state levels are being
replaced by a single tax “GST”. Moreover, backed with a robust end
to end IT system, it would be easier to administer.
 GST
 For the Government सरकारसाठी
 Inflation Management and GDP Growth –
• Removal of cascading effects of taxes.
• Duel Taxation on certain products would also come to rest

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Since CGST & SGST will be levied simultaneously
• There are also estimates that GST can add 2% to GDP in next
3-5 Years
 Export Promotion - The decrease in tax costs would boost the
exports in the country.
 Make in India - Manufacturing will get more competitive as
GST addresses cascading of tax, inter-state tax, high logistics
costs and fragmented market.
 GST

 Drawbacks of GST वस्त आिण सेवा कराचे तोटे /दोष

 Too many exemptions could undermine the levy - Petroleum,
Alcohol etc.

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 A high tax rate would stoke inflation especially in service
sector taxes will rise more steeply.

 Fiscal stress if expected collection efficiency doesn’t materialize

early.

 MSMEs will have a higher tax burden.

SURVEY- A NEW EXCITING BIRD’S EYE VIEW OF
INDIAN ECONOMY THROUGH GST

 Effect on Indirect Tax Payers अप्रत कर दत्यांवरी प�रणाम

 50% Increase in Indirect Tax payers

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 Large increase in voluntary registration under GST
 Following are the states with the greatest number of tax registrants
• Maharashtra
• UP
• Tamil Nadu
• Gujrat
 UP & West Bengal have seen large increase in the number of tax
registrants compared to the old tax regime
SURVEY- A NEW EXCITING BIRD’S EYE VIEW OF
INDIAN ECONOMY THROUGH GST
 Impact on formal and Informal Sector of Economy
अथर्व्यवस्थे औपचा�रक आिण अनौपचा�रक �ेत्रां होणारा प�रणाम
 India's Formal sector nonfarm payroll is substantially greater
than currently believed –

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o Formality defined by two criteria
1. When firms are providing some kind of social security
measures to employees – Formal Non Farm Payroll is at
31%
2. When firms are part of Tax net (Registered under GST) –
Formal Non Farm Payroll at 53%
 Around 12% firms accounting 13% Export and 37% Tax Liability
are in the tax net but are not in social security net
 About 0.6% firms are in hardcore formal sector
 87% Firms are purely in to informal sector
 No of Enterprises added in 1 year of GST – 48 Lakhs (Registration
Since Independence – 66 Lakh)
SURVEY- A NEW EXCITING BIRD’S EYE VIEW OF
INDIAN ECONOMY THROUGH GST

 Impact on Export/ Export related revelation

 First time in History of India it is possible to know data on

state wise export distribution of international export

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 Data on international export by states suggest a Strong
correlation between export performance and state’s
standard of living (For 20 Major States; Only 1 Outlier is Kerala)

 Internal trade in goods and services is about 60% of GDP

(Last year Survey estimated the same to about 30-50%)
SURVEY- A NEW EXCITING BIRD’S EYE VIEW OF
INDIAN ECONOMY THROUGH GST

 Five Largest exporting states  Five Largest Importing

• Maharashtra states
• Gujrat • Maharashtra
• Haryana • Tamil Nadu

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• Tamil Nadu • Uttar Pradesh
• Karnataka • Karnataka
• Gujrat

 Export Superstars - are the firms which accounts for

disproportionately large share of export
• Top 1% of firms accounts for only 38% Export Share
• Brazil – 72%
• Germany – 68%
• Mexico – 67%
• USA – 55%
 SURVEY- A NEW EXCITING BIRD’S EYE VIEW OF
INDIAN ECONOMY THROUGH GST
 Impact on States राज्यांवरील प�रणाम
 Distribution of GST Base among the states is closely linked to
their Gross States Domestic Product (GSDP) Allaying fears of
major producing that the shift to new system would undermine

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their tax collection
 Each state’s share in the GST Base is almost perfectly correlated
with its Share in Overall GDP

Sr. No Name Share of GST Share of

Base in % GSDP in %
1 Maharashtra 16 14.42%
2 Tamil Nadu 10 8.45%
3 Karnataka 9 7.34%
4 Uttar Pradesh 7 8.16%
 SURVEY- A NEW EXCITING BIRD’S EYE VIEW OF
INDIAN ECONOMY THROUGH GST

 GST revenues of all states combined will grow at a CAGR of

16.6% in FY18 over FY16, according to India Rating's (Consultancy
Firm) calculations.

Prepared By - Rushikesh Badave

 However, since the picture at the individual state level differs

 Eight states namely Andhra Pradesh, Chhattisgarh, Gujarat,

Himachal Pradesh, Madhya Pradesh, Odisha, Punjab and Tamil
Nadu would need compensation from the central government
for any revenue loss under baseline scenario.

 This would cost INR56 billion to the central government in FY18

 GST - APPRAISAL
 Inflation rate didn’t rise चलनवाढीच्य दरात वाढ होत नाही : GST, it was
widely feared, would cause inflation to rise, as with many countries
that launched a single tax regime. That hasn’t happened in India,
What Helped?
• The much-criticised multi-slab structure बह� स्तरी सरं चना . It

Prepared By - Rushikesh Badave

ensured the levy was as close as possible to the existing rate,
which meant the incidence of tax didn’t rise.
• second factor was the National Anti-profiteering Authority
राष्ट् नफा िवरोधी प्रािधक. Though the body was set up after the
GST rollout, the prospect of its establishment was enough to
ensure businesses did not abuse the transition .
 Induced formalization.
 The government sacrificed revenues, but improved compliance
should cover any gap.
 GST - APPRAISAL
 Revenues begins to look up as Tax settles.

 GST Council worked well – It has never had to vote on any

issues, with just one dissent recorded so far. Matters were always
thrashed out and a painstaking consensus achieved.

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 Increase in Income tax returns file may have links with GST
implementation from (4.43cr to 6.84 Cr)

 What Hasn’t Worked

 Compliance has miles to go : The biggest dampener was the
compliance process, as information technology glitches took more
than the anticipated time to be resolved.

 Hurdles for the MSMEs : GST implementation had imposed

various hurdles on the MSMEs, which included hassles in filing
returns and problems in the GST Network.
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 Cumbersome registration system : Multiple registration
requirements have complicated things for industry, which was
expecting simplicity. In many cases, registration is required in all
states. Companies fear that multiple audits and assessments due to
multiple registrations could make life more difficult for them going
forward

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 The industry and businesses are not taking this idea of (National
Anti-Profiteering Authority) kindly and they see it as a
backdoor entry of inspector raj. Experts say that prices should
be market determined and no government authority has the
business of deciding prices for goods and services.
 Confusion regarding the control over taxation : To avoid dual
control, the GST council has reached a compromised formula. 90
percent of tax assesses with an annual turnover of Rs 1.5 crore or
less, will be assessed by states and the rest by the Centre. But it has
a problem
 GST - APPRAISAL

 New cesses crop up : While GST scrapped a multiplicity of taxes

and cesses, a new levy in the form of compensation cess was
introduced for luxury and sin goods. This was later expanded to
include automobiles. A new cess on sugar is also being examined.

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 Expansion of tax base further - There are many goods that are
still outside the GST net

 No Single Tax Slab

 Tax slab rationalization - There are as many as six slabs,

excluding exempt goods.
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 Tax Burden कर बोजा – Easiest way to find out Tax burden is Tax-
GDP Ratio
 Tax-GDP Ratio कर जीडीपी प्रम - A tax-to-GDP ratio is a gauge of a
nation's tax revenue relative to the size of its economy as measured

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by GDP)
 Significance –
• This ratio is used with other metrics to determine how well a nation's
government directs its economic resources via taxation.
• Developed nations typically have higher tax-to-GDP ratios than
developing nations.
• Higher tax revenues mean a country is able to spend more on
improving infrastructure, health, and education—keys to the long-
term prospects for a country’s economy and people.
• According to the World Bank, tax revenues above 15% of a
country’s gross domestic product (GDP) are a key ingredient for
economic growth and, ultimately, poverty reduction.
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 Key Data प्रमुख मािहत –

• India's gross tax-to-GDP fell from 11% in FY19 to 9.9% in
FY20. Owing to a decline in the overall GDP marred by Covid-
19 troubles, the ratio improved to 10.2% in FY21.

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• Although India has improved its tax-to-GDP ratio in the last
six years, it is still far lower than the average OECD ratio
which is 34 per cent

 Reasons for Low Tax-GDP ratio

• Low Tax base
• Exemption for Agriculture Income
• Black money
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 Revenue sharing between Center-State के ं आिण राज्यांमधी
महसूल िवभागणी
 Principle of Fiscal Federalism
 Center shares it’s revenue with the states in following ways

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1. Devolution (States’ share of taxes करातील राज्यांच वाटा) : As
states share of taxes from the Gross Tax Revenue. (This is
extra-budgetary based on the recommendation of Finance
Commission)
2. Scheme Related Transfer योजनासब ं िं धत हस्तांतर : As Centrally
Sponsored Schemes from the Scheme Expenditure. (Based on
Budget Allocations).
3. Finance Commission Grants �वत् आयोग अनुदान : (Budget
Allocations)
(a) Revenue Deficit Grants (b) Sectoral Grants, and (c) Performance-based Incentives.
4. Other Transfers इतर हस्तांतर : Other grants or loans. (Based
on Budget Allocations).
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 Finance Commission िव� आयोग

 Article 280 of the Constitution requires that a Finance Commission be
constituted to recommend the distribution of the net proceeds of taxes

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between the Centre and states, and among the states.
 President after two years of the commencement of Indian Constitution and
thereafter every 5 years, has to constitute a Finance Commission of India.
 Currently the 15th Finance Commission has tabled it’s
recommendations.

 Appointments िनयु�� –
 The President appoints the chairman of the Finance Commission. The
Chairman of the Commission shall be selected from among persons who
have had experience in public affairs.
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 The four other members shall be selected from among persons who -
• are, or have been, or are qualified to be appointed as Judges of a High
Court; or
• have special knowledge of the finances and accounts of Government; or

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• have had wide experience in financial matters and in administration; or
• have special knowledge of economics.
 Functions
• Distribution of net proceeds of taxes to be shared between the center and
the states, and allocation between the states.
• Principles governing the grant in aid (Out of the Consolidated Fund of
India)
• Any other matter to refer to it by the President.
• Measures needed to augment the consolidated fund of state to supplement
the resources of Panchayat and Municipality on the basis of
recommendations made by the Finance Commission.
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 15th Finance Commission

 Vertical Devolution of Taxes करांची उभ्या स्व�पातील िवभागण:

Prepared By - Rushikesh Badave

• The share of states in the central taxes for the 2021-26 period is
recommended to be 41%, same as that for 2020-21.
• This is less than the 42% share recommended by the 14th Finance
Commission for 2015-20 period.
• The adjustment of 1% is to provide for the newly formed union
territories of Jammu and Kashmir, and Ladakh from the resources of the
Centre.
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 15th Finance Commission १५ वा िव� आयोग
 Horizontal Devolution of Taxes: करांची आडवी िवभागणी

14th Finance Commission 15th Finance Commission

Criteria िनकष
१४ वा िव� आयोग १५ वा िव� आयोग

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Income Distance 50 45

Population (1971 Census) 17.5 Not Considered

Population (2011 census) 10 15

Demographic Performance Not Considered 12.5

Forest Cover 7.5 Not Considered

Forest and Ecology Not Considered 10

Area 15 15

Tax Effort Not considered 2.5

Total 100 100

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 Fiscal Roadmap राजकोषीय प्रा�

 Fiscal deficit and debt levels राजकोषीय तूट आिण कजर् पातळ :
• The Centre should bring down fiscal deficit to 4% of GDP by 2025-

Prepared By - Rushikesh Badave

26. For states, fiscal deficit should be reduced to 3% of GSDP.
• The Commission observed that the recommended path for fiscal deficit
for the centre and states will result in a reduction of total liabilities of: (i)
the centre from 63% of GDP in 2020-21 to 56.% in 2025-26, and (ii) the
states on aggregate from 33% of GDP in 2020-21 to 32.5% by 2025-26.
• It also recommended forming a high-powered inter-governmental group
to :
(i) review the Fiscal Responsibility and Budget Management Act
(FRBM),
(ii) recommend a new FRBM framework for centre as well as states, and
oversee its implementation.
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• The 15th Finance Commission has highlighted some challenges with the
implementation of the Goods and Services Tax (GST). These include : large shortfall
in collections as compared to original forecast,
(ii) high volatility in collections,

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(iii) accumulation of large integrated GST credit,
(iv) glitches in invoice and input tax matching, and
(v) delay in refunds.
The Commission observed that the continuing dependence of states on compensation
from the central government (21 states out of 29 states in 2018-19) for making up for
the shortfall in revenue is a concern.
• Recommended to
I. Address Inverted Duty Structure
II. Revenue Neutrality - As far as GST is concerned, earlier, general government
revenues from the taxes subsumed under GST was around 6.3 per cent in 2016-
17. However, collections under GST was around 5.1 per cent of GDP in 2019-20.
This clearly shows that post the implementation of GST, the overall indirect tax
collections have failed to reach up to the earlier levels.