Taxation is the process by which a government or the taxing authority imposes or levies a tax on its

citizens and business entities.

It is a means of generating revenue for the government to fund public services and infrastructure. In India,
the Central and State governments play a significant role in determining the taxes.

Three main categories: proportional, progressive, and regressive

Proportional tax:

A proportional tax, also known as a flat tax, is a tax that is levied at the same rate on all taxpayers,
regardless of their income.

Progressive tax:

A progressive tax is a tax that is levied at a higher rate on those with higher incomes.

This means that the tax rate increases as the income of the taxpayer increases.

An example of a progressive tax is the income tax.

In India, the income tax rate varies depending on the income bracket of the taxpayer.

For instance, for the financial year 2023-24, the tax rate for an individual earning between INR 2.5 lakh to
INR 5 lakh is 5%, while for an individual earning above INR 10 crore, the tax rate is 30% .

Regressive tax:

A regressive tax is a tax that is levied at a higher rate on those with lower incomes.

This means that the tax rate decreases as the income of the taxpayer increases.

An example of a regressive tax is the sales tax on goods.

Since the tax is a fixed percentage of the price of the goods, it has a greater impact on low-income earners
than on high-income earners.

Tax Classification--------

Direct Tax Indirect Tax

Income Tax Goods and Services Tax (GST)

Corporation Tax Customs Duty
Capital Gain Tax Excise Duty
Securities Transaction Tax (STT) Sales Tax
Equalization Tax Stamp Duty

Direct Tax
Direct taxes in India refer to taxes that are imposed directly on individuals and entities based on their
income or wealth.

These taxes are imposed by the central government on individuals and entities based on their income or
profits earned.

The Central Board of Direct Taxes (CBDT) is responsible for the collection and administration of direct
taxes.

Types of direct taxes in India

1. Income Tax
This is levied on the income earned by individuals, Hindu Undivided Families (HUFs), partnerships, and
associations of persons (AOPs).

2. Corporation Tax
This tax is levied on the net profit of domestic firms as well as foreign corporations whose profits appear or
are deemed to emerge through their operations in India.

3. Minimum Alternate Tax (MAT)

This tax is imposed on “zero tax companies”, which typically refer to companies that declare little or no
income in order to save tax.

4. Capital Gain Tax

Q. Comment on the important changes introduced in respect of the Long Term Capital Gains Tax
(LTCGT) and Dividend Distribution Tax (DDT) in the Union Budget for 2018-2019.

The Union Budget of 2018-19 introduced the following two important changes:

Long Term Capital Gains Tax (LTCGT): Reintroduction of a 10% tax on long term capital gains arising
from transfer of listed equity shares.

Dividend Distribution Tax (DDT): Introduction of a 10% tax on distributed income by equity oriented
mutual fund.

The long-term capital gains tax existed until 2005 but was removed to encourage greater participation in
the equity markets. Though it did have its intended effect but it also had the side-effect of business
surpluses being invested in financial assets due to attractive return on investments. This benefitted
corporates primarily and also created a bias against investing in manufacturing. It has also led to
significant erosion in the tax base resulting in revenue loss.

Keeping in mind the points mentioned above, the decision to bring back long term capital gains tax on
listed equities holds merit. Moreover, LTCG in unlisted shares are currently taxed - LTCGT on listed
shares ends the advantage enjoyed by the latter, bringing them on par.
In addition, the tax on distributed income by equity oriented mutual funds will provide level playing field
across growth oriented funds (where the dividend is re-invested back into stocks) and dividend
distributing funds (investors receive regular income through dividends). Up until now, dividends from
equity-oriented funds were tax-free and were also exempt from paying the DDT.

However, these changes should also be followed by abolishing or reducing the securities transaction tax
rates (levied on all transactions made on the stock exchanges), which could lead to double taxation if
continued.

1. Definition:

Capital Gains Tax is a tax levied on the profits gained from the sale of capital assets. Capital assets
include land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and
jewellery.

2. Types of Capital Gains:

Short-term capital gains (STCG) and Long-term capital gains (LTCG).

The duration of holding assets for STCG and LTCG differs for different assets.

3. Tax Rates:

The tax rates for capital gains depend on the type of asset and the period of holding. For instance,
long-term capital gains are subject to a capital tax of 20% with indexation, whereas gains of more than
Rs.1 lakh are subject to a tax of 10% without indexation.

Short-term capital gains tax is charged at the rate of 15%.

4. Exemptions:

There are certain exemptions available under the Income Tax Act that can reduce the capital gains tax
liability.

5. Computation:

To compute capital gains, factors such as full value of consideration, cost of acquisition, cost to the
previous owner, and cost of improvement are crucial.

6. Example:

Let’s say a person purchased shares for Rs.100 on 30th September 2017 and sold them for Rs.120 on
31st December 2018.

The stock value was Rs.110 as of 31st January 2018.

Out of the capital gains of Rs.20 (i.e. 120-100), Rs.10 (i.e. 110-100) is not taxable. The rest Rs.10 is
taxable as capital gains at 10% without indexation.

5. Securities Transaction Tax (STT)

This tax is imposed on the purchase and sale of listed securities, such as shares, bonds, derivatives, and
equity-oriented mutual funds.

12.Equalisation Levy

Q. With reference to India's decision to levy an equalization tax of 6% on online advertisement

services offered by nonresident entities, which of the following statements is/are correct?
1. It is introduced as a part of the Income Tax Act.
2. Non-resident entities that offer advertisement services in India can claim a tax credit in their
home country under the "Double Taxation Avoidance Agreements".
Select the correct answer using the code given below:
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Ans-D

Equalisation Levy was introduced in India in 2016, with the intention of taxing the digital transactions i.e. the
income accruing to foreign e-commerce companies from India.

It is aimed at taxing business to business transactions.

As the levy was not introduced as part of the Income Tax Act but as a separate legislation under the
Finance Bill, global firms that offer such services in India cannot claim a tax credit in their home country
under the double taxation avoidance agreements.

India was the one of the first countries to introduce a 6 per cent equalisation levy in 2016, but the levy was
restricted to online advertisement services.

However, India introduced the digital tax in April 2020 for foreign companies selling goods and services
online to customers in India and showing annual revenues more than INR 20 million.

Applicability:

India has expanded the scope of the equalisation levy over the last few years, to tax non-resident digital
entities.

While the levy applied only to digital advertising services till 2019-20 at the rate of 6 percent, the
government in April 2020 widened the scope to impose a 2 per cent tax on non-resident e-commerce
players with a turnover of Rs 2 crore.

The scope was further widened in the Finance Act 2021-22 to cover e-commerce supply or service when
any activity takes place online.
Since May 2021, this also includes any entity that systematically and continuously does business with
more than 3 lakh users in India.

What is the Significance of Direct tax?

1. Revenue Generation:

Direct taxes are one of the main sources of income for the government.

They form around 50% of the government’s revenue share every fiscal.

2. Economic Balance:

The government achieves economic and social balance by creating tax slabs based on individuals’
earnings and age.

This helps in redistributing wealth in the country.

3. Inflation Control:

Direct taxes help in reducing the inflation rates of the country.

The government increases taxes during inflation to reduce the demand for goods and services, which
leads to a decrease in inflation.

4. Certainty:

The direct tax creates a sense of certainty for the government and the taxpayers, as the amount of tax that
must be paid and collected is known by the taxpayer and the government respectively.

5. Promotes Equality:

Individuals and organisations with higher returns are required to pay higher taxes to the government.

This aids the poor and vulnerable within society.

6. Regulates Disposable Income:

Direct taxation affects inflation, demand, and supply within the economy by regulating disposable incomes
across the board.

Indirect tax

Indirect tax is a type of tax that is not directly levied on the taxpayers.

Instead, it is often levied on goods and services, resulting in higher prices for these items.

The burden of tax payment is on the end consumer as they are the ones purchasing the products.

Here are some key points about indirect taxes in India:

1. Levied on Goods and Services:

Indirect taxes are generally imposed on suppliers or manufacturers who pass it on to the final consumer.

These taxes are levied on the manufacture, sale, import, and even purchases of goods and services.

2. Can Be Shifted:

Unlike direct taxes, the burden of indirect taxes can be shifted from one tax-paying individual to another.

For example, a wholesaler can pass it on to retailers, who then pass it on to customers.

3. Governance:

Indirect taxes are governed and administered by the Central Board of Indirect Taxes and Customs (CBIC).

4. Examples of Indirect Taxes:

Some examples of indirect taxes in India include Goods and Services Tax (GST), Excise Duty, Customs
Duty, Entertainment Tax, Service Tax, Sales Tax, Gross Receipts Tax, and Value-Added Tax (VAT).

5. GST:

One significant benefit of GST is that it eliminates the tax-on-tax or cascading effect of the previous tax
regime.

6. Reforms:

Indirect taxes are touted to be streamlined following the introduction of the uniform Goods and Services
Tax (GST).

Types of indirect taxes in India

1. Goods and Services Tax (GST):

This is a comprehensive indirect tax levied on the manufacture, sale, and consumption of goods and
services at the national level. It has replaced many indirect taxes in India.

2. Customs Duty:

This is a tax levied on goods imported into India. Sometimes, it is also levied on goods exported from
India.

3. Excise Duty:

This is a tax imposed on goods produced within the country for domestic consumption.

4. Value Added Tax (VAT):

This is a tax levied on the value addition to goods at each stage of the production process.

5. Service Tax:

This tax is levied by an entity in return for the service provided by them.

6. Sales Tax:
This is a tax charged at the point of purchase for certain goods and services.

7. Stamp Duty:

This is a tax levied on the transfer of any immovable property in a state of India.

ndirect taxes play a significant role in India’s economy for several reasons:

1. Revenue Generation:

Indirect taxes are a vital source of revenue for the government and play a crucial role in financing public
expenditure.

2. Economic Growth:

They contribute to promoting economic growth.

3. Socio-Economic Objectives:

Indirect taxes help in achieving socio-economic objectives.

4. Regulation of Market Prices:

With the elimination of the tax on tax quandary, the markets have witnessed a considerable drop in prices.

5. Improves Efficiency:

The introduction of GST, which is more of a technology-driven process, has improved efficiency in logistics.

6. Regulation of the Unorganised Sector:

GST has helped in regulating the unorganised sector.

7. Simplified Online Process:

GST has simplified the online process for tax filing.

8. Removal of the Cascading Effect of Tax:

GST has removed the cascading effect of tax (tax on tax effect)

Merits of Indirect Taxes

1. Higher Revenue:

Indirect taxes contribute significantly to the government’s revenue.

2. Convenience:

They are convenient to both the taxpayer and the state as the tax is paid in small amounts when making
purchases.
3. Broad-based:

Indirect taxes can be spread over a wide range, making them more beneficial and suitable.

4. Easy Collection:

Collection takes place automatically when goods are bought and sold.

5. Non-evadable:

They cannot be evaded, as they are a part of the price.

6. Elastic:

They are very elastic in yield, imposed on necessaries of life which have an inelastic demand.

7. Equitable:

When imposed on luxury goods consumed by the rich, they are equitable.

8. Check Harmful Consumption:

By being imposed on harmful products, they can check consumption of harmful commodities.

Demerits of Indirect Taxes

1. Regressive:

Indirect taxes are not equitable. For instance, salt tax in India fell more heavily on the poor than on the rich,
as it had to be paid at the same rate by all.

2. Uncertain:

Unless indirect taxes are imposed on necessaries, we cannot be sure of the revenue yield.

3. Increased Prices:

Indirect taxes sometimes are cumulative, which may result in the overall price of the product increasing.

4. Equal Tax Burden:

Irrespective of income level, the tax burden is equal.

5. Not Industry Friendly:

Indirect taxes are not industry friendly.

6. Unpredictable:

The amount of indirect taxes collected fluctuates

Taxation are used by governments to carry out the functions such as

1. Funding Public Services:

Governments typically use tax revenue to fund public services that accelerate economic and social
development, such as schools and health-care systems.

2. Infrastructure Development:

Tax revenue is used to finance investments in infrastructure, such as roads, bridges, airports, railways, and
other public utilities.

3. Public Sector Salaries:

A portion of the tax revenue is used to pay salaries to government servants.

4. Interest Payments:

Almost one quarter (23.31%) of the total government expense is spent on interest payments.

5. Fiscal Policy:

Fiscal policy refers to the spending programs and tax policies the government uses to guide the economy.

The government adjusts its spending levels and tax rates to monitor and influence a nation’s economy.

6. Debt Servicing:

The government uses tax revenue for debt servicing, which includes the repayment of principal and
interest on its loans.

7. Defence, Police, Judiciary:

Tax revenue is also used to fund essential expenses like defence, police, judiciary, and public health.

8. Economic Stabilization:

Through fiscal policy, the government can control economic phenomena using a mix of monetary and fiscal
policies.

9. Capital Expenditure:

Non-recurring expenses are used to build long term assets for the country (example: airports, railways,
roads, bridges, schools, colleges, factories etc)

Difference between Tax avoidance and Tax evasion

Tax Avoidance Tax Evasion

Tax avoidance involves using legal Tax evasion is an illegitimate way to
methods to minimize tax liability. minimize tax liability through unlawful
echniques like inflating expenses or
understating taxable income.
 t is an exercise in which the taxpayer It involves reducing tax liability by using
egally tries to defeat the basic intention of llegal ways, i.e., by suppressing income
he law, by taking advantage of the or inflating expenses or by showing lower
shortcomings in the legislature. ncome.
It is considered immoral in nature, which t is illegal and objectionable, both in
nvolves bending the law without breaking script and moral.
t.
The objective is to reduce tax liability by The objective is to reduce tax liability by
applying the script of law. exercising unfair means.
It is legal and happens before the It is a criminal act and happens after tax
occurrence of tax liability. iability arises. If caught, the person may
ace an enormous penalty and
mprisonment.

-----------------------Laffer Curve-----------------------

The Laffer Curve is a theory developed by economist Dr. Arthur B. Laffer that demonstrates the
relationship between tax rates and total government tax revenue.

Negative Income Tax (NIT)

Negative Income Tax (NIT) is a system where the government provides income to those who earn below a
certain threshold.

Subsidy is a negative income tax.

It is a taxation system where income subsidies are given to persons or families that are below the poverty
line.

Pigouvian tax

A Pigouvian tax is a tax levied on any market activity that generates negative externalities, which are costs
incurred by the producer but not included in the market price.

The tax is typically set by the government to correct an undesirable or inefficient market outcome.

In India, a Pigouvian tax is imposed on economic activities that generate negative externalities.

For Example, the Clean Energy cess on coal is an example of a Pigouvian tax in India.

It’s a way to internalize external costs and ensure that market prices reflect the true cost of production.

Tax Buoyancy

Tax Buoyancy is a measure of how tax revenue changes in response to changes in Gross Domestic
Product (GDP).
It indicates the responsiveness of tax revenue growth to changes in GDP.

When a tax is buoyant, its revenue increases without increasing the tax rate.

In India, tax buoyancy can be calculated by taking the proportion of nominal GDP growth to the tax
revenue collection of the same year.

Double Taxation Avoidance Agreement (DTAA)

DTAA is a mutually consented agreement between two countries on the taxability of specified incomes
which both countries claim to have the right to levy tax on.

The basic objective of DTAA is to promote and foster economic trade and investment between two
Countries by avoiding double taxation.

When a resident of one country earns income from another country, he may be taxed in both countries.
This gives rise to the need for a DTAA.

DTAA facilitates the ease of having multinational incomes without having to worry about the taxes
applicable in multiple countries. It makes a country appear as an attractive investment destination by
providing relief on dual taxation.

India has 85 active agreements.

General Anti-Avoidance Rule (GAAR)

The GAAR provisions come under the Income Tax Act, 1961, and are framed by the Department of
Revenue under the Finance Ministry.

History: GAAR was initially proposed in the Direct Tax Code 2009, and was introduced into India in the
Budget session of Parliament in 2012.

A committee under Parthasarathy Shome was set up to review the proposals.

It recommended deferring the proposals to three more years citing a need to establish the administrative
machinery necessary and training for officials for a full-scale implementation.

The General Anti-Avoidance Rule (GAAR) is an anti-tax avoidance law in India. It was introduced to curb
tax evasion and avoid tax leaks.

GAAR came into effect on 1st April 2017.

GAAR is a tool for checking aggressive tax planning, especially transactions or business arrangements
entered into with the objective of avoiding tax.

It is specifically aimed at cutting revenue losses that happen to the government due to aggressive tax
avoidance measures practiced by companies.

4. Tax Categories: Broadly, tax reduction can be of three categories:

Tax Mitigation:
This is a situation where taxpayers take advantage of a fiscal incentive provided to them by a tax
legislation by complying with its conditions.

This tax reduction is acceptable even after GAAR has come into force.

Tax Evasion:

This is when a person or entity does not pay the taxes that are due to the government. This is illegal and
liable to prosecution.

This is also not covered by GAAR as the existing jurisprudence is sufficient to cover tax evasion.

Tax Avoidance:

This includes actions taken by a taxpayer, none of which are illegal or forbidden by the law.

However, they are considered undesirable and inequitable, since they undermine the objective of effective
collection of revenue.

GAAR is specifically against transactions where the sole intention is to avoid tax.

5. Application:

As per the provision of the Income Tax Act, GAAR would apply to an arrangement entered into by the tax
payer which may be declared to be an impermissible avoidance agreement (IAA).

6. Impact:

With GAAR, there is no difference between tax avoidance and tax evasion.

All transactions which have the implication of avoiding tax can come under the scanner of GAAR.

The need for GAAR was felt after the Vodafone deal with Hutchison-Essar, which took place in the
Cayman Islands. As per the government, above USD 2 billion was lost in taxes. In the subsequent case,
the Supreme Court ruled in favor of Vodafone.

Vodafone Transfer Pricing Issue

Q. Which one of the following situations best reflects "Indirect Transfers" often talked about in
media recently with reference to India ?
(a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on
the profits arising out of its investment
(b) A foreign company investing in India and paying taxes to the country of its base on the profits
arising out of its investment
(c) An Indian company purchases tangible assets in a foreign country and sells such assets after
their value increases and transfers the proceeds to India
(d) A foreign company transfers shares and such shares derive their substantial value from
assets located in India
 ANS- D

direct Transfers-

A foreign company transfers shares and such shares derive their substantial value from assets located in
India.

The origin of retrospective taxation can be traced backed to 2012, When Vodafone Ltd. was retrospectively
taxed by the Indian tax authorities for a 2007 deal.

The 2012 act had amended the IT act to impose tax liability on the income earned from the sale of shares
of a foreign company on a retrospective basis (i.e., also applicable to the transactions done before May 28,
2012).

The amendments made by the 2012 Act clarified that if a company is registered or incorporated outside
India, its shares will be deemed to be or have always been situated in India if they derive their value
substantially from the assets located in India.

As a result, the persons who sold such shares of foreign companies before the enactment of the Act (i.e.,
May 28, 2012) also became liable to pay tax on the income earned from such sale.

The Taxation Laws (Amendment) Act, 2021 nullifies the ‘retrospective taxation’ that was introduced with the
Finance Act of 2012.

2008 – Vodafone India sells its shares to Vodafone Mauritius for ~ Rs. 250 crores

Vodafone Mauritius says we bought shares to infuse new capital in Vodafone Indian arm

Real Market price of those shares ~1550 crores

Vodafone’s Indian arm deliberately sold its shares at a lower price of ~250 cr (undervaluation of ~1300
crore)

This is one type of hidden loan or secret profit transfer from Indian arm to Mauritius arm
Mauritius arm can sell those shares again to a third party at market price and make profit

So in a way, Mauritius arm will make gain (in future), hence we want CGT on it

Thus CGT + penalty + interest ~ Rs.3200 cr. demanded from Vodafone

Issue:

The main issue was whether the transfer of shares between two foreign companies, resulting in
extinguishment of controlling interest in the Indian Company held by a foreign company, amounted to
transfer of capital assets in India and whether such transaction is chargeable to tax in India.

Legal Proceedings:

The case was originally dealt by the Bombay High Court. Later, Vodafone challenged the Income-Tax
Department’s latest notice regarding the transfer pricing case.
Outcome:

The Bombay High Court ruled in favor of Vodafone, setting aside a tax demand of Rs. 3,700 crore imposed
on Vodafone India by the income tax authorities.

---------------------Goods and Services Tax---------------------

Q. Consider the following items:

1. Cereals grains hulled
2. Chicken eggs cooked
3. Fish processed and canned
4. Newspapers containing advertising material
Which of the above items is/are exempted under GST (Goods and Services Tax)?
(a) 1 only
(b) 2 and 3 only
(c) 1, 2 and 4 only
(d) 1, 2, 3 and 4
Ans-A

Q. What is/are the most likely advantages of implementing ‘Goods and Services Tax (GST)’?
1. It will replace multiple taxes collected by multiple authorities and will thus create a single
market in India.
2. It will drastically reduce the ‘Current Account Deficit’ of India and will enable it to increase its
foreign exchange reserves.
3. It will enormously increase the growth and size of economy of India and will enable it to
overtake China in the near future.
Select the correct answer using the code given below:
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Ans-A

Q. Enumerate the indirect taxes which have been subsumed in the Goods and Services Tax (GST)
in India. Also, comment on the revenue implications of the GST introduced in India since July
2017.

Goods and Services Tax (GST) is an indirect, comprehensive, multi-stage, destination-based tax that is
levied on every value addition.The Goods and Service Tax Act was passed in the Parliament in March
2017. The Act came into effect on 1st July 2017.
At the Central level, the following taxes have been subsumed in the GST:

Central Excise Duty

Additional Excise Duty
Service Tax
Countervailing Duty
Special Additional Duty of Customs

At the State level, the following taxes have been subsumed in the GST:

State Value Added Tax/Sales Tax,

Entertainment Tax (other than the tax levied by the local bodies)
Central Sales Tax (levied by the Centre and collected by the States)
Octroi and Entry tax
Purchase Tax
Luxury tax
Taxes on lottery, betting and gambling

Revenue implications of GST since July 2017:

GST was introduced in July 2017. After the initial transitional issues following the roll-out of GST, revenue
collection picked up from an annual average of 89.8 thousand crores in 2017-18 to 98.1 thousand crores
in 2018-19.

However in 2018-19, indirect taxes have fallen short of budget estimates by about 16 per cent, following
a shortfall in GST revenues (including CGST, IGST and compensation cess) as compared to the budget
estimates.

Indirect taxes have fallen by 0.4 percentage points of GDP primarily due to shortfall in GST collections.

According to the Economic Survey, though there has been an improvement in tax to GDP ratio over the
last six years, gross tax revenues as a proportion of GDP has declined by 0.3 percentage points in
2018-19 over 2017-18.

Q. Discuss the rationale for introducing the Goods and Services Tax (GST) in India. Bring out
critically the reasons for the delay in roll out for its regime.

The Goods and Services Tax (GST) is a Value Added Tax (VAT) to be implemented in India which will
replace all indirect taxes levied on goods and services by the Indian Central and State governments.

The GST is aimed at being comprehensive for most goods and services.

Exports will be zero-rated and imports will be levied the same taxes as domestic goods and services
adhering to the destination principle. It is claimed that CGST, SGST and IGST are nothing but new
names for Central Excise/Service Tax, VAT and CST and hence GST brings nothing new to the table.
Roll out of GST is being delayed as GST will be implemented concurrently by the central and state
governments as the Central GST and the State GST respectively.

As there is heterogeneous State laws on VAT, the debate on the necessity for a GST has taken place.

The best GST systems across the world use a single GST while India has opted for a dual-GST model.

This change in the tax structure is going to have a huge impact in the supply chain of India.

It is currently in sub-optimal and has been structured in such a fashion to avoid taxes.

GST, or Goods and Services Tax, is an indirect tax that has replaced many indirect taxes in India such as
the excise duty, VAT, services tax, etc.

The Goods and Service Tax Act was passed in the Parliament on 29th March 2017 and came into effect on
1st July 2017.

It is levied on the supply of goods and services and is a comprehensive, multi-stage, destination-based tax
that is levied on every value addition.

Background of the Goods and Services Tax (GST) in India

1. Introduction of GST

The idea of a nationwide GST in India was first proposed by the Kelkar Task Force on Indirect taxes in
2000.

The objective was to replace the prevailing complex and fragmented tax structure with a unified system
that would simplify compliance, reduce tax cascading, and promote economic integration.

2. Announcement of GST

The first announcement for the introduction of GST was made in Budget Speech on 28th April,2006 by the
then Finance Minister, P. Chidambaram.

The proposed target date to introduce nationwide GST was 1st April, 2010.

3. Formation of Empowered Committee

The Empowered Committee of State Finance Ministers (EC) which had formulated the design of State VAT
was requested to come up with a roadmap and structure for the GST.

Joint Working Groups of officials having representatives of the States as well as the Centre were set up to
examine various aspects of the GST and draw up reports specifically on exemptions and thresholds,
taxation of services and taxation of inter-State supplies.

4. Release of First Discussion Paper (FDP)

Based on discussions within and between it and the Central Government, the EC released its First
Discussion Paper (FDP) on GST in November, 2009.

This spells out the features of the proposed GST and has formed the basis for discussion between the
Centre and the States so far.

5. Amendment of the Constitution

The Constitution of India was amended from 16th of September,2016 to make provision for the introduction
of GST.

New Article 366(2A) of the Indian Constitution, defines Goods and Service Tax(GST) to mean a tax on
supply of goods or services, or both, except taxes on supply of alcoholic liquor for human consumption.

6. Implementation of GST

GST was introduced on 1 July 2017 with the objective of simplifying India’s indirect tax regime, eliminating
tax cascading and curbing tax evasion. Various central and state indirect tax levies were subsumed under
GST.

Indirect Tax Structure Before GST

The Centre, States, and Local Governments had the powers to levy varied taxes under the indirect tax
regime.

The Central government collected a variety of taxes under the previous indirect tax regime such as Central
Excise Duty, Custom Duty, Service Tax, Central Sales Tax.

The State government collected a variety of taxes under the previous indirect tax regime such as Value
Added Tax.

Need for GST

GST was introduced to eliminate the cascading effect of taxes.

GST is a comprehensive indirect tax that is levied on the manufacture, sale, and consumption of goods
and services at the national level.

It replaced all indirect taxes levied on goods and services by the Central and State governments.

GST Council

Article 279A of the Indian Constitution gives power to the President of India to constitute a joint forum of
the Centre and States called the GST Council

Consisting of the - Union Finance Minister - Chairperson

The Union Minister of State, in-charge of Revenue of finance - Member

The Minister in-charge of finance or taxation or any other Minister nominated by each State Government -
Members
The GST Council is an apex committee to modify, reconcile or to make recommendations to the Union and
the States on GST, like the goods and services that may be subjected or exempted from GST, model GST
laws, etc.

What is the GST Appellate Tribunal?

The CGST Act empowers the Central Government to constitute, on the recommendation of the GST
Council, an Appellate Tribunal known as the GST Appellate Tribunal.

It is the forum of second appeal in GST laws and the first common forum of dispute resolution between
Centre and States.

The appeals against the orders passed by the Appellate Authority under the Central and State GST Acts
lie before the GST Appellate Tribunal.

Being a common forum, GST Appellate Tribunal will ensure that there is uniformity in redressal of disputes
arising under GST, and therefore, in implementation of GST across the country.

GST Rates
The GST Council has finalised 4 tier Goods and Services Tax (GST) rate structure with a multiple-slab
rates, including the cess for the new indirect tax regime.

Thus, GST will be levied at multiple rates ranging from 0% to 28%.

• The four bands of tax rates have been fixed at 5%, 12%, 18% and 28%.

• Besides, another category of tax between 40% and 65% will be imposed on luxury goods like pan
masala, tobacco products, aerated drinks and high-end cars.

• Nearly half of the consumer inflation basket goods including food grains, will be zero-rated to insulate
people from inflationary measures.

• The lowest slab of 5% will be for items of common consumption.

• The bulk of the goods and services including fast-moving consumer goods will be included in two
standard rates of 12% and 18%.

• The highest slab of 28% will include white goods and all those items on which current rate of incidence
varies from 30-31%.

• Ultra luxuries, demerit and sin goods, will attract 28% GST along with a GST cess for a period of 5 years.

• The quantum of cess on each of these will depend on current incidence of tax.

• The revenue raised from the cess will be used to finance the compensations to States for the losses.

• This cess will have a sunset clause of five years.

(A sunset provision provides for an automatic annulment of the entire or provisions of the law once a
specific date is reached).

• If the revenue raised from the cess is found to be in excess of the sums then GST Council will decide
where to use the surpluses.
• The GST will subsume the multitude of cesses currently in place, including the Swachh Bharat Cess,
Krishi Kalyan Cess and the Education Cess.

• Only the Clean Environment Cess will be retained and revenues from it will also fund the compensations.

• The GST Council was not able to take a call on the GST rate on gold.

• It will be finalized after the fitting to the approved rates structure of all items is completed.

The Federalism debate

• The most discussed consequence of the passage of GST bill is the fiscal federalism.

• The proponents of the GST bill are positive about the centre-state relations in this context of passage of
the GST bill.

• It actually accelerates the reconfiguration of centre-state fiscal relations already underway.

• The experts argue that, States would become key stakeholders in the national economy, which was quite
rare in the present scheme of things.

• An important feature of the new tax framework is the creation of the GST Council.

• The way it has been designed, the Union government has only one-third say in decisions taken by the
GST Council, while the rest is accounted for by the states; and all decisions have to be carried by a
three-fourth majority.

• Hence, this clearly indicates that centre and states need to co-operate with each other to ensure a
smooth functioning of the tax administration.

• This, clearly is a double whammy for the states, which have their fiscal autonomy enhanced due to the
increase in untied funds from net indivisible pool of taxes (from 32-42%), as a result of 14th Finance
Commission.

• However, the opponents of the GST argue that, the voting pattern in GST council is not completely based
on economics.

• The purpose of the GST Bill is to concentrate on manufacturing and achieve excellence so that the same
product is not manufactured locally with sub-optimal efficiency in every state for tax reasons.

• That being the case, it is natural there are going to be only a few manufacturing states while the rest will
be consuming states.

• To have a council where the manufacturing state has one vote whereas all other states, likely consumers,
also have a vote each is unfair. • Of course consumers will vote in their own interests.

• “Make in India” Programme is focused for strengthening and protecting the domestic industry from
foreign import.

• Likewise, state governments have to protect local industry and employment.

• For this objective lesser sales tax and other incentives is needed for helping local producers.

• But the right of state governments for variable taxation will end with the introduction of GST regime.
• Further, economists argue that taxation powers are not only a measure of resource mobilisation.

• It could be used as a tool to control and restrict the consumption of some goods for social good.

o (Ex: Tobacco products generally attracts huge tax rate as a measure to control the consumption on
health grounds.

• Here tobacco producing States argue for lesser taxes for maximum sales and the Consumer States will
demand for a leverage for fixing higher taxes.)

• Health concerns ratify the higher rate of tax on tobacco.

• The proponents of the GST bill are positive about the centre-state relations in this context of passage of
the GST bill.

• It actually accelerates the reconfiguration of centre-state fiscal relations already underway.

• The experts argue that, States would become key stakeholders in the national economy, which was quite
rare in the present scheme of things.

• An important feature of the new tax framework is the creation of the GST Council.

• The way it has been designed, the Union government has only one-third say in decisions taken by the
GST Council, while the rest is accounted for by the states; and all decisions have to be carried by a
three-fourth majority.

• Hence, this clearly indicates that centre and states need to co-operate with each other to ensure a
smooth functioning of the tax administration.

• This, clearly is a double whammy for the states, which have their fiscal autonomy enhanced due to the
increase in untied funds from net indivisible pool of taxes (from 32-42%), as a result of 14th Finance
Commission.

• However, the opponents of the GST argue that, the voting pattern in GST council is not completely based
on economics.

• The purpose of the GST Bill is to concentrate on manufacturing and achieve excellence so that the same
product is not manufactured locally with sub-optimal efficiency in every state for tax reasons.

• That being the case, it is natural there are going to be only a few manufacturing states while the rest will
be consuming states.

• To have a council where the manufacturing state has one vote whereas all other states, likely consumers,
also have a vote each is unfair.

• Of course consumers will vote in their own interests.

• “Make in India” Programme is focused for strengthening and protecting the domestic industry from
foreign import.

• Likewise, state governments have to protect local industry and employment.

• For this objective lesser sales tax and other incentives is needed for helping local producers.
• But the right of state governments for variable taxation will end with the introduction of GST regime.

• Further, economists argue that taxation powers are not only a measure of resource mobilisation.

• It could be used as a tool to control and restrict the consumption of some goods for social good. o (Ex:
Tobacco products generally attracts huge tax rate as a measure to control the consumption on health
grounds.

• Here tobacco producing States argue for lesser taxes for maximum sales and the Consumer States will
demand for a leverage for fixing higher taxes.)

• Health concerns ratify the higher rate of tax on tobacco.

• Now, this can be a tricky situation for the centre as to whose interests it should protect.

• Likewise, if a state government needs an additional resource mobilisation for facing a natural calamity, it
cannot decide for any special levy.

• Swachh bharat and other Central schemes can only be decided and used by the Central Government.

• The GST will take away the rights of states to decide taxes according to their socio-economic situations.

• The situation in Kerala is quite different than the situation in Tamil Nadu or Assam or Bihar or West
Bengal.

• Each state has its own socio-economic-political reasons to decide the type of tax to be levied.

• Therefore, the experts argue that the veto power given to centre in the GST council is undemocratic.

• They opine for a more flexible weights based voting pattern and reduction in the weightage of the centre’s
vote.

• Hence, there has to be more consensus on the structure, pattern and working of the GST council.

• The term ‘Cooperative Federalism’, sums up the ideology that would successfully define this evolution:

Together they stand and divided they will fail.

• In this, the recommendations of FFC, GST and other policies on the anvil are only stepping stones.

• Evolving institutions such as the GST Council and the revived Inter-State Council will be critical in
overseeing this transition with minimal hindrances.

State chief ministers are already equal partners in the governing council of NITI (National Institution for
Transforming India) Aayog, which has replaced the Planning Commission.