CHAPTER 1

Tax Structure in India

This chapter shall cover the following questions/concepts that the student shall read first before studying the chapter. These are those questions that should strike the mind of the reader while studying the chapter.

(1)What is the structure of taxes in India ?

(2)What is tax ?

(3)What are the kinds of taxes ?

(4)What are the features of Indirect Taxes ?

(5)What is the tax structure under GST regime ?

After reading the chapter you should be clear about the following concepts :

(1)Tax structure in India before GST.

(2)Different indirect taxes before GST.

(3)Advantages & Disadvantages of old system of Indirect Taxes.

(4)Tax structure in India post GST.

What is TAX ?

•Tax is compulsory payment to be made by every resident of India.

• The term “tax” is ordinarily used to express the exercise of the sovereign power to raise revenue for the expenses of the Government.

• Judge Cooley in his work on the “Law of Taxation” stated that taxation is —

—a mode of raising revenue ;

—for public purpose ; and

—the power of taxation is an essential and inherent attribute of sovereignity ;

—which belongs as a matter of right to every independent Government.

As is clear from the above definitions, to levy tax is the power of the Sovereign State to carry on with the affairs of the Government. In a federal system like India, the power of taxation is exercised by distribution of powers between the union i.e. Central Government and the State Governments.

In Elel Hotels and Investment Ltd. and others V. Union of India (1989), it was held: “Taxation is not now a mere source of raising money to defray expenses of Government. It is a recognised fiscal tool to achieve fiscal and social objectives.”

[*Defray expenses means to cover or meet the expenses]

Essential Characteristics of Tax

1.Imposed under statutory Power. Tax is imposed under the statutory power of Centre or State or UT respectively. For example, Income Tax is imposed under the income Tax Act, 1961 and GST is levied under the GST Act, 2017.

2.Compulsory payment. Tax is imposed under the statutory power, without the consent of the tax-payer. Hence the payment of tax is not a choice of the tax payer, but it is compulsorily enforced by the law.

3.Tax is made for public purpose. Another feature of tax is that it is an imposition made for public purpose i.e. for the welfare of the public at large.

4.No element of “Quid Pro Quo”—“Quid Pro Quo” means something in return. As the object of a tax is to levy a compulsory payment on the tax payer, hence there is no exchange of mutual benefits between the tax payer and the Government. Hence payment of tax by the taxpayer does not confer any special benefit to the tax payer.

5.Quantum of tax depends on capacity to pay. As tax is the part of the common burden on all residents of a country, the quantum of tax on the tax payer depends upon his or her capacity to pay.

6.Tax is the source of revenue to Government. The Constitution of India has laid down the foundation of a welfare state. Thus the activities of the Government for the benefit of public at large makes it necessary for the Government to impose taxes to fund the expenses of Government. Hence, tax no doubt, is the biggest source of revenue to the Government.

7.Evasion of tax is a crime. Tax evasion is the process of indulging into malpractices to illegally evade tax. Various statutes have been enacted to punish the tax payers, who indulge into tax evasion.

Constitution of India & Taxes

The Constitution of India is the foundation and source of powers to all laws in India. The Constitution of India, which came into effect on 26th January, 1950 is supreme and all laws and Government actions are subordinate to our Constitution. India is a Union of States. The structure of Government is federal in nature. The foundation of an effective and stable finance system of a country lies in its Tax System.

The Taxation Policy of a State aims to address its legitimate need to collect tax revenues to fund public services and to eliminate competitive distortions faced by local industries, trade and commerce. It works as a vibrant instrument of a stimulating industrial growth, promoting exports, regulating imports, nurturing domestic trade and commerce and thereby generating employment and furthering economic progress of the state.

As illustrated in the chart above, in the basic scheme of taxation in India, it is envisaged that

(a)Central Government will get tax revenue from Income Tax (except on Agricultural Income), Customs Duty, Central GST and IGST [Integrated GST].

(b)State Government will get tax revenue from sales tax, Excise on liquor and petrol, State GST and IGST.

Income Tax, Central GST, Integrated GST and Customs are administered by Central Government. As regards State GST is levied by individual State Governments and UTGST is administered by the Central Government but the income of UTGST goes to the respective UT’s.

(c)For Union Territories, the Union Territory GST [UT-GST] shall be levied under the UTGST Act, 2017 except for two UT’s i.e. Delhi and Puducherry as they have their own taxation acts.

(i)J&K and Ladakh: Have been made Union Territories under Notification No. 51/2019-Central Tax, dated 31st Oct, 2019.

(ii)Union Territory of Dadra & Nagar Haveli and Union Territory of Daman & Diu have been merged into one Single Union Territory w.e.f. 26-01-2020.

Union List Relevant to Taxation

List I, called as “Union List”, contains matters in which Parliament i.e. the Central Government has exclusive rights to make laws. It includes entries like Defence of India, Foreign Affairs, War and Peace, Banking etc. Some of the entries in this list relevant to taxation provisions are as follows :

Entry No. 82. Tax on income other than agricultural income.

Entry No. 83. Duties of Customs including export duties.

Entry No. 84. Duties of excise on the following goods manufactured or produced in India, namely:

(a)Petroleum Crude;

(b)High speed diesel ;

(c)Motor Spirit (commonly known as petrol);

(d)Natural gas ;

(e)Aviation turbine fuel ; and

(f)Tobacco and Tobacco products

Note:Entry No. 84 was substituted by the Constitution [101st amendment] Act, 2016 w.e.f. 16-09-2016]

Entry No. 92A. Taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter state trade or commerce.

Entry No. 97. Any other matter not included in List II, List III and any tax not mentioned in list II or list III. (These are called ‘Residual Powers’.)

State List Pertaining to Taxation

State Government has exclusive powers to make laws in respect of matters in List II of Seventh Schedule to our Constitution. These entries include Police, Public Health, Agriculture, Land etc. Some of the entries in this list relevant to taxation provisions are as follows:

Entry No. 26. Trade and Commerce within the state subject to the provisions of entry 33 of the List III.

Entry No. 27. Production, supply and distribution of goods subject to the provisions of entry 33 of the List III.

Entry No. 53. Taxes on the consumption or sale of electricity.

Entry No. 54. Taxes on sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter state trade or commerce as sale in the course of international trade or commerce of such goods.

Entry No. 62. Taxes on entertainment and amusements to the extent levied and collected by a Panchayat or a Municipality or a Regional Council or a District Council.

Concurrent List

List III of Seventh Schedule, called “concurrent list”, includes matters where both Central Government and State Government can make laws. This list includes entries like criminal law and procedure, Trust and trustees, civil procedures, economic and social planning, trade unions, charitable institutions, price control, factories, etc. In case of entries included in concurrent list, in case of conflict, law made by Union Government prevails.

Types of Taxation

I. On Basis of Relationship between Tax Base and Tax Rate

1.Proportional Taxes. Taxes which vary in direct proportion to the change in Tax Bases. The Tax base could be income, value of goods, property, Wealth Tax.

Example. Wealth Tax

Income – Taxes

Income – Taxes

2.Progressive Taxes. Taxes which increase with the increase in income.

Example. Income Tax.

3.Regressive Tax. With the increase in the income, the tax rates decreases, in such regressive taxes.

Example. Taxes on necessaries.

4.Digressive Taxes. Taxes which are mildly progressive. Such Taxes may be first increased to some limit and then after one point they may be charged according to a fixed flat rate.

II. On the Basis of Method of Assessment

1.Specific Duty : Taxes levied according to some unit of a product is called as Specific Duty. For example, Excise Duty on cigarettes was earlier levied on the basis of the length of the cigarettes [Now GST has subsumed Excise Duty].

2.Ad-Valorem Tax : Taxes levied on the basis of value of the goods is called as Ad-Valorem Duty. It is generally expressed in percentage form.

III. On the Basis of Incidence and Impact of Taxes

Incidence of Tax. Incidence of tax means the first burden of tax. Incidence of Tax falls on a person on whom the tax levied for the first time. Incidence of Tax can be shifted to other persons.

Impact of Tax. Impact of tax means the ultimate/final burden of tax. Impact of tax falls on the person who ultimately bears the burden of tax i.e. the consumer. On the basis of incidence and impact of tax, a tax can be either Direct Tax or Indirect Tax.

1. Direct Tax. When the incidence and impact of tax falls on the same person it is called as Direct Tax. Here Tax payer is the Tax Bearer i.e. the burden of tax cannot be shifted on to the shoulders of another person. Such a tax is paid by the person on whom it was imposed.

2.

•A direct tax is imposed directly on the tax payer.

•It is paid directly to the Government by the person on whom it is imposed.

•It cannot be transferred or shifted to another person.

•Direct tax is generally progressive in nature (for example - rate of income tax is higher for tax payers having higher ability to pay tax).

Example:

Say income tax is levied on the income of Joy:

(i)Levied on Joy Incidence of Tax on = Joy

(ii)Borne by Joy Impact of Tax on = Joy

2.Indirect Tax. Where the incidence of tax falls on one person but the impact of tax is an another person then such a tax is called as Indirect Tax. The burden of tax can be shifted on to someone other. The tax payer may be one person but the tax bearer is always the consumer.

•Indirect Tax can be shifted to another person.

•In case of indirect tax, the person who collects tax on sale/supply of a commodity is just a conduct.

•In indirect taxes, the tax incidence is passed on at every stage till the commodity finally reaches the consumers.

•Finally, it is the consumer who bears the incidence of indirect tax burden.

•Indirect tax is generally regressive in nature (persons consuming goods will have to bear equal burden regardless of this capacity to bear tax).

Example :

Say GST is levied on supply of goods by seller to a buyer.

(i)Levied on Seller / Supplier Incidence of Tax on = Supplier

(ii)Borne by Buyer / Recipient Impact of Tax on = Recipient

Difference between Direct and Indirect Tax

Basis

Direct Tax

Indirect Tax

1.Incidence of Tax/ First Burden.

On one person

On one person

2.Impact of Tax/ Ultimate Burden

On the same person

Shifts to other person and ultimately borne by customer/consumer.

3.Example

Income Tax

Say income Tax is levied on income of X—then X will have to pay it and bear it.

GST on the supply of goods

Levied on the seller who sells the goods, the seller can shift it to his buyers, i.e. consumers.

4.Tax Payer and Tax Bearer

The Tax payer and Tax bearer is same person.

The Tax payer is one on whom incidence of tax fell and Tax bearer Is the one who finally bears the burden of tax.

5.Final Burden on consumer

The first and final burden is on the same person.

The final burden of every Indirect Tax is on the consumer.

6.Revenue

Central Government revenue is about 56% of total tax revenue

Central Government revenue is about 44% of total tax revenue.

7.Who pays it?

Direct Taxes are paid directly to Government by the person liable to pay tax.

Indirect Taxes are paid to Government by one person, but he recovers the same from another person. Thus, the person who actually bears the tax burden (the ultimate ‘con-sumer’) pays it indirectly to Government through some other person.

8.Paid Directly or Indirectly

Direct Taxes are those which the taxpayer pays directly from his income/wealth/estate etc.

Indirect Taxes are those which the taxpayer pays indirectly i.e. while purchasing goods and commodities, paying for services etc.

9.Point of Levy

Broadly speaking, direct taxes are those which are paid after the income reaches hands of taxpayer.

Indirect Taxes are paid before the goods/services reach the taxpayer.

10.Categories

Important Direct Taxes are Income Tax, Gift Tax and Wealth Tax, Expenditure Tax etc.

Important Indirect Taxes were Central Excise (Duty on manu-facture), Customs (duty on imports and exports); Sales Tax; Octroi, Entry Tax, Service Tax, etc. But now all have been replaced by GST.

11.Tax Evasion

Comparatively more in unorganised sector.

Comparatively less because of presence of organised sector.

12.Cost of Collection

Cost of collection as a percentage of tax collected is higher.

Cost of collection as a percentage of tax collected is lower.

13.Impact on price of Goods

Direct Taxes do not affect prices of goods and services.

Tax on goods and services increase its price and reduces demand.

14.Easy/Difficult to Collect

Control is relatively difficult and therefore these are difficult to collect.

Control is relatively easy and therefore these are easier to collect.

Tax Structure in India

The tax structure in India primarily consists of Direct and Indirect taxes, but with the introduction of GST in India w.e.f. 1st July 2017, the tax structure has undergone a drastic change.

(A) The structure in India before Implementation of GST in India

The taxation structure in India was divided into direct and indirect taxes (Direct and Indirect taxes have already been explained earlier in the chapter). So let us understand in detail which all taxes were covered under these two categories.

The chart given above explains the classification of taxes into Direct and Indirect Taxes. As we have already understood the basics of direct and indirect taxes, so let as now comprehend in detail the various Indirect Taxes levied prior to the introduction of GST in India.

The power to levy various indirect taxes were shared between

(I)Central Government. The Central Government had the power to levy the following taxes—

(a) Custom Duty(b) CST : Central Sales Tax

(c) Excise Duty(d) Service Tax

(II)State Government. The State Governments levied various taxes such as :

(a) VAT : Value Added Tax(b) Profession Tax

(c) Octroi/Entry Tax(d) Stamp Duty

(e) Luxury Tax(f) Entertainment Tax, etc.

(III)Local Bodies : Municipalities, etc. The local bodies also levied taxes (local body taxes) on entry of goods into the territory of a local body, may be for sale, use or consumption.

An Example to Understand the Structure of Indirect Taxes :

This example illustrates how one company for example, here Joy and Company Limited situated in Ludhiana, bears different kind of Indirect Taxes. Let us discuss all Indirect Taxes one by one :

I.Vat – Value Added Tax. The Tax levied when the goods are sold within the same state is called as local sales Tax (Now called as VAT). Like in the example above, when Joy and Co. Ltd. purchased raw material from Patiala seller, he levied VAT on Joy and Co. Ltd. (being sale in State of Punjab). Similarily when Joy and Co. Ltd. sold goods from Ludhiana to a buyer in Amritsar again VAT is levied (being sale in State of Punjab).

II.CST – Central Sales Tax. When ever sales take place between two or more states the sales tax so levied on such sales is called as CST. Central Sales Tax is levied by the Central Government (that is why the name starts with Word Central) but is administered and collected by that State Government from where the movement of goods begins/commences. Like in this example when the supplier from Ambala, Haryana sold goods to Joy & Co. Ltd. in Punjab, then tax levied in CST. Similarly when Joy & Co. Ltd. sold goods to a buyer in Uttar Pradesh, the tax so levied is again CST.

III.Custom Duty, Import and Export Duty. Custom Duty is levied on imports into India from a place outside India and on exports to a place outside India. On purchase of raw material from U.S.A., Joy & Co. Ltd. paid another Indirect Tax which is import Duty and on sale of goods by Joy & Co. Ltd. to Australia, the tax so levied is Export Duty. Both Import Duty and Export Duty together are called as Custom Duty.

IV.Excise Duty. Excise Duty is levied when ever goods are manufactured or produced by a person in India. Like in the example, Joy & Co. Ltd. manufactures ready-made garments in their factory at Ludhiana, Punjab. On such manufacture of ready-made garments, Joy & Co. Ltd. have to pay Excise Duty.

V.Service Tax. When the services were provided or rendered by the service provider to the service received in India, another kind of Indirect Tax was levied called as service tax. Service tax was levied on the service provider, but he deducted this tax from the service receiver. So indirectly, the burden of service tax shifted to the service receiver. For example—

•A chartered accountant providing accounting services to his client.

• A saloon providing saloon services to clients, etc.

Other Indirect Taxes

1.Octroi Is a local tax charged and collected on various goods (brought into a state for consumption) by the State Government when the product enters into the state territory.

2.Entry Tax is a local tax imposed by the State Government. It is levied on the movement of goods from one state to another and is levied by the recipient state.

3.Luxury Tax is a tax on luxury goods (goods which are not considered essential goods)

4.Stamp Duty is a tax levied on legal documents such as cheques, receipts, land transactions; etc.

5.Property Tax is a tax on property that the owner has to pay. It is levied by the governing authority of the jurisdiction in which the property is located. It may be taxed by the Central Govt., State Govt. or even a municipality.

6.Road Tax is a tax paid on motor vehicles before using it on a public road.

7.Entertainment Tax is a tax charged by the local and regional governments on the services which are designed to provide leisure activities to the consumer.

8.Taxes on lottery, betting and gambling

Features of Indirect Taxes (OLd Regime Before GST)

1.Basis of Levy : The Indirect Taxes are levied on :

(i)Manufacture of goods - Excise Duty.

(ii)Imports of goods into India - Import Duty

(iii)Exports of goods outside India - Export Duty

(iv)Purchase and Sale of Goods - Sales Tax (CST and VAT)

(v)Rendering of Services - Service Tax

2.Paid by Tax Payers, Borne by Tax Bearers : All Indirect Taxes are paid by the persons on whom these are levied but ultimately these taxes are shifted again and again until they reach the final consumers who are the true tax bearers.

3.Major Source of Revenue to the Government : Indirect Taxes form major part of government’s revenue, both at the Centre as well as the State level. The proceeds from the duties of Custom and Excise go to the Central Government. The proceeds from Sales Tax go to the State Governments and the proceeds from Octroi or Entry Tax to the local governments.

Almost 46% of the Central Government revenue accrues to Indirect Taxes.

4. These Taxes are paid indirectly to the Government : All Indirect Taxes reach the Government Treasury but not directly. Such taxes keep shifting hands until the final consumers absorb the portion of all Indirect Taxes. They reach the pocket of Government in an Indirect manner unlike the Direct Taxes.

5. Taxable Event : The taxable event is the event due to which the transaction is taxed. Taxable event can be broken up into three separate words and understood according (as illustrated in the chart below).

•Taxable Event in Excise = Manufacture of goods in India

•Taxable Event in Import Duty = Imports of goods into India

•Taxable Event in Export Duty = Exports of goods from India

•Taxable Event in CST = Sales between two or more states

•Taxable Event in VAT = Sales within the same state

•Taxable Event in Service Tax = Rendering of Services

Disadvantages of Indirect Taxes (Old Regime before GST)

1. Cascading Effect: In simple words when tax keeps levying again and again on the same goods, it leads to double taxation or is termed as cascading effect. As the stages of production on sales continues, each subsequent buyer has to pay tax again and again on the same goods (goods which have already suffered tax). In the previous regime, there were number of indirect taxes, which kept levying as the goods moved from the manufacturer to the final consumer. And everytime the tax was levied, the previous tax amount was added in the cost of product, resulting into double taxation. Owing to this, not only the tax amount became exhorbitant, but the selling price of the product also increased drastically.

Cost of Raw Material

xxx

Add:

Tax paid on Raw Material (CST / VAT / Custom Duty)

xxx

Total Cost of Inputs

A

Add:

Manufacturing Cost

xxx

Add:

Excise Duty on Manufacturing Cost

xxx

Total Manufacturing Cost

B

Add:

Sales Tax

CST / VAT]

xxx

Selling Price

C

Total S.P. includes number of taxes which have been everytime added in the cost and again the next tax is levied on cost which includes the previous tax. Once after the levy of excise duty by the Central Government on goods (at the manufacturing stage), the goods are again levied with sales tax (CST by the Central Government and VAT by the State Governments at the sales stage). In simple language, taxed goods are again taxed, which is called as cascading effect.

Note:The effect of cascading effect has been explained in detail in the Chapter—“Overview of GST”, Topic—“Shortcomings of old Regime of Indirect Taxes”, in Illustration 1.

2.Exemptions and concessions: In the pre-GST scenario, businesses enjoyed many kinds of exemptions and concessions like area based exemptions, SSI exemptions under different levies which broke the chain of VAT and thus distortion was created. Also, differential tax rates on same commodity in different jurisdiction further worsen the condition.

3.Lack of transparency: There was no mechanism for cross verification of the claim of CENVAT credit made by the manufacturer/service provider under excise and service tax laws. Even under state VAT laws, all the states did not have cross verification of credits.

4.Multiple points of taxation: There were multiple points of taxation in the pre- GST scenario.

For example, excise was-levied when goods manufactured were cleared from the factory premises irrespective of the fact that the clearance was because sale or otherwise, state VAT was levied on sale of goods, entry tax was levied on entry of goods in a state.

5.Lack of uniformity in provisions and rates: There was lack of uniformity in respect of rates of taxes, credit provisions, procedures which resulted in hassles to the businessmen.

6.Double taxation - due to same subject matter being treated as ‘goods’ and ‘service’: Over the years, distinction between goods and services has become haze, due to which there was overlapping of state VAT and CST on transactions like catering services (restaurant services and outdoor catering services). Same transaction was getting taxed both by the central and state government which created double taxation and resulted into several litigations.

7.Narrow base: The pre-GST Indian taxation system consisted of different thresholds under different laws as well as numerous exemptions and concessions which made the Indian taxation base narrow as compared to the other countries.

8.Multiple taxation: There were multiple tax authorities to administer different types of taxes which was troublesome for business thereby increasing tghe compliance costs and complexities.

9.Distinction between goods and Services had become more blurred, making it difficult to identify whether it is a good or service and hence whether to levy taxes on goods or service tax. For instance leasing of equipment without transfer of control to the lessee, would be taxable as a service or as a deemed sale of goods.

10.Inflationary in Nature : Indirect Taxes are basically levied on goods and services. The levy of Taxes on goods and services always increase the prices of goods and services. Because of this reason the Indirect Taxes are inflationary in nature.

11.Increases Cost of Projects : Indirect Taxes increase the cost of projects. The Customs Duty on imports, Excise Duty, VAT.

12.Lot of Paper Work : All Indirect Tax laws, be it Central Excise, Service Tax, Customs, Sales Tax all require a lot of paper work. A number of forms are required from applying for registration to filing of returns. The documentation required always needs a trader/manufacturer to either keep lot of idle time filing all these documents or hire a CA/CS to do all for him for a heavy fee.

13.Tax Evasion : Although a lot has been done to stop tax evasion by the laws, but there are still a lot many ways that lead to tax evasion. Bogus invoices take undue advantage of the set-off schemes. Traders till date do not issue bills for sale unless demanded by a customer (although a trader can only take advantage of not issuing a bill when the amount of sale value is upto ` 100).

14.As the State Governments cannot levy service tax, hence it negatively effects their state tax revenues, precisely because Service Tax contributes majorly to the tax revenues.

15.Low level of automation of administrative procedures is another deficiency. Many of the administrative processes are still manual.

16.Return filing in India is a complex task.

(B) TAX Structure in India After Implementation of GST in India

On 1st July, 2017, GST : Goods and Services Tax was implemented in India. GST is the biggest indirect tax reform in India since independence. With the implementation of GST, 23 taxes and 17 cesses have been subsumed in GST i.e. have been abolished and replaced by only tax i.e. GST. The major reform is only in case of Indirect Taxes, Direct taxes have not be changed with the introduction of GST.

GST in India has been introduced as a Dual Levy. Let's look at the structure of GST in India:

Note:CGST, SGST, UTGST and IGST have been explained in detail in Chapter-Overview of GST.

The different taxes levied under GST have been explained below :

Taxes/Levies subsumed in GST

1.Central Excise Duty (except of petroleum products), Service tax, Duties of excise on Medical and Toilet preparations have been subsumed in CGST and SGST.

2.State VAT, CST, Octroi, Entry Tax, Entertainment Tax, Luxury Tax, Tax on Lotteries, Betting and Gambling have been subsumed in SGST (CGST will also be levied)

3.CVD and Special CVD on imported goods has been replaced by IGST. However, Basic Custom Duty [BCD] on imported goods is still levied. Stamp Duties, Tolls and Motor Vehicle Taxes are also continuing to be levied.

4.Cesses abolished: Following cesses have been abolished - Education Cess, SAHE Cess, Mica Cess, Salt Cess, Textile Cess, Tobacco Cess, Iron Ore Mines Cess, Manganese Ore Mines Cess, Mine Workers Welfare Cess, Cement Cess, Strawboard Cess, R & D Cess, Rubber Cess.

5. Check Posts at State Borders abolished

Central tax/levies

State taxes/levies

• Central Excise Duty

• Additional Excise Duties

• Excise Duty levied under Medicinal and Toiletries Preparation Act

• Service Tax

• Additional Customs Duty-CVD

• Special Additional Duty of Customs – 4% (SAD)

• CST (Central Sales Tax)

• Surcharges

• Cesses

• VAT/Sales tax

• Entertainment tax

• Luxury tax

• Taxes on lottery, betting and gambling

• State Cesses and Surcharges in so far as they relate to supply of goods and services

• Entry tax

Note:CGST, SGST, IGST & UT-GST have been explained in detail in Chapter "Overview of GST" under topic - “Components of GST”.

GST Compensation Cess

In addition to the CGST, SGST, UTGST, IGST as the case may be, there is an additional levy in the form of GST Compensation Cess on the above taxes for providing the compensation to States for loss of revenue due to implementation of GST. The said compensation cess is for the period of five years. The said cess is levied on supplies as may be notified by Central Government on the recommendation of GST Council. Accordingly, certain goods are notified like aerated waters, pan masala, tobacco and its products including Cigarettes and few types of Motor Vehicles. The ceiling on GST compensation cess is 15% though higher cess is leviable on Pan Masala and Tobacco products.

GST on Specific Products

Though GST is to consolidate tax code on all products considering various political aspects of our country, certain specific products are dealt separately. The salient features of the same are as follows :

(a)Manufacture of alcoholic beverages for human consumption are kept out of GST. State Excise Duty and Sales Tax/VAT would continue to be levied by the respective State Government.

(b) On the other hand, on Tobacco and Tobacco products Central Government would continue to levy Central Excise Duty in addition to GST. Hence, Tobacco products will be subject to Excise Duty Plus GST.

(c) Levy of GST on specified Petroleum products are postponed till that time the GST council recommends for its inclusion is GST. Till then States would continue to levy Sales Tax and Centre would continue to levy Central excise duty. The specified petroleum products are as follows :

1.Crude petroleum ;2.Diesel (HSD) ;

3.Petrol (motor spirit) ;4.Natural gas ; and

5.Aviation turbine fuel

All other fuels and petroleum products other than these five would be covered under GST.

(d)Tax on Entertainment: Municipality, Panchayat, Regional Council & District Council will have powers to impose tax on entertainment and amusement. District Councils for administration of Tribal Areas in States of Assam, Meghalaya, Tripura and Mizoram will have powers to impose Entertainment Tax.

 pre-gst regime vs. gst regime

Sr.No.

Issues

Pre-GST Regime

GST Regime

1

Broad Scheme

There were separate laws for separate levy. For e.g. Central Excise Act, 1944, respective State VAT laws.

There will be only one such law because GST shall subsume various taxes as specified above.

2

Point of Taxation

Tax is levied on manufacture and sale of goods, and/or provision of services.

GST is a Destination-based tax collected on final consumption

3

Tax on Goods and services

Goods and services were taxed separately

No differentiation between a “good” and a “service”; both are subject to one tax

4

Cascading Effect

This Problem arose because credit of CST and many other taxes were not allowed.

This situation will not arise as CST concept is being eliminated with introduction of IGST.

5

Tax Rates

There were separate rates. For e.g. Excise 12.36 % and Service Tax 15%.

There will be one CGST rate and a uniform rate of SGST across all states.

6

Tax Burden

Under present scenario, tax burden on tax payer is high.

Under this regime, tax burden is expected to reduce since all taxes are integrated which make it possible that burden is split equitably between manufacturing and services.

7

Tax Credit

Only intra-state transactions get input credit set-off, not interstate transactions.

Input credit set-off to be available for intra-state as well as inter-state transactions.

8

Cost Burden on Consumers

Due to presence of cascading effect, certain taxes become part of cost.

As GST mechanism removes such effect by providing credit, cost burden is reduced.

9

Concurrent Power

Under Pre-GST regime, there was no such power to both Centre and State on same subject tax matter

Both Centre and State are vested with the power to make law on GST by virtue of proposed Article 246A of the Constitution

10

Compliance

Tax compliance was complex because of multiplicity of laws and their provisions to be followed.

Tax compliance would be easier as only one law subsuming other taxes need to be followed.

11

Transparent Tax Administration

Tax was levied at two stages in broad manner i.e. (i) When product moved out of factory, (ii) At retail outlet.

GST is to be levied only at final destination of consumption and not at various points. This brings more transparency and corruption free tax administration.

IMPORTANT QUESTIONS

SHORT QUESTIONS ANSWERS

1.Write a note on the power of taxation under Constitution of India.

2.Differentiate between Excise Duty, Custom Duty and Sales Tax.

3.What were the different indirect taxes levied prior to GST ?

LONG QUESTIONS ANSWER

1.Explain the kinds of Taxes implemented in India.

2.What is Indirect Tax ? Differentiate between Indirect Tax and Direct Taxes.

3.Define the term Tax. Discuss in detail the features of Indirect Taxes and demerits of Indirect Taxes.

4.What is GST ?

5.Discuss the shortcomings of the previous tax structure in India prior to GST.

6.Explain in detail the tax structure of India after implementation of GST.

7.Describe the structure of Indian indirect taxation before GST.

8.Explain the deficiencies in the Indian taxation system prior to GST.

9.What is cascading effect ? Explain it with the help of an example.

10.List out the several central and state levies in India prior to GST.

Types of Taxation

(I)

(II)

(III)

On the Basis of

Relationship between

Tax Base and Tax Rate

On the Basis of

Method of Assessment

On the Basis of

Impact and Incidence

of Tax

Types of Taxation

(I)(II)

(III)

On the Basis of

Relationship between

Tax Base and Tax Rate

On the Basis of

Method of Assessment

On the Basis of

Impact and Incidence

of Tax

Taxes on Basis of Incidence and Impact

DIRECT TAXES

INDIRECT TAXES

Incidence of Tax

Impact of Tax

On

Same

Person

Incidence of Tax = On one Person

Impact of tax = On other Person

Burden of tax = SHIFTED

Example = Income tax

Example = GST

Burden of tax SHIFTED

¹

Taxes on Basis of Incidence and Impact

DIRECT TAXESINDIRECT TAXES

Incidence of Tax

Impact of Tax

On

Same

Person

Incidence of Tax = On one Person

Impact of tax = On other Person

Burden of tax = SHIFTED

Example = Income taxExample = GST

Burden of tax SHIFTED

Tax Structure in India

Before 1July 2017

st

Before implementation

of GST

Direct

Taxes

Number of

Indirect

Taxes

After 1July 2017

st

After Implementation

of GST

Direct

Taxes

Only One

Indirect

tax : GST

(A)

(B)

Tax Structure in India

Before 1July 2017

st

Before implementation

of GST

Direct

Taxes

Number of

Indirect

Taxes

After 1July 2017

st

After Implementation

of GST

Direct

Taxes

Only One

Indirect

tax : GST

(A)

(B)

Tax Structure in India before GST

DIRECT

TAXES

INDIRECT

TAXES

Income Tax

Wealth Tax

Corporate Tax

Estate Duty, Tax

CENTRAL GOVT.

STATE GOVT.

LOCAL BODY

GOODS

SERVICES :

SERVICE TAX

On rendering of

services in India

LOCAL BODY TAX

On entry of goods

into territory of a local

Body for use, sale or

consumption.

CUSTOM

DUTY

On Import

and Export of

goods

On Inter

state sale

of Goods

On manufacturing

of goods in India.

CST

EXCISE

DUTY

ON GOODS:

VAT

On Intra

State (local sales)

sales of goods.

OTHERS

Profession Tax :

On engagement

into any trade, employment

or profession

Examples :

Stamp Duty :

One execution of specified

documents

Luxury tax :

On provision of hotel rooms.

Entertainment Tax :

On entertainment such as a

amusement parks, cinema etc.

Octroi / Entry Tax :

On inter state

movement of goods, collected by

the state in which goods enter

Tax Structure in India before GST

DIRECT

TAXES

INDIRECT

TAXES

Income Tax

Wealth Tax

Corporate Tax

Estate Duty, Tax

CENTRAL GOVT.

STATE GOVT.

LOCAL BODY

GOODS

SERVICES :

SERVICE TAX

On rendering of

services in India

LOCAL BODY TAX

On entry of goods

into territory of a local

Body for use, sale or

consumption.

CUSTOM

DUTY

On Import

and Export of

goods

On Inter

state sale

of Goods

On manufacturing

of goods in India.

CST

EXCISE

DUTY

ON GOODS:

VAT

On Intra

State (local sales)

sales of goods.

OTHERS

Profession Tax : On engagement

into any trade, employment

or profession

Examples :

Stamp Duty :

One execution of specified

documents

Luxury tax :

On provision of hotel rooms.

Entertainment Tax :

On entertainment such as a

amusement parks, cinema etc.

Octroi / Entry Tax : On inter state

movement of goods, collected by

the state in which goods enter

From

Patiala, Punjab

TAX = VAT

From

Ambala, Haryana

From

U.S.A.

TAX = CST

Import Duty

(1) Purchase of raw materials

(2) Manufacturing

in Factory

(Excise Duty)

Joy & Company Ltd.

Ludhiana Factory-Manufacturing

readymade garments

(3) Finished Good Ready

(3) Sales of Finished Good

To Amritsar,

Punjab

(TAX = VAT)

(TAX = CST)

(Export Duty)

To Uttar

Pradesh

To

Australia

From

Patiala, Punjab

TAX = VAT

From

Ambala, Haryana

From

U.S.A.

TAX = CST

Import Duty

(1) Purchase of raw materials

(2) Manufacturing

in Factory

(Excise Duty)

Joy & Company Ltd.

Ludhiana Factory-Manufacturing

readymade garments

(3) Finished Good Ready

(3) Sales of Finished Good

To Amritsar,

Punjab

(TAX = VAT)(TAX = CST)(Export Duty)

To Uttar

Pradesh

To

Australia

Excise

Sales

Custom

Service

Duty

Tax

Duty

Tax

Manufacturer

Seller

Importer/Exporter

Service Provider

Wholeseller

Wholeseller

Wholeseller

Tax Payer:

Retailer

Retailer

Retailer

Consumer

Consumer

Consumer

Service

Receiver

is the

consumer

Tax Bearer:

Excise Sales CustomService

DutyTaxDutyTax

Manufacturer Seller

Importer/Exporter

Service Provider

Wholeseller

Wholeseller Wholeseller

Tax Payer:

Retailer Retailer Retailer

Consumer

Consumer Consumer

Service

Receiver

is the

consumer

Tax Bearer:

TAX

ABLE

EVENT

(iii)

Tax a

transaction

(ii)

We are

able to

(i)

Event due

to which

TAX ABLE EVENT

(iii)

Tax a

transaction

(ii)

We are

able to

(i)

Event due

to which

Tax Structure in India : GST

POST

Direct Taxes

Income Tax

Wealth Tax

Corporate Tax

Estate Duty, Tax

ALL PREVIOUS INDIRECT TAXES

(Such as Excise, CST, VAT, Service

Tax, Stamp Duty, Luxury tax, etc.

ABOLISHED

REPLACED BY ONE TAX

GST

Tax Structure in India : GSTPOST

Direct Taxes

Income Tax

Wealth Tax

Corporate Tax

Estate Duty, Tax

ALL PREVIOUS INDIRECT TAXES

(Such as Excise, CST, VAT, Service

Tax, Stamp Duty, Luxury tax, etc.

ABOLISHED

REPLACED BY ONE TAX

GST

TAX LEVIED

ON SUPPLY OF GOODS OR SERVICES OR BOTH

WITHIN THE STATE / UT

ON INTRA-STATE / INTRA-UT SUPPLY

BETWEEN STATES / UTs

ON INTER-STATE / INTER-UT SUPPLY

Intra state

supply

Dual GST

Intra UT

supply

Dual GST

i.e.

shall be levied on Intra

state supply of goods

or services or both

CGST and SGST

i.e.shall be

levied on Intra UT supply of

goods or services or both

CGST and UTGST

UT's which have their own

separate legislature (Delhi

and Puducherry) shall levy

SGST only. Other UT's which

do not have spearate

legislature shall levy UTGST.

Integrated GST (IGST)

shall be

levied on Inter State or Inter UT Supply

of goods or services or both

between :

– Two states

– Two UT's

– State and UT

DUAL-GST STRUCTURE IN INDIA

TAX LEVIED

ON SUPPLY OF GOODS OR SERVICES OR BOTH

WITHIN THE STATE / UT

ON INTRA-STATE / INTRA-UT SUPPLY

BETWEEN STATES / UTs

ON INTER-STATE / INTER-UT SUPPLY

Intra state

supply

Dual GST

Intra UT

supply

Dual GST

i.e.

shall be levied on Intra

state supply of goods

or services or both

CGST and SGST

i.e.shall be

levied on Intra UT supply of

goods or services or both

CGST and UTGST

UT's which have their own

separate legislature (Delhi

and Puducherry) shall levy

SGST only. Other UT's which

do not have spearate

legislature shall levy UTGST.

Integrated GST (IGST) shall be

levied on Inter State or Inter UT Supply

of goods or services or both

between :

– Two states

– Two UT's

– State and UT

DUAL-GST STRUCTURE IN INDIA

Four Types of Taxes under GST

SGST

CGST

UTGST

IGST

Levied on

supply

within

state

Levied by

the

Respective

State

Government

(SG)

Levied on

supply

within

state

Levied by

Central

Government

(CG)

Levied on

supply

within

UT

Levied by

CG

Levied on

supply

in the

course of

Inter state

Trade or

commerce

Levied by

CG

Four Types of Taxes under GST

SGSTCGSTUTGSTIGST

Levied on

supply

within

state

Levied by

the

Respective

State

Government

(SG)

Levied on

supply

within

state

Levied by

Central

Government

(CG)

Levied on

supply

within

UT

Levied by

CG

Levied on

supply

in the

course of

Inter state

Trade or

commerce

Levied by

CG

Taxation Under Constitution GST

POST

Central Government

State Government

Union Territory (UT)

Revenue From :

— Income Tax

Customs

— CGST (Central GST)

— IGST (Integrated GST)

—

Revenue From :

e GST

Excise on liquor

[So far GST has not been

implemented on liquor & petrol]

— (SGST) Stat

—

Revenue From :

— UTGST

Taxation Under Constitution GSTPOST

Central GovernmentState Government

Union Territory (UT)

Revenue From :

— Income Tax

Customs

— CGST (Central GST)

— IGST (Integrated GST)

—

Revenue From :

e GST

Excise on liquor

[So far GST has not been

implemented on liquor & petrol]

— (SGST) Stat

—

Revenue From :

— UTGST

Powers of Taxation under Constitution

Union List

Article 246 (1)

List I in VIIth Schedule

to Constitution

Power to make Laws

= Parliament/

Central Government

State List

Article 246 (3)

Concurrent

List

List II in VII

Schedule to constitution

th

List II in VII

Schedule to constitution

th

Power to make Laws

= State Government

Power to make Laws

= Both Central and

State Government

Powers of Taxation under Constitution

Union List

Article 246 (1)

List I in VIIth Schedule

to Constitution

Power to make Laws

= Parliament/

Central Government

State List

Article 246 (3)

Concurrent

List

List II in VII

Schedule to constitution

th

List II in VII

Schedule to constitution

th

Power to make Laws

= State Government

Power to make Laws

= Both Central and

State Government