A Primer on Goods and Services Tax in India

Abstract

India has witnessed substantial reforms in indirect taxes over the past two decades with the replacement of state sales taxes by Value Added Tax (VAT) in 2005 marking a watershed in this regard. Prior to VAT implementation, the tax structure was considered problematic primarily due to the “cascading effect of taxes”whereby an item is taxed more than once from the production to the final retail sales stage.To avoid this irrational tax structure, VAT was introduced so that that taxes are paid on the “value added portion” by each producer and the hurdles of the cascading effect are done away with. But shortcomings were also noticed in the VAT structure and efforts were made to further rationalise the system.The government has therefore recognised the need for harmonisation of goods and services tax so that both can be levied in a comprehensive and rational manner in a new taxation regime – Goods and Services Tax (GST).While presenting the Union Budget 2007-08, former Finance Minister P Chidambaram announced that GST would be introduced from April 1, 20102, in order to supplement the existing VAT system in India with a tax structure where goods and services tax can be unified in a comprehensive manner. The Empowered Committee of State Finance Ministers would work with the Central government to prepare a road map for its roll out.