Harmonized 'Goods and Service Tax' in India: A Backgrounder

Abstract

The later half of the twentieth century has been witness to the transformation of the turnover and sales taxes to value added taxes (VAT). This trend which began in France in 1954 has been emulated with success in both the developed and developing countries and also at supra-national levels such as the EC-VAT. The assistance offered by IMF to a number of developing countries in designing and set-up their indirect tax structures on a VAT model has only reinvigorated this shift. India’s tryst with VAT is no different story. The shift to VAT from sales tax has so far done well, both for the States and industry on the counts of rising collections and smoothening of interface respectively. The positive feedback from this successful transition has not only aggravated the strength of the factors fuelling the reform drive but also accentuated the movement towards redefining of the indirect tax landscape on a broader scale in its quest for simplification and harmonization. The carvings for a comprehensive tax on goods and service are, however, not new. With the introduction of ‘Service Tax’ in 1994, cross-linking of the credit mechanism between taxes on goods and services became inevitable to avoid the fallouts of cascading effect and double taxation thereon. Though there has been a partial alignment on that front under the ‘CENVAT Credit Rules’, the existing rules are limited in scope as they cover only the duties of excise. The taxes on sale of goods being beyond their coverage and in the absence of a mechanism for availability of credit across different State taxes, the citizens not only end up paying tax on tax but also have to bear its inflationary ramifications. The intent of merge the major indirect taxes (State level VAT, excise duty and service tax) into a generic ‘Goods and Service Tax’ (GST) was expressed by the Government in 2006 and international commitments were also made. A lot of water has flown since the assertion of this intent – the Empowered Committee of State Finance Ministers has undertaken to design the GST Model with similar work also undertaken by the Finance Commission independently. To set the foundation for legislative functioning, a Constitutional Amendment Bill has also been introduced in the Parliament. In this backdrop the author has attempted to sketch the Indian indirect tax paradigm necessitating the transition and provide a basic framework for understanding the GST design. The underlying objective is collate the various issues and aspects facing the GST and thus this paper serves as a backgrounder to bring in context the current status of GST in India.