Saahil Parekh 08HS2009

Centre
Direct Taxes Income Tax
Wealth Tax

Centre
Service tax
Taxes in India Excise duty
Custom duty

Indirect Taxes State

VAT
Entry tax
Luxury tax
Electricity duty
Stamp duty
Tax on lottery
Excise on alcohol
Entertainment tax
Octroi
Service tax:
 Rendering of services in India is subject to service tax imposed and administered by the
central government.
 Currently, ~112 services are taxable under the act.
 The rate of service tax is 10% (reduced temporarily from 12% to support recession-hit
industry).

Customs duty:
 Import/export of goods is subject to customs duty, which is imposed by the central
government; however, most exports are generally exempt from indirect taxes.
 The basic rate for levy of customs duty is 5%.

Excise duty (CENVAT):

 Levied on goods manufactured in India
 Comes under the jurisdiction of the central government, except alcohol which is under the
jurisdiction of state governments.
 Current basic rate of duty is 8% (reduced temporarily from 12% to support recession-hit
industry).
VAT:
 VAT (Value Added Tax) is levied on intra-state sale of goods
 It is levied and administered by individual state governments and
contributes ~50% to state tax revenues.
CST:
 Central sales tax (CST) is an origin based tax, levied on inter-state sale of
goods.
 It is a Union levy, but is administered by states and the revenue is
retained by the state from which the movement of goods originates.
 The basic CST rate levied on a sale made to registered dealers is 2%.

Entry Tax:
 Entry tax is levied by many destination states at the time of entry of
goods in their jurisdiction.
 Few states levy entry tax ~1-3% in lieu of octroi charged by them earlier.
Luxury Tax:
 Accommodation and other allied services provided in hotels and clubs
are subject to luxury tax, imposed by state governments.
 The rate of tax varies from state to state. In Maharashtra, luxury tax is
levied ~ 4-10% on hotels on the basis of tariff classification.
 However, a duty of 12% is charged on services provided by clubs.

Electricity Duty:
 State government levies electricity duty on the energy consumed by
consumers other than for captive consumption.
 Rates of duty vary from state to state in the 6-20% range.

Entertainment Tax:
 Entertainment tax is levied by states on the rendering of entertainment
services to customers
 Examples are movies, exhibitions, horse races, or other sports.
 The rate for entertainment tax is generally in the 20-60% range.

Octroi:
 Most states have done away with octroi, which was charged at the time
of entry of goods into a municipal area.
 Few states have increased the basic VAT rate in lieu of abolishing state
octroi.
 VAT is a multi-point destination based tax, levied
on value addition at each stage of transaction in
the supply chain.
 It works on the “input tax credit (ITC)”
mechanism, wherein VAT paid on inputs is
allowed to be set off against VAT payable on
subsequent sale.
 The tax credit is available on both inputs and
capital goods for manufacturers as well as
traders. The above credit mechanism works well
only for intra-state sale of goods.
 VAT was introduced w.e.f. April 1, 2005, for wider commodity
coverage and to avoid multiple taxation of commodities due
to lack of co-ordination between the Centre and states on
the rates charged and commodities covered under sales tax.
 Since the inception of VAT, taxes on commodities and
services have increased (on an average) to 5.2% of GDP in
2005-09 from 4.5% of GDP during 1995-2000.
 Two basic rates of VAT at 4%/12.5%
 A special rate of 1% for precious metals
 Items of basic necessity (around 75) are exempted
 The 4% rate has been extended to items of common
consumption (covering around 275 items such as
medicines, agricultural and industrial inputs, food,
utensils, fabrics and garments, paper, sporting goods,
and IT products)
 All other items are taxed at 12.5%
 Certain goods such as liquor, petrol, diesel, and
aviation turbine fuel are kept outside the purview of
normal VAT and are taxed as per the earlier sales tax
act or under a special section in VAT.
Cascading Impact (Tax on Tax):
The current tax system involves multi layered taxes levied by central, state
governments, and local authorities at multiple points in the supply chain.
 State VAT paid on inputs in one state is not available for set off if the
output is sold in another state.
 Excise duty on alcohol is levied by state governments; hence, CENVAT
credit in respect of excise duty paid on inputs to central government is
not available for set-off in case of excise duty payable to state
governments.
 Excise duty paid on manufacturing is not allowed to be set off against
state VAT payable on sale of goods and vice versa.
 With the service industry, wherein the major cost other than employees
is the infrastructure cost. Companies are charged VAT on purchase of
infrastructure goods; however, VAT is not allowed to be set off against
service tax liability levied on services rendered. However, service tax
payable can be set off against excise duty and vice versa. Examples:
Infrastructure, telecom, logistics
Inter-state Trade
 Regional Differences in Tax Rates:
 There is no uniformity in the rate of tax charged
on goods.
 Breaches the motive behind implementation of
VAT
 Results in differential prices of goods amongst
states and diversion of trade from costlier states
to cheaper ones.
There are many items on which the rate of tax
differs from state to state, of which, some are listed
below:
Complex Tax Structure:
 Current taxation involves multiple tax laws,
rules and administrative procedures.
 An assessee with pan-India operations has to
deal with multiple tax laws at the state level,
along with various other taxes levied by the
central government and local authorities.
 These issues discourage investments by
organised sector and are also a huge
disincentive for voluntary compliance, which
is to a great extent responsible for high
effective tax rates.
Differential Rates in Value Chain:
 In the current VAT structure, inputs for many
industries are taxed at 4%, while output is
taxed at base VAT rate i.e., 12.5%.
 Such a big gap between input and output
rates provides incentives to the manufacturer
to not report his sales, as a substantial part of
the tax is paid at this stage.
Double Taxation:
 Globally, the distinction between goods and services is clear with
all intangibles defined as services; however, in India, intangibles
are further classified as goods or services.
 The distinction between goods and services is increasingly getting
blurred with development in technology and services getting
bundled with goods.
 The current constitutional framework gives autonomy to states to
levy tax on sales of goods.
 However, states are precluded to levy tax on services that fall
under the jurisdiction of the Centre.
 With increasing share of services in tax revenues, state authorities
often define the ambiguous transactions under the ambit of goods
and charge state VAT, whereas central government levies service
tax on the same transaction.
 Examples: Sale of advertisement (media industry) and standard
software (IT industry) is classified as sale of goods and charged to
the state VAT by many state governments, whereas, the same
transaction is taxed as service by the central government.
Exemptions:
 Leads to classification issues as well as higher
effective tax rate on other goods/services to
maintain revenues.
 Because of non issuance of taxable invoice, the
exemption generally breaks the value chain and
leads to implicit cascading.
 Regional exemptions have been used as a
measure of tax planning by market participants.
For example, in case of some goods only a small
quantum of end processing is done in the
facilities situated in the exempted zone to avail
tax benefits.
 To overcome issues mentioned above and to simplify the existing
taxation system and procedures
 Ex-Finance Minister Mr. P Chidambaram, in his 2006-07 Budget speech,
suggested adopting nationwide VAT, more commonly known as GST.
 The current Finance Minister Mr. Pranab Mukherjee, in his 2009-10
Budget speech, had reiterated the rollout of GST w.e.f. April 01, 2010.
 Perceived as an attempt to join the worldwide shift from emphasis on
direct to indirect taxation.
 Seen as a positive form of tax since it taxes consumption and encourages
savings and investments.
 More evenly spread across the population, minimising economic
distortions by providing comprehensive coverage.
GST is one of the widely accepted indirect taxation system prevalent in more
than 150 countries across the globe.
GST in the Indian context can be elaborated
under following broad parameters:

1) Framework and likely tax structure

2) Taxes likely to be subsumed
3) Tax base: Goods / services likely to be taxed
4) Tax rate
 GST will be a destination-based tax levied on consumption, applicable on a comprehensive base of both
goods and services.
 The GST framework will allow full credit for taxes paid on inputs in the supply chain (i.e., taxes paid on
input goods and services can be set off against taxes payable on output goods and services).
 Considering the federal structure of the Indian government, the finance minister has suggested a dual
GST structure. In this, both Union and state governments will be empowered to levy and administer
taxes concurrently on a uniform base of goods and services.
 Dual GST will comprise:
1. CGST: To be levied by the Centre
2. SGST: To be levied by states
 Considering regional needs, states will be given some freedom to decide rates (SGST) within a
 narrow band, subject to a floor rate, so as to allow some autonomy to them.
 Levy of GST will be extended to imports as well as to impart a level playing field to the
 domestic industry. Currently, states are not allowed to levy tax on imports.
 Exports will continue to be zero rated.
 To maintain the progressive nature of taxation, items of basic necessities will continue in the exempted
list and there will be a non-rebatable discretionary tax over and above the GST rate which will be levied
on a selected list of luxury commodities.
 The GST framework should not allow for region-specific and discretionary exemptions as it will be
important in the new framework to not break the value chain.
Duties imposed by Centre:
 CENVAT/Excise duty
 Service tax
 CVD
 SAD
 Central sales tax (CST) levied on inter-state sales will be phased out.
Duties imposed by states:
 VAT (sales tax)
 Entry tax
 Octroi
Few other duties levied by state/local authorities, the future treatment of which is still hazy:
 Electricity duty
 Luxury tax
 Entertainment tax
 Stamp duty on transactions other than real estate

Under-mentioned taxes are likely to not be subsumed in GST and will continue in their current form:
 Basic custom duty
 Anti dumping duty
 State excise on liquor
 Taxes on petroleum products
 Motor vehicle tax
 Stamp duty on registration of real estate
 The current tax structure levies tax on all goods except those included in the exempted list.
 However, in case of services, the list explicitly specifies services that are under the ambit of taxation;
thus, services that are not explicitly specified in the list are not taxed.
 GST will be levied at a standard rate on a comprehensive base of goods and services except for a few
goods and services that may continue to be in the exempted list. The above will result in a large set of
services which were earlier not under the ambit of taxation, now being brought under the tax net.
 The items, which, in our view, will continue to be in the exempted list include:
1. Unprocessed food and agricultural products; however, processed food items will be taxed at the
standard rate.
2. Non-profit public sector services
3. Education and health care services
 It is highly desirable to keep the exempted list small and large comprehensive tax base, so as to have a
lower GST rate that will encourage better compliance and fewer classification issues.
 Goods and services likely to outside the purview of GST:
1. Banking and financial services
2. Real estate transactions
3. Petroleum products
4. Liquor
5. Tobacco products
 Likely GST rate will be based on revenue neutral rate (RNR), which will be
a function of:
1. Tax base: Extent of goods and services that will be brought under
the ambit of GST. Higher the tax base, lower will be the GST rate
and vice-versa.
2. Concessional rate of duties levied on certain goods and services.
3. Higher non-rebatable discretionary taxes levied on certain luxury
goods and on petroleum and liquor products.
 On a revenue neutrality principle, higher exemptions and subsidies will
result in a high GST rate, which will result in very high resistance,
especially from sectors that are currently not taxed.
 High rate will also result in non compliance and demand for exemptions.
Lower rate and a broad tax base will lead to higher voluntary compliance
and buoyant tax revenues.
 Ex-Finance Minister P. Chidambaram, has indicated likely GST rate in
the 14-16% range.
 Harmonised tax structure, unified tax base, and
common rules and administrative procedures across
the nation
 Widening of tax base to a comprehensive list of goods
and services
 Simplifying tax procedures will bring in transparency
and encourage investments in the organised sector;
hence, it will result in higher FII inflows, helping the
economy gain growth momentum
 Mr. Vijay Kelkar, Chairperson, Thirteenth Finance
Commission: “…the potential impact of GST
implementation will be to the tune of USD 15 bn
annually.”
 Only specified services are currently under the
ambit of taxation.
 Will bring goods and services under the same
umbrella of taxes, thereby reducing the
disparity.
 Increase in tax base will help to reduce the
overall tax rate across various organised sectors
 Will also aid the government in consolidating its
fiscal position.
 With increasing share of services in GDP, taxing
services not taxed currently will help reduce
overall tax rate.
 Significant increase in voluntary compliance.
 When GST was introduced in New Zealand, it
generated 45% higher revenues, primarily on
account of improved compliance.
 Stock transfer between factory and C&F
agent/depot of the same entity is not liable for
levy of CST.
 All major pharmaceutical, cement, and FMCG
companies currently operate depots/C&F agents
in all major states to avoid the levy of CST.
Companies incur an average of 1-2% of revenues
towards maintenance of these facilities.
 Companies need not bear these additional
infrastructure costs primarily used for tax
planning.
 Facilitate a smooth flow of input credit across
the value chain for inter-state trades as well
as in respect of taxes levied by multiple
authorities (for which either no input credit is
available or there are procedural hassles to
claim input credit).
 Moreover, taxes will not be levied on taxes as
is the case currently
 Result in significant avoidance of disputes on
classification issues.
 Industry will be relieved from the problem of
double taxation of the same transaction.
 Agreement of Centre and states for levy and
administration of duties
 Rate of taxes; goods to be
exempted/subsidised
 Constitutional amendment: Hurdle in GST
implementation
 Infrastructure issues
 Revamping tax administration
 The impact will be negative for sectors where the current tax
rate is lower and positive for those where current effective
tax rates are higher than the likely GST rate.
 The negative impact will be muted because of minimum
cascading impact and higher input tax credit available
 The positive impact could be subdued on account of higher
discretionary taxes levied on select luxury goods.
 We have worked out the effective tax rates applicable across
sectors and directional impact of GST, assuming GST rate at
14% for all goods and services with some basic necessities
put under the exempt category.
 In an economy there are usually three participants—consumers, industry, and
government.
 In an indirect tax regime, the industry acts as a pseudo collecting agent of the
government, collecting taxes from consumers and remitting the same to the
government.
 The government, in turn, incurs public expenditure for the benefit of consumers.
 The discussion above leads us to conclude that both industry and consumers will
gain on account of reduced effective tax rates.
 A classical question which arises is how will it be funded?
 Will it be out of government’s pocket?
 Based on experience of VAT, we are of the opinion that government revenues
are also likely to increase, which will be funded out of the parallel economy,
expanding the tax net over goods and services and the increased consumption.
 GST, being a destination-based tax on consumption of goods, will ensure better
compliance, as goods/services once entering the value chain across the nation
will be tracked till the end consumer. Hence, chances of tax avoidance will be
minimal.
 Also, since taxing will be effectively only on value addition, there will be lower
incentives for participants to avoid taxes as they will receive credits on inputs.