MOVING TO GOODS AND SERVICES TAX IN INDIA:

IMPACT ON INDIAS GROWTH AND INTERNATIONAL

TRADE
Submitted By
Anupam Yadav (101)
Gajendra Mohan Jha (117)
Ashok Chakravarthy K (122)
Nikhil Dubey (130)
Satyajit Bagchi (145)
Venkani Alnoor (157)
Chaitanya P (166)
INTRODUCTION
GST - tax on goods and services with comprehensive and continuous
chain of set-off benefits from the producer's point and service
provider's point up to the retailer's level.
Essentially a tax only on value addition at each stage
Advantages
boost up economic unification of India
better conformity and revenue resilience
evade the cascading effect in Indirect tax regime
reduce the tax burden for consumers
simple, transparent and easy tax structure
uniformity in tax rates
increased tax collections due to wide coverage
cost competitiveness of goods and services in Global market
reduce transaction costs for taxpayers



Problems in implementing GST
Computerization and trained personnel to audit revenues from
GST
Carefully choose the most suitable tax rate
Impact on general price level
Adequately informing the general public
Proper system to keep accounting records
The broad objective of this study refers to analyzing the impact of
introducing comprehensive goods and services tax (GST) on
economic growth and international trade.





HISTORY OF TAX REFORMS 1/4
References both in Manu Smriti and Arthasastra to a variety of tax
measures
King taxed traders and artisans, agriculturists and others on a
differential basis
Akbar of the Mughal dynasty constructed an efficient and fair Tax
regime
decentralised system of annual assessment
It was replaced by a system called the Dahsala
This system was credited to Raja Todar Mal
Other local methods of assessment
British Tax System
Salt Tax, Irrigation Tax, Indigo Tax, Cotton Tax or the Railroad Tax
HISTORY OF TAX REFORMS 2/4
IT department was set up in 1922
In 1924, Central Board of Revenue Act constituted the Board as a statutory body with functional
responsibilities for the administration of the Income-tax Act
In 1940 - Directorate of Inspection was created
In 1941, the Appellate Tribunal came into existence
Central Board of Revenue Act, 1963 was passed
Central Board of Direct Taxes was constituted, under this Act
In 1965, the Voluntary Disclosure Scheme was brought in followed by the 1975 Disclosure Scheme
Settlement Commission was created
The recovery of arrears of tax which till 1970 was the function of State authorities was passed on to
the departmental officers
Tax Recovery Officers
Tax Recovery Commissioners
HISTORY OF TAX REFORMS 3/4
Post independence
strong Import Substitution policy
Economic Liberalization
Tax reform in India resembles the best practice approach of
broadening the base,
reducing the rates,
reducing rate differentiation and
keeping the system simple
Need for Change
In corporate tax, excise, customs and sales taxes - almost 40 per cent of revenue comes
from diesel and petrol.
Personal income tax continues to be narrow based
Recent reforms - improve revenue productivity and horizontal equity
HISTORY OF TAX REFORMS 4/4
Indian government announces
GST roll out in April 2011
to create an efficient and
harmonized consumption tax
system in the country
The first step towards
introducing GST is to
progressively converge the
service tax rate and the CENVAT
rate
The GST is proposed to be a
comprehensive indirect tax levy
on manufacture, sale and
consumption of goods as well as
services at a national level
End the long standing distortions
of differential treatments of
manufacturing and service
sector
Impact: lead to the abolition of
taxes such as
octroi,
Central sales tax,
State level sales tax,
entry tax,
stamp duty,
telecom licence fees,
turnover tax,
tax on consumption or sale of
electricity,
taxes on transportation of
goods and services
GST will facilitate seamless
credit across the entire supply
chain and across all states under
a common tax base
CURRENT TAX STRUCTURE
Traditionally, Indias tax regime relied heavily on indirect taxes
including customs and excise
Tax structure is a three-tier federal structure, comprising the Union
Government, the State Governments and the Urban/Rural Local
Bodies
The power to levy taxes and duties is distributed in accordance with
the provisions of the government
The main taxes/duties that the Union Government is empowered to
levy are Income Tax, Customs duties, Central Excise and Sales Tax
and Service Tax
The principal taxes levied by the State Governments are Sales Tax,
Stamp Duty, Land Revenue, State Excise
The Local Bodies are empowered to levy tax on properties, Tax on
Markets and Tax/User Charges for utilities like water supply,
drainage, etc.

INEFFICIENCIES IN THE CURRENT SYSTEM
Taxation at Manufacturing Level:
The CENVAT is levied on goods manufactured or produced in
India
gives rise to definitional issues as to what constitutes
manufacturing, and valuation issues for determining the value on
which the tax is to be levied
virtually all countries have abandoned this form of taxation and
replaced it by multi-point taxation system
Exclusion of Service
States are precluded from taxing services
This limitation is unsatisfactory from two perspectives
the advancements in information technology and digitization
have blurred the distinction between goods and services
negative impact on the buoyancy of State tax revenues
CONTD.
Tax Cascading:
the most serious flaw of the current system
occurs under both Centre and State taxes, most significant
contributing factor is the partial coverage Central and State
taxes
increases the cost of production and puts Indian suppliers at
a competitive disadvantage in the international markets
Complexity
The most significant cause of complexity is policy related and
is due to the existence of exemptions and multiple rates, and
the irrational structure of the levies
complexities under the State VAT relate primarily to
classification of goods to different tax rate schedules
starting base for the CENVAT is narrow, and is being further
eroded by a variety of area-specific, and conditional and
unconditional exemptions

LITERATURE REVIEW
Krueger, Anne O. (2008): The Role of Trade and International
Policy in Indian Economic Performance, Asian Economic Policy
Review, (3), Japan Center for Economic Research.
Should Indian economic policies continue in about their present form, it is likely
that growth might decelerate to a 56% rate.
A political system and democracy with gradual reform and consensus, the
demo-graphic dividend as the percentage of population in the labor force will
rise, etc., as demonstrated by achievements in IT so far.

Bird, Richard M., Jack M. Mintz and Thomas A. Wilson (2006):
Coordinating Federal andProvincial Sales Taxes Lessons from Canadian
Experience, National Tax Journal, (59),809-25
Impact of VAT in Canada and its relevance to USA
Operated both as a federal value-added tax (the GST) and two variants of
provincial VATs
Canadian case suggests that the introduction of a federal VAT in the US would not
create any great technical problems for either the states or business.


CONTD..
Poirson Helene (2006): The Tax System in India: Could reform spur
growth?, IMF Working Paper.
Assesses the effects of Indias tax system on growth, through the level
and productivity of private investment.
Indian tax system is characterized by
a high dependence on indirect taxes
low average effective tax rates and tax productivity
high marginal effective tax rates and large tax-induced distortions on investment and
financing decisions
GST would improve tax productivity and lower the marginal tax burden
and tax-induced distortions.
Devarajan et al (1991): A Value-Added Tax (VAT) in Thailand:
Who Wins and Who Loses?, TDRI Quarterly Review, 6(1).
the impact of introducing 10 per cent VAT in Thailand using a general
equilibrium model
identify gainers and losers and the effect on output, prices and incomes.
does not bring out sectoral changes therein
CONTD..
Meagher, G.A. and Brian R. Parmenter (1993): Some Short-Run
Implications of Fight back: A General Equilibrium Analysis, General Paper
No. G-101, CPSIP, Monash University.
Analyse short-run implications of Australias tax reforms of 1992 proposed as
Fightback
Use a general equilibrium model for their analysis
The GST does not discriminate between imports and domestic commodities and
affects exports only in a minor indirect way
impact on cost-sensitive industries exposed to international competition is smaller
than the impacts of other taxes
Summers, H. Lawrence H(1989): "Tax Policy and International
Competitiveness," NBER Working Papers 2007, National Bureau of
Economic Research
Examines the interactions between tax policy, international capital mobility, and
international competitiveness
effects of tax policies depend critically on the extent of the international capital flows
which they generate.
while tax policies could generate large capital flows, governments pursue policies
which tend to inhibit capital flows following tax changes


CURRENT SYSTEM: PRINCIPAL DEFICIENCIES
Taxation at
manufacturing
level (CENVAT)
Exclusion of
Services (for
states)
Tax Cascading
Complexity
BALANCING GAME?
Vertical
Equity
Horizontal
Equity
TAX REFORM: OBJ ETIVO PRINCIPAL
Addressing Deficiencies
Economic
ally
Efficient
Neutral in
application
Distributiona
lly attractive
Simple to administer
Tax Design
Infrastructure
for tax design
Degree of
Harmonization
MODEL TO DETERMINE TOTAL OUTPUT OF VARIOUS
SECTORS OF ECONOMY

Structural input coefficients aij
Flows from sector i to sector j
of inputs required to produce one
rupees worth of output in the
current year
In standard input-output flow
matrix inputs required for capital
formation are included in the final
demand vector
B matrix (bij) represents capital
requirements of 60 sectors of the
economy

REGRESSION MODEL
RESULTS AND IMPLICATIONS
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