GST vs VAT

Ambikesh Mishra-11 AR1001

Arnab Mahanty-11AR1005
Karthikeya Pathak-11AR1011
 CURRENT TAX STRUCTURE

• Existing institutional and organizational structure with

multiple departments : one with union and one at the
state level.
• Three layers of organization.
o First at union level.
o Second at state level
o Third at local level.
• Fiscal federation in India is tilted towards the union
with important powers with the union government .
 CURRENT TAX STRUCTURE
• Union government tax departments function
under overall control of the Union Ministry of Finance

• Tax departments under each state government function under

the ministry/department of taxation of respective state
governments with their own structures, processes and
bureaucracy.
• Local-level revenue agencies (mainly urban municipalities) have
been entrusted with the responsibility for collection of some
specific local taxes mainly house property, entertainment, etc, by
the state governments
 Distribution of tax revenue
between union and state

• Constitutional mechanism for mandated rule based devolution of tax

revenue to states.
• States spend half of the total combined expenditure while collecting one-
third of the revenue.
• States own tax revenue constitutes only 60-64% of their total tax revenue
mainly through VAT.
 FALACIES

• Tax payers have to deal with different tax agencies for

different type of taxes.

• Unnecessary fragmentation of tax management

systems.

• Duplication of functions

• Inconsistent treatment of legal and accounting issues.

 FALACIES

• Increased compliance cost.

• Increased harassment of tax payers.

• Prior to introduction of VAT, there was a burden of

multiple taxation in the pre-existing central excise duty
and state sales tax.
 VAT

• Optimization of equity and efficiency in the system of taxation

is a pre-requisite of social and financial growth
• To address these major pitfalls of the prevailing taxation-system,
Central Value Added Tax (CENVAT) was introduced in early
years of the new millennium
• Prior to the introduction of VAT in the centre and in the states,
there was a burden of multiple taxation in the pre-existing
Central excise duty and State Sales Tax.
• The “tax on tax” system lead to a negative effect on production
and distribution activities
 VAT

• In case of VAT, a deduction on taxes – input

tax credit (ITC) - is made on the inputs used on which taxes have
already been made thus removing the problem of double taxation

• VAT pre-supposes a uniform floor rate of tax, differential rates

of taxation across states get eliminated which in turn prevents
‘rate war’ among different states
Flow Chart of input tax credit
 Goals achieved
• taxation has not only become more transparent, tax compliance
has also increased

• in Central Tax Revenue also was substantially with implantation

of VAT

• The rate of growth of Tax Revenue has nearly doubledfrom the

average annual rate of growth the pre-VAT five year period after
the introductionof VAT
 Problems
• CENVAT has not been extended to include chain of value
addition in the distributive trade below the stage of production

• CENVAT also does not include many Central Taxes like

Additional Excise Duty, Additional Customs Duty, Surcharges,
etc.

• The non-inclusion of these taxes keeps the benefits of

comprehensive input tax and service tax set-off out of reach for
manufacturers and dealers
 Problems
• Several taxes which are in the nature of indirect tax on goods
and services, such as luxury tax, entertainment tax, etc., and yet
not subsumed in the

• CENVAT load on the goods remains included in the value of

goods to be taxed under State VAT, and contributing to that
extent a cascading effect on account of CENVAT element
 WHY GST?

• Optimization of equity and efficiency in the system of

taxation is a pre-requisite of social and financial
growth.

• Models of taxation should aim preventing adverse

effects of taxes enhancing the rate of growth of tax
revenue by promoting natural compliance and making
taxation system broad based.
 WHY GST?
• It is claimed that there is an urgent need of replacing the existing
tax system by a new regime of taxation of goods and services
which would foster the achievement of the following objectives:
o The incidence of tax falls only on domestic consumption
o The efficiency and equity of the system is optimized
o There should be no export of taxes across taxing jurisdiction
o The Indian market should be integrated into a single
common market
o It enhances the cause of cooperative federalism (Report of
the Task Force on Goods and Services Tax, 2009: 4)
 Dual GST
• Conventionally, GST means tax which is levied and collected by the
Central Government
• Such centralized system of GST implementation would imply states’ to
lose their fiscal autonomy in levying and collection of taxes
• GST to be implemented in India would be ‘dual’ in nature
• consist of two components: one levied by the Centre (CGST) and
another levied by the States and Union Territories (SGST)
• Canada has a federal level GST since 1991 while provinces have their
own sales tax. Qubec has its own VAT on a base that consists of both
goods and services which is largely harmonized with federal GST.
Both taxes are administered by revenue authorities of Qubec with
audit returns being undertaken in close collaboration
 THE GIST OF PROPOSED GST: TAXES TO BE

SUBSUMED

Central Levies State levies

• Excise duty • Value added tax

• Additional excise duties • Entertainment tax
• Excise duty under Medicinal • Luxury tax
and • Tax on lottery, betting &
• Toiletries Preparation Act gambling
• Service tax • Entry tax
• Additional and special • Surcharges and cesses
additional
 GST Exemption

• Ideally there should not be any exemption from CGST and SGST since
exemption increases
• the amount of tax finally paid on intermediate goods.
• As such exemption will result in undesired results. However, if at all the
government needs to provide exemptions, the Task Force report recommends
that that they should be restricted to only items listed in Table 2.
 THE GIST OF GST: RATES AND THRESHOLDS
• The Gist of GST: Rates and thresholds
• Two-tier rate structure for both CGST and SGST
• - Standard rate for most goods and services
• - Lower rate for essential commodities and precious metals
• Threshold limits:
• Threshold limits for :
• Composition scheme with floor rate of 0.5% to be available for taxpayers
having annual turnover below Rs. 50 Lakh

Thresholds limits
for :
Tax Goods Services
CGST Rs. 150 Lakh Yet to be decided.
SGST Rs. 10 Lakh Rs. 10 Lakh
 Problems in Introduction of GST

• The question of role and responsibility of union and state

governments on policy issues related to the GST base, tax rate,
etc, are significant for a truly federal structure, its relation with an
effective and efficient collection mechanism and collection
agency is quite weak
• The GST policy is being discussed and debated at the highest
political level and obviously the question of fiscal autonomy of
states and their ability to raise revenue independently has played
a decisive role.
 Problems in Introduction of GST

• the administrative architecture issue, question of how separable

are the power to“levy” GST and its operationalization for
“collecting” this tax has not got due attention. It has happened
largely due to the presence of a strong state-level bureaucracy
and its rivalry with the union bureaucracy
• Highly harmonised dual-layer separate revenue agencies at
the union and state level often offered as the way out though
certainly an improvement over the status quo is only a second
best solution
 Conclusions

• GST being a single tax to be shared between the union and the
states, its best operationalization could be achieved through a
single national agency/department in charge of collecting GST
and implementing policies of the state and union
• The GST so collected can conveniently be apportioned and
distributed among the respective governments
• Any harmonisation with multiple agencies would not mean much
unless it is of a very high level, which will effectively make
multiple agencies redundant. However, looking at the complexity
of issues involved, a start could be made with the second best
option of harmonisation and ordination in some crucial areas.
 Conclusions

• The design of appropriate institutional and organisational

structures is crucial for the success of GST reforms. In such a
vision, the lynchpin of success would be a highly profession a
land motivated human resource, nationwide information
technology architecture, processes and procedures, work fl ows
and systems compatible with the GST structure and a high level
of harmonisation with other revenue agencies especially ITD.
• Integration and alignment and reform the revenue administration
and civil services structure with more efficient forms of
organising government bureaucracies on professional lines