Part B- First Discussion Paper on GST- 1st Segment

[Deepak Aggarwal]

GST……Goods and Services Tax

Part-B

First Discussion Paper on GST- 1^st Segment

• First Segment of First Discussion Paper on GST explains a brief reference to the process of introduction of VAT in the Centre and in the States and also areas where needs further improvements i.e. justification for GST.

Introduction of VAT

• In India, VAT was introduced at the Central level for a selected number of commodities in terms of MODVAT w.e.f March, 1986 and later it is extended to all commodities in terms of CENVAT w.e.f. 2002-03.
• Later on Service tax was added to CENVAT w.e.f. 2004-05.
• Vat was introduced at the State level beginning from April, 2005.

Before introduction of VAT

- at Central level, there was a burden of multiple taxation i.e. tax on tax. No Input tax credit was allowed in earlier regime.

-at State level, in case of multi point sales taxation, burden of sales tax paid on purchase on each level was also added and thus a cascading effect of taxation was there. Also no input credit was allowed in earlier regime.

After introduction of VAT

-at Central level, a set-off is given i.e. input tax credit introduced.

-at State level, a set-off is given for input tax paid and also for tax paid on previous purchases to remove cascading effect of taxation.

Justification of GST

• Current system of VAT at Central and State level have some shortcomings.

Shortcomings- at Central level

- Non-inclusion of several Central taxes e.g. additional customs duty, surcharges etc.

- Non-inclusion of value added chain in the distribution trade below the manufacturing level

Shortcomings- at State level

-Non-inclusion of several state taxes e.g. luxury tax, entertainment tax etc.

-Cascading effect on account of Cenvat element i.e. excise duty on the goods remains included in the value of goods to be taxed under state VAT

- No credit of input services at state level

• After introduction of GST, all shortcomings at Central and State level will be removed.

At Central level

-GST will provide comprehensively more indirect central taxes

-Integrate goods and service taxes for the purpose of set-off relief

-Widening of dealer base by capturing the value addition in distributive trade

At State level

-Removal of cascading effects of CENVAT i.e. excise duty

-Removal of cascading effects of Service tax

Thus GST is not simply VAT plus Service tax. It is an improvement over the previous system of VAT and Service tax.