Features and impact of current system with an ideal GST regime

 

Current regime of indirect taxes An ideal GST structure

Features

Goods and services taxed separately* No differentiation between a good and a service; both subject to one tax
VAT applies at manufacturing stage (CENVAT i.e. excise duty) as well as at sales stage (state VAT i.e. sales tax). VAT applies at point of consumption. Set-off on the inputs gets credit through the production and distribution stages
Input credit set-off not available across different taxes. For example, set off not available for CENVAT against state VAT. Input tax credit available across state and central tax jurisdictions.

 

Some taxes (CENVAT, service tax) levied at the stage of production, while some (state VAT) levied on sale Follows a destination based principle where tax is collected on final consumption
Many indirect taxes not included in central and state VAT.** Subsumes all indirect taxes under one tax.
Different tax rates levied across products and across states Single tax rate to apply on all goods and services
Intra-state transactions get input credit set off but not inter- state transactions Input credit set off to be available across intra-state and inter-state transactions.

IMPACT

Cascading of taxes across manufacturing and distribution chain increases cost of products making them uncompetitive Eliminates cascading by providing for input credit set off at all stages of production
States’ levy of entry tax/octroi when goods pass through states result in bottlenecks at borders, raising inventory costs Facilitates inter-state trade as transactions across state and municipal jurisdictions are free from tax.
Different tax rates across states leads to economic distortions Single national tax rate reduces economic distortions.

 

 

Sources: Report of the Task force on GST, 13th Finance Commission; Report of the Fourteenth Finance Commission, Chapter 13, „Goods and Services Tax‟; First Discussion Paper on Goods and Services Tax in India, The Empowered Committee of State Finance Minister; PRS.

Notes: * Service tax cannot be levied by states. It is levied by the centre.

**CENVAT does not include additional excise duty, additional customs duty, central surcharges and cesses. State VAT does not include luxury tax, entertainment tax, taxes on lottery, advertisements, entry tax etc. CENVAT applies only at the manufacturing stage, and does not extend down to the distribution stage till the retail sale of goods.

***Exemptions under CENVAT and service tax include: oil and gas production, mining, agriculture, wholesale and retail trade, real estate construction, and other services. Under state VAT, all services, real property, agriculture, oil and gas production, and mining are exempt.

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