INTRODUCTION OF TAXATION

"GST will enable the move from fragmented economy one market... it will boost investment, growth." ~ Arvind Subramanian (Former Chief Economic Advisor to the Government of India)

The term 'tax' is something which is most significant in the economy of any country in the world. Taxes collected by Government are used to provide common benefits to all. Taxes do not guarantee any direct benefit for a person who pays the tax. It is not based on the “quid pro quo principle.” In simple words, we can say that tax is that money is given to the government by an individual or a group of individuals. Here, however, we are going to discuss GST; this term was unknown to most of the people of India but now it has become a part of the life of everyone, the reason why is, that it has replaced one of the forms of the old system of Tax collection and that was an indirect tax. Before understanding the term GST we need to be familiar with the term like Direct tax and Indirect tax and apart from this so many various other enthralling & significant stuffs.

Concept of Direct and Indirect Tax:

Direct Tax - The tax whose incidence of tax and impact of a tax levy on the same individual or a group of individuals is called Direct tax. A direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to the Government by the persons (juristic or natural) on whom it is imposed. For instance, Income tax, Corporate Tax, Capital Gains Tax and so Security Insurance Tax etcerta.
Indirect Tax - The tax whose incidence of tax and impact of tax levy on different individual or a group of individuals is called Direct tax. If the taxpayer (such as a manufacturer or provider of service or seller of goods) is just a conduit and at every stage the tax-incidence is passed on till it finally reaches the consumer, who really bears the brunt of it, such tax is indirect tax. For instance, Custom Duty, Central Excise Duty, State Excise Duty, Surcharge, Service tax, VAT etcetera. Indirect taxes are also called consumption taxes, they are regressive in nature because they are not based on the principle of ability to pay. However, indirect taxation in India has witnessed a paradigm shift on July 01, 2017, with the introduction of a unified indirect tax regime wherein a large number of Central and State indirect taxes have been subsumed into a single tax – Goods and Services Tax (GST). The introduction of GST is a very significant step in the field of indirect tax reforms in India.

EVOLUTION OF TAXATION FROM THE VERY BEGINNING

Here, we divide the thorough concept of taxation into three segments.

The first part will discuss taxation in the pre-independence and post-independence periods.

The second part will discuss taxation before GST.

Finally, the third part will discuss the evolution of GST.

PART 1

Taxation in the pre-independence and post-independence period:

Tax system in India can be traced back to the period of Manusmriti and Arthashastra. Direct tax took different forms from ancient times. Kautilya, in Arthashastra, emphasised equity and justice in the form of taxation. In Arthashastra, the rate of tax was fixed and the schedule for the payment of tax was predetermined. The land revenue was at 1/6th share of the property held and this could be increased during war times. Kautilya also advised the King to make the tax collection stringent during war times from 1/6th to 1/4th of the property in case of land revenue. Tax in various forms such as land revenue, export & import duties, road cess, ferry charges, tax on business income, tolls were levied during those days. Tax system followed now is based on the theory of maximum social welfare.

In order to understand the concept of modern taxation from the very beginning, we need to enter in its roots which undergoes from British Raj, however, tax is present from the very beginning of the human civilization. On account to understand previous taxation system and new one. We need to categorized it in two parts.

Taxation in the pre-independence period
Taxation in the post-independence period

1. Taxation system pre-independence:

Tax system was introduced in its modern form in India for the first time in 1860 by Sir James Wilson in order to sustain financial losses in the economy caused by Military mutiny. It was levied on rich Britishers. Therefore it was not liked by powerful people .The rates of tax in the year 1860 were as follows- 2% of income tax was levied on income between Rs. 200 and Rs. 500. Income above Rs. 500 was charged at 4%. Even during those days, exemptions on income w[as taken into consideration. Income below Rs.200 including the agricultural income was exempted from tax. Government property, religious and charitable institutions were also exempted from tax.

The period of 1860 to 1866 was a period of experiments on tax system. Tax rates and tax laws were changed from time to time, 23 Acts were passed in the field of direct taxation. The Act of 1860 was lapsed in the year 1865. Although, the Act of 1860 was not very successful, the system to collection of tax on the income continued. Amendments were made to this Act by introducing License Tax in 1867 which continued for one year and abandoned next year with the introduction of Certificate Tax in 1868. In 1869, General Income Tax was introduced and was followed till 1873. License Tax on Trades and Profession was introduced in 1878. This Act exempted Agricultural income from tax bracket and also raised the exemption limit to Rs. 500, whereas the rate of tax continued to be at 2%. This Act remained in force till 1886. In order to make Income Tax Laws more stringent afresh, Act was passed in 1886. This Act was an important landmark in the history of Income Tax in India. In 1917, an additional tax by name ‘super tax’ was introduced in order to generate more revenues to the government. While other taxes were levied on ‘step basis’, super tax was levied on ‘slab rate system’. This Act of 1886 was in force till 1918, with a number of amendments .There were six heads of income- ‘Income from salaries’,‘income from house property’ ‘interest on securities’, ‘income from business’, ‘income earned from profession’, ‘income from other sources’. The Income Tax Act of 1922, brought tremendous changes in the Income Tax laws. It laid ground for the establishment and growth of Income Tax Department. For the first time, Income Tax

administration was centralised in the hands of Central Board of Revenue in 1924 . In 1945, due to shortage of manpower in the IT department, recruitment of IT officials were made through Indian Accounts and Audit Examination. This service of these professionals gradually came to be known as the ‘Indian Revenue Service’. Tax on Capital Gains was introduced for the first time in 1946, which was amended later.

2. Taxation System during post-independence:

As we can see above and strive to understand about the changes in taxation system which came with passage of time. Now, however, we have reached in that part of taxation where India is a Independent nation and in Independent nation, India is endeavouring to stand on its own feet. Owing to that, Indian politicians and administrators took various steps to make India a self-reliant nation.

An important milestone in the history of the tax system in Independent India was from 1953 to 1961. In the year 1953, The Estate Duty Act was passed for the levy and collection of duty on Estate. In the same year, the Government appointed the ‘Taxation Enquiry Commission’ under the chairmanship of Dr. John Mathai. The main objectives of this committee was to examine the incidence of tax, distribution of burden of tax system in the society, inequalities in wealth and income, suitability of tax system in the country keeping in view the development and progress of the nation. In 1956, Mr. Nikolas submitted a report on Personal and Business Taxation which led to the enactment of several Taxation Acts, namely, ‘Wealth Tax Act 1957’, ‘The Expenditure Tax Act 1957’, ‘Gift Tax Act,’ 1958. The report from the Law Commission was received on 26th September 1958. The Government formed ‘Direct Taxes

Administration Enquiry Committee’ under the chairmanship of Shri Mahavir Tyagi, to design the measures to minimize the inconveniences caused to assessees and to avoid tax evasion. This report was submitted on 30th November 1959. The recommendations of these two reports led to the Enactment of Income Tax Act of 1961.

Income Tax Act, 1961, came into effect on 1st April 1962, based on the recommendations of Law Commission and Enquiry Committee, which has 298 sections and 4 schedules and is applicable to whole of India, including Jammu and Kashmir.

PART 2

Tax structure in India before GST:

Here we'll try to comprehend the systems of taxation prevailing in India before GST. So without further delay let's indulge in this work. For better understanding we are dividing it in two parts.

Single Point Tax Collection System
VAT

MODVAT
CENVAT

1.Single Point Tax Collection:

This tax system was prevailing before 1986. In this system of taxation, the tax was collected on commodity in this way - Actual price of the item + previous tax + profit or productivity cost added by the Distributor\Retailer + fixed tax percentage on that item = Total cost of the item.

Ques: Let's suppose that a person buys raw material cost ₹100 on which he paid tax 10% thereafter he prepared the item and added his ₹40 profit. Now to sell that product he had to give 10% to the government. The illustration is given below on the basis of the Single Point Tax Collection.
Mathematical calculation:
Level 1- 100 (actual cost of the raw material )+ 10%(tax percentage)= 110(new cost of the same item at the next level)
Level 2- 110+ 40(profit added)+ 10%(tax percentage)= ₹150

2. VAT:

This term stands for Value added Tax. VAT came into being in 1986. In this type of tax collection, tax is imposed only on the actual price and the value which was added in the item at different level.

Ques: Let's suppose that a person buys raw material costs ₹100 on which he paid tax 10% thereafter he prepared the item and added his ₹40 profit. Now to sell that product he had to give 10% to the government. Illustration is given below on the basis of VAT.
Mathematical calculation:
Level 1- 100 (actual cost of the raw material)+ 10%(tax percentage)= 110(new cost of the same item for next level)
Level 2- 100+ 40(profit added)+ 10%(tax percentage)= ₹140

As you can see the difference between the tax system of Single Point Tax Collection and VAT, in which VAT is removing cascading effect and owing to the the cost of the same product it ₹10 less.

MODVAT was nothing but the system of OTL- ITC to get the to avoid cascading effect from manufacturing product on Excise Duty. And it was for goods only
CENVAT was also to reduce cascading effect but is for both goods and services.

PART 3:

Evolution of GST:

The concept of Goods and Service Tax (GST) for India was first mooted sixteen years back, during the regime of Shri Atal Bihari Vajpayee as Prime Minister. From there on, on 28th February, 2006, the then Finance Minister in his Financial budget for 2006-07 suggested that GST would be implemented from 1st April, 2010. The Empowered Committee of State Finance Ministers (EC), were asked to define the planand structure for GST. Joint Working Committee Officials of the state as well as Centre were set up to draw up reports explicitly on exemptions and threshold, tax collection of administrations and tax assessment between State supplies. In light of talks inside and among it, the EC discharged its First Discussion Paper(FDP) on GST in November, 2009. The FDP spelled out the highlights of the proposed GST and has framed the basis for the present GST laws and rules.

In March 2011, Constitution (115th Amendment) Bill, 2011 was introduced in the Lok Sabha for the implementation of GST. However due to political reason Bill was not passed .On 19th December 2014, The Constitution (122nd Amendment) Bill 2014 was presented in the Lok Sabha and was passed by Lok Sabha in May 2015. The Bill was then taken to Rajyasabha and was passed on to Joint Committee on 14th May 2015. The committee submitted its report on 22nd July 2015. After ratification by the required number of State legislatures and assent of the President, the Constitutional amendment was notified as Constitution (101st Amendment) Act 2016 on 8th September, 2016. This paved the way for the progress in the journey of GST.

After GST Council approved CGST, IGST, UTGST, and GST Bill in 2017, these Bills were passed in Loksabha on 29th March 2017. The Rajya Sabha passed these Bills on 6th April 2017 and were enacted as Acts on 12th April 2017. Thereafter, State Governments passed Goods and Service Tax Bills for the respective States. After the enactment of various GST Laws, GST was successfully implemented by Honourable Prime Minister, Shri Narendra Modi on 1st July 2017, in the Central Hall of Parliament of India.

MECHANISM OF GST IN INDIA

Goods and Services Tax, GST is an indirect tax for the entire nation, which makes India a common united market by ensuring indirect taxes are replaced in the country. Passed in the Parliament on March 29, 2017. The GST Act came into effect on 1st July 2017 and holds great significance as both the Central and State governments rely on the GST for their indirect tax revenue.

TYPES OF GST

There are four different types of GST as listed below:

The Central Goods and Services Tax (CGST)
The State Goods and Services Tax (SGST)
The Union Territory Goods and Services Tax (UTGST)
The Integrated Goods and Services Tax (IGST)

SGST is defined as one of the two taxes imposed on transactions of goods and services of every state. Levied by State Government of every state, SGST replaces every kind of existing state tax that include Sales Tax, Entertainment Tax, VAT, Entry Tax, etc. Under SGST, the State Government can claim the earned revenue.

CGST is referred to as the Central Tax levied on transactions of goods and services which take place within a state. Imposed by the Central Government, CGST ensures to replace of all other Central taxes inclusive of State Tax, CST, SAD, etc. Prices of goods and services under CGST are charged in accordance with the basic market price.

IGST is applied to the interstate transactions of goods and services. IGST is also applicable to the goods that are imported to distribute among the respective states. The IGST is levied when the movement of products and services occurs from one state to another.

UTGST applicable on the Intra UT supply of goods and services, the aim to impose UTGST is to apply a collection of tax to provide benefits as same as SGST. The UTGST is applicable to five Union Territories namely Lakshadweep, Damn and Diu, Dadra and Nagar Haveli, Andaman and Nicobar Islands, and Chandigarh.

EXEMPTED ITEMS

Diesel, Crude oil, petrol, natural gas, and jet fuel are not involved under GST as of now. Liquor is kept out of GST and therefore it would require an amendment under constitutional provision to be brought into GST net. In addition to this the the unpacked items are also out of GST.

SLAB OF GST FOR ITEMS

There are four slabs categorized based on goods and services, as proposed by the Government:

5% : Under this slab, household items are included like sweets, sugar, spices, tea, coffee, coal, edible oil, etc.
12% : Under this slab, computers and processed foods included cheese, ghee, ayurvedic medicines, cell phones, fertilizers, etc. Services like work contracts, business-class air tickets, and non-ac hotels are also included.
18% : This slab qualifies for toothpaste, soaps, hair oil, etc. as well as capital goods and industrial intermediaries.
28% : This slab involves luxurious items such as premium cars, consumer durables – AC, Refrigerators, etc.

However, the slab is changed by GST council according to the requisites.

GST REGISTRATION

The process by which a taxpayer gets registered under Goods and Service Tax (GST) is GST registration. Once the registration process has been completed, the Goods and Service Tax Identification Number (GSTIN) is provided. The 15-digit GSTIN is provided by the Central Government and helps to determine whether a business is liable to pay GST.

Who is eligible to register under GST?

GST Registration must be completed by the following individuals and businesses:

Individuals who have registered under the tax services before the GST law came into effect.
Non-Resident Taxable Person and Casual Taxable Person
Individuals who pay tax under the reverse charge mechanism
All e-commerce aggregators
Businesses that have a turnover that exceeds Rs.40 lakh. In the case of Uttarakhand, Himachal Pradesh, Jammu & Kashmir, and North-Eastern states, the turnover of the business should exceed Rs.10 lakh.
Input service distributors and agents of a supplier

Types of GST Registration:

Under the GST Act, GST Registration can be of various types .The different types of GST Registration are:

Normal Taxpayer:

Most businesses in India fall under this category. You need not provide any deposit to become a normal taxpayer. There is also no expiry date for taxpayers who fall under this category.

Casual Taxable Person:

Individuals who wish to set up a seasonal shop or stall can opt for this category. You must deposit an advance amount that is equal to the expected GST liability during the time the stall or seasonal shop is operational. The duration of the GST Registration under this category is 3 months and it can be extended or renewed.

Composition Taxpayer:

Apply for this if you wish to obtain the GST Composition Scheme. You will have to deposit a flat under this category. The Input tax credit cannot be obtained under this category.

Non-Resident Taxable Person:

If you live outside India, but supply goods to individuals who stay in India, opt for this type of GST Registration. Similar to the Casual Taxable Person type, you must pay a deposit equal to the expected GST liability during the time the GST registration is active. The duration for this type of GST registration is usually 3 months, but it can be extended or renewed at the type of expiry

Steps to complete GST registration process online:

The step-by-step procedure that individuals must follow to complete GST Registration is mentioned below:

Step 1: Visit the GST portal - https://www.gst.gov.in

Step 2: Click on the 'Register Now' link which can be found under the 'Taxpayers' tab

Step 3: Select 'New Registration'.

Step 4: Fill the below-mentioned details:

Under the 'I am a' drop-down menu, select 'Taxpayer'.
Select the respective state and district.
Enter the name of the business.
Enter the PAN of the business.
Enter the email ID and mobile number in the respective boxes. The entered email ID and mobile number must be active as OTPs will be sent to them.
Enter the image that is shown on the screen and click on 'Proceed'.

Step 5: On the next page, enter the OTP that was sent to the email ID and mobile number in the respective boxes.

Step 6: Once the details have been entered, click on 'Proceed'.

Step 7: You will be shown the Temporary Reference Number (TRN) on the screen. Make a note of the TRN.

Step 8: Visit the GST portal again and click on 'Register' under the 'Taxpayers' menu.

Step 9: Select 'Temporary Reference Number (TRN)'.

Step 10: Enter the TRN and the captcha details.

Step 11: Click on 'Proceed'.

Step 12: You will receive an OTP on your email ID and registered mobile number. Enter the OTP on the next page and click on 'Proceed'.

Step 13: The status of your application will be available on the next page. On the right side, there will be an Edit icon, click on it.

Step 14: There will be 10 sections on the next page. All the relevant details must be filled, and the necessary documents must be submitted. The list of documents that must be uploaded are mentioned below:

Photographs
Business address proof
Bank details such as account number, bank name, bank branch, and IFSC code.
Authorisation form
The constitution of the taxpayer.

Step 15: Visit the 'Verification' page and check the declaration, Then submit the application by using one of the below mentioned methods:

By Electronic Verification Code (EVC). The code will be sent to the registered mobile number.
By e-Sign method. An OTP will be sent to the mobile number linked to the Aadhaar card.
In case companies are registering, the application must be submitted by using the Digital Signature Certificate (DSC).

Step 16: Once completed, a success message will be shown on the screen. The Application Reference Number (ARN) will be sent to the registered mobile number and email ID.

Step 17: You can check the status of the ARN on the GST portal.

GST COUNCIL CONSTITUTION

According to Article 279A, it is on the part of the president to give the order to constitute the council of GST within the 60 days from the 12th September 2016 which is already notified by the Government.

Following are the designated personnel, who will form the GST Council together:

The Union Finance Minister who will be the CHAIRMAN of the council;
The Union Minister of State in charge of Revenue or Finance who will be the MEMBER of council;
ONE MEMBER from each state who is Minister in charge of Finance or Taxation or any other Minister and anyone of them will be VICE CHAIRMAN of the GST Council who will be mutually elected by them.

Note:

The Secretary of Revenue Department will work as EX-Officio Secretary to the GST Council,
The Chairperson of the Central Board of Excise and Customs(CBEC) will be the permanent invitee in all the proceedings of the GST Council who will not have voting rights.

Functions of the GST Council:

The GST council will be supposed to make the recommendation to the Union and State on the following matters:

Principles of levy, model Goods and Services Tax Laws, the appointment of Goods and Services Tax levied on supplies in the course of Inter-State trade or commerce under article 269A, and the principles that govern the place of supply;
As the Council may decide, any other matter relating to the goods and services tax.
On subsuming various taxes, cess, and surcharges in GST.
On the Threshold limit below which, services and goods will be exempted from GST.
On GST rates including floor rate with bands of GST and any special rate for time being to arrange resources to face any natural calamity.

Furthermore, the GST Council met for the 47th time on 28th& 29th June 2022 at Chandigarh. The Council discussed and approved:
(i) Recommendations relating to GST rates on Goods and Services;

(ii) withdrawal of exemptions on certain goods and Services;

(iii) Clarification of GST rate on certain goods/services;

(iv) Measures for trade facilitation; and

(v) Measures to streamline GST Compliance.

IMPACT OF GST ON ECONOMY

Advantages:

Wider tax base: Over 63.9 lakh taxpayers migrated into the GST in July 2017. This number has more than doubled to over 1.38 crore taxpayers as of June 2022.
Generation of e-way bills: Over 53 lakh taxpayers and 67,000 transporters are enrolled on the e-way portal, generating, on average, 7.81 crore e-way bills per month. Since the launch of the system, a total of 292 crore e-way bills have been generated of which 42 percent are for the inter-state transport of goods.
Increase in average collection: The average monthly collections have increased from Rs 1.04 lakh crore in 2020-21 to Rs 1.24 lakh crore in 2021-22. In the first two months of this year, the average collections are Rs 1.55 lakh crore.
Removal of tax arbitration: GST has eliminated the tax arbitrage that existed among the states under the CST/VAT regime.
Increase in the logistic supply chain: With no such arbitrage under the IGST and with the e-way bills, the logistics supply chain efficiencies have increased manifold.
Decrease in tax rate: In the pre-GST regime, on most items, the combined Centre and states rates were more than 31 percent.
However, under the GST, the rates of over 400 goods and 80 services have been reduced.
The highest 28 percent rate is restricted to sin and luxury items.
Out of a total of 230 items which were in the 28 percent slab, close to 200 have been shifted to the lower slabs.
Special attention to MSMEs: Special attention has been paid to the needs of the micro, small and medium enterprises (MSMEs), their tax and compliance burden be kept low.
The enhancement of the threshold exemption limit from Rs 20 lakh to Rs 40 lakh for goods.
Introduction of the quarterly returns and monthly payments (QRMP) scheme which has the potential to benefit 89 percent of the taxpayers.
Introduction of GSTN: The creation of GSTN, a professionally managed technology company to run the platform was a step in the right direction.
Automated IGST: The system of automated IGST refunds by customs and refund of accumulated input tax credit (ITC) to exporters by the GST authorities has made the neutralization of input taxes on export goods and services seamless and hassle-free.

Challenges:

‘Sin’ taxes, for instance, are at cross purposes with the government’s policy of generating growth and creating jobs under Make in India’.
The hotel generates indirect employment in ancillary areas: it buys bed linen, furnishings, rugs and carpets, air conditioners, cutlery, electrical fittings, and furniture, and consumes enormous quantities of food produce.
Five-star hotels also generate foreign exchange by attracting rich tourists and visitors. So, it’s unwise to tax these hotels to death.
Creation of ripple effect
Different laws for the same product: GST on bread is zero, but the vegetable sandwich is in the 5% tax slab, hitting the vegetable grower directly.
Tax on employment generating sectors: Taxes on wine, rum, and beer, which generate large-scale employment and are the backbone of grape and sugarcane farming and the cocoa industry.
Hurdles in the automobile sector
Legal disputes: The confusion has given rise to several disputes. ID Fresh Food, for instance, which makes ready-to-eat foods like chapatis, rotis, parottas and sells various types of idli and dosa batter appealed against a GST ruling of the Authority for Advance Rulings.
Exemption for certain items: There are items that are exempt from GST Petrol, diesel, and aviation turbine fuel are not under the purview of GST but come under Central excise and State taxes.
Central excise duties and varying State Taxes contribute over 50% of the retail price of petrol and diesel, probably the highest in the world barring banana republics.
Distrust between centre and states
Real growth decreased in recent years

Epilogue:

GST is a positive step toward shifting the Indian economy from an informal to the formal economy. It is important to utilize experiences from global economies that have implemented GST before us, to overcome the impending challenges. The gradual widening of the fiscal capacity of the states has to be legally guaranteed without reducing the Centre’s share.

The recommendations of the GST Council “should be a product of a collaborative dialogue involving the Union and States”.

The Council should focus on administrative changes, which can be introduced in the areas of assessment under GST, advanced ruling mechanism, the constitution of tribunals, etc.

. . .

Bibliography:

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