Tax policy plays a major role in the Indian economy through its impact on efficiency and equity. As discussed in our previous blogs that the previous indirect tax regime created various complexities, which forced the Government to overhaul the earlier indirect tax system and introduce a new tax system throughout India with an aim to curb the cascading effect of other indirect taxes , rationalizing taxes and to enhance the spectrum of the Input Tax Credit (“ITC”).as this would reduce the incidence of indirect taxes on the products and service which in turn would reduce the prices of goods services, which would ultimately result in consumer benefits handed down from the reduction of incidence of taxes.

Though the introduction of CENVAT Credit (in the pre-GST era) removed to a great extent cascading burden by expanding the coverage of credit for all inputs, including capital goods. CENVAT scheme later also allowed credit of services and the basket of inputs, capital goods and input services could be used for payment of both central excise duty and service tax, however, the CENVAT had certain incompleteness.

The incompleteness in CENVAT was that it was not extended to include chain of value addition in the distributive trade below the stage of production. Similarly, in the State-level VAT, CENVAT load on the goods was not removed and the cascading effect of that part of tax burden has remained unrelieved. Moreover, there are several taxes in the States, such as, Luxury Tax, Entertainment Tax, etc. which were not subsumed in the VAT.

Similarly, the introduction of VAT (in the pre-GST era) in the States tried to remove the cascading effect by giving set-off for tax paid on inputs as well as tax paid on previous purchases, however, CST was another source of distortion in terms of its cascading nature. It was also against one of the basic principles of consumption taxes that tax should accrue to the jurisdiction where consumption takes place.

GST was basically brought into existence with a view of “One Nation, One Tax, One Market“. GST is a destination based consumption tax as against the previous concept of origin-based tax. The aim of GST is to eliminate this prevailing issue of cascading tax effects, Indirect Tax issues, to increase the number of tax payers, entertain consumption-based tax administration instead of Manufacturing, bring out a buoyancy in government revenue and diminish tax evasion and corruption from the society. This was implemented with an aim to boost economic activities related with all sectors of the economy, as it creates a positive impact on the growth rate of GDP.

We can summarise the need of GST as under:

(i)        Multiple Statutes under the earlier law;

(ii)       Improper Set off system;

(iii)      Complex structure;

(iv)      Varied tax rates;

(v)       Difficulty in administration due to multiple departments;

(vi)      Removal of cascading effect of taxes