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Journey from VAT to GST: The ultimate tax reform

August 26, 2015
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After much of hassle & opposition, Value Added Tax (VAT) was introduced in India on April 1, 2005. VAT is a State levy derived from Entry 54 of the State List, wherein each respective State has power to collect & levy VAT on different goods at rates determined by the State itself. The Central Government acts as the facilitator for the implementation of VAT. VAT was designed to boost tax revenue collection and widen the tax net, though the essential items have been exempt or are taxed at a lower tax rate.

How does VAT work

VAT is a multi point consumption based tax levied on local sales at each stage of value addition. VAT as the name suggests implies addition of value by each trader before passing it to the next level; nonetheless Input Tax Credit (ITC) is available of the value of VAT paid by the buyer. Consequently the net tax burden on each dealer is only the value added by him. Paradoxically the ultimate tax is always borne by the end consumer.

VAT is a form of indirect tax paid to the government by the seller of goods. The value added on which VAT is applicable is calculated as the sale price as reduced by the cost of sale of that product. The VAT charged on the purchase of the goods from the supplier is called ITC and the VAT chargeable on sale of goods to the consumer is known as Output tax.  The VAT liability would be calculated by computing the difference in the Output tax liability at the time of sale less the ITC paid on purchase.

Issues in the current VAT structure

The purpose of levy of VAT in India was to bring transparency in the tax structure & to reduce tax evasion. Conversely, the current VAT structure has resulted in a complex tax structure of dissimilar VAT provisions in each state, varied tax rates & multiple local levies like VAT, service tax, excise, octroi & entry tax. The growing complexity in the existing tax system has lead India to head towards a much more comprehensive tax reform, Goods & Service tax (GST), which is expected to knit the country in a unified tax market. The industry & the markets have huge expectations of achieving economic stability by the implementation of GST. It is expected to bring down prices considerably as there would be no possibility of double taxation on any transaction.

What is GST

GST is set to consolidate all state economies. This would be the biggest tax reform in India. While it would take several pages to even summarize GST, broadly GST would entail the following features:

  • The new system, if implemented will significantly alter the country’s tax administration by replacing a string of local levies such as sales tax/ VAT, central sales tax, service tax, excise duty, octroi with a unified single tax GST.
  • The implementation would create uniformity across all the states in India and lead to building of a common national market.
  • Under the new tax regime each sale/ service will be subject to two taxes Central GST (CGST) & State GST (SGST).
  • Both CGST & SGST will be levied on the taxable value of the transaction. All goods & services, leaving a few will be brought under the GST net.
  • GST is a destination based tax wherein, tax is levied where the goods & services are consumed.

Current status of GST

The Constitutional Amendment bill for the rollout of GST has been presented in the Rajya Sabha. The government has promised to compensate the states for the potential loss in revenue for a period of five years. The bill is based on the recommendations of the Rajya Sabha select committee. The bill in its current form does not specify the GST rate in the tax bill.

GST Way forward

GST is the future of India. It is very much essential in the emerging environment of the Indian economy. The present tax system requires division of each transaction value in the value of goods & services, which leads to complications & double taxation in many cases. In the new tax regime when all the taxes are integrated, it would be justifiable to equally split the taxes between the goods & service. The taxes would be divided between the centre & the respective state.

GST being a destination based tax would lead to generation of revenue to states consuming the goods. While today the revenue is concentrated in states manufacturing & selling the goods, it would be distributed across India. There would be employment opportunities and economic prosperity which would attract investments from all over the world and increase tax revenues.


About the Author

Qualified as a Chartered Accountant in November 2006, she has a strong professional experience in the fields of finance, direct & indirect taxation. Having worked with renowned Companies like PriceWaterhouseCoopers (‘PwC’) and Reliance Industries, she has a realm of exposure in handling litigation cases of giant corporate clients, drafting opinions, analyzing the taxability of transactions, health check reviews & individual taxation. Post her stint with PwC, Parul has proceeded to set up her own venture in the areas of direct & indirect taxation.


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