Q. 1. What is meant by Government Expenditure or Public Expenditure? Discuss its types or composition.
Q. 2. Mention the recent causes of the increase in government expenditure in India.
Q. 3. Discuss the results of the increase in government expenditure in India.
Q. 4. What is Tax?
Q. 5. Classify Taxes.
Q. 6. Write the Merits and Demerits of Direct Taxes.
Q. 7. Write the Merits and Demerits of Indirect Taxes.
Q. 8. Distinction between Direct Tax and Indirect Tax.
Q. 9. Mention the main features of India’s tax system.
Q. 10. Describe the defects of India’s tax system.
Q. 11. Discuss about the concept of Goods and Services Tax (GST).
Q. 12. Discuss briefly the historical background of Goods and Services Tax (GST).
Q. 13. What are the objectives of Goods and Services Tax (GST).
Q. 14. What are the salient Features of Goods and Services Tax (GST).
Q. 15. What are the enefits of Goods and Services Tax (GST).
Q. 16. What are the different types of Goods and Services Tax (GST).
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Government Expenditure and Tax
Q. 1. What is meant by Government Expenditure or Public Expenditure? Discuss its types or composition.
Answer: Since the government spends money for the welfare of the people of the country, such expenditure is called Public Expenditure. The Central Government, State Governments, and Local Governments all incur such expenditure for the public. As this expenditure is carried out by the government, it is also termed Government Expenditure. In fact, government expenditure and public expenditure are the same. By government expenditure we mean the expenditure incurred by the state on administration, defense, public welfare, economic development, etc.
Types or Composition of Government Expenditure in India
Government expenditure in India can be divided into the following categories:
(i) Administrative Expenditure,
(ii) Defense Expenditure,
(iii) Non-Plan Expenditure,
(iv) Plan Expenditure, and
(v) Grants to States.
(i) Administrative Expenditure: To ensure proper administration, the government has to incur heavy expenses. A large number of employees are engaged in government offices, police, judiciary, etc. Huge amounts are spent on their salaries, allowances, and pensions for retired employees. All these fall under administrative expenditure. After Independence, especially during the planning period, India’s administrative machinery expanded manifold, causing administrative expenses to rise significantly. According to the Chelliah Committee, 20–25% of government employees are actually surplus.
(ii) Defense Expenditure: India’s defense expenditure has steadily increased. About 10.2% of the government’s total plan and non-plan expenditure goes to defense. Due to strained relations with neighboring countries, this expenditure keeps rising. Defense expenditure rose from ₹171 crores in 1950–51 to ₹16,611 crores in 1994–95. Besides hostile relations, the increase in defense personnel salaries has also raised costs in this sector.
(iii) Non-Plan Expenditure: Non-plan expenditure has also gone up considerably. This includes salaries and dearness allowances of government employees. Recently, such expenses have risen sharply, leading to an overall increase in non-plan expenditure. Interest payments on government loans also fall under this category. Such interest payments increased from ₹37 crores in 1950–51 to ₹44,000 crores in 1994–95.
(iv) Plan Expenditure: Plan expenditure, which refers to developmental government expenditure, has also increased substantially. For economic development under Five-Year Plans, the government spends heavily on agriculture, industry, irrigation, power, transport, etc. As planning progresses, expenditure in these areas also rises. In 1994–95, plan expenditure stood at ₹48,761 crores, which was 30% of the total expenditure.
(v) Grants to States: The Central Government also incurs substantial expenditure in giving grants to states. Such expenditure falls under non-plan expenditure. In 1994–95, this amounted to around ₹2,480 crores. In 1984–85, grants accounted for about 18.7% of total expenditure, while in 1993–94 it was about 16%. Due to the rise in plan expenditure, the share of non-plan expenditure has declined in percentage terms.
Q. 2. Mention the recent causes of the increase in government expenditure in India.
Answer: In recent times, government expenditure in India has increased abnormally. Various factors have contributed to this rapid rise. The main causes can be stated as follows:
(i) Since 1951, India has adopted economic planning. The government’s objective is to achieve economic development through planning. To fulfill the targets of different plans, the government spends huge amounts of money. The size of successive plans has expanded, leading to a continuous rise in plan expenditure. Investments in agriculture, industry, transport, and power generation have significantly increased, thereby raising government expenditure.
(ii) The government aims to establish a Welfare State. For the welfare of the people, several measures have been undertaken, which have raised government expenditure.
(iii) Subsidy expenditure has risen considerably. The government provides subsidies on fertilizers and foodgrains. Food distributed through the rationing system carries subsidies. Fertilizers imported and sold to farmers at lower prices also involve subsidies. In the 1999–2000 budget, expenditure on this head was estimated at ₹22,000 crores. Exporters also receive subsidies on exported goods. Thus, subsidy expenditure has risen sharply.
(iv) Due to border tensions and international disturbances, strengthening defense has become necessary. This has led to an increase in defense expenditure.
(v) The Central Government provides substantial assistance to states in the form of grants and loans. A large share of central revenue is spent on this. The rise in grants to states has increased government expenditure.
(vi) The volume of government borrowing has steadily increased. Consequently, interest payments and debt repayments have raised government expenditure.
(vii) Another reason is the absence of a strict economy policy in public expenditure. Considerable wastage occurs in government sectors. In addition, frequent elections in a parliamentary democracy also involve heavy expenses.
(viii) Rising inflation has further contributed to the increase. Inflation raises the cost of goods and services purchased by the government and also compels the government to pay higher dearness allowances to its employees. Thus, overall government expenditure has increased.
Q. 3. Discuss the results of the increase in government expenditure in India.
Answer: The increase in government expenditure has both advantages and disadvantages.
One of the positive results is that higher government expenditure has led to an increase in capital formation in the country. Investments by the government in agriculture, industry, and other sectors have enhanced the amount of capital. Moreover, with the rise in government expenditure, demand has been created for goods produced by private entrepreneurs. This has also led to growth in the private sector. Above all, the rise in government expenditure has helped build the infrastructure necessary for economic development.
On the other hand, one of the main drawbacks is that government expenditure has risen so much that it can no longer be met from the current year’s revenue. As a result, budget deficits have emerged. To meet these deficits, the government has had to borrow from the central bank. The central bank, in turn, has printed new currency notes to provide loans to the government. This has increased the supply of money in the country, which has given rise to inflation. Thus, the rise in money supply and inflation may be regarded as a major negative outcome of higher government expenditure.
It must be remembered that government expenditure can be either productive or unproductive. When productive expenditure increases, the production capacity of the country also increases, and prices do not rise rapidly. However, if unproductive expenditure rises, demand for goods increases but production does not. Consequently, prices rise. Expenditure outside planned development is mainly unproductive. Therefore, the lower the increase in such expenditure, the better it is for the economy.
Q. 4. What is Tax?
Answer: In a modern economic system, the government of every country participates in various economic activities. To finance these, the government collects revenue from the public, and from this revenue, different types of expenditure are met. The sources of government revenue can broadly be divided into two categories:
(i) Tax Revenue and (ii) Non-Tax Revenue.
The revenue collected by the government through taxes is called tax revenue. On the other hand, revenue collected from other sources apart from taxes is known as non-tax revenue. Non-tax revenue includes administrative fees, donations, grants, profits from government enterprises, borrowing from the public, etc. Before understanding what constitutes tax revenue, it is important to define tax.
Tax may be defined as the compulsory payments made by the public to the government without any expectation of direct return. From this definition, two significant features of tax emerge:
(i) Tax payment is compulsory: This means that when a tax is imposed on an individual, the person is legally bound to pay it. Taxes are enforced by law, and failure to pay them is a punishable offense.
(ii) No direct benefit is linked with payment of tax: Although the government spends the tax revenue for various public welfare purposes, there is no direct relationship between paying tax and receiving specific benefits from the government. If a person pays money to the government in exchange for receiving a particular good or service, such payment is not called tax but rather an administrative charge or non-tax revenue.
For example, license fees paid to the government, fines, or money paid for purchasing government securities do not fall under tax revenue, because in these cases, some direct benefit is obtained, and these payments are not compulsory in nature—they depend on the will of the individual. Similarly, when the government sells goods produced in public sector enterprises, the money paid by the public to buy them is government revenue, but not tax revenue, because it is made in direct exchange for goods or services.
Q. 5. Classify Taxes.
Answer: Taxes are mainly of two types—(i) Direct Tax and (ii) Indirect Tax.
(i) Direct Tax: A tax whose burden cannot be shifted to another person is called a direct tax. The person on whom the direct tax is imposed has to bear the entire burden himself; he cannot transfer it to anyone else. In other words, both the impact and the incidence of the tax fall on the same person. Examples of direct tax include income tax, gift tax, wealth tax, etc. In all these cases, the person who is assessed to pay the tax has to bear the burden himself, without shifting it to others.
(ii) Indirect Tax: A tax whose burden can be shifted to another person is called an indirect tax. The person on whom the tax is legally imposed does not bear its burden himself; instead, someone else bears it. In other words, the impact and the incidence of the tax fall on different persons. Examples of indirect tax include sales tax, excise duty, import duty, export duty, etc. For instance, in the case of sales tax, the seller collects the tax but shifts its burden onto the buyer.
In any country, tax revenue plays a crucial role as a source of government revenue. In India too, the principal source of government revenue is tax revenue. Among tax revenues, the larger portion is collected through indirect taxes. Indirect taxes hold the most important position in India’s tax structure. During the planning period, both direct and indirect taxes increased considerably, but due to various reasons, indirect taxes have increased much more than direct taxes.
Because of the predominance of indirect taxes, the Indian tax structure is described as a regressive tax system. While the wealthy section of society pays direct taxes like income tax, wealth tax, and gift tax, indirect taxes are paid by the entire population. Thus, compared to the rich, the poor have to bear a heavier burden. For this reason, the Indian tax system is also regarded as an inequitable tax system.
Q. 6. Write the Merits and Demerits of Direct Taxes.
Answer:
Merits of Direct Taxes:
(i) Just Tax: Direct taxes are considered just because their burden cannot be shifted to others. They are levied according to an individual’s paying capacity. Hence, they are aligned with the principle of justice. The rich pay more due to their higher capacity, while the poor pay less or may even be exempted.
(ii) Reduction of Economic Inequality: Direct taxes follow the principle of progressiveness. As income increases, the tax rate also rises. Revenue collected from taxing the rich is used for welfare of the poor, thereby reducing economic inequality.
(iii) Certainty in Collection: Both government and taxpayers have clarity regarding the amount and timing of payment. Hence, neither party faces uncertainty.
(iv) Elasticity: Direct taxes can be easily adjusted by the government according to its financial needs. Thus, they follow the “Canon of Elasticity.”
(v) Productivity: Direct taxes such as income tax, corporate tax, and wealth tax provide the government with a large revenue base.
(vi) Low Collection Cost: Since many direct taxes are collected at source (e.g., employers deduct income tax), the cost of collection remains relatively low.
(vii) Control of Inflation: By reducing disposable income, higher direct taxes help control inflation, acting as an “automatic stabilizer.”
(viii) Reduction of Black Money: With strict enforcement and higher rates, direct taxes can help reduce black money in the economy.
(ix) Growth of Civic Consciousness: Since taxpayers directly feel the burden, they become more conscious of government spending and their civic responsibilities.
Demerits of Direct Taxes:
(i) Limited Coverage: Direct taxes are not paid by all. For example, in India, only about 2% of the population pays income tax.
(ii) Unpopular Tax: As the burden cannot be shifted, taxpayers often find direct taxes unpleasant and complain against them.
(iii) Unscientific Nature: Determining fair progressive rates is difficult, since there is no clear standard to measure the diminishing marginal utility of money with rising income.
(iv) Tax Evasion: Direct taxes are more prone to evasion as people conceal income details, leading to black money generation.
(v) High Administrative Costs: The government incurs heavy expenditure in running income tax departments and ensuring compliance.
(vi) Encouragement to Corruption: Evasion opportunities lead to collusion between tax officials and taxpayers, fostering bribery and corruption.
(vii) Obstruction to Capital Formation: High taxes reduce savings and thereby hinder capital formation in the economy.
(viii) Discourages Work and Investment: Higher tax rates reduce people’s incentive to work harder or invest, as additional earnings invite higher tax burdens.
(ix) Lack of Broad Civic Consciousness: Since only a limited section of society pays direct taxes, overall civic awareness in the country does not grow, except among those who actually pay.
Q. 7. Write the Merits and Demerits of Indirect Taxes.
Answer: An indirect tax is one in which the impact and incidence fall on different persons. Examples include sales tax, excise duty, etc. Indirect taxes have certain merits and demerits, which are discussed below:
Merits of Indirect Taxes:
(i) Revenue Collection: The government can collect huge revenue through indirect taxes, as they are levied on mass-consumption goods like cigarettes, matches, sugar, soap, cloth, tobacco, etc.
(ii) Wide Coverage: Indirect taxes touch almost every citizen. Every individual contributes something through these taxes, which is why the government’s major portion of tax revenue comes from indirect taxes.
(iii) Convenience in Payment: Since indirect taxes are included in the price of goods, taxpayers (buyers) pay them at the time of purchase. Thus, they face no major inconvenience.
(iv) Less Unpopular: Unlike direct taxes, the burden of indirect taxes is not directly felt. Hence, they are not as unpopular.
(v) Not Compulsory: Since indirect taxes are product-specific, people can avoid them by not buying the taxed goods.
(vi) Non-Discriminatory: Indirect taxes are imposed equally on rich and poor alike; there is no distinction in rates.
(vii) Reduction in Harmful Consumption: By imposing high taxes on harmful goods like liquor, opium, or cigarettes, their consumption can be reduced.
(viii) Difficult to Evade: As the tax is included in the purchase price, evasion becomes very difficult.
(ix) Increased Revenue from Inelastic Goods: Goods with inelastic demand, when taxed, continue to be consumed even at higher prices, leading to higher revenue.
(x) Control of Imports and Exports: Import duties can restrict imports, while reducing export duties can encourage exports. Thus, indirect taxes help regulate foreign trade and reduce trade deficits.
(xi) Price Stability: Indirect taxes can be adjusted to stabilize prices—reduced when prices need to fall, increased when prices need to rise.
(xii) Administrative Cost: The collection cost of indirect taxes is low, as consumers pay at purchase and sellers remit the tax to government authorities.
Demerits of Indirect Taxes:
(i) Against Equity: Indirect taxes violate the principle of justice, since both rich and poor pay the same rate regardless of ability to pay. Hence, the burden on the poor is heavier.
(ii) Regressive: Indirect taxes are regressive in nature because they affect the poor more than the rich.
(iii) Uncertainty: Both taxpayers and the government face uncertainty—taxpayers don’t know the exact burden, and government revenue collection is not fixed.
(iv) Price Rise: Imposition of indirect taxes increases the prices of goods, reducing demand and production.
(v) Reduction in Consumption: Poor people are forced to cut consumption due to higher prices.
(vi) Reduction in Consumer Surplus: As prices rise, consumer surplus decreases. Moreover, taxpayers’ financial condition and ability to pay are not considered.
(vii) Complexity: Indirect taxes are more complicated and involve higher administrative difficulties and costs compared to direct taxes.
(viii) No Real Reduction of Undesirable Consumption: Although it is argued that indirect taxes reduce consumption of harmful goods, addicts usually continue to purchase them despite higher prices.
(ix) Tax Evasion: Indirect taxes are not fully evasion-proof. For example, sales tax can be evaded through collusion between sellers and buyers. Import and export duties are also prone to evasion.
(x) Wage-Price Inflation: Higher prices due to taxes encourage demands for higher wages. Wage rises lead to further price increases, resulting in cost-push inflation.
(xi) Lack of Civic Consciousness: Since taxpayers do not feel the burden directly, indirect taxes do not create civic awareness. People remain indifferent to how the government spends this revenue.
Q. 8. Distinction between Direct Tax and Indirect Tax.
Answer: There are clear differences between direct and indirect taxes. To understand these, it is necessary to know the distinction between the incidence of taxation (the ultimate burden of the tax) and the shifting of the burden of taxation.
(i) In the case of direct tax, the burden of tax cannot be shifted from one person to another. The impact and incidence of the tax fall on the same person. On the other hand, in the case of indirect tax, the taxpayer can shift the burden of the tax onto another person. That is, the impact and incidence fall on different persons. For example, income tax is a direct tax, since the taxpayer cannot transfer the burden to someone else. Sales tax is an indirect tax, since the seller can shift its burden onto the buyer.
(ii) A direct tax is paid directly by the taxpayer to the government. There is no third party between the taxpayer and the government. In contrast, in indirect tax, the actual taxpayer does not pay the government directly. A third party stands between the government and the taxpayer. For example, in sales tax, the seller collects the tax from the buyer and then pays it to the government.
(iii) Direct tax is levied on the income, wealth, or profits of individuals or institutions. Indirect tax, however, is usually imposed on the purchase and sale of goods, imports, and exports.
(iv) Direct tax is compulsory. The person on whom it is imposed must pay it, and tax evasion is a criminal offense. On the other hand, indirect tax is not compulsory. If a person does not buy the taxed goods, they can avoid paying it.
(v) In the case of direct tax, the taxpayer’s disposable income is reduced. In the case of indirect tax, the price of goods rises, and when the consumer purchases them at the increased price, their expenditure rises.
(vi) While imposing direct tax, the government is aware of the taxpayer’s taxable capacity. In the case of indirect tax, the government cannot accurately assess taxpayers’ capacity to pay.
(vii) Direct tax is fair, since it is levied according to an individual’s ability to pay. Indirect tax is unfair, as it does not consider this principle.
(viii) Direct tax is progressive, meaning the rate rises with an increase in income. Indirect tax is regressive, since it imposes a heavier relative burden on the poor compared to the rich.
(ix) Payment and collection of direct tax are certain. The taxpayer knows how much and when to pay, and the government knows how much revenue it will collect. In indirect tax, both payment and collection are uncertain.
(x) Direct tax may reduce the taxpayer’s incentive to work and invest, making it unpopular. In contrast, in indirect tax, taxpayers often don’t realize they are paying tax, making it less disliked. However, if imposed excessively, it increases commodity prices and becomes unpopular.
(xi) The scope of direct tax is limited, and the burden is shared by fewer people. Indirect tax has wider coverage and involves the majority of the population.
(xii) Direct tax can be evaded, leading to black money. Indirect tax generally cannot be easily evaded.
(xiii) In terms of administrative cost, direct tax is usually costlier to collect. Indirect tax involves relatively lower administrative costs.
(xiv) The contribution of direct tax to total revenue is relatively small. In contrast, indirect tax provides much higher revenue. In India, about 80% of the central and state government’s tax revenue comes from indirect taxes, making them more important for public investment and economic development.
(xv) Direct tax helps control inflation. On the other hand, imposing high indirect taxes tends to increase inflation.
Finally, direct tax becomes effective from a specific financial year, meaning there is a time gap between imposition and collection. In the case of indirect tax, however, the burden is imposed immediately from the next day of imposition, so there is no such time gap between levy and collection.
Q. 9. Mention the main features of India’s tax system.
Answer: The following features of India’s tax system are noteworthy:
(i) In the Indian tax system, tax revenue is relatively more important than non-tax revenue. About 40% of total revenue is collected from taxes, whereas only about 20% of government revenue comes from non-tax sources. However, in recent times, the share of tax revenue in total revenue has been declining, while the share of non-tax revenue has been increasing.
(ii) Recently, tax revenue in India has increased significantly. As a result, in 1998–99, tax revenue accounted for 20% of India’s Gross National Product (GNP). Yet, this ratio is still low compared to other countries. In the USA, Britain, Denmark, Sweden, etc., 30% to 40% of the GNP is collected as tax revenue. In comparison, India collects only about 20% of GNP as tax revenue. Hence, there is still scope for greater tax revenue collection in India.
(iii) A notable feature of India’s tax system is the predominance of indirect taxes. The majority of total tax revenue comes from indirect taxes, while only a small portion is collected from direct taxes.
(iv) Between income tax and corporate profit tax in India, more revenue is collected from corporate profit tax.
(v) Another characteristic of India’s tax system is that agricultural income tax plays a very minor role. Agricultural income tax is excluded from the central revenue list; the power to impose this tax is vested in the state governments. Agriculture is an important sector in India’s economy, contributing nearly 30% of the total national income. Yet, the amount of tax revenue collected from agriculture is very small.
Q. 10. Describe the defects of India’s tax system.
Answer: The defects of India’s tax system are as follows:
(i) In India, indirect taxes are given much more importance than direct taxes. Indirect taxes fall more heavily on the poor population. As a result, the majority of India’s tax revenue is collected from the poor. Such a tax system is regressive. One of the main reasons for the predominance of indirect taxes is the low share of direct taxes and the absence of agricultural income tax. With the adoption of various development plans, government expenditure has increased, compelling the government to rely continuously on indirect taxes.
(ii) The rates of direct taxes in India are excessively high. At one point, the marginal rate of direct taxes, especially income tax, was as high as 85%. Although the marginal rate of income tax has since been reduced, it is still higher in India compared to many other countries. Because of these high rates, tax evasion is widespread in India. To reduce this, the marginal rate of income tax has now been considerably lowered.
(iii) India’s tax system is inelastic. With economic development, national income has increased, but tax revenue has not increased proportionately with the rise in national income. For this reason, the Indian tax system is considered inelastic.
(iv) India’s tax administration and collection system are defective. The cost of tax collection is very high. Moreover, due to flaws in the system, tax evasion is rampant. Court injunctions also result in a large amount of pending, uncollected taxes. Furthermore, there is a lack of proper coordination among different types of taxes.
(v) There is a lack of stability in India’s tax system. Tax rates are frequently changed, creating uncertainty and anxiety among the people. Frequent changes in the tax structure harm both the government and the public.
Q. 11. Discuss about the concept of Goods and Services Tax (GST).
Answer: Literally, Goods and Services Tax (GST) refers to a type of indirect tax imposed on the supply of goods and services, recognized as the legitimate successor of VAT. According to Article 366 (12A) of the Indian Constitution, GST means a tax levied on the supply of goods, services, or both, excluding the supply of alcoholic liquor for human consumption. Here, the term “supply” is used in a broad sense. Hence, it is described as a comprehensive, multi-stage, destination-based tax levied on value addition. Furthermore, Article 366 (26A) defines services as anything other than goods.
As it is ultimately consumption-based, GST is not imposed on exports. However, it is levied on imported goods and services. It is important to note that earlier indirect taxes were origin-based, whereas GST is always consumer-based. GST was introduced by bringing most central and state indirect taxes under a single tax system. Post-independence, this reform in indirect taxation marked an ambitious and exemplary step. Throughout the entire chain of supply—from producer to retailer—GST allows for set-off/adjustment benefits. That means, at every stage of value addition in the supply chain, this tax is levied, and each supplier can adjust input tax credit against output tax credit. In reality, the final burden of GST falls on the ultimate consumer. The initial suppliers in the chain pay the applicable tax to the government, intermediaries enjoy adjustment benefits, and the ultimate consumer bears the final liability.
Because intermediaries in the supply chain can adjust tax credits, the cascading effect (tax on tax) has been avoided. As a result, the total cost of production of goods and services decreases, and all stakeholders benefit from the system. Before the implementation of GST, under central excise duty, sales tax, etc., tax-on-tax was common, leading to additional burdens. After the introduction of GST, most indirect taxes were merged into a single tax. Consequently, multiple taxation at different stages of central and state supply chains was reduced, and the country’s overall cost of tax administration also came down.
Q. 12. Discuss briefly the historical background of Goods and Services Tax (GST).
Answer: The journey of indirect tax reforms in India began in 1986. With political changes, this reform process continued gradually through the introduction of MODVAT, VAT, etc. Finally, from July 1, 2017, GST was formally implemented across India. Thus, the history of GST can be discussed in several phases based on time.
2000: The concept of GST in India was first proposed by the then Prime Minister.
February 28, 2006: The Union Finance Minister, in the Budget for 2006–07, proposed GST and suggested it should be implemented from April 1, 2010. For this purpose, an Empowered Committee (EC) of State Finance Ministers was formed. States were requested to participate in preparing the framework of GST based on their VAT experience. Subsequently, Joint Working Groups consisting of Central and State representatives reviewed different aspects of GST and prepared reports, particularly on exemptions, threshold limits, services, and inter-state taxation.
November 2009: Based on joint discussions between the Central Government and various committees, the EC published the First Discussion Paper (FDP) on GST, which elaborated on the proposed features and the foundation of GST laws and rules.
March 2011: The 115th Constitutional Amendment Bill was introduced in the Lok Sabha to implement GST. However, due to lack of political consensus and the end of the 15th Lok Sabha’s tenure in August 2013, the bill could not be enacted.
December 19, 2014: The 122nd Constitutional Amendment Bill was introduced in the Lok Sabha.
May 2015: The bill was passed in the Lok Sabha and then moved to the Rajya Sabha.
May 14, 2015: The bill was referred to a Joint Committee of the Lok Sabha and Rajya Sabha.
July 22, 2015: The Select Committee submitted its report.
August 1, 2016: Based on political consensus, the Constitutional Amendment Bill was taken up in the Rajya Sabha.
August 3, 2016: The bill was passed in the Rajya Sabha.
August 8, 2016: The bill was passed in the Lok Sabha.
September 8, 2016: After the required ratification by state legislatures and Presidential assent, the Constitution (101st Amendment) Act, 2016 was notified, paving the way for GST implementation in India.
March 29, 2017: The CGST Bill, IGST Bill, UTGST Bill, and Compensation Bill were introduced in the Lok Sabha after approval by the GST Council and were passed.
April 6, 2017: These bills were introduced in the Rajya Sabha and approved.
April 12, 2017: All four bills passed by both Houses of Parliament became laws.
Later, SGST Bills were approved in different state legislatures and enacted into law. After these legislations came into effect, GST was implemented across India from July 1, 2017, except in Jammu & Kashmir, where it was enforced from July 8, 2017.
Looking at the global history of GST, it was first introduced in France in 1954. To simplify tax structures, around 140 countries across the world have since adopted this system.
Q. 13. What are the objectives of Goods and Services Tax (GST).
Answer: The primary goals and objectives of implementing GST from July 1, 2017, are as follows:
(i) To apply a uniform tax system across the entire country. Like direct taxes, one of the main aims of GST was to enforce the principle of “One Nation, One Tax” for indirect taxes as well.
(ii) To make the national market more organized through uniform taxation.
(iii) To integrate the various existing laws relating to different types of indirect taxes within a relatively complex federal structure into a single law.
(iv) To establish a modern and advanced tax system by removing the obstacles present in the earlier indirect tax framework.
(v) To increase monitoring of tax collection through GST. This helps reduce tax evasion and makes it easier to catch defaulters.
(vi) To minimize the cascading effect, i.e., the tax-on-tax impact that occurred due to multiple indirect taxes on a single transaction.
(vii) To levy tax only on the value added at each stage in the life cycle of a product or service, i.e., throughout the entire supply chain.
(viii) To facilitate this system through the set-off/adjustment of input tax credit against output tax credit.
(ix) To reduce the burden of maintaining various records. Instead of excessive documentation, GST allows the maintenance of only a few uniform documents.
(x) To prepare necessary documents relating to indirect taxes and reduce both administrative costs and compliance costs associated with managing such taxes.
(xi) To eliminate all existing indirect taxes and create a strong tax base for the greater interest of the nation.
(xii) To remove all obstacles and restrictions on inter-state movement of goods.
(xiii) To eliminate disparities in state revenue caused by the application of different indirect tax rates in different states.
(xiv) To bring diversity and greater acceptance in the tax structure in response to globalization and foreign competition.
Q. 14. What are the salient Features of Goods and Services Tax (GST).
Answer: By analyzing the basic concept of Goods and Services Tax (GST), some of its fundamental features can be identified, such as:
(i) Indirect Tax: GST is a type of modern indirect tax that is levied on the value of supply of goods and services.
(ii) Dual GST: According to constitutional provisions, both the Central and State governments have the authority to levy and collect GST simultaneously.
(iii) Supply as a Base: In this tax system, the supply of goods and services is taken as the base. In other words, both taxability and the amount of tax are determined on the value of supply.
(iv) Removal of Distinction between Goods and Services: GST was introduced to eliminate the distinction between goods and services. The same rate of GST is applied to both without differentiation.
(v) Applicability: Except for alcoholic liquor for human consumption and five petroleum products (crude oil, petrol, diesel, aviation turbine fuel, and natural gas), GST is applicable on all goods and services as recommended by Parliament.
(vi) Inter-State Supply: Integrated GST (IGST) is levied on inter-state supply, supply between union territories, and imports. The overall system is operated smoothly through tax credits in the continuous chain of inter-state supplies.
(vii) Destination/Consumption-based Tax: Unlike the earlier origin-based system, GST is a destination-based tax. It is borne by the final consumer, even though levied and collected at earlier stages.
(viii) Tax-free Supply: Almost all exports and supplies made to Special Economic Zones (SEZs) or any unit under SEZ are exempted from GST, i.e., they are zero-rated.
(ix) Subsumption of Central Indirect Taxes: Before GST, the central government levied various indirect taxes such as central excise duty, additional excise duty, additional customs duty, special additional duty of customs, service tax, and various surcharges and cesses. From July 1, 2017, all these were subsumed into GST.
(x) Subsumption of State Indirect Taxes: Before July 1, 2017, the states levied several indirect taxes such as VAT, central sales tax, entertainment tax (except levied by local bodies), purchase tax, luxury tax, stamp duty, lottery and betting tax, advertisement tax, and surcharges/cesses. With GST, almost all of these were subsumed.
(xi) Benefits of Input Tax Credit (ITC): At different stages of supply, ITC can be availed. Input IGST can be set off against output IGST, CGST, SGST, and UTGST. Input CGST can be set off against output CGST and IGST. Input SGST can be set off against output SGST and IGST. Input UTGST can be set off against output UTGST and IGST.
(xii) Threshold for GST: According to constitutional provisions, in case of goods supply, exemption from registration and tax is available up to ₹20 lakhs in special category states and ₹40 lakhs in other states. For services, the exemption limit is ₹10 lakhs in special category states and ₹20 lakhs in other states. Dealers under the Composition Scheme (not availing ITC benefit) enjoy concessional tax at a fixed rate: up to ₹75 lakhs turnover in special states and ₹1.5 crores in other states for goods, and ₹50 lakhs for services.
(xiii) Introduction of GST: GST came into effect on July 1, 2017, across all states and union territories of India, and from July 8, 2017, in Jammu & Kashmir.
(xiv) Electronic Filing of Return: Taxpayers can electronically file returns on due dates, and taxes can be paid through multiple modes such as internet banking, debit/credit cards, NEFT, and RTGS.
Q. 15. What are the enefits of Goods and Services Tax (GST).
Answer: Keeping in mind the shortcomings of the earlier indirect tax system, this modern tax structure was introduced. Under GST, the central and state governments, producers and industries, business organizations, and consumers — all benefit in one way or another. The benefits to different stakeholders are discussed below:
(A) Business and Industrial Organisations
Organized entities engaged in production of goods and supply of services gain the following benefits under GST:
1. Except for certain specific exemptions, GST is a very simple tax structure.
2. With the elimination of multiple indirect taxes, a simple and uniform system has been introduced, reducing administrative costs.
3. Earlier, businesses had to bear heavy compliance costs for documentation and record keeping. After GST, compliance costs as well as manpower requirements have decreased.
4. Registration, return filing, tax payment, refunds, etc., are completed easily and automatically.
5. Nationwide electronic input tax credit adjustments with output tax ensure transparency.
6. Since all processes are carried out via the GSTN Portal, there is no face-to-face interaction between taxpayers and tax authorities.
7. Being fully online, transactions are easily and automatically audited, saving time, labor, and cost.
8. Standardized registration, return formats, classification of goods/services, refunds, etc., ensure consistency in tax management.
9. Cascading effect (tax on tax) has been significantly reduced.
10. Fewer tax rates and fewer exemptions reduce administrative burdens.
11. Higher turnover thresholds for mandatory registration exempt many small businesses and service providers.
(B) Central Government
1. GST has significantly widened the tax base.
2. Revenue collection of the central government has increased.
3. Subsuming various central indirect taxes simplified the structure.
4. Tax administration has become stronger and more robust.
5. Technology-driven system ensures transparency and reliability.
6. Return filing, tax determination, refunds, etc., are completed efficiently in less time.
7. GST plays a key role in financial policy-making and planning.
8. Human resources and national resources are better utilized, reducing wastage.
9. Consumers’ savings have increased, strengthening overall investment.
10. Uniform tax rates across states reduce tax evasion in inter-state transactions.
11. Loopholes previously exploited under the old system are harder to use now due to a more structured mechanism.
12. Exports are zero-rated, encouraging exporters, increasing national production, and earning more foreign exchange.
(C) State Governments and Union Territories
1. Subsuming VAT, CST, stamp duty, purchase tax, entertainment tax, etc., into GST expanded the tax base and reduced costs.
2. States and UTs facing revenue losses get compensated by the Centre.
3. State tax administration has improved drastically, reducing favoritism, corruption, errors, and delays through a technology-driven system.
4. The nationwide GSTN Portal ensures better compliance and reduces tax evasion.
5. Uniform law across India minimizes disputes and complications between states.
6. Input tax credit under GST reduces cascading of taxes.
7. As GST is consumption-based, revenue distribution between Centre and states is more balanced.
(D) Consumers
1. GST eliminates multiple taxes and reduces the cascading effect, saving consumers from paying higher taxes.
2. Reduction in multiple tax burdens has increased disposable income and purchasing power.
3. Lower tax burden boosts savings.
4. Uniform GST rates across the country keep prices consistent nationwide.
5. Clear mention of GST in invoices improves transparency, trust, and awareness among consumers.
6. Technology-based GST system ensures consumers receive reliable and efficient services.
Q. 17. Goods and Services Tax Network (GSTN)
The Goods and Services Tax Network (GSTN) refers to a technology-driven integrated framework related to taxation. It is a not-for-profit, government-owned company. In other words, all matters related to GST can be accessed through its common portal: “[www.gst.gov.in.”](http://www.gst.gov.in.”)
Through this portal, various processes such as supplier registration, GST return filing, invoice matching, integration with banks, and availing input tax credit are carried out. This GSTN platform was developed with the support of Infosys. By using this technological infrastructure, the implementation of GST has greatly benefited all stakeholders, namely the Central and State Governments, taxpayers, and others.
Q. 16. What are the different types of Goods and Services Tax (GST).
Answer: The tax levied on goods and services can be classified into the following five categories:
(i) Central Goods and Services Tax (CGST): This is the tax levied and collected by the Central Government on the taxable value of supplies of goods and services made within a state and within union territories. This tax is administered and regulated under the CGST Act, 2017.
(ii) Integrated Goods and Services Tax (IGST):
This tax is levied and collected by the Central Government on the taxable value of supplies involving inter-state trade, inter-union territory trade and imported goods. It is governed by the IGST Act, 2017.
(iii) Union Territory Goods and Services Tax (UTGST): According to the UTGST Act, 2017, this tax is collected by the concerned Union Territory on the taxable value of supplies made within six Union Territories (excluding Delhi, Puducherry, and Jammu & Kashmir).
(iv) State Goods and Services Tax (SGST): As per the SGST Act, 2017, this indirect tax is levied and collected by the respective State Governments on the taxable value of goods and services supplied within the 28 states and within the three Union Territories (Delhi, Puducherry, and Jammu & Kashmir).
(v) GST Compensation Cess to States: Under the GST (Compensation to States) Act, 2017, this cess is levied and collected by the Central Government to provide compensation to the states for any revenue loss arising due to the implementation of GST.
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