Presently, the Constitution empowers the Central Government to levy exercise duty on manufacturing and service tax on the supply of service. Further, it empowers the State Government to levy sales tax or value added tax (VAT) on the sale of goods. This exclusive division of fiscal powers has led to a multiplicity of indirect in the country. In addition, Central Sales Tax (CST) is levied on inter-State sale of goods by Central Government, but collected and retained by exporting States. Further many States levy an entry tax on the entry of goods in local areas.

This multiplicity of taxes at the States and Central levels has resulted in complex indirect tax structure in the country that is ridden with hidden costs for the trade and industry. Firstly, there is no uniformity of tax rates and structure across States. Secondly, there is no cascading of taxes due to ‘tax on tax’ No credit of excise duty and service tax paid at the stage of manufacturing is available to the traders while paying the State Level Sales Tax or VAT, and vice-versa. Further, no credit of State taxes paid in one State can be availed in other States. Hence, the prices of goods and services get artificially inflated to the extent of this ‘tax on tax’.

The introduction of GST would mark a clear departure from the scheme of distribution of fiscal powers envisaged in the Constitution. The proposed dual GST envisages taxation of the same taxable event, i.e. , supply of goods and services, simultaneously by both the Centre and States. Therefore, both Centre and States have been empowered to levy GST across the value chain from the stage of manufacture to consumption. The credit of GST paid on inputs at every stage of value addition would be available for the discharge of GST liability on the output, thereby ensuring GST is charged only on the component of value addition at each stage. This would ensure that there is no ‘tax on tax’ in the country.

GST will simplify and harmonize the indirect tax regime in the country. It is expected to reduce cost of production and inflation in the economy, thereby making the Indian trade and industry more competitive, domestically as well as internationally. It is also expected that introduction of GST will foster a common or seamless Indian Market and contribute significantly to the growth of economy.

Further, GST will broaden the tax base, and result in the better tax compliance due to robust IT infrastructure, Due to seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an in-built mechanism in the design of GST that would incentivize tax compliance by traders.

Dual GST
Inter-State Transactions and the IGST Mechanism:
Destination-Based Consumption Tax: