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Group assignment for Indian Economy: Issues and Challenges First year Trimester 3 (20 Marks) Guidelines A. The Assignment The group assignment of 20 marks would be an analysis of an economic policy reform/intervention in the Indian economy. The assignment will test students’ critical understanding of the policy intervention, its features, the challenges and issues related to its implementation and the macroeconomic impact of the policy implementation. A. Deliverables: The students need to submit an interim report to inform and get feedback on their choice of the topic by the end of 7 th Session. Data included in the analysis may be from databases such as Economic Survey Reports, RBI, EXIM Bank, WTO, IMF-World Bank, World Trade Indicators, UNCTAD, OECD-STAN, World Development Reports etc. The sources of data should be mentioned. They will submit a group report (soft copy) by the end of 10 th Session. The size of the report should not exceed 10 pages. Finally, but most importantly a thorough Plagiarism test should be conducted before submitting the final report. The maximum limit of Plagiarised portion should not exceed 15% of the full text including the reference list. B. Organization of the report and the marking scheme: 1. Identifies the rationale for the study and accordingly provides the title and builds the introduction (5 marks) 2. Identifies key features of the economic policy reform/intervention and analyzes its relevance against the macroeconomic scenario of the economy at the time of the implementation (5 marks) 3. Analyses the issues and challenges related to the implementation of the economic policy reform (2 marks) 4. Identifies and explains the macroeconomic impact of the policy reform (3 marks) 5. Conclusion (3 marks) 6. Referencing (2 marks) *******

1. Introduction GST is an Indirect Tax which has replaced many Indirect Taxes in India. The Goods and Service Tax Act was passed in the Parliament on 29th March 2017. The Act came into effect on 1st July 2017; Goods & Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that is levied on every value addition. In simple words, Goods and Service Tax (GST) is an indirect tax levied on the supply of goods

and services. This law has replaced many indirect tax laws that previously existed in India. GST is one indirect tax for the entire country. 2. Rationale for choosing policy intervention In the pre-GST regime, every purchaser including the final consumer paid tax on tax. This tax on tax is called Cascading Effect of Taxes. GST has removed this cascading effect as the tax is calculated only on the value-addition at each stage of the transfer of ownership. GST has mainly removed the Cascading effect on the sale of goods and services. Removal of cascading effect has impacted the cost of goods. Since the GST regime eliminates the tax on tax, the cost of goods decreases. GST is also mainly technologically driven. All activities like registration, return filing, application for refund and response to notice needs to be done online on the GST Portal; this accelerates the processes. This indirect tax system under GST has improved the collection of taxes as well as boosted the development of Indian economy by removing the indirect tax barriers between states and integrating the country through a uniform tax rate.

3. Features Goods and Service Tax is a part of the VAT regime as the revenues and taxes collected are on the basis of the value added at every stage. But unlike VAT regime, GST also includes the service taxes in addition to the taxes collected on goods. Input tax credit (ITC) is provided in this regime and tax relief is given to the middlemen. Mentioned below are few of the main features of the Goods and Service Tax as per the final agreement: 1. Taxes Covered: Most of the indirect taxes under the old regime are covered under the new Goods and Service Tax, like the: • CST – Central Sales Tax (levied by CG and collected by SG) • VAT – Value Added Tax • ST – Service Tax • CenVAT – Central Value Added Tax (Union Excise Duty) • CVD – Additional Customs Duty • SAD – Special Additional Duty of Customs Of these, the important three indirect taxes by the centre are the Union Excise Duty, Service Tax and the Customs Duty, only the central excise and service tax was brought under the GST. The customs duty on trade wasn’t merged under the GST regime. The states had two major indirect taxes namely the Sales Tax (VAT) and the State excise duty, of these only the sales tax was merged under the GST regime. With the major 4 taxes of the central and the state government, several other low revenue incurring taxes were also merged with the GST.

The following taxes levied and collected by the Centre are merged with the GST: Union Excise Duty Service Tax Duties of Excise (Medicinal and Toilet Preparation) Additional Duties of Excise (Textiles and Textile Products) Additional Duties of Excise (Goods of Special Importance) Additional Duties of Custom (commonly known as CVD) Special Additional Duty of Customs (SAD) Cesses and Surcharges

State taxes that are subsumed under the GST are: State VAT Central Sales Tax Entertainment Tax (not levied by the local bodies) Entry Tax (other than those in lieu of octroi) Luxury Tax Taxes on advertisements Taxes on lotteries, betting and gambling State cesses and surcharges insofar as they relate to supply of goods or services There were few products and taxes excluded from the GST: these notable taxes which are not covered under the GST are – levy on petroleum products, taxes on alcoholic product and electricity duties and stamp duties on immovable properties and taxes on vehicle. The unification of number of taxes into a single umbrella of GST is the biggest achievement of this reform. Both the central and the state government agreed to sacrifice their rights and powers to give a broader path for this common tax. 2. Unified Tax Regime: Where previously the taxes on goods and taxes on services were imposed as well as administered differently, GST integrates then into a Unified Tax regime. 3. Four-Tier Rate Structure: A four tier rate structure is proposed by the Goods and Service Tax. The slabs of tax rates are fixed at 5%, 12%, 18% and 28% other than Nil rate on essentials and a 3% tax rate on Gold. An

additional cess has been demanded by the central government on the demerit luxury goods that would come under the 28% tax slab. Exempted from taxes include essential commodities like food. The consumer goods will be taxed at 5% and the rates of 12% and 18% will be levied considering different factors like necessity and luxury.

4. Service Tax under GST: A massive changes from the standard service tax regime has been brought under the GST with a rate of 5% tax being imposed on essential services where as 12% being charged on common services. Some of the commercial services have been taxed at 18% and luxury services being taxed at 28% like the luxury goods. Services that are provided by Post offices, Educational Institutions, RBI, etc have been exempted from service taxation of GST. As observed, a standard service have been taxed at 18%. 5. Turnover limit under GST and tax right over low turnover entities: Application of GST on businesses when the Turnover exceeds Rs 20 Lakhs per annum ( Rs 10 Lakhs for the North Eastern States). Whereas the traders whose turnover is below Rs 20 Lakhs and want to avail the ITC (input tax credit), must go for voluntary registration. If the sales are below Rs 20 Lakhs and the goods are being supplied to other states, the trader must register under GST. The composition scheme under GST is only for a selected group of tax payers whose turnover does not exceed Rs 75 Lakhs. 6. Tax revenue appropriation between the centre and states: As decided, the central and the state government will have a 50-50 share in the tax revenues (except for IGST) and will be collected in the name of CGST and SGST. According to this, a good or a service taxed at 18% will go at 9% under CGST and 9% under SGST. 7. Components of GST – IGST and CGST & SGST: As the taxes of the centre and state are being merged, both of them should get their own share in GST. For this, the GST council decide to adopt a dual component for GST namely Central Goods and Service Tax (CGST) and State Goods and Service Tax (SGST). The objective behind this was to divide the revenue from the unified GST between the centre and the state. Central and State GST So through this, GST has been made a destination based on consumption tax. The term Destination based Tax means that the revenue under SGST will not go to the producing state but will go to the consuming state. When there is Intra-state consumption after the production of goods, the SGST will completely go to the concerned state but the CGST will be credited to the central government. Integrated GST (IGST) When there is Inter-state trade of goods ie. the commodity is being produced in one state and is being traded to another state, IGST comes into picture. So according to the Article 269A of the GST Law, IGST will be levied and collected by the central government on the supply of goods under inter-state trade. The tax revenue shall be collected by the central government to ensure the trade and supply chain is not being interrupted. 8. Composition Scheme under GST For the tax payers whose turnover does not exceed Rs 75 Lakhs can avail the benefits under the composition scheme. This scheme is restricted to manufacturers and restaurants. No other

service provider can avail this scheme. This enables the taxpayers to pay at a fixed rate of GST but without ITC. The 7 sisters and Sikkim – Himachal Pradesh have a limit of Rs 50 Lakhs. The main objective of this scheme is to bring ease and simplicity to the tax payers with reduced compliance cost. A prescribed percentage of the turnover has to be made every month instead of paying taxes at normal rate. Manufacturers 1% Restaurants 2.5% Other Suppliers 0.5% The registered tax payers will have to file quarterly returns instead monthly returns but won’t be eligible for any input tax credit. The exceptions to this scheme include the manufacturers of Icecream, Pan Masala, Tobacco and other edible ice. 9. Right to Tax on Territorial waters: As decided by the central and state government, GST just like other laws of Indian will be applicable to the Territorial waters ie. 12 nauticalmiles.

4. Challenges and issues related to its implementation • GST aims to simplify India's indirect tax system by combining a number of taxes into a single unified tax that includes central excise, service tax, VAT, entry tax, and so on. However, there are numerous obstacles in the way of the government's successful implementation. The following are a few of them: – In May 2015, the Lok Sabha passed the GST Constitutional Amendment Bill. The government, however, faced significant political setbacks and failed to pass the bill in the Rajya Sabha during the monsoon and winter sessions of last year. – Once this is accomplished, another Herculean task will be to get the GST Bill passed in state legislatures by the respective state governments. The government would also be obliged to make the GST bill public and provide adequate time for all stakeholders to understand and comment on it. – The success of GST is heavily reliant on two key factors: the ‘RNR' and the ‘threshold limit' for GST. The Revenue Neutral Rate, or RNR, is the rate at which the government will not lose revenue as a result of the implementation of GST. RNR, it goes without saying, would have a negative effect on India Inc if it is excessively higher than the current tax structure. RNR was set at 27 percent after a study by the National Institute of Public Finance and Policy (NIPFP). However, the Economic Advisor Panel recently recommended an RNR of 15% to 15.5 percent, implying a lower tax rate of 12% and a standard tax rate of 17 percent to 19 percent. – Furthermore, the government and the Empowered Committee disagree on the threshold limit of turnover for distributors under GST, which aims to expand the tax base under GST. – The robust IT backbone connecting all state governments, trade and industry, banks, and other stakeholders in real-time is another factor that will influence GST's success. The government has already established a special purpose vehicle (SPV) called the Goods and

Services Tax Network (GSTN), which is responsible for developing a GST portal, which includes a front-end system for trade and industry as well as a back-end system for all government departments. GSTN will provide all stakeholders with technology support for registration, return filing, tax payment, IGST settlement, MIS, and other dashboards on the GST portal. – GST is not the same as the country's current indirect taxation system. Tax administration personnel – both at the federal and state levels – will need to be adequately trained in terms of principle, law, and process in order to enforce GST effectively. The tax administration staff will have to change their mindset, strategy, and attitude toward the taxpayers as well. And to do so, they'd have to "learn, unlearn, and relearn" the GST in both letter and spirit. – States would be allowed to levy an additional 1% non-vatable tax on inter-state supply of goods for the first two years, according to the Constitutional Amendment Bill introduced in the Lok Sabha, to compensate for revenue loss while transitioning to GST. A few states were in favour of this, while others were against it. However, the Empowered Committee recently recommended that the extra tax be repealed. There is still no clarity on the subject. – The taxing events of "manufacture under central excise," "sale under VAT," and "provision of service under service tax" will converge into a single taxing event of "supply" under GST, i.e. GST will be imposed on the event of supply of goods or services. As a result, the 'Place of Supply Rules' will be an important factor in determining where goods or services are provided. These are some of the biggest challenges that the government and industry face in the run-up to the GST's implementation.

REFERENCES https://www.indianeconomy.net/splclassroom/features-of-the-new-goods-and-service-tax-gstsystem/ https://www.gstindia.com/the-challenges-of-implementing-gst/...