Introduction:

The goods and services tax (GST) is a Canadian value-added tax levied on most
goods and services sold for domestic consumption. The tax is levied to provide
revenue for the federal government. The GST is paid by consumers, but it is levied
and remitted to the government by businesses selling the goods and services.

Like a sales tax, businesses collect the GST from customers when they purchase
goods or services and then remit those taxes to the government. The GST was
between 5% and 7% in 2011. Some provinces add the GST to their own provincial
sales tax (this is called the harmonized tax), for combined totals of between 5% and
15% in 2011.

Certain goods and services are not subject to GST, certain businesses do not have
to charge it, and people of certain ethnic descent or geographic location do not
have to pay it.

THE NEED FOR GST

Suppose Mr. A sells goods to Mr. B and charges sales tax; then Mr. B re-sells those
goods to Mr. C after charging sales tax. While Mr. B was computing his sales tax
liability, he also included the sales tax paid on previous purchase, which is how it
becomes a tax on tax.

This was the case with the sales tax few years ago. At that time, VAT was introduced
whereby every next stage person gets credit of the tax paid at earlier stage. This
means that when Mr. B pays tax of Rs. 21, he deducts Rs. 10 paid earlier.

Similar concept came in Excise Duty and Service Tax also, which is called Cenvat
credit scheme. To a huge extent, the problem of cascading effect of taxes is
resolved by these measures.
However, there are still problems with the system that have not been solved till
date. Wish all talk about these problems now.

The credit of Input VAT is available against Output VAT. The credit of input
excise/service tax is available against output excise / service tax. However, the
credit of VAT is not available against excise and vice versa.

VAT is compute don a value which includes excise duty. This shows that there is
still a tax on tax!

What is GST?

The Goods and Service Tax (GST) is a Value Added Tax (VAT) that would be
implemented in India, from April 2016. GST is a comprehensive tax mechanism
where in all major indirect taxes are clubbed into one, whether they are levied on
services (service tax) or goods (excise and vat). One of the aims of introducing GST
is to reduce the cascading effects of taxes which is the primary focus of VAT but vat
system is not comprehensive enough to do so.
GST is so segregated in three segments

SGST (State Goods and Service Tax)

Will be collected by State Government
CGST (Central Goods and Service Tax)
Will Be collected by Central Government
IGST (Integrated Goods and Service Tax)
Will be collected by Central Government
Presently, there are around 160 countries that have implemented GST/VAT in some
form or other. In some countries ,VAT is the substitute for GST ,but conceptually it is
a destination based tax levied on consumption of goods and services.
France was the first to introduce GST.

Only Canada has dual GST model (Just like India is going to implement Dual
GST Model).
Rate of GST ranges between 1520% generally (may differ to higher/lower
side in few countries).
Mechanism:
How The GST works?
As the GST is classified in three categories, there is certain regulations for collection
of GST
Scenario 1
Sale in one state and resale in the same state
Since it is a sale within a state, CGST and SGST will be levied. The collection goes to
the Central Government and the State Government as pointed out in the diagram.
Then the goods are resold within the state. This is again a sale within a state, so
CGST and SGST will be levied. Sale price is increased so tax liability will also
increase. In the case of resale, the credit of input CGST and input SGST is claimed
has own and the remaining taxes go to the respective governments.
Scenario 2
Sale in one state and resale in another state
Since it is a sale with in a state, CGST and SGST will be levied. Later the goods are
resold from one state to another state (outside the state). Therefore, IGST will be
levied. Whole IGST goes to the central government.
Against IGST, both the in put taxes are taken as credit. But SGST never went to the
central government, still the credit is claimed. This is the crux of GST. Since this
amounts to a loss to the Central Government, the state government compensates
the central government by transferring the credit to the central government.
Scenario 3
In this case, goods are moving from one state to another state. Since it is an
interstate sale, IGST will be levied. The collection goes to the Central Government.
Later the goods are resold within the state. Therefore, CGST and SGST will be levied.
Against CGST and SGST, 50% of the IGST 8 is taken as a credit. But we see that
IGST never went to the state government, still the credit is claimed against SGST.
Since this amounts to a loss to the State Government, the Central government
compensates the State government by transferring the credit to the State
government.
Advantage of GST
Expected advantages of GST in India:

GST will make the tax system simpler.

This single tax which will be levied on the product or service which is sold.
Multiple taxes like central sales tax, state sales tax etc. will not exist and will
be replaced by GST.
GST is the countrys best bet to achieve fiscal consolidation.
The cost of production falls in the domestic market, Indian goods and services
will be more price-competitive in foreign markets. This can bode well for
 exporters, who compete with manufacturers abroad facing a lower cost
structure.
GST will be effective in lowering the prices. Lower prices will help in boosting
consumption, which is again beneficial to companies.
Disadvantages of GST in India:

Firstly, it is really required that all the states implement the GST together and
that too at the same rates. Otherwise, it will be really cumbersome for
businesses to comply with the provisions of the law. Further, GST will be very
advantageous if the rates are same, because in that case taxes will not be a
factor in investment location decisions, and people will be able to focus on
profitability
GST clearly sets out the taxable event. The rules should be more refined and
free from ambiguity.
The GST is a destination based tax, not the origin one. This shall be difficult in
case of services, because it is not easy to identify where a service is
provided, thus this should be properly dealt with.
Conclusion:
First, given that there are 32 actors in the negotiations (29 states, two Union
Territories with legislatures and the central government), it would take considerable
time to finalize the structure and operational aspects of the tax. In view of this, the
most optimistic scenario is that it would not be before 2016 that the tax would be
implemented, even if the process of amending the Constitution is completed.
Second, the tax structure that would emerge from the negotiations would be far
from ideal. It would be unrealistic to expect a flawless GST. In fact, such a GST
structure does not exist in any country where both the center and states are
empowered to levy the tax (Bird and Gendron 2010). Every country has to adopt the
structure it can administer. It is neither a gorilla, nor a chimpanzee, but a genus-like
primate (Rao 2010). The structure that would emerge would be based on the
consensus reached and it is necessary to ensure that the fundamental, sound
features of the tax are not compromised. Finally, for the above reason, it is
important to consider the GST reform as a process rather than an event. Once the
basic features of the tax are implemented, it would be necessary to improve the
structure and operational aspects of the tax over time. In fact, the introduction of
GST is only the next stage of reform. In that sense, the introduction of GST will not
be a silver bullet and we should keep expectations at a realistic level.