School of Law, Narsee Monjee Institute of Management Studies, Bangalore

NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES

School Of Law

(Bengaluru Campus)

Subject: Principles of Taxation -II

Internal Continuous Assessment

Title- Issues with transition from multiple taxes to one tax regime: A critical analysis of
GST

Submitted By: Submitted To:

Jeetika Aggarwal Adv. Benny Pappachen

Visiting Faculty , Sol NMIMS
4th Year, B.A. L.LB. (Hons.)
Bangalore
School of Law, NMIMS Bangalore
BSc, LLM-Business Law, PGDBA
SAP ID: 81011219002 PGD-Cyber Law & Forensics(NLSIU)

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 School of Law, Narsee Monjee Institute of Management Studies, Bangalore

Contents

Abstract.................................................................................................................................................3
1. Introduction...................................................................................................................................3
2. Need for GST structure in India.....................................................................................................4
3. Transition Process..........................................................................................................................4
4. Issues and Challenges....................................................................................................................6
5. Suggestions and Conclusion...........................................................................................................8

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 School of Law, Narsee Monjee Institute of Management Studies, Bangalore

Issues With Transition From Multiple Taxes To One Tax Regime: A Critical Analysis
Of GST

ABSTRACT

“Post GST , the implementation has not been very smooth as there was a complete struck
down from multiple tax regime to a single consolidated tax ‘Goods and Services Tax: One
Nation , one Tax’. This extract will discuss the transition process , transition provisions
along with the challenges and issues the system faced. However there are certain remedies
which should possibly be used to curb such challenges and issues as the tax structure is still
in its infant stage.”

1. Introduction

On July 1, 2017, India established a comprehensive indirect tax known as the Goods and
Services Tax (GST). It replaced a complicated system of various taxes and was lauded as a
significant tax system overhaul. Yet, the introduction of the GST has not been without
obstacles. The biggest obstacle for the new GST system was the changeover procedure.
Following the advent of the Goods and Services Tax (GST), a significant indirect tax reform,
the tax collection equations have altered substantially. The Goods and Services Tax (GST)
has simplified India's indirect tax structure by replacing various tax systems with a single
unified tax; nonetheless, its implementation has been hampered by a number of challenges.
Several of them apply to Input Tax Credit provisions, the continuation of existing procedures
such as employment work for a fair duration without unfavourable GST law repercussions,
and all claims (pending and prospective) relevant to existing laws filed before, on, or after the
designated day. This excerpt will examine the transition process, the transition provision, as
well as the concerns and obstacles encountered when introducing GST in various economic
sectors.1
1
Kulkarni, S. (2023) New tax regime: Old tax regime: How many times can you switch between new tax regime
and Old Tax Regime?, The Economic Times. Available at:

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2. Need for GST structure in India

In a society plagued by income disparity – where the richest 1% of the population enjoys over
50% of the nation's wealth, while the lower half of the population can claim just over 4% -
certain measures must be in place to prevent the poor from being burdened further.2

The Minister of Finance also cited the necessity to safeguard government revenues by
maintaining revenue-neutral tax incidence under the new system. This would not have been
conceivable under a single-rate arrangement, since the rate would have had to be kept high to
prevent the government from incurring a loss. Any significant decline in income would have
an impact on government expenditure programmes, such as infrastructure development and
protection of the most vulnerable members of society.

Thirdly, various tax rates are justified by the influence of the GST on inflation. A higher tax
rate on some items with a large weight in the consumer price index may have contributed to
the price increase, which would have had a negative impact on demand, investment, and
economic growth.3

3. Transition Process
1. Input Tax Credit

The transition of Input Tax Credits available under VAT, Excise Duty, and Service Tax to the
GST has been arranged. There are intricate provisions for carrying over ITCs obtained under
the current law. The GST legislation should provide for this credit. Nevertheless, the
individual selecting the composition plan would not be permitted to retain the current ITC.
ITC of different taxes under the existing law would be carried forward as follows:

i. Closing Balance Of Credit On Inputs

In the GST system, the closing balance of ITC from the final return filed before GST can be
utilised as a credit. With the 2017 implementation of the GST, the GST Transition Process
began. The credit will only be available if tax returns for the preceding six months, January

https://economictimes.indiatimes.com/wealth/tax/how-many-times-can-you-switch-between-new-tax-regime-
and-old-tax-regime/articleshow/97552053.cms (Accessed: February 26, 2023).
2
Kantha, S. (2019) India's GST must eventually evolve to just one or two slabs, The Wire. Available at:
https://thewire.in/economy/indias-gst-must-eventually-evolve-just-one-two-slabs (Accessed: February 28,
2023).
3
ClearTax (2023) GST transition: GST migration process simplified, GST Transition | GST Migration Process
Simplified. ClearTax. Available at: https://cleartax.in/s/transition-to-gst (Accessed: February 28, 2023).

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2017 through June 2017, were filed under the old regime (i.e. Service Tax returns, Excise and
VAT had been filed). Form TRAN 1 must be submitted before December 27, 2017 for the
ITC to be carried forward. Moreover, TRAN 1 can only be corrected once.4

ii. Credit On Capital Goods

Prior to the introduction of the Goods and Services Tax, only a portion of Capital Goods
input tax could be refunded. For instance, if ITC on Capital Items acquired in 2016-2017 is
10,000 INR. 50%, or INR 5,000, can be claimed as Input Tax Credit in the same year, while
the remaining INR 5,000 can be claimed the next year. In such instances, there may be
available credit on the capital goods that has not been utilised. This unutilized credit can be
carried over to the GST by filling out Form TRAN 1.5

iii. Credit On Stock

A service provider or manufacturer who has products remaining in the closing stock for
which duty has been paid may also claim the credit. In the GST Portal, the vendor must
disclose the inventory of such products. The invoices must be less than a year old and in the
merchant's possession in order to claim Input Tax Credit.

2. Other Cases

i. Job Work: Inputs and semi-finished goods withdrawn for job work and returned on or
after July 1 shall be exempt from taxation. Circumstances under which no tax is due:
• Items must be returned to the manufacturer within six months of July 1st, with a
maximum extension of two months.
• Items possessed by employee and disclosed on Form TRANS-1
• The sale of semi-finished products is restricted to the payment of tax in India or the
export of goods from India within six months of July 1st, with an extension of no
more than two months. If completed items were withdrawn before the first of July for
carrying out specific operations and are returned within six months after the first of
July, no taxes are charged. If products are not returned within six months, the ITC will
be collected.
4
Shrivastava, S. (2020) Migration to the new tax structure under GST transition process, Corpbiz. Available at:
https://corpbiz.io/learning/migration-to-the-new-tax-structure-under-gst-transition-process/#Input_Tax_Credit
(Accessed: February 28, 2023).
5
Jena, R.C. (2022) Challenges in implementation of GST, Legal Service India - Law, Lawyers and Legal
Resources. Available at: https://www.legalserviceindia.com/legal/article-8238-challenges-in-implementation-of-
gst.html (Accessed: February 28, 2023).

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i. Credit Distribution By Input Service Distributor

In circumstances where the service was obtained before to July 1 and the invoice was
received on or after July 1, the GST Transition Procedure will apply. ITC may be distributed
by Input Service Distributors under the GST.

ii. Composition Dealer

When a registered merchant, who previously paid tax under the composition system but is
now a regular taxpayer under the GST, satisfies certain requirements, he or she may claim
input tax credit for inputs accessible as of July 1st:

Used in production of the taxable supply A registered person is entitled for Input Tax Credit
under GST if an invoice or other receipts for duty payments are provided. These bills are no
older than twelve months. The GST Transition Procedure will be applied to the new tax
system, and the taxpayer must be aware of the ramifications of the transition from the old
regime to the new regime. At this period of transition, this migration is likely to have a
significant effect, given the turnover cap under GST is INR 50 lakh, as opposed to the current
INR 10 lakh.6

Consequently, it is reasonable and secure to predict that many ordinary taxpayers will switch
to paying taxes under the composition plan. In the opposite scenario, merchants who are
subject to the composition system would be changed into normal taxpayers. This may occur
if the commodities they trade in are not excluded under the new regime's exemption list.

4. Issues and Challenges

1. Initial implementation challenges: The deployment of GST was hampered by early

implementation challenges, such as technical issues in the GST Network (GSTN), the system
used to handle GST, and the unreadiness of businesses. These complications led to filing
delays, confusion over tax rates, and increased compliance costs for businesses. Due to the
novelty of the Goods and Services Tax (GST) in the United States, it was required to teach
the whole tax administration workforce, from state to federal government, on the concept,
law, and processes to be applied under this new tax regime. As a consequence, the operations

6
Cooper, Graeme S.; Vann, Richard J., A Few Myths about the GST Forum: Legal Perspectives on the State of
India Tax System, Page 252

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of several banks and other organisations have been affected, and they have yet to have a
complete understanding of GST.7

2. Compliance and administrative burden: Under the GST system, businesses are expected
to submit a variety of returns and comply with several regulations. This has raised the
compliance burden, particularly for small and medium-sized enterprises (SMEs), who may
lack the resources to comply with the new system's criteria.8

3. Multiple Tax Rates: Despite the fact that the Goods and Services Tax was intended to
simplify the tax system, the many tax rates and exemptions have rendered it very
complicated. There are five tax bands for goods and services, with rates ranging from 0% to
28%. Moreover, certain goods are free from the GST, while others are subject to various tax
rates. This complexity has made it difficult for businesses to identify the correct tax rate for
their products and services.9

4. Negative Effect on service sector: As a result of the adoption of GST, the bulk of the
service sector is currently taxed at 18%. This rate is greater than the previous rates, which
included a cess. Hence, it indirectly raises the spending of a large population of end
consumers, since industries with a widespread customer base, such as telecoms, seek to boost
their pricing.

5. Loss of income for certain states: GST, which stands for Goods and Services Tax, is a
destination tax based on consumption. This indicates that the tax will be collected in the state
of consumption. It is advantageous for consuming states since producing states do not pay
their fair share of taxes. The Compensation Act was created to solve this problem, yet it has
simply made determining compensation more complicated. While it was hoped that the
Goods and Services Tax would increase government income, the effect on revenue has been
inconsistent. While businesses struggled to comply with the new system, there was a
temporary decline in income. On the other hand, as the tax base expands, it is projected that
the GST would increase revenue over time.10

7
Tran-Nam, Binh. “The Goods and Services Tax (GST): The Public Value of a Contested Reform.” Successful
Public Policy: Lessons from Australia and New Zealand, edited by Joannah Luetjens et al., ANU Press, 2019,
pp. 235–56. JSTOR, http://www.jstor.org/stable/j.ctvh4zj6k.17. Accessed 28 Feb. 2023.
8
Umar, Asad. “Reformed GST: Challenges and Opportunities.” The Pakistan Development Review, vol. 49,
no. 4, 2010, pp. 765–67. JSTOR, http://www.jstor.org/stable/41428689. Accessed 28 Feb. 2023.
9
Chaudhary, R. (2017) Implementation issues in GST, iPleaders. Available at:
https://blog.ipleaders.in/implementation-issues-in-gst/ (Accessed: February 28, 2023).
10
Desk, S. (2023) What are the problems of implementation of GST?, Vakilsearch. Available at:
https://vakilsearch.com/blog/problems-of-implementation-of-gst/#:~:text=The%20main%20problems%20of
%20Implementation,the%20prevention%20of%20double%20taxation. (Accessed: February 28, 2023).

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6. Robust IT Network: Maintaining a reliable IT network capable of supporting GST

operations via the real-time integration of state governments, trade and industry, and other
stakeholders is another obstacle to implementing GST. GSTN was particularly designed for
this purpose. The Goods and Services Tax Network (GSTN) is an information technology
network that supplies the GST system's whole tax collection and filing process with computer
capabilities. It acts as a conduit between taxpayers and the government, merging state and
federal governments for tax purposes and aiding both the federal and state governments in
monitoring all company financial activities.

7. Effect on Inflation: The installation of the GST has had a mixed impact on the rate of
inflation. Although tax rates have reduced on certain goods and services, they have increased
on others. This has raised the price of several items, particularly those that were formerly free
from tax.

5. Suggestions and Conclusion

With the adoption of the Goods and Services Tax, India has seen one of the most significant
indirect tax changes since independence. It has been about five years since the introduction of
the GST in the nation. As a result of redefining indirect taxation by absorbing almost all
indirect taxes, it has united the country under the GST tax umbrella. The effective
consolidation of a comprehensive collection of indirect taxes was a difficult endeavour in and
of itself. As previously noted, the route to effective implementation is marked by a number of
obstacles. GST is primarily a commercial reform in India, and it has both benefits and
drawbacks. There are items and services that are less costly than others. Certain industries
may be able to prosper at the cost of others. Nevertheless, it is anticipated that these
losses/negative effects would only last for a limited period of time and may produce fruit in
the long term, given that the public supports the system and the competent authorities
continue to improve it. If correctly implemented, the Goods and Services Tax can do wonders
for the Indian economy. 11

11
RAO, R. KAVITA. “Goods and Services Tax: The 13th Finance Commission and the Way.” Economic and
Political Weekly, vol. 45, no. 48, 2010, pp. 71–77. JSTOR, http://www.jstor.org/stable/25764185. Accessed 28
Feb. 2023.

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With the removal of double taxation and the reduction of product prices, the Goods and
Services Tax (GST) may integrate the informal sector into the larger Indian economy and
offer a much-needed boost to the ailing export market. The shift from various tax systems to
a single tax system has not been without obstacles. In spite of the fact that the Goods and
Services Tax (GST) was meant to streamline the tax system, it has resulted in greater
compliance and administrative costs, a complicated tax structure, and mixed effects on
revenue and inflation. These difficulties must be resolved to guarantee that the new system's
advantages are fully realised. Yet, if properly administered, the GST system may be a benefit
to the economy of this nation. The reduction of product prices, removal of double taxation,
and introduction of the Goods and Services Tax (GST) may promote the expansion of the
export system and the economy.

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