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May 19, 2017

Impact of GST: Grand implementation; Structural impact; Taxation uniformity

Under the Goods and Services Tax (GST), emphasis on value addition; an amalgamation of a large number of central and state taxes into a single tax; and set-off allowance of prior-stage taxes will mitigate the ill effects of cascading. This will also allow free flow of tax credit in intra and interstate transactions, leading to a more efficient and leaner tax structure

CRISIL Research believes that the reform will improve tax efficiency on account of three major changes to the existing system:
 

  • The limitation in central value-added tax (CENVAT), pre-GST, lied in non-inclusion of several central taxes such as additional customs duty and surcharges. At the state level, there were several taxes, such as luxury tax and entertainment tax, which were not subsumed in the VAT. Pre GST, state VAT was also applied on the value of goods including CENVAT, leading to a cascading effect to the tune of CENVAT load.
  • Pre GST, service tax was not allowed for set-off against VAT
  • Pre GST, CST was levied on the inter-state transfer of goods but did not carry any set-off relief.