India is moving towards introduction of Goods and Services Tax (GST). The GST would be a multistage comprehensive value added tax encompassing both goods and services. In the federal structure of India and under the constitutionally assigned taxation powers to different governments, GST would be a major indirect tax reform, as both the Centre (the Union Government) and State Governments have concurrent rights to tax goods as well services at every stage of value addition in production and distribution.
The proposed GST builds on a series of reforms of indirect taxation. The introduction of Value Added Tax (VAT) at State level, mostly since April 2005, resulted in a first round of cleaning up of hidden indirect taxes which facilitated expansion of the tax base (Aggarwal 1995), better tax compliance and higher tax buoyancy for the majority of Indian States. It is envisaged that the proposed GST will further clean up the indirect tax system by reducing cascading of taxes and facilitating a nation-wide market for goods and services. Under GST, it is expected that harmonisation of indirect tax structure (tax rates and tax base across States), concurrent taxation power of Centre and States on consumption of goods and services and joint monitoring of same taxpayers would result in better tax compliance, reduce leakage of revenue and better coordination between Central and State tax administrations. The reduction of cascading of taxes and transaction costs associated with inter-State sales of goods could facilitate higher economic growth by attracting investment. It is the expectation of the Central Government that introduction of GST will improve India's ranking in World Bank's ease of doing business as it will remove cascading of taxes as well as transaction costs involved in distribution of goods and provide services across States.
Major fiscal motives behind the proposal to introduce GST include the expansion of fiscal space of the Central and State governments to address rising demands for public expenditure and revenue constraints; overcoming the Constitutional barriers relating to taxation by removing definitional differences between goods and services and the manufacturing and distribution of goods; and achieve greater fiscal prudence by aligning taxation powers to expenditure commitments/responsibilities under fiscal federalism.