CHAPTER - 2

REVIEW OF LITERATURE

INTRODUCTION
The Taxation was born and shaped with civilization. The structure and
complexity of the tax system have been developed along with the development of
civil society. The sovereign authority of the Government to extract tax is the life of
taxation, Governments’ need for resources is its bargaining power and human instinct
of reluctance to sacrifice money is the reason for its mandatory imposition.

Kautilya`s in Arthasastra state that the taxes are often perceived to be a measure
for raising resources for the government. In the primitive barter economies of the
medieval period in Europe and even in ancient India, the primary objective of taxation
was to raise resource for the economy.

Goods and Services Tax is basically destination based consumption tax levied on
goods and services. Simply, GST is a single tax on the supply of goods and services,
right from the manufacturer to the consumer. In the nutshell, it’s a tax would be levied
only on the value addition with transfer of input tax credit on the subsequent stages of
value addition which means that the final burden of tax shall be borne by the final
consumer of the goods or services.

The Goods and Services Tax is a combination of two words “Goods” &
“Services”. Where Goods means every kind of movable property other than money
and securities but includes actionable claim, growing crops, grass and things attached
to or forming part of the land which are agreed to be severed before supply or under a
contract of supply {Sec.2(52)} and Services means anything other than goods, money
and securities but includes activities relating to the use of money or its conversion by
cash or by any other mode, from one form, currency or denomination, to another
form, currency or denomination for which a separate consideration is charged.
Background
Taxation policy in ancient India was highly logical and based on the principles
of economic theory and equity in comparison with the current taxation policies of the
government. The tax system of our ancients was quite reasonable, rational,
convenient, elastic, appealing and based on the principles of maximum welfare with
some exceptions.

A new era has been started in the indirect taxation system of our country. It’s a
tax system which has converted entire country in integrated market. “One Tax One
Nation” is the motto of this indirect tax system. GST is a destination and consumption
based indirect tax which is imposed over the supply of goods and services directly
from the manufacturer to the consumer. Thus the final consumer will bear only the
GST charged by the last dealer in the supply chain, with set-off benefits at all the
previous stages.

GST was first discussed on 2003 after the suggestions of Kelkar task force
under the chairmanship of Vijay Kelkar. A proposal to introduce national level GST
by April 2010 was made on the budget speech of year 2006- 07. After several efforts
and discussion an 122nd constitutional amendment bill for GST was brought into
parliament, following which 101st Constitutional (Amendment) Act 2016 was enacted
and passed from Lok Sabha (House of the people) on 3 august 2016 and on 8th august
2016 from Rajya Sabha (Council of States).

It was assented by Honourable president of India on 8th September 2016 and

finally it commenced its journey with its introduction in the country on 1st July 2016.
The introduction of GST in India was mainly due to the cascading effect that
prevailed in the earlier taxation system of our country. The Indian Goods and services
tax subsumes about 17 indirect taxes levied by central and state government as well as
23 cess.
 REVIEW OF LITERATURE
INTRODUCTION
India embarked upon a new era of global practices by embracing and
implementing goods and services tax (GST) on 1st July 2017. After 13 years’ post
initial thought process and consideration by Kelkar Task Force report related to value
added tax and indirect taxes, Goods and Services Tax has been introduced in India.

Implementation of Goods and Services Tax is a major structural change and is

believed to be a step in the right direction as opined by economists around the world
from a long term perspective: what are its impacts in short run and how do Indian
stock markets react to this? Answering this question makes sense as Stock markets are
considered to be barometer of economic activity and parade sentiment of the market
players, companies and industry.

Owing to federal structure of India, GST has two components, namely, Central
GST and State GST and both Centre and State Governments will levy the same across
the value chain. For efficacious implementation of GST in India, GST Network has
been registered which is not-for-profit and also non-Governmental company offering
common IT infrastructure for tax payers, Central and State Governments and all other
stakeholders. Inherent advantages of GST implementation include: wider tax base,
rationalized tax structure, synchronization of center and state tax administrations and
computerization of compliance procedures reducing errors as many as possible.

Literature elucidates many studies exploring the impact of structural changes,

political effects, dividend proclamations, oil shocks, etc. on stock market.

In this study the author investigates the impact of implementation of goods

and services tax on national stock exchange of India by considering nifty 50 indexes
and by applying event study technique.

The contribution of the paper is from the perspective of broadening our

understanding about impacts of structural changes on the stock market in short run to
all market participants, regulators, potential investors and high net worth individuals,
fund managers, hedge funds and policymakers.

The rest of the paper is structured as follows. In Section 2, we review literature

and introduce Indian stock market. In Section 3, we accentuate on the data used for
our study and the research methodology. In Section 4, we present our empirical
findings and conclude our study. In Section 5, we highlight the scope for the future
research.

LITERATURE REVIEW AND INDIAN STOCK MARKET

Literature elucidates many studies exploring the impact of structural changes,
political effects, dividend proclamations, oil shocks, etc on stock market.

Event study techniques elucidates impact of any particular incident on the

returns of stock market by designing a window both pre-event and post-event and
computing abnormal returns during the period. The same technique is employed in
literature for ascertaining efficiency of stock market as advocated by.

As per efficient market hypothesis (EMH), a market is considered to be in-

formational efficient if a security’s price adjusts swiftly and literally accurate to new
information. Fama’s original formulation of EMH recognized three forms of market
efficiency namely weak, semi-strong and strong form of efficiency based on reflection
of information in stock’s price. EMH has been conceivably one of the most important
paradigms in finance which has been expansively researched and yet remains
inconclusive even to this day.

National stock exchange of India (NSE) has total market capitalization of

US$2.27 trillion which makes 11th largest stock exchange in the world. Nifty 50
indexes was launched in 1996 by the NSE India. The nifty 50 index is a diversified
Index comprising of 50 stocks which account for 12 sectors of the Indian economy.
It’s an index which is widely used in the industry for benchmarking by mutual fund
portfolios, institutional investors, index-based derivatives as well as index funds.
 The nifty 50 index represents approximately 62.9% of free-float market
capitalization of all the stocks listed on NSE India (as on 31st March 2017).

Table 1 provides details about year-wise trading value of different market segments in
national stock exchange of India (in Rs. Crores). The growth in Equity Futures &
Options segment has been stupendous and is one of the main reasons why NSE
figures as the 11th largest stock exchange in the world. Table 2 provides a snapshot of
nifty 50 index performance since 2013-14. Volatility in percentage terms has been
calculated as standard deviation of Natural Logarithm of returns for the respective
month/year. The table gives us an idea of P/E Ratio of nifty 50 stocks from an
emerging market like India. Figure 1 highlights daily closing price of nifty 50 index
of national stock exchange of India before and af- ter implementation of GST.

Table 1. Year-wise trading value of different market segments in national stock

exchange of India (in Rs. Crores).

Segment/Year 2016-17 2017-18 2018-19 2019-20 2020-21

Capital Market 2,808,488 4,329,655 4,236,983 5,055,913 7,234,826
Equity Futures & Options 38,211,408 55,606,453 64,825,834 94,370,302 164,984,859
Wholesale Debt Market 851,434 772,369 569,495 682,426 517,889
Currency F&O 4,012,513 3,023,908 4,501,886 4,857,076 5,028,502
Interest Rate Futures 30,173 421,558 526,425 307,809 321,208
Total 45,914,017 64,153,943 74,660,623 105,273,526 178,087,284
Source: NSE fact book.

Data and Methodology

India embarked upon a new era of global practices by embracing and
implementing goods and services tax on 1st July 2017 which is considered as the
“event” for this study. Nifty 50 index data from 12th June 2017 to 21st July 2017 (t ±
14 days) was collected from the national stock exchange of India website
http://www.nseindia.com and the authenticity has been cross-verified from Prowess
database.

Fama in efficient market hypothesis advocated that it’s not-possible for any
market participant to outperform the market (i.e. earn abnormal returns) owing to the
fact that all information which is publicly available is already reflected and
incorporated into stock prices.

Event-study technique is used in literature to investigate semi-strong form of

market efficiency. In this study we strive to investigate efficiency of Indian stock
market post embracing GST.

GOODS AND SERVICE TAX: LITERATURE SURVEY

G. Garg, (2014) analyzed the impact of GST on Indian tax scenario. He tried to
highlight the objectives of the proposed GST plan along with the possible challenges
and opportunity that GST brings. He concluded that GST is the most logical steps
towards the comprehensive indirect tax reform in our country since independence.
GST is livable on all supply of goods and provision of services as well combination
thereof. All sectors of economy i.e. the industry, business including Govt.
departments and service sector shall have to bear impact of GST. All sections of
economy viz., big, medium, small scale units, intermediaries, importers, exporters,
traders, professionals and consumers shall be directly affected by GST. One of the
biggest taxation reforms in India – the Goods and Service Tax (GST) is all set to
integrate State economies and boost overall growth. GST will create a single, unified
Indian market to make the economy stronger. Experts say that GST is likely to
improve tax collections and Boost India’s economic development by breaking tax
barriers between States and integrating India through a uniform tax rate. Under GST,
the taxation burden will be divided equitably between manufacturing and services,
through a lower tax rate by increasing the tax base and minimizing exemptions.

Pinki et al., (2014) the authors in the paper have explored the concept of GST, the
need to introduce it in India, the hurdles in introducing it in India and suggestions to
overcome the same. The paper also discusses the benefits of introducing GST at the
earliest. The authors have discussed the options to introduce the dual GST in India
which could be Concurrent Dual GST, National GST or State GST. Under the
concurrent dual GST the better option was the one where GST is applied on both
goods and services. The other option explored was whether the Central GST would be
on goods and services but state GST would be only on goods since state to collect
GST in services is difficult to determine. This option also recommended one single
return with both CGST and SGST details and PAN based registration. The authors
have also discussed the constitutional amendments required if GST is ever to be
introduced since without the amendment taxing both goods and services using one tax
is not possible. The paper also highlights the issues in the credit mechanism in the
CGST/SGST model since it is difficult to practically implement in terms of
determination of place where service is taxable. The other challenges to introduction
of GST in India highlighted are the availability of strong IT network, infrastructure
and programmes, agreement on other provisions like basic threshold, exemption to
goods/services, rates to be applied, etc.

Rashid et al.(2014) in this paper the authors study impact of GST in Malaysia
since it is proposed to introduce GST in Malaysia in 2015. The GST is being
introduced mainly so as to increase the revenue collections of the government and
reduce the deficit. The authors have studied the impact of the introduction of this GST
and its relation to certain indicators like the consumer price index and the structural
balance. For this the relation between these factors and the GST are studied for
Singapore, Thailand and Indonesia so that whilst implementing GST in Malaysia the
administration can adopt the best practice. The paper recommends transparency in
implementing GST and review of the rates/base of GST after 5 years and rectification
based on the 5 year experience.

N. Kumar,(2014) concluded that GST will help in eradicating economic distortion

by current Indian tax system and is expected to encourage unbiased tax structures
which will be indifferent to geo locations.

Jaiprakash (2014) in his research study mentioned that the GST at the Central
and the State level are expected to give more relief to industry, trade, agriculture and
consumers through a more comprehensive and wider coverage of input tax set-off and
service tax setoff, subsuming of several taxes in the GST and phasing out of CST.
Saravanan Venkadasalam,(2014) has analysed the post effect of the goods
and service tax (GST) on the national growth on ASEAN States using Least Squares
Dummy Variable Model (LSDVM) in his research paper. He stated that seven of the
ten ASEAN nations are already implementing the GST. He also suggested that the
household final consumption expenditure and general government consumption
expenditure are positively significantly related to the gross domestic product as
required and support the economic theories. But the effect of the post GST differs in
countries.
Shaik et al, (2015) studied the concept and impact of GST on Indian economy.
The study also focused on some aspects of GST models. This study also covered the
advantages and working of GST. The study concluded that GST in Indian framework
will lead to commercial benefits which were untouched by VAT system and would
essentially leads to economic development.

Sehrawat & Dhanda,(2015) conducted a study focused on advantages and

challenges of GST faced by India in execution. They concluded that a simplified and
transparent tax system was the need of Indian economy. Pointing out the various
advantages they said that GST will provide India a world class tax structure and a
seamless tax system but it will depend upon effectiveness of its implementation.

Khurana & Sharma,(2016) conducted a study with a view to explore various

benefits and opportunities of GST by throwing a light on its’ background, objectives
of proposed GST plan and its impact on Indian tax scenario. They concluded that
GST implementation will definitely benefit producers and consumers although its’
implementation requires concentrated efforts of all stake holders especially central
and state government.

Munde & chavan, (2016) conducted a study to discuss the pros and cons of GST
and accordingly make suggestions to minimize loopholes and make it more effective.
They concluded that if the probable loopholes are dealt effectively, tax payers will
accept the change brought upon and if procedures in GST proves to be simple and
assures the involvement of interest of all stakeholders then definitely it will lead to
economic development and rationalization of prices.
Kumar, R, (2016), in his paper ‘Comparison between Goods and Services Tax
and Current Taxation System – A Brief Study’ differentiate the GST framework and
previous taxation system and highlighted the impact of GST on Indian economy.

Khurana, A. And Sharma, A.,(2016), in their paper ‘Goods and Services Tax
in India – A Positive Reform for Indirect Tax’ highlighted the objectives of GST and
reforms in indirect taxation system in India. And conclude after implementation of
GST, manufacturer, wholesaler and retailer can be easily recovered input taxes in
form of tax credit.

Shefalidani,(2016) stated impact of GST on Indian economy in the study in which

some benefits of GST such as one nation one tax, free from cascading effect, increase
consumption due to cascading effect, transparency and GDP growth are studied.
Petroleum products, real estate, and liquor are free from GST.

Dani, S.,(2016) in her research study revealed that GST being a system replacing
all indirect taxes might hamper the progress of the country as the attempt to
implement it is not being made whole heartedly.

Lourdunathan F and Xavier P.,(2016) studied inexplicit opinion of

manufacturers, traders and society. It also included challenges and prospectus of GST
in future in India. Centre and state level taxes also discussed in this paper. Various
states are shown in which GST is followed for growth of economy. Some issues such
demonetisation issue, inappropriate time, political issues, rate for manufacturers and
traders, impact on working and cash flow and implementation in unorganised sectors
became some main issues in path of GST.

Lourdunathan & Xavier,(2017) conducted a study based on exploratory

research technique on the basis of past literature to study the opinions of
manufacturers, traders, society etc. about the GST and the challenges and prospects of
introducing GST in India. They concluded that no doubt GST stands with one tax one
nation slogan and will provide relief to producers as well as consumers. Its efficient
implementation will lead to resource and revenue gains. They also said that seamless
credit and return processing without human intervention requires educating, training,
and conducting workshops on GST on the part of government.

Mujalde, S. and Vani, A.,(2017), in their research paper on ‘Goods and

Services Tax (GST) and its outcomes in India’ focused on the features of GST, impact
of GST on Indian economy and discussed possible advantages and challenges of GST.
Nath, B.,(2017), in his paper on ‘Goods and Services Tax: A Mile Stone in Indian
Economy’ discussed benefit and impact of GST on Indian economy and also conclude
that GST has a positive impact on various sectors and industries.

Nishitha Guptha,(2017) in her study stated that implementation of GST in the

Indian framework will lead to commercial benefits which were untouched by the
VAT system and would essentially lead to economic development.

Kawle ,S, P. and Aher, L.,Y.,(2017) in their research paper highlighted the
working of GST in India along with its impact on the Indian economy.

Nayyar, A. and Singh, I.,(2017) in their study cited that introduction of GST is
a major breakthrough in the Indian economy. It will help in redefining the Indian Tax
Structure by being more transparent and corruption free.

Abda, S.,(2017) in his research paper concentrated on the objectives, purpose and
benefits of GST to our economy and how it will help in strengthening it.

B, MitraPriya,(2017) stated GST as a Game changer in Indian Economy. The

paper showed that GST reduced complexity of various taxes and also removed
cascading effect. Tax structure shown in paper in which various tax rates included.
Impact on Tax incidence included various sectors such as Telecom, E- Commerce,
Automobile, real estate, banking and consumer goods. Impact on input tax credit
showed that there would be availability of cross credit utilization in CGST and SGST.
Kapoor Kapil,(2017) critically examined GST implementation, models,
mechanism, issues and challenges. Development stages GST in India studied in this
paper. Exclusions from GST which is petrol alcohol, tobacco, Diesel and some
benefits such as simplicity, transparency, cascading effect, reduction in burden of tax
revenue collection, economic growth and no tax for exporters are included in this
paper. Challenges also studied in the paper. So the paper concluded that proper
implementation of GST will lead to economic growth.
Yadav, S. S. and Shankar, R.,(2018) in their research paper analysed the
history and evolution of GST in the country and how it has replaced various indirect
taxes. Rupa, R. (2017) in her research paper explained the concept of GST. Also she
highlighted the advantages and disadvantages of GST in our economy.

Conclusion
After a thorough analysis of the above literature it can be concluded that GST
will provide relief to producers and consumers by subsuming the several indirect
taxes in India.

The Study of literature indicates that the implementation of Goods and

Services Tax helps in better utilization of resources and makes the taxation system
environment friendly. The taxes for both Centre and States will be collected at the
point of sale. Both will be charged on the manufacturing cost. Individuals will be
benefited by this as prices are likely to go down.

The lower price of goods increases consumption and more consumption leads
to higher production thereby leading to economic growth and development of the
country.

Implementation of goods and services tax is a major structural change and is

believed to be a step in the right direction as opined by economists around the world.
Inherent advantages of GST implementation including wider tax base, rationalized tax
structure, synchronization of center and state tax administrations and computerization
of compliance procedures reducing errors as many as possible far outweigh
implementation hiccups. In this study we investigated the impact of implementation
of goods and services tax on national stock exchange of India by considering nifty 50
index of NSE and by applying event study technique. The result of the study suggests
that implementation of GST impacts nifty 50 index of NSE in a positive way resulting
in abnormal returns which is statistically significant. The results of the study seem to
suggest that the market participants in India have embraced GST and have reacted
positively to its implementation. What it also infers is that there is an opportunity to
make short-term money when such events occur in any market by trading on index
derivatives namely index futures or index options.

The results of the study provide fresh evidences on our understanding about
impacts of structural changes on stock market in short run to regulators, potential
investors and high net worth individuals, fund managers, hedge funds and
policymakers. Further study can be carried out with larger dataset which is a
limitation of this study. Future research can be carried out by analyzing impacts of
implementation of GST sector-wise i.e. how GST implementation affects automobile
sector, manufacturing sector, textile Sector, IT/ITeS sector, agricultural sector, oil and
gas sector, and so on. A study of this sort will further elucidate impacts of different
GST slabs implemented across different sectors.