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Tax policies play an important role on the economy through their impact on both efficiency
and equity. A good tax system should keep in view issues of income distribution and, at the
same time, also endeavour to generate tax revenues to support government expenditure on
public services and infrastructure development. Cascading tax revenues have differential
impacts on firms in the economy with relatively high burden on those not getting full offsets.
Value added tax was first introduced by Maurice Laure, a French economist, in 1954. The tax
was designed such that the burden is borne by the final consumer. Since VAT can be applied
on goods as well as services it has also been termed as goods and services tax (GST). During
the last four decades VAT has become an important instrument of indirect taxation with 130
countries having adopted this, resulting in one-fifth of the worlds tax revenue. Tax reform in
many of the developing countries has focused on moving to VAT. Most of these countries
have gained thus indicating that other countries would gain from its adoption. For a
developing economy like India it is desirable to become more competitive and efficient in its
Executive Summary
I. Backdrop 1-
The differential multiple tax regime across sectors of production leads to distortions in
allocation of resources thus introducing inefficiencies in the sectors of domestic production.
While indirect taxes paid by the producing firms get offsets under state VAT and CENVAT,
the producers do not receive full offsets particularly at the state level. The multiplicity of
taxes further adds the difficulty in getting full offsets.
Add to this, the lack of full offsets of taxes loaded on to the fob export prices. The export
competitiveness gets negatively impacted even further. Efficient allocation of productive
resources and providing full tax offsets is expected to result in gains for GDP, returns to the
factors of production and exports of the economy.
The Joint Working Group of the Empowered Committee of the State Finance Ministers
submitted its report on the proposed Goods and Services Tax (GST) to the Finance Minister
in November 2007. A dual GST, one for the Centre and other for the states, was to be
implemented by 1 April 2010. The new system would replace the state VAT , CENVAT, and
some other taxes.
The proposed GST would eliminate the cascading effect and would integrate hitherto
disjointed goods and service taxes. It will lead to uniformity in tax rates and procedures
throughout the country. It will ensure better compliance and thus will increase the revenue of
both centre and states. The export sector will also gain from this integration of state and
centre taxes. Consumer will be benefited in form of lower tax rates.
There will be dual tax rate viz Central GST(CGST) and State GST(SGST). Also, for
interstate sales there will be an Integrated GST. However cross credits among CGST and
SGST will not be allowed. The rates for CGST and SGST are yet to be decided. It is also
proposed to keep certain taxes such as taxes on petroleum products to be kept out of
purview of GST.
However, there are major challenges to introduction of GST like amendment of constitution
of India to alter power of taxation of centre and state, rates of SGST and CGST,
standardisation of procedure, compensation for revenue loss to states, etc.
1. Backdrop
1.1 Tax policies play an important role on the economy through their impact on both
efficiency and equity. A good tax system should keep in view issues of income distribution
and, at the same time, also endeavour to generate tax revenues to support government
expenditure on public services and infrastructure development. Cascading tax revenues
have differential impacts on firms in the economy with relatively high burden on those not
getting full offsets.
1.2 Traditionally Indias tax regime relied heavily on indirect taxes including customs and
excise. Revenue from indirect taxes was the major source of tax revenue till tax reforms
2.1 In India the power for taxation has been divided between centre and state under article
246 of the constitution. As per the said article the centre has power to tax under list I of the
Schedule VII of the constitution, the state can tax under list II of the schedule and both can
make law under list III of the schedule. Therefore, there is a clearly defined and multiple tax
regime in India.
2.2 Prior to the introduction of VAT in the Centre and in the States, there was a burden of
multiple taxation in the pre-existing Central excise duty and the State sales tax systems.
Before any commodity was produced, inputs were first taxed, and then after the commodity
got produced with input tax load, output was taxed again. This was causing a burden of
multiple taxation (i.e. tax on tax) with a cascading effect. Moreover, in the sales tax
structure, when there was also a system of multi-point sales taxation at subsequent levels of
distributive trade, then along with input tax load, burden of sales tax paid on purchase at
each level was also added, thus aggravating the cascading effect further.
2.3 In India, VAT was introduced at the Central level for a selected number of commodities in
terms of MODVAT with effect from March 1, 1986, and in a
2.4 When VAT is introduced in place of Central excise duty, a set-off is given, i.e., a
deduction is made from the overall tax burden for input tax. In the case of VAT in place of
sales tax system, a set-off is given from tax burden not only for input tax paid but also for tax
paid on previous purchases. With VAT, the problem of tax on tax and related burden of
cascading effect is thus removed. .
2.5 Before introduction of VAT, in the sales tax regime, apart from the problem of multiple
taxation and burden of adverse cascading effect of taxes as already mentioned, there was
also no harmony in the rates of sales tax on different commodities among the States. Not
only were the rates of sales tax numerous (often more than ten in several States), and
different from one another for the same commodity in different States, but there was also an
unhealthy competition among the States in terms of sales tax rates so-called rate war
often resulting in, revenue-wise, a counter-productive situation.
2.6 It is in this background that attempts were made by the States to introduce a harmonious
VAT in the States, keeping at the same time in mind the issue of sovereignty of the States
regarding the State tax matters.
The States started implementing VAT beginning April 1, 2005. After overcoming the initial
difficulties, all the States and Union Territories have now implemented VAT.
several taxes which are in the nature of indirect tax on goods and services, such as
luxury tax, entertainment tax, etc., have yet not been subsumed in the VAT.
CENVAT load on the goods remains included in the value of goods to be taxed under
State VAT, and contributing to that extent a cascading effect on account of CENVAT
element.
non integration of VAT on goods with tax on services at the State level and
cascading effect of service tax.
3.3 In the GST, both the cascading effects of CENVAT and service tax are removed with set-
off, and a continuous chain of set-off from the original producers point and service providers
point upto the retailers level is established which reduces the burden of all cascading
effects.
GST is not simply VAT plus service tax but an improvement over the previous system of VAT
and disjointed service tax.
IV Benefits of GST
4.1 Benefits for centre
As per the existing taxation system the centre does not has power to tax on production of
goods. The power to levy tax on sales rests with state except in case of inter state sales.
Therefore, introduction of GST would empower centre to tax sales also.
Increase in GDP
Increase in exports
There is no uniformity in rate of taxes among the states. Even after introduction of VAT there
are different rates of tax in different states. Therefore, there was rate war among states. GST
will lead to uniformity in tax rates. Other benefits for state are:-
Will reduce rate wars, therefore, outflow of investment to other states due to rate war
will be prevented
Benefits to industry
Will provide comprehensive input tax credit, the service tax can be set off with sales
tax
No need to pay CST
Many central and state indirect taxes will be subsumed in GST, therefore, a single tax
is to be paid.
Uniformity in tax procedure throughout the country
Reduced tax burden will increase competitiveness of Indian products in foreign
markets
4.5 The GST at the Central and at the State level will thus give more relief to industry,
trade, agriculture and consumers through a more comprehensive and wider coverage of
input tax set-off and service tax set-off, subsuming of several taxes in the GST and phasing
out of CST. With the GST being properly formulated by appropriate calibration of rates and
adequate compensation where necessary, there may also be revenue/ resource gain for
both the Centre and the States, primarily through widening of tax base and possibility of a
significant improvement in tax compliance. In other words, the GST may usher in the
possibility of a collective gain for industry, trade, agriculture and common consumers as well
as for the Central Government and the State Governments. The GST may, indeed, lead to
the possibility of collectively positive-sum game.
V Overview of GST
WHAT IS GOODS AND SERVICE TAX ?
5.1 Goods and Service Tax is a tax on goods and services, which is leviable at each point of
sale or provision of service, in which at the time of sale of goods or providing the services
the seller or service provider can claim the input credit of tax which he has paid while
purchasing the goods or procuring the service.
The working of GST with respect to manufacturer, trader and consumer can be seen in the
illustrations given below. The manufacturers will get the input credit of all the taxes paid by
them on the raw material and also on the services.
Let us assume the rate of GST is 16 percent and a toy manufacturer used following inputs
for manufacturing toys and sells the goods at Rs 120 lakh to trader:-
Manufacturer
Item no Particulars Amount (Rs Rate of tax ( Input tax paid
in lakhs) in percent) (Rs in lakhs)
1 Raw material 50 16 8
2 Stores and spares 25 16 4
3 Services 25 16 4
Total value of inputs 100 16
Suppose trader use services amounting to Rs 5 lakh paying service tax at rate of 16 percent
amounting to Rs 0.8 lakh. Therefore total input tax paid by trader is:-
Trader
Item no Particulars Amount (Rs Rate of tax ( Input tax paid
in lakhs) in percent) (Rs in lakhs)
1 Goods purchased from 120 16 19.2
manufacturer
2 Services 5 16 0.8
Total value of inputs 125 20
If trader sell goods to consumer by adding Rs 5 lakh profit margin .The output tax payable by
trader is :-
Sale Value Rate of tax ( in percent) output tax to be paid
(Rs in lakhs)
Rs 130 lakh 16 20.8
From the above illustration it can be seen that the manufacturer and the trader gets credit of
the tax paid on good and services and had to pay tax on value added only. Further, the
government will get tax of Rs 20.8 lakh which is tax on final sale value of the product though
from different sources as detailed below:-
Systems of GST
5.3 Internationally, there are three systems in vogue:
(a) Invoice System
(b) Payment System
(c) Hybrid System
Brief description of three systems is:
Type of System Input Credit Output Tax
Invoice system On receipt of invoice On issue of invoice
Payment system On making payment On making payment
Hybrid At the option of dealer to be At the option of dealer to be
declared in advance declared in advance
(a) Invoice System: In the invoice system, the GST (Input) is claimed on the basis of
invoice and it is claimed when the invoice is received, it is immaterial whether payment is
made or not. Further the GST (Output) is accounted for when invoice is raised. Here also the
time of receipt of payment is immaterial. One may treat it as mercantile system of
accounting. In India the present system of sales tax on goods is an invoice system of VAT
and here it is immaterial whether the taxpayer is following the cash basis of accounting or
mercantile basis of accounting. The advantage of invoice system is that the input credit can
Rate Structure
6.1 The GST shall have two components: one levied by the Centre (hereinafter referred to
as Central GST), and the other levied by the States (hereinafter referred to as State GST).
Rates for Central GST (CGST) and State GST ( SGST) would be prescribed appropriately,
reflecting revenue considerations and acceptability. This dual GST model would be
implemented through multiple statutes (one for CGST and SGST statute for every State).
However, the basic features of law such as chargeability, definition of taxable event and
taxable person, measure of levy including valuation provisions, basis of classification etc.
would be uniform across these statutes as far as practicable.
For services their shall be single rate for SGST and CGST.
Applicability
6.2 The Central GST and the State GST would be applicable to all transactions of goods and
services made for a consideration except the exempted goods and services, goods which
are outside the purview of GST and the transactions which are below the prescribed
threshold limits.
The Central GST and State GST are to be paid to the accounts of the Centre and the States
separately. It would have to be ensured that account-heads for all services and goods would
have indication whether it relates to Central GST or State GST (with identification of the
State to whom the tax is to be credited).
Input Credit
6.3 Since the Central GST and State GST are to be treated separately, taxes paid against
the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST
and could be utilized only against the payment of Central GST. The same principle will be
applicable for the State GST. A taxpayer or exporter would have to maintain separate details
in books of account for utilization or refund of credit.
Cross utilization of Income Tax Credit between the Central GST and the State GST would
not be allowed except in the case of inter-State supply of goods and services under the
IGST model which is explained later.
Ideally, the problem related to credit accumulation on account of refund of GST should be
Procedures
6.4 To the extent feasible, uniform procedure for collection of both Central GST and State
GST would be prescribed in the respective legislation for Central GST and State GST.
Administration
6.5 The administration of the Central GST to the Centre and for State GST to the States
would be given. This would imply that the Centre and the States would have concurrent
jurisdiction for the entire value chain and for all taxpayers on the basis of thresholds for
goods and services prescribed for the States and the Centre.
The taxpayer would need to submit periodical returns, in common format as far as possible,
to both the Central GST authority and to the concerned State GST authorities.
Each taxpayer would be allotted a PAN-linked taxpayer identification number with a total of
13/15 digits. This would bring the GST PAN-linked system in line with the prevailing PAN-
based system for Income tax, facilitating data exchange and taxpayer compliance.
Keeping in mind the need of tax payers convenience, functions such as assessment,
enforcement, scrutiny and audit would be undertaken by the authority which is collecting the
tax, with information sharing between the Centre and state
7.1 The following taxes levied at centre will get subsumed under GST:-
i. Central Excise Duty
iii. The Excise Duty levied under the Medicinal and Toiletries Preparation Act
viii. Cesses.
7.2 The following State taxes and levies would be, to begin with, subsumed under GST:
7.3 However following taxes are proposed to be kept out of purview of GST due the reasons
as detailed:-
Tax on items containing Alcohol: Alcoholic beverages would be kept out of the purview of
GST. Sales Tax/VAT could be continued to be levied on alcoholic beverages as per the
existing practice. In case it has been made Vatable by some States, there is no objection to
that. Excise Duty, which is presently levied by the States may not also be affected.
Tax on Tobacco products: Tobacco products would be subjected to GST with ITC. Centre
may be allowed to levy excise duty on tobacco products over and above GST with ITC.
Tax on Petroleum Products: As far as petroleum products are concerned, it was decided
that the basket of petroleum products, i.e. crude, motor spirit (including ATF) and HSD would
be kept outside GST as is the prevailing practice in India. Sales Tax could continue to be
levied by the States on these products with prevailing floor rate. Similarly, Centre could also
continue its levies. A final view whether Natural Gas should be kept outside the GST will be
taken after further deliberations.
IX INTEGRATED GOODS AND SERVICE TAX (IGST):
9.1 The scope of IGST model is that, Centre would levy IGST which would be CGST plus
X GST on Export
Zero Rating of Exports
10.1 Exports would be zero-rated. Similar benefits may be given to Special Economic Zones
(SEZs). However, such benefits will only be allowed to the processing zones of the SEZs.
No benefit to the sales from an SEZ to Domestic Tariff Area (DTA) will be allowed.
GST on Imports:
10.2 The GST will be levied on imports with necessary Constitutional Amendments. Both
CGST and SGST will be levied on import of goods and services into the country. The
incidence of tax will follow the destination principle and the tax revenue in case of SGST will
accrue to the State where the imported goods and services are consumed. Full and
complete set-off will be available on the GST paid on import on goods and services.
XI Miscellaneous Matters
11.1 Refunds: If for a tax period the input credit of a dealer is more than the output credit
then he is eligible for refund subject to the provisions of law applicable in this respect. The
excess may be carried forward to next period or may be refunded immediately depending
upon the provision of law.
11.2 Exempted Goods and Services: Certain goods and services may be declared as
Various tax exemptions have been granted both by the Centre and States to achieve objectives of
promoting a particular sector or to reduce tax burden on a particular segment of society in the interest
of fairness or to promote a particular economic activity etc. Tax exemptions have the effect of
narrowing the tax base and increasing the administrative and compliance cost of GST. Therefore, it is
felt that exemptions should be minimized. Direct and transparent subsidies, instead of tax exemptions,
are more efficient way to achieve the targeted objective. It is recommended that apart from a dual rate
GST structure at the Central and the State levels, there should be a common exemption list. Further,
specific provisions to provide limited flexibility to the States within a set of prescribed criteria may
need to be incorporated, as in the prevailing VAT structure, in order to accommodate exemption of
goods of local importance. Similar limited flexibility would need to be provided to the Centre to
address exceptional situations such as natural disasters.
Advance ruling and dispute resolution authorities should be set up by the Centre and States
to ensure uniformity and fairness in decision-making.
(3) Design and structure of GST: No less significant is the issue of an appropriate
(4) Resources Sharing: Another contentious issue that is bound to crop up in this
regard is the manner of sharing of resources between the Centre and the states
and among the states inter se as also the basis of their devolution;
(5) Flow of Goods and Services: Apart from all these, there has to be a robust and
integrated MIS dedicated to the task of tracking flow of goods and services across
the country and rendering accurate accounting of levies associated with such flow
of goods and services; and
(6) Determination of Revenue Neutral Rate (RNR): At present States are charging
VAT rates 0%, 4%, 12.5% and 20% besides other levies and thus the average rate
of tax comes to 17%. Similarly, Centre is charging Central Excise duty @ 14%,
CST 2%, Service Tax 10%. The combined effect of all the taxes taken together
comes to an average rate of tax @ 27.5%. The proposed GST rate is mooted @
20% both for the Central GST @ 12% and the State GST @ 8%. Assuming that the
States may agree on the implementation of GST based on compensation being
given to them like what was decided at the time of introduction of VAT i.e. 1st April,
2005, the Centre may suffer loss while satisfying the needs of about 30 states.
The following issues are yet to be answered even after the release of the Discussion paper
1. Does Exemption of 1.5 Crores in CGST for goods equally apply to dealers?
As GST will cover in its scope the levy of excise and VAT therefore the exemption limit of 1.5
Crores specified in the discussion paper will extend its hands to dealers also or the same will
be limited to the manufacturers. If the second view is opted then the definition of
Manufacture will be rolled back in the GST tax regime.
2. What is the Service tax threshold exemption limit under CGST?
The Empowered Committee has not specified the threshold exemption limit applicable to
services under CGST. However they have clarified that the same will be in conformity with
the existing threshold exemption of Rs. 10 Lakhs.
3. IGST (Inter-state transaction of GST) levy will be equal to CGST plus SGST, thus the
same will be single rates. Are separate records are to be maintained in this respect also?
It has been clarified that the IGST credit will be allowed to be set off against IGST, CGST or
SGST payable by the taxpayer. In the current scenario CST is levied on interstate sale of
goods, but the dealers aren't allowed to avail the credit of the same and they are
emphasizing on the scenario to buy the goods from within the state so as to avail the credit
of VAT. However in this new tax regime the IGST will be levied at the rate which will be equal
to CGST plus SGST, this leads to a new issue that IGST will be levied at a single compound
rate or two different rates i.e. CGST and SGST will be levied differently or not.
If the rear view is adopted then the question arises that the credit of the IGST will be allowed
to be set off against both CGST and SGST separately or cross adjustments will be allowed.
If the cross adjustment is allowed then the taxpayers availing exemption of 1.5 Crores under
CGST will be willing to purchase goods and sale them outside the state as in that situation
they will be getting the full credit of IGST thus benefiting them utmost. This scenario
changes the complete situation as it exists presently. This difficulty is yet to be sorted and
clarified by the Government.
4 The dual GST model would be implemented through multiple statutes one for CGST and
SGST statute for every State.
Different statues will govern the SGST levy. This will lead to non uniformity in the tax
structure at state levels. Further, there may be complexities for smooth implementation of
GST across the nation.
5 Transitional Issues
The transition would cause ambiguity with respect to issues like treatment of "stock in hand",
available CENVAT (Central Value Added Tax), credit / VAT (Value Added Tax) credit. However,
these should be provided for much before the implementation of GST.
A scheme for the treatment of such exemptions should be well devised so that there is no adverse
affect on the industry. Though Customs will remain outside the GST regime, a large number of bonds
executed by importers and exporters with Government will have to be suitably amended for changed
liability in view of new GST.
7 Job Work
Issues such as what documents and records need to be prepared by the job worker and the principal
and time limits for claiming CENVAT credit are to be decided. Since, the focus would be on 'supply'
after the implementation of GST, the status of job workers needs to be determined.
8 Assessable Value
The calculation of assessable value under GST is ambiguous since it still unknown what the
components of the assessable value are. Are discounts and other charges such as loading/unloading,
freight, cartage and packing includible in the assessable value or would they be chargeable
separately?
9 Place of Supply
In the GST regime, the taxable event would be 'supply' and it is very essential to understand as to
where the 'supply' actually takes place. "Place of Supply" rules refers to the rules that allocate the
right to tax between the states. The main concern here is which state will collect the SGST.
9. Common Procedures
The industry expects that there would be similar formats for registration, returns and other records for
both CGST and SGST. Functions such as assessment, enforcement, scrutiny and audit should be
undertaken by the authority which is collecting the tax with information sharing between the Centre
and the States.
Conclusion
GST, if implemented efficiently, could prove to be a "Good Sensible Tax". But the Government should
come up with the draft rules as soon as possible so that there is enough time for industry to analyse
the draft and make representations to the concerned authorities with their suggestions.