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AGARWAL SANJIV AND COMPANYCHARTERED ACCOUNTANTS, JAIPUR

1. INDIRECT TAX STRUCTURE IN INDIA – AT A GLANCE

Current Tax StructureIndia currently has a dual system of taxation of goods and services, which is quite different from dual GST. Taxes on goods are described as “VAT” at both Central and State level. It has adopted value added tax principle with input tax credit mechanism for taxation of goods and services, respectively, with limited cross-levy set-off.

The present tax structure for indirect taxation can best be understood by the following chart:

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In Central Excise, duty is levied as origin based single point tax on manufacture of goods with some exceptions where set off scheme is used to reduce the cascading

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Present Tax Structure[Four Important

Excise Duty Customs Duty

Sales Tax / VAT/ CST

Service Tax

Entry No. 84, List I, Schedule VII

Entry No. 83,List I,

Schedule VIIEntry No. 54 of

List II (StateVAT) and 92A of

List I (CentralSales Tax)

Residuary Entry No. 97, List I,Schedule VII

Taxable Event isManufacture Taxable Event

is SaleTaxable Event is Provision of Service

Taxable Event is Import & Export

Median Rate-12% (12.5% w.e.f.01.06.2015)

Rates - 5%, 12.5% & 20%

Single Rate- 12.36% (14% w.e.f. 01.06.2015)

Median Rate-24.72%


effect of taxes. CENVAT is only at manufacturing level and does not go up to retail level.

At State level, varieties of schemes were framed like origin based single point system (first point tax), multi point system with set off, last point (retail level) system, and so on. This was, again, not uniform even within a State. States adopted different systems for different commodities too. Cascading effect at that time was reduced to a great extent with the use of declaration forms, though, that by itself was a complex system. With the introduction of State VAT, there is combination of origin based (Central Sales Tax) and destination based multi point system of taxation.

Similarly, there was no Union level tax on services till the introduction of Service Tax in 1994 although, selective levy by the States on specified services like entertainment tax, is continuing. Service tax is currently charged on all the services except the services mentioned in the Negative List and specifically exempted from the service tax, although initially tax was charged on selected services. The VAT at Union (CENVAT) as well as State Level (VAT) is on goods only, except that at the Union level, there is input tax credit mechanism between CENVAT and Service Tax.

Other Important Indirect Taxes/Duties

1. Octroi2. Entry Tax3. Luxury Tax4. Research and Development Cess5. Telecom License Fees6. Turnover Tax7. Tax on Consumption or Sale of Electricity8. Taxes on Transportation of Goods and Services9. Lottery Tax10.Tax on Betting and Gambling 11.Stamp Duty12.Property Tax13.Toll Tax, Passenger Tax and Road Tax14.Royalties15.Cesses/ Surcharges16.Tax on advertisement

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2.

RECENT IMPROVEMENTS IN TAX STRUCTURE

Over the past several years, significant progress has been made to improve the indirect tax structure, broaden the base and rationalize the rates.

Major improvements are:

Replacement of the single-point State sales taxes by the VAT in all of the Statesand Union Territories.

Reduction in the Central Sales Tax rate to 2 per cent from 4 per cent, as part of a complete phase out of the tax.

Introduction of service tax by the Centre, and a substantial expansion of itsbase over the years (Negative list from July, 2012).

Rationalization of the CENVAT rates by reducing their multiplicity andreplacing many of the specific rates by ad valorem rates based on themaximum retail price (MRP) of the products.

Shift from inspector regime to self compliance. Electronic platform

In spite of the improvements made in the tax design and administration over the past few years, the systems at both Central and State levels still remains complex. The most significant cause of complexity is, of course, policy related and is due to the existence of exemptions and multiple rates, and the extant structure of the levies. These deficiencies are the most glaring in the case of CENVAT and the service tax. The introduction of Goods and Services Tax (GST) would thus be opportune for deepening the reform process already underway. The principal broad-based consumption taxes that the GST would replace are the CENVAT and the service tax levied by the Centre and the VAT levied by the States. All these are multi-stage value- duded taxes.

In defining options for reform, the starting point is the basic structure of the tax. The Empowered Committee of State Finance Ministers in November 2007 had recommended a “Dual” GST, to be levied concurrently by both levels of Government. The dual GST option strikes a good balance between fiscal autonomy of the Centre and States, and the need for harmonization. It empowers both levels of Government to apply the tax to a comprehensive base

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of goods and services, at all points in the supply chain. It also eliminates tax cascading, which occurs because of truncated or partial application of the Centre and State taxes.

3. ALTERNATIVE MODELS OF GST

Some of the popular GST models being practiced in various countries or those being suggested are –(a) Canadian model

Being a Federal State, Canada follows dual GST between Union and States having three components — Federal GST and Provincial Retail Sales Tax (PRST) being administered separately; joint federal and provincial VAT being administered federally and separate federal and provincial VAT being administered provincially only for Quebec. Introduced in 1905, present tax rate is 5%. Indian situation resembles to that of Canadian model.

(b) Australian model Australia follows a single GST which is a federal tax collected by Centre and distributed to States. GST was introduced in July 2010 and rate of tax is 10%. Indian situation is similar but States may not like to lose their autonomy.

(c) Malaysian model

Goods and services tax (GST) in Malaysia, a value added tax, was scheduled to be implemented by the Government during the third quarter of 2011, but has not yet been implemented. The Government is still studying the possible impact of the tax. During the Government reading of the 2014 budget, Malaysian Prime Minister announced that GST @ 6% shall be imposed starting on April 1, 2015.

(d) Singapore model

On the recommendation of the 1986 Economic Committee, Singapore's government decided to shift from direct to indirect taxes, to maintain its international competitiveness in attracting investments, and to sustain its economic growth. GST was first introduced in Singapore on 1st April 1994 at 3%. The GST rate was increased to 4% in 2003 and to 5% in 2004. The GST rate was raised to 7% in 2007.

(e) United Kingdom model

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Value Added Tax (VAT) is a tax on consumption levied in the United Kingdom by the national government. It was introduced in 1st January, 1973 and is the third largest source of government revenue after income tax and National Insurance. Before 1973 the UK had a consumption tax called Purchase Tax, which was levied at different rates depending on the goods' luxuriousness. The general rate is 20% and reduced rate is 5%.

(f) United States of America modelThe United States does not impose a national-level sales or value-added tax. Sales taxes and complementary use taxes are imposed and administered at the state (sub national) and local (substate) levels. Currently, 45 of the 50 US states, the District of Columbia and Puerto Rico impose some form of sales and use tax. Only Alaska, Delaware, Montana, New Hampshire and Oregon do not impose such taxes.

(g) Suggestions for India Kelkar had suggested unified goods and services tax to merge Central

excise, service tax and value added tax in one common base. Bagchi had suggested a combination of Central excise, service tax and VAT

to be levied by both — Centre and States separately. Empowered Committee has suggested dual model of GST in India

with CGST, SGST and Inter State GST (IGST).

India needs to adopt a GST system which is politically acceptable and administratively feasible. India is moving forward on EC’s recommended model.

GST: A GLOBAL EYE VIEW

COUNTRYYEAR OF

INTRODUCTION

GST RATE

Canada June 1905 5%

France April 1954 Standard rate : 20% reduced rate : 5.5% & 10%, super reduced rate of 2.1%

UK January 1973 Standard rate : 20% reduced rate : 5%Japan April 1989 Standard rate : 8%Singapore April 1994 7%Australia July 2000 10%

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Malaysia April 2015 6%

India April 2016 (Proposed) Suggested revenue neutral rate : 27%

4. GOODS & SERVICES TAX (GST)

Need for a Common Tax (GST)

Why do we need GST today? In today's Indian economy, where service sector contributes over 55%, separate taxation of goods and services is neither viable nor desirable. Value added in manufacture and sale of goods require inputs of both — goods and services and vice versa, which is often not separable. Taxation of goods and services separately by union as well as States brings in distortion in tax structure, is retrogatory and adversely affects revenues. The present consumption tax system in India is complicated as well as multi-layered. GST is a part of ongoing tax reforms which aims at evolving an efficient and harmonized consumption tax system. It shall replace the multiple taxes with a single tax operating at various levels of supply chain, thus, avoiding the cascading effect of multiple taxes. Also, it shall cover all goods and services, unlike the present system, with a negative or exempted list. It will also end the distortion in differential tax treatment of various goods and services. GST is going to be pinnacle of achieving an integration of excise duties, service tax, State value added tax and other local taxes. With GST, uniformity of levy of indirect taxes will be ensured across the country.

The basic objective of GST is to remove trade barriers by creating a common domestic market for goods and services at a national level. GST will be an answer to this goal which is a broad based tax levied at multiple stages of production and distribution with the taxes on inputs credited against taxes payable on output. At the same time, revenue is protected by being collected throughout the chain of economic transactions but without any distortions in production processes or decisions. Tax collected at any intermediate stage is only a pass through transaction leading to an incentive for tax compliance. GST thus, seeks to achieve economic efficiency and tax neutrality.

Shortcomings in the Present Structure and Need of GST

(a) Tax Cascading

Tax cascading occurs under both, Union and State taxes. The most significant contributing factor to tax cascading is the partial coverage by Central and State

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taxes. Oil and gas production and mining, agriculture, real estate construction, infrastructure projects, wholesale and retail trade, and range of services remain outside the ambit of the Cenvat and the Service Tax levied by the Centre. The exempt sectors are not allowed to claim any credit for the Cenvat or the Service Tax paid on their inputs.

Similarly, under the State VAT, no credits are allowed for the inputs to the exempted sectors, which include the entire service sector. Another major contributing factor to tax cascading is the Central Sales Tax (CST) on inter- State sales, collected by the Origin State for which no credit is allowed by any State Government.

(b) Levy of Excise Duty on manufacturing point

The CENVAT is levied on goods manufactured or produced in India. Limiting the tax to the point of manufacturing is a severe impediment to an efficient and neutral application of tax. Taxable event at manufacturing point itself forms a narrow base.For example, valuation as per excise valuation rules of a product, whose consumer price is Rs. 100/-, is, say, Rs. 70/-. In such a case, excise duty as per the present provisions is payable only on Rs.70/-, and not on Rs.100/-. Further, definitional issues as to what constitutes manufacturing, and valuation issues for determining the value on which the tax is to be levied, are other concerns. However, these concepts have evolved through judicial rulings to a great extent.

(c) Complexity in determining the nature of transaction – Sale vs. Service

The distinctions between goods and services found in the Indian Constitution have become more complex. Today, goods, services, and other types of supplies are being packaged as composite bundles and offered for sale to consumers under a variety of supply-chain arrangements. Under the current division of taxation powers in the Constitution, neither the Centre nor the States can apply the tax to such bundles in a seamless manner. Each Indirect Tax Structure in India – An Introduction 11 Government can tax only parts of the bundle, creating the possibility of gaps or overlaps in taxation.

Example:- In case of Installation of AC(Air Conditioner) where a bundle of services are provided like wood and other material used for installation , VAT is charged on such material and on labour part service tax is applicable, but no value is defined separately. VAT and Service Tax are charged on percentage basis as defined by State and Central Govt.

(d) Inability of States to levy tax on services

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Exclusion of services from the State taxation powers is its negative impact on the buoyancy of State tax revenues. With no powers to levy tax on incomes or the fastest growing components of consumer expenditures, the States have to rely almost exclusively on compliance improvements or rate increases for any buoyancy in their own-source revenues. Alternatives to assigning the taxation of services to the States include assigning to the States a share of the Central VAT (including the tax from services).

(e) Lack of Uniformity in Provisions and Rates

Present VAT structure across the States lacks uniformity, which is not restricted only to the rates of tax, but also extends to procedures and, sometimes, to the definitions, computation and exemptions.

(f) Fixation of situs – Local Sale vs. Central Sale

Whether a sale takes place in one State or another, i.e. to fix the situs of a salen transaction, is the major conflict, as its taxability affects the revenue of the State. Though CST is a tax levied by the Central Government, it is collected and retained by the collecting State. Whether a transaction is a direct inter-State sale from State ‘X’ to the customer ‘ABC’ located in State ‘Y’; or is a stock transfer from State ‘X’ to branch in State ‘Y’ first, and then a local sale to the customer ‘ABC’ in the State ‘Y’, will have a bearing on the revenue of the State ‘X’ or State ‘Y’, as the case may be.

A significant number of litigations pertain to this issue. Ultimately, the Central Government made provisions under the Central Sales Tax Act, 1956 and created a Central Appellate Authority to resolve such matters.

(g) Interpretational Issues

Another problem arises in respect of interpretation of various provisions and determining the category of the commodities. We find a significant number of litigation surrounding this issue only. To decide whether an activity is sale or works contract; sale or service, is not free from doubt in many cases.

(h) Narrow Tax Base

The starting base for the CENVAT is narrow, and is being further eroded by a variety of area-specific and conditional exemptions.

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Earlier the service tax was applicable on selective services but after the implementation of Finance Act, 2012 the system of comprehensive taxation of services was implemented, while excluding few service by specifying them in “negative list”.

The complexities under the State VAT relate primarily to classification of goods to different tax rate Schedules. Theoretically, one might expect that the lower tax rates would be applied to basic necessities that are consumed largely by the poor. This is not the case under the State VAT. The lowest rate of 1% applies to precious metals and jewellery, and related products. The middle rate of 5% applies to selected basic necessities and also a range of industrial inputs and IT products. In fact, basic necessities fall into all three categories – exempted from tax, taxable at 5%, and taxable at the standard rate of 12.5%.

Higher rate of 20% is also applicable mainly to petroleum products and liquor. However, most retailers find it difficult to determine the tax rate applicable to a given item without referring to the legislative schedules. Consumers are even less aware of the tax applicable to various items.

(i) Complexities in Tax Administration

Compounding the structural or design deficiencies of each of the taxes is then poor or archaic infrastructure for their administration. Taxpayer services, which are a lynchpin of a successful self-assessment system, are virtually nonexistent or grossly inadequate under both Central and State administrations.

Many of the administrative processes are still manual, not benefiting from the efficiencies of automation. All these not only increase the costs of compliance, but also undermine the revenue collection.

What is GST?

Simply put, goods and services tax is a tax levied on goods and services imposed at each point of sale or rendering of service. Such GST could be on entire goods and services or there could be some exempted class of goods or services or a negative list of goods and services on which GST is not levied. GST is an indirect tax in lieu of tax on goods (excise) and tax on service (service tax). The GST is just like State level VAT which is levied as tax on sale of goods. GST will be a national level value added tax applicable on goods and services.

A major change in administering GST will be that the tax incidence is at the point of sale as against the present system of point of origin. According to the Task Force

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under the 13th Finance Commission, GST, as a well designed value added tax on all goods and services, is the most elegant method to eliminate distortions and to tax consumption.

For example, a product whose base price is Rs.100 and after levying excise duty @ 12% value of the product is Rs. 112. On sale of such goods VAT is levied @ 12.5% and value to the ultimate consumer is Rs. 126. In the proposed GST system on base price of Rs.100 CGST and SGST both will be charged, say @ 8% each, then the value to the ultimate consumer is Rs. 116. So, in such a case the industry can better compete in global environment.

Therefore, GST may be defined or understood as 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 may claim the input credit of tax which he has paid while purchasing the goods or procuring the service.

Pre-requisites for GST

An efficient GST regime requires —• harmonization of tax base, tax rates, tax laws and procedures• avoiding cascading effect by providing credit of total amount of tax paid on inputs• levying tax on destination basis• ensuring uniformity in law and procedure

GST regime should also consider the following to be an effective tax—• the fiscal autonomy of provinces• use of tax as an instrument to achieve social and or economic objectives• risk and rewards of ownership of the tax.

Following are, therefore, the pre-requisites for entering into a GST regime —• Setting up of empowered committee for GST (like VAT) which can steer the road

map into action• Broaden the tax base for excise duty (presently 40% comes from petroleum

products)• Finishing area based and product based exemptions• Rationalization of concessions and exemptions including that on exports• Expanding service tax to almost all services• Common/unified tax rate for goods and services which may be ideally, revenue

neutral (a suitable GST rate)• Avoiding or minimizing differential tax rates

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• Abolition of other small taxes• Abolition of CST in a phased manner• Power to levy service tax on select/agreed services to States• Issue of inter-State services and goods movement vis-a-vis levy of duty or tax to

be sorted out• Revenue sharing mechanism to be rationalized• Centre should be enabled to tax value added upto retail stage.Taxes/Duties Likely to be subsumed in GST

Central Taxes/Levies State Taxes/LeviesCentral excise duty under Central Excise Act, 1944

Sales Tax/Value Added Tax (VAT)

Additional excise duties – Under Additional Duties of Excise (Goods of Special Importance Act, 1957

Entertainment tax

Excise Duty under Medicinal & Toiletries Preparation Act, 1955

State excise duty

Service Tax under Finance Act, 1994 Luxury taxAdditional customs duty (countervailing duty - CVD)

Taxes on lottery, betting & gambling

Special Additional Duty of Customs (SAD)

Entry tax (not in lieu of Octroi)

Surcharges (e.g. national calamity contingent duty)

Purchase tax

Cesses (e.g., education cess, Cess on rubber, Cess on tea etc)

State Cesses

Central Sales tax (to be phased out) State Surcharges

Taxes/Duties not likely to be subsumed in GST

Central Taxes/Levies State Taxes/LeviesBasic Customs Duty Taxes on Liquors

Excise Duty on Tobacco products Toll Tax/ Road Tax

Export Duty Environment Tax

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Specific Cess Property Tax

Specific Central Cess like Education and Oil Cess.

Tax on Consumption or Sale of Electricity - Not certainStamp Duty - Not certain

Advantages of Comprehensive GST

1. It will boost up economic unification of India and will assist in better conformity and revenue resilience.

2. In GST system, both Central and state taxes will be collected at the point of sale. Both components (the Central and state GST) will be charged on the manufacturing cost.

3. It will reduce the tax burden for consumers.4. It will result in a simple, transparent and easy tax structure; merging all

levies on goods and services into one GST.5. Cascading effect of multiple taxation would be avoided. 6. It will bring uniformity in tax rates with only one or two tax rates across

the supply chain;7. It will result in a good administration of tax structure.8. It may broaden the tax base.9. It will increase tax collections due to wide coverage of goods and services

and both-state and central government would gain. 10. It will result in cost competitiveness of goods and services in Global

market.It will reduce transaction costs for taxpayers through simplified tax compliance

Possible Distortions /Complexities which may arise on Implementation of GST

1. Not using the correct accounting method.

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2. Incorrectly claiming GST credits on government charges - such as land tax, council rates, water rates.

3. Incorrectly claiming a GST credit on the 'total cost' of a business insurance policy.

4. There's a stamp duty component in the premium which is not subject to GST, a GST credit cannot be claimed on this portion of the payment.

5. Not remitting GST on some government grants and incentives which are received inclusive of GST

6. Lack of harmony between tax laws / accounting practices / accounting standards vis-à-vis tax standards.

7. Incorrectly claiming GST credits on wages and superannuation payments.8. Incorrectly claiming GST credits on GST-free purchases such as basic food

items, exports and some health services.9. Incorrectly claiming the full amount of GST credits on entertainment

expenses where the business has elected for fringe benefits tax purposes to use the 50/50 split method, in which case only 50% of the input tax credits can be claimed.

10. Sole traders and partnerships not apportioning input tax credits and making adjustments to expenditure that's partly private and partly business use.

11. Incorrectly claiming an upfront GST credit on assets financed through a commercial hire purchase (CHP).While an up-front GST credit is available for businesses accounting for GST using the accruals or invoice basis,

12. Incorrectly claiming GST credits on payments for Yellow Pages advertising. If the business chooses to pay for the cost of advertising by installments.

13. Claiming a GST credit when the business does not have a valid tax invoice.

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5. PROPOSED INDIRECT TAX STRUCTURE

Proposed Taxability Matrix

Steps involved in GST introductionFollowing steps are needed on political, administrative and technological fronts –

— Setting up a high level committee for monitoring the project of GST (Empowered committee is in place).

— Constitutional amendments (pending in Rajya Sabha; passed by Lok Sabha)— Drafting of GST law (process started)— Strong political commitment (looks a reality in present political set up).— Arriving at common/general consensus including political agreement (efforts are

on)— Preparing a blueprint/road map for GST (April 2016)— Creating a conducive environment for GST (slow efforts)

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— Centre-States co-ordination (efforts on, onus on Empowered Committee)— Consolidation of Central Excise, Service Tax and VAT on imports/exports— Identification of issues to be resolved (almost done)— Building up GST infrastructure and administrative machinery— Adequate reorientation of administration, training and public education

programme.— Establishment of information technology systems, software and enabling

environment (GSTN is under process)— Interaction with trade and industry and others stake holders concerned (being

held)Features of Proposed GST

Following are the highlights of proposed GST to be levied in India:

Dual structure: India is implementing ‘dual GST’. Central Government would be levying Central GST (CGST) and State Governments would be levying State GST (SGST). CGST and SGST would be applicable on all the transactions of goods and services made for a consideration except:• Exempted goods and services which are outside the purview of GST; and • Transactions which are below the prescribed threshold limits.

Task Force (13th Finance Commission) suggested that –(a) Central Board of Excise & Customs (CBEC) shall be responsible for

implementing the CGST and State Tax administration should be separately responsible for implementing the SGST.

(b) Tax administrative functions such as assessment, enforcement, scrutiny and audit should be undertaken by the CBEC in respect of CGST and by the State tax administration in respect of SGST.

Statutes: This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). However, an assurance is given in the paper that 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.

Date of introduction of GST: No date for introduction of the GST is proposed in the Paper. The deadline for its implementation was originally 2010 i.e. April 1, 2010 which had to be missed. The proposed implementation of GST is now April, 2016.

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Rate of GST: Rate for SGST and CGST is not specified in the paper but it is assured that the same would be known at appropriate time. The rates in GST regime would be:• Necessities: Lower rate • Goods of basic importance: Standard rate • Precious metal: Special rate • Exempted items: Nil rate / reduced rate • Others.

However, Prime Minister’s Economic Advisory Council has suggested that the centre could follow the pattern in which there is only one rate for goods and one rate for services or one rate which is common to both, goods and services and that it is advantageous to have a single rate. The 13th Finance Commission had also suggested a single rate of GST.

The total GST rate is likely to be in the range of 16-27 percent.

Tax credits: The discussion paper states that the credit of CGST would be available for payment of CGST and credit of SGST would be available for payment of SGST. It is also assured that, in due course, the rules for taking and utilization of credit for the Central GST and the State GST would be prescribed and would be on similar lines. Fortunately, cross-utilization of tax credit between the Central GST and the State GST would be allowed in the case of inter-State supply of goods and services under the IGST model. According to Task force report, full and immediate input credit should be allowed for tax paid (both CGST and SGST) on all purchases of capital goods (including GST on capital goods) in the year in which the capital goods are acquired. Similarly, any kind of transfer of the capital goods at a later stage should also attract GST liability like all other goods and services. It also suggests that cross utilization of credit should not be allowed.

Inter-state GST (IGST): Central Government would levy IGST (which would be CGST plus SGST) on all inter-State transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services. The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST.

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Basic Threshold: A dual threshold is proposed for CGST and SGST. For CGST, the basic exemption for goods would remain at Rs. 1.5 crores and for services a similar exemption would be provided later. For SGST, the basic exemption for goods and services would be ` 10 lakhs. The Task Force has suggested that exemption limit should be uniform for both, CGST and SGST and across the states.

Composition/Compounding Scheme: There would be a compounding cut-off at ` 50 lakh of gross annual turnover and a floor rate of 0.5% across the States. The scheme would also allow option for GST registration for dealers with turnover below the compounding cut-off.

Zero rating of Exports: Exports would be zero-rated. Similar benefits may be given to Special Economic Zones (SEZs). It is also specified that the refund of CGST/SGST should be granted in a time-bound manner. A similar recommendation has been made by Task Force. It also suggest framing up of place of supply rules.

GST on Imports: Both CGST and SGST will be levied on import of goods and services into the country. Full and complete set-off will be available on the GST paid on import on goods and services.

Special Industrial Area Scheme: After the introduction of GST, the tax exemptions, remissions etc. related to industrial incentives would be converted, if at all needed, into cash refund schemes. Regarding Special Industrial Area Schemes, it is clarified that such exemptions, remissions etc. would continue up to the legitimate expiry time both for the Centre and the States.

Products outside GST regime: Items containing Alcohol and petroleum products will be outside the GST regime. However in respect of “Purchase Tax” no decision is made whether it should be part of GST regime or outside it.

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Compliances and Procedures: The assessees would be allotted PAN-based registration numbers and would be required to file periodic returns for SGST and CGST. Also, appropriate accounting codes will be prescribed for Central GST and State GST separately. Task Force suggests that all compliance and enforcement procedures under CGST and SGST must be uniform.

Tax Administration: Tax administration of CGST and SGST would be parallel, meaning SGST will be administered by State Government and CGST by Central Government. In view of the introduction of GST, IT Infrastructure will be improved. Further, requisite Constitutional amendments will also be carried out. It is mentioned that specific provisions would also be made to the issues of dispute resolution and advance ruling. It is apparent that the paper gives clarity on many fronts though clarity still eludes on the taxable event in GST, rate, carry forward of CENVAT credit, etc.Task Force suggests that the tax base should comprehensively extend over all goods and services upto the final consumer point. There should be no classification between goods and services in law so as to ensure that there is no classification dispute. The GST should be structured on the destination principle. As a result, the tax base will shift from production to consumption whereby imports will be liable to both CGST and SGST and exports should be relieved of the burden of goods and service tax by zero rating. Consequently, revenues will accrue to the State in which the consumption takes place or is deemed to take place. The computation of the CGST and SGST liability should be based on the invoice credit method i.e., allow credit for tax paid on all intermediate goods or services on the basis of invoices issued by the supplier. As a result, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax will effectively ‘stick’ on final consumption within the taxing jurisdiction. This will facilitate elimination of the cascading effect at various stages of production and distribution.

Salient Features of Proposed Tax Administration of GST

PAN based Registration of Taxpayers

The model legislation for the introduction of goods and services tax (GST) will have a provision for registration of individuals and companies which pay the tax. The registration will be done through a uniform PAN-linked business identification number.

Registration brings a person within the control of the tax authorities. As per Task Force, all persons who are liable to income tax or whose sales exceed Rs. 5,00,000 are required to obtain a PAN. All persons with annual aggregate

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turnover of goods and services exceeding Rs. 10 lakh (excluding CGST and SGST) should be required to register and obtain a GST registration number. Person with lower turnover may be allowed an option to register. Also, there will be single GST registration numbers for all branches in a state. Therefore, a dealer having branches across states will have as many GST registration numbers as the number of states in which he operates. Since the number is PAN based, it is not necessary to have any pre-registration verification. It should be mandatory for all registrant dealers to obtain an e-mail ID and also open an internet banking account with any bank. The form must capture the e-mail ID and the internet bank account number.

The new business identification number was likely to be the 10-digit alphanumeric PAN, in addition to two digits for state code and one or two check numbers for disallowing fake numbers. The total number of digits in the new number was likely to be 13-14.

However, the states may, if necessary, undertake post-registration verification to eliminate any potential abuse. In future, the string corresponding to PAN will be replaced by the Unique Identification Number (UIN) proposed to be issued to all residents.

GST Invoice

According to Task Force, VAT Invoices are crucial control document of VAT since it forms the primary source of information. Recommendations relating to VAT invoices are as under:

i) The law should require a supplier making a taxable supply to another taxable person to provide a VAT invoice with that supply or the payment for it. The requirement should be enforceable by some penalty.

ii) The VAT invoice should be standardized across all states so as to contain a minimum of information.

Payment on monthly basis

The Task Force has recommended that the VAT period should be a calendar month. Since the collection under VAT will serve as the dominant source of revenue for state governments it is imperative to provide for a collection mechanism which would ensure a periodic flow of revenue to the exchequer subject to a minimum compliance burden on taxpayers and risk of revenue loss.

Strong, Broad and common IT infrastructure

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The Central Government shall establish a common IT infrastructure which will serve the needs of both CGST and SGST. A Taxpayers Information Network (TIN) will be established by the centre keeping in view the information requirement of CBEC and the state tax administration. The TIN will be shared between the centre and the state.

The payment of tax and transaction reporting should be made through a combined payment and transaction reporting statement in form no. GST-1. This statement should detail all business to business transactions relating to sale. This statement should be common for both CGST and SGST compliance and it should be mandatory to file this statement electronically on a monthly basis while making payment of taxes.

Common Appellate Authority

There should be a common appellate authority since the tax base will be common. Similarly, the authority for advance ruling will also be common. No authority should have any power to make preventive detention for the purposes of CGST and SGST. Procedures for collection of both the CGST and SGST should be uniform.

Organizational Structure proposed under GST

The organizational structure under the GST regime should be on functional basis rather than on territorial jurisdiction basis. The present organizational structure is based on territorial jurisdiction and one office i.e. Range handles all the different functions pertaining to units falling under their jurisdiction. Thus, one office handles the various functions of registration, audit, refund, adjudication, legal, recovery, taxpayer services etc.

Under GST, it is proposed that different divisions of an office should handle different functions of registration, audit, refund, adjudication, legal, recovery, taxpayer services etc. This has been done to encourage specialization as well as better organizational structure. The new structure would be having:

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Organizational Structure for GST

Audit Commissionerate

Anti-Evasion Commissionerate

GST Commissionerate


Audit Commissionerate

Present scenario: At present, the Audit work in Central Excise Commissionerate is done by the Audit teams which work under the direct supervision of an AC level officer who reports to the Commissioner. This is the case where units are located at one place. In the case of Multi Locational units (MLU) belonging to same assessee is co-ordinate by the office of ADG (Audit).

Proposal for GST

It is proposed that separate and exclusive Commissionerate should be set up for audit work.

For the taxpayers having Multi-locational units (MLU) in a state, for high revenue-paying units and for some of the complex business sectors, it is recommended that the Audit must be conducted by Audit Commissionerate.

For other assessee, it is proposed that the jurisdictional GST Commissionerate should do the Audit work.

It is proposed that in Audit Commissionerate there should be specialized Cells for specific industry or sector.

It has also been suggested that these specialized groups may provide policy inputs to the Board also.

It was proposed that the entire staff of Audit Commissionerate is not required to be centralized at the headquarters.

Anti-Evasion Commissionerate

Anti-evasion work is done by three types of teams –

(i) Anti-evasion wing of the Commissionerate Headquarters; (ii) Preventive units of the Divisions; and (iii) Directorate General of Central Excise Intelligence (DGCEI).

Out of the three, the DGCEI is carrying out the work of intelligence and investigation at national level. It is top-ranked of three as regards quality of cases booked, value of goods and amount of duty involved in offence cases.

Proposal for GST

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It is proposed that the anti-evasion work should be handled by a more specialized and exclusive Anti-evasion Commissionerate.

In case of certain states where there are smaller numbers of taxpayers like in North-eastern states, Uttarakhand etc., one anti-evasion Commissionerate may have jurisdiction over more than one State.

In the States like Maharashtra and Gujarat where one state may require more than one Anti-evasion Commissionerate more than one anti-evasion Commissionerate is required.

It was also proposed that the entire staff of Anti-evasion Commissionerate is not required to be centralized at the headquarters.

GST Commissionerate

There are three types of GST Commissionerate to be set up. This has been done keeping in mind the fact that taxpayers within a state and amongst the states are not uniformly located. Also, some assessee has more than one premise in a state. It has also been considered that now CBEC will be administering manufacturers, types of dealers, service providers and inter-State dealers.

Thus, it has been provided that a uniform organizational structure for the entire country would not work and different types of organizational structure is required depending upon dispersal/diversity of assessee in an area.

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6. PROPOSED MODELS OF GST FOR INDIA

There are three prime models of GST:1. GST at Central (Union) Government level only2. GST at State Government level only3. GST at both, Union and State Government levels

Central GST

Under this option, the two levels of government would combine their levies in the form of a single National GST, with appropriate revenue sharing arrangements among them. The tax could be controlled and administered by the Central Government. There are several models for such a tax. Australia is the most recent example of a National GST, which is levied and collected by the Centre, but the proceeds are allocated entirely to the States.

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PROPOSED GST MODEL

Central GST

(GST to be levied by the

Centre)

Dual GST(GST to be levied by the Centre and the States

Concurrently)

State GST(GST to be levied by

theStates)


In the case of a Central GST (where all goods and services are taxed by the Central government only), the Centre will collect most of the country’s total tax revenue, leaving very little for the sub-national Governments. As against this, the present proposal is to have a dual GST.

A single national VAT has great appeal from the perspective of establishment and promotion of a common market in India. However, the States may worry about the loss of control over the tax design and rates. Indeed, some control over tax rates is acritical issue in achieving accountable sub-national governance and hard budget constraints. The States may also be apprehensive that the revenue sharing arrangements would over time become subject to social and political considerations,deviating from the benchmark distribution based on the place of final consumption. The Bagchi Report also did not favour this option for the fear that it would lead to too much centralization of taxation powers.

The key concerns about this option would thus be political. Notwithstanding the economic merits of a National GST, it might have a damaging impact on the vitalityof Indian federalism.

State GST

The second model is to have a State GST in which the States alone levy GST and theCentre withdraws from the field of GST or VAT completely. It can be a desirable option given the mismatch in resources and responsibilities of the States. In this case, the State GST will work as the redistributing mechanism. The loss to the Centre from vacating this tax field could be offset by a suitable compensating reduction in fiscal transfers to the States. This would significantly enhance the revenue capacity of the States and reduce their dependence on the Centre. The USA is the most notable example of such arrangements, where the general sales taxes are relegated to the States. However, there would be significant hurdles in adopting this option inIndia, and it may not be suitable here.

Third, a complete withdrawal of the Centre from the taxation of inter-State suppliesof goods and services could undermine the States’ ability to levy their own taxes onsuch supplies in a harmonized manner. In particular, it would be impractical to bring inter-State services within the ambit of the State GST without a significantcoordinating support from the Centre.

Dual GST

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In a federal country like India where the power to tax domestic trade is divided between the Central Government and the State Government, the designing of a destination based GST becomes extremely complicated. A conventional national GST cannot be implemented without the States losing their fiscal autonomy. Dual GST signifies that GST would be levied by both, the Central Government and the State, on supply of goods or services. Under the Constitution, presently the taxing powers are presently split between the State and the Centre. In case of certain transactions, the power to tax is vested with the Centre and while in certain others, the power is vested with the State. Under GST, the power to tax on supply of all goods and services would be vested in the hands of both, the State and the Centre. However, in certain cases, such as the interstate transactions, the power to tax would be vested with the Central Government, while the revenue would in some appropriate manner, get distributed to the States. Considering the dual taxation power to tax transactions under GST, the structure is referred to as Dual GST. Considering the basic framework of the constitution and keeping its structure intact, Dual GST appears to be implementable solution for India scenario.In view of the above, recommend the following:-

1. The GST will be a dual levy imposed concurrently by the Centre and the States, but independently. It will have two components: one levied by the Centre (hereinafter referred to as CGST), and the other levied by the States and Union Territories (UTs) [hereinafter referred to as SGST]

2. Both the CGST and SGST will operate over a common base. That is, the base will be identical.

Dual GST can be divided into:

Concurrent Dual GST Non - Concurrent Dual GST

Non-Concurrent Dual GST

Under the concurrent dual GSTs, the Centre and State taxes apply concurrently to supplies of all goods and services. However, it poses two challenges. First, it requires a constitutional amendment. Second, a framework is needed for defining the place of supply of inter-State services and for the application of State GST to them.

Therefore, as suggested in the Poddar-Ahmed Working Paper, to circumvent both of these hurdles, GST on goods can be levied by the States only and on services by theCentre only. The States already have the power to levy the tax on the sale and purchase of goods (and also on immovable property), and the Centre for taxation of

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services. No special effort would be needed for levying a unified Centre tax on inter- State services.

Under this model, while levying the VAT on services, the Centre would essentially play the coordinating role needed for the application and monitoring of tax on inter-State services. The Centre would withdraw from the taxation of goods. Even the revenues collected from the taxation of services could be transferred back to the States, partially or fully.

Within this framework, cascading could be completely eliminated by the States agreeing to allow an input credit for the tax on services levied by the Centre. Likewise, the Centre would allow an input credit for the tax on goods levied by the States.

However, the said model may not be acceptable to the Centre as well as the States. Moreover, constitutional amendment would still be required in this model since theStates are not presently empowered to levy sales tax on goods where movement of such goods take place in the course of inter-State trade or commerce. Therefore, theGovernment has already announced its intention to follow the Concurrent Dual GST of such goods take place in the course of inter-State trade or commerce. Therefore, the Government has already announced its intention to follow the Concurrent Dual GST

Concurrent Dual GST

Here the GST will be levied by both tiers of Governments concurrently. There will be Central GST to be administered by the Central Government and there will be State GST to be administered by State Governments. Thus, the GST would comprise a Central GST and State GST: a Central-level GST will subsume central taxes, such as, excise duty, CVD, SAD and service tax; and a State-level GST will subsume VAT, octroi, entry taxes, luxury tax, etc. Therefore, under this model, both goods and services would be subject to concurrent taxation by the Centre and the States. This variant is closer to the model recommended by the Kelkar Committee in 2002.

Example: Under existing system Centre can levy tax on goods as well as on services, such as Excise duty on manufacture of goods and Service tax on Services but State has no power to levy Tax on manufactured goods such as VAT but in concurrent dual GST model both Centre and State will have power to levy taxes on both Goods and Services.

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Inter-state GST (IGST)

Central Government would levy IGST (which would be CGST plus SGST) on all inter-State transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services. The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST.

7. GST: LEGAL FRAME WORK

The Constitution (115th Amendment) Bill, 2011 (GST)The Government on 22 March, 2011 introduced the Constitution (115th Amendment) Bill, 2011 in the Parliament which will facilitate implementation of the Goods and Service Tax (GST). This Constitutional Bill provided for the following: Amendment in the Constitution conferring simultaneous power on Parliament as

well as the State Legislatures (including every Union territory) to make laws for levying GST on every transaction of supply of goods or services or both except those that are exempt or kept out of the purview of the goods and services tax

States to levy tax on intra-State sale of goods kept outside the purview of the GST (namely, Petroleum crude, High Speed Diesel, Natural Gas, Motor Spirit (Petrol), Aviation Turbine Fuel and Alcoholic Liquor for human consumption)

Subsuming of various Central levies (like Excise Duty, AEDs, Excise Duty on Medicinal and Toilet Preparations, Service Tax, CVD, SAD, certain Surcharges and Cesses)

Subsuming of various State levies (like VAT/Sales Tax, entertainment tax (unless levied by local bodies), Luxury Tax, Taxes on lottery/gambling, tax on advertisements, State Cesses/Surcharges

Integrated GST (IGST) would be applicable on inter-State transactions of goods and services

Creation of a Goods and Services Tax Council

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Enabling the setting up of a Goods and Services Tax Dispute Settlement Authority

Enabling the levy of goods and services tax on sale or purchase of newspapers and advertisements published therein ]

Permitting only Municipalities and Panchayats to levy and collect tax on entry of goods in a local area for consumption, use or sale therein

Empowering District Councils and Regional Councils also to levy tax on entertainment and amusement;

The Constitution (115th Amendment) Bill, 2011 (Bill No. 22 of 2011) sought to amend the Constitution of India as follows –New insertion of Articles

Article 246A Special provision with respect to goods and service tax Article 269A Levy and collection of goods and service tax in course of inter state

trade or commerce Article 279A Goods and Service Tax Council Article 279B Goods and Services Tax Dispute Settlement Authority

Summary of Standing Committee Report on The Constitution (115th Amendment Bill), 2011 (GST) The Parliamentary Standing Committee on Finance (Chairperson: Mr. Yashwant Sinha) submitted its 73rd Report on the Constitution 115th Amendment Bill (Goods and Services Tax), 2011 on August 7, 2013.The Committee made the following observations: Design of the GST: The implementation of GST would allow the centre and states

to avoid multiple layers of taxation. This will require a broad consensus among all the states with respect to the design and implementation of the GST, and the centre should play a pro-active role in this regard. The implementation of the

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GST should be preceded by adequate groundwork on the experience of other countries and a credible study on the impact of the GST regime on state revenues.

Compensation mechanism: No structured mechanism has been formulated to attend to the concerns of states regarding loss of revenue upon adoption of GST. It recommended incorporation of a well-defined and permanent compensation mechanism to ensure that states do not suffer revenue losses. For this purpose, creation of a GST Compensation Fund under the administrative control of the GST Council is recommended.

Integrated Goods and Services Tax (IGST): Under the Bill, the existing Central Sales Tax (CST) will be replaced by the Integrated GST. The centre will have exclusive authority to levy taxes on inter-state trade and imports. It will act as a clearing house and transfer the tax thus collected to the state government of the buyer (destination state). With regards to the proceeds of IGST, the Modified Bank Model, and the revenue concerns regarding the “destination” principle, it observed/recommended as follows :

While, in principle, IGST transactions would be revenue neutral, in practice, it is possible to have a positive balance at the end of the fiscal year. Suitable provisions should be made in the Bill for distribution of the remaining proceeds of IGST once the accounts are settled.

The Modified Bank Model as proposed by the Task Force on GST set up by the 13th Finance Commission could be considered instead of the IGST Model. Under the Modified Bank Model the centre and states jointly identify a nodal bank to receive the collection of the state and centre GST and work as a clearing house.

Since the destination-based IGST model favours consumer states more than producer states, centre should ensure that the model does not act as a disincentive for manufacturing states.

Flexibility for states:

Following observations were made for retaining state autonomy: Declared Goods: In order to ensure that no unilateral decision is taken by

the centre with respect to goods exempted from the GST, the Bill should be amended so that Parliament can specify restrictions and conditions of taxes “on the recommendation of the GST Council”.

Flexibility in raising taxes: A new sub-clause should be added to give Parliament and state legislatures more flexibility in raising taxes in exceptional circumstances, and the centre to levy surcharges and cess when required.

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Special category states: Exceptions with regards to Jammu and Kashmir, North-eastern States and other special category states, etc should be included in the Bill.

Floor rate: States should be allowed to increase their GST rate within a narrow band with a predetermined floor rate. The threshold limit on turnover for small-traders, etc should also be left to the GST Council.

GST Dispute Settlement Authority: The creation of a GST Dispute Settlement Authority should be omitted from the Bill as this proposed body would override the supremacy of Parliament and the state legislatures. The GST Council should be the body to address disputes

Harmonized tax structure: The Bill states that the GST Council will be guided by the need for a harmonized structure of GST and for the development of a harmonized national market. The word ‘harmonized structure’ should be clarified, and it should be emphasized that it is a guiding principle and not obligatory in nature.

Consensus: The Bill provides that decisions of the proposed GST Council will be made by consensus of all members, but does not define ‘consensus’. The Committee interpreted this as a ‘unanimous decision’ and felt that a consensus is unlikely due to different socio-economic interests of states. It recommended the amendment so as to provide for voting.

Entry tax: The Bill proposes to amend the State List to allow for the collection of octroi, entertainment tax, etc by a Panchayat or a Municipality. The Committee was of the view that the entry tax be subsumed in the GST. States should collect the entry tax and distribute it to the local bodies.

IT infrastructure: A well-designed IT infrastructure across the country is a pre-requisite for realizing the benefits of GST. The Central Government should provide technical assistance and capacity building at the state level.

Monitoring: A GST Monitoring/Evaluation Cell should be created to function under the aegis of the proposed GST Council and to evaluate, on a continuous basis, the immediate impact of the GST on key aspects like GDP, inflation, retail prices paid by final customer, etc.

Delegated legislation: Specific aspects related to rates, exemptions, exclusions, thresholds, etc should not ideally be included in a Constitution (Amendment) Bill. It may be included in the by-laws and rules.

Salient Features of Constitution (One Hundred And Twenty-Second Amendment) Bill, 2014

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The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 was introduced in the Lok Sabha on December 19, 2014. The following is the gist of amendments proposed by this Bill:

1. The Bill seeks to amend the Constitution to introduce the goods and services tax (GST). Consequently, the GST subsumes various central indirect taxes including the Central Excise Duty, Additional Excise Duties, Service Tax, Additional Customs Duty (CVD) and Special Additional Duty of Customs (SAD), etc. It also subsumes state Value Added Tax (VAT)/Sales Tax, Central Sales Tax, Entertainment Tax, Octroi and Entry Tax, Purchase Tax and Luxury Tax, etc.

2. Concurrent powers for GST: The Bill inserts a new Article 246A in the Constitution to give the central and state governments the concurrent power to make laws on the taxation of goods and services.

3. Integrated GST (IGST): However, only the centre may levy and collect GST on supplies in the course of inter-state trade or commerce. The tax collected would be divided between the centre and the states in a manner to be provided by Parliament, by law, on the recommendations of the GST Council.

4. GST Council: The President must constitute a Goods and Services Tax Council within sixty days of this Act coming into force. The GST Council aim to develop a harmonized national market of goods and services.

5. GST council examines issues relating to goods, services tax and make recommendations to the Union, and the States on parameters like rates, exemption list and threshold limits. The Council shall function under the Chairmanship of the Union Finance Minister and will have the Union Minister of State in charge of Revenue or Finance as member, along with the Minister in-charge of Finance or Taxation or any other Minister nominated by each State Government.

6. Composition of the GST Council: The GST Council is to consist of the following three members: (a) the Union Finance Minister (as Chairman), (b) the Union Minister of State in charge of Revenue or Finance, and (c) the Minister in charge of Finance or Taxation or any other, nominated by each

state government.

7. Functions of the GST Council: These include making recommendations on:

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taxes, cess and surcharges levied by the centre, states and local bodies which may be subsumed in the GST;

goods and services which may be subjected to or exempted from GST; model GST laws, principles of levy, apportionment of IGST and principles that

govern the place of supply; the threshold limit of turnover below which goods and services may be

exempted from GST; rates including floor rates with bands of GST; special rates to raise additional resources during any natural calamity; special provision with respect to Arunachal Pradesh, Jammu and Kashmir,

Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and

Any other matters relating to the goods and services tax, as the Council may decide.

8. The Goods and Service Tax Council shall recommend the date on which the goods and service tax be levied on petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel.

9. Resolution of disputes: The GST Council may decide upon the modalities for the resolution of disputes arising out of its recommendations.

10.Restrictions on imposition of tax: The Constitution imposes certain restrictions on states on the imposition of tax on the sale or purchase of goods. The Bill amends this provision to restrict the imposition of tax on the supply of goods and services and not on its sale.

11.Additional Tax on supply of goods: An additional tax (not to exceed 1%) on the supply of goods in the course of inter-state trade or commerce would be levied and collected by the centre. Such additional tax shall be assigned to the states for two years, or as recommended by the GST Council.

12.The net proceeds of additional tax on supply of goods in any financial year, except the proceeds attributable to the Union territories, shall not form part of the Consolidated Fund of India and be deemed to have been assigned to the States from where the supply originates.

13.Compensation to states: Parliament may by law provide for compensation to states for revenue losses arising out of the implementation of the GST, on the GST Council’s recommendations. This would be up to a five-year period.

14.The Government of India may where it considers necessary in the public interest, exempt such goods from the levy of tax.

15.Both Centre and States will simultaneously levy GST across the value chain. Centre would levy and collect Central Goods and Services Tax (CGST), and

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States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State.

16.The Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supply of goods and services. There will be seamless flow of input tax credit from one State to another. Proceeds of IGST will be apportioned among the States.

17.GST will be a destination-based tax. All SGST on the final product will ordinarily accrue to the consuming State.

It may be noted that 122nd Amendment Bill has since been passed by the Lok Sabha in May 2015 but has been referred to the Select Committee by Rajya Sabha.

8. GST: THE JOURNEY SO FAR

Chronology of major events in progress of Goods & Service Tax in India

Year Milestone1974 LK Jha Committee suggests VAT

1986MODVAT introduced in India from 1st of March on select commodities

1991 Chelliah Committee recommends VAT1999 FM announces decision to introduce VAT in India.

Formation of Empowered Committee on VAT

2002Task Force on Indirect Taxes report headed by Kelkar

CENVAT introduced on all commodities at central level2003 VAT introduced in first Indian State of Haryana2005 VAT in 24 States/UTs including Punjab, Chandigarh, HP, J&K

and Delhi.2006 VAT implemented in 5 more States including Rajasthan.

2007

FM announces GST introduction in India from April 01, 2010. VAT implemented in Tamil Nadu & Puducherry.

Central Sales Tax (CST) phase out starts, CST cut to 3%. Joint Working Group set up for proposing GST roadmap and structure.

2008 VAT introduced in the last Indian State of UP from January 33


01, 2008. CST reduced to 2%

2009

Empowered Committee release First Discussion Paper on GST in November.

Report of Task Force on GST of 13th Finance Commission in December

Report of 13th Finance Commission (TFC) (Chapter 5 on GST) in December

2010 Proposed date to introduce GST in India postponed to April 01, 2011.

2011 Government introduces Constitution Amendment Bill on GST in Lok Sabha

2013Parliament Standing Committee submit reports

Standing Committee recommendations incorporated in Bill

2014March : Revised Bill incorporating recommendations of Standing Committee sent to EC for examination

December : GST Bill moved in Lok Sabha06.05.20

15 Lok Sabha passes GST Bill12.05.20

15Bill on GST not passed by Rajya Sabha ; referred to Select Committee

22.05.2015 Rajya Sabha Panel on GST holds its 1st Meeting

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9. WAY FORWARD

Union Budget 2015-16On a optimistic note, it has been stated in Union Budget 2015-16 that introduction of common Goods and Services Tax (GST) could be a game changer. GST will put in place a state of the art indirect tax system by 1st April 2016. The economic situation is therefore upbeat, on a rise and forward looking so far as growth and reforms are concerned.

The Government has already introduced the Bill to amend Constitution of India for Goods and Services Tax (GST) in last session of Parliament. GST is expected to play a transformative role in the way our economy functions GST will add buoyancy to economy by developing a common Indian market and reducing the cascading effect on the cost of goods and services. The Budget speech reaffirms the commitment to have GST in place from next year.

The Budget speech states –

"I have already introduced the Bill to amend the Constitution of India for Goods and Services Tax (GST) in the last Session of this august House. GST is expected to play a transformative role in the way our economy functions. It will add buoyancy to our economy by developing a common Indian market and

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reducing the cascading effect on the cost of goods and services. We are moving in various fronts to implement GST from the next year.

Introduction of GST is eagerly awaited by Trade and Industry. To facilitate a smooth transition to levy of tax on services by both the Centre and the States, it is proposed to increase the present rate of service tax plus education cesses from 12.36% to a consolidated rate of 14%.

The debate whether to introduce a Goods and Services Tax (GST) must now come to an end. We have discussed the issue for the past many years. Some States have been apprehensive about surrendering their taxation jurisdiction; others want to be adequately compensated. I have discussed the matter with the States both individually and collectively. I do hope we are able to find a solution in the course of this year and approve the legislative scheme which enables the introduction of GST. This will streamline the tax administration, avoid harassment of the business and result in higher revenue collection both for the Centre and the States. I assure all States that government will be more than fair in dealing with them."

As a part of the movement towards GST, education cess and secondary & higher education cess have been subsumed in excise duty and Service Tax in the present Budget. Further, the general rate of excise duty will be rounded off from 12.36% (including cesses) to 12.5%. In case of Service Tax, it will go up from 12.36% (including cesses) to 14%.

The Union Budget focuses on Goods & Services Tax (GST) covering following aspects:

State of the art GST regime to be introduced GST likely to be introduced from 1st April, 2016 GST will enable leakage proof tax regime GST to play a transformative role However, no clear cut road map on GST as to how GST will be introduced

from 1st April 2016 and preparedness there for.

Going by the present mood, the Government of the day feels that it may be able to introduce GST in India w.e.f. 01.04.2016, replacing a host of indirect taxes presently levied by the Centre , State and Local Bodies . It hopes for the parliamentary nod (two-third majority) in the forthcoming budget sessions in 2015. This is necessary as the Indian Constitution requires amendment to allow states to tax services and the Centre to tax goods at the retail level and to provide legal framework for GST by providing for constitution of a GST council and dispute settlement mechanism.

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GST is expected to play a key role in bringing about more transparency into the tax system. Instead of fiscal concessions, concessions to select industries on grounds such as environmental protection etc. could be provided in a transparent manner through cash refunds or otherwise. While unified rate may be there, states may be allowed to charge rates most suitable to them such as on alcohol, petroleum products, etc. A very strong infrastructure network would be required to administer GST which would include facility for online payment of tax and e-filing of returns. The GST as a new levy could be a very effective tool and break-through in indirect tax reforms, provided it is made simple and assessee-friendly – not like the present tax system.

Not only GST is expected to change the complexion of indirect taxation in India, it will also bring down the prices of goods and services across the board. The consensus among the states (>30) and between the Centre and states hold the key. Once consensus is reached, GST may see the light of the day in a year’s time, even during any time of the year, it being a transaction based tax.

While there is no doubt that GST must see the light of the day, the sooner the better, it should also address the problems in present day taxation i.e., it should seek to achieve rationalization, boost transparency, offer flexibility to Union and states and broaden the much needed tax base. If GST comes into operation, it would achieve the status of integrated and most comprehensive set off tax structure in India leading to enhanced economic activities and tax buoyancy. GST would offer a complete set off and there will be no tax cascading effect as there will be no tax on tax, an ideal proposition for all. Even the Government won’t mind as tax revenues would go up substantially (VAT is a live case).

In the Empowered Committee meeting held on 22.04.2015 , it was resolved that consensus position , it argues well for the passage of Constitution Amendment Bill in the next session of Parliament.

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10.

SELECT FAQ’s ON GST*

Q1: What is the justification of GST?

Ans: There was a burden of "tax on tax" in the pre-existing Central excise duty of the Government of India and sales tax system of the State Governments. The introduction of Central VAT (CENVAT) has removed the cascading burden of "tax on tax" to a good extent by providing a mechanism of "set off" for tax paid on inputs and services upto the stage of production, and has been an improvement over the pre-existing Central excise duty. Similarly, the introduction of VAT in the States has removed the cascading effect by giving set-off for tax paid on inputs as well as tax paid on previous purchases and has again been an improvement over the previous sales tax regime.

But both the CENVAT and the State VAT have certain incompleteness. The incompleteness in CENVAT is that it has yet not been extended to include chain of value addition in the distributive trade below the stage of production. It has also not included several Central taxes, such as Additional Excise Duties, Additional Customs Duty, Surcharges etc. in the overall framework of CENVAT, and thus kept the benefits of comprehensive input tax and service tax set-off out of the reach of manufacturers/ dealers. The introduction of GST will not only include comprehensively more indirect Central taxes and integrate goods and services taxes for set-off relief, but also capture certain value addition in the distributive trade.

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Similarly, in the present State-level VAT scheme, CENVAT load on the goods has not yet been removed and the cascading effect of that part of tax burden has remained unrelieved. Moreover, there are several taxes in the States, such as, Luxury Tax, Entertainment Tax, etc. which have still not been subsumed in the VAT. Further, there has also not been any integration of VAT on goods with tax on services at the State level with removal of cascading effect of service tax. In addition, although the burden of Central Sales Tax (CST) on inter-State movement of goods has been lessened with reduction of CST rate from 4% to 2%, this burden has also not been fully phased out. With the introduction of GST at the State level, the additional burden of CENVAT and services tax would be comprehensively removed, and a continuous chain of set-off from the original producer's point and service provider's point upto the retailer's level would be established which would eliminate the burden of all cascading effects, including the burden of CENVAT and service tax. This is the essence of GST. Also, major Central and State taxes will get subsumed into GST which will reduce the multiplicity of taxes, and thus bring down the compliance cost. With GST, the burden of CST will also be phased out.

Thus, GST is not simply VAT plus service tax, but a major improvement over the previous system of VAT and disjointed services tax – a justified step forward. *Source: www.empcom.gov.in

Q 2: What is GST? How does it work?

Ans: As already mentioned in answer to Question 1, GST is a tax on goods and services with comprehensive and continuous chain of set-off benefits from the producer's point and service provider's point upto the retailer's level. It is essentially a tax only on value addition at each stage, and a supplier at each stage is permitted to set-off, through a tax credit mechanism, the GST paid on the purchase of goods and services as available for set-off on the GST to be paid on the supply of goods and services. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. The illustration shown below indicates, in terms of a hypothetical example with a manufacturer, one wholeseller and one retailer, how GST will work. Let us suppose that GST rate is 10%, with the manufacturer making value addition of Rs.30 on his purchases worth Rs.100 of input of goods and services used in the manufacturing process. The manufacturer will then pay net GST of Rs. 3 after setting-off Rs. 10 as GST paid on his inputs (i.e. Input Tax Credit) from gross GST of Rs. 13. The manufacturer sells the goods to the wholeseller. When the wholeseller sells the same goods after making value addition of (say), Rs. 20, he pays net GST of only Rs. 2, after setting-off of Input Tax Credit of Rs. 13 from the gross GST of Rs. 15 to the

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http://www.empcom.gov.in/


manufacturer. Similarly, when a retailer sells the same goods after a value addition of (say) Rs. 10, he pays net GST of only Re.1, after setting-off Rs.15 from his gross GST of Rs. 16 paid to wholeseller. Thus, the manufacturer, wholeseller and retailer have to pay only Rs. 6 (= Rs. 3+Rs. 2+Re. 1) as GST on the value addition along the entire value chain from the producer to the retailer, after setting-off GST paid at the earlier stages. The overall burden of GST on the goods is thus much less. This is shown in the table below. The same illustration will hold in the case of final service provider as well.

Stage of Supply Chain

Purchase Value Of Input

Value Additio

n

Value at Which Supply

Goods and Services Made to

Next Stage

Rate of

GST

GST on

Output

Input Tax Credi

t

Net GST=GST on output-Input Tax

Credit

Manufacturer 100 30 130 10% 13 10 13–10 = 3

Whole Seller 130 20 150 10% 15 13 15–13 = 2Retailer 150 10 160 10% 16 15 16–15 = 1

Q 3: How can the burden of tax, in general, fall under GST?

Ans: As already mentioned in Answer to Question 1, the present forms of CENVAT and State VAT have remained incomplete in removing fully the cascading burden of taxes already paid at earlier stages. Besides, there are several other taxes, which both the Central Government and the State Government levy on production, manufacture and distributive trade, where no set-off is available in the form of input tax credit. These taxes add to the cost of goods and services through "tax on tax" which the final consumer has to bear. Since, with the introduction of GST, all the cascading effects of CENVAT and service tax would be removed with a continuous chain of set-off from the producer's point to the retailer's point, other major Central and State taxes would be subsumed in GST and CST will also be phased out, the final net burden of tax on goods, under GST would, in general, fall. Since there would be a transparent and complete chain of set-offs, this will help widening the coverage of tax base and improve tax compliance. This may lead to higher generation of revenues which may in turn lead to the possibility of lowering of average tax burden.

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Q 4: How will GST benefit industry, trade and agriculture?

Ans: As mentioned in Answer to Question 3, the GST will give more relief to industry, trade and agriculture through a more comprehensive and wider coverage of input tax set-off and service tax set-off, subsuming of several Central and State taxes in the GST and phasing out of CST. The transparent and complete chain of set-offs which will result in widening of tax base and better tax compliance may also lead to lowering of tax burden on an average dealer in industry, trade and agriculture.

Q 5: How will GST benefit the common consumers?

Ans: As already mentioned in Answer to Question 3, with the introduction of GST, all the cascading effects of CENVAT and service tax will be more comprehensively removed with a continuous chain of set-off from the producer’s point to the retailer’s point than what was possible under the prevailing CENVAT and VAT regime. Certain major Central and State taxes will also be subsumed in GST and CST will be phased out. Other things remaining the same, the burden of tax on goods would, in general, fall under GST and that would benefit the consumers.

Q 6: How will GST benefit the small entrepreneurs and small traders?

Ans: The present threshold prescribed in different State VAT Acts below which VAT is not applicable varies from State to State. The existing threshold of goods under State VAT is Rs. 5 lakhs for a majority of bigger States and a lower threshold for North Eastern States and Special Category States. A uniform State GST threshold across States is desirable and, therefore, the Empowered Committee has recommended that a threshold of gross annual turnover of Rs. 10 lakh both for goods and services for all the States and Union Territories may be adopted with adequate compensation for the States (particularly, the States in North-Eastern Region and Special Category States) where lower threshold had prevailed in the VAT regime. Keeping in view the interest of small traders and small scale industries and to avoid dual control, the States considered that the threshold for Central GST for goods may be kept at Rs.1.5 Crore and the threshold for services should also be appropriately high. This raising of threshold will protect the interest of small traders. A Composition scheme for small traders and businesses has also been envisaged under GST as will be detailed in Answer to Question 14. Both these features of GST will adequately protect the interests of small traders and small scale industries. Q 7: Why is Dual GST required?

Ans: India is a federal country where both the Centre and the States have been

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assigned the powers to levy and collect taxes through appropriate legislation. Both the levels of Government have distinct responsibilities to perform according to the division of powers prescribed in the Constitution for which they need to raise resources. A dual GST will, therefore, be in keeping with the Constitutional requirement of fiscal federalism. Q 8: How would a particular transaction of goods and services be taxed

simultaneously under Central GST (CGST) and State GST (SGST)? Ans: The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits. Further, both would be levied on the same price or value unlike State VAT which is levied on the value of the goods inclusive of CENVAT. While the location of the supplier and the recipient within the country is immaterial for the purpose of CGST, SGST would be chargeable only when the supplier and the recipient are both located within the State. Illustration I: Suppose hypothetically that the rate of CGST is 10% and that of SGST is 10%. When a wholesale dealer of steel in Uttar Pradesh supplies steel bars and rods to a construction company which is also located within the same State for , say Rs. 100, the dealer would charge CGST of Rs. 10 and SGST of Rs. 10 in addition to the basic price of the goods. He would be required to deposit the CGST component into a Central Government account while the SGST portion into the account of the concerned State Government. Of course, he need not actually pay Rs. 20 (Rs. 10 + Rs. 10 ) in cash as he would be entitled to set-off this liability against the CGST or SGST paid on his purchases (say, inputs). But for paying CGST he would be allowed to use only the credit of CGST paid on his purchases while for SGST he can utilize the credit of SGST alone. In other words, CGST credit cannot, in general, be used for payment of SGST. Nor can SGST credit be used for payment of CGST.

Illustration II: Suppose, again hypothetically, that the rate of CGST is 10% and that of SGST is 10%. When an advertising company located in Mumbai supplies advertising services to a company manufacturing soap also located within the State of Maharashtra for, let us say Rs. 100, the ad company would charge CGST of Rs. 10 as well as SGST of Rs. 10 to the basic value of the service. He would be required to deposit the CGST component into a Central Government account while the SGST portion into the account of the concerned State Government. Of course, he need not again actually pay Rs. 20 (Rs. 10+Rs. 10) in cash as it would be entitled to set-off this liability against the CGST or SGST paid on his purchase (say, of inputs such as stationery, office equipment, services of an artist etc). But for paying CGST he

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would be allowed to use only the credit of CGST paid on its purchase while for SGST he can utilise the credit of SGST alone. In other words, CGST credit cannot, in general, be used for payment of SGST. Nor can SGST credit be used for payment of CGST. Q9: What is the rate structure proposed under GST?

Ans: The Empowered Committee has decided to adopt a two-rate structure –a lower rate for necessary items and items of basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items. For upholding of special needs of each State as well as a balanced approach to federal flexibility, it is being discussed whether the exempted list under VAT regime including Goods of Local Importance may be retained in the exempted list under State GST in the initial years. It is also being discussed whether the Government of India may adopt, to begin with, a similar approach towards exempted list under the CGST.

For CGST relating to goods, the States considered that the Government of India might also have a two-rate structure, with conformity in the levels of rate with the SGST. For taxation of services, there may be a single rate for both CGST and SGST.

The exact value of the SGST and CGST rates, including the rate for services, will be made known duly in course of appropriate legislative actions.

Q 10: What is the concept of providing threshold exemption for GST?

Ans: Threshold exemption is built into a tax regime to keep small traders out of tax net. This has three-fold objectives:

a. It is difficult to administer small traders and cost of administering of such traders is very high in comparison to the tax paid by them.

b. The compliance cost and compliance effort would be saved for such small traders.

c. Small traders get relative advantage over large enterprises on account of lower tax incidence.

The present thresholds prescribed in different State VAT Acts below which VAT is not applicable varies from State to State. A uniform State GST threshold across

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States is desirable and, therefore, as already mentioned in Answer to Question 6, it has been considered that a threshold of gross annual turnover of Rs. 10 lakh both for goods and services for all the States and Union Territories might be adopted with adequate compensation for the States (particularly, the States in North-Eastern Region and Special Category States) where lower threshold had prevailed in the VAT regime. Keeping in view the interest of small traders and small scale industries and to avoid dual control, the States also considered that the threshold for Central GST for goods may be kept Rs.1.5 Crore and the threshold for services should also be appropriately high. Q 11: What is the scope of composition and compounding scheme under GST?

Ans: As already mentioned in Answer to Question 6, a Composition/Compounding Scheme will be an important feature of GST to protect the interests of small traders and small scale industries. The Composition/Compounding scheme for the purpose of GST should have an upper ceiling on gross annual turnover and a floor tax rate with respect to gross annual turnover. In particular there will be a compounding cut-off at Rs. 50 lakhs of the gross annual turnover and the floor rate of 0.5% across the States. The scheme would allow option for GST registration for dealers with turnover below the compounding cut-off. Q 12: How will imports be taxed under GST?

Ans: With 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. Q 13: Will cross utilization of credits between goods and services be

allowed under GST regime?

Ans: Cross utilization of credit of CGST between goods and services would be allowed. Similarly, the facility of cross utilization of credit will be available in case of SGST. However, the cross utilization of CGST and SGST would generally not be allowed except in the case of inter-State supply of goods and services under the IGST model which is explained in answer to the next question.

Q 14: How will be Inter-State Transactions of Goods and Services be

taxed under GST in terms of IGST method?

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Ans: The Empowered Committee has accepted the recommendation for adoption of IGST model for taxation of inter-State transaction of Goods and Services. The scope of IGST Model is that Centre would levy IGST which would be CGST plus SGST on all inter-State transactions of taxable goods and services. The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. The relevant information is also submitted to the Central Agency which will act as a clearing house mechanism, verify the claims and inform the respective governments to transfer the funds.

The major advantages of IGST Model are:

a. Maintenance of uninterrupted ITC chain on inter-State transactions.b. No upfront payment of tax or substantial blockage of funds for the inter-State

seller or buyer.c. No refund claim in exporting State, as ITC is used up while paying the tax.d. Self monitoring model.e. Level of computerization is limited to inter-State dealers and Central and State

Governments should be able to computerize their processes expeditiously.f. As all inter-State dealers will be e-registered and correspondence with them will

be by e-mail, the compliance level will improve substantially.g. Model can take ‘Business to Business’ as well as ‘Business to Consumer’

transactions into account. Q 15: Why does introduction of GST require a Constitutional Amendment?

Ans: The Constitution provides for delineation of power to tax between the Centre and States. While the Centre is empowered to tax services and goods upto the production stage, the States have the power to tax sale of goods. The States do not have the powers to levy a tax on supply of services while the Centre does not have power to levy tax on the sale of goods. Thus, the Constitution does not vest express power either in the Central or State Government to levy a tax on the ‘supply of goods and services’. Moreover, the Constitution also does not empower the States to impose tax on imports. Therefore, it is essential to have Constitutional

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Amendments for empowering the Centre to levy tax on sale of goods and States for levy of service tax and tax on imports and other consequential issues.

As part of the exercise on Constitutional Amendment, there would be a special attention to the formulation of a mechanism for upholding the need for a harmonious structure for GST along with the concern for the powers of the Centre and the States in a federal structure. Q 16: How are the legislative steps being taken for CGST and SGST?

Ans: A Joint Working Group has been constituted (September 30, 2009) comprising of the officials of the Central and State Governments to prepare, in a time-bound manner draft legislation for Constitutional Amendment. Q 17: How will the rules for administration of CGST and SGST be framed?

Ans: The Joint Working Group, as mentioned above, has also been entrusted the task of preparing draft legislation for CGST, a suitable Model Legislation for SGST and rules and procedures for CGST and SGST. Simultaneous steps have also been initiated for drafting of legislation for IGST and rules and procedures. As a part of this exercise, the Working Group will also address to the issues of dispute resolution and advance ruling.

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