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States will retain power to tax
November, 11th 2009

In what appears to be a victory for States, alcoholic beverages are to be kept out of the purview of the proposed Goods and Services Tax (GST) system.

But sales tax/VAT will continue to be levied on them as is the practice now. This is stated in the first discussion paper on GST released by the Empowered Committee of State Finance Ministers here today.

Also, excise duty imposed by various States on alcoholic beverages will stay. Tobacco products are, however, to be subject to GST with input tax credit. The Centre will also be allowed to levy excise duty on tobacco products over and above the GST, but without input tax credit.

On petroleum products, there is consensus that crude, motor spirit (including ATF) and diesel would be kept outside GST. Sales tax could continue to be levied by the States on these products with prevailing floor rate, says the discussion paper. A final view on whether natural gas should be kept outside the GST will be taken after further discussions.

Releasing the discussion paper, the Chairman of the Empowered Committee, Dr Asim Dasgupta, said that there was special concern for small dealers in terms of reduced threshold and a composition/compounding scheme for them.

Broadly, India plans to adopt a dual GST structure where the Centre will levy a central GST (CGST) and States will levy a State GST (SGST). The strength of GST lies in continuous set-off from the producers/service providers to retailers point, Dr Dasgupta pointed out, adding that this may reduce the overall tax burden on commodities and services and promote growth and employment.

Two-rate structure

For State GST, the Empowered Committee has agreed on a two-rate structure a lower rate for necessary items and goods 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.

States want the Centre to adopt a two-rate structure for goods in respect of CGST, with conformity in the levels of rate under the SGST. For taxation of services, the States are keen that there may be a single rate for both CGST and SGST.

Without committing on the possible rates for State GST, Dr Dasgupta said that the rates will be made known duly in the course of appropriate legislative actions.

On the issue of threshold for State GST, it has been agreed that a threshold of gross annual turnover of Rs 10 lakh both for goods and services for all the States and Union Territories be adopted. Currently, the threshold prescribed in different State VAT Acts below which VAT is not applicable varies from State to State.

States want the threshold for Central GST in respect of goods be kept at Rs 1.5 crore and that for services be placed appropriately high. Currently, there is a separate threshold of services (Rs 10 lakh) and goods (Rs 1.5 crore) in service tax and CENVAT.

While exports would be zero-rated, similar benefits may be given to special economic zones (SEZ). Only processing zones in SEZs will be eligible for the benefits. No benefit will be allowed for sales from a SEZ to domestic tariff area, says the discussion paper.

GST will be levied on imports with necessary constitutional amendments. Both CGST and SGST will be levied on import of goods and services into the country. While destination principle will prevail in deciding the incidence of tax, the tax revenue in case of SGST will accrue to the State where imported services and goods are consumed.

Also, full set-off will be available on the GST paid on import on goods and services.

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