As is now well known, the Task Force appointed by the Thirteenth Finance Commission, Government of India, has issued a report on December 15, 2009 detailing the recommendations on various issues relating to the design and implementation of the proposed GST in India.
These recommendations differ considerably from the model and structure of the GST envisaged by the Empowered Committee of State Finance Ministers (EC) as described in the First Discussion Paper released by the EC on November 10, 2009. The differences relate to several critical areas such as the tax base, tax rates, threshold limits, taxation of inter-state supplies of goods and services, exemptions/ compounding schemes and taxation of alcohol, tobacco and petroleum products in the GST regime, amongst others.
While a subsequent article will discuss these differences, this one and the one to follow will highlight the key recommendations of the Task Force. It is understood that these recommendations are yet to be deliberated and debated by the EC.
At the outset, given the inadequate preparation for GST implementation as of date, the Task Force has recommended that the implementation date of the dual GST be postponed by six months, to October 1, 2010.
GST structure It should be a dual levy imposed concurrently by the Centre and the States and should have two components; the Central GST (CGST) and the State GST (SGST). The tax base should extend to all goods and services in a comprehensive manner upto the final consumption point and the destination principle should be followed, resulting in shifting of the tax base from the State of production to the State of consumption.
GST rates The CGST and SGST on all goods and services should be fixed at a single positive rate of 5 per cent and 7 per cent respectively. Out of the 7 per cent SGST rate, a formula based devolution of an amount equivalent to 2 per cent SGST should be made to local governments and bodies in lieu of abolition of entry tax, octroi, cesses, etc.
Coverage The CGST & the SGST should be made applicable on all transactions of goods and services made for a consideration except for exempted goods and services, goods which are required to be outside the purview of the GST (negative list) and transactions which are below the prescribed threshold limits. The real estate and power sectors should also be integrated into the GST framework.
Classification The GST should ensure that there are no classification disputes between goods and services i.e. whether a particular transaction would be taxed under VAT or Service Tax or both and hence no distinction should be maintained between goods and services in terms of tax treatment and rates.
Subsumation of existing taxes The Central taxes to be subsumed under the CGST are the Central Excise Duty; the additional Excise Duties; Service Tax; Additional
Customs Duty commonly known as Countervailing Duty (CVD); surcharges and all cesses.
The state taxes to be subsumed under the SGST are VAT/ Sales tax (including Central Sales Tax CST and Purchase Tax); Entertainment tax (other than levied by the local bodies); luxury tax; taxes on lottery, betting and gambling; state cesses and surcharges in so far as they relate to supplies of goods and services and entry taxes not in lieu of octroi.
Other state levies such as stamp duties, taxes on vehicles, taxes on goods and passengers and taxes and duties on electricity should also be subsumed under the SGST.
Finally, all entry taxes and octroi levied by the local governments or bodies should be abolished.
The Central Sales Tax (CST) should be phased out upon the introduction of the GST.
Input tax credits The ITC for the CGST & SGST would operate in parallel and would be available for utilisation only against the output payment of CGST & SGST respectively. A taxpayer or exporter would have to maintain separate accounts for availment and utilisation of credits. Full and immediate ITC should be allowed for tax paid on all purchases of capital goods in the year of purchase and any subsequent transfers of capital goods should attract GST liability.
Cross utilisation of ITC between the CGST & the SGST should not be allowed.
Exemptions, Thresholds & Composition schemes
Exemptions The Centre and the States should draw up a common exemption list which should be restricted to:
* All public services of Government (Central, State and municipalities / panchayats) including civil administration, health services and formal education services provided by Government excluding railways, post and telegraph, PSEs, Banks and Insurance;
* Unprocessed food articles covered under public distribution system irrespective of the outlets through which they are sold;
* Education services provided by non-Governmental schools and colleges;
* Health services provided by non-governmental agencies;
* Any service between an employer and employee either as a service provider, recipient or vice versa.
No exemptions should be provided to developers of or units in the Special Economic Zones (SEZs).
Uniform thresholds There should be a uniform exemption threshold limit both for the CGST and the SGST. The threshold limit has been prescribed for both taxes at Rs. 10 lakhs.
Compounding schemes The option for availing Composition / Compounding scheme under GST would be available to dealers having aggregate turnover of goods and services between Rs. 10 lakhs to Rs. 40 lakhs at a rate of one percent each towards CGST and SGST.
The dealers in high value products like gold, silver, platinum, precious stones and bullion, would be allowed to opt for the compounding scheme at the aforementioned rate irrespective of the turnover.
The next article will discuss the other key recommendations of the task force.
The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers