As is now well known, the Empowered Committee of State Finance Minister (EC) had, in November 2009, issued a First Discussion Paper (Paper) on the dual Goods and Service Tax (GST). This paper had set out the ECs views on the nature of the dual GST, its coverage, the manner of its applicability, its coverage and on several other design aspects of the GST as well, including on treatment of inter-state supplies of goods and services. In the last week of January this year, the Ministry of Finance (MoF) put out its comments on the GST, as envisaged in the paper. This article discusses the above views of the MoF.
At the outset, the dual structure whereby the Centre would levy the Central GST (CGST) and the States would levy the State GST (SGST) has been affirmed. Thus the country would see the GST being introduced both at the Centre and in the States at the same time and this dual GST would apply on all transactions of goods and services. Several other suggestions of the EC in regard to the availment and utilisation of input tax credits, procedures for collection and payment of the respective taxes and the extension of the GST to tobacco products have all been accepted by the MoF. However, the MoF has not agreed with several other key recommendations of the EC. These are discussed below.
Rate Structure of GST The MoF has advocated a single rate of CGST & SGST across goods and services, as against a dual-rate GST proposed by the EC. According to the MoF, a two rate structure for goods would pose problems such as likelihood of inversions in duty structure, input credit accumulation, increase in refund claims, higher general rate (RNR) of tax, demand for lower rate on services and continuation of the endemic distinction between goods and services. The MoF has further suggested that the SGST and CGST rates be put out in the public domain much before initiation of legislative action. These are very welcome suggestions indeed and, if accepted, would go a long way in keeping the GST structure simple.
Subsumation of the existing taxes Among the State taxes, the MoF is of the view that electricity duty, octroi, purchase tax and taxes levied by local bodies should all be subsumed under the SGST. These are proposed to be kept out of the GST, as per the Paper.
Exemptions Around 99 items which are presently exempted under VAT may continue to remain exempted in the GST regime. The MoF is of the view that there should be no scope with individual States for expansion of this list even for goods of local importance. Efforts will be made by the Centre to substantially reduce the number of items presently exempted under the CENVAT regime. A common list of exemptions for CGST and SGST should be drawn up.
Taxation of alcohol and petroleum products Alcoholic beverages should be brought under the purview of GST in order to remove the cascading effect on GST paid on inputs such as raw material and packaging material. Sales tax / VAT and State excise duty can be charged over and above GST.
The MoF is of the view that keeping crude petroleum and natural gas out of the GST net would imply that the credit on capital goods and input services going into exploration and extraction would not be available resulting in cascading. Diesel, ATF and motor spirit are derived from a common input, viz., crude petroleum along with other refined products such as naphtha, lubricating oil base stock, etc., Leaving diesel, ATF and motor spirit out of the purview of GST would make it extremely difficult for refineries to apportion the credit on capital goods, input services and inputs. These products are principal inputs for many services such as aviation, road transport, railways, cab operators etc., As such, these may be levied to GST and in select cases credit of GST paid on these items may be disallowed in order to minimize the possibility of misuse. These are again very welcome suggestions.
GST on imports MoF has suggested that levy of GST on imports may be handled by Centre through a Central legislation either as a customs duty (as is being done now) or along the lines of IGST. SGST collected by Centre may be passed on to concerned State following the destination principle. Taxation of import of services may be on the basis of reverse charge model, as is being done at present.
Threshold & composition schemes MoF is of the view that the threshold for goods and services should be common between the Centre & States on the one hand and between goods and services on the other. The annual turnover threshold could be Rs 10 lakh or more. The threshold exemption should not apply to dealers and service providers who undertake inter-State supplies. MoF believes that the problem of dual control is better addressed through a compounding scheme as well as administrative simplification for small dealers through several measures. The Centre may also have a composition scheme up to a gross turnover limit of Rs 50 lakh, if the threshold for registration is kept at Rs 10 lakh. The floor rate of 0.5 per cent will be for SGST alone, in case the Centre also brings a Composition Scheme for small assesses. The Centre may consider leaving the administration of the Compounding Scheme, both for the CGST and the SGST, to the States.
Compliance procedures MoF suggests that there should be a uniform registration system throughout the country which will enable easy linkage with the Income Tax database through use of PAN numbers. Returns pertaining to inter-State transactions will require filing to the related Central IGST authority only.
Way forward The comments of the MoF apparently formed the basis for the discussions in the meeting between the MoF and the EC which was held towards end January. However, the only announcement post the meeting was that the implementation of the GST would be postponed beyond April 1, 2010. It is understood that a meeting is being scheduled between the MoF and EC subsequent to the Budget scheduled for 26th February wherein various issues relating to GST will be discussed. It is hoped that soon thereafter a clear agreement on the GST between the Centre and the States will take place and an announcement be made to that effect.