First Discussion Paper
On
Goods and Services Tax
In India
The Empowered Committee
Of
State Finance Ministers
New Delhi
November 10 , 2009
First Discussion Paper
On
Goods and Services Tax
In India
The Empowered Committee
Of
State Finance Ministers
New Delhi
November 10 , 2009
Contents
Pages
Foreword i-iv
Introduction 1-11
Preparation for GST 11-13
Goods & Services Tax Model for India 13-27
Annexure on Frequently Asked 29-53
Questions and Answers on GST
Foreword
If the Value Added Tax (VAT) is considered to be
a major improvement over the pre-existing Central
excise duty at the national level and the sales tax system
at the State level, then the Goods and Services Tax
(GST) will be a further significant breakthrough - the
next logical step - towards a comprehensive indirect tax
reform in the country.
Keeping this overall objective in view, an
announcement was made by Shri P. Chidambaram, the
then Union Finance Minister in the Central Budget
(2007-2008) to the effect that GST would be introduced
from April 1, 2010 and that the Empowered Committee
of State Finance Ministers, on his request, would
work with the Central Government to prepare a road
map for introduction of GST in India. After this
announcement, the Empowered Committee of State
Finance Ministers decided to set up a Joint Working
Group (May 10, 2007), with the then Adviser to the
Union Finance Minister and the Member-Secretary of
Empowered Committee as Co-convenors and the
concerned Joint Secretaries of the Department of
Revenue of Union Finance Ministry and all Finance
Secretaries of the States as its members. This Joint
Working Group, after intensive internal discussions as
i
well as interaction with experts and representatives of
Chambers of Commerce and Industry, submitted its
report to the Empowered Committee (November 19,
2007).
This report was then discussed in detail in the
meeting of Empowered Committee (November 28, 2007).
On the basis of this discussion and written observations
of the States, certain modifications were made and a
final version of the views of Empowered Committee
at that stage was prepared and was sent to the
Government of India (April 30, 2008). The comments
of the Government of India were received on December
12, 2008 and were duly considered by the Empowered
Committee (December 16, 2008). It was decided that
a Committee of Principal Secretaries / Secretaries
of Finance / Taxation and Commissioners of Trade
Taxes of the States would be set up to consider these
comments, and submit their views. These views
were submitted and were accepted in principle by
the Empowered Committee (January 21, 2009).
Consequent upon this in-principle acceptance, a
Working Group, consisting of the concerned officials of
the State Governments was formed who, in close association
with senior representatives of the Government of India,
submitted their recommendations in detail on the
structure of GST. An important interaction has also
recently taken place between Shri Pranab Mukherjee,
the Union Finance Minister and the Empowered
ii
Committee (October 19, 2009) on the related issue of
compensation for loss of the States on account of
phasing out of CST. The Empowered Committee has
now taken a detailed view on the recommendations of
the Working Group of officials and other related matters.
This detailed view of the Empowered Committee on
the structure of GST is now presented in terms of the
First Discussion Paper, along with an Annexure on
Frequently Asked Questions and Answers on GST, for
discussions with industry, trade, agriculture and people
at large.
The Discussion Paper is divided into four sections.
Since GST would be further improvement over the VAT,
Section 1 begins with a brief reference to the process of
introduction of VAT at the Centre and the States and
also indicates the precise points where there is a need
for further improvement. This section also shows
how the GST can bring about this improvement.
With this as the background for justification of GST,
Section 2 then describes the process of preparation for
GST. Thereafter, Section 3 presents in detail the
comprehensive structure of the GST model. For
illustrating this GST model further, there is in the end
an Annexure on Frequently Asked Questions and
Answers.
This Discussion Paper has been the result of truly
collective efforts on the basis of hardwork of all the
iii
concerned officials of the States, the officials of
Empowered Committee Secretariat and the Adviser and
officials of the Union Finance Ministry, the counsel and
active participation of Finance Ministers and concerned
Senior Ministers of the States at each stage, and the
encouragement and advice of the Union Finance
Minister.
With the release of this First Discussion Paper and
the Annexure on Frequently Asked Questions and
Answers, we now sincerely invite interaction with the
representatives of industry, trade, agriculture and
common people. This interaction and campaign will
immediately start at the national level and at the State
levels. As a part of this interaction, we look forward to
receiving the views of industry, trade, agriculture as
well as consumers in a time-bound manner.
Asim Kumar Dasgupta
Chairman,
Empowered Committee of
State Finance Ministers
&
Minister of Finance & Excise,
Government of West Bengal
New Delhi,
November 10, 2009
iv
1. Introduction
1.1 Introduction of the Value Added Tax (VAT) at
the Central and the State level has been considered to be
a major step an important breakthrough in the sphere
of indirect tax reforms in India. If the VAT is a major
improvement over the pre-existing Central excise duty at
the national level and the sales tax system at the State
level, then the Goods and Services Tax (GST) will indeed
be a further significant improvement the next logical
step towards a comprehensive indirect tax reforms in
the country.
1.2 Keeping this objective in view, an announcement
was made by the then Union Finance Minister in the
Central Budget (2007-08) to the effect that GST would be
introduced with effect from April 1, 2010 and that the
Empowered Committee of State Finance Ministers, on his
request, would work with the Central Government to
prepare a road map for introduction of GST in India. After
this announcement, the Empowered Committee of State
Finance Ministers decided to set up a Joint Working
Group (May 10, 2007), with the then Adviser to the Union
Finance Minister and Member-Secretary of the
Empowered Committee as its Co-convenors and concerned
four Joint Secretaries of the Department of Revenue of
Union Finance Ministry and all Finance Secretaries of
the States as its members. This Joint Working Group got
itself divided into three Sub-Groups and had several
1
rounds of internal discussions as well as interaction with
experts and representatives of Chambers of Commerce
& Industry. On the basis of these discussions and
interaction, the Sub-Groups submitted their reports which
were then integrated and consolidated into the report of
Joint Working Group (November 19, 2007).
1.3 This report was discussed in detail in the meeting
of the Empowered Committee on November 28, 2007, and
the States were also requested to communicate their
observations on the report in writing. On the basis of
these discussions in the Empowered Committee and the
written observations, certain modifications were
considered necessary and were discussed with the
Co-convenors and the representatives of the Department
of Revenue of Union Finance Ministry. With the
modifications duly made, a final version of the views of
Empowered Committee on the model and road map for
the GST was prepared (April 30, 2008). These views of
Empowered Committee were then sent to the Government
of India, and the comments of Government of India were
received on December 12, 2008. These comments were duly
considered by the Empowered Committee (December 16,
2008), and it was decided that a Committee of Principal
Secretaries/Secretaries of Finance/Taxation and
Commissioners of Trade Taxes of the States would be set
up to consider these comments, and submit their views.
These views were submitted and were accepted in principle
by the Empowered Committee (January 21, 2009). As
2
a follow-up of this in-principle acceptance, a Working
Group consisting of the concerned officials of the State
Governments was formed who, in association with senior
representatives of Government of India, submitted
their recommendations in detail on the structure of GST.
An important interaction has also recently taken
place between Shri Pranab Mukherjee, the Union
Finance Minister and the Empowered Committee
(October 19, 2009) on the related issue of compensation
for loss of the States on account of phasing out of CST.
The Empowered Committee has now taken a detailed view
on the recommendations of the Working Group of officials
and other related matters. This detailed view is now
presented in terms of the First Discussion Paper, along
with an Annexure on Frequently Asked Questions and
Answers on GST, for discussion with industry, trade,
agriculture and people at large. Since the GST at the
Centre and States would be a further improvement over
the VAT, a brief recalling of the process of introduction of
VAT in India is worthwhile.
Value Added Tax at the Central and the State level
1.4 Prior to the introduction of VAT in the Centre
and in the States, there was a burden of multiple taxation
in the pre-existing Central excise duty and the State sales
tax systems. Before any commodity was produced, inputs
were first taxed, and then after the commodity got produced
with input tax load, output was taxed again. This was
causing a burden of multiple taxation (i.e. "tax on tax")
3
with a cascading effect. Moreover, in the sales tax
structure, when there was also a system of multi-point
sales taxation at subsequent levels of distributive trade,
then along with input tax load, burden of sales tax paid
on purchase at each level was also added, thus aggravating
the cascading effect further.
1.5 When VAT is introduced in place of Central excise
duty, a set-off is given, i.e., a deduction is made from the
overall tax burden for input tax. In the case of VAT in
place of sales tax system, a set-off is given from tax burden
not only for input tax paid but also for tax paid on previous
purchases. With VAT, the problem of "tax on tax" and
related burden of cascading effect is thus removed.
Furthermore, since the benefit of set-off can be obtained
only if tax is duly paid on inputs (in the case of Central
VAT), and on both inputs and on previous purchases (in
the case of State VAT), there is a built-in check in the
VAT structure on tax compliance in the Centre as well as
in the States, with expected results in terms of
improvement in transparency and reduction in tax
evasion. For these beneficial effects, VAT has now been
introduced in more than 150 countries, including several
federal countries. In Asia, it has now been introduced in
almost all the countries.
1.6 In India, VAT was introduced at the Central level
for a selected number of commodities in terms of
MODVAT with effect from March 1, 1986, and in a
4
step-by-step manner for all commodities in terms of
CENVAT in 2002-03. Subsequently, after Constitutional
Amendment empowering the Centre to levy taxes on
services, these service taxes were also added to CENVAT
in 2004-05. Although the growth of tax revenue from the
Central excise has not always been specially high, the
revenue growth of combined CENVAT and service taxes
has been significant.
1.7 Introduction of VAT in the States has been a more
challenging exercise in a federal country like India, where
each State, in terms of Constitutional provision, is
sovereign in levying and collecting State taxes. Before
introduction of VAT, in the sales tax regime, apart from
the problem of multiple taxation and burden of adverse
cascading effect of taxes as already mentioned, there was
also no harmony in the rates of sales tax on different
commodities among the States. Not only were the rates
of sales tax numerous (often more than ten in several
States), and different from one another for the same
commodity in different States, but there was also an
unhealthy competition among the States in terms of sales
tax rates so-called "rate war" often resulting in,
revenue-wise, a counter-productive situation.
1.8 It is in this background that attempts were made
by the States to introduce a harmonious VAT in the
States, keeping at the same time in mind the issue of
sovereignty of the States regarding the State tax matters.
5
The first preliminary discussion on State-level VAT took
place in a meeting of Chief Ministers convened by
Dr. Manmohan Singh, the then Union Finance Minister
in 1995. In this meeting, the basic issues on VAT were
discussed in general terms and this was followed up
by periodic interactions of State Finance Ministers.
Thereafter, in a significant meeting of all the
Chief Ministers, convened on November 16, 1999 by
Shri Yashwant Sinha, the then Union Finance Minister,
two important decisions, among others, were taken. First,
before the introduction of State-level VAT, the unhealthy
sales tax "rate war" among the States would have to end,
and sales tax rates would need to be harmonised by
implementing uniform floor rates of sales tax for different
categories of commodities with effect from January 1, 2000.
Secondly, on the basis of achievement of the first objective,
steps would be taken by the States for introduction
of State-level VAT after adequate preparation. For
implementing these decisions, a Standing Committee
of State Finance Ministers was formed which was then
made an Empowered Committee of State Finance
Ministers.
1.9 Thereafter, the Empowered Committee has met
regularly. All the decisions were taken on the basis of
consensus. On the strength of these repeated discussions
and collective efforts, involving the Ministers and the
concerned officials, it was possible within a period of about
6
a year and a half to achieve nearly 98 per cent success in
the first objective, namely, harmonisation of sales tax
structure through implementation of uniform floor rates
of sales tax.
1.10 After reaching this stage, steps were initiated
for systematic preparation for introduction of State-level
VAT. In order again to avoid any unhealthy competition
among the States which may lead to distortions in
manufacturing and trade, attempts have been made from
the very beginning to harmonise the VAT design in the
States, keeping also in view the distinctive features of each
State and the need for federal flexibility. This has been
done by the States collectively agreeing, through
discussions in the Empowered Committee, to certain
common points of convergence regarding VAT, and
allowing at the same time certain flexibility to
accommodate the local characteristics of the States. In
the course of these discussions, references to the Tenth
Five Year Plan Report of the Advisory Group on Tax
Policies & Tax Administration (2001) and the report of
Kelkar (Chairman) Task Force were helpful.
1.11 Along with these measures, steps were taken for
necessary training, computerization and interaction with
trade and industry. While these preparatory steps were
taken, the Empowered Committee got a significant
support from Shri P. Chidambaram, the then Union
7
Finance Minister, when he responded positively in
providing Central financial support to the States in
the event of loss of revenue in transitional years of
implementation of VAT.
1.12 As a consequence of all these steps, the States
started implementing VAT beginning April 1, 2005. After
overcoming the initial difficulties, all the States and
Union Territories have now implemented VAT. The
Empowered Committee has been monitoring closely the
process of implementation of State-level VAT, and
deviations from the agreed VAT rates has been contained
to less than 3 per cent of the total list of commodities.
Responses of industry and also of trade have been indeed
encouraging. The rate of growth of tax revenue has nearly
doubled from the average annual rate of growth in the
pre-VAT five year period after the introduction of VAT.
Justification of GST
1.13 Despite this success with VAT, there are still
certain shortcomings in the structure of VAT both at the
Central and at the State level. The shortcoming in
CENVAT of the Government of India lies in non-inclusion
of several Central taxes in the overall framework of
CENVAT, such as additional customs duty, surcharges,
etc., and thus keeping the benefits of comprehensive input
tax and service tax set-off out of reach for manufacturers/
dealers. Moreover, no step has yet been taken to capture
the value-added chain in the distribution trade below the
8
manufacturing level in the existing scheme of CENVAT.
The introduction of GST at the Central level will not only
include comprehensively more indirect Central taxes
and integrate goods and service taxes for the purpose of
set-off relief, but may also lead to revenue gain for the
Centre through widening of the dealer base by capturing
value addition in the distributive trade and increased
compliance.
1.14 In the existing State-level VAT structure there
are also certain shortcomings as follows. There are, for
instance, even now, several taxes which are in the nature
of indirect tax on goods and services, such as luxury tax,
entertainment tax, etc., and yet not subsumed in the VAT.
Moreover, in the present State-level VAT scheme,
CENVAT load on the goods remains included in the value
of goods to be taxed under State VAT, and contributing
to that extent a cascading effect on account of CENVAT
element. This CENVAT load needs to be removed.
Furthermore, any commodity, in general, is produced on
the basis of physical inputs as well as services, and there
should be integration of VAT on goods with tax on services
at the State level as well, and at the same time there
should also be removal of cascading effect of service tax.
In the GST, both the cascading effects of CENVAT and
service tax are removed with set-off, and a continuous
chain of set-off from the original producer's point and
service provider's point upto the retailer's level is
established which reduces the burden of all cascading
effects. This is the essence of GST, and this is why GST
9
is not simply VAT plus service tax but an improvement
over the previous system of VAT and disjointed service
tax. However, for this GST to be introduced at the State-
level, it is essential that the States should be given the
power of levy of taxation of all services. This power of levy
of service taxes has so long been only with the Centre.
A Constitutional Amendment will be made for giving this
power also to the States. Moreover, with the introduction
of GST, burden of Central Sales Tax (CST) will also be
removed. The GST at the State-level is, therefore, justified
for (a) additional power of levy of taxation of services for
the States, (b) system of comprehensive set-off relief,
including set-off for cascading burden of CENVAT and
service taxes, (c) subsuming of several taxes in the GST
and (d) removal of burden of CST. Because of the removal
of cascading effect, the burden of tax under GST on goods
will, in general, fall.
1.15 The GST at the Central and at the State level
will thus give more relief to industry, trade, agriculture
and consumers through a more comprehensive and
wider coverage of input tax set-off and service tax set-
off, subsuming of several taxes in the GST and phasing
out of CST. With the GST being properly formulated
by appropriate calibration of rates and adequate
compensation where necessary, there may also be
revenue/ resource gain for both the Centre and the States,
primarily through widening of tax base and possibility of
10
a significant improvement in tax-compliance. In other
words, the GST may usher in the possibility of a collective
gain for industry, trade, agriculture and common
consumers as well as for the Central Government and
the State Governments. The GST may, indeed, lead to
the possibility of collectively positive-sum game.
2. Preparation for GST
2.1 Keeping this significance of GST in view, an
announcement was made by the then Union Finance
Minister in the Union Budget, as mentioned before, to
the effect that GST would be introduced from April 1, 2010,
and that the Empowered Committee of State Finance
Ministers would work with the Central Government to
prepare a road map for introduction of the GST. After
this announcement, the Empowered Committee, as stated
earlier, had set up a Joint Working Group which submitted
a report on a model and road map for GST. After
accommodating the views of the States appropriately on
this report, the views of the Empowered Committee on
the model and road map were sent to the Government of
India on 30 th April, 2008. The comments of the
Government of India were received on 12th December,
2008. These comments were duly considered by the
Empowered Committee in its meeting held on 16 th
December, 2008 and it was decided that a Committee
of Principal Secretaries/Secretaries (Finance/Taxation) and
11
Commissioners of Trade Taxes should consider the
comments received from the Government of India and
submit its views and also work out the Central GST
and State GST rates. The Committee held detailed
deliberations on 5 th and 6 th January, 2009, and
submitted its recommendations to the Empowered
Committee. The Empowered Committee considered
these recommendations in its meeting held on 21 st
January, 2009 and accepted them in principle. The
Empowered Committee also decided to constitute a
Working Group consisting of Principal Secretaries/
Secretaries (Finance/Taxation) and Commissioners of
Trade Taxes of all States/UTs to give their
recommendations on (a) the commodities and services
that should be kept in the exempted list, (b) the rules
and principles of taxing the transactions of services
including the transactions in inter-State services, and
(c) finalization of the model suggested for inter-state
transaction/movement of goods including stock transfers
in consultation with the State Bank of India and some
other nationalized banks. It was also decided that the
senior representatives from the Government of India
may also be associated. The Working Group deliberated
on the issues on 10th February, 2009 and decided to
form three Sub Working Groups to deliberate each item
in depth. The Reports of the Working Group on the
three issues have already been received, and the
Empowered Committee has taken a view on these
recommendations for concluding the details of GST
structure.
12
2.2 While making this preparation of GST, it was
also necessary, as mentioned earlier, to phase out the CST,
because it did not carry any set-off relief and there
was a distortion in the VAT regime due to export of tax
from one State to other State. The Empowered Committee
accordingly took a decision to phase out CST on the
understanding with the Centre that, since phasing out of
CST would result in a loss of revenue to the States on a
permanent basis, an appropriate mechanism to
compensate the States for such loss would be worked out.
The rate of CST has already been reduced to 2% and will
be phased out with effect from the date of introduction of
GST on the basis of such GST structure which, with
necessary financial support to the States, should
adequately compensate for the loss of the States on a
permanent basis. With these steps at preparation in mind,
it is important now to turn to the proposed model of GST.
3. Goods & Services Tax Model For India
3.1 It is important to take note of the significant
administrative issues involved in designing an effective
GST model in a federal system with the objective of
having an overall harmonious structure of rates. Together
with this, there is a need for upholding the powers of
Central and State Governments in their taxation matters.
Further, there is also the need to propose a model that
would be easily implementable, while being generally
acceptable to stakeholders.
13
Salient features of the GST model
3.2 Keeping in view the report of the Joint Working
Group on Goods and Services Tax, the views received
from the States and Government of India, a dual GST
structure with defined functions and responsibilities of
the Centre and the States is recommended. An appropriate
mechanism that will be binding on both the Centre and
the States would be worked out whereby the harmonious
rate structure along with the need for further modification
could be upheld, if necessary with a collectively agreed
Constitutional Amendment. Salient features of the
proposed model are as follows:
(i) The GST shall have two components: one levied
by the Centre (hereinafter referred to as Central GST),
and the other levied by the States (hereinafter referred to
as State GST). Rates for Central GST and State GST
would be prescribed appropriately, reflecting revenue
considerations and acceptability. This dual GST model
would be implemented through multiple statutes (one for
CGST and SGST statute for every State). However, the
basic features of law such as chargeability, definition of
taxable event and taxable person, measure of levy
including valuation provisions, basis of classification etc.
would be uniform across these statutes as far as
practicable.
(ii) The Central GST and the State GST would be
applicable to all transactions of goods and services made
14
for a consideration except the exempted goods and
services, goods which are outside the purview of GST
and the transactions which are below the prescribed
threshold limits.
(iii) The Central GST and State GST are to be paid to
the accounts of the Centre and the States separately. It
would have to be ensured that account-heads for all
services and goods would have indication whether it
relates to Central GST or State GST (with identification
of the State to whom the tax is to be credited).
(iv) Since the Central GST and State GST are to be
treated separately, taxes paid against the Central GST
shall be allowed to be taken as input tax credit (ITC) for
the Central GST and could be utilized only against the
payment of Central GST. The same principle will be
applicable for the State GST. A taxpayer or exporter would
have to maintain separate details in books of account for
utilization or refund of credit. Further, the rules for taking
and utilization of credit for the Central GST and the State
GST would be aligned.
(v) Cross utilization of ITC between the Central
GST and the State GST would not be allowed except in
the case of inter-State supply of goods and services under
the IGST model which is explained later.
(vi) Ideally, the problem related to credit accumulation
on account of refund of GST should be avoided by both the
Centre and the States except in the cases such as exports,
15
purchase of capital goods, input tax at higher rate than
output tax etc. where, again refund/adjustment should be
completed in a time bound manner.
(vii) To the extent feasible, uniform procedure for
collection of both Central GST and State GST would be
prescribed in the respective legislation for Central GST
and State GST.
(viii) The administration of the Central GST to the
Centre and for State GST to the States would be given.
This would imply that the Centre and the States would
have concurrent jurisdiction for the entire value chain and
for all taxpayers on the basis of thresholds for goods and
services prescribed for the States and the Centre.
(ix) The present threshold prescribed in different
State VAT Acts below which VAT is not applicable
varies from State to State. A uniform State GST threshold
across States is desirable and, therefore, it is considered
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 also
considered that the threshold for Central GST for goods
16
may be kept at Rs.1.5 crore and the threshold for Central
GST for services may also be appropriately high. It may
be mentioned that even now there is a separate threshold
of services (Rs. 10 lakh) and goods (Rs. 1.5 crore) in the
Service Tax and CENVAT.
(x) The States are also of the view that 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 would be a compounding cut-off at Rs. 50 lakh of
gross annual turn over 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.
(xi) The taxpayer would need to submit periodical
returns, in common format as far as possible, to both the
Central GST authority and to the concerned State GST
authorities.
(xii) Each taxpayer would be allotted a PAN-linked
taxpayer identification number with a total of 13/15 digits.
This would bring the GST PAN-linked system in line
with the prevailing PAN-based system for Income tax,
facilitating data exchange and taxpayer compliance.
(xiii) Keeping in mind the need of tax payer's
convenience, functions such as assessment, enforcement,
17
scrutiny and audit would be undertaken by the authority
which is collecting the tax, with information sharing
between the Centre and the States.
Central and State Taxes to be subsumed under GST
3.3 The various Central, State and Local levies were
examined to identify their possibility of being subsumed
under GST. While identifying, the following principles
were kept in mind:
(i) Taxes or levies to be subsumed should be
primarily in the nature of indirect taxes, either on the
supply of goods or on the supply of services.
(ii) Taxes or levies to be subsumed should be part of
the transaction chain which commences with import/
manufacture/ production of goods or provision of services
at one end and the consumption of goods and services at the
other.
(iii) The subsumation should result in free flow of tax
credit in intra and inter-State levels.
(iv) The taxes, levies and fees that are not specifically
related to supply of goods & services should not be
subsumed under GST.
(v) Revenue fairness for both the Union and the
States individually would need to be attempted.
18
3.4 On application of the above principles, it is
recommended that the following Central Taxes should be,
to begin with, subsumed under the Goods and Services
Tax:
(i) Central Excise Duty
(ii) Additional Excise Duties
(iii) The Excise Duty levied under the Medicinal and
Toiletries Preparation Act
(iv) Service Tax
(v) Additional Customs Duty, commonly known as
Countervailing Duty (CVD)
(vi) Special Additional Duty of Customs - 4% (SAD)
(vii) Surcharges, and
(viii) Cesses.
Following State taxes and levies would be, to begin with,
subsumed under GST:
(i) VAT / Sales tax
(ii) Entertainment tax (unless it is levied by the local
bodies).
(iii) Luxury tax
(iv) Taxes on lottery, betting and gambling.
(v) State Cesses and Surcharges in so far as they
relate to supply of goods and services.
(vi) Entry tax not in lieu of Octroi.
19
Purchase tax: Some of the States felt that they are
getting substantial revenue from Purchase Tax and,
therefore, it should not be subsumed under GST while
majority of the States were of the view that no such
exemptions should be given. The difficulties of the
foodgrains producing States and certain other States
were appreciated as substantial revenue is being earned
by them from Purchase Tax and it was, therefore, felt that
in case Purchase Tax has to be subsumed then adequate
and continuing compensation has to be provided to such
States. This issue is being discussed in consultation with
the Government of India.
Tax on items containing Alcohol: Alcoholic
beverages would be kept out of the purview of GST. Sales
Tax/VAT can be continued to be levied on alcoholic
beverages as per the existing practice. In case it has been
made Vatable by some States, there is no objection to that.
Excise Duty, which is presently being levied by the States
may not be also affected.
Tax on Tobacco products: Tobacco products would
be subjected to GST with ITC. Centre may be allowed to
levy excise duty on tobacco products over and above GST
without ITC.
Tax on Petroleum Products: As far as petroleum
products are concerned, it was decided that the basket of
petroleum products, i.e. crude, motor spirit (including
20
ATF) and HSD would be kept outside GST as is the
prevailing practice in India. Sales Tax could continue to
be levied by the States on these products with prevailing
floor rate. Similarly, Centre could also continue its levies.
A final view whether Natural Gas should be kept outside
the GST will be taken after further deliberations.
Taxation of Services : As indicated earlier, both the
Centre and the States will have concurrent power to levy
tax on all goods and services. In the case of States, the
principle for taxation of intra-State and inter-State has
already been formulated by the Working Group of
Principal Secretaries/Secretaries of Finance/Taxation
and Commissioners of Trade Taxes with senior
representatives of Department of Revenue, Government
of India. For inter-State transactions an innovative model
of Integrated GST will be adopted by appropriately
aligning and integrating CGST and SGST. The working
of this model is elaborated below.
3.5 Inter-State Transactions of Goods and Services
The Empowered Committee has accepted the
recommendations of the Working Group of concerned
officials of Central and State Governments 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
21
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. The relevant information will also be 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.
22
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.
3.6 GST Rate Structure
The Empowered Committee has decided to adopt 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. For upholding of
special needs of each State as well as a balanced approach
to federal flexibility, and also for facilitating the
introduction of GST, 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.
The States are of the view that for CGST relating to
goods, the Government of India may also have a two-rate
structure, with conformity in the levels of rate under 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.
23
3.7 Zero Rating of Exports
Exports would be zero-rated. Similar benefits may
be given to Special Economic Zones (SEZs). However, such
benefits will only be allowed to the processing zones of
the SEZs. No benefit to the sales from an SEZ to Domestic
Tariff Area (DTA) will be allowed.
3.8 GST on Imports: The GST will be levied on
imports with necessary Constitutional Amendments. Both
CGST and SGST will be levied on import of goods and
services into the country. The incidence of tax will follow
the destination principle and the tax revenue in case of
SGST will accrue to the State where the imported goods
and services are consumed. Full and complete set-off will
be available on the GST paid on import on goods and
services.
3.9 Special Industrial Area Scheme
After the introduction of GST, the tax exemptions,
remissions etc. related to industrial incentives should be
converted, if at all needed, into cash refund schemes after
collection of tax, so that the GST scheme on the basis of a
continuous chain of set-offs is not disturbed. Regarding
Special Industrial Area Schemes, it is clarified that such
exemptions, remissions etc. would continue up to
legitimate expiry time both for the Centre and the States.
Any new exemption, remission etc. or continuation of
earlier exemption, remission etc. would not be allowed.
24
In such cases, the Central and the State Governments
could provide reimbursement after collecting GST.
3.10 IT Infrastructure
After acceptance of IGST Model for Inter-State
transactions, the major responsibilities of IT
infrastructural requirement will be shared by the Central
Government through the use of its own IT infrastructure
facility. The issues of tying up the State Infrastructure
facilities with the Central facilities as well as further
improvement of the States' own IT infrastructure,
including TINXSYS, is now to be addressed expeditiously
and in a time bound manner.
3.11 Constitutional Amendments, Legislations
and Rules for administration of CGST and SGST
It is essential to have Constitutional Amendments
for empowering the States for levy of service tax, GST on
imports and consequential issues as well as corresponding
Central and State legislations with associated rules and
procedures. With these specific tasks in view, a Joint
Working Group has recently been constituted (September
30, 2009) comprising of the officials of the Central and
State Governments to prepare, in a time bound manner
a draft legislation for Constitutional Amendment, 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
25
of a legislation for IGST and rules and procedures. As
a part of this exercise, the Working Group will also
address the issues of dispute resolution and advance
ruling.
3.12 Harmonious structure of GST and the
States' autonomy in a Federal Framework
As a part of the exercise on Constitutional Amendment,
a special attention would be given, as mentioned earlier
in para 3.2, to the formulation of a mechanism for
upholding the need for a harmonious structure for GST
along with the concern for the States' autonomy in a
federal structure.
3.13 Dispute Resolution and Advance Ruling
As a part of the exercise on drafting of legislation,
rules and procedures for the administration of CGST and
SGST, specific provisions would also be made to the issues
of dispute resolution and advance ruling.
3.14 Need for compensation during
implementation of GST
Despite the sincere attempts being made by the
Empowered Committee on the determination of GST rate
structure, revenue neutral rates, it is difficult to estimate
accurately as to how much the States will gain from
service taxes and how much they will lose on account of
26
removal of cascading effect, payment of input tax credit
and phasing out of CST. In view of this, it would be
essential to provide adequately for compensation for
loss that might emerge during the process of
implementation of GST for the next five years. This
issue may be comprehensively taken care of in the
recommendations of the Thirteenth Finance
Commission. The payment of this compensation will
need to be ensured in terms of special grants to be
released to the States duly in every month on the basis
of neutrally monitored mechanism.
3.15 With the release of this First Discussion Paper
and the Annexure on Frequently Asked Questions and
Answers on GST, interaction with the representatives of
industry, trade and agriculture would begin immediately
at the national level, and then also simultaneously at the
State levels. Similarly awareness campaign for common
consumers would also be initiated at the same time. As a
part of the discussion and campaign, the views of the
industry, trade and agriculture as well as consumers are
being sought in a structured and time bound manner.
27
Annexure
Frequently Asked Questions and Answers on GST
Question 1 : What is the justification of GST ?
Answer : 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
29
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.
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,
30
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.
Question 2. What is GST? How does it work ?
Answer : 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
31
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 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
32
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.
Table
Stage of Purchase Value Value Rate GST Input Net
supply value of addition at of on Tax GST=
chain Input which GST output credit GST on
supply output
of goods Input
and tax
services credit
made to
next stage
Manufacturer 100 30 130 10% 13 10 1310 = 3
Whole seller 130 20 150 10% 15 13 1513 = 2
Retailer 150 10 160 10% 16 15 1615 = 1
Question 3 : How can the burden of tax, in
general, fall under GST ?
Answer : 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"
33
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.
Question 4 : How will GST benefit industry, trade
and agriculture ?
Answer : 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.
34
Question 5 : How will GST benefit the exporters?
Answer : The subsuming of major Central and
State taxes in GST, complete and comprehensive set-
off of input goods and services and phasing out of
Central Sales Tax (CST) would reduce the cost of
locally manufactured goods and services. This will
increase the competitiveness of Indian goods and
services in the international market and give boost
to Indian exports. The uniformity in tax rates and
procedures across the country will also go a long way
in reducing the compliance cost.
Question 6 : How will GST benefit the small
entrepreneurs and small traders?
Answer : 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
35
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.
Question 7 : How will GST benefit the common
consumers?
Answer : 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.
36
Question 8 : What are the salient features of the
proposed GST model?
Answer : The salient features of the proposed model
are as follows:
(i) Consistent with the federal structure of the
country, the GST will have two components:
one levied by the Centre (hereinafter referred
to as Central GST), and the other levied by the
States (hereinafter referred to as State GST).
This dual GST model would be implemented
through multiple statutes (one for CGST and
SGST statute for every State). However, the
basic features of law such as chargeability,
definition of taxable event and taxable person,
measure of levy including valuation provisions,
basis of classification etc. would be uniform
across these statutes as far as practicable.
(ii) The Central GST and the State GST would
be applicable to all transactions 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.
37
(iii) The Central GST and State GST are to be paid
to the accounts of the Centre and the States
separately.
(iv) Since the Central GST and State GST are to
be treated separately, in general, taxes paid
against the Central GST shall be allowed to be
taken as input tax credit (ITC) for the Central
GST and could be utilized only against the
payment of Central GST. The same principle
will be applicable for the State GST.
(v) Cross utilisation of ITC between the Central
GST and the State GST would, in general, not
be allowed.
(vi) To the extent feasible, uniform procedure for
collection of both Central GST and State GST
would be prescribed in the respective
legislation for Central GST and State GST.
(vii) The administration of the Central GST would
be with the Centre and for State GST with the
States.
(viii) The taxpayer would need to submit periodical
returns to both the Central GST authority and
to the concerned State GST authorities.
38
(ix) Each taxpayer would be allotted a PAN-
linked taxpayer identification number with
a total of 13/15 digits. This would bring the
GST PAN-linked system in line with the
prevailing PAN-based system for Income tax
facilitating data exchange and taxpayer
compliance. The exact design would be worked
out in consultation with the Income-Tax
Department.
(x) Keeping in mind the need of tax payers
convenience, functions such as assessment,
enforcement, scrutiny and audit would be
undertaken by the authority which is collecting
the tax, with information sharing between the
Centre and the States.
Question 9 : Why is Dual GST required ?
Answer : India is a federal country where both the
Centre and the States have been 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.
39
Question 10 : How would a particular transaction
of goods and services be taxed
simultaneously under Central GST
(CGST) and State GST (SGST)?
Answer : 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
40
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
41
CGST he 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.
Question 11 : Which Central and State taxes are
proposed to be subsumed under GST ?
Answer : The various Central, State and Local
levies were examined to identify their possibility of
being subsumed under GST. While identifying, the
following principles were kept in mind:
(i) Taxes or levies to be subsumed should be
primarily in the nature of indirect taxes, either
on the supply of goods or on the supply of
services.
(ii) Taxes or levies to be subsumed should be part
of the transaction chain which commences with
import/ manufacture/ production of goods or
provision of services at one end and the
consumption of goods and services at the other.
(iii) The subsumation should result in free flow of
tax credit in intra and inter-State levels.
42
(iv) The taxes, levies and fees that are not
specifically related to supply of goods & services
should not be subsumed under GST.
(v) Revenue fairness for both the Union and the
States individually would need to be attempted.
On application of the above principles, the
Empowered Committee has recommended that the
following Central Taxes should be, to begin with,
subsumed under the Goods and Services Tax:
(i) Central Excise Duty
(ii) Additional Excise Duties
(iii) The Excise Duty levied under the Medicinal
and Toiletries Preparation Act
(iv) Service Tax
(v) Additional Customs Duty, commonly known as
Countervailing Duty (CVD)
(vi) Special Additional Duty of Customs - 4% (SAD)
(vii) Surcharges, and
(viii) Cesses.
43
The following State taxes and levies would be, to
begin with, subsumed under GST:
(i) VAT / Sales tax
(ii) Entertainment tax (unless it is levied by the
local bodies).
(iii) Luxury tax
(iv) Taxes on lottery, betting and gambling.
(v) State Cesses and Surcharges in so far as they
relate to supply of goods and services.
(vi) Entry tax not in lieu of Octroi.
Purchase tax: Some of the States felt that they are
getting substantial revenue from Purchase Tax and,
therefore, it should not be subsumed under GST while
majority of the States were of the view that no such
exemptions should be given. The difficulties of the
foodgrain producing States was appreciated as
substantial revenue is being earned by them from
Purchase Tax and it was, therefore, felt that in case
Purchase Tax has to be subsumed then adequate and
continuing compensation has to be provided to such
States. This issue is being discussed in consultation
with the Government of India.
44
Tax on items containing Alcohol: Alcoholic
beverages would be kept out of the purview of GST.
Sales Tax/VAT could be continued to be levied on
alcoholic beverages as per the existing practice. In
case it has been made Vatable by some States, there
is no objection to that. Excise Duty, which is presently
levied by the States may not also be affected.
Tax on Tobacco products: Tobacco products
would be subjected to GST with ITC. Centre may be
allowed to levy excise duty on tobacco products over
and above GST with ITC.
Tax on Petroleum Products: As far as petroleum
products are concerned, it was decided that the basket
of petroleum products, i.e. crude, motor spirit
(including ATF) and HSD would be kept outside GST
as is the prevailing practice in India. Sales Tax could
continue to be levied by the States on these products
with prevailing floor rate. Similarly, Centre could also
continue its levies. A final view whether Natural Gas
should be kept outside the GST will be taken after
further deliberations.
Taxation of Services : As indicated earlier, both
the Centre and the States will have concurrent power
to levy tax on goods and services. In the case of States,
the principle for taxation of intra-State and inter-
45
State has already been formulated by the Working
Group of Principal Secretaries /Secretaries of
Finance / Taxation and Commissioners of Trade
Taxes with senior representatives of Department of
Revenue, Government of India. For inter-State
transactions an innovative model of Integrated GST
will be adopted by appropriately aligning and
integrating CGST and IGST.
Question 12 : What is the rate structure proposed
under GST ?
Answer : 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
46
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.
Question 13: What is the concept of providing
threshold exemption for GST?
Answer : 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
47
from State to State. A uniform State GST threshold
across 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.
Question 14 : What is the scope of composition and
compounding scheme under GST?
Answer : 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
48
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.
Question 15 : How will imports be taxed under GST ?
Answer : 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.
Question 16 : Will cross utilization of credits
between goods and services be
allowed under GST regime?
Answer : 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.
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Question 17 : How will be Inter-State Transactions
of Goods and Services be taxed under
GST in terms of IGST method ?
Answer : 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.
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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 computerisation is limited to inter-State
dealers and Central and State Governments
should be able to computerise 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.
Question 18 : Why does introduction of GST require
a Constitutional Amendment?
Answer : The Constitution provides for
delineation of power to tax between the Centre and
States. While the Centre is empowered to tax services
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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
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.
Question 19: How are the legislative steps being
taken for CGST and SGST ?
Answer : A Joint Working Group has recently been
constituted (September 30, 2009) comprising of the
officials of the Central and State Governments to
prepare, in a time-bound manner a draft legislation
for Constitutional Amendment.
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Question 20: How will the rules for administration
of CGST and SGST be framed?
Answer : 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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