GST The principal discussion and debate relating to the introduction of Goods and

Services Tax (GST) in India was to whether the single unified GST was the appropriate
model or whether the dual GST was the more feasible and doable one. In this regard the
announcement that was made sometime ago b! the "mpowered #ommittee of State
$inance %inisters was that it had accepted the recommendation of the &or'ing Group that it
had set up of a dual GST. The report of the "mpowered #ommittee on GST has been
forwarded to the $inance %inistr! for consideration.
The %inistr! has in turn forwarded it to the ()th $inance #ommission to stud! and anal!se
the recommendations from a federalist standpoint and in particular from the point of
protecting and ensuring the buo!anc! of revenues of both the #entre and the states. The
$inance #ommission has as a part of its brief started engaging with the chambers of
commerce and selective trade associations to ascertain their views and identif! challenges
and concerns with regard to the chosen model of GST and also loo'ing at global best
practices in this regard.
*ow the central iron! of the whole debate is that while the contours of the dual GST model
are 'nown in parts as a result of the public interactions that the chairman of the "mpowered
#ommittee has had the report of its &or'ing Group is not released to the public and hence
the recommendations are not 'nown in full and thus the interactions of the $inance
#ommission with the above sta'eholders is with regard to a GST model whose full details
are not 'nown to the public+ $urther it could well be that the $inance #ommission could
recommend a materiall! different GST+
*evertheless on the how of the GST it seems clear that the recommended dual GST will
have a federal part and a State part. $urther the $ederal and the State GST will both consist
of a goods tax and a tax on services. Thus both taxes will appl! to goods and services.
$urther the $ederal GST and the State GST will consist of multiple rates insofar as the!
relate to goods and will comprise a single rate insofar as the! relate to services. $ull input
tax credits would be available in regard to the $ederal GST and the State GST. The two
taxes will operate in parallel and throughout the suppl! chain. &hat is therefore re,uired to
be determined is the taxable event which gives rise to the two taxes.
Internationall! GST is based on supplies of goods- services rather than on manufacture and
sales and there are fairl! elaborate rules governing the time and place of suppl!. It is ver!
li'el! that the dual GST in India would also incorporate detailed rules in relation to
determination of the taxable event and also the taxing .urisdiction.
/n the rates again the excise dut! as well as the State 01T have multiple rates with a
t!pical 2 per cent-(3 per cent two4rate structure for excise and a t!pical 5 per cent-(6.7 per
cent two4rate structure for the State 01T. /n the services front it is not clear as to whether
the $ederal and the State GST will appl! on the same set of services or the! will operate on
a mutuall! exclusive basis. 1lso the present rate of service tax is (6 per cent and it is a moot
point as to what the single rate of the $ederal and the State GST will be on services.
The cumulative incidence of the excise dut! and the State 01T at present wor's out to
around 66 per cent to 65 per cent of the retail sales price. There is an expectation that under
the GST the aggregate incidence of the tax should be significantl! lower.
There is much debate on the li'el! aggregate rate of the GST and there appears to be a
consensus that it ma! approximate 68 per cent. 9owever recent debate suggests that a
further reduction in the aggregate rate of GST is being contemplated. It is also possible that
several other design elements of the GST can undergo changes. The additional benefit
apart from the reduction in rate of the model is that the base on which $ederal and the State
GST will be charged will be uniform and this will ensure that there is no cascading of taxes.
It appears that it will onl! be b! end 6882 that things will cr!stallise on several aspects of the
GST. 1 balance will need to be struc' between the benefit of simplicit! in the chosen model
of the GST and the socio4economic ob.ectives that are sought to be achieved. #learl!
tradeoffs will have to be made. *evertheless the point of the when on the introduction of
the GST is still answered b! the response of the 1pril 68(8 deadline.
This means that the countr! will onl! have a period of (7 months from beginning 688: to
%arch 68(8 to ensure that all the constitutional (if an!) polic! and legislative changes ta'e
place. It does seem increasingl! a big challenge but it is still a ver! real goal in the e!es of
both the #entral and State Government circles regardless of the political persuasion of the
parties in power. This is ver! positive thing in itself but the point is whether there is enough
time to get the .ob done. There reall! now needs to be a strong and focused push so that the
1pril 68(8 deadline on the introduction of GST is met. 1ll sta'eholders need to wor' closel!
with the powers that be to ma'e this happen.
1 crucial part of Indias taxation reforms the proposed goods and services tax (GST) result
in an efficient and harmonised consumption tax s!stem in the countr!. #onceptualised b!
finance minister ; #hidamabram in 6887 when he introduced the value added tax the GST
is a multi4stage consumption tax imposed on a broad range of goods and services. It is a tax
on transactions and end customers who consume the goods or services and bear the final
cost of the tax.
9owever it was onl! in <udget 688348= that #hidambaram announced a decision on GST.
9e said >It is m! sense that there is a large consensus that the countr! should move
towards a national4level goods and services tax (GST) that should be shared between the
#entre and the States. I propose that we set 1pril ( 68(8 as the date for introducing GST.?
*ot surprisingl! he tried to move towards converging the service tax with the #envat rate.
9e increased the service tax rate to (6@ from the earlier (8@. This process of convergence
of rates is li'el! to be carried further in <udget 688=482 when #hidambaram plans to
consolidate excise dut! rates at about (3@. The service tax rate is li'el! to continue at its
present (6@ and ma! be increased in 688248:.
In the long term it is possible that the GST is levied at a rate between (5@ and (3@. This
would also be in line with India Incs demand of an effective goods and services tax rate of
(7@. The forthcoming <udget is however unli'el! to have an! ma.or announcements
relating to GST.
$or an effective GST regime both the #entre and state4level indirect taxes need to be
harmonised as world4over goods and services attract the same rate of tax. &hile this is the
ver! foundation of a GST the picture becomes a bit haA! in Indias ,uasi4federal structure. 1t
present there is no decision how this will be done. Tax experts sa! there are three options
between the #entre and states to lev! GST. /ne the #entre can have full powers to lev!
and collect the tax and then distribute it to states in accordance with a predefined formula.
Two a dual lev! one at the #entral level and another at the state level on a common base.
Three both the #entre and states having the right to tax goods.
%ost tax experts are of the view...
that it is the second model that can wor' out in India. %ahesh ;urohit director $oundation
for ;ublic "conomics and ;olic! Besearch said >India can go in for the dual lev! s!stem
wherein the #entre levies onl! sumptuar! excise on some commodities in place of the
current #envat and service tax and the rest is levied b! states at the rate of about 67@.?
B %uralidharan principal consultant ;rice &aterhouse #oopers agreed and said >Given
Indias federal structure it would be wise to lev! a dual GST. The #entral GST can be levied
at about (5@ to (3@ and the state GST at (6@to (5@.?*orth <loc' is currentl! weighing
these options but the second option of a dual lev! appears plausible.
1nother suggestion b! tax exerts is to lev! GST at about 68@ as it would be in step with
international rates. %ost countries in the "uropean Cnion lev! GST at rates ranging from
(7@ to 67@. #hina levies the tax at a (:@ rate. This is also an option the finance ministr! is
considering.
In a complete turnabout from its original stance it ma! also disregard the recommendations
made b! the Del'ar committee and the tax committee for the (8th4$ive Eear ;lan headed b!
;arthasarthi Shome sources said. This is because the suggestions put forth b! the two
committees are restricted to the #oncurrent Fist and would re,uire extensive amendment of
the constitution. &ith the deadline for GST onl! two !ears awa! the finance ministr! is tr!ing
to introduce the GST regime within the existing framewor'....
It is widel! expected that this <udget will chart a roadmap and indicate which model of
Goods and Services Tax will be introduced in the countr!. GST has been declared to be the
goal for 68(8 in the last <udget. There are several models of GST each with its own merit
and demerit. 1 loo' at some of the models in circulationG
1ustralian %odelG In 1ustralia GST is a federal tax collected b! the #entre and distributed to
the states. <ut India is a heterogeneous countr! and there is no chance that states will allow
the #entre to collect all the taxes while the! become .ust spending institutions.
#anadian %odelG The GST in #anada is dual between the #entre and the states and has
three varietiesG
(i) $ederal GST and provincial retail sales taxes (;ST) administered separatel! 4 followed b!
the largest ma.orit!.
(ii) Hoint federal and provincial 01Ts administered federall! (9armonious Sales Tax 4 9ST).
(iii) Separate federal and provincial 01T administered provinciall! (IST) 4 onl! for Iuebec as
it is li'e a brea'awa! province.
The first variet! is fundamentall! the #anadian model which is similar (though not the same)
to the existing situation in India.
Del'ar4Shah %odelG This model of a unified goods and services tax is based on a Jgrand
bargainJ to merge #entral "xcise Service Tax and State 01T into one common base. Two
different rates of tax are to be levied b! the #entre and the states. The collection will be b!
the #entre. This is li'e the 9ST model in #anada.
1.a! Shah wants the collection from big industries to be done b! the #entre while the states
collect it from the smaller industries. The! want the model to be introduced straightawa!.
This exposition does not even ta'e into account the #onstitution in the countr!. The
#onstitution allows #entral "xcise and Service Tax to be collected b! the #entre and the 01T
(sales tax) to be collected b! the states. If the #onstitution does not allow such an amalgam
how the model can be operative is not indicated in the model.
<agchi4;oddar %odelG This model .ust li'e Del'er4ShahKs envisages a combination of
#entral "xcise Service Tax and 01T to ma'e it a common base of goods and services tax to
be levied both b! the #entre and the states separatel!. This means that the #entral "xcise
1ct will be abolished and the goods tax will be onl! on the sale of goods. It will merge in it the
service tax.
To put this in legal lingo the J taxable eventJ for the GST will be the act of sale of goods and
services. The concept of manufacture will simpl! vanish. The difference between the <agchi4
;oddar and Del'er4Shah models is that in the former the collection is at two levels b! the
#entre and the states while in the latter the collection is onl! b! the #entre.
So while the Del'ar4Shah model is li'e the #anadian 9ST the <agchi4;oddar one is li'e the
Iuebec model.
1lthough the model sa!s that it is based on the Iuebec model it is actuall! not full! so as
this model envisages collection both b! the #entre as well as the states whereas the
Iuebec model envisages collection onl! b! the state of Iuebec.
The <agchi4;oddar model also clearl! envisages that a #onstitutional amendment is
necessar! to bring the taxing powers on goods and services under the #oncurrent Fist and
to abolish the present division of taxing powers between the #entre and the states. %!
arguments against the combined GST in the <agchi4;oddar model are the followingG
(i) The amendment of the #onstitution as envisaged in this model will not be practicable
immediatel! and it will in an! case create a huge political upheaval in the countr!.
(ii) The Supreme #ourt also ma! not allow the change in the basic structure of the
#onstitution because it compromises the fiscal federalism ingrained in the #onstitution.
(iii) BevenueG Total collection of revenue will remain the same. There is no reason wh! we
should create such an upheaval for merel! a theoretical pursuit.
(iv) #ombining the service tax with 01T at the state level is fraught with innumerable
problems.
(v) 1t present the service tax collected at an! change is given credit with goods at the central
level against dut! on goods cleared from an! other states. Such interchangeabilit! will not be
possible in case the service taxes are collected b! the states. The free flow of a common
Indian mar'et will be hindered.
(vi) The states ma! impose different rates of service tax on the same service.
(vii) 1 service having an all4India character will get different treatment in different states.
"ven the model itself admits that its success assumes complete similarit! of rates and
procedures in all the states which is most unli'el! to happen. The states could not even
enact the same 01T laws recentl!.
The ;ractical %odelG The same result with no upheaval-without upsetting the present setup
can be achieved b! a dual 01T or parallel GST at the central as well as the state levels. 1t
the central level we can have as we have now a combination of #envat and Service Tax. 1t
the state level we can have 01T alone without Service Tax.
There is no need to combine #envat and 01T which envisages the complete abolition of
#entral "xcise 1ct which gives the power to the #entre to charge tax on manufacture. 1t the
#entre the merging of #envat and Service Tax has been alread! done to a large extent b!
allowing interchangeabilit! of input credit for both goods and services.
The rate of tax can be made (5 per cent for both goods and services in the next <udget or
the one after that. 1t the state level 01T can be perfected b! abolishing #ST and allowing
inter4changeabilit! of input credit between states. This will wor' administrativel! as well as
revenue4wise.
Bealising that India is a federal countr! with disparate states this dual or parallel GST and
01T is a most practical proposition. There is no need to serve a doctrinaire approach and
create a ma!hem to get the same revenue.