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
i
Foreword
I f the Val ue Added Tax (VAT) i s consi dered to be
a major i mpr ovement over the pr e-exi sti ng Centr al
exci se duty at the nati onal l evel and the sal es tax system
at the State l evel , then the Goods and Ser vi ces Tax
(GST) wi l l be a further si gni fi cant breakthrough - the
next l ogi cal step - towards a comprehensi ve i ndi rect tax
reform i n the country.
Keepi n g th i s ov er al l obj ecti v e i n v i ew, an
announcement was made by Shri P. Chi dambaram, the
then Uni on Fi nance Mi ni ster i n the Centr al Budget
(2007-2008) to the effect that GST woul d be i ntroduced
from Apri l 1, 2010 and that the Empowered Commi ttee
of State Fi nance Mi ni ster s, on hi s r equest, woul d
work wi th the Central Government to prepare a road
map for i ntr oducti on of GST i n I ndi a. After thi s
announcement, the Empower ed Commi ttee of State
Fi nance Mi ni ster s deci ded to set up a Joi nt Wor ki ng
Gr oup (May 10, 2007), wi th the then Advi ser to the
Uni on Fi nance Mi ni ster and the Member-Secretary of
Empower ed Commi ttee as Co-con v en or s an d th e
concer ned Joi nt Secr etar i es of the Depar tment of
Revenue of Uni on Fi nance Mi ni str y and al l Fi nance
Secr etar i es of the States as i ts member s. Thi s Joi nt
Worki ng Group, after i ntensi ve i nternal di scussi ons as
i i
wel l as i nteracti on wi th experts and representati ves of
Chamber s of Commer ce and I ndustr y, submi tted i ts
r epor t to the Empower ed Commi ttee (November 19,
2007).
Thi s r epor t was then di scussed i n detai l i n the
meeti ng of Empowered Commi ttee (November 28, 2007).
On the basi s of thi s di scussi on and wri tten observati ons
of the States, cer tai n modi fi cati ons wer e made and a
fi nal ver si on of the vi ews of Empower ed Commi ttee
at th at s tage was pr epar ed an d was s en t to th e
Gover nment of I ndi a (Apr i l 30, 2008). The comments
of the Government of I ndi a were recei ved on December
12, 2008 and were dul y consi dered by the Empowered
Commi ttee (December 16, 2008). I t was deci ded that
a Commi ttee of Pr i nci pal Secr etar i es /Secr etar i es
of Fi nance /Taxati on and Commi ssi oner s of Tr ade
Taxes of the States woul d be set up to consi der these
commen ts , an d s u bmi t th ei r v i ews . Th es e v i ews
wer e submi tted and wer e accepted i n pr i nci pl e by
th e Empower ed Commi ttee (Jan u ar y 21, 2009).
Con s equ en t u pon th i s i n -pr i n ci pl e acceptan ce, a
Worki ng Group, consi sti ng of the concerned offi ci al s of
the State Governments was formed who, in close association
wi th seni or representati ves of the Government of I ndi a,
submi tted thei r r ecommendati ons i n detai l on the
str uctur e of GST. An i mpor tant i nter acti on has al so
recentl y taken pl ace between Shri Pranab Mukherjee,
the Uni on Fi nance Mi ni ster and the Empower ed
i i i
Commi ttee (October 19, 2009) on the r el ated i ssue of
compensati on for l oss of the States on account of
phasi ng out of CST. The Empower ed Commi ttee has
now taken a detai l ed vi ew on the recommendati ons of
the Worki ng Group of offi ci al s and other rel ated matters.
Thi s detai l ed vi ew of the Empower ed Commi ttee on
the structure of GST i s now presented i n terms of the
Fi r st Di scussi on Paper , al ong wi th an Annexur e on
Frequentl y Asked Questi ons and Answers on GST, for
di scussi ons wi th i ndustry, trade, agri cul ture and peopl e
at l arge.
The Di scussi on Paper i s di vi ded i nto four secti ons.
Si nce GST woul d be further i mprovement over the VAT,
Secti on 1 begi ns wi th a bri ef reference to the process of
i ntroducti on of VAT at the Centre and the States and
al so i ndi cates the preci se poi nts where there i s a need
for fur ther i mpr ovement. Thi s secti on al so shows
how the GST can br i ng about thi s i mpr ovement.
Wi th thi s as the backgr ound for justi fi cati on of GST,
Secti on 2 then descri bes the process of preparati on for
GST. Ther eafter , Secti on 3 pr esents i n detai l the
compr eh en s i v e s tr u ctu r e of th e GST model . For
i l l ustrati ng thi s GST model further, there i s i n the end
an Annexur e on Fr equentl y Ask ed Questi ons and
Answer s.
Thi s Di scussi on Paper has been the resul t of trul y
col l ecti ve effor ts on the basi s of har dwor k of al l the
i v
con cer n ed offi ci al s of th e States , th e offi ci al s of
Empowered Commi ttee Secretari at and the Advi ser and
offi ci al s of the Uni on Fi nance Mi ni stry, the counsel and
acti ve parti ci pati on of Fi nance Mi ni sters and concerned
Seni or Mi ni sters of the States at each stage, and the
encour agement and advi ce of the Uni on Fi nance
Mi ni ster .
Wi th the rel ease of thi s Fi rst Di scussi on Paper and
the Annexur e on Fr equentl y Asked Questi ons and
Answers, we now si ncerel y i nvi te i nteracti on wi th the
r epr esentati ves of i ndustr y, tr ade, agr i cul tur e and
common peopl e. Thi s i nter acti on and campai gn wi l l
i mmedi atel y start at the nati onal l evel and at the State
l evel s. As a part of thi s i nteracti on, we l ook forward to
r ecei vi ng the vi ews of i ndustr y, tr ade, agr i cul tur e as
wel l as consumers i n a ti me-bound manner.
Asi m Kumar Dasgupta
Chairman,
Empowered Commi ttee of
State Fi nance Mi ni sters
&
Mi ni ster of Fi nance & Exci se,
Government of West Bengal
New Del hi ,
November 10, 2009
1
1. Introduction
1.1 I ntroducti on of the Val ue Added Tax (VAT) at
the Central and the State l evel has been consi dered to be
a major step an i mportant breakthrough i n the sphere
of i ndi rect tax reforms i n I ndi a. I f the VAT i s a major
i mprovement over the pre-exi sti ng Central exci se duty at
the nati onal l evel and the sal es tax system at the State
l evel , then the Goods and Servi ces Tax (GST) wi l l i ndeed
be a further si gni fi cant i mprovement the next l ogi cal
step towards a comprehensi ve i ndi rect tax reforms i n
the country.
1.2 Keepi ng thi s objecti ve i n vi ew, an announcement
was made by the then Uni on Fi nance Mi ni ster i n the
Central Budget (2007-08) to the effect that GST woul d be
i ntroduced wi th effect from Apri l 1, 2010 and that the
Empowered Commi ttee of State Fi nance Mi ni sters, on hi s
request, woul d work wi th the Central Government to
prepare a road map for i ntroducti on of GST i n I ndi a. After
thi s announcement, the Empowered Commi ttee of State
Fi nance Mi ni ster s deci ded to set up a Joi nt Wor ki ng
Group (May 10, 2007), wi th the then Advi ser to the Uni on
Fi n an ce Mi n i s ter an d Member -Secr etar y of th e
Empowered Commi ttee as i ts Co-convenors and concerned
four Joi nt Secretari es of the Department of Revenue of
Uni on Fi nance Mi ni stry and al l Fi nance Secretari es of
the States as i ts members. Thi s Joi nt Worki ng Group got
i tsel f di vi ded i nto thr ee Sub-Gr oups and had sever al
2
rounds of i nternal di scussi ons as wel l as i nteracti on wi th
experts and representati ves of Chambers of Commerce
& I ndustr y. On the basi s of these di scussi ons and
i nteracti on, the Sub-Groups submi tted thei r reports whi ch
were then i ntegrated and consol i dated i nto the report of
Joi nt Worki ng Group (November 19, 2007).
1.3 Thi s report was di scussed i n detai l i n the meeti ng
of the Empowered Commi ttee on November 28, 2007, and
the States wer e al so r equested to communi cate thei r
observati ons on the report i n wri ti ng. On the basi s of
these di scussi ons i n the Empowered Commi ttee and the
wr i tten obs er v ati ons , cer tai n modi fi cati ons wer e
consi der ed necessar y and wer e di scussed wi th the
Co-convenors and the representati ves of the Department
of Revenue of Uni on Fi nance Mi ni str y. Wi th the
modi fi cati ons dul y made, a fi nal versi on of the vi ews of
Empowered Commi ttee on the model and road map for
the GST was prepared (Apri l 30, 2008). These vi ews of
Empowered Commi ttee were then sent to the Government
of I ndi a, and the comments of Government of I ndi a were
recei ved on December 12, 2008. These comments were dul y
consi dered by the Empowered Commi ttee (December 16,
2008), and i t was deci ded that a Commi ttee of Pri nci pal
Secr etar i es /Secr etar i es of Fi n an ce/Tax ati on an d
Commi ssi oners of Trade Taxes of the States woul d be set
up to consi der these comments, and submi t thei r vi ews.
These vi ews were submi tted and were accepted i n pri nci pl e
by the Empowered Commi ttee (January 21, 2009). As
3
a fol l ow-up of thi s i n-pri nci pl e acceptance, a Worki ng
Group consi sti ng of the concerned offi ci al s of the State
Governments was formed who, i n associ ati on wi th seni or
r epr esentati ves of Gover nment of I ndi a, submi tted
thei r recommendati ons i n detai l on the structure of GST.
An i mpor tant i nter acti on has al so r ecentl y tak en
pl ace between Shr i Pr anab Muk her j ee, the Uni on
Fi nance Mi ni ster and the Empower ed Commi ttee
(October 19, 2009) on the rel ated i ssue of compensati on
for l oss of the States on account of phasi ng out of CST.
The Empowered Commi ttee has now taken a detai l ed vi ew
on the recommendati ons of the Worki ng Group of offi ci al s
and other r el ated matter s. Thi s detai l ed vi ew i s now
presented i n terms of the Fi rst Di scussi on Paper, al ong
wi th an Annexure on Frequentl y Asked Questi ons and
Answers on GST, for di scussi on wi th i ndustry, trade,
agri cul ture and peopl e at l arge. Si nce the GST at the
Centre and States woul d be a further i mprovement over
the VAT, a bri ef recal l i ng of the process of i ntroducti on of
VAT i n I ndi a i s worthwhi l e.
Value Added Tax at the Central and the State level
1.4 Pri or to the i ntroducti on of VAT i n the Centre
and i n the States, there was a burden of mul ti pl e taxati on
i n the pre-exi sti ng Central exci se duty and the State sal es
tax systems. Before any commodi ty was produced, i nputs
were first taxed, and then after the commodity got produced
wi th i nput tax l oad, output was taxed agai n. Thi s was
causi ng a burden of mul ti pl e taxati on (i .e. tax on tax)
4
wi th a cascadi ng effect. Mor eover , i n the sal es tax
structure, when there was al so a system of mul ti -poi nt
sal es taxati on at subsequent l evel s of di stri buti ve trade,
then al ong wi th i nput tax l oad, burden of sal es tax pai d
on purchase at each l evel was al so added, thus aggravati ng
the cascadi ng effect further.
1.5 When VAT i s i ntroduced i n pl ace of Central exci se
duty, a set-off i s gi ven, i .e., a deducti on i s made from the
overal l tax burden for i nput tax. I n the case of VAT i n
pl ace of sal es tax system, a set-off i s gi ven from tax burden
not onl y for i nput tax pai d but al so for tax pai d on previ ous
purchases. Wi th VAT, the probl em of tax on tax and
r el ated bur den of cascadi ng effect i s thus r emoved.
Furthermore, si nce the benefi t of set-off can be obtai ned
onl y i f tax i s dul y pai d on i nputs (i n the case of Central
VAT), and on both i nputs and on previ ous purchases (i n
the case of State VAT), there i s a bui l t-i n check i n the
VAT structure on tax compl i ance i n the Centre as wel l as
i n th e States , wi th ex pected r es u l ts i n ter ms of
i mpr ovement i n tr anspar ency and r educti on i n tax
evasi on. For these benefi ci al effects, VAT has now been
i ntroduced i n more than 150 countri es, i ncl udi ng several
federal countri es. I n Asi a, i t has now been i ntroduced i n
al most al l the countri es.
1.6 I n I ndi a, VAT was i ntroduced at the Central l evel
for a sel ected number of commodi ti es i n ter ms of
MODVAT wi th effect fr om Mar ch 1, 1986, and i n a
5
step-by-step manner for al l commodi ti es i n ter ms of
CENVAT i n 2002-03. Subsequentl y, after Consti tuti onal
Amendment empower i ng the Centr e to l evy taxes on
servi ces, these servi ce taxes were al so added to CENVAT
i n 2004-05. Al though the growth of tax revenue from the
Central exci se has not al ways been speci al l y hi gh, the
revenue growth of combi ned CENVAT and servi ce taxes
has been si gni fi cant.
1.7 I ntroducti on of VAT i n the States has been a more
chal l engi ng exerci se i n a federal country l i ke I ndi a, where
each State, i n ter ms of Consti tuti onal pr ovi si on, i s
soverei gn i n l evyi ng and col l ecti ng State taxes. Before
i ntroducti on of VAT, i n the sal es tax regi me, apart from
the probl em of mul ti pl e taxati on and burden of adverse
cascadi ng effect of taxes as al ready menti oned, there was
al so no harmony i n the rates of sal es tax on di fferent
commodi ti es among the States. Not onl y were the rates
of sal es tax numerous (often more than ten i n several
States), and di ffer ent fr om one another for the same
commodi ty i n di ffer ent States, but ther e was al so an
unheal thy competi ti on among the States i n terms of sal es
tax r ates so-cal l ed r ate war often r esul ti ng i n,
revenue-wi se, a counter-producti ve si tuati on.
1.8 I t i s i n thi s background that attempts were made
by the States to i ntr oduce a har moni ous VAT i n the
States, keepi ng at the same ti me i n mi nd the i ssue of
soverei gnty of the States regardi ng the State tax matters.
6
The fi rst prel i mi nary di scussi on on State-l evel VAT took
pl ace i n a meeti ng of Chi ef Mi ni ster s convened by
Dr. Manmohan Si ngh, the then Uni on Fi nance Mi ni ster
i n 1995. I n thi s meeti ng, the basi c i ssues on VAT were
di scussed i n gener al ter ms and thi s was fol l owed up
by per i odi c i nter acti ons of State Fi nance Mi ni ster s.
Th er eafter , i n a s i gn i fi can t meeti n g of al l th e
Chi ef Mi ni ster s, convened on November 16, 1999 by
Shri Yashwant Si nha, the then Uni on Fi nance Mi ni ster,
two i mportant deci si ons, among others, were taken. Fi rst,
before the i ntroducti on of State-l evel VAT, the unheal thy
sal es tax rate war among the States woul d have to end,
and sal es tax r ates woul d need to be har moni sed by
i mpl ementi ng uni form fl oor rates of sal es tax for di fferent
categori es of commodi ti es wi th effect from January 1, 2000.
Secondl y, on the basi s of achi evement of the fi rst objecti ve,
steps woul d be taken by the States for i ntr oducti on
of State-l evel VAT after adequate pr epar ati on. For
i mpl ementi ng these deci si ons, a Standi ng Commi ttee
of State Fi nance Mi ni sters was formed whi ch was then
made an Empower ed Commi ttee of State Fi nance
Mi ni sters.
1.9 Thereafter, the Empowered Commi ttee has met
regul arl y. Al l the deci si ons were taken on the basi s of
consensus. On the strength of these repeated di scussi ons
and col l ecti ve efforts, i nvol vi ng the Mi ni sters and the
concerned offi ci al s, i t was possi bl e wi thi n a peri od of about
7
a year and a hal f to achi eve nearl y 98 per cent success i n
the fi rst objecti ve, namel y, harmoni sati on of sal es tax
structure through i mpl ementati on of uni form fl oor rates
of sal es tax.
1.10 After reachi ng thi s stage, steps were i ni ti ated
for systemati c preparati on for i ntroducti on of State-l evel
VAT. I n order agai n to avoi d any unheal thy competi ti on
among the States whi ch may l ead to di stor ti ons i n
manufacturi ng and trade, attempts have been made from
the very begi nni ng to harmoni se the VAT desi gn i n the
States, keepi ng al so i n vi ew the di sti ncti ve features of each
State and the need for federal fl exi bi l i ty. Thi s has been
done by the States col l ecti vel y agr eei ng, thr ough
di scussi ons i n the Empower ed Commi ttee, to cer tai n
common poi nts of conver gence r egar di ng VAT, and
al l owi n g at th e s ame ti me cer tai n fl ex i bi l i ty to
accommodate the l ocal characteri sti cs of the States. I n
the course of these di scussi ons, references to the Tenth
Fi ve Year Pl an Report of the Advi sory Group on Tax
Pol i ci es & Tax Admi ni strati on (2001) and the report of
Kel kar (Chai rman) Task Force were hel pful .
1.11 Al ong wi th these measures, steps were taken for
necessary trai ni ng, computeri zati on and i nteracti on wi th
trade and i ndustry. Whi l e these preparatory steps were
taken, the Empower ed Commi ttee got a si gni fi cant
suppor t fr om Shr i P. Chi dambar am, the then Uni on
8
Fi nance Mi ni ster , when he r esponded posi ti vel y i n
pr ovi di ng Centr al fi nanci al suppor t to the States i n
the event of l oss of r evenue i n tr ansi ti onal year s of
i mpl ementati on of VAT.
1.12 As a consequence of al l these steps, the States
started i mpl ementi ng VAT begi nni ng Apri l 1, 2005. After
over comi ng the i ni ti al di ffi cul ti es, al l the States and
Uni on Ter r i tor i es have now i mpl emented VAT. The
Empowered Commi ttee has been moni tori ng cl osel y the
pr ocess of i mpl ementati on of State-l evel VAT, and
devi ati ons from the agreed VAT rates has been contai ned
to l ess than 3 per cent of the total l i st of commodi ti es.
Responses of i ndustry and al so of trade have been i ndeed
encouragi ng. The rate of growth of tax revenue has nearl y
doubl ed from the average annual rate of growth i n the
pre-VAT fi ve year peri od after the i ntroducti on of VAT.
J ustification of GST
1.13 Despi te thi s success wi th VAT, there are sti l l
certai n shortcomi ngs i n the structure of VAT both at the
Centr al and at the State l evel . The shor tcomi ng i n
CENVAT of the Government of I ndi a l i es i n non-i ncl usi on
of sever al Centr al taxes i n the over al l fr amewor k of
CENVAT, such as addi ti onal customs duty, surcharges,
etc., and thus keepi ng the benefi ts of comprehensi ve i nput
tax and servi ce tax set-off out of reach for manufacturers/
deal ers. Moreover, no step has yet been taken to capture
the val ue-added chai n i n the di stri buti on trade bel ow the
9
manufacturi ng l evel i n the exi sti ng scheme of CENVAT.
The i ntroducti on of GST at the Central l evel wi l l not onl y
i ncl ude compr ehensi vel y mor e i ndi r ect Centr al taxes
and i ntegrate goods and servi ce taxes for the purpose of
set-off rel i ef, but may al so l ead to revenue gai n for the
Centre through wi deni ng of the deal er base by capturi ng
val ue addi ti on i n the di stri buti ve trade and i ncreased
compl i ance.
1.14 I n the exi sti ng State-l evel VAT structure there
are al so certai n shortcomi ngs as fol l ows. There are, for
i nstance, even now, several taxes whi ch are i n the nature
of i ndi rect tax on goods and servi ces, such as l uxury tax,
entertai nment tax, etc., and yet not subsumed i n the VAT.
Mor eover , i n the pr esent State-l evel VAT scheme,
CENVAT l oad on the goods remai ns i ncl uded i n the val ue
of goods to be taxed under State VAT, and contri buti ng
to that extent a cascadi ng effect on account of CENVAT
el ement. Thi s CENVAT l oad needs to be r emoved.
Furthermore, any commodi ty, i n general , i s produced on
the basi s of physi cal i nputs as wel l as servi ces, and there
shoul d be i ntegrati on of VAT on goods wi th tax on servi ces
at the State l evel as wel l , and at the same ti me there
shoul d al so be removal of cascadi ng effect of servi ce tax.
I n the GST, both the cascadi ng effects of CENVAT and
servi ce tax are removed wi th set-off, and a conti nuous
chai n of set-off from the ori gi nal producers poi nt and
ser vi ce pr ovi der s poi nt upto the r etai l er s l evel i s
establ i shed whi ch reduces the burden of al l cascadi ng
effects. Thi s i s the essence of GST, and thi s i s why GST
10
i s not si mpl y VAT pl us servi ce tax but an i mprovement
over the previ ous system of VAT and di sjoi nted servi ce
tax. However, for thi s GST to be i ntroduced at the State-
l evel , i t i s essenti al that the States shoul d be gi ven the
power of levy of taxation of all services. This power of levy
of servi ce taxes has so l ong been onl y wi th the Centre.
A Constitutional Amendment will be made for giving this
power also to the States. Moreover, with the introducti on
of GST, burden of Central Sal es Tax (CST) wi l l al so 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 compr ehensi ve set-off r el i ef,
i ncl udi ng set-off for cascadi ng burden of CENVAT and
servi ce taxes, (c) subsumi ng of several taxes i n the GST
and (d) removal of burden of CST. Because of the removal
of cascadi ng effect, the burden of tax under GST on goods
wi l l , i n general , fal l .
1.15 The GST at the Central and at the State l evel
wi l l thus gi ve more rel i ef to i ndustry, trade, agri cul ture
and consumer s thr ough a mor e compr ehensi ve and
wi der coverage of i nput tax set-off and servi ce tax set-
off, subsumi ng of several taxes i n the GST and phasi ng
out of CST. Wi th the GST bei ng pr oper l y for mul ated
by appr opr i ate cal i br ati on of r ates and adequate
compensati on wher e necessar y, ther e may al so be
revenue/resource gain for both the Centre and the States,
primarily through widening of tax base and possi bi l i ty of
11
a si gni fi cant i mprovement i n tax-compl i ance. I n other
words, the GST may usher i n the possi bi l i ty of a col l ecti ve
gai n for i ndustr y, tr ade, agr i cul tur e and common
consumers as wel l as for the Central Government and
the State Governments. The GST may, i ndeed, l ead to
the possi bi l i ty of col l ecti vel y posi ti ve-sum game.
2. Preparation for GST
2.1 Keepi ng thi s si gni fi cance of GST i n vi ew, an
announcement was made by the then Uni on Fi nance
Mi ni ster i n the Uni on Budget, as menti oned before, to
the effect that GST woul d be i ntroduced from Apri l 1, 2010,
and that the Empowered Commi ttee of State Fi nance
Mi ni sters woul d work wi th the Central Government to
prepare a road map for i ntroducti on of the GST. After
thi s announcement, the Empowered Commi ttee, as stated
earl i er, had set up a Joi nt Worki ng Group whi ch submi tted
a r epor t on a model and r oad map for GST. After
accommodati ng the vi ews of the States appropri atel y on
thi s report, the vi ews of the Empowered Commi ttee on
the model and road map were sent to the Government of
I n di a on 30
th
Apr i l , 2008. Th e commen ts of th e
Government of I ndi a were recei ved on 12
th
December,
2008. These comments wer e dul y consi der ed by the
Empower ed Commi ttee i n i ts meeti ng hel d on 16
th
December, 2008 and i t was deci ded that a Commi ttee
of Principal Secretaries/Secretaries (Finance/Taxation) and
12
Commi ssi oner s of Tr ade Taxes shoul d consi der the
comments recei ved from the Government of I ndi a and
submi t i ts vi ews and al so wor k out the Centr al GST
and State GST r ates. The Commi ttee hel d detai l ed
del i ber ati on s on 5
th
an d 6
th
Jan u ar y , 2009, an d
submi tted i ts r ecommendati ons to the Empower ed
Commi ttee. The Empower ed Commi ttee consi der ed
these r ecommendati ons i n i ts meeti ng hel d on 21
st
Januar y, 2009 and accepted them i n pr i nci pl e. The
Empower ed Commi ttee al so deci ded to consti tute a
Wor ki ng Gr oup consi sti ng of Pr i nci pal Secr etar i es/
Secr etar i es (Fi nance/Taxati on) and Commi ssi oner s of
Tr ade Tax es of al l States /UTs to gi v e th ei r
recommendati ons on (a) the commodi ti es and servi ces
that shoul d be kept i n the exempted l i st, (b) the rul es
and pr i nci pl es of taxi ng the tr ansacti ons of ser vi ces
i ncl udi ng the transacti ons i n i nter-State servi ces, and
(c) fi nal i zati on of the model suggested for i nter -state
transacti on/movement of goods i ncl udi ng stock transfers
i n consul tati on wi th the State Bank of I ndi a and some
other nati onal i zed banks. I t was al so deci ded that the
seni or r epr esentati ves fr om the Gover nment of I ndi a
may al so be associ ated. The Worki ng Group del i berated
on the i ssues on 10
th
Febr uar y, 2009 and deci ded to
form three Sub Worki ng Groups to del i berate each i tem
i n depth. The Repor ts of the Wor ki ng Gr oup on the
thr ee i ssues have al r eady been r ecei ved, and the
Empower ed Commi ttee has taken a vi ew on these
r ecommendati ons for concl udi ng the detai l s of GST
structure.
13
2.2 Whi l e maki ng thi s preparati on of GST, i t was
al so necessary, as menti oned earl i er, to phase out the CST,
because i t di d not car r y any set-off r el i ef and ther e
was a di storti on i n the VAT regi me due to export of tax
from one State to other State. The Empowered Commi ttee
accor di ngl y took a deci si on to phase out CST on the
understandi ng wi th the Centre that, si nce phasi ng out of
CST woul d resul t i n a l oss of revenue to the States on a
per man en t bas i s , an appr opr i ate mech an i s m to
compensate the States for such l oss woul d be worked out.
The rate of CST has al ready been reduced to 2% and wi l l
be phased out wi th effect from the date of i ntroducti on of
GST on the basi s of such GST str uctur e whi ch, wi th
necessar y fi nanci al suppor t to the States, shoul d
adequatel y compensate for the l oss of the States on a
permanent basi s. Wi th these steps at preparati on i n mi nd,
i t i s i mportant now to turn to the proposed model of GST.
3. Goods & Services Tax Model For India
3.1 I t i s i mportant to take note of the si gni fi cant
admi ni strati ve i ssues i nvol ved i n desi gni ng an effecti ve
GST model i n a feder al system wi th the objecti ve of
havi ng an overal l harmoni ous structure of rates. Together
wi th thi s, there i s a need for uphol di ng the powers of
Central and State Governments i n thei r taxati on matters.
Further, there i s al so the need to propose a model that
woul d be easi l y i mpl ementabl e, whi l e bei ng general l y
acceptabl e to stakehol ders.
14
Salient features of the GST model
3.2 Keepi ng i n vi ew the report of the Joi nt Worki ng
Group on Goods and Servi ces Tax, the vi ews recei ved
from the States and Government of I ndi a, a dual GST
structure wi th defi ned functi ons and responsi bi l i ti es of
the Centre and the States i s recommended. An appropri ate
mechani sm that wi l l be bi ndi ng on both the Centre and
the States woul d be worked out whereby the harmoni ous
rate structure al ong wi th the need for further modi fi cati on
coul d be uphel d, i f necessary wi th a col l ecti vel y agreed
Consti tuti onal Amendment. Sal i ent featur es of the
proposed model are as fol l ows:
(i ) The GST shal l have two components: one l evi ed
by the Centre (herei nafter referred to as Central GST),
and the other l evi ed by the States (herei nafter referred to
as State GST). Rates for Central GST and State GST
woul d be pr escr i bed appr opr i atel y, r efl ecti ng r evenue
consi derati ons and acceptabi l i ty. Thi s dual GST model
woul d be i mpl emented through mul ti pl e statutes (one for
CGST and SGST statute for every State). However, the
basi c features of l aw such as chargeabi l i ty, defi ni ti on of
taxabl e event and taxabl e per son, measur e of l evy
i ncl udi ng val uati on provi si ons, basi s of cl assi fi cati on etc.
woul d be uni for m acr oss these statutes as far as
practi cabl e.
(i i ) The Central GST and the State GST woul d be
appl i cabl e to al l transacti ons of goods and servi ces made
15
for a consi der ati on except the exempted goods and
servi ces, goods whi ch are outsi de the purvi ew of GST
and the tr ansacti ons whi ch ar e bel ow the pr escr i bed
threshol d l i mi ts.
(i i i ) The Central GST and State GST are to be pai d to
the accounts of the Centre and the States separatel y. I t
woul d have to be ensur ed that account-heads for al l
ser vi ces and goods woul d have i ndi cati on whether i t
rel ates to Central GST or State GST (wi th i denti fi cati on
of the State to whom the tax i s to be credi ted).
(i v) Si nce the Central GST and State GST are to be
treated separatel y, taxes pai d agai nst the Central GST
shal l be al l owed to be taken as i nput tax credi t (I TC) for
the Central GST and coul d be uti l i zed onl y agai nst the
payment of Centr al GST. The same pr i nci pl e wi l l be
appl i cabl e for the State GST. A taxpayer or exporter woul d
have to mai ntai n separate detai l s i n books of account for
uti l i zati on or refund of credi t. Further, the rul es for taki ng
and uti l i zati on of credi t for the Central GST and the State
GST woul d be al i gned.
(v) Cr oss uti l i zati on of I TC between the Centr al
GST and the State GST woul d not be al l owed except i n
the case of i nter-State suppl y of goods and servi ces under
the I GST model whi ch i s expl ai ned l ater.
(vi) I deally, the problem related to credit accumulation
on account of refund of GST shoul d be avoi ded by both the
Centre and the States except i n the cases such as exports,
16
purchase of capi tal goods, i nput tax at hi gher rate than
output tax etc. where, agai n refund/adjustment shoul d be
compl eted i n a ti me bound manner.
(vi i ) To the extent feasi bl e, uni form procedure for
col l ecti on of both Central GST and State GST woul d be
prescri bed i n the respecti ve l egi sl ati on for Central GST
and State GST.
(vi i i ) The admi ni strati on of the Central GST to the
Centre and for State GST to the States woul d be gi ven.
Thi s woul d i mpl y that the Centre and the States woul d
have concurrent juri sdi cti on for the enti re val ue chai n and
for al l taxpayers on the basi s of threshol ds for goods and
servi ces prescri bed for the States and the Centre.
(i x) The pr esent thr eshol d pr escr i bed i n di ffer ent
State VAT Acts bel ow whi ch VAT i s not appl i cabl e
vari es from State to State. A uni form State GST threshol d
across States i s desi rabl e and, therefore, i t i s consi dered
that a threshol d of gross annual turnover of Rs.10 l akh
both for goods and servi ces for al l the States and Uni on
Terri tori es may be adopted wi th adequate compensati on
for the States (parti cul arl y, the States i n North-Eastern
Regi on and Speci al Categor y States) wher e l ower
threshol d had prevai l ed i n the VAT regi me. Keepi ng i n
vi ew the i nter est of smal l tr ader s and smal l scal e
i ndustr i es and to avoi d dual contr ol , the States al so
consi dered that the threshol d for Central GST for goods
17
may be kept at Rs.1.5 crore and the threshol d for Central
GST for servi ces may al so be appropri atel y hi gh. I t may
be menti oned that even now there i s a separate threshol d
of servi ces (Rs. 10 l akh) and goods (Rs. 1.5 crore) i n the
Servi ce Tax and CENVAT.
(x) The States are al so of the vi ew that Composi ti on/
Compoundi ng Scheme for the purpose of GST shoul d have
an upper cei l i ng on gross annual turnover and a fl oor tax
rate wi th respect to gross annual turnover. I n parti cul ar,
there woul d be a compoundi ng cut-off at Rs. 50 l akh of
gross annual turn over and a fl oor rate of 0.5% across the
States. The scheme woul d al so al l ow opti on for GST
r egi s tr ati on for deal er s wi th tur nov er bel ow the
compoundi ng cut-off.
(xi ) The taxpayer woul d need to submi t peri odi cal
returns, i n common format as far as possi bl e, to both the
Central GST authori ty and to the concerned State GST
authori ti es.
(xi i ) Each taxpayer woul d be al l otted a PAN-l i nked
taxpayer i denti fi cati on number wi th a total of 13/15 di gi ts.
Thi s woul d bri ng the GST PAN-l i nked system i n l i ne
wi th the prevai l i ng PAN-based system for I ncome tax,
faci l i tati ng data exchange and taxpayer compl i ance.
(xi i i ) Keepi n g i n mi n d th e n eed of tax pay er s
conveni ence, functi ons such as assessment, enforcement,
18
scruti ny and audi t woul d be undertaken by the authori ty
whi ch i s col l ecti ng the tax, wi th i nfor mati on shar i ng
between the Centre and the States.
Central and State Taxes to be subsumed under GST
3.3 The vari ous Central , State and Local l evi es were
exami ned to i denti fy thei r possi bi l i ty of bei ng subsumed
under GST. Whi l e i denti fyi ng, the fol l owi ng pri nci pl es
were kept i n mi nd:
(i ) Taxes or l evi es to be subsumed shoul d be
pri mari l y i n the nature of i ndi rect taxes, ei ther on the
suppl y of goods or on the suppl y of servi ces.
(i i ) Taxes or l evi es to be subsumed shoul d be part of
the tr ansacti on chai n whi ch commences wi th i mpor t/
manufacture/ producti on of goods or provi si on of servi ces
at one end and the consumption of goods and services at the
other.
(i i i ) The subsumati on shoul d resul t i n free fl ow of tax
credi t i n i ntra and i nter-State l evel s.
(i v) The taxes, l evi es and fees that are not speci fi cal l y
r el ated to suppl y of goods & ser vi ces shoul d not be
subsumed under GST.
(v) Revenue fai r ness for both the Uni on and the
States i ndi vi dual l y woul d need to be attempted.
19
3.4 On appl i cati on of the above pr i nci pl es, i t i s
recommended that the following Central Taxes should be,
to begi n wi th, subsumed under the Goods and Servi ces
Tax:
(i ) Central Exci se Duty
(i i ) Addi ti onal Exci se Duti es
(i i i ) The Exci se Duty l evi ed under the Medi ci nal and
Toi l etri es Preparati on Act
(i v) Servi ce Tax
(v) Addi ti onal Customs Duty, commonl y known as
Countervai l i ng Duty (CVD)
(vi ) Speci al Addi ti onal Duty of Customs - 4% (SAD)
(vi i ) Surcharges, and
(vi i i ) Cesses.
Fol l owi ng State taxes and l evi es woul d be, to begi n wi th,
subsumed under GST:
(i ) VAT / Sal es tax
(i i ) Entertai nment tax (unl ess i t i s l evi ed by the l ocal
bodi es).
(i i i ) Luxury tax
(i v) Taxes on l ottery, betti ng and gambl i ng.
(v) State Cesses and Surcharges i n so far as they
rel ate to suppl y of goods and servi ces.
(vi ) Entry tax not i n l i eu of Octroi .
20
Purchase tax: Some of the States fel t that they are
getti ng substanti al r evenue fr om Pur chase Tax and,
therefore, i t shoul d not be subsumed under GST whi l e
major i ty of the States wer e of the vi ew that no such
exempti ons shoul d be gi ven. The di ffi cul ti es of the
foodgr ai ns pr oduci ng States and cer tai n other States
were appreci ated as substanti al revenue i s bei ng earned
by them from Purchase Tax and i t was, therefore, fel t that
i n case Purchase Tax has to be subsumed then adequate
and conti nui ng compensati on has to be provi ded to such
States. Thi s i ssue i s bei ng di scussed i n consul tati on wi th
the Government of I ndi a.
Tax on items containing Alcohol: Al cohol i c
beverages woul d be kept out of the purvi ew of GST. Sal es
Tax/VAT can be conti nued to be l evi ed on al cohol i c
beverages as per the exi sti ng practi ce. I n case i t has been
made Vatabl e by some States, there i s no objecti on to that.
Exci se Duty, whi ch i s presentl y bei ng l evi ed by the States
may not be al so affected.
Tax on Tobacco products: Tobacco products woul d
be subjected to GST wi th I TC. Centre may be al l owed to
l evy exci se duty on tobacco products over and above GST
wi thout I TC.
Tax on Petroleum Products: As far as petrol eum
products are concerned, i t was deci ded that the basket of
petrol eum products, i .e. crude, motor spi ri t (i ncl udi ng
21
ATF) and HSD woul d be kept outsi de GST as i s the
prevai l i ng practi ce i n I ndi a. Sal es Tax coul d conti nue to
be l evi ed by the States on these products wi th prevai l i ng
fl oor rate. Si mi l arl y, Centre coul d al so conti nue i ts l evi es.
A fi nal vi ew whether Natural Gas shoul d be kept outsi de
the GST wi l l be taken after further del i berati ons.
Taxation of Services : As i ndi cated earl i er, both the
Centre and the States wi l l have concurrent power to l evy
tax on al l goods and servi ces. I n the case of States, the
pri nci pl e for taxati on of i ntra-State and i nter-State has
al r eady been for mul ated by the Wor ki ng Gr oup of
Pr i nci pal Secr etar i es/Secr etar i es of Fi nance/Taxati on
an d Commi s s i on er s of Tr ade Tax es wi th s en i or
representati ves of Department of Revenue, Government
of I ndi a. For i nter-State transacti ons an i nnovati ve model
of I ntegr ated GST wi l l be adopted by appr opr i atel y
al i gni ng and i ntegrati ng CGST and SGST. The worki ng
of thi s model i s el aborated bel ow.
3.5 Inter-State Transactions of Goods and Services
Th e Empower ed Commi ttee h as accepted th e
r ecommendati ons of the Wor ki ng Gr oup of concer ned
offi ci al s of Central and State Governments for adopti on
of I GST model for taxati on of i nter -State tr ansacti on
of Goods and Servi ces. The scope of I GST Model i s that
Centre woul d l evy I GST whi ch woul d be CGST pl us SGST
on al l i nter -State tr ansacti ons of taxabl e goods and
22
servi ces wi th appropri ate provi si on for consi gnment or
stock transfer of goods and servi ces. The i nter-State sel l er
wi l l pay I GST on val ue addi ti on after adjusti ng avai l abl e
credi t of I GST, CGST, and SGST on hi s purchases. The
Exporti ng State wi l l transfer to the Centre the credi t of
SGST used i n payment of I GST. The I mporti ng deal er
wi l l cl ai m credi t of I GST whi l e di schargi ng hi s output tax
l i abi l i ty i n hi s own State. The Centre wi l l transfer to the
i mporti ng State the credi t of I GST used i n payment of
SGST. The rel evant i nformati on wi l l al so be submi tted
to the Central Agency whi ch wi l l act as a cl eari ng house
mechani sm, veri fy the cl ai ms and i nform the respecti ve
governments to transfer the funds.
The major advantages of I GST Model are:
a) Mai ntenance of uni nterrupted I TC chai n on i nter-
State transacti ons.
b) No upfront payment of tax or substanti al bl ockage
of funds for the i nter-State sel l er or buyer.
c) No refund cl ai m i n exporti ng State, as I TC i s used
up whi l e payi ng the tax.
d) Sel f moni tori ng model .
e) Level of computeri zati on i s l i mi ted to i nter-State
deal er s and Centr al and State Gover nments
shoul d be abl e to computer i ze thei r pr ocesses
expedi ti ousl y.
23
f) As al l i nter-State deal ers wi l l be e-regi stered and
correspondence wi th them wi l l be by e-mai l , the
compl i ance l evel wi l l i mprove substanti al l y.
g) Model can take Busi ness to Busi ness as wel l as
Busi ness to Consumer transacti ons i nto account.
3.6 GST Rate Structure
The Empowered Commi ttee has deci ded to adopt a
two-rate structure a l ower rate for necessary i tems and
goods of basi c i mportance and a standard rate for goods
i n general . There wi l l al so be a speci al rate for preci ous
metal s and a l i st of exempted i tems. For uphol di ng of
speci al needs of each State as wel l as a bal anced approach
to feder al fl exi bi l i ty, and al so for faci l i tati ng the
i ntroducti on of GST, i t i s bei ng di scussed whether the
exempted l i st under VAT regi me i ncl udi ng Goods of Local
I mportance may be retai ned i n the exempted l i st under
State GST i n the i ni ti al years. I t i s al so bei ng di scussed
whether the Government of I ndi a may adopt, to begi n
wi th, a si mi l ar approach towards exempted l i st under the
CGST.
The States are of the vi ew that for CGST rel ati ng to
goods, the Government of I ndi a may al so have a two-rate
structure, wi th conformi ty i n the l evel s of rate under the
SGST. For taxati on of servi ces, there may be a si ngl e rate
for both CGST and SGST.
The exact val ue of the SGST and CGST r ates,
i ncl udi ng the rate for servi ces, wi l l be made known dul y
i n course of appropri ate l egi sl ati ve acti ons.
24
3.7 Zero Rating of Exports
Exports woul d be zero-rated. Si mi l ar benefi ts may
be gi ven to Speci al Economi c Zones (SEZs). However, such
benefi ts wi l l onl y be al l owed to the processi ng zones of
the SEZs. No benefi t to the sal es from an SEZ to Domesti c
Tari ff Area (DTA) wi l l be al l owed.
3.8 GST on Imports: The GST wi l l be l evi ed on
i mports wi th necessary Consti tuti onal Amendments. Both
CGST and SGST wi l l be l evi ed on i mport of goods and
servi ces i nto the country. The i nci dence of tax wi l l fol l ow
the desti nati on pri nci pl e and the tax revenue i n case of
SGST wi l l accrue to the State where the i mported goods
and servi ces are consumed. Ful l and compl ete set-off wi l l
be avai l abl e on the GST pai d on i mport on goods and
servi ces.
3.9 Special Industrial Area Scheme
After the i ntroducti on of GST, the tax exempti ons,
remi ssi ons etc. rel ated to i ndustri al i ncenti ves shoul d be
converted, i f at al l needed, i nto cash refund schemes after
col l ecti on of tax, so that the GST scheme on the basi s of a
conti nuous chai n of set-offs i s not di sturbed. Regardi ng
Speci al I ndustri al Area Schemes, i t i s cl ari fi ed that such
exempti ons, r emi ssi ons etc. woul d conti nue up to
l egi ti mate expi ry ti me both for the Centre and the States.
Any new exempti on, remi ssi on etc. or conti nuati on of
earl i er exempti on, remi ssi on etc. woul d not be al l owed.
25
I n such cases, the Central and the State Governments
coul d provi de rei mbursement after col l ecti ng GST.
3.10 IT Infrastructure
After acceptance of I GST Model for I nter -State
tr an s acti on s , th e maj or r es pon s i bi l i ti es of I T
i nfrastructural requi rement wi l l be shared by the Central
Government through the use of i ts own I T i nfrastructure
faci l i ty. The i ssues of tyi ng up the State I nfrastructure
faci l i ti es wi th the Central faci l i ti es as wel l as further
i mpr ovement of the States own I T i nfr astr uctur e,
i ncl udi ng TI NXSYS, i s now to be addressed expedi ti ousl y
and i n a ti me bound manner.
3.11 Constitutional Amendments, Legislations
and Rules for administration of CGST and SGST
I t i s essenti al to have Consti tuti onal Amendments
for empoweri ng the States for l evy of servi ce tax, GST on
i mports and consequenti al i ssues as wel l as correspondi ng
Central and State l egi sl ati ons wi th associ ated rul es and
procedures. Wi th these speci fi c tasks i n vi ew, a Joi nt
Worki ng Group has recentl y been consti tuted (September
30, 2009) compri si ng of the offi ci al s of the Central and
State Governments to prepare, i n a ti me bound manner
a draft l egi sl ati on for Consti tuti onal Amendment, draft
l egi sl ati on for CGST, a sui tabl e Model Legi sl ati on for
SGST and rul es and procedures for CGST and SGST.
Si mul taneous steps have al so been i ni ti ated for drafti ng
26
of a l egi sl ati on for I GST and rul es and procedures. As
a par t of thi s exer ci se, the Wor ki ng Gr oup wi l l al so
addr ess the i ssues of di spute r esol uti on and advance
r ul i ng.
3.12 Harmonious structure of GST and the
States autonomy in a Federal Framework
As a part of the exerci se on Consti tuti onal Amendment,
a speci al attenti on woul d be gi ven, as menti oned earl i er
i n par a 3.2, to the for mul ati on of a mechani sm for
uphol di ng the need for a harmoni ous structure for GST
al ong wi th the concer n for the States autonomy i n a
federal structure.
3.13 Dispute Resolution and Advance Ruling
As a part of the exerci se on drafti ng of l egi sl ati on,
rul es and procedures for the admi ni strati on of CGST and
SGST, speci fi c provi si ons woul d al so be made to the i ssues
of di spute resol uti on and advance rul i ng.
3.14 Need for compensation during
implementation of GST
Despi te the si ncere attempts bei ng made by the
Empowered Commi ttee on the determi nati on of GST rate
structure, revenue neutral rates, i t i s di ffi cul t to esti mate
accur atel y as to how much the States wi l l gai n fr om
servi ce taxes and how much they wi l l l ose on account of
27
removal of cascadi ng effect, payment of i nput tax credi t
and phasi ng out of CST. I n vi ew of thi s, i t woul d be
essenti al to pr ovi de adequatel y for compensati on for
l os s th at mi gh t emer ge du r i n g th e pr oces s of
i mpl ementati on of GST for the next fi ve year s. Thi s
i ssue may be compr ehensi vel y taken car e of i n the
r ecommen dati on s of th e Th i r teen th Fi n an ce
Commi ssi on. The payment of thi s compensati on wi l l
need to be ensur ed i n ter ms of speci al gr ants to be
rel eased to the States dul y i n every month on the basi s
of neutral l y moni tored mechani sm.
3.15 Wi th the rel ease of thi s Fi rst Di scussi on Paper
and the Annexure on Frequentl y Asked Questi ons and
Answers on GST, i nteracti on wi th the representati ves of
i ndustry, trade and agri cul ture woul d begi n i mmedi atel y
at the nati onal l evel , and then al so si mul taneousl y at the
State l evel s. Si mi l arl y awareness campai gn for common
consumers woul d al so be i ni ti ated at the same ti me. As a
part of the di scussi on and campai gn, the vi ews of the
i ndustry, trade and agri cul ture as wel l as consumers are
bei ng sought i n a structured and ti me bound manner.
29
Annexure
Frequently Asked Questions and Answers on GST
Question 1 : What is the justification of GST ?
Answer : Ther e was a bur den of tax on tax i n
th e pr e-ex i s ti n g Cen tr al ex ci s e du ty of th e
Government of I ndi a and sal es tax system of the State
Gover nments. The i ntr oducti on of Centr al VAT
(CENVAT) has r emoved the cascadi ng bur den of
tax on tax to a good ex ten t by pr ov i di n g
a mechani sm of set off for tax pai d on i nputs and
servi ces upto the stage of producti on, and has been
an i mprovement over the pre-exi sti ng Central exci se
duty. Si mi l arl y, the i ntroducti on of VAT i n the States
has removed the cascadi ng effect by gi vi ng set-off
for tax pai d on i nputs as wel l as tax pai d on previ ous
purchases and has agai n been an i mprovement over
the previ ous sal es tax regi me.
But both the CENVAT and the State VAT
have certai n i ncompl eteness. The i ncompl eteness i n
CENVAT i s that i t has yet not been extended to
i ncl ude chai n of val ue addi ti on i n the di stri buti ve
30
tr ade bel ow the stage of pr oducti on. I t has al so
not i ncl uded several Central taxes, such as Addi ti onal
Exci se Duti es, Addi ti onal Customs Duty, Surcharges
etc. i n the overal l framework of CENVAT, and thus
kept the benefi ts of comprehensi ve i nput tax and
servi ce tax set-off out of the reach of manufacturers/
deal ers. The i ntroducti on of GST wi l l not onl y i ncl ude
comprehensi vel y more i ndi rect Central taxes and
i ntegrate goods and servi ces taxes for set-off rel i ef,
but al so captur e cer tai n val ue addi ti on i n the
di stri buti ve trade.
Si mi l arl y, i n the present State-l evel VAT
scheme, CENVAT l oad on the goods has not yet been
removed and the cascadi ng effect of that part of tax
burden has remai ned unrel i eved. Moreover, there are
several taxes i n the States, such as, Luxury Tax,
Entertai nment Tax, etc. whi ch have sti l l not been
subsumed i n the VAT. Further, there has al so not
been any i ntegrati on of VAT on goods wi th tax on
servi ces at the State l evel wi th removal of cascadi ng
effect of servi ce tax. I n addi ti on, al though the burden
of Central Sal es Tax (CST) on i nter-State movement
of goods has been l essened wi th reducti on of CST
rate from 4% to 2%, thi s burden has al so not been
ful l y phased out. Wi th the i ntroducti on of GST at
the State l evel , the addi ti onal burden of CENVAT
and servi ces tax woul d be comprehensi vel y removed,
31
and a conti nuous chai n of set-off from the ori gi nal
producers poi nt and servi ce provi ders poi nt upto the
r etai l er s l evel woul d be establ i shed whi ch woul d
el i mi nate the bur den of al l cascadi ng effects,
i ncl udi ng the burden of CENVAT and servi ce tax.
Thi s i s the essence of GST. Al so, major Central and
State taxes wi l l get subsumed i nto GST whi ch wi l l
reduce the mul ti pl i ci ty of taxes, and thus bri ng down
the compl i ance cost. Wi th GST, the burden of CST
wi l l al so be phased out.
Thus GST i s not si mpl y VAT pl us servi ce
tax, but a major i mpr ovement over the pr evi ous
system of VAT and di sjoi nted servi ces tax a justi fi ed
step forward.
Question 2. What is GST? How does it work ?
Answer : As al r eady menti oned i n answer to
Questi on 1, GST i s a tax on goods and servi ces wi th
compr ehensi ve and conti nuous chai n of set-off
benefi ts fr om the pr oducer s poi nt and ser vi ce
pr ovi der s poi nt upto the r etai l er s l evel . I t i s
essenti al l y a tax onl y on val ue addi ti on at each stage,
and a suppl i er at each stage i s permi tted to set-off,
through a tax credi t mechani sm, the GST pai d on
the purchase of goods and servi ces as avai l abl e for
set-off on the GST to be pai d on the suppl y of goods
32
and servi ces. The fi nal consumer wi l l thus bear onl y
the GST charged by the l ast deal er i n the suppl y
chai n, wi th set-off benefi ts at al l the previ ous stages.
The i l l ustrati on shown bel ow i ndi cates, i n
terms of a hypotheti cal exampl e wi th a manufacturer,
one whol esel l er and one retai l er, how GST wi l l work.
Let us suppose that GST r ate i s 10%, wi th the
manufacturer maki ng val ue addi ti on of Rs.30 on hi s
purchases worth Rs.100 of i nput of goods and servi ces
used i n the manufacturi ng process. The manufacturer
wi l l then pay net GST of Rs. 3 after setti ng-off Rs. 10
as GST pai d on hi s i nputs (i .e. I nput Tax Credi t) from
gross GST of Rs. 13. The manufacturer sel l s the goods
to the whol esel l er. When the whol esel l er sel l s the
same goods after maki ng val ue addi ti on of (say), Rs.
20, he pays net GST of onl y Rs. 2, after setti ng-off of
I nput Tax Credi t of Rs. 13 from the gross GST of
Rs. 15 to the manufacturer. Si mi l arl y, when a retai l er
sel l s the same goods after a val ue addi ti on of (say)
Rs. 10, he pays net GST of onl y Re.1, after setti ng-off
Rs.15 from hi s gross GST of Rs. 16 pai d to whol esel l er.
Thus, the manufactur er , whol esel l er and r etai l er
have to pay onl y Rs. 6 (= Rs. 3+Rs. 2+Re. 1) as GST
on the val ue addi ti on al ong the enti re val ue chai n
from the producer to the retai l er, after setti ng-off GST
pai d at the earl i er stages. The overal l burden of GST
33
on the goods i s thus much l ess. Thi s i s shown i n the
tabl e bel ow. The same i l l ustrati on wi l l hol d i n the
case of fi nal servi ce provi der as wel l .
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
Whol e sel l er 130 20 150 10% 15 13 1513 = 2
Retai l er 150 10 160 10% 16 15 1615 = 1
Question 3 : How can the burden of tax, in
general, fall under GST ?
Answer : As al r eady menti oned i n Answer to
Questi on 1, the pr esent for ms of CENVAT and
State VAT have remai ned i ncompl ete i n removi ng
ful l y the cascadi ng burden of taxes al ready pai d at
ear l i er stages. Besi des, ther e ar e sever al other
taxes, whi ch both the Central Government and the
State Government l evy on producti on, manufacture
and di stri buti ve trade, where no set-off i s avai l abl e
i n the form of i nput tax credi t. These taxes add to
the cost of goods and servi ces through tax on tax
34
whi ch the fi nal consumer has to bear. Si nce, wi th
the i ntroducti on of GST, al l the cascadi ng effects of
CENVAT and servi ce tax woul d be removed wi th a
conti nuous chai n of set-off from the producers poi nt
to the retai l ers poi nt, other major Central and State
taxes woul d be subsumed i n GST and CST wi l l al so
be phased out, the fi nal net burden of tax on goods,
under GST woul d, i n general , fal l . Si nce there woul d
be a tr anspar ent and compl ete chai n of set-offs,
thi s wi l l hel p wi deni ng the coverage of tax base and
i mprove tax compl i ance. Thi s may l ead to hi gher
generati on of revenues whi ch may i n turn l ead to the
possi bi l i ty of l oweri ng of average tax burden.
Question 4 : How will GST benefit industry, trade
and agriculture ?
Answer : As menti oned i n Answer to Questi on 3,
the GST wi l l gi ve more rel i ef to i ndustry, trade and
agr i cul tur e thr ough a mor e compr ehensi ve and
wi der coverage of i nput tax set-off and servi ce tax
set-off, subsumi ng of sever al Centr al and State
taxes i n the GST and phasi ng out of CST. The
transparent and compl ete chai n of set-offs whi ch wi l l
r esul t i n wi deni ng of tax base and better tax
compl i ance may al so l ead to l oweri ng of tax burden
on an av er age deal er i n i n du s tr y , tr ade an d
agri cul ture.
35
Question 5 : How will GST benefit the exporters?
Answer : The subsumi ng of major Centr al and
State taxes i n GST, compl ete and comprehensi ve set-
off of i nput goods and servi ces and phasi ng out of
Central Sal es Tax (CST) woul d reduce the cost of
l ocal l y manufactured goods and servi ces. Thi s wi l l
i ncrease the competi ti veness of I ndi an goods and
servi ces i n the i nternati onal market and gi ve boost
to I ndi an exports. The uni formi ty i n tax rates and
procedures across the country wi l l al so go a l ong way
i n reduci ng the compl i ance cost.
Question 6 : How will GST benefit the small
entrepreneurs and small traders?
Answer : The pr esent thr eshol d pr escr i bed i n
di fferent State VAT Acts bel ow whi ch VAT i s not
appl i cabl e vari es from State to State. The exi sti ng
threshol d of goods under State VAT i s Rs. 5 l akhs
for a majori ty of bi gger States and a l ower threshol d
for Nor th Easter n States and Speci al Categor y
States. A uni form State GST threshol d across States
i s des i r abl e an d, th er efor e, th e Empower ed
Commi ttee has r ecommended that a thr eshol d of
gross annual turnover of Rs. 10 l akh both for goods
and servi ces for al l the States and Uni on Terri tori es
may be adopted wi th adequate compensati on for the
States (par ti cul ar l y, the States i n Nor th-Easter n
36
Regi on and Speci al Category States) where l ower
threshol d had prevai l ed i n the VAT regi me. Keepi ng
i n vi ew the i nterest of smal l traders and smal l scal e
i ndustr i es and to avoi d dual contr ol , the States
consi dered that the threshol d for Central GST for
goods may be kept at Rs.1.5 crore and the threshol d
for servi ces shoul d al so be appropri atel y hi gh. Thi s
rai si ng of threshol d wi l l protect the i nterest of smal l
traders. A Composi ti on scheme for smal l traders and
busi nesses has al so been envi saged under GST as
wi l l be detai l ed i n Answer to Questi on 14. Both these
features of GST wi l l adequatel y protect the i nterests
of smal l traders and smal l scal e i ndustri es.
Question 7 : How will GST benefit the common
consumers?
Answer : As al r eady menti oned i n Answer to
Questi on 3, wi th the i ntroducti on of GST, al l the
cascadi ng effects of CENVAT and servi ce tax wi l l be
more comprehensi vel y removed wi th a conti nuous
chai n of set-off fr om the pr oducer s poi nt to the
retai l ers poi nt than what was possi bl e under the
prevai l i ng CENVAT and VAT regi me. Certai n major
Central and State taxes wi l l al so be subsumed i n GST
and CST wi l l be phased out. Other thi ngs remai ni ng
the same, the bur den of tax on goods woul d, i n
general , fal l under GST and that woul d benefi t the
consumers.
37
Question 8 : What are the salient features of the
proposed GST model?
Answer : The sal i ent features of the proposed model
are as fol l ows:
(i ) Consi stent wi th the federal structure of the
country, the GST wi l l have two components:
one l evi ed by the Centre (herei nafter referred
to as Central GST), and the other l evi ed by the
States (herei nafter referred to as State GST).
Thi s dual GST model woul d be i mpl emented
through mul ti pl e statutes (one for CGST and
SGST statute for every State). However, the
basi c features of l aw such as chargeabi l i ty,
defi ni ti on of taxabl e event and taxabl e person,
measure of l evy i ncl udi ng val uati on provi si ons,
basi s of cl assi fi cati on etc. woul d be uni form
across these statutes as far as practi cabl e.
(i i ) The Central GST and the State GST woul d
be appl i cabl e to al l transacti ons of goods and
ser vi ces except the exempted goods and
servi ces, goods whi ch are outsi de the purvi ew
of GST and the transacti ons whi ch are bel ow
the prescri bed threshol d l i mi ts.
38
(i i i ) The Central GST and State GST are to be pai d
to the accounts of the Centre and the States
separatel y.
(i v) Si nce the Central GST and State GST are to
be treated separatel y, i n general , taxes pai d
agai nst the Central GST shal l be al l owed to be
taken as i nput tax credi t (I TC) for the Central
GST and coul d be uti l i zed onl y agai nst the
payment of Central GST. The same pri nci pl e
wi l l be appl i cabl e for the State GST.
(v) Cross uti l i sati on of I TC between the Central
GST and the State GST woul d, i n general , not
be al l owed.
(vi ) To the extent feasi bl e, uni form procedure for
col l ecti on of both Central GST and State GST
wou l d be pr es cr i bed i n th e r es pecti v e
l egi sl ati on for Central GST and State GST.
(vi i ) The admi ni strati on of the Central GST woul d
be wi th the Centre and for State GST wi th the
States.
(vi i i ) The taxpayer woul d need to submi t peri odi cal
returns to both the Central GST authori ty and
to the concerned State GST authori ti es.
39
(i x) Each taxpayer woul d be al l otted a PAN-
l i nked taxpayer i denti fi cati on number wi th
a total of 13/15 di gi ts. Thi s woul d bri ng the
GST PAN-l i nked system i n l i ne wi th the
prevai l i ng PAN-based system for I ncome tax
faci l i tati ng data exchange and taxpayer
compl i ance. The exact desi gn woul d be worked
out i n consul tati on wi th the I ncome-Tax
Department.
(x) Keepi ng i n mi nd the need of tax payer s
conveni ence, functi ons such as assessment,
enfor cement, scr uti ny and audi t woul d be
undertaken by the authori ty whi ch i s col l ecti ng
the tax, wi th i nformati on shari ng between the
Centre and the States.
Question 9 : Why is Dual GST required ?
Answer : I ndi a i s a federal country where both the
Centre and the States have been assi gned the powers
to l evy and col l ect taxes thr ough appr opr i ate
l egi sl ati on. Both the l evel s of Gover nment have
di sti nct r esponsi bi l i ti es to per for m accor di ng to
the di vi si on of powers prescri bed i n the Consti tuti on
for whi ch they need to rai se resources. A dual GST
wi l l , therefore, be i n keepi ng wi th the Consti tuti onal
requi rement of fi scal federal i sm.
40
Question 10 : How would a particular transaction
of goods and services be taxed
simultaneously under Central GST
(CGST) and State GST (SGST)?
Answer : The Centr al GST and the State GST
woul d be l evi ed si mul taneousl y on every transacti on
of suppl y of goods and servi ces except the exempted
goods and ser vi ces, goods whi ch ar e outsi de the
purvi ew of GST and the transacti ons whi ch are bel ow
the prescri bed threshol d l i mi ts. Further, both woul d
be l evi ed on the same pri ce or val ue unl i ke State VAT
whi ch i s l evi ed on the val ue of the goods i ncl usi ve of
CENVAT. Whi l e the l ocati on of the suppl i er and the
reci pi ent wi thi n the country i s i mmateri al for the
purpose of CGST, SGST woul d be chargeabl e onl y
when the suppl i er and the reci pi ent are both l ocated
wi thi n the State.
Illustration I : Suppose hypotheti cal l y that the rate
of CGST i s 10% and that of SGST i s 10%. When a
whol esal e deal er of steel i n Uttar Pradesh suppl i es
steel bars and rods to a constructi on company whi ch
i s al so l ocated wi thi n the same State for , say Rs.
100, the deal er woul d charge CGST of Rs. 10 and
SGST of Rs. 10 i n addi ti on to the basi c pri ce of the
goods. He woul d be requi red to deposi t the CGST
component i nto a Central Government account whi l e
41
the SGST porti on i nto the account of the concerned
State Government. Of course, he need not actual l y
pay Rs. 20 (Rs. 10 + Rs. 10 ) i n cash as he woul d be
enti tl ed to set-off thi s l i abi l i ty agai nst the CGST or
SGST pai d on hi s purchases (say, i nputs). But for
payi ng CGST he woul d be al l owed to use onl y the
credi t of CGST pai d on hi s purchases whi l e for SGST
he can uti l i ze the cr edi t of SGST al one. I n other
words, CGST credi t cannot, i n general , be used for
payment of SGST. Nor can SGST credi t be used for
payment of CGST.
Illustration II: Suppose, agai n hypotheti cal l y, that
the rate of CGST i s 10% and that of SGST i s 10%.
When an adverti si ng company l ocated i n Mumbai
s u ppl i es adv er ti s i n g s er v i ces to a compan y
manufacturi ng soap al so l ocated wi thi n the State of
Maharashtra for, l et us say Rs. 100, the ad company
woul d charge CGST of Rs. 10 as wel l as SGST of
Rs. 10 to the basi c val ue of the servi ce. He woul d be
r equi r ed to deposi t the CGST component i nto a
Central Government account whi l e the SGST porti on
i nto the account of the concerned State Government.
Of course, he need not agai n actual l y pay Rs. 20 (Rs.
10+Rs. 10) i n cash as i t woul d be enti tl ed to set-off
thi s l i abi l i ty agai nst the CGST or SGST pai d on hi s
purchase (say, of i nputs such as stati onery, offi ce
equi pment, servi ces of an arti st etc). But for payi ng
42
CGST he woul d be al l owed to use onl y the credi t of
CGST pai d on i ts purchase whi l e for SGST he can
uti l i se the credi t of SGST al one. I n other words, CGST
credi t cannot, i n general , be used for payment of
SGST. Nor can SGST credi t be used for payment of
CGST.
Question 11 : Which Central and State taxes are
proposed to be subsumed under GST ?
Answer : The var i ous Centr al , State and Local
l evi es were exami ned to i denti fy thei r possi bi l i ty of
bei ng subsumed under GST. Whi l e i denti fyi ng, the
fol l owi ng pri nci pl es were kept i n mi nd:
(i ) Taxes or l evi es to be subsumed shoul d be
pri mari l y i n the nature of i ndi rect taxes, ei ther
on the suppl y of goods or on the suppl y of
servi ces.
(i i ) Taxes or l evi es to be subsumed shoul d be part
of the transacti on chai n whi ch commences wi th
i mport/ manufacture/ producti on of goods or
pr ovi si on of ser vi ces at one end and the
consumpti on of goods and servi ces at the other.
(i i i ) The subsumati on shoul d resul t i n free fl ow of
tax credi t i n i ntra and i nter-State l evel s.
43
(i v) The tax es , l ev i es and fees that ar e not
speci fi cal l y rel ated to suppl y of goods & servi ces
shoul d not be subsumed under GST.
(v) Revenue fai rness for both the Uni on and the
States i ndi vi dual l y woul d need to be attempted.
On appl i cati on of th e abov e pr i n ci pl es , th e
Empowered Commi ttee has recommended that the
fol l owi ng Central Taxes shoul d be, to begi n wi th,
subsumed under the Goods and Servi ces Tax:
(i ) Central Exci se Duty
(i i ) Addi ti onal Exci se Duti es
(i i i ) The Exci se Duty l evi ed under the Medi ci nal
and Toi l etri es Preparati on Act
(i v) Servi ce Tax
(v) Addi ti onal Customs Duty, commonl y known as
Countervai l i ng Duty (CVD)
(vi ) Speci al Addi ti onal Duty of Customs - 4% (SAD)
(vi i ) Surcharges, and
(vi i i ) Cesses.
44
The fol l owi ng State taxes and l evi es woul d be, to
begi n wi th, subsumed under GST:
(i ) VAT / Sal es tax
(i i ) Entertai nment tax (unl ess i t i s l evi ed by the
l ocal bodi es).
(i i i ) Luxury tax
(i v) Taxes on l ottery, betti ng and gambl i ng.
(v) State Cesses and Surcharges i n so far as they
rel ate to suppl y of goods and servi ces.
(vi ) Entry tax not i n l i eu of Octroi .
Purchase tax: Some of the States fel t that they are
getti ng substanti al revenue from Purchase Tax and,
therefore, i t shoul d not be subsumed under GST whi l e
majori ty of the States were of the vi ew that no such
exempti ons shoul d be gi ven. The di ffi cul ti es of the
foodgr ai n pr oduci ng States was appr eci ated as
substanti al revenue i s bei ng earned by them from
Purchase Tax and i t was, therefore, fel t that i n case
Purchase Tax has to be subsumed then adequate and
conti nui ng compensati on has to be provi ded to such
States. Thi s i ssue i s bei ng di scussed i n consul tati on
wi th the Government of I ndi a.
45
Tax on items containing Alcohol: Al cohol i c
beverages woul d be kept out of the purvi ew of GST.
Sal es Tax /VAT coul d be conti nued to be l evi ed on
al cohol i c beverages as per the exi sti ng practi ce. I n
case i t has been made Vatabl e by some States, there
i s no objecti on to that. Exci se Duty, whi ch i s presentl y
l evi ed by the States may not al so be affected.
Tax on Tobacco products: Tobacco pr oducts
woul d be subjected to GST wi th I TC. Centre may be
al l owed to l evy exci se duty on tobacco products over
and above GST wi th I TC.
Tax on Petroleum Products: As far as petrol eum
products are concerned, i t was deci ded that the basket
of petr ol eum pr oducts, i .e. cr ude, motor spi r i t
(i ncl udi ng ATF) and HSD woul d be kept outsi de GST
as i s the prevai l i ng practi ce i n I ndi a. Sal es Tax coul d
conti nue to be l evi ed by the States on these products
wi th prevai l i ng fl oor rate. Si mi l arl y, Centre coul d al so
conti nue i ts l evi es. A fi nal vi ew whether Natural Gas
shoul d be kept outsi de the GST wi l l be taken after
further del i berati ons.
Taxation of Services : As i ndi cated earl i er, both
the Centre and the States wi l l have concurrent power
to l evy tax on goods and servi ces. I n the case of States,
the pri nci pl e for taxati on of i ntra-State and i nter-
46
State has al ready been formul ated by the Worki ng
Gr oup of Pr i nci pal Secr etar i es /Secr etar i es of
Fi nance /Taxati on and Commi ssi oner s of Tr ade
Taxes wi th seni or representati ves of Department of
Revenue, Gover nment of I ndi a. For i nter -State
transacti ons an i nnovati ve model of I ntegrated GST
wi l l be adopted by appr opr i atel y al i gni ng and
i ntegrati ng CGST and I GST.
Question 12 : What is the rate structure proposed
under GST ?
Answer : The Empowered Commi ttee has deci ded
to adopt a two-r ate str uctur e a l ower r ate for
necessary i tems and i tems of basi c i mportance and a
standard rate for goods i n general . There wi l l al so be
a speci al r ate for pr eci ous metal s and a l i st of
exempted i tems. For uphol di ng of speci al needs of
each State as wel l as a bal anced approach to federal
fl exi bi l i ty, i t i s bei ng di scussed whether the exempted
l i st under VAT r egi me i ncl udi ng Goods of Local
I mportance may be retai ned i n the exempted l i st
under State GST i n the i ni ti al years. I t i s al so bei ng
di scussed whether the Gover nment of I ndi a may
adopt, to begi n wi th, a si mi l ar appr oach towar ds
exempted l i st under the CGST.
For CGST rel ati ng to goods, the States
consi dered that the Government of I ndi a mi ght al so
47
have a two-rate structure, wi th conformi ty i n the
l evel s of r ate wi th the SGST. For taxati on of
servi ces, there may be a si ngl e rate for both CGST
and SGST.
The exact val ue of the SGST and CGST
rates, i ncl udi ng the rate for servi ces, wi l l be made
known dul y i n cour se of appr opr i ate l egi sl ati ve
acti ons.
Question 13: What is the concept of providing
threshold exemption for GST?
Answer : Threshol d exempti on i s bui l t i nto a tax
regi me to keep smal l traders out of tax net. Thi s has
three-fol d objecti ves:
a) I t i s di ffi cul t to admi ni ster smal l traders and
cost of admi ni steri ng of such traders i s very
hi gh i n compari son to the tax pai d by them.
b) The compl i ance cost and compl i ance effor t
woul d be saved for such smal l traders.
c) Smal l traders get rel ati ve advantage over l arge
enterpri ses on account of l ower tax i nci dence.
The present threshol ds prescri bed i n di fferent State
VAT Acts bel ow whi ch VAT i s not appl i cabl e vari es
48
from State to State. A uni form State GST threshol d
across States i s desi rabl e and, therefore, as al ready
menti oned i n Answer to Questi on 6, i t has been
consi dered that a threshol d of gross annual turnover
of Rs. 10 l akh both for goods and servi ces for al l the
States and Uni on Terri tori es mi ght be adopted wi th
adequate compensati on for the States (parti cul arl y,
the States i n Nor th-Easter n Regi on and Speci al
Category States) where l ower threshol d had prevai l ed
i n the VAT regi me. Keepi ng i n vi ew the i nterest of
smal l traders and smal l scal e i ndustri es and to avoi d
dual contr ol , the States al so consi der ed that the
threshol d for Central GST for goods may be kept
Rs.1.5 Crore and the threshol d for servi ces shoul d
al so be appropri atel y hi gh.
Question 14 : What is the scope of composition and
compounding scheme under GST?
Answer : As al r eady menti oned i n Answer to
Questi on 6, a Composi ti on/Compoundi ng Scheme wi l l
be an i mpor tant featur e of GST to pr otect the
i nterests of smal l traders and smal l scal e i ndustri es.
The Composi ti on/Compoundi ng scheme for the
purpose of GST shoul d have an upper cei l i ng on gross
annual turnover and a fl oor tax rate wi th respect to
gross annual turnover. I n parti cul ar there wi l l be a
compoundi ng cut-off at Rs. 50 l akhs of the gr oss
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annual turnover and the fl oor rate of 0.5% across the
States. The scheme woul d al l ow opti on for GST
r egi str ati on for deal er s wi th tur nover bel ow the
compoundi ng cut-off.
Question 15 : How will imports be taxed under GST ?
Answer : Wi th Consti tuti onal Amendments, both
CGST and SGST wi l l be l evi ed on i mport of goods
and servi ces i nto the country. The i nci dence of tax
wi l l fol l ow the desti nati on pr i nci pl e and the tax
revenue i n case of SGST wi l l accrue to the State
where the i mported goods and servi ces are consumed.
Ful l and compl ete set-off wi l l be avai l abl e on the GST
pai d on i mport on goods and servi ces.
Question 16 : Will cross utilization of credits
between goods and services be
allowed under GST regime?
Answer : Cr os s uti l i zati on of cr edi t of CGST
between goods and ser vi ces woul d be al l owed.
Si mi l arl y, the faci l i ty of cross uti l i zati on of credi t wi l l
be avai l abl e i n case of SGST. However, the cross
uti l i zati on of CGST and SGST woul d general l y not
be al l owed except i n the case of i nter-State suppl y of
goods and servi ces under the I GST model whi ch i s
expl ai ned i n answer to the next questi on.
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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 Commi ttee has accepted
the recommendati on for adopti on of I GST model for
taxati on of i nter -State tr ansacti on of Goods and
Servi ces. The scope of I GST Model i s that Centre
woul d l evy I GST whi ch woul d be CGST pl us SGST
on al l i nter-State transacti ons of taxabl e goods and
servi ces. The i nter-State sel l er wi l l pay I GST on
val ue addi ti on after adjusti ng avai l abl e cr edi t of
I GST, CGST, and SGST on hi s pur chases. The
Exporti ng State wi l l transfer to the Centre the credi t
of SGST used i n payment of I GST. The I mporti ng
deal er wi l l cl ai m credi t of I GST whi l e di schargi ng
hi s output tax l i abi l i ty i n hi s own State. The Centre
wi l l transfer to the i mporti ng State the credi t of I GST
used i n payment of SGST. The rel evant i nformati on
i s al so submi tted to the Central Agency whi ch wi l l
act as a cl eari ng house mechani sm, veri fy the cl ai ms
and i nform the respecti ve governments to transfer
the funds.
The major advantages of I GST Model are:
a) Mai ntenance of uni nter r upted I TC chai n on
i nter-State transacti ons.
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b) No upfr ont payment of tax or substanti al
bl ockage of funds for the i nter-State sel l er or
buyer.
c) No refund cl ai m i n exporti ng State, as I TC i s
used up whi l e payi ng the tax.
d) Sel f moni tori ng model .
e) Level of computeri sati on i s l i mi ted to i nter-State
deal er s and Centr al and State Gover nments
shoul d be abl e to computeri se thei r processes
expedi ti ousl y.
f) As al l i nter-State deal ers wi l l be e-regi stered and
cor r es pon den ce wi th th em wi l l be by
e-mai l , the compl i ance l evel wi l l i mpr ove
substanti al l y.
g) Model can take Busi ness to Busi ness as wel l as
Busi ness to Consumer tr ansacti ons i nto
account.
Question 18 : Why does introduction of GST require
a Constitutional Amendment?
Answer : Th e Con s ti tu ti on pr ov i des for
del i neati on of power to tax between the Centre and
States. Whi l e the Centre i s empowered to tax servi ces
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and goods upto the producti on stage, the States have
the power to tax sal e of goods. The States do not have
the powers to l evy a tax on suppl y of servi ces whi l e
the Centre does not have power to l evy tax on the
sal e of goods. Thus, the Consti tuti on does not vest
expr ess power ei ther i n the Centr al or State
Government to l evy a tax on the suppl y of goods and
servi ces. Moreover, the Consti tuti on al so does not
empower the States to i mpose tax on i mpor ts.
Ther efor e, i t i s essenti al to have Consti tuti onal
Amendments for empoweri ng the Centre to l evy tax
on sal e of goods and States for l evy of servi ce tax and
tax on i mports and other consequenti al i ssues.
As part of the exerci se on Consti tuti onal
Amendment, there woul d be a speci al attenti on to
the formul ati on of a mechani sm for uphol di ng the
need for a harmoni ous structure for GST al ong wi th
the concern for the powers of the Centre and the
States i n a federal structure.
Question 19: How are the legislative steps being
taken for CGST and SGST ?
Answer : A Joi nt Worki ng Group has recentl y been
consti tuted (September 30, 2009) compri si ng of the
offi ci al s of the Central and State Governments to
prepare, i n a ti me-bound manner a draft l egi sl ati on
for Consti tuti onal Amendment.
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Question 20: How will the rules for administration
of CGST and SGST be framed?
Answer : The Joi nt Worki ng Group, as menti oned
above, has al so been entrusted the task of prepari ng
dr aft l egi s l ati on for CGST, a s u i tabl e Model
Legi sl ati on for SGST and rul es and procedures for
CGST and SGST. Si mul taneous steps have al so been
i ni ti ated for drafti ng of l egi sl ati on for I GST and rul es
and pr ocedur es. As a par t of thi s exer ci se, the
Wor ki ng Gr oup wi l l al so addr ess to the i ssues of
di spute resol uti on and advance rul i ng.