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The comments of the Department of Revenue (DOR) on the ‘First Discussion Paper on GST’ reflect the inclination of Centre on different contradicting issues related to Goods and Services Tax (GST). On some issues the DOR agrees with the recommendations of the Empowered Committee of State Finance ministers (here-in-after referred as EC) while on some varies with it.

Comments of ‘DOR’ on different significant issues and their consequences are as under:

GST Model

The ‘DOR’ is agreed with the dual GST model having two components: CGST (Central GST) and SGST (State GST), recommended by the EC with appropriate binding mechanism to harmonies the various important aspects of the GST like rate structure, taxation base, exemption etc. between the centre and states. 

In addition, IGST (Integrated Goods and Services Tax) on inter-state transactions should also be levied and collected by the centre. SGST on imports should also be levied and collected by the centre. Centre should pass on SGST collection on imports to concerned states on the destination principle.

The Central GST and the State GST should 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. Also the ‘DOR’ is of the view that there should be a common base for taxation between Centre and States.

Accounts where CGST, SGST and IGST should be paid

Ministry’s view:

CGST should be paid to the accounts of the Centre.

SGST should be paid to the accounts of the states.

IGST should be paid to the accounts of the Centre.

Account-heads for all good and services would have an indication whether it relates to CGST or SGST (with identification of the state to whom the tax is to be credited).

Input Tax Credit

The Centre is agreed with the states recommendations on input tax credit. It means that the taxes paid against CGST should be allowed to be taken as input tax credit (ITC) for CGST and could be utilized only against the payment of Central GST. The same principle will be applicable for the SGST. A taxpayer or exporter would have to maintain separate details in books of account for utilization or refund of credit. Cross utilization of ITC between the central GST and the state GST should not be allowed expect in the case of inter-state supply of goods and services under the GST model. 

Credit accumulation on account of refund of GST should be avoided both by the centre and state except in some cases as of (a) export, (b) purchase of capital goods, (c) input-tax at higher rate than output tax etc. Refund /adjustment should be completed in a time bound manner. 

It wouldn’t be easy to assure refund in a time bound manner. 

Procedure for collection of Tax

The ministry agreed with the recommendations of states that an uniform procedure for collection of both CGST and SGST may be prescribed in the respective legislation for CGST and SGST, to the extent feasible. ‘It is proposed to prescribe a common registration form, common registration number, common return format, common service centers for acceptance of registration applications and return for Central GST and State GST.’said Sushil Solanki, Commissioner, Central Excise.

Threshold limit

The ‘DOR’ is of the view that there should be a uniform threshold for goods and services for both SGST and CGST. This annual turnover threshold could be Rs.10 lakh or even more than that. The threshold should not apply to dealers and service providers who undertake inter-state supplies.

A problem of dual control may arise and an opposition would come primarily from the traders. Although they are subject to state VAT, the implementation of GST will mean that they would have to pay the central levy in addition to the state GST. Also they would be required to invest in Information Technology to maintain records as also with compliance.

This type of problem may be handled by facilitating a provision of compounding scheme as well as administrative simplifications for small dealers through measures such as:

a) Registration by single agency for both SGST and CGST without manual interface.

b) No physical verification of premises and no pre-deposit of security.

c) Simplified return format

d) Larger frequency for return filing, through certified service-centres / CAs etc.

e) Audit in 1-2% cases based on risk parameters.

f) Lenient penal provisions.

Composition / compounding Scheme

Both the Centre and States are of the same view that there should be a Compounding Scheme for the purpose of GST with an upper ceiling on gross annual turnover and a floor rate with respect to gross annual turnover. There will be a compounding cut-off of Rs. 50 lakh of gross annual turnover and a floor rate of 0.5% across the states.

Centre may also have a Composition Scheme upto gross turnover limit of Rs. 50 lakh, if threshold for registration is kept as Rs. 10 lakh. The floor rate of 0.5% will be for SGST alone, in case centre also brings a Composition Scheme for small assesses.

The Centre may also consider leaving the administration of Compounding Scheme, both for CGST and SGST to the states. As mentioned earlier this step will help small traders who will be exposed to SGST as well as CGST; in case the threshold would be kept as Rs. 10 lakh.


The taxpayers 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. 

In addition, taxpayers having inter-state transactions will require submission of returns to related Central IGST authority.

Registration System

Centre is in favour of uniform registration system through-out the country and this registration system should enable easy linkage with Income tax database through use of PAN number.

Common Dispute Resolution Scheme

The Centre has suggested setting up a common dispute resolution scheme for settlement of cases in the proposed Goods and Services Tax (GST). Since the tax base has to be identical for the two components, viz., CGST and SGST; it is desirable that any dispute between a taxpayer and either of the tax administration is settled in a uniform manner. The possibility of setting up a harmonized system for scrutiny, audit and dispute settlement may be developed.

Treatment of Taxes

Centre wants Electricity duty, Octroi, purchase tax and taxes levied by local bodies to be subsumed under GST other than the taxes proposed to be under GST. 

Purchase tax: The ‘DOR’ is not in the favour of keeping purchase tax outside the net of GST. If it won’t be subsumed under GST; it will give loophole to the states to impose ‘purchase tax’ on any commodity (food-grains, agriculture / forest produce, minerals, industrial inputs etc.) over and above GST. Hence, purchase tax must be subsumed. The matter of inclusion of purchase tax in GST net shouldn’t be linked to any compensation.

Tax of items containing alcohol: The ‘DOR’ is of the view that alcoholic beverages should be brought under the purview of GST in order to remove the cascading effect on GST paid on inputs such as raw material and packaging material. Sales tax / VAT and state excise duty can be charged over and above GST. Similar, dispensation should apply to opium, Indian hemp and other narcotic drugs and narcotics but medicines or toilet preparations of these substances should attract only GST.

Tax on Tobacco Product: The Ministry is agreed with the states proposal that Tobacco products should be subjected to GST with ITC. Centre may be allowed to levy on excise duty on tobacco products over and above GST without ITC.

Tax on Petroleum Products: States are in the favour of keeping petroleum product i.e., crude, motor spirit (including ATF) and HSD outside GST. No decision has yet been taken on Natural Gas. But the centre is not in the favour of keeping crude petroleum and natural gas out of the GST net since it would imply that the credit on capital goods and input services going into exploration and extraction would not be available resulting in cascading.

Diesel, ATF and motor spirit are derived from a common input, viz., crude petroleum along with other refined products such as naphtha, lubricating oil base stock etc. Leaving diesel, ATF and motor spirit out of the purview of GST would make it extremely difficult for refineries to apportion the credit on capital goods, input services and inputs. These products are principal inputs for many services such as aviation, road transport, railways, cab operator etc. As such, these may be levied to GST so that credit of the GST paid on these items may be allowed. But in select cases credit of GST paid on these items may be disallowed in order to minimize the possibility of misuse.

Taxation of services: Centre has left it on the disposal of ‘EC’. The sub-working of the Empowered Committee in it’s report has suggested two options each for B to B and B to C transactions.

Centre has suggested that the ‘EC’ should decide that which option has to be adopted. Such a decision may be taken and communicated to ‘DOR’.

Inter-state Transaction of Goods & Services: Centre agreed with the IGST Model suggested by ‘EC’. It should be noted that IGST Model will work smoothly only when there is a common threshold for goods and services and for centre and states. Also, having more than one rate either for CGST or SGST will complicate the working of IGST Model.

The Modified Bank Model suggested by the Thirteenth Finance commission’s Task Force has been set aside by the ‘DOR’. 

GST Rate Structure: As of the Task Force recommendations, the ‘DOR’ is also in the favour of single rate of SGST both for goods and services. However, a two rate structure for goods would pose the following problems:

a) Likelihood of services in duty structure with raw materials and intermediates being at a higher rate and finished goods being at lower rate, especially as the intention is to apply the lower rate to necessities.

b) Inversions would result in input credit accumulation and deemed for refunding the same from time to time.

c) The general rate (RNR) would have to be higher than under a single rate structure.

d) Currently, services are chargeable to tax at a single rate. Adopting a dual rate for goods would generate a similar demand for services too.

e) Having different rates for goods and services would imply that the distinction between goods and services should continue.

For CGST the ministry has suggested single rate for both goods as well as services.


The ministry has proposed to substantially reduce the 330 exemptions allowed under CENVAT. Around 99 items presently exempted under VAT may continue to remain exempted in GST regime. It means that Centre will have to trim it’s list to 99 before GST is implemented since the proposed list would be common for CGST and SGST.

There should be no scope with individual states for expansion of this list even for goods of local importance. However, reducing exemptions require political will. It’s a tough task. More likely, we will see a gradual reduction in the number of exemptions. 

GST on Export and Import

The ministry agrees with ‘EC’ that the exports should be zero-rated. Similar benefits may be given to Special Economic Zones. However, such benefits should only be allowed to the processing zone of SEZs. No benefit to the sales from an SEZ to Domestic Tariff Area (DTA) will be allowed. 

Levy of GST on imports may be handled by Centre through a central legislation either as a custom duty (as is being done now) or along the lines of concerned state following the destination principle. 

Taxation of import of services may be on the basis of reverse charge model, as is being done at present.

Constitutional amendment, legislation and rules for administration of CGST and SGST

The Joint Working Group (JWG) has held several meetings by now. Department of Revenue is closely working with Ministry of Law, Government of India, for finalization of draft constitutional amendment. The issue of empowering states to levy GST on imports has been deliberated by the JWG and the view which has emerged out of discussion is that the Centre shall collect GST on imports and pass on the SGST component of it to concerned state on destination principle. 

The JWG was constituted on Sep 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 procedure for CGST and SGST.


Compensation would be a matter of deep concern between the centre and the states, although finance ministry appears inclined to accept recommendations of Task Force of 13TH finance commission on this. The ‘EC’ had already referred the issue of compensation to the TFC. The Task Force on this issue has recommended that the centre may create a corpus of Rs. 30,000 crore over a five year period transferring Rs. 6,000 crore annually to compensate the state if they were to adopt flawless GST.

It will be interesting to see how the states react on the comment of the ‘DOR’ and also the making of final consensus.



Published by

Nagesh Bajaj
Category GST   Report

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