Concept of GST in India

What is GST?

G=GOODS

S=SERVICE

T=TAX

It means GST is a Tax-on Goods and services and it is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at the national level. Its main objective is to consolidates all indirect tax levies into a single tax, except customs (excluding SAD) replac-ing multiple tax levies, overcoming the limitations of existing indirect tax structure, and creating efficien-cies in the administration.

Therefore, GST is a broad base a single comprehensive tax levied on goods and services through a tax credit mechanism, this tax is collected on value-added goods and services at each stage of sale or purchase in this supply chain.

The system allows the set-off GST paid in the procurement of goods and services against the GST which is payable on the supply of goods or services. However, the end consumer bears this tax as he is the last person in the supply chain.

The term 'GST' is defined in article 366 (12A) of the Constitution of India to mean “any tax on supply of goods or services or both except taxes on supply of the alcoholic liquor for human consumption”.

Article 366 (26A) of the Constitution of India provides that “services means anything other than goods”. Therefore, all services will be covered under the scope of GST unless “negative list of services” are separately notified.

The concept of “declared goods of special importance” will not be there.

Under this model GST have two components viz. the central GST to be levied and collected by the Centre and the state GST to be levied and collected be the respective States. Central Excise duty, addi-tional excise duty, service tax, and additional duty of customs (equivalent of excise), state vat, entertain-ment tax, taxes on lotteries, betting and gambling and entry tax (not levied by local bodies) would be subsumed within GST.

GST is the biggest reform proposed in the tax regime one country after independence under the indirect system. At present system of taxes are being levied of charged by the Center and the State respectively as stated above.

It is also settled opposition of law that no government can charge the tax without authority of law.

Since under the GST regime only one tax called as GST, will be charged in respect of supply of goods and services.

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Why the Dual GST model?

In the country like Australia, New Zealand, Germany, there is Single (Central) GST model, where the Centre levies and collects the GST for both Centre and the States, and then distributes the share of the individual States in accordance with its consumption pattern determined on the basis of prior survey. It may be recalled that GST is a destination based consumption tax.

In the Quebec Province of Canada the Single (State) GST model is applicable where the situation is reverse of that in the Singe (Central) GST model. Here, the individual States collect GST for both Centre and their respective States, and then pass on the Centre's share to the Centre. Very few countries have adopted this model

The another model of GST is the Dual GST model where both Centre and the States levy and collect their share of GST concurrently and simultaneously in their separate streams of Central GST (CGST) and States GST (SGST). The GST with respect to interstate movement of goods and services is the most critical part of this model. After considering twelve models for this purpose, it has been decided to adopt the Integrated GST (IGST) model. In the IGST models, the IGST comprising CGST and SGST will be levied and collected by the Centre. The Centre will retain the CGST share and despatch the SGST shares to the respective destination States. The entire mechanism will be computerised.

Because of the absence of complications involved in determining the GST share of the destination States with respect to interstate movement of Goods and Services, the Central GST model would have been the easiest option. But given the federal structure of our Constitution and fiscal autonomy for the States enshrined in it, India could not have opted for this model. On the other hand, the Indian constitution gives supremacy to Centre over the States in three important areas i.e. Defence, External Affairs and Finance. Therefore, the Centre cannot be made to outsource the collection of centre's portion of GST to the States. Thus, the best option for India was to adopt the Dual GST model.

Therefore, necessary powers to levied the tax will be derived or available to the Center or state respectively by virtue of amendment in the constitution and (122nd amendment) Bill, 2014 is introduced and passed by Lok Sabha in May 2015 and referred to the select committee by the Rajya Sabha.

Salient features of GST

●	GST would replace the following taxes currently levied and collected by the center: 

a)	Central Excise duty 

b)	Duties of Excise (medicinal and Toilet preparations ) 

c)	Additional Duties of Excise (Goods of Special Importance ) 

d)	Additional Duties of excise (textiles and textile Products) 

e)	Additional Duties of Customs (commonly known as CVD) 

f)	Special Additional Duty of Customs (SAD) 

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g)	Service Tax 

h)	Cesses and surcharges insofar as far as they relate to supply of goods or services. 

●	State tax  that would be subsumed with in the GST are: 

a)	State VAT 

b)	Central Sales Tax 

c)	Purchase Tax 

d)	Luxury Tax 

e)	Entry Tax (All Forms) 

f)	Entertainment Tax (not levied by the local bodies ) 

g)	Taxes on advertisements 

h)	Taxes on lotteries, betting and gambling 

i)	State cesses and surcharges insofar as far as they relate to supply of goods or services 

3.	Goods & Services Tax Model For India 

3.1	It is important to take note of the significant administrative issues involved in designing an effective GST model in a federal system with the objective of having an overall harmonious structure of rates. Together with this, there is a need for upholding the powers of Central and State Governments in their taxation matters. Further, there is also the need to propose a model that would be easily implementable, while being generally acceptable to stakeholders. 

3.2 Keeping in view the report of the Joint Working Group on Goods and Services Tax, the views received from the States and Government of India, a dual GST structure with defined functions and responsibilities of the Centre and the States is recommended. An appropriate mechanism that will be binding on both the Centre and the States would be worked out whereby the harmonious rate structure along with the need for further modification could be upheld, if necessary with a collectively agreed Con-stitutional Amendment. Salient features of the proposed model are as follows:

(i)The GST shall have two components: one levied by the Centre (hereinafter referred to as Central GST), and the other levied by the States (hereinafter referred to as State GST). Rates for Central GST and State GST would be prescribed appropriately, reflecting revenue considerations and acceptability. This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). However, the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. would be uni-form across these statutes as far as practicable.

(ii) The Central GST and the State GST would be applicable to all transactions of goods and services made 15 for a consideration except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits.

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(iii)	The Central GST and State GST are to be paid to the accounts of the Centre and the States separately. It would have to be ensured that account-heads for all services and goods would have indica-tion whether it relates to Central GST or State GST (with identification of the State to whom the tax is to be credited). 

(iv)	Since the Central GST and State GST are to be treated separately, taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and could be utilized only against the payment of Central GST. The same principle will be applicable for the State GST. A taxpayer or exporter would have to maintain separate details in books of account for utilization or refund of credit. Further, the rules for taking and utilization of credit for the Central GST and the State GST would be aligned. 

(v)	Cross utilization of ITC between the Central GST and the State GST would not be allowed except in the case of inter-State supply of goods and services under the IGST model which is explained later. 

(vi)	Ideally, the problem related to credit accumulation on account of refund of GST should be avoided by both the Centre and the States except in the cases such as exports, 16 purchase of capital goods, input tax at higher rate than output tax etc. where, again refund/adjustment should be completed in a time bound manner. 

(vii)	To the extent feasible, uniform procedure for collection of both Central GST and State GST would be prescribed in the respective legislation for Central GST and State GST. 

(viii)	The administration of the Central GST to the Centre and for State GST to the States would be given. This would imply that the Centre and the States would have concurrent jurisdiction for the entire value chain and for all taxpayers on the basis of thresholds for goods and services prescribed for the States and the Centre. 

(ix)	The present threshold prescribed in different State VAT Acts below which VAT is not applicable varies from State to State. A uniform State GST threshold across States is desirable and, therefore, it is considered that a threshold of gross annual turnover of Rs.10 lakh both for goods and services for all the States and Union Territories may be adopted with adequate compensation for the States (particularly, the States in North-Eastern Region and Special Category States) where lower threshold had prevailed in the VAT regime. Keeping in view the interest of small traders and small scale industries and to avoid dual control, the States also considered that the threshold for Central GST for goods 17 may be kept at Rs.1.5 crore and the threshold for Central GST for services may also be appropriately high. It may be mentioned that even now there is a separate threshold of services (Rs. 10 lakh) and goods (Rs. 1.5 crore) in the Service Tax and CENVAT. 

(x)	The States are also of the view that Composition/ Compounding Scheme for the purpose of GST should have an upper ceiling on gross annual turnover and a floor tax rate with respect to gross annual turnover. In particular, there would be a compounding cut-off at Rs. 50 lakh of gross annual turnover and a floor rate of 0.5% across the States. The scheme would also allow option for GST registration for dealers with turnover below the compounding cut-off. 

(xi)	The taxpayer would need to submit periodical returns, in common format as far as possible, to both the Central GST authority and to the concerned State GST authorities. 

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(xii)	Each taxpayer would be allotted a PAN-linked taxpayer identification number with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing PAN-based system for Income tax, facilitating data exchange and taxpayer compliance. 

(xiii)	Keeping in mind the need of tax payer's convenience, functions such as assessment, enforce-ment, 18 scrutiny and audit would be undertaken by the authority which is collecting the tax, with informa-tion sharing between the Centre and the States. 

Taxation principle- 'destination' basis

GST will follow the destination principle i.e impact of GST would fall on the person finally consuming the commodity. Also tax revenue in case of SGST will accuse to the state where the imported goods and services are consumed.

GST would be structured on the destination principle, as a result of this, tax base will shift from production to consumption whereby imports will be liable to both CGST and SGST and exports should be relived from the burden of GST by zero rating. Consequently , revenue will accrue to the State in which the consumption takes place to take place.

What is the necessity the GST?

Justification of levy GST at Central Level

In the case of excise (ED), duties paid on the raw material consumed are being permitted as input credit only. For the taxes / duties paid for the post-manufacturing expenses. there is no mechanism for input, credit under the Central Excise Duty Act. This is for the reason that ED is charged at the stage of manufacture and not subsequent thereto. Under the existing system, there is no tax on the value added in the distribution channel.

Secondly, over a period of time, the CG has started charging Additional ED, Additional customs Duty, surcharges etc. for which no input credit is permitted. thus, these duties have led to charging of VAT on it i.e tax on tax. In order to remove cascading of taxes it is necessary that there should be only one tax with appropriate mechanism for tax credit.

Thirdly, credit for Service Tax (ST) is being permitted to a manufacture / service provider to a limited extent. Both EC and ST are levied through different statute. in order to permit credit of ST paid in respect of all the services consumed, it is necessary to have a comprehensive system under which both the goods and services are covered.

Fourthly, a major effect in the existing system is that value for the purpose of computing tax under VAT is cost of goods plus ED paid to the CG. Thus, Vat is charged on the duty paid to the CG. This leads to cascading of taxes i.e. levying tax on taxes. In order to make the GS competitive at the global level, it is necessary that the cascading of taxes be removed. it can be done only when there is a comprehensive tax system wherein ITC is seamless i.e. a continuous chain of set-off from the original producer's / service provider's point up to the retailer's level.

Fifthly, as on today, ST is levied on restricted items only. There are LARGE NUMBERS of services remaining to be taxed. If the system has to be made comprehensive and ITC to be seamless, it is neces-

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sary the SGs should be empowered to levy tax on services. In order to make the system seamless all the SGs will have to be permitted to levy taxes on services.

Justification for the GST at the State level

A major defect under the existing structure of state VAT has been levying of tax on ED paid to the CEnntral Government. This goes against the basic principles of not levying tax on tax. for example, if the Cost of goods is RS. 100 and rate of ED is 10.00%. Vat @4.00% will have to be paid of Rs. 4.40 i.e. 4.00% of Rs. 110. It can be seen that Rs. 4.00 is VAT on the value of the goods while Rs. 0.40 is VAT on ED.

Secondly, Vat is also being charged in respect of Additional ED, Additional Custom Duty etc. All these have distorted the whole structure and lead to cascading if taxes.

Thirdly, despite having introduced VAT, many of the stage have continued with levy of various types of indirect taxes like LUXURY tax, entertainment tax etc.

Fourthly, despite having introduced VAT, tax in being levied on inter-state TRANSFER of goods. since no input credit in permitted in respect of CST paid , it has led to Additional burden for the dealers. It has Hindered the growth of inter-state transactions and led to lots of administrative problems like issues / collection of C / F Form etc.

The solution of the entire problem lies in having a continuous chain of set-off from the original producer's point and services provider's point up to the retailer's level which would eliminates the burden of all cas-cading effects, including the burden of CENVAT and service tax. with the removal of various indirect taxes levied by the SGs there will be reduction in the multiplicity of taxes bringing down the compliance cost.

With GST, the burden of CST will also be phased out. Under the proposed system. The buyer in importing will b able to claim taxes paid to the dealer in exporting state as input credit.

Export of GS under GST

How the export of GS will be treated under GST?

Exports would be zero-rated. In view of this, the question of disallowance of ITC will not arise. ITC accumulated on account of the same can be made use of in respect of the tax liability arising for the local sales. In respect of 100% EoU, accumulated ITC will be permitted as refund.

How will GST benefit the exporters?

It is expected that the subsuming of major Central and State taxes in GST, complete and comprehen-sive setoff of input GS and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured GS. This will increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports. The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost.

Special Economic Zone (SEZ) and GST

How the sale and purchase of GS to and from SEZ will be treated?

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As in the case of exports, benefits may be given to Special Economic Zones (SEZs) also. However, such benefits will only be allowed to the processing zones of the SEZs. It means that sales made by units in SEZ to Domestic Tariff Area will be taxable.

Import of Goods

As the taxes are proposed to be levied on the entire distribution channel, how import of GS will be treated?

It is proposed to levy GST on value of goods imported. Both CGST and SGST will be levied on import of GS into the country. The incidence of tax will follow the destination principle and the tax revenue in case of SGST will accrue to the State where the imported goods and services are consumed. Full and complete set-off will be available on the GST paid on import on GS.

Whether this duty will be over and above Custom Duty levied at present?

Yes. Custom Duty will continue to be levied as at present. GST will be required to be paid additionally on the value of imported GS.

Purchase tax: Some of the States felt that they are getting substantial revenue from Purchase Tax and, therefore, it should not be subsumed under GST while majority of the States were of the view that no such exemptions should be given. The difficulties of the foodgrains producing States and certain other States were appreciated as substantial revenue is being earned by them from Purchase Tax and it was, therefore, felt that in case Purchase Tax has to be subsumed then adequate and continuing compensation has to be provided to such States. This issue is being discussed in consultation with the Government of India.

Tax on items containing Alcohol: Alcoholic beverages would be kept out of the purview of GST. Sales Tax/VAT can be continued to be levied on alcoholic beverages as per the existing practice. In case it has been made Vatable by some States, there is no objection to that. Excise Duty, which is presently being levied by the States may not be also affected.

Tax on Tobacco products: Tobacco products would be subjected to GST with ITC. Centre may be allowed to levy excise duty on tobacco products over and above GST without ITC.

Tax on Petroleum Products: As far as petroleum products are concerned, it was decided that the basket of petroleum products, i.e. crude, motor spirit (including 21 ATF) and HSD would be kept outside GST as is the prevailing practice in India. Sales Tax could continue to be levied by the States on these products with prevailing floor rate. Similarly, Centre could also continue its levies. A final view whether Natural Gas should be kept outside the GST will be taken after further deliberations.

Taxation of Services : As indicated earlier, both the Centre and the States will have concurrent power to levy tax on all goods and services. In the case of States, the principle for taxation of intra-State and inter-State has already been formulated by the Working Group of Principal Secretaries/Secretaries of Finance/Taxation and Commissioners of Trade Taxes with senior representatives of Department of Rev-enue, Government of India. For inter-State transactions an innovative model of Integrated GST will be adopted by appropriately aligning and integrating CGST and SGST. The working of this model is elabo-rated below.

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Model GST law being drafted

NEW DELHI, 17 July 2015. The Government remains committed to roll out the Goods and Services Tax (GST) from April 1, 2016. Currently a Central GST Law and a model legislation for the States were being drafted to levy GST on intra-state supplies; on inter-state supplies and levy of GST on imports. The GST Council would be constituted after the enactment of the Constitution Amendment Bill which is cur-rently with the Select Committee of the Rajya Sabha, said Mr. V S Krishnan, Member Service Tax and GST, Central Board of Excise and Customs (CBEC), Ministry of Finance, in an interface with media at FICCI Federation House, here today. He added that the reports of various Committees/sub-committees on Place of supply rules, IGST Model and Business processes relating to Registration, Refunds, Returns & Payments were awaiting approval. Mr. Krishnan said that the issues under discussions were Rates of CGST, IGST & SGST; threshold limits of exemptions & compounding; List of exempted goods & services; Transitional provisions for treatment of accumulated CENVAT credit; Dispute resolution mechanism; Dis-tribution of responsibility between Centre & State in implementing the three pillars of the compliance verification system Return Scrutiny, Audit and Anti-evasion. Mr. Navin Kumar, Chairman, GST Network (GSTN), said that the GST Automated System will be one-stop-shop for the key needs of taxpayers of the entire nation. The mandate of GSTN is to provide shared IT infrastructure and services to Central and State governments and taxpayers for implementation of GST. He added that implementation of GST needs a strong IT infra and services backbone, which enables capturing, processing and exchanging of information amongst stakeholders (taxpayers, state, central government, banks and RBI). Mr. Kumar said that GST rollout strategy provides two options to the State Governments for creating GST infrastructure. In the first model, States/CBEC would develop their own backend modules and exchange data with GST common portal using APIs over a secured network. In the other, GSTN would develop backend modules for States and host the same at central data centre location. 13 states have exercised the option to use the backend systems of GSTN. Mr. Rajeev Dimri, Partner, BMR & Associates LLP and Co-Chairman, FICCI's Taxation Committee; Mr. S Madhavan, Ex. Sr. Partner, PwC and Co-Chairman of the FICCI's Task Force on GST and Mr. Sachin Menon, Chief Operating Officer Tax and National Head Indirect Tax, KPMG and Co-Chairman of the FICCI's Task Force on GST, also shared their perspectives on GST and discussed the challenges that will be faced by businesses on introduction of GST.

Three Draft legislation on GST to be ready by 15 September

New Delhi: Even as uncertainty looms over the passage of the constitutional amendment bill for goods and services tax rollout in the Rajya Sabha, the government has almost finished work on three legislationcentral GST law, state GST law and integrated GST lawthat will lay down the fine print of this indirect tax regime.

Revenue secretary Shaktikanta Das said all three draft legislation will be ready by 15 September.

“One of the committees has already submitted its report. The other two will do so by 15 September,” Das said while addressing a conference of chief commissioners of Central Board of Excise and Customs.

Once the amendment bill is passed in Parliament, it has to be ratified by 50% of the states and receive the President's nod. After that, the government has to move these three other bills for Parliament's nod.

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The government aims to implement GST from 1 April 2016.

Salient features of Bill to Introduce GST in India

Union Finance Minister Shri Arun Jaitley Intoduces the Constitution Amendment Bill on Goods and Services Tax (GST) in Lok Sabha;

New Article 246a Proposed to Confer Simultaneous Power to Union and State Legislatures to Legislate on GST ;

Centre To Compensate States for Loss of Revenue Arising on Account of Implementation of the GST for a period up to Five Years

The Union Cabinet approved on 17th December,2014 the proposal for introduction of a Bill in the Parliament for amending the Constitution of India to facilitate the introduction of Goods and Services Tax (GST) in the country. The Union Finance Minister Shri Arun Jaitley introduced the said Bill in the Lok Sabha today.

The proposed amendments in the Constitution will confer powers both to the Parliament and State legislatures to make laws for levying GST on the supply of goods and services in the same transaction.

GST will simplify and harmonise the indirect tax regime in the country. GST will broaden the tax base, and result in better tax compliance due to a robust IT infrastructure. Due to the seamless transfer of input tax credit from one state to another in the chain of value addition, there is an in-built mechanism in the design of GST that would incentivize tax compliance by traders. It is thus, expected that introduction of GST will foster a common and seamless Indian market and contribute significantly to the growth of the economy.

Following are the salient features of this Bill:

A new Article 246A is proposed which will confer simultaneous power to Union and State legislatures to legislate on GST.

A new Article 279A is proposed for the creation of a Goods & Services Tax Council which will be a joint forum of the Centre and the States. This Council would function under the Chairmanship of the Union Finance Minister and will have Ministers in charge of Finance/Taxation or Minister nominated by each of the States & UTs with Legislatures, as members. The Council will make recommendations to the Union and the States on important issues like tax rates, exemptions, threshold limits, dispute resolution modali-ties etc.

It is proposed to do away with the concept of 'declared goods of special importance' under the Constitution.

Centre will compensate States for loss of revenue arising on account of implementation of the GST for a period up to five years. A provision in this regard has been made in the Amendment Bill (The compen-sation will be on a tapering basis, i.e., 100% for first three years, 75% in the fourth year and 50% in the fifth year).

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The proposed GST has been designed keeping in mind the federal structure enshrined in the Consti-tution and will have the following important features:

Central taxes like Central Excise Duty, Additional Excise Duties, Service Tax, Additional Customs Duty (CVD) and Special Additional Duty of Customs (SAD), etc. will be subsumed in GST.

At the State level, taxes like VAT/Sales Tax, Central Sales Tax, Entertainment Tax, Octroi and Entry Tax, Purchase Tax and Luxury Tax, etc. would be subsumed in GST.

All goods and services, except alcoholic liquor for human consumption, will be brought under the purview of GST Petroleum and petroleum products have also been Constitutionally brought under GST. However, it has also been

provided that petroleum and petroleum products shall not be subject to the levy of GST till notified at a future date on the recommendation of the GST Council. The present taxes levied by the States and the Centre on petroleum and petroleum products, i.e., Sales Tax/VAT, CST and Excise duty only, will continue to be levied in the interim period.

Both Centre and States will simultaneously levy GST across the value chain. Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State.

The Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supply of goods and services. There will be seamless flow of input tax credit from one State to another. Proceeds of IGST will be apportioned among the States.

GST is a destination-based tax. All SGST on the final product will ordinarily accrue to the consuming State.

GST rates will be uniform across the country. However, to give some fiscal autonomy to the States and Centre, there will a provision of a narrow tax band over and above the floor rates of CGST and SGST.

It is proposed to levy a non-vatable additional tax of not more than 1% on supply of goods in the course of inter- State trade or commerce. This tax will be for a period not exceeding 2 years, or further such period as recommended by the GST Council. This additional tax on supply of goods shall be as-signed to the States from where such supplies originate.

Under new laws there will be no distinction between goods and services. And by amalgamating a large number of central and state taxes, the new tax law will mitigate cascading or double taxation in a major way and pave the way for a common national market.

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Annexure

Frequently Asked Questions and Answers on GST Question 1 : What is the justification of GST ?

Answer : There was a burden of “tax on tax” in the pre-existing Central excise duty of the Govern-ment of India and sales tax system of the State Governments. The introduction of Central VAT (CENVAT) has removed the cascading burden of “tax on tax” to a good extent by providing a mechanism of “set off” for tax paid on inputs and services upto the stage of production, and has been an improvement over the pre-existing Central excise duty. Similarly, the introduction of VAT in the States has removed the cascad-ing effect by giving set-off for tax paid on inputs as well as tax paid on previous purchases and has again been an improvement over the previous sales tax regime. But both the CENVAT and the State VAT have certain incompleteness. The incompleteness in CENVAT is that it has yet not been extended to include chain of value addition in the distributive 30 trade below the stage of production. It has also not included several Central taxes, such as Additional Excise Duties, Additional Customs Duty, Surcharges etc. in the overall framework of CENVAT, and thus kept the benefits of comprehensive input tax and service tax set-off out of the reach of manufacturers/ dealers. The introduction of GST will not only include comprehen-sively more indirect Central taxes and integrate goods and services taxes for set-off relief, but also cap-ture certain value addition in the distributive trade. Similarly, in the present State-level VAT scheme, CENVAT load on the goods has not yet been removed and the cascading effect of that part of tax burden has remained unrelieved. Moreover, there are several taxes in the States, such as, Luxury Tax, Entertainment Tax, etc. which have still not been subsumed in the VAT. Further, there has also not been any integration of VAT on goods with tax on services at the State level with removal of cascading effect of service tax. In addition, although the burden of Central Sales Tax (CST) on inter-State movement of goods has been lessened with reduction of CST rate from 4% to 2%, this burden has also not been fully phased out. With the introduction of GST at the State level, the additional burden of CENVAT and services tax would be comprehensively removed, 31 and a continuous chain of set-off from the original producer's point and service provider's point upto the retailer's level would be established which would eliminate the burden of all cascading effects, including the burden of CENVAT and service tax. This is the essence of GST. Also, major Central and State taxes will get subsumed into GST which will reduce the multiplicity of taxes, and thus bring down the compliance cost. With GST, the burden of CST will also be phased out. Thus GST is not simply VAT plus service tax, but a major improvement over the previous system of VAT and disjointed services tax a justified step forward.

Question 2. What is GST? How does it work ?

Answer : As already mentioned in answer to Question 1, GST is a tax on goods and services with comprehensive and continuous chain of set-off benefits from the producer's point and service provider's point upto the retailer's level. It is essentially a tax only on value addition at each stage, and a supplier at each stage is permitted to set-off, through a tax credit mechanism, the GST paid on the purchase of goods and services as available for set-off on the GST to be paid on the supply of goods 32 and services. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. The illustration shown below indicates, in terms of a hypothetical example with a manufacturer, one wholeseller and one retailer, how GST will work. Let us suppose that GST rate is 10%, with the manufacturer making value addition of Rs.30 on his purchases worth Rs.100 of input of goods and services used in the manufacturing process. The manufacturer will then pay net GST of Rs. 3 after setting-off Rs. 10 as GST paid on his inputs (i.e. Input Tax Credit) from gross GST of Rs. 13.

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The manufacturer sells the goods to the wholeseller. When the wholeseller sells the same goods after making value addition of (say), Rs. 20, he pays net GST of only Rs. 2, after setting-off of Input Tax Credit of Rs. 13 from the gross GST of Rs. 15 to the manufacturer. Similarly, when a retailer sells the same goods after a value addition of (say) Rs. 10, he pays net GST of only Re.1, after setting-off Rs.15 from his gross GST of Rs. 16 paid to wholeseller. Thus, the manufacturer, wholeseller and retailer have to pay only Rs. 6 (= Rs. 3+Rs. 2+Re. 1) as GST on the value addition along the entire value chain from the producer to the retailer, after setting-off GST paid at the earlier stages. The overall burden of GST 33 on the goods is thus much less. This is shown in the table below. The same illustration will hold in the case of final service provider as well.

Question 3 : How can the burden of tax, in general, fall under GST ?

Answer : As already mentioned in Answer to Question 1, the present forms of CENVAT and State VAT have remained incomplete in removing fully the cascading burden of taxes already paid at earlier stages. Besides, there are several other taxes, which both the Central Government and the State Govern-ment levy on production, manufacture and distributive trade, where no set-off is available in the form of input tax credit. These taxes add to the cost of goods and services through “tax on tax” 34 which the final consumer has to bear. Since, with the introduction of GST, all the cascading effects of CENVAT and service tax would be removed with a continuous chain of set-off from the producer's point to the retailer's point, other major Central and State taxes would be subsumed in GST and CST will also be phased out, the final net burden of tax on goods, under GST would, in general, fall. Since there would be a transparent and complete chain of set-offs, this will help widening the coverage of tax base and improve tax compli-ance. This may lead to higher generation of revenues which may in turn lead to the possibility of lowering of average tax burden.

Question 4 : How will GST benefit industry, trade and agriculture ?

Answer : As mentioned in Answer to Question 3, the GST will give more relief to industry, trade and agriculture through a more comprehensive and wider coverage of input tax set-off and service tax set-off, subsuming of several Central and State taxes in the GST and phasing out of CST. The transparent and complete chain of set-offs which will result in widening of tax base and better tax compliance may also lead to lowering of tax burden on an average dealer in industry, trade and agriculture.

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Question 5 : How will GST benefit the exporters?

Answer : The subsuming of major Central and State taxes in GST, complete and comprehensive setoff of input goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured goods and services. This will increase the competitiveness of Indian goods and services in the international market and give boost to Indian exports. The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost.

Question 6 : How will GST benefit the small entrepreneurs and small traders?

Answer : The present threshold prescribed in different State VAT Acts below which VAT is not appli-cable varies from State to State. The existing threshold of goods under State VAT is Rs. 5 lakhs for a majority of bigger States and a lower threshold for North Eastern States and Special Category States. A uniform State GST threshold across States is desirable and, therefore, the Empowered Committee has recommended that a threshold of gross annual turnover of Rs. 10 lakh both for goods and services for all the States and Union Territories may be adopted with adequate compensation for the States (particularly, the States in North-Eastern 36 Region and Special Category States) where lower threshold had prevailed in the VAT regime. Keeping in view the interest of small traders and small scale industries and to avoid dual control, the States considered that the threshold for Central GST for goods may be kept at Rs.1.5 crore and the threshold for services should also be appropriately high. This raising of threshold will protect the interest of small traders. A Composition scheme for small traders and businesses has also been envisaged under GST as will be detailed in Answer to Question 14. Both these features of GST will adequately protect the interests of small traders and small scale industries.

Question 7 : How will GST benefit the common consumers?

Answer : As already mentioned in Answer to Question 3, with the introduction of GST, all the cascad-ing effects of CENVAT and service tax will be more comprehensively removed with a continuous chain of set-off from the producer's point to the retailer's point than what was possible under the prevailing CENVAT and VAT regime. Certain major Central and State taxes will also be subsumed in GST and CST will be phased out. Other things remaining the same, the burden of tax on goods would, in general, fall under GST and that would benefit the consumers.

Answer : The salient features of the proposed model are as follows:

(i)	Consistent with the federal structure of the country, the GST will have two components: one levied by the Centre (hereinafter referred to as Central GST), and the other levied by the States (hereinafter referred to as State GST). This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). However, the basic features of law such as chargeability, defi-nition of taxable event and taxable person, measure of levy including valuation provisions, basis of classi-fication etc. would be uniform across these statutes as far as practicable. 

(ii)	The Central GST and the State GST would be applicable to all transactions of goods and services except the exempted goods and services, goods which are outside the purview of GST and the transac-tions which are below the prescribed threshold limits. 

(iii)	The Central GST and State GST are to be paid to the accounts of the Centre and the States separately. 

(iv)	Since the Central GST and State GST are to be treated separately, in general, taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and could be utilized only against the payment of Central GST. The same principle will be applicable for the State GST. 

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(v)	Cross utilisation of ITC between the Central GST and the State GST would, in general, not be 

allowed. 

(vi)	To the extent feasible, uniform procedure for collection of both Central GST and State GST would be prescribed in the respective legislation for Central GST and State GST. 

(vii)	The administration of the Central GST would be with the Centre and for State GST with the 

States. 

(viii)	The taxpayer would need to submit periodical returns to both the Central GST authority and to the concerned State GST authorities. 

(ix)	Each taxpayer would be allotted a PANlinked taxpayer identification number with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing PAN-based system for Income tax facilitating data exchange and taxpayer compliance. The exact design would be worked out in consultation with the Income-Tax Department. 

(x)	Keeping in mind the need of tax payers convenience, functions such as assessment, enforce-ment, scrutiny and audit would be undertaken by the authority which is collecting the tax, with information sharing between the Centre and the States. 

Question 9 : Why is Dual GST required ?

Answer : India is a federal country where both the Centre and the States have been assigned the powers to levy and collect taxes through appropriate legislation. Both the levels of Government have distinct responsibilities to perform according to the division of powers prescribed in the Constitution for which they need to raise resources. A dual GST will, therefore, be in keeping with the Constitutional requirement of fiscal federalism.

Question 10 : How would a particular transaction of goods and services be taxed simultaneously under Central GST (CGST) and State GST (SGST)?

Answer : The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits. Further, both would be levied on the same price or value unlike State VAT which is levied on the value of the goods inclusive of CENVAT. While the location of the supplier and the recipient within the country is immaterial for the purpose of CGST, SGST would be chargeable only when the supplier and the recipient are both located within the State.

Illustration I : Suppose hypothetically that the rate of CGST is 10% and that of SGST is 10%. When a wholesale dealer of steel in Uttar Pradesh supplies steel bars and rods to a construction company which is also located within the same State for , say Rs. 100, the dealer would charge CGST of Rs. 10 and SGST of Rs. 10 in addition to the basic price of the goods. He would be required to deposit the CGST component into a Central Government account while 41 the SGST portion into the account of the concerned State Government. Of course, he need not actually pay Rs. 20 (Rs. 10 + Rs. 10 ) in cash as he would be entitled to set-off this liability against the CGST or SGST paid on his purchases (say, inputs). But for paying CGST he would be allowed to use only the credit of CGST paid on his purchases while for SGST he can utilize the credit of SGST alone. In other words, CGST credit cannot, in general, be used for payment of SGST. Nor can SGST credit be used for payment of CGST.

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Illustration II: Suppose, again hypothetically, that the rate of CGST is 10% and that of SGST is 10%. When an advertising company located in Mumbai supplies advertising services to a company manufactur-ing soap also located within the State of Maharashtra for, let us say Rs. 100, the ad company would charge CGST of Rs. 10 as well as SGST of Rs. 10 to the basic value of the service. He would be required to deposit the CGST component into a Central Government account while the SGST portion into the account of the concerned State Government. Of course, he need not again actually pay Rs. 20 (Rs. 10+Rs. 10) in cash as it would be entitled to set-off this liability against the CGST or SGST paid on his purchase (say, of inputs such as stationery, office equipment, services of an artist etc). But for paying 42 CGST he would be allowed to use only the credit of CGST paid on its purchase while for SGST he can utilise the credit of SGST alone. In other words, CGST credit cannot, in general, be used for payment of SGST. Nor can SGST credit be used for payment of CGST.

Question 11 : Which Central and State taxes are proposed to be subsumed under GST ?

Answer : The various Central, State and Local levies were examined to identify their possibility of being subsumed under GST. While identifying, the following principles were kept in mind:

(i)	Taxes or levies to be subsumed should be primarily in the nature of indirect taxes, either on the supply of goods or on the supply of services. 

(ii)	Taxes or levies to be subsumed should be part of the transaction chain which commences with import/ manufacture/ production of goods or provision of services at one end and the consumption of goods and services at the other. 

(iii)	The subsumation should result in free flow of tax credit in intra and inter-State levels. 

(iv)	The taxes, levies and fees that are not specifically related to supply of goods & services should not be subsumed under GST. 

(v)	Revenue fairness for both the Union and the States individually would need to be attempted. 

On application of the above principles, the Empowered Committee has recommended that the following Central Taxes should be, to begin with, subsumed under the Goods and Services Tax:

(i)	Central Excise Duty 

(ii)	Additional Excise Duties 

(iii)	The Excise Duty levied under the Medicinal and Toiletries Preparation Act 

(iv)	Service Tax 

(v)	Additional Customs Duty, commonly known as Countervailing Duty (CVD) 

(vi)	Special Additional Duty of Customs - 4% (SAD) 

(vii)	Surcharges, and 

(viii)	Cesses. 

The following State taxes and levies would be, to begin with, subsumed under GST:

(i)	VAT / Sales tax 

(ii)	Entertainment tax (unless it is levied by the local bodies). 

(iii)	Luxury tax 

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(iv)	Taxes on lottery, betting and gambling. 

(v)	State Cesses and Surcharges in so far as they relate to supply of goods and services. 

(vi)	Entry tax not in lieu of Octroi. 

Purchase tax: Some of the States felt that they are getting substantial revenue from Purchase Tax and, therefore, it should not be subsumed under GST while majority of the States were of the view that no such exemptions should be given. The difficulties of the foodgrain producing States was appreciated as substantial revenue is being earned by them from Purchase Tax and it was, therefore, felt that in case Purchase Tax has to be subsumed then adequate and continuing compensation has to be provided to such States. This issue is being discussed in consultation with the Government of India.

Tax on items containing Alcohol: Alcoholic beverages would be kept out of the purview of GST. Sales Tax/VAT could be continued to be levied on alcoholic beverages as per the existing practice. In case it has been made Vatable by some States, there is no objection to that. Excise Duty, which is presently levied by the States may not also be affected.

Tax on Tobacco products: Tobacco products would be subjected to GST with ITC. Centre may be allowed to levy excise duty on tobacco products over and above GST with ITC.

Tax on Petroleum Products: As far as petroleum products are concerned, it was decided that the basket of petroleum products, i.e. crude, motor spirit (including ATF) and HSD would be kept outside GST as is the prevailing practice in India. Sales Tax could continue to be levied by the States on these products with prevailing floor rate. Similarly, Centre could also continue its levies. A final view whether Natural Gas should be kept outside the GST will be taken after further deliberations.

Taxation of Services : As indicated earlier, both the Centre and the States will have concurrent power to levy tax on goods and services. In the case of States, the principle for taxation of intra-State and inter- 46 State has already been formulated by the Working Group of Principal Secretaries/Secretaries of Finance /Taxation and Commissioners of Trade Taxes with senior representatives of Department of Rev-enue, Government of India. For inter-State transactions an innovative model of Integrated GST will be adopted by appropriately aligning and integrating CGST and IGST.

Question 12 : What is the rate structure proposed under GST ?

Answer : The Empowered Committee has decided to adopt a two-rate structure a lower rate for necessary items and items of basic importance and a standard rate for goods in general. There will also be a special rate for precious metals and a list of exempted items. For upholding of special needs of each State as well as a balanced approach to federal flexibility, it is being discussed whether the exempted list under VAT regime including Goods of Local Importance may be retained in the exempted list under State GST in the initial years. It is also being discussed whether the Government of India may adopt, to begin with, a similar approach towards exempted list under the CGST. For CGST relating to goods, the States considered that the Government of India might also 47 have a two-rate structure, with conformity in the levels of rate with the SGST. For taxation of services, there may be a single rate for both CGST and SGST. The exact value of the SGST and CGST rates, including the rate for services, will be made known duly in course of appropriate legislative actions.

Question 13: What is the concept of providing threshold exemption for GST?

Answer : Threshold exemption is built into a tax regime to keep small traders out of tax net. This has three-fold objectives:

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a)	It is difficult to administer small traders and cost of administering of such traders is very high in comparison to the tax paid by them. 

b)	The compliance cost and compliance effort would be saved for such small traders. 

c)	Small traders get relative advantage over large enterprises on account of lower tax incidence. 

The present thresholds prescribed in different State VAT Acts below which VAT is not applicable varies 48 from State to State. A uniform State GST threshold across States is desirable and, therefore, as already mentioned in Answer to Question 6, it has been considered that a threshold of gross annual turnover of Rs. 10 lakh both for goods and services for all the States and Union Territories might be adopted with adequate compensation for the States (particularly, the States in North-Eastern Region and Special Category States) where lower threshold had prevailed in the VAT regime. Keeping in view the interest of small traders and small scale industries and to avoid dual control, the States also considered that the threshold for Central GST for goods may be kept Rs.1.5 Crore and the threshold for services should also be appropriately high.

Question 14 : What is the scope of composition and compounding scheme under GST?

Answer : As already mentioned in Answer to Question 6, a Composition/Compounding Scheme will be an important feature of GST to protect the interests of small traders and small scale industries. The Composition/Compounding scheme for the purpose of GST should have an upper ceiling on gross annual turnover and a floor tax rate with respect to gross annual turnover. In particular there will be a compound-ing cut-off at Rs. 50 lakhs of the gross 49 annual turnover and the floor rate of 0.5% across the States. The scheme would allow option for GST registration for dealers with turnover below the compounding cut-off.

Question 15 : How will imports be taxed under GST ?

Answer : With Constitutional Amendments, both CGST and SGST will be levied on import of goods and services into the country. The incidence of tax will follow the destination principle and the tax revenue in case of SGST will accrue to the State where the imported goods and services are consumed. Full and complete set-off will be available on the GST paid on import on goods and services.

Question 16 : Will cross utilization of credits between goods and services be allowed under GST regime?

Answer : Cross utilization of credit of CGST between goods and services would be allowed. Similarly, the facility of cross utilization of credit will be available in case of SGST. However, the cross utilization of CGST and SGST would generally not be allowed except in the case of inter-State supply of goods and services under the IGST model which is explained in answer to the next question.

Question 17 : How will be Inter-State Transactions of Goods and Services be taxed under GST in terms of IGST method ?

Answer : The Empowered Committee has accepted the recommendation for adoption of IGST model for taxation of inter-State transaction of Goods and Services. The scope of IGST Model is that Centre would levy IGST which would be CGST plus SGST on all inter-State transactions of taxable goods and services. The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax

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liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. The relevant information is also submitted to the Central Agency which will act as a clearing house mechanism, verify the claims and inform the respective governments to transfer the funds. The major advantages of IGST Model are:

a)	Maintenance of uninterrupted ITC chain on inter-State transactions. 

b)	No upfront payment of tax or substantial blockage of funds for the inter-State seller or buyer. 

c)	No refund claim in exporting State, as ITC is used up while paying the tax. 

d)	Self monitoring model. 

e)	Level of computerisation is limited to inter-State dealers and Central and State Governments should be able to computerise their processes expeditiously. 

f)	As all inter-State dealers will be e-registered and correspondence with them will be by e-mail, the compliance level will improve substantially. 

g)	Model can take 'Business to Business' as well as 'Business to Consumer' transactions into account. 

Question 18 : Why does introduction of GST require a Constitutional Amendment?

Answer : The Constitution provides for delineation of power to tax between the Centre and States. While the Centre is empowered to tax services 52 and goods upto the production stage, the States have the power to tax sale of goods. The States do not have the powers to levy a tax on supply of services while the Centre does not have power to levy tax on the sale of goods. Thus, the Constitution does not vest express power either in the Central or State Government to levy a tax on the 'supply of goods and ser-vices'. Moreover, the Constitution also does not empower the States to impose tax on imports. Therefore, it is essential to have Constitutional Amendments for empowering the Centre to levy tax on sale of goods and States for levy of service tax and tax on imports and other consequential issues. As part of the exercise on Constitutional Amendment, there would be a special attention to the formulation of a mecha-nism for upholding the need for a harmonious structure for GST along with the concern for the powers of the Centre and the States in a federal structure.

Question 19: How are the legislative steps being taken for CGST and SGST ?

Answer : A Joint Working Group has recently been constituted (September 30, 2009) comprising of the officials of the Central and State Governments to prepare, in a time-bound manner a draft legislation for Constitutional Amendment.

Question 20: How will the rules for administration of CGST and SGST be framed?

Answer : The Joint Working Group, as mentioned above, has also been entrusted the task of prepar-ing draft legislation for CGST, a suitable Model Legislation for SGST and rules and procedures for CGST and SGST. Simultaneous steps have also been initiated for drafting of legislation for IGST and rules and procedures. As a part of this exercise, the Working Group will also address to the issues of dispute resolution and advance ruling.

3.5 Inter-State Transactions of Goods and Services

The Empowered Committee has accepted the recommendations of the Working Group of concerned officials of Central and State Governments for adoption of IGST model for taxation of inter-State transac-

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tion of Goods and Services. The scope of IGST Model is that Centre would levy IGST which would be CGST plus SGST on all inter-State transactions of taxable goods and 22 services with appropriate provi-sion for consignment or stock transfer of goods and services. The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. The relevant information will also be submit-ted to the Central Agency which will act as a clearing house mechanism, verify the claims and inform the respective governments to transfer the funds.

The major advantages of IGST Model are:

a)	Maintenance of uninterrupted ITC chain on inter State transactions. 

b)	No upfront payment of tax or substantial blockage of funds for the inter-State seller or buyer. 

c)	No refund claim in exporting State, as ITC is used up while paying the tax. 

d)	Self monitoring model. 

e)	Level of computerization is limited to inter-State dealers and Central and State Governments should be able to computerize their processes expeditiously. 

f)	As all inter-State dealers will be e-registered and correspondence with them will be by e-mail, the compliance level will improve substantially. 

g)	Model can take 'Business to Business' as well as 'Business to Consumer' transactions into ac-count. 

Petroleum products

As per the First Discussion paper, petroleum products were proposed to be kept outside the purview of GST, primarily based on revenue considerations of states. The enabling provisions for such exclusion were sought to be incorporated in the Constitutional Amendment bill itself which would make the future reversal of this policy decision extremely difficult.

However, in the recent EC meeting, the central government had again expressed its intention to include petroleum products within GST and not to have any constitutional embargo in this respect, which now seems to be the final consensus. The thinking seems to be to 'zero rate' these products under GST so that Centre and states can continue to levy current taxes with a refund for input GST. This could ensure that GST chain is not broken and the governments do not suffer any revenue loss.

While zero-rating could be better than having an outright constitutional restriction, it may still fall short of the industry's expectation of having a seamless tax and credit regime for petroleum products. Instead of Petroleum Industry claiming refund of input GST credit, allowing to use the input tax credit of GST against excise duty and VAT could help to reduce the administrative cost of processing refunds. In any case, for certain products like natural gas, strong grounds exist for differentiating them from other petroleum products and treating them as any other industrial input under GST.

Entry tax

While the Centre wanted Entry tax to be subsumed into GST, few states still had an alternative view. The industry is of the view that continuing with Entry tax, in addition to GST, will be complicated and could

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pose challenges in terms of creating a common market and also in managing compliances. We believe that Entry tax, being a cost to the business, should be subsumed into GST, even if it means a slightly higher Revenue Neutral Rate (RNR) for the states concerned.

ROLE OF CHARTERED ACCOUNTANTS

1.	Tracking GST development 

2.	Review of draft legislation & impact analysis 

3.	Industry advocacy 

4.	Implementation assistance 

5.	Post implementation support 

6.	To see that all transactions of supply are properly dealt with. 

7.	Record keeping 

8.	Departmental Audit 

9.	External Audit of GST Records 

10.	System Audit 

11.	Certifications for tax credit and special audits. 

12.	Confirm that all the taxable supplies have been considered. 

The Audit under the gst regime should be there to find out the correct credit and treatment of input tax credit by the dealer. There is vide scope for the professional to perform under the GST.

Regards,
Shubham Pahuja	

		

		

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