Goods and Services Tax
First Discussion Paper on GST
AUTHOR: Rama Krishna Vadlamudi Bombay
November 11th, 2009
http://ramakrishnavadlamudi.blogspot.com/
Implementation
and introduction of Goods and Services Tax (GST) is one of the long-awaited
critical economic reforms that are expected of the re-elected Indian
Government. Much water has flowed down the Ganges
since the concept of GST had hit newspaper headlines some years back. The word
‘GST’ has occupied the mind space of policy makers as well as public at large
for the past few years.
The
Empowered Committee of States’ Finance Ministers had met on November 11, 2009
and agreed for a dual structure of GST – Central GST (CGST) and State GST
(SGST) while releasing the First Discussion Paper on GST in India
ABBREVIATIONS:
CENVAT : Central VAT
CGST : Central GST
CST : Central Sales
Tax
GOI : Government of India
GST : Goods and
Services Tax
IGST : Integrated GST
ITC : Input Tax
Credit
MODVAT : Modified VAT
SGST : State GST
VAT : Value Added Tax
CONTENTS PAGE
1. Highlights of
First Discussion Paper on GST in India
2. What are the issues that are yet to be sorted out? 5
3. What is the impact
of GST on India Inc? 5
4. Who are the beneficiaries of GST? 6
5. What is the
overall impact of GST on economy? 6
6. What is the background to the introduction of GST? 7
7. What is the present setup in relation to indirect taxes? 7
8. What is the principle behind the concept of VAT? 8
9. What is the definition of GST? 8
10. What is the need for introduction of GST? 9
11. How does the GST
work at the ground level?
(a practical example) 9
12. What are the merits of GST? 10
13. What are the pre-requisites for successful
implementation of GST? 10
14. What are the GST rates likely to be? 11
15. What will be the effective date of GST rollout? 11
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Highlights of the
First Discussion Paper on GST in
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The following are the highlights of the “First
Discussion Paper on Goods and Services Tax in India” announced by the Empowered
Committee on State Finance Minister in New Delhi on November 10, 2009 in the
presence of Union Finance Minister, Pranab Mukherjee (the committee’s chairman
and West Bengal finance minister Asim Dasgupta released the document in New
Delhi):
- The
Empowered Committee has agreed to phase out CST (central sales tax – at present
at a rate of two per cent) upon introduction of GST (Goods and Services
Tax) on the understanding that the States would be adequately compensated,
by the Centre, for any revenues loss on account of phasing out of CST
- DUAL GST: A dual GST structure is recommended. The two components are: Central
GST (CGST) to be imposed by the Centre and State GST (SGST) by the States.
Rates of GST would be decided
later.
- The date of implementation of GST will also be
decided later
- Separate acts will be enacted at the Centre and
the States to implement CGST and SGST respectively.
- 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.
- 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 (Integrated GST) model. IGST
would consist of both the Central GST (CGST) and the state GST (SGST).
- A uniform threshold of
annual gross turnover of Rs 10 lakh is proposed for all goods and services
for SGST applicable for all States and
- Each
taxpayer would be allotted a PAN-linked taxpayer identification number
- 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) Excise Duty levied under the Medicinal
& Toiletries Preparation Act
(iv) Service Tax
(v) Additional Customs Duty, also known as Countervailing
Duty (CVD)
(vi) Special Additional Duty of Customs - 4%
(SAD)
(vii) Surcharges, and
(viii) Cesses.
- Following
State taxes and levies would be, to begin with, subsumed under GST:
(i) VAT / Sales tax
(ii) Entertainment tax (unless it is levied
by the local bodies).
(iii) Luxury tax
(iv) Taxes on lottery, betting and gambling.
(v) State Cesses and Surcharges in so far as
they relate to supply of goods and services.
(vi) Entry tax not in
lieu of octroi
- Some
Taxes kept out of GST purview:
- Alcoholic Beverages: They will be kept out of GST
- Crude oil, diesel, petrol and ATF: They will be kept out of GST. States will be
free to levy taxes on them.
- Decision
is yet to be taken on certain taxes:
- Purchase Tax: (Usually imposed by
- Natural Gas:
A final view will be taken later in consultation with GOI.
- Tobacco Products: They will be subjected to GST
with input tax credit (ITC)
- Taxation of Services: Both the Centre and
States will have concurrent power to levy tax on all goods and services. For inter-State transactions an
innovative model of Integrated GST will be adopted by appropriately
aligning and integrating CGST and SGST.
- GST Rate Structure: It has
been decided to adopt a two-rate structure – a lower rate for necessary
items and goods of basic importance and a standard rate for goods in
general. There will also be a special rate for precious metals and a list
of exempted items. The GST rates will be decided later.
- Exports: They would be zero-rated, meaning
exporters of goods and services need not pay GST on their exports. GST
paid by them on the procurement of goods and services will be refunded. Exports are “zero rated’ as in
competitive international markets one cannot export taxes!
- Imports: Both CGST and SGST will be
imposed on imports of goods and services into the country
- The administration of GST shall be divided
into states and Centre with a proposition to have uniform compliance
procedures across states under the respective laws.
- Constitutional Amendments: The
implementation of GST requires some legal and constitutional changes. The
government may have to bring out an Integrated Goods and Services Act
replacing the existing acts governing a plethora of taxes. A Joint Working Group (JWG) was
set up on September 30, 2009 to address these issues and prepare the
necessary draft constitutional amendments. The States, at present, 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. For the GST to be
introduced at the State level, it is essential that the States should be
given the power of levy of taxation of all services. This power of levy of
service taxes has so long been only with the Centre. A Constitutional
Amendment will be made for giving this power also to the States.
- Adequate compensation to States: It would be essential
to provide adequately for compensation for loss that might emerge during
the process of implementation of GST for the next five years. This issue
may be comprehensively taken care of in the recommendations of the
Thirteenth Finance Commission.
- IT Infrastructure: This has to be expedited at
the level of Centre and States.
- The
spirit of fiscal federalism must be kept in mind always. This spirit of
co-operative federalism is the essence of GST and the only feature that
would ensure that a national market with free movement of goods and
services across State boundaries develops, in the true sense.
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What are the issues
that are yet to be sorted out?
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- One
interpretation from the First Discussion Paper of November 10, 2009, is
that Octroi seems to have been kept out the GST diluting the spirit behind
introduction of GST. Many experts infer that octroi,
which is at present applicable on entry of goods in specified areas, may
not be subsumed into GST and would continue to be levied by local bodies.
- The
rates of CGST and SGST have not been specified in the discussion paper
- Also,
the probable date of implementation date has also not been specified in
the discussion paper. Many experts feels that the date may get postponed
to October 1st, 2010 instead of the original April 1st,
2010.
- The
discussion paper has not suggested any threshold limit of annual gross turnover
(below which GST will not be made applicable) for Central GST on services;
while the threshold limit for CGST on goods has been kept at Rs 1.5 crore.
- The
process of consensus build-up is underway on GST rates and compensation
formula for possible revenue loss for states
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What is the impact of
GST on India Inc?
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It is
debatable whether India Inc is ready for a rollout of GST by April 1, 2010. The
implications for India Inc are enormous. Overall, GST is expected to reduce tax
incidence for several goods and services in the country. Lesser taxes and cost
means higher demand for goods and services. GST is expected to bring in uniform
indirect tax system across the country which is easy to understand and
implement. Its effective implementation will have beneficial impact on Indian
companies in the form of lower working capital needs, better supply chain
management, reduction in ware house costs, and others. Reduced working capital
requirement would result in less interest costs.
o
A company, like, Maruti Suzuki, is readying itself for GST rollout.
The company thinks with GST, the tax incidence on their cars will come down
substantially which means the demand for their cars would go up.
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Tax experts are of the opinion that GST will result in reduced
taxes for many goods and services
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GST is going to change the way FMCG and other manufacturing
companies do business in India
o
Industries, like, cement, aluminium, copper, VFY, telecom, FMCG
suffer from not only heavy taxation but also, multiple taxation and various
slabs. Once GST is implemented these sectors will be relieved of the twin
problems of higher and multiple taxation. It will have a salutary impact on the
operations of these companies.
o
The impact on FMCG sector will be from a different perspective
also. After GST, the need for maintaining several warehouses across the states
will be removed. This is big scope for FMCG companies to restructure their
operations, logistics and ERP systems in a big way.
o
In the existing regime, companies set up several warehouses in many
states to avoid certain taxes. With the introduction of GST, companies need not
resort to such practice of setting up warehouses in many states.
o
Once GST is introduced, several bottlenecks in the supply chain can
be removed and companies will save substantial costs
o
A corollary of the reorganization on the part of FMCG sector will
be felt on the logistics sector. This entire supply chain will undergo a
thorough overhaul and this will create huge opportunities, for integrated
logistics players in India
o
The implementation of GST across the Centre and States and UTs
presupposes the existence of a robust information technology (IT) services.
This is a great opportunity for IT and IT-related companies, especially, in the
medium-sized IT players.
o
The operations of NBFCs too will undergo as they too suffer from
various forms of service taxes. It is hoped that the GST rollout will create
tremendous scope for NBFCs to ease their burden of multiple taxes.
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Who are the
beneficiaries after GST?
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The effective implementation of GST is expected
to benefit the government, industry, traders, companies, end-consumers, lawyers,
accountants, IT service providers, etc.
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What is the overall
impact of GST on economy?
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Dr. Vijay Kelkar, currently chairman of the 13th Finance
Commission, says the introduction of GST would be the single biggest measure
after the elimination of licensing in 1991. In fact, this could also provide
the requisite stimulus to the economy during the present economic slow down.
GST once introduced will create a common market across the length and breadth
of the country. Effective implementation of a unified GST with minimum
exemptions will give a fillip to the GDP growth. As per the rough estimates of
Dr. Vijay Kelkar, the economic value of the GST reforms in India will be to an extent of USD 500 billion,
or roughly 50 per cent of India
The 13th Finance Commission, that was
set up in November 2007 (award period: 2010-15), is reviewing the GST structure
and deciding on the sharing of taxes between the Centre and States. State
finances would be shaped by the recommendations of the Commission.
Let us
examine, briefly, the contours of the proposed GST and the background thereto:
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What is the background
to the introduction of GST?
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In India
The concept of Goods and Services Tax or GST was mooted by Dr.
Vijay Kelkar, former Finance Secretary in 2004. The Kelkar Task Force had suggested
a comprehensive Goods and Services Tax (GST) based on VAT (value added tax)
principle. VAT was introduced in India Union Territories
After VAT, the next
logical step is GST. GST is an improvement over VAT. The implementation of GST
is a step towards a comprehensive indirect tax reform in the country. The
groundwork for implementation of GST with effect from April 1, 2010, was
started way back in 2007 after the then Finance Minister, P.Chidambaram,
announced GST rollout while presenting the Union Budget 2007-08 in Parliament.
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What is the present
setup in relation to indirect taxes?
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At present, the Central Government levies tax on goods at the
manufacturing level in the form of CENVAT, whereas the State Governments impose
tax on goods at the point of sale in the form of VAT. The responsibility of
taxing services lies with the Central Government, which began the service tax
in 1994. As of now, the tax base is fragmented between the Centre and the
States. The present indirect tax system is very complex with a multitude of
taxes both at the Centre and State level and a surfeit of tax exemptions
leading to inefficient tax collection. The States, at present, 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.
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What is the principle
behind the concept of VAT?
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Before we delve deeper
into the features of GST, it would be instructive to know something about ‘VAT
principle.’
The VAT principle is that only the incremental value added at each
stage of production is taxed. Businesses are assessed for taxes on the total
value of their sales but receive credit for the taxes paid by their suppliers. In India
In sales tax, there is no provision for input tax credit, which
means that the end consumer may pay tax on an input that has already been taxed
previously. This is known as cascading effect and leads to increase in consumer
tax and price levels; which may result in tax evasion and can be detrimental to
economic growth. In contrast, VAT provides for input credit. VAT is intended to
be levied whenever there is some value addition to raw material. The taxpayers
on the other hand will get input tax credit, or ITC, for the amount of tax paid
off at several stages of procurement. As VAT is imposed on value addition – at
every single stage – there is no incidence of cascading. In this way, the final
consumers bear the burden of paying value added tax. The individual consumers
cannot recover VAT on purchases made by them. However, businesses can recover
VAT on the services and materials, which are bought by them in order to
continue the supply of the products and services.
CENVAT or Central
Value Added Tax: This is nothing but basic excise duty levied by the
central government upto the manufacturing level. The bulk of what is commonly
termed ‘excise collections’ in India India
IGST Act or Indian
Goods and Services Act: This is the proposed name for the new legislation which
will give legal foundations to the Central GST.
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What is the definition
of GST?
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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 up to 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.
GST is a unified tax on
goods and services aimed at replacing the multiple tax system currently being
followed by the Centre and States. GST is a multi-stage
consumption tax imposed on a broad range of goods and services. It is a tax on
transactions and end-customers who consume the goods or services bear the final
cost of the tax. The underlying principle is that the GST will have a simple
structure and goods as well as services will be taxed at a uniform rate. It is
aimed to be a simple, nation-wide, transparent and efficient system of indirect
taxation. It is expected to replace the present CENVAT, service tax, state VAT
and other taxes. Moreover, Central Sales Tax also would have to be phased out.
However, it remains to be seen whether the core principles of GST will be
implemented in letter and spirit at the time of its final introduction by the
Centre and the States.
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What is the need for
introduction of GST?
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- The
introduction of GST is part of a long-awaited indirect tax reform in the
country. Our current structure of indirect taxes is driven by a
multiplicity of taxes- some levied by the Centre and others by the States.
- Each
of these taxes applies to a narrow base both in terms of the economic
activity it covers, e.g, manufacture, sale, entry, entertainment etc, and
the range of goods and services it applies to
- The
output tax is allowed to be adjusted against tax already paid on inputs
only in a few cases
- Then,
there are a variety of exemptions meant to serve multiple socio-economic
objectives. As a consequence, high rates of tax are required to be imposed
to generate a given amount of revenue.
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How does the GST work
at the ground level?
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Stage of supply chain
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Purchase value of input
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Value addition
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Value at which supply of
goods and services made to next stage
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Rate of GST
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GST on output
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Input tax credit
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Net GST = GST on output
– input tax credit
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Rs
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Rs
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Rs
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%
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Rs
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Rs
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Rs
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Manufacturer
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200
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80
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280
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10
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28
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20
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8 (28 – 20)
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Wholesaler
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280
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60
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340
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10
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34
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28
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6 (34 – 28)
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Retailer
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340
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30
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370
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10
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37
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34
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3 (37 – 34)
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As shown in the above example, let us
assume a manufacturer buys raw materials at a cost of Rs 200. While buying she
pays a GST of Rs 20 at the assumed rate of 10 per cent. During the
manufacturing process, she adds value to the tune of Rs 80 and converts the raw
material into a finished good and sells it for Rs 280 and pays a GST of Rs 28
on the finished product at the rate of 10 per cent. Effectively, here her net
GST would be only Rs 8 (28 – 20) as she avails Rs 20 as input tax credit (which
she is entitled while buying raw materials). Likewise in the entire chain till
retailer the same principle applies down the line. The wholesaler buys the
finished product for Rs 280 and adds value Rs 60 and sells it for Rs 340 to the
retailer and pays GST of Rs 34 on the product; however, the wholesaler’s net
GST would only be Rs 6 (34 – 28) after deducting the input tax credit. In the
case of retailer, he buys it for Rs 340 and adds a value of Rs 30 and sells it
for Rs 370 and in the process his effective GST would be only Rs 3 (37 – 34).
To put it simply, the tax payer is only paying tax on the value addition and
not on the entire value of finished product; except the end-consumer.
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What are the merits of
GST?
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ü Only the incremental
value added at each stage of value addition gets taxed
ü The producer gets input
tax credit except at the hands of the final consumer
ü It avoids tax on tax and
tax incidence is reduced for all players involved
ü It reduces transaction
costs for tax payers benefiting the traders and industry
ü More players will come
under tax net as it gets widened with GST ensuring better compliance
ü Due to the input tax
credits, the prices for end-consumers may come down as traders and service
providers may pass on the benefit of lower taxes to end-users
ü GST may cleanse the
present tax system of red tape, delays, corruption and leakages
ü The effective rollout of
GST is expect to usher in a single and common market across the country
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What are the
pre-requisites for successful implementation of GST?
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The following are the prerequisites for an effective rollout of
GST:
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It needs to have minimum number of GST rates and minimum exemptions
so as to achieve widest possible tax base
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The rates of CGST and SGST
are needed to be moderate
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The rates of tax of SGST and exemptions from SGST are uniform
throughout the country
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The input credit chain is seamless covering the entire value chain
from manufacturing to retail without breaks regardless of whether goods or
services are supplied within a State or across State boundaries
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The tax treatment of goods and services is similar
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The Central and State levies are fully neutralized in the case of
exports (out of India
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The procedures are simple and harmonized between the Centre and the
States
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Removal of distorting state taxes such as entry tax, octroi, high
stamp duties etc by subsuming them in the GST
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Amongst the administrative actions that are critical for the
success of GST is the creation of a strong Information Technology
Infrastructure both for the Centre and the States.
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Where are the GST
rates likely to be?
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Kelkar Task Force in 2004 had suggested a maximum
rate of 20% for GST. Currently, the central government levies excise duty at
various rates like 16, 12 and 8 per cent.
It also levies 10.30 per cent service tax on more than 100 services.
States do not levy or collect service taxes, but get a share from the Centre’s
collections.
EMPOWERED COMMITTEE OF STATE FINANCE
MINISTERS ON GST:
The meeting of the Empowered Committee was held
in New Delhi
ü
A broad consensus has been reached among the States to have two
rate slabs – standard rate and lower rate
ü
At the States: Standard GST rate is likely to be in the region of
8% to 9% and for essential commodities the lower rate may be pegged at 4% or 5%
ü
A Joint Working Group (JWG) will be set up to thrash out a legal
framework or GST Act and other constitutional amendments to switch over to the
dual GST regime #
# The formation of a JWG is necessary because neither the
Centre nor the States can levy tax on items which fall outside their respective
lists as per the Seventh Schedule of the Constitution. As such, the rollout of
GST requires constitutional amendments to enable the Centre and States to tax
beyond the manufacturing stage. The JWG will prepare a model GST Act for the
Centre and the States.
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What will be effective
date of GST rollout?
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Government of India
Sources:
Newspapers, MOF, Report of Kelkar Task Force, First Discussion Paper on GST dt
10.11.2009 by the Empowered Committee of State Finance Ministers,, etc.
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