JAMIA MILLIA ISLAMIA, NEW DELHI

GOODS AND SERVICES TAX IN

INDIA
As a part of TAX LAW
Project

Submitted to: Submitted by:

DR. KIRAN BALA DILWAR HUSSAIN

B.A. LL. B (H) 7TH SEMESTER

 ACKNOWLEDGEMENT
The assignment work bears the imprint of many people, and I express my gratitude to all those
who have helped me and rendered their help in all the possible ways in a completion of my
assignment.

It is a matter of immense pleasure to express my gratitude to my Hon’ble faculty Dr. KIRAN

BALA for her guidance and excellent insights which gave direction and focus to this paper. I thank
her for lending her precious time in making this assignment an authentic piece of work. She
regularly guided me.

I also owe sincere gratitude to the staff at library for always helping in the process of finding
material and other sources for research. I am very grateful to all the individuals involved in the
subgroup for their contributions and assistance in compiling this assignment and the
recommendations that go with it: they are the outcome of an open, interactive and creative
cooperation.

I also thank social networking site for searching the required information in precise and as per
needed. How I can forget to give credit and my satisfaction to my friends. My institution and
family really supported me throughout in my endeavors to which I am honored to thank. My sense
of gratitude is due to FACULTY OF LAW, JMI.

At last, I express my heartfelt gratitude to the God Almighty, without whose blessing and
motivation, the completion of this assignment would have been impossible.

Thanks to all.......

Dilwar Hussain
 Table of Contents

Executive Summary

I. Backdrop 1-

II. India’s Tax Regime

III. Rationale for GST

IV. Overview of GST:-

 How GST works
 System of GST

V. Salient features of GST model

VI. Proposed GST Model
Taxes to be subsumed under GST
Rate Structure
Taxes out of purview of GST
Threshold Limits
Exemptions
Tax Credit
VII. How integrated GST will work?

VIII GST on Import

GST on Export
IX Miscellaneous
X Road Blocks in implementation of GST?

XI Proposed amendments in legislations.

XII Suggestion for effective Implementation
XIII GST Implications for organisations
INTRODUCTION

The differential multiple tax regime across sectors of production leads to distortions in allocation
of resources thus introducing inefficiencies in the sectors of domestic production. While indirect
taxes paid by the producing firms get offsets under state VAT and CENVAT, the producers do not
receive full offsets particularly at the state level. The multiplicity of taxes further adds the difficulty
in getting full offsets.
Add to this, the lack of full offsets of taxes loaded on to the fob export prices. The export
competitiveness gets negatively impacted even further. Efficient allocation of productive
resources and providing full tax offsets is expected to result in gains for GDP, returns to the factors
of production and exports of the economy.
The Joint Working Group of the Empowered Committee of the State Finance Ministers submitted
its report on the proposed Goods and Services Tax (GST) to the Finance Minister in November
2007. A dual GST, one for the Centre and other for the states, was to be implemented by 1 April
2010. The new system would replace the state VAT , CENVAT, and some other taxes.
The proposed GST would eliminate the cascading effect and would integrate hitherto disjointed
goods and service taxes. It will lead to uniformity in tax rates and procedures throughout the
country. It will ensure better compliance and thus will increase the revenue of both centre and
states. The export sector will also gain from this integration of state and centre taxes. Consumer
will be benefited in form of lower tax rates.
There will be dual tax rate viz Central GST(CGST) and State GST(SGST). Also, for interstate
sales there will be an Integrated GST. However cross credits among CGST and SGST will not be
allowed. The rates for CGST and SGST are yet to be decided. It is also proposed to keep certain
taxes such as taxes on petroleum products to be kept out of purview of GST.
However, there are major challenges to introduction of GST like amendment of constitution of
India to alter power of taxation of centre and state, rates of SGST and CGST, standardisation of
procedure, compensation for revenue loss to states, etc.
1. BACKDROP

1.1 Tax policies play an important role on the economy through their impact on both efficiency
and equity. A good tax system should keep in view issues of income distribution and, at the same
time, also endeavour to generate tax revenues to support government expenditure on public
services and infrastructure development. Cascading tax revenues have differential impacts on
firms in the economy with relatively high burden on those not getting full offsets.
1.2 Traditionally India’s tax regime relied heavily on indirect taxes including customs and excise.
Revenue from indirect taxes was the major source of tax revenue till tax reforms were undertaken
during nineties. The major argument put forth for heavy reliance on indirect taxes was that the
India’s majority of population was poor and thus widening base of direct taxes had inherent
limitations. Another argument for reliance on indirect taxes was that agricultural income was not
subjected to central income tax and there were administrative difficulties involved in collecting
taxes.
However, it became evident that indirect taxes lead to undesirable effects on prices and allocation
of resources. The Government of India constituted Indirect Taxation Enquiry Committee in 1976
headed by Shri L. K. Jha to study the structure of indirect taxes, central, state and local level taxes
and suggest policy reforms. Indirect Taxation Enquiry Committee submitted its report in 1978.
The committee found a major problem with indirect tax regime as it had caused unintended
distortion in the allocation of resources and cascading effects. The committee recommended that
indirect taxation should move towards taxation of final products and introduce modified form of
value added tax. However, a major obstacle in rationalisation of indirect tax system was the levy
of tax on commodities by government at different levels viz., centre, state and local authorities.
This multiple taxation provides incentives for tax evasion and undermines efficiency. Further,
there is lack of uniformity in the pattern of commodity taxation resulting in harassment to the public
by multiple tax authorities. Heavy reliance on indirect taxes for raising revenue was also found to
increase cost and fuel inflation.
1.3 The Government of introduced the Long Term Fiscal Policy (LTFP) on 19 December 1985 for
prudent fiscal management. Major excise and custom reforms were introduced in LTFP. The
reforms in excise relates to introduction of modified value added tax i.e MODVAT. However, fill
up in the tax policy came with introduction of economic reforms in 1990. The system of MODVAT
was progressively converted into VAT and CENVAT was introduced at centre level.
Subsequently, after Constitutional Amendment empowering the Centre to levy taxes on services,
these service taxes were also added to CENVAT in 2004-05.At state level also VAT was
introduced in 2005.
1.4 Despite all the various changes the overall taxation system continues to be complex and has
various exemptions. The Government of India constituted a Task Force on implementation of
Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) to chalk out a framework for
fiscal policies to achieve FRBM targets. The Report of the Task Force on implementation of the
FRBMA, chaired by Dr. Vijay Kelkar, submitted its Report in July 2004. It has recommended
introduction of a national VAT on goods and services (GST) which would help improve the
revenue productivity of domestic indirect taxes and enhance welfare through efficient resource
allocation.
The Joint Working Group of the Empowered Committee of the State Finance Ministers submitted
its report on the proposed Goods and Services Tax (GST) to the Finance Minister in November
2007. A dual GST, one for the Centre and other for the states, was to be implemented by 1 April
2010
II INDIA’S TAX REGIME

2.1 In India the power for taxation has been divided between centre and state under article 246
of the constitution. As per the said article the centre has power to tax under list I of the Schedule
VII of the constitution, the state can tax under list II of the schedule and both can make law under
list III of the schedule. Therefore, there is a clearly defined and multiple tax regime in India.

Taxation structure existing in country:-

Taxes levied by Centre Taxes Levied by State
Central Excise and Custom Value Added Tax( state sales
tax)
Service Tax Local taxes
Direct Taxes

2.2 Prior to the introduction of VAT in the Centre and in the States, there was a burden of multiple
taxation in the pre-existing Central excise duty and the State sales tax systems. Before any
commodity was produced, inputs were first taxed, and then after the commodity got produced
with input tax load, output was taxed again. This was causing a burden of multiple taxation (i.e.
“tax on tax”) with a cascading effect. Moreover, in the sales tax structure, when there was also a
system of multi-point sales taxation at subsequent levels of distributive trade, then along with
input tax load, burden of sales tax paid on purchase at each level was also added, thus
aggravating the cascading effect further.

2.3 In India, VAT was introduced at the Central level for a selected number of commodities in
terms of MODVAT with effect from March 1, 1986, and in a
step-by-step manner for all commodities in terms of CENVAT in 2002-03. Subsequently, after
Constitutional Amendment empowering the Centre to levy taxes on services, these service taxes
were also added to CENVAT in 2004-05.

2.4 When VAT is introduced in place of Central excise duty, a set-off is given, i.e., a deduction is
made from the overall tax burden for input tax. In the case of VAT in place of sales tax system,
a set-off is given from tax burden not only for input tax paid but also for tax paid on previous
purchases. With VAT, the problem of “tax on tax” and related burden of cascading effect is thus
removed. .
2.5 Before introduction of VAT, in the sales tax regime, apart from the problem of multiple taxation
and burden of adverse cascading effect of taxes as already mentioned, there was also no
harmony in the rates of sales tax on different commodities among the States. Not only were the
rates of sales tax numerous (often more than ten in several States), and different from one another
for the same commodity in different States, but there was also an unhealthy competition among
the States in terms of sales tax rates – so-called “rate war” – often resulting in, revenue-wise, a
counter-productive situation.

2.6 It is in this background that attempts were made by the States to introduce a harmonious VAT
in the States, keeping at the same time in mind the issue of sovereignty of the States regarding
the State tax matters.

The States started implementing VAT beginning April 1, 2005. After overcoming the initial
difficulties, all the States and Union Territories have now implemented VAT.
III Rationale for GST
3.1 Despite this success with VAT, there are still certain shortcomings in the structure of VAT both
at the Central and at the State level.

The shortcoming in CENVAT of the Government of India are as follows:-

 non-inclusion of several Central taxes in the overall framework of CENVAT, such as

additional customs duty, surcharges, etc., and thus keeping the benefits of comprehensive
input tax and service tax set-off out of reach for manufacturers/dealers.

 no step has yet been taken to capture the value-added chain in the distribution trade
below the manufacturing level in the existing scheme of CENVAT.

The introduction of GST at the Central level will not only include comprehensively more indirect
Central taxes and integrate goods and service taxes for the purpose of set-off relief, but may also
lead to revenue gain for the Centre through widening of the dealer base by capturing value
addition in the distributive trade and increased compliance.

3.2 In the existing State-level VAT structure there are also certain shortcomings as follows:-

 several taxes which are in the nature of indirect tax on goods and services, such as luxury
tax, entertainment tax, etc., have yet not been subsumed in the VAT.

 CENVAT load on the goods remains included in the value of goods to be taxed under
State VAT, and contributing to that extent a cascading effect on account of CENVAT
element.

 non integration of VAT on goods with tax on services at the State level and cascading
effect of service tax.

3.3 In the GST, both the cascading effects of CENVAT and service tax are removed with set-off,
and a continuous chain of set-off from the original producer’s point and service provider’s point
upto the retailer’s level is established which reduces the burden of all cascading effects.

GST is not simply VAT plus service tax but an improvement over the previous system of VAT
and disjointed service tax.

3.4 Implementation of GST will also remove several roadblocks in the existing taxation system in
India.
Some of these are:
a)Tax cascading – The Goods and Services Tax Act will overcome the problem of tax- cascading
through input tax credit mechanisms. Under this system, sellers or vendors of goods and services
are eligible to avail tax credits on the amount of GST paid to eligible procurements. Manufacturers
can avail credits for the GST paid to procure inputs, capital goods and services used in the
manufacturing process. In the same way, wholesalers and retailers can avail credits for the GST
paid on procurement of stock. But the final customer who purchases the product for consumption
will not be able to avail and utilize any tax credit. Tax cascading can be understood by the
following example:-
A tax is applied on a particular product at each stage and and no credit is available, then tax will
be charged at each stage whenever a good or service changes hands. In other words, tax is
applied several times and is charged even on the tax which forms part of the inputs.
The following taxes will be applied to the product:
 While purchasing inputs i.e. raw materials for the product, the manufacturer pays sales
tax.
 When a wholesaler purchases the product from the manufacturer, then he pays tax on
procurement of the product.
 When the retailer purchases the product from the wholesaler, the wholesale again charges
tax.
 Lastly, the customer purchases the product from the retailer; the retailer again charges a
tax. This layering of sales tax will significantly increase the final sales price as each party
in the supply chain increases the price of the product to recover the tax they paid. The
cascading effect will increase then tax is paid on tax.
There are a large number of products and range of services that are outside the ambit of CENVAT
and service tax. The exempts sectors are not allowed to claim any credit of the input tax. In the
same way, under the state VAT, no credits are allowed for the inputs procured and used towards
exempted sectors. Non-eligibility for availment of credits leads to
tax cascading. Due to large number of exemptions, the effect of tax cascading in India is
significantly high.
b) Complexity – Presently in India, for taxing sale of goods, there is Central Sales tax and
respective VAT Acts for each state and Union territory. The Goods and Services Tax will remove
this complication by having a unified code for implementation of State GST in different states. The
GST will not only subsume a large number of indirect taxes but also solve the classification issues
by introducing only one or two rates of tax. Other than this there would be categories that are
exempted or zero rated.
Presently the activities in a supply chain are subject to several taxes. For example – the
manufacture of goods is subject to excise duty and sale of these manufactured goods is subject
to state VAT or CST. The GST will ensure uniform single tax across the entire supply chain.
c) Double taxation – The GST will not make any difference between goods and services as GST
will be levied at each stage in the supply chain. This will help in solving the problem of double
taxation. The issue is not only between the taxes of customs duties, excise duties and service tax
but also between service tax and VAT. The issue of double taxation was addressed by the
Honorable Supreme Court in the case of BSNL vs. UOI (2006(3)SCC-1), wherein the Court held
that the same activity cannot be regarded as both goods and services and hence both service tax
and VAT should not be applicable on the same set of transactions.
The implementation of GST will resolve the dilemma of a large number of assessee who are not
sure of application of the type of tax on certain specified transactions like software development,
sale of sim cards by telecom operators, online subscription of newspapers, value added services
provided by telecom operators, right to distribute movies etc.
d) Composite contracts – There are a large number of works contracts which involve the supply
of goods and services which are available to customers under different supply chain
arrangements. Such situations arise in a gap or overlapping in taxation of goods and services as
the States do not have the power to impose tax on services and the Centre does not have the
power to impose tax on sale of goods within the state. In such cases, a comprehensive solution
can be provided only by implementation of GST.
e)Revenue growth- The introduction of GST along with prudent accounting policies,
transparency and supported by a robust electronic controls will bring down the peak rates of
taxation and enhance revenue growth. This can be understood by the following table by
comparing the present rates of tax and the proposed GST.

Goods from producer to wholesaler Present taxes GST (Rs.)

(Rs.)
Cost of production 80,000 80,000
Producers margin of profit 20,000 20,000
Producer’s price 1,00,000 1,00,000
 Central Excise duty at 14% 14,000 Nil
 VAT at 12.5% 14250 Nil
 Central GST at (expected rate )12% Nill 12,000
 State GST at (expected rate) 8% Nill 8,000
Total Price 1,28,250 1,20,000
Goods from wholesaler to retailer Present taxes GST (Rs.)
(Rs.)
Cost of goods to wholesaler 1,14,000 1,00,000
 Profit margin at 5% 5,700 5,000
Total 1,19,700 1,05,000
 VAT at 12.5% 712.5 Nill
 Central GST (expected rate )12% Nil 600
 State GST at (expected rate) 8% Nill 400
Total 1,20,412.5 1,06,000
Goods from retailer to final consumer Present taxes GST (Rs.)
(Rs.)
Cost of goods to wholesaler 1,20,412.5 1,06,000
 Profit margin at 10% 12,041.25 10,500
Total 1,32,453.75 1,16,500
 VAT at 12.5% 1,505.15 Nill
 Central GST (expected rate )12% Nill 1,050
 State GST at (expected rate) 8% Nill 840
Total price to the final consumer 1,33,958.9 1,18,390

Tax component in the price to the final 30,467.65 22,890

consumer
Final price exclusive of taxes 1,03,491.25 95,500
IV Benefits of GST

4.1 Benefits for centre

As per the existing taxation system the centre does not has power to tax on production of goods.
The power to levy tax on sales rests with state except in case of inter state sales. Therefore,
introduction of GST would empower centre to tax sales also.

Benefits of GST for Centre:

Increase in GDP

Increase in exports

Power to tax after production down to distribution point

Ensures better compliance and prevent tax evasion

4.2 Benefits to state

There is no uniformity in rate of taxes among the states. Even after introduction of VAT there
are different rates of tax in different states. Therefore, there was rate war among states. GST
will lead to uniformity in tax rates. Other benefits for state are:-

Benefits for states

Will get power to tax services

Will reduce rate wars, therefore, outflow of investment to other states due to rate war
will be prevented

Introduction of comprehensive system of reliefs including set off of CENVAT and

service taxes

Increase in revenue due to broadening of tax base

Removal of burden of CST

4.3 Benefits to industry

Benefits to industry
 Will provide comprehensive input tax credit, the service tax can be set off with sales
tax
No need to pay CST
Many central and state indirect taxes will be subsumed in GST, therefore, a single tax
is to be paid.
Uniformity in tax procedure throughout the country
Reduced tax burden will increase competitiveness of Indian products in foreign
markets

4.4 Benefits to consumer

Benefits to consumer

Reduced tax burden will be passed on to consumers in form of reduced prices.

Better compliance and increased tax revenue will enable the government to spend
more on welfare

4.5 The GST at the Central and at the State level will thus give more relief to industry, trade,
agriculture and consumers through a more comprehensive and wider coverage of input tax set-
off and service tax set-off, subsuming of several taxes in the GST and phasing
out of CST. With the GST being properly formulated by appropriate calibration of rates and
adequate compensation where necessary, there may also be revenue/ resource gain for both the
Centre and the States, primarily through widening of tax base and possibility of a significant
improvement in tax compliance. In other words, the GST may usher in the possibility of a collective
gain for industry, trade, agriculture and common consumers as well as for the Central Government
and the State Governments. The GST may, indeed, lead to the possibility of collectively positive-
sum game.
V Overview of GST

WHAT IS GOODS AND SERVICE TAX ?

5.1 Goods and Service Tax is a tax on goods and services, which is leviable at each point of sale
or provision of service, in which at the time of sale of goods or providing the services the seller or
service provider can claim the input credit of tax which he has paid while purchasing the goods
or procuring the service.

HOW WILL IT WORK?

5.2 GST will be paid at each step till final distribution stage. It will be charged by
dealers(manufacturer, trader and service provider) on the price of goods and services. While GST
is paid at each step in the supply chain of goods and services, the paying dealers don’t actually
bear the burden of the tax because GST is an indirect tax and ultimate burden of the GST has to
be taken by the last Customer. This is because they include GST in the price of the goods and
services they sell and can claim credits for the most GST included in the price of goods and
services they buy. The cost of GST is borne by the final consumer, who can’t claim GST credits,
i.e. input credit of the tax paid.

The working of GST with respect to manufacturer, trader and consumer can be seen in the
illustrations given below. The manufacturers will get the input credit of all the taxes paid by them
on the raw material and also on the services.

Let us assume the rate of GST is 16 percent and a toy manufacturer used following inputs for
manufacturing toys and sells the goods at Rs 120 lakh to trader:-
Manufacturer
Item Particulars Amount Rate of tax Input tax paid
no (Rs in lakhs) ( in percent) (Rs in lakhs)
1 Raw material 50 16 8
2 Stores and spares 25 16 4
3 Services 25 16 4
Total value of inputs 100 16

The output tax to be paid

Sale Value Rate of tax ( in percent) output tax to be paid
 (Rs in lakhs)
Rs 120 lakh 16 19.2

Net Tax payable by manufacturer

Total output tax to be paid Rs 19.2 lakh

Total Input tax Paid Rs 16 lakh
Net Tax to be Paid Rs 3.2 lakh

Suppose trader use services amounting to Rs 5 lakh paying service tax at rate of 16 percent
amounting to Rs 0.8 lakh. Therefore total input tax paid by trader is:-
Trader
Item Particulars Amount Rate of tax Input tax paid
no (Rs in lakhs) ( in percent) (Rs in lakhs)
1 Goods purchased from 120 16 19.2
manufacturer
2 Services 5 16 0.8
Total value of inputs 125 20

If trader sell goods to consumer by adding Rs 5 lakh profit margin .The output tax payable by
trader is :-
Sale Value Rate of tax ( in percent) output tax to be paid
(Rs in lakhs)
Rs 130 lakh 16 20.8

Net Tax payable by Trader

Total output tax to be paid Rs 20.8 lakh

Total Input tax Paid Rs 20 lakh
Net Tax to be Paid Rs 0.8 lakh

Net Tax payable by consumer

Sale Value Rate of tax ( in percent) output tax to be paid

(Rs in lakhs)
 Rs 130 lakh 16 20.8

From the above illustration it can be seen that the manufacturer and the trader gets credit of the
tax paid on good and services and had to pay tax on value added only. Further, the government
will get tax of Rs 20.8 lakh which is tax on final sale value of the product though from different
sources as detailed below:-

Description Output tax Input tax credit Net tax payable to

(Rs in lakh) (Rs in lakh) government
(Rs in lakh)
Raw material 8 0 8
supplier
Stores and spares 4 0 4
supplier
Service provider I 4 0 4
Manufacturer 19.2 16 3.2
Service Provider II 0.8 0 0.8
Trader 20.8 20 0.8
Total Tax payable 20.8
to Government

GST composition of manufacturer and dealer

25

20

15 Output Tax
Input Tax Credit
10
Net Tax Payable

0
Manufacturer Trader
Composition of tax paid by the consumer

raw material
stores& spares
service providerI
manufacturer
service providerII
trader
Systems of GST
5.3 Internationally, there are three systems in vogue:
(a) Invoice System
(b) Payment System
(c) Hybrid System
Brief description of three systems is:
Type of System Input Credit Output Tax
Invoice system On receipt of invoice On issue of invoice
Payment system On making payment On making payment
Hybrid At the option of dealer to be At the option of dealer to be
declared in advance declared in advance

(a) Invoice System: In the invoice system, the GST (Input) is claimed on the basis of invoice and
it is claimed when the invoice is received, it is immaterial whether payment is made or not. Further
the GST (Output) is accounted for when invoice is raised. Here also the time of receipt of payment
is immaterial. One may treat it as mercantile system of accounting. In India the present system of
sales tax on goods is an invoice system of VAT
and here it is immaterial whether the taxpayer is following the cash basis of accounting or
mercantile basis of accounting. The advantage of invoice system is that the input credit can be
claimed without making the payment. The disadvantage of the invoice system is that the GST has
to be paid without receiving the payment.
(b) Payment System: In the payment system of GST, the GST (Input) is claimed when the
payment for purchases is made and the GST (Output) is accounted for when the payment is
made. In this system, it is immaterial whether the assessee is maintaining the accounts on cash
basis or not. The advantage of cash invoice system is that the Tax (output) need not be deposited
until the payment for the goods and/or services is received. The disadvantage of the payment
system is that the GST (input) cannot be claimed without making the payment.
The Taxes on services in India are based on this payment system since service tax is payable on
receipt basis and further Cenvat credit is only allowable when payment of the service is made. In
some countries, this system is also adopted for small traders to keep them away from the
complexities of the Invoice system, which is purely a mercantile system.
(c) Hybrid System: In hybrid system the GST (Input) is claimed on the basis of invoice and GST
(Output) is accounted for on the basis of payment, if allowed by the law. In some countries the
dealers have to put their option for this system or for a reversal of this system
before adopting the same.
VI Salient features of the GST model proposed in India

Rate Structure

6.1 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 (CGST) and State GST ( SGST) 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 uniform across these statutes
as far as practicable.

The proposed rate structure is as follows:

 A lower rate for essential structure.

 Standard rate for general goods.

 Special rates for precious metals.

 For services their shall be single rate for SGST and CGST.

These GST rates are yet not announced by the government.

Applicability

6.2 The Central GST and the State GST would be applicable to all transactions of goods and
services made 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.

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
indication whether it relates to Central GST or State GST (with identification of the State to whom
the tax is to be credited).

Input Credit
6.3 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.

Cross utilization of Income Tax Credit 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.

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, 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.

Procedures

6.4 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.

Administration

6.5 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.

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.

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.

Keeping in mind the need of tax payer’s convenience, functions such as assessment,
enforcement, scrutiny and audit would be undertaken by the authority which is collecting the tax,
with information sharing between the Centre and state
VII Taxes to be subsumed under GST

7.1 The following taxes levied at centre will get subsumed under GST:-
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.

7.2 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

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.

Taxes to be kept out of purview of GST

7.3 However following taxes are proposed to be kept out of purview of GST due the reasons as
detailed:-

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.
.VIIIThreshold Limits- Services
8.1 In order to give relief to small dealers government has proposed to provide exemption from
SGST and CGST. Different threshold limits may be specified for taxes on services and
taxes on goods. 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 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.

The present threshold limit vis a vis proposed limit is:-

Turnover of Services Present System Proposed Syatem

Below Rs. 10 Lakh No Service Tax
Between Rs 10 lakh and Rs Service tax payable
150 lakh
Above Rs 150 lakh Service tax payable
Thresh hold limit for goods Differs from state to state
In case of Centre it is Rs
150 lakh
Neither SGST nor CGST
Only SGST
Both SGAT and CGST
No exemption
Threshold limit of Rs 150 lakh
 IX INTEGRATED GOODS AND SERVICE TAX (IGST):

9.1 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 with appropriate provision 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 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:

(i) Maintenance of uninterrupted ITC chain on inter-state transactions.

(ii) No upfront payment of tax or substantial blockage of funds for the inter-state seller or buyer.
(iii) No refund claim in exporting State, as ITC is used up while paying the tax.
(iv) Self monitoring model.
(v) Level of computerization is limited to inter-state dealers and Central and State Governments
should be able to computerize their processes expeditiously.
(vi) As all inter-state dealers will be e-registered and correspondence with them will be done by
e-mail, the compliance level will improve substantially.
(vii) Model can take ‘Business to Business’ as well as ‘Business to Consumer’ transactions into
account.
 X GST on Export
Zero Rating of Exports

10.1 Exports would be zero-rated. Similar benefits may be given to Special Economic Zones
(SEZs). However, such benefits will only be allowed to the processing zones of the SEZs. No
benefit to the sales from an SEZ to Domestic Tariff Area (DTA) will be allowed.

GST on Imports:

10.2 The GST will be levied on imports with necessary 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.

Special Industrial Area Scheme

10.3 After the introduction of GST, the tax exemptions, remissions etc. related to industrial
incentives should be converted, if at all needed, into cash refund schemes after collection of tax,
so that the GST scheme on the basis of a continuous chain of set-offs is not disturbed. Regarding
Special Industrial Area Schemes, it is clarified that such exemptions, remissions etc. would
continue up to legitimate expiry time both for the Centre and the States. Any new exemption,
remission etc. or continuation of earlier exemption, remission etc. would not be allowed. In such
cases, the Central and the State Governments could provide reimbursement after collecting GST.
XI Miscellaneous Matters

11.1 Refunds: If for a tax period the input credit of a dealer is more than the output credit then he
is eligible for refund subject to the provisions of law applicable in this respect. The excess may be
carried forward to next period or may be refunded immediately depending upon the provision of
law.

11.2 Exempted Goods and Services: Certain goods and services may be declared as exempted
goods and services and in that case the input credit cannot be claimed on the GST paid for
purchasing the raw material in this respect or GST paid on services used for providing such goods
and services.

11.3 Tax Exemptions

Various tax exemptions have been granted both by the Centre and States to achieve objectives
of promoting a particular sector or to reduce tax burden on a particular segment of society in the
interest of fairness or to promote a particular economic activity etc. Tax exemptions have the
effect of narrowing the tax base and increasing the administrative and compliance cost of GST.
Therefore, it is felt that exemptions should be minimized. Direct and transparent subsidies, instead
of tax exemptions, are more efficient way to achieve the targeted objective. It is recommended
that apart from a dual rate GST structure at the Central and the State levels, there should be a
common exemption list. Further, specific provisions to provide limited flexibility to the States within
a set of prescribed criteria may need to be incorporated, as in the prevailing VAT structure, in
order to accommodate exemption of goods of local importance. Similar limited flexibility would
need to be provided to the Centre to address exceptional situations such as natural disasters.

11.4 Advance Ruling

Advance ruling and dispute resolution authorities should be set up by the Centre and States to
ensure uniformity and fairness in decision-making.

11.5 Joint Authority and Legislation

The authority to amend the common exempted list and the common composition scheme should
rest with a joint authority of Central and State Governments to ensure that no single State or
Central Government amends either of these unilaterally.
11.6 IT Infrastructure
The success of the GST largely depends upon IT infrastructure available for collection,
compilation and exchange of data at the shortest possible time. IT infrastructure with national
coverage and extensive reach is critical for the successful implementation of GST. For this, an
initiative at the Central Government level needs to be taken in order to put in place a strong IT
infrastructure.
XII Roadblock to implementation of GST
12.1 Bringing about an integration of all taxes levied on goods and services in a federal polity with
sharp distribution of legislative powers is a Herculean task to say the least. The Constitution of
India, 1950 demarcates taxing powers in a two-tier structure wherein levies on production and
international imports are with the Union and post- production levies rest with the states. The
Centre levies duties of excise on manufactures and import/countervailing duties on international
imports apart from levying a tax on services under various taxing and the residuary entry in the
Union List. The states levy VAT on goods sold or entering in the state under various entries of the
state list. Even if all Union-level levies are integrated into a single levy and all state level levies
culminate in a single State level levy; this may still have two levies and the resultant cascading
and administrative burdens may nevertheless remain to an extent, though this may go a long way
in harmonising levies. A harmonised, integrated and full fledged GST calls for the following:

(1) Constitutional Amendments: Implementation of GST calls for effecting widespread

amendments in the Constitution and the various constitutional entries relating to
taxation. As per provisions of Article 368 of the constitution , the bill for amendment is to
be passed by majority of the members of both houses and two third of the members
present and voting. Also, the amendment is to be approved by fifty percent of the state
legislative assemblies.In the current scenario it is difficult to visualise constitutional
amendments of such far reaching implications going through, more so in view of the fact
that sharing of legislative powers is such an essential element of our federal polity and
it may be perceived to be a basic feature of the Constitution;

(2) Integration of Services: Services have to be appropriately integrated in the tax

network;

(3) Design and structure of GST: No less significant is the issue of an appropriate
design and structure of GST. For instance, how the issue of inter-state movement of
goods and services may be addressed. The phasing out of CST may go a long way in
addressing the issue of inter-state trade and commerce in goods but the crucial issue
regarding services originating in one state and being consumed in other state still
remains;
(4) Resources Sharing: Another contentious issue that is bound to crop up in this regard
is the manner of sharing of resources between the Centre and the states and among the
states inter se as also the basis of their devolution;

(5) Flow of Goods and Services: Apart from all these, there has to be a robust and
integrated MIS dedicated to the task of tracking flow of goods and services across the
country and rendering accurate accounting of levies associated with such flow of goods
and services; and

(6) Determination of Revenue Neutral Rate (RNR): At present States are charging VAT
rates 0%, 4%, 12.5% and 20% besides other levies and thus the average rate of tax
comes to 17%. Similarly, Centre is charging Central Excise duty @ 14%, CST 2%,
Service Tax 10%. The combined effect of all the taxes taken together comes to an
average rate of tax @ 27.5%. The proposed GST rate is mooted @ 20% both for the
Central GST @ 12% and the State GST @ 8%. Assuming that the States may agree on
the implementation of GST based on compensation being given to them like what was
decided at the time of introduction of VAT i.e. 1st April, 2005, the Centre may suffer loss
while satisfying the needs of about 30 states.
XIII Some questions to be answered

The following issues are yet to be answered even after the release of the Discussion paper
1. Does Exemption of 1.5 Crores in CGST for goods equally apply to dealers?
As GST will cover in its scope the levy of excise and VAT therefore the exemption limit of 1.5
Crores specified in the discussion paper will extend its hands to dealers also or the same will be
limited to the manufacturers. If the second view is opted then the definition of Manufacture will be
rolled back in the GST tax regime.
2. What is the Service tax threshold exemption limit under CGST?
The Empowered Committee has not specified the threshold exemption limit applicable to services
under CGST. However they have clarified that the same will be in conformity with the existing
threshold exemption of Rs. 10 Lakhs.
3. IGST (Inter-state transaction of GST) levy will be equal to CGST plus SGST, thus the same
will be single rates. Are separate records are to be maintained in this respect also?
It has been clarified that the IGST credit will be allowed to be set off against IGST, CGST or SGST
payable by the taxpayer. In the current scenario CST is levied on interstate sale of goods, but the
dealers aren't allowed to avail the credit of the same and they are emphasizing on the scenario
to buy the goods from within the state so as to avail the credit of VAT. However in this new tax
regime the IGST will be levied at the rate which will be equal to CGST plus SGST, this leads to a
new issue that IGST will be levied at a single compound rate or two different rates i.e. CGST and
SGST will be levied differently or not.
If the rear view is adopted then the question arises that the credit of the IGST will be allowed to
be set off against both CGST and SGST separately or cross adjustments will be allowed. If the
cross adjustment is allowed then the taxpayers availing exemption of 1.5 Crores under CGST will
be willing to purchase goods and sale them outside the state as in that situation they will be getting
the full credit of IGST thus benefiting them utmost. This scenario changes the complete situation
as it exists presently. This difficulty is yet to be sorted and clarified by the Government.
4 The dual GST model would be implemented through multiple statutes one for CGST and SGST
statute for every State.
Different statues will govern the SGST levy. This will lead to non uniformity in the tax structure at
state levels. Further, there may be complexities for smooth implementation of GST across the
nation.

5 Transitional Issues
The transition would cause ambiguity with respect to issues like treatment of "stock in hand", available
CENVAT (Central Value Added Tax), credit / VAT (Value Added Tax) credit. However, these should be
provided for much before the implementation of GST.

6 Exemptions
There should be a common exemption list for CGST (Central Goods and Services Tax) and SGST (State
Goods and Services Tax) so that there is no discrepancy in the collection of taxes. Another important issue
are area-based exemptions.

A scheme for the treatment of such exemptions should be well devised so that there is no adverse affect
on the industry. Though Customs will remain outside the GST regime, a large number of bonds executed
by importers and exporters with Government will have to be suitably amended for changed liability in view
of new GST.

7 Job Work
Issues such as what documents and records need to be prepared by the job worker and the principal and
time limits for claiming CENVAT credit are to be decided. Since, the focus would be on 'supply' after the
implementation of GST, the status of job workers needs to be determined.

8 Assessable Value
The calculation of assessable value under GST is ambiguous since it still unknown what the components
of the assessable value are. Are discounts and other charges such as loading/unloading, freight, cartage
and packing includible in the assessable value or would they be chargeable separately?

9 Place of Supply
In the GST regime, the taxable event would be 'supply' and it is very essential to understand as to where
the 'supply' actually takes place. "Place of Supply" rules refers to the rules that allocate the right to tax
between the states. The main concern here is which state will collect the SGST.

10Branch / Stock Transfer

An efficient provision for branch transfer / stock transfer should be put in place under the GST regime. The
system should enable the businesses to make branch transfers without payment of tax and the procedure
should be simple to ensure maximum compliance and minimise disputes.

10 Return / Rejection / Replacement of Goods

There has been no clarification on the treatment of goods which are returned, rejected or replaced. A major
question here is whether the treatment would be similar to the present system of reversing the credit or
whether new provision would be introduced.

9. Common Procedures
The industry expects that there would be similar formats for registration, returns and other records for both
CGST and SGST. Functions such as assessment, enforcement, scrutiny and audit should be undertaken
by the authority which is collecting the tax with information sharing between the Centre and the States.

Conclusion
GST, if implemented efficiently, could prove to be a "Good Sensible Tax". But the Government should come
up with the draft rules as soon as possible so that there is enough time for industry to analyse the draft and
make representations to the concerned authorities with their suggestions.
XIV SUGGESTIONS FOR EFFECTIVE IMPLEMENTATION
14.1 Some suggestions for better administrative machinery to handle the implementation of
Goods and Services Tax Act in India are:

 Standardization of systems and procedures.

 Tax relief in case of branch transfer
 Well defined procedures in case of Job works
 Uniform dispute settlement machinery.
 Adequate training for both tax payers and tax enforcers.
 Re-organization of administrative machinery for GST implementation.
 Building information technology backbone – the single most important initiative for GST
implementation.
 Uniform Implementation of GST should be ensured across all states (unlike the staggered
implementation of VAT) as many issues might arise in case of transactions between states
who comply with GST and states who are not complying with GST.
XV GST Implications for organisations
15.1 GST shall be the mother of all Indian tax reforms of this centaury and it would subsume most
(if not all) of the existing Central and State level taxes on supply of goods and services.
Accordingly, GST would have a significant impact on business environment and its operations.
When undertaking oversight of organizational readiness to adopt GST, independent directors
need to focus on the following aspects:
1 GST will have a multi-fold impact on operations – Besides the fiscal impact and tax
compliance, GST will have an impact on cash flows, product pricing, supply chain arrangements,
procurement, revenue recognition and the IT systems. It is therefore important to assess whether
the organization is undertaking a holistic impact assessment of GST encompassing all of the
above.
2 Assess the impact on financial results – GST will have an impact on the financial statements;
for example the top-line may get reduced in some cases (e.g. traded items) due to elimination of
tax cascading. The gross margins will also undergo changes as Cost of Goods Sold may undergo
changes as a result on input tax credits. For listed companies, these changes will need to be
factored in quarterly forecasts and earning releases to the stock markets.
3 Monitor the impact on cash flows – Most of the planning in GST will revolve around optimizing
cash flows. The impact will be as a result of GST on imports, stock transfers and changes in point
of taxation/ tax credits.
4 Organisations may need to re-design certain aspects of their Supply Chain – The concept
of mere supply of goods and services trigger tax liability under GST as opposed to sale under the
present VAT, will impact Sourcing, Production and Distribution aspects of the Supply Chain. For
instance, sourcing considerations would involve revisiting sourcing mix (local, inter-state and
imports), stock transfer policy and renegotiation of vendor price due to the GST impact. From a
production perspective, GST impact would vary depending upon the manufacturing and
distribution arrangements e.g. own/ job-work/ contract manufacturing. The “Place of Supply” rules
will determine state where GST is to be deposited.
5 Understand the linkages, differences for companies implementing IFRS – For companies
implementing IFRS, the requirements under IFRS vary with those under GST. Organizations will
need to consider necessary re-alignments within their IT systems to effectively manage these
differences. For instance, there could be possible differences between GST levy date and date of
revenue recognition, accounting for multiple element arrangements (e.g. the invoice value
includes a supply and maintenance element), accounting for barter transactions, reconciliation of
GST on stock transfers with accounting records etc.
6 Understand the implications on product pricing, marketing and HR – The impact of GST
needs to be considered in the margins of various stakeholders in the distribution chain to ensure
that GST does not negatively impact product pricing and consequently market share. This calls
for a reassessment of exchange, discount and incentive schemes. From a HR perspective, there
may be a need to reconsider the indirect tax management structure, training requirements of key
indirect tax personnel depending upon the impact assessment.
7 Assess if the IT systems are geared to address GST requirements effectively with
minimal manual workarounds – The Audit Committee should at the outset require management
to undertake necessary enhancements to IT systems so that the necessary systemic alignments
are in place to manage GST MIS requirements. Changes in the system are likely to be required
primarily on account of change in taxes/ tax rates, availability of credits for input taxes on
purchases including inter-state purchases and Import GST, availability of cross credits for goods
and services and GST on stock transfer.

15.2 To summarise, organizations need to undertake the following to enable a smooth

transition to GST:
 Have an internal core team which will closely monitor the GST developments.
 Identify existing bottlenecks and those likely to arise from proposed GST framework.
 Representation to the implementing agencies through appropriate industry associations
to
 highlight issues and propose solutions in the proposed GST framework.
 Ensure flexibility in new systems/ processes/ contracts, to accommodate changes
warranted by GST
 Identify need for restructuring business/ transactions/supply chain in the light of the GST
framework
 Modify internal IT, invoicing and other systems/ processes/ policies to make them GST
compliant
 Create awareness within organization about changes, modifications in roles/
responsibilities of team