Rate of GST and Ideal Structure in Indian Context

R Muralidharan
Executive Director
20th August 2008

Agenda

GST-Global Scenario

Why is GST considered as the preferred tax structure?

Constitution of the Joint Working Group

GST- Current State of Play

Present Structure

Features of Proposed GST Model

Rate of GST

Issues & Challenges

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GST-Global Scenario

More than 140 countries have already introduced GST/National VAT

Most countries have a single GST rate

Typically it is a single rate system but two/three rate systems are also
prevalent depending upon the requirement of the implementing nation

Standard GST rate in most countries ranges between 15-20%

All sectors are taxed with very few exceptions/ exemptions

Full tax credits on inputs 100% set off

Canada and Brazil alone have a dual VAT

US does not have a national level VAT

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Why is GST considered as the preferred tax structure?

A simple tax structure with only one or two rates of taxes

Uniform single tax across the supply chain
Reduced transaction cost in the hands of the tax payers
Increased tax collections due to wider tax base and better compliance
Improvement in international cost competitiveness of indigenous goods
and services
Enhancement in efficiency in manufacture and distribution due to
economies of scale
GST encourages an unbiased tax structure that is neutral to business
processes, business models, organization structure, product substitutes
and geographical locations
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Constitution of the Joint Working Group

The Empowered Committee (EC) in consultation with the Central

Government, had constituted a Joint Working Group (JWG) in May
2007 to lay out the road map for the GST

The JWG had been entrusted with the task of studying global GST
models and identify alternate models for introduction in India

Based on a study of the alternate models vis--vis Indias federal

structure, the JWG had suggested the best model for introduction of
GST in India

JWG constituted 3 Sub-Working Groups for discussions in smaller

groups

The JWG presented its report in November 2007

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GST Current State of Play

Empowered Committee (EC) has submitted its report to the FM on the

recommended model

EC has suggested a dual GST

FM has requested the Finance Commission, headed by Dr. Kelkar, to

study the report and make recommendations. Finance Commission has
sought the views of various associations and chambers

The Commission envisages that its recommendations will be submitted

to the FM by end 2008, in time for all subsequent work to commence
and conclude by first quarter 2010
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Present Structure

Federal Tax Excise and Service tax have been

integrated
*(I) CENVAT (Excise) + Service Tax
Can be set off against each other

State Tax Input VAT can be set off against

payment of output VAT/CST
*(II) VAT

(III) CST
No set off: Always a cost

*I & II are parallel levies and cannot be set off against each other

Credit set off possible

Set off not possible
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Features of proposed GST Model

Dual GST recommended by Joint Working Group of the EC

EC has accepted the recommendations and submitted its report to the

Government

Present available details form the basis for subsequent slides

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 Features of proposed GST Model

Basic Structure

- Dual GST comprising Central GST and State GST

- Central GST and State GST, in themselves, to comprise both the

goods tax and the services tax

Central GST and State GST to operate throughout the supply / value

chain
Taxable event to be supplies - as against manufacture (excise) and sales

(VAT)

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 Features of proposed GST Model

Classification
- HSN to form the basis of classification of goods under Central and
State GST
- classification of services based on global best practices and Indian
realities
Rates
- uniform rates for services
- multiple rates for goods
Imports to be charged to both Central and State GST
Excise Free Zones could continue for their life spans

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 Features of proposed GST Model

Input tax Credits ( ITC)

- full credits under the Central and the State GST that will operate in
parallel
- cross utilization of credits between Central GST and State GST not
permitted
- refund of unutilized accumulated ITC
Inter-State transactions
- goods to be taxed in the destination/importing State
- services to be taxed in the State of consumption
- zero rating in the originating State

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 Features of proposed GST Model

Basic Structure

- identified taxes to be subsumed by GST

- stamp duty, toll tax, passenger tax and road tax not subsumed in GST

- exports to be zero rated

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 Features of proposed GST Model

Taxation of crude & petroleum products

- to be brought in GST with ITC
- excise duties ( without ITC) to be levied over and above GST by both
Centre & State
Or
- only crude, motor spirit & high speed diesel be out of the purview of
the GST remaining products as per above
Finance Commission will make recommendations in regard to petroleum
products

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 Features of proposed GST Model

Treatment of services

Any economic activity which is not supply of goods is supply of services

All services to be taxed with few exceptions

Central GST on services relatively easy to collect

State GST on services will be far more complex particularly on cross

border services

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Features of proposed GST model

Cross border Services

Taxed at the place of consumption of services

Difficult to determine the actual place of effective use/enjoyment of

services
Rules for place of supply of services to be framed

Currently no uniform practice exists

Administrative convenience + convenience of the trade & industry to be

factored to determine the place of collection of service tax

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 Features of proposed GST Model

Thresholds

- uniform thresholds under Central & State GST

Exemptions

- common lists for Centre and States with little flexibility for States to

deviate

- exemption schemes proposed to be converted to post-tax cash

refund schemes

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 GST Rate in Select Countries

EU
- UK 17.5%
- Germany 19%
- France 19.6%
- Belgium 21%
Australia 10%
New Zealand 12.5%
China 17%

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 GST Rate in India

What would be the GST rate in India?

Clearly a huge debate and the rates which are typically being discussed
are as follows:
- 20%
- 14%
- 12%
Any of the above, would still be less than the present cumulative rate of
indirect taxes
The rate to be adopted would depend on the extent of coverage of GST
and ability to prune exemptions

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Issues & Challenges

General

By far the most important indirect tax reform in the area of indirect taxes is
just around the corner
Huge issues and challenges which need utmost attention by the Government
Ideally GST model should be finalised at least 12 months prior to
implementation- by April 2009
Trade & Industry should be consulted before finalisation so that the
implementation does not fail
This will give certainty to the businesses and result in high compliance

Finalization of the GST Laws is critical

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Issues & Challenges

Specific Issues & Challenges - Law

Rates
- integration of a large number of Central & State Taxes and obtaining of
consensus amongst States to abolish multiple local taxes
- multiplicity of taxes and tax rates

Thresholds
- rationalization under Central & State GST

Taxation of Petroleum /Alcohol/Tobacco products

- GST with ITC
- excise duties ( without GST)
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Issues & Challenges

Specific Issues & Challenges - Law

Taxation of Inter-State Services

- huge challenges due to its complexity

Operating a seamless input credit system

- pure VAT/ no cascading

Integrating the origin based tax with the destination based GST

Uniformity across States

Proper transition from existing tax structures

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Issues & Challenges

Specific Issues & Challenges Govt related

Standardization of systems and procedures

Uniform dispute settlement machinery

Training

Re-organization of administrative machinery for GST implementation is the

key

Building information technology backbone the single most important

initiative for GST implementation

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Issues & Challenges

Specific Issues & Challenges Govt related

Protecting and balancing the present and future revenues of the Centre
and the States
- commission on Centre-State Relations (CCSR)
- views from Trade & Industry

Impact on backward States

- safeguarding the interests of less developed States with lower revenue
potential

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Thank You

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