GST – FEATURES OF FIRST
DISCUSSION PAPER
RELEASED ON 10.11.2009
K.VAITHEESWARAN
ADVOCATE & TAX CONSULTANT
Flat No.3, First Floor,
No.9, Thanikachalam Road,
T. Nagar,
Chennai - 600 017, India
Tel.: 044 + 2433 1029 / 4048
402, Front Wing,
House of Lords,
15/16, St. Marks Road,
Bangalore – 560 001, India
Mobile: 98400-96876
E-mail : askvaithi@yahoo.co.uk vaithilegal@yahoo.co.in
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DISCUSSION PAPER ON GST
The First Discussion Paper on GST in
India has been released by the Empowered
Committee of State Finance Ministers on
10.11.2009.
The Paper reflects the various meetings
held by both Central Government and State
Government Officials and a comprehensive
discussion of the subject
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JUSTIFICATION OF GST
 There are short comings in the structure of VAT
at the Central and State Level.
 Several Central Taxes such as additional customs
duty, surcharge, etc. do not form part of the
cenvat chain.
 No steps has been taken to capture the value
addition in the supply chain after manufacture at
the Central Level.
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JUSTIFICATION OF GST
 GST at Central level will be a comprehensive indirect
Central tax on goods and services.
 Revenue of Centre will increase due to the widening of
the dealer base.
 At the State level there are various taxes such as luxury
tax, entertainment tax, etc. which are not subsumed in
VAT.
 At the State level VAT the cenvat on goods is included
in the value and there is a cascading effect.
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JUSTIFICATION OF GST
 The cenvat load needs to be removed
 There must be an integration of VAT on goods as
well as a tax on services at the State level.
 Cascading effect of service tax must be removed.
 In GST cascading effect of both Cenvat and
Service Tax will get removed.
 Relief to industry, trade and consumers through a
comprehensive wider coverage of set off in GST .
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JUSTIFICATION OF GST
 With GST being properly formulated through
appropriate calibration of rates and adequate
compensation wherever necessary there may be
revenue / resource gain both for Centre and State.
 This will be due to widening of tax base and
significant improvement in tax compliance.
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CST
 The rate of CST has already been reduced to 2%
and will be phased out with effect from the
date of introduction of GST.
 The GST structure would adequately compensate
for the loss of the States on a permanent basis.
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GST MODEL FOR INDIA
Power of Central and State Government
has to be upheld with reference to taxation
matters.
Model must be easily implementable and
generally acceptable to stake holders.
Dual GST structure is therefore
recommended.
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CENTRAL GST (CGST)
CGST would be levied by the Centre
through a separate statute on all
transactions of goods and services made
for a consideration.
Exceptions would be exempted goods and
services, goods kept out of GST and
transactions below prescribed threshold
limits.
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CENTRAL GST (CGST)
 This would subsume the following:
– Central Excise Duty
– Additional Excise Duty
– Additional Excise Duty on medicinal and toilet
preparations.
– Countervailing Duty
– Additional Duty under Section 3(5) of the Customs Tariff
Act.
– Service Tax
– Cesses
– Surcharges
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CENTRAL GST (CGST)
 CGST would be a tax on all transactions of goods
and services made for consideration.
 It would be levied and collected by the Centre.
 CGST would be levied across the value chain.
 Rates for CGST would be prescribed
appropriately reflecting revenue considerations
and acceptability.
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STATE GST (SGST)
SGST would be levied by the States
through statute on all transactions of goods
and services made for a consideration.
Exceptions would be exempted goods and
services, goods kept out of GST and
transactions below prescribed threshold
limits.
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STATE GST (SGST)
Every State will have a SGST Statute.
Basic features of law such as chargeability,
taxable event, measure, valuation,
classification would be uniform across
these Statutes as far as practicable.
State GST would be paid to the accounts of
the respective State.
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STATE GST (SGST)
 SGST would subsume the following:
–
–
–
–
–
VAT / Sales Tax
Entertainment Tax unless levied by local bodies.
Luxury Tax
Taxes on lottery, betting and gambling
State cesses and Surcharges relatable to supply of
goods and services
– Entry Tax in lieu of Octroi
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ITEMS NOT IN GST Petroleum
Petroleum products i.e. crude, motor spirit
including aviation turbine fuel and HSD.
Sales tax could continue to be levied by
the States with prevailing floor rate.
Centre could also continue its levies.
Final view to be taken on natural gas after
deliberation.
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ALCOHOL & TOBACCO
Alcoholic beverages kept out of GST.
States can continue to levy sales tax / VAT
and excise duty on these items.
Tobacco would be subjected to GST with
input tax credit.
 Centre may be allowed to levy excise duty
on Tobacco products over and above GST
without input tax credit.
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PURCHASE TAX
 Some States have expressed the view that
purchase tax should not be covered by GST.
 Difficulties are faced by food grain producing
States with substantial revenue from purchase
tax.
 If purchase tax is subsumed in GST continuing
compensation has to be provided.
 The issue is being discussed.
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KEY FEATURES OF CREDIT
MECHANISM
CGST can be set off against CGST
SGST can be set off against SGST
CGST cannot be used for set off against
SGST and vice versa.
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TAXATION OF SERVICES
 Centre and State will have concurrent power to
levy tax on all goods and services.
 Principles for intra-State and inter-State
transaction has been formulated by the working
group.
 For inter-State transaction an innovative model of
Integrated GST (IGST) to be adopted.
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INTER-STATE TRANSACTIONS
 Centre would levy IGST which would be CGST
+ SGST.
 IGST would be levied on all inter-State
transactions of taxable goods and services with
appropriate provision for consignment or
stock transfer of goods and services.
 Inter-State dealer will pay IGST after adjusting
available, IGST, CGST and SGST on his
purchases.
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IGST
 The seller in State-A will pay the IGST to the
Centre.
 While paying IGST the seller will adjust against
available credit of IGST, CGST and SGST.
 State Government-A will have to transfer the
credit of SGST used by the seller for payment of
IGST to the Centre.
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IGST
 Buyer in State-B can avail credit of the IGST
charged.
 Buyer in State-B can use the IGST to discharge
output tax liability in his own State.
 Centre has to transfer credit of IGST used for
payment of SGST to State Government-B.
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IGST – ILLUSTRATION
(Not forming part of the Paper)
 Tamil Nadu seller selling to Karnataka buyer for
Rs.1,00,000/-.
 IGST payable assuming an 8% rate is Rs.8,000/-.
 Rs.8,000/- can be paid by adjusting
– Inter-State purchases (IGST) Rs.3,000/– Local purchases (CGST) Rs.1,500/– Local purchases (SGST) Rs.1,500/-
 Since dealer has used SGST of Tamil Nadu to the extent
of Rs.1,500/-, Centre has to transfer Rs.1,500/- to Tamil
Nadu Government.
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IGST – ILLUSTRATION
(Not forming part of the Paper)
 IGST of Rs.8,000/- is availed as credit by Karnataka
buyer.
 Karnataka dealer sells the goods at Rs.2,00,000/attracting CGST of say Rs.16,000/- and SGST of
Rs.16,000/-.
 If IGST of Rs.8,000/- is used to pay the SGST then
Karnataka Government has to transfer Rs.8,000/- to the
Centre.
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IGST – CLEARING HOUSE
 Transfers are only between Centre and State.
 No transfer from one State to another State.
 Process to be facilitated through a clearing house
mechanism.
 Every State would be both selling and purchasing
State and therefore there would be netting of
funds through the clearing house.
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ADVANTAGES OF IGST
MODEL
 Uninterrupted ITC chain
 No upfront payment of tax or blockage of funds for the
inter-State seller or buyer
 No refund claim in exporting State as ITC is used up
while paying tax.
 Self-monitoring model.
 Computerization limited to inter-State dealers and
Governments.
 All inter-State dealers will be e-registered.
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GST RATE STRUCTURE
 Lower rate for necessary items and goods of
basic importance.
 Standard rate for goods in general
 Special rate for precious metals
 List of exempted items.
 Discussions on as to whether exempted list under
VAT including goods of local importance can
continue in State GST in the initial years.
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GST RATE STRUCTURE
 Discussions on as to whether Government of
India can adopt a similar approach towards
exempted list under CGST.
 States are of the view that CGST should have a
two rate structure with conformity in the levels of
rates under State.
 For services there may be a single rate for both
CGST and SGST.
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GST RATE STRUCTURE
 Exact rates would be known through
appropriate legislative action.
 Exports would be zero rated and similar benefits
may be given to processing zones of SEZs.
 No benefit to sales from SEZ to DTA.
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GST ON IMPORTS
 Both CGST and SGST would be levied on import
of Goods and Services into the country.
 Tax would be based on destination principle.
 Tax revenue in the case of SGST will accrue to
the State where the imported goods and
services are consumed.
 Full set off of GST on imports will be available.
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SPECIAL INDUSTRIAL AREA
SCHEME
 Tax exemptions, remissions, etc. related to
industrial incentives should be converted if at all
needed into cash refund schemes after collection
of tax.
 Special Industrial Area Schemes would continue
upto the legitimate expiry time both for
Centre and States.
 New exemption, remission or continuation would
not be allowed.
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COMPOUNDING SCHEME
Interest of small traders and small scale
industries would be protected.
Scheme will have an upper ceiling on gross
annual turnover and a floor tax rate.
Compounding cut off at Rs.50 lakhs with a
floor rate of 0.5% across the States.
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THRESHOLD LIMITS
Rs.10 lakhs for goods and services for all
the States and Union Territories might be
adopted with compensation for some States
which has lower threshold limits.
Threshold for Central GST for goods may
be kept at Rs.1.5 crores.
Threshold for Central GST on services
should be appropriately high.
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ILLUSTRATION OF GST AS
GIVEN IN DISCUSSION PAPER
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CONSTITUTIONAL
AMENDMENTS
 Amendment required to empower States for levy
of service tax; GST on imports; consequential
issues; and corresponding Central and State Law
with associated Rules and procedures.
 Amendment required to empower Centre to levy
tax on the sale of goods.
 Joint working group constituted on 30.09.2009 to
prepare draft legislation for Constitutional
amendments.
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LEGISLATION
 Constitutional amendments are required.
 Draft legislation for CGST to be prepared.
 Suitable model legislation for SGST to be
prepared.
 Rules and procedures for CGST and SGST to be
prepared.
 IGST legislation with Rules and procedures to be
drafted.
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Thank you
K. VAITHEESWARAN
Advocate & Tax Consultant
Flat No.3, First Floor,
No.9, Thanikachalam Road,
T. Nagar,
Chennai - 600 017. India.
Tel.: 044 + 2433 1029 / 4048
402, Front Wing,
House of Lords,
15/16, St. Marks Road,
Bangalore – 560 001, India.
Mobile: 98400-96876
E-mail : askvaithi@yahoo.co.uk & vaithilegal@yahoo.co.in
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