Report of the Task Force on Goods and Services Tax Thirteenth Finance Commission
GST
Dated:- 17-12-2015
Executive Summary
1. The taxation of goods and services in India has, hitherto, been characterised as a cascading and distortionary tax on production resulting in mis-allocation of resources and lower productivity and economic growth. It also inhibits voluntary compliance. Therefore, it is necessary to replace the existing indirect tax system by a new regime which would foster the achievement of the following objectives:
(a) The incidence of tax falls only on domestic consumption;
(b) The efficiency and equity of the system is optimized;
(c) There should be no export of taxes across taxing jurisdictions;
(d) The Indian market should be integrated into a single common market;
(e) It enhances the cause of cooperative federalism. (Para 2.1)
2. A well designed 'value added tax on all goods and services (GST) is the most elegant method of eliminating distortions
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vices in law so as to ensure that there is no classification dispute. (Para 2.7)
vi. The GST should be structured on the destination principle. As a result, the tax base will shift from production to consumption whereby imports will be liable to both CGST and SGST and exports should be relieved of the burden of goods and service tax by zero rating. Consequently, revenues will accrue to the State in which the consumption takes place or is deemed to take place; (Para 2.13)
vii. The computation of the CGST and SGST liability should be based on the invoice credit method i.e., allow credit for tax paid on all intermediate goods or services on the basis of invoices issued by the supplier. As a result, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax will effectively 'stick' on final consumption within the taxing jurisdiction. This will facilitate elimination of the cascading effect at various stages of production and distrib
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he States should draw up a common exemption which should be restricted to the following:-;
a. All public services of Government (Central, State and municipal/panchayati raj) including Civil administration, health services and formal education services provided by Government schools and colleges, Defence, Para-military, Police, Intelligence and Government Departments. However, public services will not include Railways, Post and Telegraph, other commercial Departments, Public Sector enterprises, banks and Insurance, health and education services;
b. Any service transactions between an employer and employee either as a service provider, recipient or vice versa;
c. any unprocessed food article which is covered under the public distribution system should be exempt regardless of the outlet through which it is sold; and
d. education services provided by non-Governmental schools and colleges; and
e. health services provided by non-Governmental agencies. (Para 2.26)
xi. The SIN -go
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e jointly manned by both States so as to reduce the number of check-posts and enhance efficiency in the road movement of goods. (Para 3.20)
xv. Keeping in view the compliance cost and administrative feasibility, small dealers (including service providers) and manufacturers should be exempted from the purview of both CGST and SGST if their annual aggregate turnover (excluding both CGST and SGST) of all goods and services does not exceed Rs. 10 lakh. However, like in most other countries, those below the threshold limit may be allowed to register voluntarily to facilitate sales to other registered manufacturers/dealers, limit competitive distortions and avoid inequities. Further, the threshold exemption limit should be uniform for both CGST and SGST and across States. (Paras 2.61 and 2.62)
xvi. Further, with a view to reduce administrative and compliance burden, small dealers with annual aggregate turnover of goods and services between Rs. 10 lakh to Rs. 40 lakh2 may be allowed to
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t of the small scale industry should be conducted only by the state tax administration. The enforcement by the State tax administration would be adequate to even deal with CGST evasion. (Paras 2.66 and 2.67)
xix. The area based exemption in respect of CENVAT should not be continued under the GST framework. In case it is considered necessary to provide support to industry for balanced regional development, it would be appropriate to provide direct investment linked cash subsidy. (Para 2.74)
xx. Since the GST is designed to ensure that all producers and distributors are treated as complete pass- through and exports are zero-rated, there should be no exemption for the developers of, or units in, the Special Economic Zones. (Para 2.75)
xxi. The tax regime for power sector, vehicles, goods and passengers, financial services and the real estate and housing services sector should be reformed and integrated into the GST framework along the lines summarized in the paragraphs 4 to 7 and
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and gambling, and all cesses and surcharges by States);
Since all taxes on goods and services, levied by the Centre or the States, should be subsumed in the GST, the following other taxes levied by the States on goods and services should also be subsumed:
i. Stamp duty;
ii. Taxes on Vehicles;
iii. Taxes on Goods and Passengers; and
iv. Taxes and duties on electricity. (Para 2.11)
xxv. Any amount collected through these taxes on the SIN goods should not be subsumed either in the CGST or the SGST. Similarly any amount which is collected as tax/fee/charge/cess which is essentially in the nature of a user charge for supply of goods and services (including environmental goods and services) also should not be subsumed under the CGST or SGST. Further, both Centre and the States should take steps to consolidate all taxes (other than proposed GST) on the SIN goods as a single levy termed as Central Excises and State Excises, respectively. (Para 2.11)
xxvi. All entry and Octroi d
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rrent jurisdiction. The tax regime for the transport equipments and transport services should be the same as in the case of any other normal goods. (Para 2.38)
6. The consumption of financial services should be comprehensively taxed under the GST framework on the basis of the full taxation method. (Paras 2.39 to 2.41)
7. The real estate sector should be integrated into the GST framework by subsuming the stamp duty on immovable properties levied by the States to facilitate input credit and eliminate cascading effect. The new GST regime for immovable property transactions and real estate services should be designed on the lines of the comprehensive taxation method. Therefore, the new regime would comprise of the following elements: –
a. The GST should apply for all newly constructed property (both residential and commercial). If it is self-used by the person who constructed it, the GST should be applied on the cost of construction. If it is sold or transferred, the GST should be ap
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ng adjustment for inflation. If the property has been acquired by the seller before the introduction of GST, the GST should be levied on the difference between the sale price and the cost of acquisition and improvements thereto. In such cases, no input tax credit would be allowed.
c. The adjustment for inflation may be made on the basis of the same inflation index as provided for the purposes of determination of capital gains under the Income-tax Act, 1961.
d. The new regime will also be subject to the threshold exemption of Rs. 10,00,000/- for small businesses thereby eliminating the problem of excessively large number of landlords seeking GST registration.
e. Immovable property will also include land and, therefore, the new regime will also be applicable to land transactions. However, where land is used for construction of a property, it will be treated as an input. In such cases, the GST paid in respect of land will be allowed as input tax credit in the same manner as other in
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egral part of the proposed GST design. (Paras 2.42 to 2.48)
8. In the context of the GST, it is necessary to resolve the problem relating to the treatment of inter-state sales/transfers in a manner that the incidence of the tax falls on the consumption of commodities without any distortionary cascading effect and the revenue accrues to the State where the final consumer is located. After analysing the various Models, we recommend a Modified Bank Model, which comprises, inter alia, of the following functional components:-
(i) In the course of inter-state B2B supply, the seller in the origin State shall collect the SGST leviable on the transaction from the buyer in the destination State as if the sale was within the origin State.
(ii) The seller would issue an invoice to the buyer indicating the details of the transaction (including the date of the transaction) and his business identification number (BIN).
(iii) The seller shall use the input SGST for payment of the output SGST o
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ture, provide payment gateway to all banks in India and provide screen-based upload or file upload facility for receiving payment and transaction information.
(viii) It would be mandatory for all registered dealers to make the payment by electronically furnishing Form No. GST-I, which would be a combined monthly payment and return form for all intra-state and inter-state transactions..
(ix) As far as the registered dealer is concerned, he would be required to make a single payment of the aggregate of all sums due to the Centre and all other States. Even though he would have collected tax in the Origin State for inter-state transactions with buyers in a number of destination States, he can fulfil his obligation of directly remitting the tax so collected to all the destination states through a single payment made along with the electronic furnishing of Form No. GST-I. This mechanism will have the benefit of extremely low compliance cost.
(x) It would be mandatory for all registered
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. The various tax administrative functions such as assessment, enforcement, scrutiny and audit should be undertaken by the CBEC in respect of the CGST and by the State tax administration in respect of the SGST subject to our recommendation on small-scale industries. However, from a taxpayer's perspective all compliance and enforcement procedures under CGST and SGST should be uniform. The Central Government shall establish a common IT infrastructure which will serve the needs of both CGST and SGST. (Para 4.8)
10. The jurisdiction between the CBEC and the State Administration may be divided between the two in such manner that the interface of the taxpayer is confined to one tax administration only. The basis for division could be turnover or any other criteria which is considered reasonable so that the compliance and administrative burden is minimized.
(Para 4.8)
11. All persons with annual aggregate turnover of goods and services exceeding Rs. 10 lakh (excluding CGST and SGST) shou
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te.
13. The payment of tax and the transaction reporting should be made through a combined payment and transaction reporting statement in Form No. GST-I. This statement should detail all business to business transactions relating to sales. This statement should be common for both CGST and SGST compliance and it should be mandatory to file this statement electronically on a monthly basis while making payment of taxes. The VAT period should be a calendar month. (Para 4.8)
14. The administration of this levy should be based on audited accounts and not on the basis of any form of physical controls. Since the tax base will be common, there should be a common appellate authority. Similarly, the Authority for Advance Ruling should also be common. Best international practices should be embedded in the Central-GST, particularly in respect of laws relating to levy of penalties, and circumstances and method of prosecution. No authority should have any power to make preventive detention for the
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ence of the policymakers is for adoption of a single rate as it is more efficient. Therefore, we recommend one positive rate, each for CGST and SGST on all goods and services. In addition, there should be a zero rate applicable to all goods and services exported out of the country. (Para 5.9)
17. One of the crucial issues relates to the determination of the rate of CGST and SGST. Since the GST is primarily intended as an exercise in reforming the consumption tax in India and not an exercise for additional resource mobilisation through discretionary changes, the CGST and SGST rates should be such rates which would yield the same revenue as collected from the various taxes which will be subsumed in the CGST and SGST , that is, it should be a 'revenue neutral rates' or 'RNR'). (Para 5.17)
18. Using the fiscal year 2007-08 as the base year for calculation of the RNR, we first estimate the GST base under five different methods. These methods are (i) Subtraction-Indirect Method; (ii) Con
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osed to be subsumed in the SGST is estimated to be 6.0 percent. Therefore, the combined RNR is estimated to be 11 percent. Incidentally, this estimate is the same as estimated by Poddar and Bagchi in their pioneering study published in November, 2007. These estimates do not factor in the revenue gains from increased compliance and GDP. To the extent, the flawless GST will reduce cascading effect, there will be significant increase in the corporate profits and hence corporate tax collections. Hence, in actual practice, the RNR of 11 percent will be revenue positive. However, all entry and Octroi taxes by state governments and other sub-national Governments are also proposed to be abolished. Accordingly, it is imperative to provide for an alternate buoyant source of revenue to the third-tier of Government. Hence, we recommend the following:-
i. The rate of CGST and SGST on all non-SIN goods should be fixed at the single rate of 5 percent and 7 percent, respectively;
ii. A formula-bas
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. These distortions yield inefficient resource allocation and consequently, inferior GDP growth. The introduction of the GST will bring about a macroeconomic dividend by reducing what have been called the “negative grey area dynamic effects” of cascading taxation. As a result it reduces the overall incidence of indirect taxation by removing the many distortionary features of the present indirect tax system. The switchover to a flawless GST will have significant macroeconomic effects. The overall macroeconomic effect of reduction in economic distortions due to GST would be to It would provide an impetus to economic growth. Using CGE Model, the NCAER study commissioned by the Thirteenth Finance Commission estimates the impact of the introduction of a GST which would eliminate all taxes on production and distribution and rest on final consumption only. The study is based on two important assumptions of full employment and that 50 percent of indirect taxes remain embedded and 'stick' on pr
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ver and above the growth in GDP which would have been achieved otherwise. The present value of the GST-reform induced gains in GDP may be computed as the present value of additional income stream based on some discount rate. Assuming the long-term real rate of interest of about 3 per cent as the discount rate, the present value of total gain in GDP is computed as between Rs. 1,469 thousand crores and 2,881 thousand crores. The corresponding dollar values are $325 billion and $637 billion or as much as one-third to one-half of the country's GDP for the year 2009-10. (Para 7.6)
22. Gains in exports are expected to vary between 3.2 and 6.3 per cent with corresponding absolute value range as Rs. 24,669 crore and Rs. 48,661 crore. Imports are expected to gain somewhere between 2.4 and 4.7 per cent with corresponding absolute values ranging between Rs. 31,173 crore and Rs. 61,501 crore. (Para 7.11)
23. The benefit to the poor from the implementation of GST will flow from two sources: fir
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benefit millions of farmers in India. Similarly, the urban poor will also benefit from new employment opportunities. With regard to the food crops the poor would continue to remain secured through the public distribution system. The prices of many other consumer goods are expected to decline. These include sugar; beverages; cotton textiles; wool, silk and synthetic fibre textiles; and textile products and wearing apparel. (Paras 7.24, 7.27 and 7.28)
25. The changeover to GST is designed to be revenue neutral at existing levels of compliance. Given the design of the 'flawless' GST, the producers and distributors will only be pass through for the GST. Therefore, this policy initiative should witness a higher compliance and an upsurge in revenue collections. This will also have an indirect positive impact on direct tax collections. Further, given the fact that GST will trigger an increase in the GDP, this in turn would yield higher revenues even at existing levels of compliance. Another
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T, the expansion in the power of the States is significantly larger than the Centre. Therefore, the proposed GST will alter the balance of power in favour of the states thereby reducing the vertical imbalance. (Para 7.36)
28. The GST envisages a mechanism whereby both the Centre and the States will cease to have any independent power to make changes in the design and structure once agreed upon. The existing mechanism for arriving at a collective decision on the structure of the GST should be permanently institutionalised so that changes in the initial design of the GST are collectively agreed and implemented by both the Centre and the States. The Empowered Committee of State Finance Ministers may, upon the introduction of the GST, be transformed into a permanent constitutional body known as the Council of Finance Ministers. This Council shall comprise of the Union Finance Minister and all State Finance Ministers. The Union Finance Minister would be the Chairman of this Council.
(Pa
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. However, with a view to incentivising the States and establishing a credible mechanism for deciding on compensation claims, if any, we recommend the following:-
i) A GST Compensation Fund should be created under the administrative control of the Council of Finance Ministers.
ii) The Central Government shall transfer to the GST Compensation Fund a minimum sum of Rs. 6000 crores per annum over the next five years (i.e. a total amount of Rs. 30,000 crores) if, and only if, the States-
a. introduce the 'flawless' GST as recommended by us; and
b. follow the road map, as suggested by us, for its introduction;
iii) The amounts in the Fund should be used only for the following purposes:-
a. To compensate the states for any revenue loss on account of the adoption of the 'flawless' GST;
b. The balance, if any in the Fund, to be carried forward to the subsequent year;
c. The balance, if any remaining at the end of the fifth year, to be distributed amongst the states on the basis
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or the Central Government to play a more proactive role in this effort. Towards this, the leadership of the Union Finance Minister would be vital. This will provide the necessary impetus to the process of 'grand bargaining' for the GST. (Para 10.4)
33. On account of lack of adequate preparedness, the implementation of the GST scheduled for 1st April, 2010 should be postponed by six months to 1st October, 2010. However, the Council should release a timeline of various activities for introduction of GST simultaneously with the announcement for postponement. (Para 10.6)
34. All taxes on goods and services including cesses and surcharges levied at the State and sub-national level should be subsumed in the SGST. However, if for some political economy reasons it is considered expedient to introduce the GST in a phased way, we recommend the phasing in the following manner:-
a) In the year 2010-11, all elements of the Flawless GST recommended by us whereby
i. the single CGST rate shoul
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er of Government have a interest in the efficient functioning of the GST and do not have to impose any cascading taxes like cess, entry tax or Octroi.
(Paras 10.3 to 10.10)
CHAPTER – I
Introduction
1.1 In 2004, analysing the structure of the prevailing indirect tax system both at the Central and State level, the Task Force on Implementation of the Fiscal Responsibility and Budget Management Act, 2003 observed that “high import tariffs, excises and turnover tax on domestic goods and services have enormous cascading effects, leading to a distorted structure of production, consumption and exports. This problem can be effectively addressed by shifting the tax burden from production and trade to final consumption, and from savings to consumption. The existing tax system introduces innumerable distortions resulting in inefficient resource allocation and adversely impacting GDP growth. It also provides an incentive to firms to engage in political lobbying for exemptions and favourable mod
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flawless'
GST5. Experts, in particular, were of the view that the dual GST was an idea whose time had not come.
1.3 By mid-2004, the State Governments were already at an advance stage of preparation for a switch over from the cascading type sales tax to a partial VAT regime which was eventually introduced with effect from the 1st April, 20056. The VAT has two basic rates of 4 percent and 12.5 percent. There is an exempted category and a special rate of 1 percent for a few selected items. The items of basic necessities and goods of local importance are put under the exempted category. Special rate of 1 percent is applicable for Gold, silver and precious stones. The 4 per cent rate applies to other essential items and industrial inputs. The 12.5 percent is residual rate of VAT applicable to commodities not covered by other schedules. There is also a category with 20 percent floor rate of tax, but the commodities listed in this schedule will not be subjected to VAT. This category covers
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nce Ministers to work with the Central Government to prepare a road map for introduction of GST in India.
1.5 The Thirteenth Finance Commission has been mandated to make recommendations after considering the impact of the proposed implementation of the GST with effect from the 1st April, 2010 including its impact on foreign trade. For this purpose, it is necessary to know the structure of the Goods and Services Tax which will be in place. The authority to design the structure of the GST Model jointly vests in the Empowered Committee of States' Finance Ministers and the Central Government. The Empowered Committee brought out its preliminary views on the design of the GST in a paper7 of April, 2008 and the Union Government gave its response to these proposals. After further consultations, the Empowered Committee presented the first discussion paper in November, 2009. The contours outlined in this paper do not adequately advance the cause of indirect of tax reforms due to a number of inf
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chievement of the following objectives:
(a) The incidence of tax falls only on domestic consumption;
(b) The efficiency and equity of the system is optimized;
(c) There should be no export of taxes across taxing jurisdictions;
(d) The Indian market should be integrated into a single common market;
(e) It enhances the cause of cooperative federalism.
2.2 With a view to attaining the objectives set out above, we recommend a VAT type Goods and Services Tax (GST). In the context of the design of the GST, some of the important issues are discussed in the following paragraphs.
a. Single GST versus Dual GST
2.3 In a federal country like India where the power to tax domestic trade is divided between the Central Government and the State Government, the designing of a destination based GST becomes extremely complicated. A conventional national GST8 cannot be implemented without the States losing their fiscal autonomy. However, this is not feasible since revenues from State VAT acco
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oods purchased by the dealer would not be treated as inputs. Input tax credit will not be available on taxes paid on capital goods. A income type VAT would give credit for tax paid on current inputs and tax paid on capital goods to the extent attributable to depreciation of capital goods, in any given year. Credit for tax on capital goods will therefore be spread over the life of the capital good. A consumption type VAT goes a step further in that only final consumption is treated as the final use of a good; full credit, therefore, is given for taxes paid on capital goods as well, in the year of purchase.
2.6 The consumption base has been a much favoured tax base from both the perspective of economic neutrality and ease of administration. It is also the only VAT that is equivalent to a retail sales tax, in that it restricts the burden of the tax to final consumption goods. In effect, the tax is only on the pure value added within the production stage in question. Consumption VATs are
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ials and capital goods in allowing GST credit. Only this GST variant is equivalent to a retail sales tax.
(b) The tax base of both CGST and SGST should comprehensively extend over all goods and services going up to the final consumer (retail level), reflecting the tax base of a typical consumption VAT.
(c) Since the tax base will extend to all goods and services, no distinction will be maintained between goods and services. A registered dealer will be required to collect taxes on every invoice irrespective of whether the supply is for goods or services. Therefore, no classification of goods and services should be provided for in law. This will eliminate all classification disputes.
2.8 In the course of discussion with officials in the Department of Revenue a view was expressed that in the context of service tax, it should be levied on all services but there should be a positive list of such services. This view was based on the consideration that the assessing officer feels comfort
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arize himself with a much longer list and any gap in his knowledge base could lead to erroneous judgement. Therefore, we are not inclined to agree with the view of the Department of Revenue officials that the taxation of services should be based on a positive list. Accordingly, we recommend that all goods and services should be subject to tax other than those specified in the negative list.
2.10 In view of the fact that the CGST and SGST are intended to be levied on consumption of all goods and services, these two taxes must subsume all taxes presently levied on various goods and services by the Centre and the States, respectively. For the purposes of identifying the taxes which needs to be subsumed in the CGST and SGST, we recommend that the following principles9 should be adopted:-
(a) Taxes or levies to be subsumed should be primarily in the nature of indirect taxes, either on the supply of goods or on the supply of services.
(b) Taxes or levies to be subsumed should be part of
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vied by local bodies);
iii. Entry taxes not in lieu of Octroi;
iv. Other Taxes and Duties (includes Luxury Tax, Taxes on lottery, betting and gambling, and all cesses and surcharges by States)12;
c. Since all taxes on goods and services, levied by the Centre or the States, should be subsumed in the GST, the following other taxes levied by the States on goods and services should also be subsumed:
i. Stamp duty;
ii. Taxes on Vehicles;
iii. Taxes on Goods and Passengers; and
iv. Taxes and duties on electricity.
d. Any amount collected through these taxes on the SIN goods should not be subsumed either in the CGST or the SGST. Similarly any amount which is collected as tax/fee/charge/cess which is essentially in the nature of a user charge for supply of goods and services (including environmental goods and services) also should not be subsumed under the CGST or SGST. Further, both Centre and the States should take steps to consolidate all taxes (other than proposed GST) on t
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imports are not under the origin principle, while just the converse holds under the destination principle. It is important to note that the distinction between the two principles is based on the location of production and consumption. In view of our recommendation for a consumption type GST and the need for increased international competitiveness, we recommend that –
a. the GST should be structured on the destination principle. As a result, the tax base will shift from production to consumption whereby imports will be liable to tax and exports will be relieved of the burden of goods and service tax. Consequently, revenues will accrue to the State in which the consumption takes place or is deemed to take place;
b. international exports should be zero rated;
c. international imports should be subject to both CGST and SGST at the time of importation irrespective of whether or not the imported goods are produced domestically;
d. SGST on B2B imports should be collected by the same
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n. The amount of tax a dealer submits to tax authorities is simply the difference between the tax he collected on his sales and the tax he paid on his purchases. Under the subtraction method, each dealer's tax liability is computed by applying the applicable VAT rate to the difference between his total sales (inclusive of the VAT element in his sales price) and his total purchases (inclusive of the VAT element in his purchase price). Hence, unlike the credit method, the amount of VAT connected with a taxable transaction is not required to be explicitly stated on the associated invoice.
2.15 The credit method therefore, is more transparent, whereby the effective tax rate on any commodity is easily identifiable as the rate applicable to the last transaction in that commodity. In the case of the subtraction method, the rate of VAT is not separately indicated and to this extent there is a loss of transparency. Further, since the effective rate under the subtraction method is a weighted av
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aid against the CGST should be allowed to be taken as input tax credit (ITC) for the CGST and could be utilized only against the payment of CGST. The same principle will be applicable for the SGST.
v. Cross utilization of ITC between the CGST and the SGST should not be allowed.
e. Treatment of capital goods
2.17 In the past, a number of countries, introduced accelerated depreciation or investment allowance to compensate for domestic trade taxes paid on capital goods. With the gradual introduction of VAT and the feasibility of extending credit for VAT on fixed assets,14 depreciation rates were rationalised. Later in some countries, VAT was used to slow down the development of capital intensive production processes. To this end, they disallowed the credit for the VAT on fixed assets (defined as all assets which are subject to depreciation) and non-material assets, like technical know-how. The case for allowing full and immediate credit for the VAT on capital goods rests on several a
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denial of full and immediate credit for the VAT on capital goods violates the neutrality of VAT.
2.18 Therefore, in recent years, most countries have introduced a full and immediate credit for the VAT on capital goods applied for the purpose of registered businesses. Under the Central Excise Act, credit for CENVAT paid on capital goods or CVD on imported capital goods is spread over two years resulting in the kind of distortions discussed above. The rationale for this spread over is essentially loss in revenues. The estimated total credit for CENVAT paid on capital goods and CVD on imported capital goods in 2002-03 was Rs. 8,500 crore and could be expected to increase to about Rs. 9,000 crore in 2004-05. Since the credit is allowed over a period of two years, the loss in revenues is, therefore, estimated to be Rs. 4,500 crore and restricted to the transitional year only. However, in the context of revenue gain from reduction in depreciation rates proposed in the section on corporate t
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added in the final stage only. In other words, if a commodity is exempt only at the retail level, then only the retail level is freed of VAT. Although the retailer would not charge VAT on its sale, the retailer would not be entitled to a credit for tax paid on the purchase of an exempt item. If a commodity or service is zero rated, the zero rated trader's value added is not taxed and the trader receives a credit for the tax paid on the purchase of materials and other inputs used. Zero rating, in theory, is the only way to ensure that a product is truly free of VAT, since any tax paid would be credited on the last sale. The considerations influencing the choice between zero rating and exemption are:
(1) The desirability of freeing users of specific goods or services completely from VAT (as with zero rating), or only partially (as with exemption);
(2) The merits of excluding certain firms from the registration and filing of returns. Even from the perspective of firms themselves, ther
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late the value of taxable inputs purchases, in order to avail themselves of the refund of a larger input tax element. The resources needed to cross-check such claims can impose additional and perhaps unsustainable demands on prevailing systems.
2.22 Further, tax exemptions are economically inefficient, inequitable, lead to revenue loss, breed rent-seeking behaviour, increase compliance cost and enhance administrative burden. The case for tax incentives is further weakened in the existing tax regime of moderate tax rates.
2.23 In general, a case is often made for exempting food on the consideration that the levy of GST would have a significant impact on those living at or below the subsistence levels. Food constitutes a large variety of items and attempt at any definition will lead to complexity in legislation. If the exemption is extended to all categories of food items, the revenue base will shrink significantly and the standard rate would need to be substantially higher. This would
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to other non-food items also.
2.24 In the case of health services, there are two approaches. The first approach is the full taxation model whereby the health services form part of the comprehensive GST base. As a result, there is effectively zero tax liability in the case of publicly funded subsidised health care facilities since input tax credit will be more than the output tax. As regards, health care availed in other health care facilities covered by insurance, there would be no additional burden on the consumer since the expenditure would be borne by the insurance company and can be claimed as input credit. Essentially, there would be zero incidence of GST on health care. Consequently, there would be opportunities for reduction in the price of health care. The second approach is the exemption approach which does not allow for full rebating of input taxes and therefore, effectively there is a significant element of GST embedded in the price of the final health care. Therefore, whi
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owever, given the multitude of schools and colleges in the country and the disproportionately large administrative burden, we recommend that the educational services may be exempted from the levy of GST and such exemption should be limited to formal education services provided by schools and colleges.
2.26 Keeping in view the above-mentioned economic and administrative implications of exemptions and zero rating, we summarize our recommendations on exemption from GST as under:-
a. Ordinarily, there should not be any exemption from CGST or SGST. If for some reason, it is considered necessary to provide exemption, the Centre and the States should draw up a common exemption;
b. The common list of exemption should be restricted to the following:-
i. All public services of Government (Central, State and municipal/panchayati raj) including Civil administration, health services and formal education services provided by Government schools and colleges, Defence, Para-military, Police, Int
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uts cannot be estimated and leads to a cascading effect on downstream products. Consequently, it is necessary to rationalise the tax treatment of petroleum products.
2.28 The petroleum products can essentially be classified into two categories: (i) industrial inputs or fuels such as crude oil; (ii) transportation fuels comprising of HSD, MS and ATF; and (iii) household fuels comprising of kerosene and Liquefied Petroleum Gas (LPG). While industrial fuels are intermediate inputs, transportation fuels and kerosene (collectively referred to as “emission fuels”) are used both as intermediate inputs and in final consumption. The emission fuels generate negative externalities, whose consumption needs to be checked. Therefore, generally, such emission fuels are subject to an excise against which no input tax credit is allowed in respect of inputs (including capital goods) used in the manufacture of such fuels. However, in large number of cases, such emission fuels are also used as intermedia
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credit may be allowed through the abatement mechanism only. Further, no input tax credit in respect of excise would be allowed to any other person.
2.30 We also recommend that the industrial fuels should be subjected only to GST (both Central and State) with the benefit of input credit like any other intermediate good.
2.31 Both the Central and the State Governments may determine the appropriate revenue neutral rate of excise in the case of emission fuels.
h. Treatment of tobacco goods and alcohol
2.32 Like emission fuels, all tobacco goods and alcohol are also SIN-goods17. Therefore, on the same analogy, we recommend a dual levy of GST and excise on the entire range of these goods. As a general rule, no input credit will be allowed to any person in respect of GST on these goods since they are predominantly used in final consumption. However, this general rule should be relaxed in the case of a dealer trading in these goods on the consideration that the consumption is essent
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ortant inputs in the process of production of goods and services. Hence, it is necessary to rationalise the tax treatment of the power sector so as to ensure that there is seamless flow of input tax credit across all the processes/activities in the power sector. At present, the power sector is subject to multiple taxation. At the Central Government level, power equipments are either exempt from CENVAT or subject to concessional rates. As a result, either no or partial input tax credit is available and the input taxes remain embedded in the cost of the power equipments. This problem is further compounded by the absence of a levy on power generation, distribution or consumption thereby denying input tax credit even for equipments and stores which are subject to CENVAT. Similarly, at the State level, there is no benefit of input tax credit in respect of the State VAT on inputs used in the process of power generation and distribution. The cumulative impact of the taxation regime at both th
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power projects and consequently the cost of generation and distribution of electricity. As a result, it will improve profitability of power projects thereby attracting new investments into the sector. To the extent the cost of power will witness reduction, downstream industries will also benefit from cost savings and thus become internationally more competitive.
k. Treatment of transport services
2.37 Transport services, like most other services, is used both as intermediate input and in final consumption. Further, the transport equipments are also subject to multiple taxation at both Central and State level. The present regime leads to cascading effect of embedded taxes on the downstream industry which do not get rebated thereby leading to enhanced cost for such industries. Hence, it is imperative to rationalise the taxation regime for transport services.
2.38 Accordingly, we recommend the following:
(i) The tax on vehicles and the tax on goods and passengers levied by the Stat
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mption of financial services is viewed as progressive because such services as banking, brokerage, property and casualty insurance and foreign exchange transactions are connected closely with those having higher income and wealth. The progressive revenue objective thus dictates as wide an application of VAT to financial services as possible. It also encourage countries to consider compensatory taxes where an exemption must be provided and even additional ad hoc taxes for revenue purposes. Therefore, given the progressive nature of taxation of financial services and the distortionary impact of compensatory and ad hoc taxes, we recommend that the consumption of financial services should be comprehensively taxed under the GST framework.
2.40 We recognise that there are predominantly three alternative methods for levying GST on financial services: the exemption method, the zero rating method and the full taxation method. While the exemption method and the zero rating method reduces the po
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ead to an increase in the GST rate for other sectors thereby distorting economic efficiency and incentive for compliance.
2.43 Secondly, expenditure on housing also constitutes a significantly large proportion of total personal consumption expenditure. Therefore, the exemption of the housing sector from the GST base would distort the consumption pattern. Further, it would also undermine vertical equity in as much as consumption of housing services is relatively high in the case of the rich.
2.44 Thirdly, real estate is subject to multiple taxation at both levels of Government. At the Central Government level, there has been an attempt to introduce service tax on housing services and allow credit for inputs used for the supply of such services. However, at the State level input tax credit is not available for all taxes, thereby leading to significant cascading effect. Further, there is no incentive to the purchaser to obtain an invoice. Consequently, the audit trail of such transactio
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ng, and inhibits the development of a liquid secondary market. In the context of a distortionary tax regime governing the real estate industry in India, there is a strong tendency for this industry to remain outside the organised sector and consequently the regulatory framework. Therefore, it serves as a breeding ground for tax evasion and criminal activities.
2.46 Fourthly, rationalisation of the tax regime governing the real estate industry could yield numerous benefits: improve tax compliance in the property tax which is critical for the revenue base of local government, a reduced role for black money, and a reduced role for the criminal element in the real estate sector and significantly lowering of costs by mass housing.
2.47 Keeping in view the implications of the different methods for taxing real estate and housing services discussed in Annexe-I, we recommend the following strategy for integrating the real estate sector into the GST framework:
i. The stamp duty on immovable
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espect of input tax paid on goods and services used for maintenance. No input tax credit should be allowed in respect of tax paid on construction or acquisition of the property or tax paid on improvements thereto.
(c) All secondary market transactions in immovable properties (whether constructed before or after the introduction of GST) should be liable to GST. However, if the property has been constructed after the introduction of GST, the GST should be levied on the resale value and input tax credit should be allowed in respect of the GST paid upon construction or purchase of the property after making adjustment for inflation. If the property has been acquired by the seller before the introduction of GST, the GST should be levied on the difference between the sale price and the cost of acquisition and improvements thereto. In such cases, no input tax credit would be allowed.
(d) The adjustment for inflation may be made on the basis of the same inflation index as provided for the p
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ge scale indirect taxes through registration and stamp duties constitutes a case of erroneous tax policy. Therefore, States may continue to levy a registration fee at a specific rate not exceeding Rs. 1000 per transaction in immovable property, which is merely a user charge for the IT systems used in property registration.
2.48 The proposed new regime will lead to more efficient allocation of resources in as much as it will be comprehensive in its scope for taxation of immovable property transactions and real estate services. It will be neutral between old and new properties, and between rented and self occupied properties. It will be administratively less burdensome since no distinction would be required to be made between residential and commercial properties. Similarly, the treatment of input tax credit will be relatively simple with the tax paid on construction/acquisition of the property being allowed as a set off, after inflation indexing, against the GST on resale of the proper
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m of the present system of taxation of immovable property transaction and real estate services forms an integral part of the proposed GST design.
n. Place of supply rules
2.49 The value added tax system is based on tax collection in a staged process, with successive taxpayers entitled to deduct input tax on purchases and account for output tax on sales. Each business in the supply chain takes part in the process of controlling and collecting the tax, remitting the proportion of tax corresponding to the margin realised on transactions, or the difference between the VAT paid out to suppliers and the VAT charged to customers.
2.50 In practice, most countries with value added taxes impose the tax at all stages and normally allow immediate deduction of taxes on purchases by all but the final consumer. These features give value added taxes their main economic advantage, that of neutrality. The full right to deduction of input tax through the supply chain, with the exception of the final
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on and therefore all revenue accrues to the jurisdiction where the sale to the final customer occurs.
2.52 In the international trade in tangible goods, the place of taxation (or the place of supply) is the place of delivery, or shipment, of the goods to the recipient (buyer). In other words, a sale of goods is taxable in a jurisdiction if the goods are made available in, or delivered/shipped, that jurisdiction.
2.53 However, the nature of service and intangible products does not allow for the application of the same rules. In principle, the provider should account for the tax in the jurisdiction where the service or the intangible property is consumed or used, irrespective of the contract, payment, beneficial interest or the location of the supplier and customer at the time of the supply. Whether intangible property is used or a service is actually performed in a jurisdiction is essentially a matter of fact. However, it is not always easy to determine where services and intangibles
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mobile services (that is, passenger travel services, freight transportation services, telecommunication services, motor vehicles lease/rentals and E-commerce supplies), there is no fixed place of performance or use/enjoyment of the service. Therefore special rules need to be framed keeping in mind the basic destination principle.
c) In the case of other services and intangible property, the place of supply is determined on the basis of one or more of the following proxies:
i. Place of performance of service;
ii. Place of use or enjoyment of the service or intangible property;
iii. Place of location/residence of the recipient; and
iv. Place of location/residence of the supplier.
2.55 In defining the place of supply of services and intangible property, a distinction is often made between supplies made to businesses (B2B) and final consumers (B2C). In general, the place of supply in the case of B2B transaction is the place where the recipient is located or established regardle
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ngular transactions, supplies among branches and between branches and head office, and cost reimbursement/ allocation arrangements.
2.57 The place of supply rules indicated above relate to international transactions of goods and services. Ordinarily, these rules should also apply to inter-state supplies. However, in practice there are substantial deviations in these rules. The recipient of the services may be located in more than one state and there is no practice to determine the residency of the recipient unlike in the case of international transactions. Therefore, it is extremely difficult to identify the place in which the recipient is established/ located. In general, it would be desirable to tax B2B supplies of services and intangibles in the State of destination, and not of origin.
2.58 Given that any tax on B2B supplies would generally be fully creditable, excessive sophistication would not be warranted for defining the place of destination of such supplies. For multi-establi
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herefore, we recommend that the Centre and the States may consider framing the rules on the basis of the guidelines indicated above.
o. Threshold Limit for registration of GST dealers
2.61 Typically a small number of firms account for a large proportion of revenues from taxes on goods and services. Simultaneously, resources used in the collection of taxes are scarce and must therefore be deployed effectively; these need to be concentrated on the largest taxpayers as part of the risk management strategy. Further, the compliance burden under the invoice credit method is relatively high and it is uneconomical to collect revenues from a large number of small taxpayers. Hence, keeping in view the compliance cost and administrative feasibility, small dealers (including service providers) and manufacturers should be exempted from the purview of both CGST and SGST if their annual aggregate turnover (excluding both CGST and SGST) of all goods and services does not exceed Rs. 10 lakh. However
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heir consumption unlike those similarly placed in other states and therefore, would be inequitable. This will also have the potential to trigger tax-induced migration from these states. Accordingly, we recommend that the threshold exemption limit should be uniform for both CGST and SGST and across States.
2.63 Further, with a view to reduce administrative and compliance burden, we also recommend small dealers with annual aggregate turnover of goods and services between Rs. 10 lakh to Rs. 40 lakh20 may be allowed to opt for a compounded levy of one percent, each towards CGST and SGST. However, no input credit should be allowed against the compounded levy or purchases made from exempt dealers.
2.64 The Group recognizes that certain high value goods comprising of (i) gold, silver and platinum ornaments; (ii) precious stones; and (iii) bullions (hereafter referred to as “high value goods”) are prone to smuggling due to high tax incidence thereby generating negative externalities in terms
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ore, in any case the small scale industry has to comply with the reporting of payment and transaction information of SGST. No additional burden is cast upon the small scale industry for compliance with the CGST. Hence, the case for continuing with the existing exemption upto Rs. 1.5 crores of turnover is extremely weak. Accordingly, we recommend that this exemption should not be continued under the GST framework.
2.67 Further, the small scale industries are generally wary of dealing with multiple tax administrations. Therefore, in order to inspire confidence of the small scale industry in the new GST framework, we also recommend that the scrutiny/audit of the small scale industry should be conducted only by the state tax administration. However, the State tax administration may seek the assistance of the central tax administration or any other state tax administration if the operations of the small scale industry transcend the state boundaries. Since the CGST and the SGST are proposed
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ns was ill advised. It created a host of distortions. We have to design and introduce subterfuges to neutralize those distortions. But such subterfuges make the tax administration needlessly clumsy and complex and run counter to our declared policy of simplifying the tax system. There is clearly a case for revisiting the whole issue of area based tax exemptions. If their premature withdrawal is not possible for political and business reasons, at the minimum such incentives should not be extended to fresh areas and the ones already in force should be extinguished when their applicability ends.”
2.70 Further, the existing exemption for Uttranchal and Himachal has been objected to by many States. In particular, Chief Ministers of Haryana, Uttar Pradesh and Punjab have often expressed their opposition to such exemptions as these had the effect of diverting industries to Himachal Pradesh and Uttranchal.
2.71 Para 3.3.2.(viii) of the draft of “An Approach to the 11th Five Year Plan” has a
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ST and the ease of compliance through a combined transaction reporting and payment Form No. GST-I.
2.74 In view of the above, we recommend that the area based exemption in respect of CENVAT should not be continued under the GST framework. In case it is considered necessary to provide support to industry for balanced regional development, it would be appropriate to provide direct investment linked cash subsidy.
r. Treatment of Special Economic Zones
2.75 Since the GST is designed to ensure that all producers and distributors are treated as complete pass- through and exports are zero-rated, there is no case for allowing any form of incentive to the developers of, or units in, the Special Economic Zones. We recommend accordingly.
CHAPTER – III
Treatment of Inter-State transactions
3.1 The Indian Constitution as it originally stood envisaged taxation of interstate sales only in the state where it was consumed. Unfortunately, this led some states to issue notices to dealers n
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ross states and the transaction is documented through the use of “C Forms”. The latter is issued by the importing state to the importing registered dealers within the state, and is submitted to the exporting dealer in order that the latter can avail himself of the concessional rate of tax. If the good is sold to unregistered dealers outside the state and is not a declared good, the transaction, by law attracts the rate applicable in the exporting state. If the rate applicable in the exporting state is less than the CST rate, the transaction is not required to be documented through the “C Form”. Since sales tax applies only when there is a sale, no tax is attracted when goods move from one state to another as transfer between branches of the same enterprise or on a 'consignment' basis.
3.3 The CST constitutes a distorting factor in the location of industries and the flow of internal trade, impeding the growth of a truly common market in the country. It also causes inter-jurisdictional
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any distortionary cascading effect and the revenue accrues to the State where the final consumer is located.
3.5 The Empowered Committee of State Finance Ministers had set up a Working Group for designing the model. The following models for treatment of inter-state trade have been analysed by the Group:-
i. Bank model
ii. TDS model
iii. SGST authority model
iv. CGST authority model
v. TINXSYS (De-matted C-form) model
vi. TINXSYS with reverse charge model
vii. Full De-mat model
viii. Inter-State De-mat model
ix. IGST model.
3.6 After a detailed analysis of the merits and demerits of all the models, the Group recognised that the success of every model depended on the following pre-requisites:-
a. E-filing of return every month with dealer wise transaction details
b. E-payment of taxes
c. National Portal for access to information by member States and dealers
d. National agency for overseeing the flow of information and taxes
e. Strong IT infrastructure for th
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r of the selling State.
b. Remittance of SGST collected by the seller to the respective buying State's Account in the designated bank, along with the details of buyers and invoices.
c. Transfer of remitted tax amount by the designated bank to the respective buying State.
d. Refund of input SGST by the selling state to the seller in the event of inter-state transactions
e. Allowance of Input tax credit to the buyer in the buying State to the extent of the SGST received by remittance and transfer of tax amount.
3.9 The Bank Model was found to be more suitable Model, to monitor the interstate transactions of goods including stock transfer, on the following assumptions:
i. This model would ensure evasion free tax environment and easy administration of credit flow to the buyers in the buying States.
ii. This model envisages a level of automation that would ensure capturing all the information relating to interstate transactions in the exporting state and transferring the same t
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fore, the Group abandoned the Bank Model.
3.11 We have also analysed the various Models presented in the Report of the Working Group. The IGST Model recommended by the Group, while requiring a IT and complex accounting infrastructure, would also require a separate legislation for levy of IGST on inter-state transactions. This will have to be similar to the present CST legislation. Further, the IGST Model envisages that the IGST may be paid either by using the CGST or the SGST. Similarly, credit for the IGST by the buyer can be claimed to make payment of either CGST or SGST. Rules would also be required to be framed for prioritising the set off against CGST, IGST and SGST. This implies a complex accounting of input tax credit and apportionment between CGST and SGST which would considerably enhance both compliance and administrative burden. Further, the Centre and the States may also have to compensate each other at different points in time. It also envisages the establishment of a cent
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d bank in the prescribed manner. This will ensure a self-adjustment mechanism for input credit thereby minimizing the need for issue of refunds.
(iv) The buyer in the destination State shall make use of the SGST so paid in the State of origin for making payment of output SGST in the destination State.
(v) All registered dealers across the country shall pay the sum due as CGST and SGST to the credit of the Central Government and all other States within one week from the end of the month to which the sale transactions relate.
(vi) The Central Government and State Governments shall jointly identify a nodal bank to receive the collection of CGST and SGST by collecting banks. The nodal bank will also receive all information relating to purchase and sale by registered dealers.
(vii) The nodal bank shall host the IT infrastructure, provide payment gateway to all banks in India and provide screen-based upload or file upload facility for receiving payment and transaction information.
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g payment of CGST and SGST and furnishing information relating to transactions of both purchases from and sales to registered dealers in Form No. GST-I shall be as under:-
(a) Seller will open Nodal Bank website or approach GST facilitation centre (which will provide Bank website access and also guide Seller) to submit Form No.GST-I. The Nodal Bank would only serve as the payment gateway to facilitate payment in any bank in which the dealer has an internet banking account.
(b) Seller will enter his basic details such as his BIN, Name, Phone and email (Financial year will be current year by default and can be changed, date of deposit will be the current date) on Form No.GST-I.
(c) In case the number of Invoices for sale to registered dealers and purchases from registered dealers is less than 10, the Seller shall enter the details of such individual invoices online (Invoice number, date of the invoice, BIN of the registered purchaser or seller and amount of GST collected or paid fo
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nternet banking to access his bank account. Then the total GST amount as per the challan will be debited to his account and credited to Government account by the bank.
(h) The bank will confirm to Nodal Bank details of successful deposit of GST amount to Government account.
(i) Nodal Bank, upon receipt of confirmation from bank of the GST payment by Seller, would generate the Form No. GST-I, which can be printed out by the Seller for his own record purposes.
(j) The Seller would issue an Invoice to the Buyer with details of the Invoice Number and the GST amount for that Invoice. The Buyer can verify if the GST amount has been credited to the Government by using the Seller BIN, Invoice number, date of invoice and Invoice Amount to verify the corresponding entry from the nodal bank website.
(xii) Input credit for GST would be available to the Buyer against that Invoice by using the combination of Seller BIN, Invoice Number, date of invoice and Amount of GST for that Invoice
(xi
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ocumentation like the 'C' Form in the case of CST.
(xvi) Since every registered dealer would be required to furnish information relating to both the purchases and sales to registered dealers, this would enable automatic matching of input credit claims and identify all mismatches for follow up action. This will eliminate any possibility of fraudulent claim of input credit and evasion.
(xvii) The Nodal Bank should be paid on per transaction record basis and the entire cost should be borne by the Central Government.
(xviii) Further, in case of any default, the administrative responsibility and control over the collection and recovery of SGST should vest in the origin State.
3.13 As described above, the Modified Bank Model will continue to be evasion proof as the Bank Model. Since the Model envisages a single payment mechanism through a combined monthly payment-cum-return Form No. GST-I, the registered dealer can develop the data relating to the transactions on a real time basis ove
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to the sellers in the origin State in all cases. Therefore, if buyers in State 'A' have made payment to sellers in State 'B' and, therefore, certain amounts have become due to State 'A', there would be similar situations where sellers in State 'A' would be required to make good certain amounts to either State 'B' or any other State. Hence, it would result in almost no gain or loss to any State as they would mostly cancel each other over a period of time and over a number of transactions.21 The problem lies in the fact that the seller is allowed a float for a certain period before remitting the amounts to the destination States. The alternate remedy of collecting taxes like on imports at the State border check posts is fraught with severe economic inefficiency. It has been well documented that border check posts are extremely inefficient mechanisms for tax collection since they slow down the movement of goods across borders which in turn translates into high cost of inventory management
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tination State since a single consolidated payment is required to be made in respect of all CGST and SGST liability.
3.17 In some quarters, doubts have been expressed about the efficacy of the Bank process in transfer and reconciliation of SGST remittances and its ability to handle and transfer the vast information of inter-state transactions of goods between millions of business entities across the State borders In this context, it may be pointed out that, even today, all taxes of the Central and State Governments are collected by the banks, reconciled and transferred to the Government at different levels. Further, the large volume of data can be smoothly handled by creating appropriate IT structure. Such capacity has been developed by TCS for NSDL to handle the Income tax Department's database. We believe other large IT firms like Infosys and WIPRO also have similar software design and IT project executing capacity. The Nodal Bank can hire any such firm for developing the IT structu
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s that there is no international precedence (even in EU) in favour of adopting this model to the complexities of Indian situation. Unlike in the EU, we have a common thread in the form of CGST which binds inter-state transactions. This, coupled with the system of consolidated payment of CGST and SGST and transaction related information, ensures a fool proof compliance mechanism.
3.20 In view of the above, we recommend that-
i. all inter-state transactions in goods and services should be effectively zero rated by adopting the Modified Bank Model along the lines discussed in the aforesaid paragraphs.
ii. the consignment sales and branch transfers across states should be subject to treatment in the same manner as if it was a inter-state transaction in the nature of sale between two independent dealers.
iii. the function of all state border check posts should be reduced to checking contrabands by setting up large scanners for trucks to pass through without any need for physical veri
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of taxpayers
4.3 The creation of an efficient taxpayer information system for the purposes of administering a VAT necessarily entails the creation of a taxpayer's master file through a mechanism of registration of all dealers liable to GST. Registration brings a person within the control of the tax authorities. Steps towards its compilation must be taken well in advance of the start of the GST.
4.4 Fortunately, there exists a unique taxpayers identification number at the central level in the Income Tax Department in the form of the Permanent Account Number (PAN). All persons who are liable to income tax or whose sales exceed Rs. 5,00,000 are required to obtain a PAN. The Customs and the Central Excise Department has already adopted the PAN for registration of importers and exporters and manufacturers. Since the operation of a successful VAT entails coordination between the tax administrations at both the national and the state level through computerised information sharing we recomme
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ot be allowed to use the registration number, though self-generated, unless he has furnished the form.
v. Since the number is PAN based, it is not necessary to have any pre-registration verification. However, the states may, if necessary, undertake post-registration verification to eliminate any potential abuse.
vi. To begin with, on the eve of the introduction of GST, the dealer must furnish a consolidated form for all States in which he operates. If, at a later stage, the dealer extends his operation to a new State, he should be required to furnish a form for extension of activities and register the self-generated number for the new State.
vii. Overtime, the string corresponding to PAN will be replaced by the Unique Identification Number (UIN) proposed to be issued to all residents.
viii. It should be mandatory for all registrant dealers to obtain an e-mail ID and also open an internet banking account with any bank. The form must capture the e-mail ID and the internet bank ac
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e VAT laws the allowance of a credit for input tax is conditional on the existence of a VAT invoice issued during the period for which the credit is claimed. An invoice is also required by the tax authorities to audit the collection of VAT. Further as indicated above, the VAT invoices form the primary source from which the return of VAT invoices will have to be prepared and furnished to tax authorities for third party information matching. Accordingly, we make the following recommendations relating to VAT invoices:
i. The law should require a supplier making a taxable supply to another taxable person to provide a VAT invoice with that supply or the payment for it. The requirement should be enforceable by some penalty.
ii. The VAT invoice should be standardised across all states so as to contain a minimum of information about the supply being invoiced.
c. Periodicity of GST Payment
4.7 Since the amount of VAT collected by a dealer is related to his turnover, the dealer is likely
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l be responsible for implementing the CGST and the State Tax administrations will be separately responsible for implementing the SGST23. The various tax administrative functions such as assessment, enforcement, scrutiny and audit should be undertaken by the CBEC in respect of the CGST and by the State tax administration in respect of the SGST subject to our recommendation on small-scale industries.
(b) All procedures under CGST and SGST should be uniform.
(c) Each taxpayer should be allotted a PAN based taxpayer identification number, as recommended above.
(d) The unit of taxation for the purposes of GST should be persons as defined under the Income Tax Act. Consequently, for the purposes of CGST, all production units/branches of a person located anywhere in the country will be treated as a single taxable entity eligible for CGST input credit across units/branches. Similarly, for the purposes of SGST, all production units/branches of a person located anywhere within the Sta
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returns on a quarterly basis.
(i) Electronic filing of all other returns, if any, should also be mandatory. Therefore, the return forms should be common for CGST and SGST compliance.
(j) The information furnished shall be stored in a common database to which both the CBEC and the State tax administration will have access.
(k) For the purposes of audit, both CBEC and the State tax administration can design an independent risk management strategy. However, both must coordinate to ensure that the same taxpayer is not subject to simultaneous audit under CGST and SGST.
(l) The administration of this levy should be based on audited accounts and not on the basis of any form of physical controls.
(m) Since the tax base will be common, there should be a common appellate authority. Similarly, the Authority for Advance Ruling will also be common.
(n) Best international practices should be embedded in the Central-GST, particularly in respect of laws relating to levy of penalties, and c
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distribution and sale is also extremely high. Therefore, they support the elegance of a single rate (other than the zero rates). Economists espouse the optimality of tax rates based on elasticity. In general, business and industry also espouse a single rate since it is simple to comply and eliminates the problem of classification which arises under the multiple rates regime leading to protracted legal disputes and taxpayers' grievances. Further, multiple rates also implies that the standard rate is relatively high. Since taxes result in economic distortion which increases exponentially with the increase in the applied tax rate, a relatively high standard rate creates much larger economic distortion. It also provides an incentive for evasion and frequent lobbying by trade and industry for favourable modifications in the tax schedule.
5.2 Early VAT systems were characterised by a progressive tax structure whereby basic necessities were taxed at lower rates, luxuries at higher rates and
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hould be a single uniform rate on all goods. Similarly, it is well accepted that there should be a single VAT rate covering all kind of production”. In view of the fact that both the Centre and the States had multiple rates, the service tax base was extremely narrow, and the States had not moved to VAT, the Task Force, even while recognising the efficacy of a single VAT rate, recommended multiple rates as a transitory step towards a single VAT rate24 . The recommendation does not, in any way, undermine the efficacy of a single VAT rate25.
5.4 Bogetic and Hassan (1993)26 analysed a diverse group of 34 countries on a wide spectrum of VAT structures bases and revenues. In terms of VAT structure, two groups of countries were identified: single rate and multiple rate countries. Given the revenue performance data and the consensus preference of tax experts for single rates, they examined whether existing data on VAT support the contention that countries with single rate mobilise more revenu
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ry rate. The co-efficient in the tax is small in magnitude, although it is highly significant, so that the loss in efficiency due to an increase in the VAT rate is relatively modest. The elasticity of VAT revenues to VAT rate is (-) 0.3 approximately. Silvani and Wakefield (2002) analyse a sample of 22 countries in the 1990s and show that, if the VAT tax rate is raised by one percentage point, productivity falls by 3.6 per cent.
5.6 The Group took note of the fact that, in 2007-08, the combined statutory incidence of CENVAT, CST and State level VAT on goods was in the range of 27 per cent and 30 per cent30. This combined rate is one of the highest in the world and is not conducive to voluntary compliance. Further, it also underscores the need for multiple rates.
5.7 The Group also took note of the need to minimize the tax burden on consumption by low income households. However it does not recommend a low rate of tax, or exemption, for products consumed by low income households since
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of Rs. 10 lakh.
5.8 Further, in terms of best international practice, recent experience shows that the preference of the policymakers is for adoption of a single rate as it is more efficient.31.
5.9 In the light of the above, the Group recommends one positive rate, each for CGST and SGST on all goods and services. In addition, there should be a zero rate applicable to all goods and services exported out of the country.
5.10 A view has been expressed that a single rate of State GST for all goods and services will, in our country with its large low income population, be highly regressive. It is mainly the articles of common consumption which are in the lower rate bands of VAT. The single revenue-neutral rate will definitely be much higher than the rate now prevailing at the lower bands. In short, the incidence of taxation on the articles consumed by the common man will rise, while the rate of tax on luxuries will fall. The implementation of a regressive tax during an economic slowdow
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eamless flow of the input credit mechanism. Consequently, the cascading effect would be negligible. Further, the tax base will be exclusive of CENVAT. The cumulative effect would be that the real tax incidence under the proposed GST model would approximate the statutory rate and would not be significantly different from the present levels of incidence on such products. The proposed single rate GST regime will be transparent in comparison to the present opaque system. A move to a single rate of GST is regressive if the initial point is a destination based VAT type regime across a comprehensive base and allowing for seamless flow of input credit where the cascading effect is either non-existent or negligible. Since the existing indirect tax structure is characterised by significant cascading effect, the move to a single rate of GST which approximates the real incidence, does not result in any adverse distributional consequences.
5.12 A tax on consumption can be regressive. The structure
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odity by the relatively richer section of the society. In the aforesaid paragraphs, we have recommended a modest threshold exemption level of Rs. 10 lakh. This recommendation is aimed to address the issue.
5.13 The distributional consequences of the proposed GST should be analysed keeping in view its impact on economic growth and employment. To the extent it enhances economic efficiency, it will also create new opportunities for employment which would obviously benefit the relatively poorer section of the society and improve equity32. There is yet another instrument to improve the distributional outcome of this by direct cash transfer to the target groups. With the proposed UIN system such a policy is feasible and a more efficient option.
5.14 In view of the above, the apprehension that the move to a single rate would be regressive is misplaced.
5.15 It has been argued that the proposal to have a uniform rate of State GST reduces the autonomy of the States and, therefore, undermines
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nce of GST is dependant, amongst others, on the ratio[ 𝑊𝑒𝑖𝑔𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑜𝑓 𝑠𝑡𝑎𝑡𝑢𝑡𝑜𝑟𝑦 𝑟𝑎𝑡𝑒𝑠/𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑟𝑎𝑡𝑒]35. Therefore, the ratio is less than one if there are multiple rates. Hence, it is necessary to adopt a single rate so as to optimize the performance of the GST.
II. Determination of the rate of GST
5.17 One of the crucial issues relates to the determination of the rate of CGST and SGST. Since the GST is primarily intended as an exercise in reforming the consumption tax in India and not an exercise for additional resource mobilisation through discretionary changes, the CGST and SGST rates should be such rates which would yield the same reven
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f the RNR.
5.19 The RNR for the CGST and the SGST is determined in accordance with the formula-
RNR = R/B X 100
Where,
RNR : Revenue Neutral Rate for the Centre or the States as the case may be;
R : Collection from the Central or State taxes, as the case may be, which are proposed to be subsumed in the CGST and SGST;
B : Estimated Tax base of the GST
a. Taxes to be subsumed in the GST
5.20 The Central taxes which are proposed to be subsumed by the Empowered Committee in the CGST are indicated in Para 2.11 of Chapter-II of this Report. We concur in this proposal of the EC. Further, the SIN goods will be subject to a dual levy comprising of the CGST and Excises. The total collection from these central taxes in 2007-08 was Rs. 233435 crores (including collection from petroleum and tobacco products) of which collection from non-SIN goods and services was Rs. 157733 crores only. The breakup of the collections is presented in Table-1. Since the SIN-goods will continue to be s
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SGST, our RNR for the SGST is sought to be calculated in respect of an amount of Rs. 188285 crores.
Table-2: Revenues from State taxes to be subsumed in SGST
Sl. No.
Nature of Taxes
Non-SIN Goods
POL
Tobacco
Alcohol
Total
1
Stamp Duty
38473
38473
2
Taxes on Vehicles
15549
15549
3
Taxes on Goods & passengers
6719
6719
4
Taxes and Duties on Electricity
9188
9188
5
Sales Tax /VAT (incl. CST and Purchase Tax)
110826
56442
3000
11450
181718
6
Entertainment tax
1062
1062
7
Entry taxes not in lieu of Octroi
3914
3914
8
Other taxes and Duties*
2554
2554
9
Total (sum of 1 to 8)
188285
56442
3000
11450
259177
10
TF – Taxes (sum of 1 to 8)
188285
11
EC- Taxes (sum of 5 to 8)
118356
*This includes (i) taxes on lo
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the GST base, we use the following methods/approaches:-
1. Subtractive – indirect method (SI method);
2. Consumption method
i. Task Force Estimate; and
ii. NCAER Estimate.
3. Shome Index method
4. Revenue method
5.24 We use the average of the estimates under these methods as the estimate of the GST Base for the purposes of calculating RNR.
1. Subtractive – indirect method (SI method)
5.25 At the producer level, the GST base is equivalent to the value added which is the value that a producer adds to his raw materials or purchases before selling the new or improved product or service. That is, the inputs (the raw materials, transport, rent, advertising, and so on) are bought, people are paid wages to work on these inputs and, when the final good or service is sold, some profit is left. So value added can be looked at from the additive side (wages plus profits) or from the subtractive side (output minus inputs).
5.26 Value added = wages + profits = output – input. If the
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the profit and loss accounts of 28, 51, 248 business entities for the financial year ending on the 31st March, 2008 (financial year 2007-08) which have electronically filed their profit and loss account along with their return of income with the Income Tax Department for assessment year 2008-09. The activities of these entities are classified into 9 sectors and further sub classified into 74 sub-sectors (refer Annex – II). Further, the sample includes 3,50,894 companies and 3,84,425 partnership firms. Since it is mandatory for firms with an annual turnover of more than Rs. 40 lakhs and all companies to electronically file their return of income, the dataset includes all companies and such firms, who have filed their return upto 15th August, 2009 for the financial year 2007-08 (assessment year 2008-09). In addition, it also includes other business entities which have voluntarily opted to electronically file their return. For the purposes of this exercise, we assume that these 28, 51,24
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Between 40 lakh to Rs. 100 lakh
333047
219065
2.34
Between 1 crore to Rs. 2 crore
199099
280778
3.00
Between 2 crore to Rs. 5 crore
165385
519055
5.55
Between 5 crore to Rs. 10 crore
71341
498382
5.33
Between 10 crore to Rs. 100 crore
71332
1840605
19.68
Above 100 crore
8160
5884524
62.91
Gross Total
2851557
9354445
100
Less : indirect Taxes
333047
281168
Turnover net of indirect taxes
9073277
*Turnover is defined as total credits in the Profit and Loss Account as reduced by the value of closing stock. This is the same definition used for computing the GDP
5.29 The distribution of taxpayers across turnover is shown in Table-3. For this purpose, “turnover” is defined to mean the aggregate of all income receipts credited to the Profit and Loss account so as to align it with the definition of “gross value of output” for the purposes of National Accounts by the CSO. The aggregate gross value of output of the sample entities is
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ce imports are liable to GST at the point of importation, the 'value of imports' is aggregated with the 'net value of supply of domestically produced goods and services' to arrive at the 'net value of domestically available goods and services'.
c. Since exports are zero rated in a GST regime, the value of exports is reduced from the 'net value of domestically available goods and services' to arrive at the 'net value of goods and services available for domestic consumption' or the 'aggregate output tax base'.
d. Similarly, the expense items on the debit side of the Profit and Loss Account, in respect of which input tax credit would be potentially available, are identified and appropriately adjusted for indirect taxes to arrive at the 'value of purchase of intermediate goods and services'.
e. Under the GST Model, full and immediate input credit is proposed to be allowed for GST paid on purchase of capital goods in the year of purchase. Therefore, the 'value of purchase of capital
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account.40 This is estimated to be Rs. 87,21,874 crores in the financial year 2007-08 for all sectors. This constitutes 105.02 percent of the gross value of the output in the non-agriculture sector in 2007-08, as reported by CSO. However, the corresponding figure for the taxable sectors (excluding financial, rail and real estate sectors) is Rs. 77,62,224 crores.
5.32 The item 'any other income' as reported in the accounts does not include rent, dividend, interest, profit on sale of investments liable to STT, profit on other investment, profit on currency fluctuation and agricultural income. In practice, a large number of professional entities report their gross receipts under this item since they do not view themselves as carrying on business or engaged in sales. Since the Group has recommended a comprehensive GST base to include all goods and services, the value of supply of goods and services must therefore, include the item 'any other income'. As regards, rent, dividend, interest,
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he aggregate of the expenditure on items listed in Table-4. The aggregate of such expenditure by all the sample entities during the financial year 2007-08 is Rs. 73,29,483 crores of which Rs. 4,32,910 crores relates to purchase of agricultural commodities and the balance Rs. 68,96,573 crores relates to purchases from the non-agricultural sector. However, the 'value of purchases of intermediate goods and services' by the taxable sectors (excluding financial, rail and real estate sectors) is Rs. 67,12,418 crores.
Table 4 : Intermediate goods and services forming part of input Tax Base
A
Purchases of trading goods and raw material
B
Special services
1
Freight
2
Consumable Stores
3
Power & Fuel
4
Building repair
5
Machinery repair
6
Total expenditure on insurance
7
Workmen and staff welfare expenses
8
Entertainment
9
Hospitality
10
Conference
11
Sales promotion including publi
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t tax credit would be available since no output tax would have been paid by the unregistered dealers. In the case of primary articles like cereals and plantation crops, these would generally be purchased from agriculturists who would be outside the scope of GST either by virtue of exemption or by virtue of their turnover being below the threshold limit. If for some reason, the agriculturist falls within the scope of the GST, he would be liable to collect GST for which the purchaser in our sample would be eligible to claim input credit. Since agriculturists do not ordinarily file an income tax return, his sales do not form part of the output base estimated above. Therefore, purchases of primary articles would not be entitled to any input credit. Such purchases are estimated to be Rs. 4,32,910 crores. Further, we also estimate 10 percent of the purchases of trading goods and raw materials from the secondary sector to have been purchased from the unregistered dealers on which no input cre
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lue of purchases from the unregistered dealers' in 2007-08 for all sectors is computed at Rs. 16,82,145 crores of which Rs. 4,32,910 crores relate to purchases of agricultural commodities and the balance Rs .12,49,235 crores to non-agricultural goods and services. In the course of discussion in different fora on the estimated purchase from unregistered dealers, a view was expressed that this estimate may be upwardly biased. Therefore, it is important to undertake a validation check of the estimate.
5.39 In general, the unorganized sector in terms of the National Accounts Statistics is a good proxy for the unregistered dealers under the GST. The share of the unorganised sector in the non-agriculture Net Domestic Product in 2007-08 is 48.69 percent and 90.27 percent in the agricultural sector.41 Applying theses ratios to the firm level profit and loss account, the purchases from the unorganised sector/unregistered dealers is estimated at Rs. 37,48,729.crores of which Rs. 3,90,788 crores
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exemption for unprocessed food articles (rice and wheat) on our estimation of the GST base is not significant.
5.42 Similarly, we have also recommended exemption from GST in respect of health and education services. The health and the education sector is mostly organised as charitable trusts. The charitable trusts are required to file their returns in paper form and therefore do not form part of the sample. However, 3928 trusts with a total turnover of Rs. 8133 crores have electronically filed their returns. Assuming that these trusts operate in the health and education sector, the volume of the total turnover is insignificant to make any material difference to the estimation of the GST base. Therefore, no separate adjustment is made to provide for the exemption for the health and education sector under the proposed GST.
5.43 Separate data relating to life-saving drugs is not available. Therefore, we estimate the GST base relating to this sector at Rs. 5000 crores on the basis of ane
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diture on rent is included in the 'value of purchase of intermediate goods and services'. To the extent GST on rent will also be collected on business-to-consumer transactions, it is not feasible to make any estimate of the volume of such rental transactions. Therefore, the estimate of the tax base relating to real estate and housing services is limited to the estimated base in respect of real estate (land and buildings) transactions. In 2007-08, the Gross Fixed Capital Formation by way of construction in the household sector is Rs. 429260 crores. This does not include the value of land. Assuming that the land value accounts for 50 percent of the total value of the real estate, the GST base relating to land is estimated at Rs. 429260 crores.
5.47 The comprehensive GST is intended to bring within its fold rail transport services also. However, this is intended to be confined to rail services provided for transportation of goods only. The rail transportation sector is entirely under the
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831
100055
2673342
2773397
A
Output Tax Base
1. Net value of supply of domestically produced goods and services
Rs. in crs
8721874
112713
7762224
2. Value of Imports
Rs. in crs
1200678
1200678
3. Net value of domestically available goods and services (1+2)
Rs. in crs
9922552
112713
8962902
4. Value of Exports
Rs. in crs
989505
989505
5. Aggregate of Output Tax Base (3-4)
Rs. in crs
8933047
112713
7973397
B
Input Tax Base
1. Value of purchase of Capital Goods
Rs. in crs
457504
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al Accounts Division of the CSO. The Input Flow Matrix or contains details of 130 commodities consumed as input in 130 industries, covering the entire range of economic activities. Commodities are recorded in columns and industries are recorded in rows in a square matrix form. The value of each commodity consumed by each industry is at factor cost. It also provides commodity-wise detail of Total final use, that is, private final consumption expenditure (PFCE), government final consumption expenditure (GFCE), gross fixed capital formation (GFCF), change in stock (CIS), export and import.
5.52 To estimate the GST base, we need to estimate the contribution of all commodities in the primary, secondary and tertiary sectors of economy to the value addition chain. Since GST will be applicable only on the output of registered dealers with a turnover of more than Rs. 10 lakh, consumption of goods and services from unregistered dealers will not be subject to GST. Therefore, it is necessary to e
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rnment.
5.54 Gross Fixed Capital Formation (GFCF) comprises of two broad components i.e., construction and machinery equipments. The machinery equipments component is in the nature of capital goods which, under the GST, are proposed to be treated as intermediate inputs. Therefore, this element is not included as part of the GST base. Similarly, expenditure on construction by the Public Sector and the Private Corporate Sector is also proposed as intermediate input by allowing full and immediate input credit on capital goods. Therefore, for the purposes of this exercise what is relevant is the estimate of the Gross fixed Capital Formation in the household sector.
5.55 The expenditure on construction as reported in Statement 19 of National Accounts Statistics, 2009 is Rs. 5,00,036 crores comprising of Rs. 3,66,855 crores towards construction and Rs. 1,33,181 crores towards plant and machinery. The household sector in general would be in the un-organised sector (unregistered dealers or f
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these would essentially be rendered by entities with turnover below the threshold limit or by government or by the non-profit sector.
5.57 The estimate of the non-land GST Base for 2006-07 is obtained by aggregating the PFCE on goods and services from registered dealers (organized sector), the net purchases of goods and services by the Government and the component relating to final consumption in the Gross Fixed Capital Formation in the household sector.
5.58 In Table-6, the size of the non-land GST Base for 2006-07 is estimated at Rs. 28,98,520 crores, which accounts for 76.69 percent of the GDP at factor cost at current prices (Rs. 3779385 crores). Applying the same ratio, the size of the non-land GST Base in 2007-08 is estimated to be Rs. 33,13,817 crores. The GST Base relating to land for 2007-08 is estimated to be Rs. 4,29,260 crores as computed under the SI method. Therefore, the aggregate GST Base in 2007-08 is estimated at Rs. 37,43,077 crores. This estimate is significantly
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Rs. in crs
3779385
11
Non-land GST base as a proportion of GDP (Row 9 divided by Row 10)
in percent
76.69
12
GDP at factor cost in 2007-08
Rs. in crs
4320892
13
Estimated non-land GST Base in 2007-08 (Row 11* Row 12)
Rs. in crs
3313817
14
GST base relating to land for 2007-08/1
Rs. in crs
429260
15
Estimated GST Base in 2007-08 (Row 13 + Row 14)
Rs. in crs
3743077
/1 The GST base relating to land in 2006-07 is estimated at Rs. 366855 crores
ii. NCAER Estimate
5.59 The Thirteenth Finance Commission had assigned a study to Dr. Rajesh Chadha of the NCAER to carry out a study on the implication of GST for international study. Using CGE Model, NCAER has, inter alia, also estimated the RNR for a comprehensive GST factoring the impact of exemption for the food sector, education and health services. However, it does not factor the impact of-
a. exemption for small businesses (i.e. the threshold exemption of Rs. 10 lakh for GST registration by dealers); and
b
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of construction in the household sector is Rs. 429260 crores. This does not include the value of land. Assuming that the land value accounts for 50 percent of the total value of the real estate, the GST base relating to land is estimated at Rs. 429260 crores.
Table -7 NCAER Estimate of the GST Base
Sl. No.
Description
Units
Amount
1
Estimated GST Base (excluding land and the threshold exemption) in 2003-04
Rs. in crs
2450042
2
Impact of the threshold exemption (purchases from the unorganised sector)
Rs. in crs
894152
3
Non-land GST Base in 2003-04 adjusted for threshold exemption
Rs. in crs
1555890
4
GDP at factor cost in 2003-04
Rs. in crs
2538170
5
Estimated non-land GST Base in 2003-04 (Row 3 divided by Row 4)
In percent
60.30
6
GDP at factor cost in 2007-08
Rs. in crs
4320892
7
Estimated non-land GST Base in 2007-08 (Row5* Row6)
Rs. in crs
2648692
8
GST base relating to land for 2007-08/1
Rs. in crs
429260
9
Estimated GST Base in 2007-08 (Row
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the VAT base is broad with few exemptions;
ii. the general VAT rate is not impeded by other lower rates;
iii. tax administration is transparent; and
iv. social norms do not erode tax compliance.
5.65 This has been observed in Chile whose VAT bases were proverbially wide. With an 18% VAT rate, Chile's VAT revenue was almost 9% of GDP. Chile taxed even unprocessed food and fresh vegetables.
5.66 If the VAT base is narrow as is the case in the U.K., then the Shome Index would reveal a small percent collection in terms of GDP. Thus, in the U.K., with a VAT rate of 17.5%, the revenue intake has hovered around 6%. In terms of the Shome Index, at a VAT rate of 'X' percent, the VAT revenue in terms of GDP is nearly as low as (1/3rd * 'X') percent. In other countries, say with some other characteristic such as low compliance, a similar outcome would be experienced.
5.67 In most countries, as a thumb rule, VAT revenue hovers between (1/3rd * 'X') percent and (1/2 * 'X') percent of GDP.
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timates of GDP per se appears to be under reported since the value of output reported in the sample is substantially higher than the value of output as estimated from the National Accounts Statistics prepared by CSO for comparable sectors.
4. Revenue Method
5.71 A common method used by the revenue authorities both at the centre and state levels is to estimate the implicit GST base in the revenues actually collected and make such adjustments as are necessary to reflect the increase or decrease in the base on the basis of the recommended design and structure of the GST.
5.72 As would be seen, the output tax base is computed by estimating the implicit base underlying the aggregate of (i) the amount of collection by way of countervailing duty and Union excise duties for non-POL goods; and (ii) the estimated revenue foregone as reported in the Receipts Budget of the Union Government). This implicit base is calculated at the aggregate Union Excise Duty rate of 16.48 percent (inclusive of
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bsp;
Countervailing Duty
(Rs. in crs)
53510
Public Ledger Account (paid to Govt)
(Rs. in crs)
53108
Revenue foregone
(Rs. in crs)
87468
Cenvat
(Rs. in crs)
147447
Output Tax
(Rs. in crs)
341533
Output Tax Base
(Rs. in crs)
2072409
Input Tax Base
(Rs. in crs)
894703
Existing GST Base (Goods)
(Rs. in crs)
1177706
B
Services (Existing Base)
(Rs. in crs)
413697
C
Additional Base
Financial Services
(Rs. in crs)
66835
Rail
(Rs. in crs)
20750
Land
(Rs. in crs)
429260
Trade
(Rs. in crs)
518102
Petroleum, Power and Tobacco
(Rs. in crs)
191513
Construction
(Rs. in crs)
131884
Su
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for calculating the RNR for both levies.
Table 10 : Estimation of GST Base and the RNR
Sl No.
Description
Units
Amount
A
Subtraction-Indirect Method
(Rs. in crs)
3073037
B
Consumption Method
* Tast Force Estimate
(Rs. in crs)
3743077
Chadha Estimate
(Rs. in crs)
3077952
C
Shome Index Method
(Rs. in crs)
2782809
D
Revenue Method
(Rs. in crs)
2949748
E
Average of all estimated GSt Base
(Rs. in crs)
3125325
F
Centre's RNR
(in percent)
5.05
G
State's RNR
(in percent)
6.02
c. The Revenue Neutral Rate(RNR)
5.76 Given the estimate of the GST Base and the level of central taxes which are intended to be subsumed in the GST, we estimate the RNR for the CGST at 5.0 percent. Similarly, the RNR in respect of the state level TF-taxes which are proposed to be subsumed in the SGST is estimated to be 6.0 percent. Therefore, the combined RNR is estimated to be 11 percent. Incidentally, this estimate is the same as estimated
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hird-tier of Government after an appropriate Constitutional Amendment;
iii. The formula should be based on the recommendations of the State Finance Commission.
iv. Pending Constitutional Amendment, the collection from 7 percent SGST shall accrue to the State Government and devolution to the third-tier Government should continue to be made on the basis of the recommendations of the State Finance Commission.
v. Both the Central and the State Governments may continue to levy taxes, in addition to the CGST and SGST, on the various non-SIN goods as at present.
Chapter – VI
Revenue Performance of GST
6.1 As is well-known, VAT is, potentially, a broad-based tax levied on all commodity sales with a view to, ultimately, taxing the whole of final consumption. VAT is not a progressive but a proportional tax. It was never designed to meet social or redistributive objectives. In theory, the tax is, therefore, most “efficient” when imposed on all goods and services at a single stand
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of a country is to the “pure” VAT regime, the more its VRR is close to 1. Any other value – higher or lower – indicates deviation from a single tax rate applied on all final consumption or a failure to collect all tax due. A VRR close to 1 is taken as an indicator of a VAT bearing uniformly on a broad base with effective tax collection. On the other hand, a low VRR may indicate an erosion of the tax base at the standard rate. This can result from exemptions, reduced rates, registration thresholds for small traders, poor compliance or poor tax administration or a combination of these.
6.3 The VRR is characterised by a number of deficiencies. The estimation of the potential VAT tax base (i.e. consumption by end users or national consumption) is difficult to assess with precision. In general, the figures of national consumption used to calculate the VRR are taken from the national accounts48, but “consumption” within the meaning of national accounts does not exactly match the potential V
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79.
6.4 The VRR is affected by both policy decisions – over the base and the number of rates – and compliance levels. The VRR is actually the product of a “Policy efficiency ratio” (comparing the theoretical revenue from actual VAT law and revenue from a pure VAT system) and a “Compliance efficiency ratio” (comparing actual VAT revenues with theoretical revenue from actual tax law). Therefore, mathematically expressed,-
𝐕𝐑𝐑=𝑊𝑒𝑖𝑔𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑜𝑓 𝑠𝑡𝑎𝑡𝑢𝑡𝑜𝑟𝑦 𝑟𝑎𝑡𝑒𝑠 / 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑟𝑎𝑡𝑒∗ (1−𝐸𝑥𝑒𝑚𝑝𝑡𝑖𝑜𝑛𝑠) ∗(𝐶𝑜𝑚𝑝
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e of statutory rates is equal to the single rate (standard rate) and accordingly, the ratio 𝑊𝑒𝑖𝑔𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑜𝑓 𝑠𝑡𝑎𝑡𝑢𝑡𝑜𝑟𝑦 𝑟𝑎𝑡𝑒𝑠/𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑟𝑎 = is equal to 1 (one).
Table 11 : – Computation of VAT Revenue Ratio (VRR) under the 'Flawless' GST*
Sl. No.
Description
Unit
Amount
A
Private Final Consumption Expenditure
Rs. in crs
2605859
B
Government Final Consumption Expenditure
Rs. in crs
479099
C
Gross Fixed Capital Formation (Household Sector)
Rs. in crs
435689
D
Gross Fixed Capital Formation (Land)
Rs. in crs
429260
E
Potential GST Base (A+B+C+D)
Rs. in crs
3949907
F
Actual Tax Base
Rs. in crs
3125325
G
VAT Revenue Ration (F divided by E)
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registered dealers is exempt, there is a revenue loss. However, part of the revenue loss is recouped since purchases from unregistered dealers are not eligible for input tax credit. Similarly, a large part of the food items is distributed by small dealers and therefore there is significant overlap in the revenue effect of the threshold exemption and the food sector. The same also holds well in the health and education sector. The net impact of the exemptions under the 'flawless' GST on the tax base is estimated to be Rs. 206830 crores only. This accounts for 6.2 percent erosion in the potential tax base. Hence, the ratio 1−𝐸𝑥𝑒𝑚𝑝𝑡𝑖𝑜𝑛𝑠 is calculated to be 0.938. Consequently, the 'Policy Efficiency Ratio' is estimated to be 0.938.
6.7 We do not have any method of making a direct estimate of compliance. However, compliance level is the ratio of the VRR to the 'Policy Efficiency Ratio'. Therefore, the im
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ongst 29 OECD countries indeed have a VRR exceeding 0.7; another 17 countries have a VRR ranging between 0.5 and 0.7 and the balance 7 countries have a VRR of less than 0.5. Therefore, our estimate of VRR (and also the RNR) cannot be considered as an outlier. The reason underlying such high VRR is the minimization of the exemptions and the elimination of the multiple rates.
6.9 The existing VRR in the case of Central Government levy on goods and services is extremely low. The current base is estimated to be as low as 0.3649. Further, the factor 𝑊𝑒𝑖𝑔𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑜𝑓 𝑠𝑡𝑎𝑡𝑢𝑡𝑜𝑟𝑦 𝑟𝑎𝑡𝑒𝑠/𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑟𝑎𝑡𝑒 is also estimated to be 0.7550. Therefore, the 'Policy
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ase in the compliance level. Hence, any apprehension that given the existing compliance level, the high level of VRR cannot be achieved is totally misplaced. The VRR under the 'flawless' GST can be achieved by eliminating the policy deficiencies under the existing regime for taxation of goods and services. What is required is a strong political consensus to do so.
CHAPTER – VII
Implications of the Goods and Services Tax
7.1 The economic case for a 'flawless' GST is straightforward: Income is taxed irrespective of source and use; therefore, consumption should also be taxed on the same principle. This is the feasible second-best solution, compared to the unattainable first best distortion-free world of lump sum taxation. The 'flawless' GST is rooted in this breathtakingly simple analytical proposition. In the Indian economic policy context, poverty reduction and inclusive growth are key policy objectives and will, undoubtedly, continue for some time. What, then, are the implications o
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oblem of the present distortionary indirect tax system can be effectively addressed by shifting the tax burden from production and trade to final consumption. The 'flawless' GST, which subsumes all indirect taxes on goods and services, is the most elegant method of taxing consumption. Under this structure, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax essentially 'sticks' on final consumption within the taxing jurisdiction.
7.3 The introduction of the GST will also bring about a macroeconomic dividend by reducing what have been called the “negative grey area dynamic effects” of cascading taxation. As a result it reduces the overall incidence of indirect taxation by removing the many distortionary features of the present indirect tax system. There are seven important macroeconomic channels through which the 'flawless' GST minimises the distortions. First, the failure to tax all goods and services distorts consumption deci
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educes the incremental capital-output ratio (ICOR). This is perhaps the most important gain through the introduction of the GST in India. Fourth, for a given constellation of exchange rates and price levels, violation of the destination principle places local producers at a competitive disadvantage, relative to producers in other jurisdictions. The GST envisages comprehensive taxation of imports on consideration of consumption in India and irrespective of whether the imported goods and services are produced in India or not, thereby, providing a level playing field to domestic producers particularly in the import-substitution industry. Fifth, differences in the tax structure of different States and the Central Government greatly increase the cost of doing business53. The proposed GST, though dual in nature, envisages a uniform structure, design and compliance system at all levels of Government and across States.
Therefore, the cost of doing business in India will significantly reduce.
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e of 12 percent55 on all goods and services, the economic distortion and the incentive to evade will be considerably reduced. We can also expect an upsurge in compliance and hence, revenue collections. This in turn will improve fiscal management and reduce the 'crowding-out' effect.
7.4 The overall macroeconomic effect of reduction in economic distortions due to GST would be to provide an impetus to economic growth. Using CGE Model, the NCAER study commissioned by the Thirteenth Finance Commission estimates the impact of the introduction of a GST which would eliminate all taxes on production and distribution and rest on final consumption only. The study is based on two important assumptions of full employment and that 50 percent of indirect taxes remain embedded and 'stick' on production and distribution. The study concludes that 'implementation of a comprehensive GST in India will lead to efficient allocation of factors of production thus leading to gain in GDP and exports. This woul
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. We assume a discount rate as the long-term real rate of interest at about 3 per cent. The present value of total gain in GDP has been computed as between Rs. 1,469 thousand crores and 2,881 thousand crores. The corresponding dollar values are $325 billion and $637 billion or as much as one-third to one-half of the country's GDP for the year 2009-10.
7.7 The manufacturing sectors would benefit from economies of scale. Output of sectors including textiles and readymade garments; minerals other than coal, petroleum, gas and iron ore; organic heavy chemicals; industrial machinery for food and textiles; beverages; and miscellaneous manufacturing is expected to increase. The sectors in which output is expected to decline include natural gas and crude petroleum; iron ore; coal tar products; and nonferrous metal industries.”. The results of the NCAER Study are also suggested of the GSTs positive environmental impact on the economy.
7.8 Further, the changeover to GST will be neutral to vert
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diction would be taxed at the same rate as products produced and consumed within the jurisdiction. The 'flawless' GST embodies this principle. Consequently, both export-oriented industries and import-substituting industries would become internationally more competitive. As a result, while exports can be expected to register an increase, imports are likely to decrease. These outcomes are supported by the NCAER study.
7.11 Gains in exports are expected to vary between 3.2 and 6.3 per cent with corresponding absolute value range as Rs. 24,669 crore and Rs. 48,661 crore. Imports are expected to gain somewhere between 2.4 and 4.7 per cent with corresponding absolute values ranging between Rs. 31,173 crore and Rs. 61,501 crore.
7.12 The sectors with relatively high proportional increase in exports include textiles and readymade garments; beverages; industrial machinery for food and textiles; transport equipment other than railway equipment; electrical and electronic machinery; and chemical
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a has also entered into a large number of free trade agreements under which it will, in general, not be possible for India to use customs duty as a means to providing protection/level playing field. Therefore, it is necessary to ensure that the imports into the country are subject to the same level of taxation as domestically produced goods. The 'flawless' GST will ensure this by subjecting the imports to both CGST and SGST. This will provide a level playing field to the domestic industry and, in particular, the manufacturing sector vis-a-vis imports.
c. GST: Equity and Poverty reduction
7.15 Poverty reduction will continue to remain the central objective of economic policy making in India. Any policy for poverty reduction must enable the provision of, at least, food, clothing, shelter, education and health.
7.16 At present, primary food articles like rice and wheat are liable to tax by many states either by way of purchase tax or sales tax at a lower rate. As a result, the inciden
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these services will bear a relatively lower burden. Since these services are necessary to meet the basic human needs, the tax exemption for these services will enable the poor to have cheaper accessibility. In any case, as at present, these services will continue to be exempt from tax and therefore no additional burden will arise on account of the switchover to GST.
7.18 Housing is yet another important item of basic needs of the poor. The GST provides for including within its scope the transactions in real estate. Therefore, for a registered real estate builder, all taxes on inputs (including on land) will be off-set against the tax payable on the constructed property.56 This will effectively reduce cost of housing to the extent of embedded taxes and hence, benefit the poor.
7.19 Another necessary item of consumption by the poor is clothing. The NCAER study shows that the implementation of the GST will result in a sharp decline in the prices of cotton textiles ( by 6.44 percent), w
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of demand for particular goods and services, and tax rates should be higher on products that are complementary with leisure that cannot be taxed directly. (as opposed to work which generates income that can be taxed). This holds well in a world where it is possible to implement optimal tax reforms without any residual distortions caused by successful attempts at incidence shifting. However, in practice, shifting of tax incidence is well documented. Further, the representative consumer assumption that operates an optimal tax model is not just invalid, but actively dangerous in a policy context where poverty reduction and inclusive growth are key policy objectives. For instance, if, as intuition would lead us to expect, the demand for the basket of goods consumed by the poor is less elastic than that consumed by the rich, then the regressive policy implications of implementing optimal tax reform would be horrific i.e impose a higher tax on goods of consumption by the poor. Hence, the pr
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t purchases are made from the formal sector by the informal sector, they will be GST borne and since no output tax will be payable in the informal sector, the tax will stick on the producer. Therefore, comprehensive consumption type destination based GST will also result in a higher tax burden on the informal economy than the present level. Hence, the switch over to the 'flawless' GST will also improve horizontal equity.
d. GST and Prices
7.24 Prices of agricultural commodities and services are expected to rise. Most of the manufactured goods would be available at relatively low prices especially textiles and readymade garments.
7.25 There are two opposing forces which determine the changes in price levels. First, increased payments to the primary factors of production, viz. land, labour and capital, increase the cost of production and hence tend to have upward pull on prices. Second, sectors under imperfect competition (manufacturing sectors) get benefits of cost reduction through
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ces of all manufacturing sector would decline between 1.22 and 2.53 percent. Consequently, the terms of trade will move in favour of agriculture between 1.9 to 3.8 percent.
7.28 The increase in agricultural prices would benefit millions of farmers in India. Similarly, the urban poor will also benefit from new employment opportunities. With regard to the food crops the poor would continue to remain secured through the public distribution system. The prices of many other consumer goods are expected to decline. These include sugar; beverages; cotton textiles; wool, silk and synthetic fibre textiles; and textile products and wearing apparel.
e. GST and informal sector
7.29 Another challenge to the consensus on GST based indirect tax reform in developing countries like India has been the argument that given the existence of an informal sector, a comprehensive GST can be welfare reducing, when revenue neutral. The argument rests on the premise that when the choice of a commodity set for
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ted to have significant positive welfare effects even while maintaining revenue neutrality.
f. GST and Fiscal management
7.31 The changeover to GST is designed to be revenue neutral at existing levels of compliance. Given the design of the 'flawless' GST, the producers and distributors will only be pass through for the GST. Further, given the single and low rate of tax the benefit from evasion will significantly reduce. Therefore, there will be little incentive for the producers and distributors to evade their turnover. Accordingly, this policy initiative should witness a higher compliance and an upsurge in revenue collections. This will also have an indirect positive impact on direct tax collections. Further, given the fact that GST will trigger an increase in the GDP, this in turn would yield higher revenues even at existing levels of compliance. Another important source of gain for the Government would be the savings on account of reduction in the price levels of a large number o
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nues from stamp duty will be additionality for the States. Therefore, in the first year of implementation of GST and phasing out of the Stamp duty, the States should expect additional revenues to the extent of Rs. 70,000 crores (excluding the incentive amount). However, in the subsequent years this gain would diminish on account of the phasing out of stamp duty but will be more than adequately compensated as compliance starts improving.
7.34 Therefore, overall the implementation of GST should enable the Government at both levels to better meet the challenges of fiscal correction.
g. GST and vertical balance of power
7.35 The GST envisages a mechanism whereby both the Centre and the States will cease to have any independent power to make changes in the design and structure once agreed upon. Since both levels of Government would be similarly placed, this has no impact on the balance of power.
7.36 Under the proposed GST, both the Centre and the States will have concurrent power to t
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al to transform not only the tax system in the country but also the way we organise and do business.
CHAPTER – VIII
“Flawless” Goods and Services Tax and the autonomy of States
8.1 The design of the GST based on a common base and a uniform rate across states without the power to make any unilateral changes, is viewed by some states as undermining the fiscal autonomy of the States. Therefore, it is argued that the states should agree to a floor rate of tax and should have the flexibility to increase their rates to meet any revenue crisis.
8.2 Full autonomy in the exercise of taxation powers would mean that the Centre or the States, as the case may be,-
a. Retain the power to enact the tax;
b. Enjoy the risks and rewards of 'ownership' of the tax (i.e. not be insulated from fluctuations in revenue collections),
c. Be accountable to their constituents; and
d. Be able to use the tax as an instrument of social or economic policy.57
8.3 Tax autonomy to any level of Gover
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assigning a limited role of revenue collection to the tax system and using the direct transfer mechanism for achieving the various social and economic objectives. Given this new strand of economic thinking, the ability to use the tax system as a tool for achieving various social and economic objectives should cease to be a measure of tax autonomy.
8.5 In the past under the sales tax regime in the states, the flexibility to use the tax system as a tool for achieving various social and economic objectives has generated economic distortions and also triggered a race to the bottom. Further, if the States are allowed the autonomy to increase the rates by setting the SGST rates as the floor rates, they would have a tendency to opt for this lazy option rather than improve their enforcement mechanism. Such increase in rates would mean a greater incentive to evade which, in turn, would make industries in competing states uncompetitive. It would also trigger tax-induced migration. Consequently
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States. As discussed above, harmonization of the tax base and the tax rates will eliminate the distortionary impact on economic efficiency and equity arising from inter-jurisdictional differences. Further, such harmonization will enable consequent harmonization of the tax laws and the administration and compliance systems.
8.8 Harmonization of tax laws is critical. Variation in the wording and structure of tax provisions can be an unnecessary source of confusion and complexity, which can be avoided if the Centre and all the States adopt a common GST law as in the case of the Central Sales Tax or agree to separately legislate an identical GST law. In either situation, there would be harmonization in respect of critical elements like common time and place of supply rules, common rules for recovery of input tax, valuation of supplies, invoicing requirements, tax interpretations and rulings regarding classification of goods and services, determination of what constitutes taxable considera
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T tax base, tax rate and administrative and compliance systems should be viewed as an imperative for optimizing the efficiency and productivity of GST across jurisdictions in a federal structure. All jurisdictions will be worse off without harmonization. Therefore, it should not be perceived as eroding the fiscal autonomy of the Centre or the States.
8.11 If harmonization across Centre and all states is envisaged, what should be the institutional mechanism to usher and maintain such harmonization? At present, the responsibility for designing the initial structure of the GST has essentially been left to the Empowered Committee of State Finance Ministers and official level representatives of the Central Government. This body is now internationally recognised as an important institutional arrangement which has rendered yeoman service in substantially furthering the cause of indirect tax reform in the country. However, there is also a need to maintain stability and integrity in the struct
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ters. Thereafter, any change in the structure of the GST (both base and the rates) should be allowed to be carried out only if the Chairman and two-thirds of the State Finance Ministers agree to do so. Consequently, neither the Centre nor any State will have the authority to unilaterally make any change in the agreed design of the GST. However, in the event of a crisis, the Member State or the Centre may take immediate steps to impose a surcharge subject to ex-post facto approval by the Council within one month. Further, such surcharge should not be allowed to remain in force beyond a period of one year.
8.14 This Council should, in due course, have a permanent secretariat of its own in New Delhi.
8.15 The proposed mechanism will also ensure that all changes are thoroughly analysed and debated before being implemented. More importantly, since both the Centre and the States would surrender their individual autonomy to change the structure of the GST to the proposed constitutional body
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be revenue neutral at the aggregate level but not necessarily for all individual States. It has, therefore, been suggested that if the States were to be denied the flexibility of upward adjustment to the tax rates, they should be compensated for the revenue loss estimated on a transparent basis.
9.3 The RNR calculated by us in the preceding paragraph is estimated to be 6 percent if all the taxes listed in paragraph are subsumed. Our calculations of revenue estimates, based on estimated C-efficiencies of the existing state level indirect tax structure and of the proposed State GST, for each state indicates that there would be no revenue loss for any state on account of the switch over to GST at the estimated RNR rate of 6 percent and existing level of compliance. This is primarily due to the fact that the change entails significant increase in the tax base for the States. In fact, we estimate that there would be significant revenue gain at 7 percent RNR as recommended by us.58
9.4 The
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(i.e. a total amount of Rs. 30,000 crores) if, and only if, the States-
a. introduce the 'flawless' GST as recommended by us; and
b. follow the road map, as suggested by us, for its introduction;
iii) The amounts in the Fund should be used only for the following purposes:-
a. To compensate the states for any revenue loss on account of the adoption of the 'flawless' GST;
b. The balance, if any in the Fund, to be carried forward to the subsequent year;
c. The balance, if any remaining at the end of the fifth year, to be distributed amongst the states on the basis of the same formula used for distributing resources in the divisible pool.
iv) The amount will be transferred in quarterly instalments.
v) The amounts shall be disbursed by the Council on the basis of the recommendations by a three member Compensation Committee comprising of the Secretary, Department of Revenue, Government of India, Secretary to the Council and any fiscal expert appointed by the Central Governme
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we recommend the following:
i. Any state which deviates from the GST base or rates, collectively agreed upon, without the authority of the Council, should be liable to such penalty for the year, as may be recommended by the Thirteenth Finance Commission.
ii. If the deviation is for a period less than a year, the state will be liable for a proportionate amount of penalty attributable to the period of deviation. Similarly, if the deviation is for a period more than a year, the state will be liable for the completed years and the proportionate amount relating to the remainder period.
iii. The amounts collected in penalty shall be deposited in the GST Compensation Fund for formula based devolution to the States.
9.9 This mechanism will provide symmetric treatment of positive and negative externalities whereby creation of positive externalities will be rewarded and negative externalities will be penalised.
CHAPTER – X
Goods and Services Tax – The way forward
10.1 The intro
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nths.
10.3 The Central Government has entered into a number of free trade agreements. As these agreements are operationalized, it is necessary to optimise the efficiency and competitiveness of Indian industry. There is no headroom for pursuing distortionary policies. To the extent, the distortions are induced by the indirect tax system, there is an urgent need to reform the same by adopting a flawless Goods and Services Tax along the lines recommended in this Report. The adoption of a flawless Goods and Services Tax is critical to the survival of the Indian industry in the face of increasing international competition consequent to a number of free trade agreements entered into by India.
10.4 Hitherto, the approach of the Central Government has been to act as a catalyst in the process of the design of the GST. This responsibility has essentially been left to the Empowered Committee of State Finance Ministers and official level representatives of the Central Government. Since the desig
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he States and the Centre to (a) adopt uniform classification, (b) adopt uniform rates, (c) not modify the classification or the rates except with the agreement of all the States and the Centre and (d) provide for other essential common features like zero-rating of (or credit by importing State for) inter-State sale of goods. This could be on the lines of the GST legislation in Australia, under which all the States and the Commonwealth (the Centre) have to agree before any change in the rate or the base of GST can be implemented.
10.6 The implementation of the GST is scheduled for 1st April, 2010. However, given the fact that the discussion paper on GST has not yet been released for public debate, it is unlikely that the Centre and the States would be able to complete all legislative and administrative processes before the 1st April, 2010. Therefore, it would be appropriate for the Council to postpone the implementation by six months to 1st October, 2010. However, the Council should re
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n adopt a 'big bang' approach.
10.9 The introduction of the GST should be viewed as the last mile in the reform of the indirect tax system of this country initiated in 1986 with the introduction of the MODVAT. The present system of taxes on goods and services is an outcome of a gradual approach to tax reform over the last 23 years. Consequent to this approach, the country has undoubtedly lost out on potentially higher economic growth, higher real wage rates, fiscal consolidation and consumer welfare. All stakeholders other than the oligarchs, both within and outside the system, stand to gain from a swift comprehensive changeover to the GST. The multitude of the poor will gain from this reform measure more than any other stakeholder. To the extent the switchover is staggered, the potential gains from the comprehensive GST would remain unrealised thereby adversely impacting the poor. We therefore, recommend that all taxes on goods and services, whether levied by the Centre or the States
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i. Stamp duty should be eliminated and replaced by a Registration Fee at a specific rate;
ii. the revenues attributable to 2 percentage point out of the 7 percentage point of SGST should be set apart for devolution to the third-tier of Government and the revenues from the balance 5 percentage points will remain with the State Government so that the third-tier of Government have a interest in the efficient functioning of the GST and do not have to impose any cascading taxes like cess, entry tax or Octroi.60
10.11 Further, we also recommend that the phased program for introduction of the GST as outlined above should be incorporated in the GST legislation so that there is no uncertainty on the evolution of the GST which will enable trade and industry to appropriately structure their business.
10.12 We do not envisage any loss of revenue at the rates of CGST and SGST recommended by us. However, the rates being sufficiently low, we expect more than normal growth in revenues through bet
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based value added tax on all goods and services is the most elegant method of eliminating distortions and taxing consumption. Under this structure, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax essentially 'sticks' on final consumption within the taxing jurisdiction.
11.2 The efficiency of the VAT enhances with increase in the purity of the GST Model. The most important ten elements of a pure GST are the following:-
a. The base should extend to all goods and services including immovable property;
b. There should be a single low rate;
c. The tax should be destination based;
d. The tax should be designed on invoice-credit method;
e. Full and immediate input tax credit in respect of capital goods;
f. The GST must replace all transaction based taxes on goods and services and factors of production.
g. There should be seamless flow of the tax through all stages of production and distribution so as to stick on “fi
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ediate credit for tax paid on capital goods will also be provided. Further, it also provides for a single rate of tax of 12 percent for all general goods and services across all states, comprising of 5 percent by the Centre and 7 percent by the States62. However, products of high value like gold and platinum will be subject to tax at the rate of 1 percent each by the Centre and the States and exports will be zero rated.
11.4 There is empirical evidence to suggest that the switchover from the present distortionary taxation of goods and services to a 'flawless' GST will, amongst others, increase productivity of all factors of production and hence enhance GDP. The switchover has also been analysed to be pro-poor and therefore, further the cause of poverty reduction. Further in the Indian context, a dual VAT type tax concurrently levied by both the Centre and the States would enable the creation of a common market.
11.5 Given the benefits of the changeover to the flawless GST, it would b
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f Rs. 70,000 crores. In addition, we have also recommended that the States should be provided with an additional Rs. 30,000 crores as incentive to adopt a 'flawless' GST. Therefore, the switch over to the flawless GST will augment the combined resource base of the States by an aggregate sum of Rs. 100,000 crores63.
11.7 We recognise that the levy will be imposed and enforced by a large number of Governments. Therefore, there would be constant pressure on States to deviate from the pure VAT model and trigger harmful tax competition. This would jeopardise the sustainability of the benefits from the implementation of the 'flawless' GST. Therefore, it is also necessary to establish an institutional mechanism which would be responsible for making any change in the design and structure of the VAT. Our recommendation to establish a Council of Finance Ministers is intended to subsume the independent powers of the both the Central and State Governments to levy tax on goods and services in favo
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GST should be postponed to 1st October, 2010. We believe that it should be possible to adhere to this timeline. The benefits from the switch over to the GST are contingent upon the purity of the GST design. In the context of VAT, international experience shows that any design-related 'VAT mistakes are very hard to rectify'. Therefore, it must be ensured that there are no design related mistakes at birth. However, if there is a trade-off between the timeline and the design of the GST, the dilemma must be resolved in favour of design.
11.10 Further, in order to implement the 'flawless' GST it would be necessary to undertake constitutional amendments to enable both the Centre and the States to exercise concurrent jurisdiction over the taxation of all goods and services, creation of the proposed Council of Finance Ministers and assignment of part of the GST proceeds to the third-tier of government. These amendments must, inter alia, provide that the taxation of goods and services by both
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iance.
Secondly, expenditure on housing also constitutes a significantly large proportion of total personal consumption expenditure. Therefore, the exemption of the housing sector from the GST base would distort the consumption pattern. Further, it would also undermine vertical equity in as much as consumption of housing services is relatively high in the case of the rich.
Thirdly, real estate is subject to multiple taxation at both levels of Government. At the Central Government level, there has been an attempt to introduce service tax on housing services and allow credit for inputs used for the supply of such services. However, at the State level input tax credit is not available for all taxes, thereby leading to significant cascading effect. Further, there is no incentive to the purchaser to obtain an invoice. Consequently, the audit trail of such transactions is lost and producers of inputs are also encouraged to suppress such transactions. The cumulative effect is to incentivise
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tate industry in India, there is a strong tendency for this industry to remain outside the organised sector and consequently the regulatory framework. Therefore, it serves as a breeding ground for tax evasion and criminal activities.
Fourthly, rationalisation of the tax regime governing the real estate industry could yield numerous benefits : improve tax compliance in the property tax which is critical for the revenue base of local government, a reduced role for black money, and a reduced role for the criminal element in the real estate sector and significantly lowering of costs by mass housing.
At a conceptual level, under a VAT, sales, rentals, and rental values of immovable property would be taxable and credit would be available for the VAT embedded in purchases. Immovable property that generates housing services should be treated in the same manner. The theoretically most attractive solution would be to register all legal persons, who own or buy residential real estate, for VAT p
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rge VAT on the amount of the rental. The lessee, being an unregistered consumer, would not be able to pass the tax on; he would be stuck with it just like consumers of other services. Similarly, in his role as owner-occupier, the producer of housing services would “charge” VAT on these services, whose value equals the rental value of the dwelling rendered to himself as consumer. And like the lessor, he would have to remit that tax (net of any tax on inputs, such as repair and maintenance services) to the government.
In practice, the registration of all owner occupiers and the computation of all imputed rental values present formidable administrative problems and are, therefore, not feasible. If imputed rental values cannot be taxed, the taxation of rental charges would appear to favour owner-occupiers over lessees. Further, the practical difficulties of taxing small landlords might be severe. Therefore, as a second-best approach, it would be appropriate to provide a threshold exemptio
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T
E
E
T
E
E
E
T
B. New residential property
i. Construction/ First Sale
ii. Resale
iii. Rental charges
iv. Imputed rental values
v. Alteration and maintenance
T
T
T
E
T
T
T
E
E
T
T
E
E
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T
C. Existing commercial property stock
i. Sale
ii. Rental charges
iii. Imputed rental values
iv. Alteration and maintenance
T
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E
T
T
E
E
T
T
T
E
T
D. New commercial property
i. Construction/First Sale
ii Resale
iii. Rental charges
iv. Imputed rental values
v. Alteration and maintenance
T
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E
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E
E
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E
T
E. Inputs (both goods and services) used for construction
T
T
T
Under the comprehensive taxation method, all new properties (both residential and commercial) constructed after the introduction of the VAT are liable to tax on construction/first sale of the building on the reasoning tha
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to enhancement in the value of the property. The treatment in respect of resale of properties built prior to the introduction of VAT would be the same with the modification that no input tax credit is allowed in respect of VAT which is paid at the time of its purchase. Further, VAT is also levied on the value of the supply of all goods and services for construction, alteration and maintenance of an immovable property.
The comprehensive method, as its name suggests, is extremely wide in its scope. Firstly, it extends to the consumption of existing stock of properties, as well as to any unanticipated future increases in the rental value of the new properties. Secondly, this method also effectively entails full taxation of imputed rental value of owner-occupied properties. New properties attract tax on their full capital value (i.e., the purchase price) at the time of purchase, for which no deduction is allowed to the owner during the period of self-occupation of the property. Thirdly,
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ainst VAT payable on rental value. Further, in many cases, there are frequent changes in the use of the dwelling as owner-occupied residence or rental dwelling. Since input tax credits are allowed only for houses used for rental purposes, these changes in the usage of the dwelling would require special rules for appointment of the input tax credits resulting in increased administration burden for the tax office. However, these problems are surmountable by not allowing any credit for input tax paid on construction/purchase of the property or improvement thereto against VAT payable on rental value. The credit for such input tax can be allowed only at the time of resale, after adjusting the same for inflation. Thirdly, in the case of existing stock of properties, the tax applies on the full resale value. This may be appropriate only where the existing properties did not previously bear the taxes that were being replaced by the VAT. If indeed substitute taxes (though of the cascading varie
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in the comprehensive taxation method, the VAT on resale is payable only on the margin earned on sale of the property. The treatment in respect of resale of properties built prior to introduction of VAT is the same with the modification that no input tax credit is allowed in respect of VAT which is paid at the time of its purchase. Further, VAT is also levied on the value of the supply of all goods and services for construction, alteration and maintenance of an immovable property.
The Variant-A is economical neutral between rented properties and owner occupied properties in as much as both the actual rent and imputed rent is exempt. Similarly, this method is also neutral across properties constructed before and properties constructed after the introduction of VAT since resale of the property is liable to VAT. The administrative and compliance difficulties are similar to those faced under the comprehensive taxation method with the modification that the number of landlords seeking regis
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after the introduction of VAT. All resale of properties, whether constructed before or after the introduction of the VAT is exempt. As a result, the scope of VAT does not extend to existing properties. Further, VAT is also levied on the value of the supply of all goods and services for construction, alteration and maintenance of an immovable property.
Variant-B is extremely narrow in its scope since sale and resale of both existing and new residential properties, rental value and imputed rent are exempt. This can be highly distortionary since the benefit from such exemption would depend on the mix of taxable and non-taxable inputs used in construction. Further, a distinction would also need to be made between residential and non-residential properties to allow for the exemption and input tax credit. This would add to the complexity in the tax administration.
The real estate sector should be integrated into the GST framework keeping in view the implications of the different methods.
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Jiwei and Wang Shuilin (eds), Fiscal Reforms in China, The World Bank.
Ahmad, Ehtisham, Satya Poddar A.M. Abdel-Rahman, Rick Matthews, and Christopher Waerzeggers (2008): “Indirect Taxes for the Common Market”, Report to the GCC Secretariat.
Ahmad, E and Nicholas Stern (1984): “The theory of tax reform and Indian indirect taxes”, Journal of Public Economics, 25, 259-98.
and Nicholas Stern (1991): “The Theory and Practice of Tax Reform in Developing Countries”, Cambridge University Press.
Aujean, Michel, Peter Jenkins and Satya Poddar (1999): “A New Approach to Public Sector Bodies”, 10 International VAT Monitor 144 (1999).
Bagchi, Amresh et al (1994): “Reform of Domestic Trade Taxes in India: Issues and Options”, National Institute of Public Finance and Policy, New Delhi.
Barrand, Peter (1991): “The treatment Non-Profit Bodies and Government Entities under the New Zeland GST”, International VAT Monitor, January 1991.
Bird, Richard M. (1994): “Where Do We Go From Here? Alternat
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ansition Countries”, Cambridge University Press, Cambridge.
and Michael Smart (2008): “Impact on Investment of Replacing a Retail Sales Tax by a Value-Added Tax: Evidence from Canadian Experience”, Working Paper No. 15, the Institute of International Business, University of Toronto.
Boesters et al: “Economic Effects of VAT Reform in Germany”, Discussion paper No. 06030, ZEW, Centre for European Economic Research.
Buckett, Alan (1992): “VAT in the European Community”, Butterworths, London.
Burgess, Robin, Stephen Howes and Nicholas Stern(1993): “Tax Reforms of Indirect Taxes in India”, Discussion Paper No. EF No.7 of the Suntory-Toyota International Centre for Economic Research and Related Disciplines, London School of Economics, London.
Canada Department of Finance (1987): “Federal Sales Tax Reform”, Government of Canada, 1987.
Canada (1996): “Harmonized Sales Tax”, Technical Paper, Department of Finance, Ottawa.
Cnossen, Sijbren (2001) “Tax Policy in the European Union: A Rev
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lication of VAT to the non-profit sector and Public Bodies”.
Evans, Michael (2009): “The Value-Added Tax Treatment of Financial Services and Real Property”, International Seminar on GST Architecture in a Federal System.
European Community (1987): “Completing the Internal Market – The Introduction of VAT Clearing Mechanism for Intra-Community Sales”, pp.7
Government of India (1953-54): “Report of the Taxation Enquiry Commission”, Ministry of Finance (Department of Economic Affairs), New Delhi.
(1978): “Report of the Indirect Taxation Enquiry Committee”, Ministry of Finance, New Delhi.
(1990): “Report of the Working Group for Review of the Modvat Scheme”, Ministry of Finance, New Delhi.
(1991-92): “Tax Reforms Committee, Interim and Final Reports”, Ministry of Finance, New Delhi.
(1998): “Report of the Finance Ministers Committee to Chart a Time Path for the Introduction of VAT”, Ministry of Finance, New Delhi.
(1999): “Report of the Committee of Finance Secretaries for Ide
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8): “National Accounts Statistics”, Central Statistical Organisation, Ministry of Statistics & Programme Implementation, New Delhi.
(2009): “Input-Output Transactions Table 2006-07” , Central Statistical Organisation, Ministry of Statistics & Programme Implementation, New Delhi.
(2009): Statement No. (76.3), share of unorganized segment in net domestic product-National Accounts Statistics (NAS).
(2009): IOTT, 2003-04- National Accounts Statistics (NAS).
(2009): Statement No.(36) Government Final Consumption Expenditure by purpose-National Accounts Statistics (NAS)
(2009): Statement No. (19), capital formation by type of asset and by type of institutions-National Accounts Statistics (NAS).
(2009): Statement No. .(36) Government Final Consumption Expenditure by purpose-National Accounts Statistics (NAS).
Government of Karnataka (2001): “Final Report of the Tax Reforms Commission”, Finance Department, Bangalore.
Hamilton, Bob and Chun-Yan Kuo (1991): “The Goods and Services
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ional Conference of ASSOCHAM, New Delhi, 29 June.
Kuo, C.Y., Tom McGirr, Satya Poddar (1988): “Measuring the Non-neutralities of Sales and Excise Taxes in Canada”, Canadian Tax Journal, 38, 1988.
Longo, C.A. (1992): “Federal problems with VAT in Brazil”, paper presented at the International Conference on Tax Reforms, NIPFP, New Delhi.
McLure, Charles (1993): “The Brazilian Tax Assignment: Ends, Means and Constraints”, in A Reforma Fiscal No Brasil, proceedings of the International Symposium on Fiscal Reform, Sao Paulo.
(1998): “Electronic Commerce and the Tax Assignment Problem: Preserving State Sovereignty in a Digital World”, State tax Notes, 14(15), pp 1169-81.
(2000a): “Implementing Sub-national Value Added Taxes on Internal Trade : The Compensating VAT (CVAT)” International Tax and Public Finance, 7(6), pp.732-740
(2000b): “Implementing sub-national VATs on internal trade: The compensating VAT (CVAT),” International Trade and Public Finance, Vol 7.
(2003): “Harmonizing
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national Services and Intangibles”, Centre for Tax policy and Administration, OECD.
(2008): “Revenue Statistics – Special Feature: Taxing Power of Sub-Central Governments (1965-2007), OECD
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Poddar, Satya (1990): “Options for VAT at the State Level” in Gills, M.C. Shoup and P. Sicat (ed.), Value Added Taxation in Developing Countries, The World Bank, Washington D.C.
(2001): “Zero-Rating of Inter-State Sales under a Sub-National VAT: A New Approach”, paper presented at the 94th Annual Conference of NTA on November 8-10, Baltimore.
(2003): “Consumption Taxes, The Role of the Value Added Tax”, in Patrick Honohan (ed.) Taxation of Financial Intermediation: theory and practice in emerging economies, (World Bank and the Oxford University Press).
(2007): “VAT on Financial Services-Searching for a Workable Comprimise”, in Krever Richard and David While (ed): GST in Retrospect and Pr
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Purohit, Mahesh C. and Vishnu Kanta Purohit (2009): “Goods and Services Tax in India: Estimating Revenue Implications of the Proposed GST”, Thirteenth Finance Commission, Government of India.
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(2001): “Report of the Expert Group on Taxation of Services”, Government of India, March, 2001.
(2008): “Unfinished Reform Agendum: Fiscal Consolidation and Reforms – A comment” in Jagdish Bhagwati and Charles W. Colomiris, Sustaining India's Growth Miracle” Columbia Business School, 2008 pp.104-114
Rao, M. Govinda and R. Kavita Rao (2006): “Trends and Issues in Tax Policy and Reform in India” India Policy Forum – 2005-06, NCAER-Brookings Institution.
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Shome Parthasarthi (1992): “Trends and Future Directions in Tax Policy Reforms: A Latin American Perspective”, Bulletin for International Fiscal Documentation (DIFD),
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gs of the Annual Bank Conference on Development in Latin America and the Caribbean, World Bank, Washington D.C.
1 Reference to GST in this Report includes both CGST and SGST
2 The limit of Rs. 40 lakh is based on the consideration that dealers with turnover of Rs. 40 lakh or more are subject to tax audit under the Income Tax Act, 1961 and therefore they would suffer fromany additional burden in terms of documentation under the GST.
3 This is consistent with the proposal of the EC in their Discussion paper dated 30th April,2008.
4 Report of the Task Force on Implementation of Fiscal Responsibility and Budget Management Act, 2003, Government of India (July, 2004)
5 “Flawless” GST means a GST which has all the elements described in para 3 of the Executive Summary.
6 Haryana was the first State to introduce the partial VAT regime in 2003.
7 “A Model and Road Map for Goods and Services Tax in India-Views of the Empowered Committee of State Finance Ministers”, New Delhi, April 30, 200
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Other reasons for rationalizing the depreciation rates were significant control over rate of inflation in the price of capital goods and reduction in corporate tax rates.
15 However, forward shifting is unlikely if competing imports can be sold without the element of tax on capital goods.
16 For example, a dealer operating a petrol station will be allowed input credit in respect of GST on petrol purchased by him from an oil marketing company.
17 SIN-goods are goods whose consumption create negative externalities and for the purposes of this Report, collectively or severally, refers to emission fuels, tobacco goods and alcohol.
18 The Task Force has not made any independent assessment of the impact of the embedded taxes in power generation and distribution. However, discussions with experts in the field suggest that the embedded taxes could account for as high as 30 per cent of the cost of power production and distribution.
19 The increase in the value of land is attributable to th
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ions would be required to be paid directly to the importing State and not to the dealer.
22 At present, PAN has been allotted to more than 80 million people, including companies, firms and other business entities. Therefore, it is highly unlikely that there would be any existing business entity which would not have obtained a PAN.
23 The jurisdiction between the CBEC and the State Administration may be divided between the two in such manner that the interface of the taxpayer is confined to one tax administration only. The basis for division could be turnover or any other criteria which is considered reasonable so that the compliance and administrative burden is minimized.
24 This has been ascertained from Dr. Vijay L. Kelkar, who headed the Task Force.
25 The recommendation for multiple VAT rates was adversely commented upon by experts.
26 Bogetic, Zeljko and Fareed Hassan ( 1993). Determinants of Value-Added Tax Revenue: A Cross-Section Analysis, The World Bank Working Paper No.1
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vatable. This combined statutory incidence has since reduced to a lower range of 18 per cent to 20 per cent in 2008-09 as a consequence of the sharp temporary cut in the CENVAT rate.
31 Michael Keen (2009): “What makes a successful VAT?”, Presentation at the Workshop on September 30, 2009 at the National Institute of Public Finance and Policy (NIPFP), New Delhi.
32 Unemployment results in an implicit taxation of the poor at the rate of 100 per cent.
33 Some States have argued that but for the flexibility, the Central Government would not have been able to reduce the CENVAT rate as a response to the economic slowdown witnessed in the second half of the fiscal year 2008-09.
34 This would be so even after making appropriate adjustment for allowing the Centre to levy tax upto the retail stage.
35 A standard rate is defined to mean the rate on supply of all general goods and services for which no other specific rate is provided. In effect, this is the rate applicable to the residuary
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e unorganised sector.
40 In the case of rent, the expenditure on rent is reduced by the rental income reported. Therefore, we do not separately include this item in the 'net value of supply of domestically produced goods and services'.
41 See Statement 76.1 of National Accounts Statistics 2009
42 In reality, it is likely that the purchases from unregistered dealers would be substantially larger than our estimate. To the extent it is so, the GST base is likely to increase, and the RNR would be lower, than our estimate.
43 This matrix is also referred to as 'The Absorption Matrix'
44 NCAER has estimated the RNR for non-petroleum taxes at 6.20 percent under the first scenario that there will be no threshold exemption for registration and no specific goods and services based exemption. This scenario is not relevant for us since we intend to provide a threshold exemption and exemption for some specific goods and services. Under the second scenario of no threshold exemption but exemptio
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e-9 is estimated to be Rs. 18,89,096 crores( Rs. 1358344 crores plus Rs. 530752 crores) and the estimated potential base is Rs. 29,49,748 crores. Therefore, the share of exemptions in the potential base is estimated to be 0.64. Hence, the share of the actual base is 0.36.
50 The standard rate is 16.48 percent and the weighted average of statutory rates is estimated to be 12.28 percent. Therefore, the ratio of weighted average of statutory rates to standard rate is 0.75.
51 This is the product of 0.36 and 0.75.
52 This is the product of the 'Policy Efficiency Ratio' (0.27) and the 'Compliance Efficiency Ratio'(0.84).
53 This is a league table in which we have long languished at the bottom.
54 Prior to the tax cut in December 2008 as part of the economic stimulus, the combined rate was 28 per cent approximately.
55 However, there will be a special rate of 1 percent on high value items like gold and platinum and zero rate on exports.
56 At present, the value of a constructed proper
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p;
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Document 1
FORM
GST
1
Report of the Task Force on Goods and Services Tax
Thirteenth Finance Commission
Goods and Services Tax
[This form is to be used for reporting of transactions
and payment of both CGST and SGST]
Financial Year
Business Identification Number (BIN)
Date of
Month to which transactions relate
deposit(DD/MM/YYYY)
BSR Code
Date (DD/MM/YYYY)
Serial Number
Form Identification Number (FIN)
Transaction Reference Number
Full Name
Complete Address with City & State
Email Address
PIN
Phone Number (with STD Code)
Mobile No.
Details of payment
Total amount of CGST and SGST
payable (in figures)
Units
Crores
Lakhs
Thousands
Hundreds
Tens
Total Amount of CGST and SGST
payable (in words)
Paid by debit to account
Date of
debit
(Account No. of the deductor)
Name of the Bank in which payment
is made
Computation of tax liability
Sale transactions
a. Registered dealers (intra-state)
Unregistered dealers (all transactions)
Expo
= = = = = = = =
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ccount Number
solemnly declare that to the best of my knowledge and belief,
the information given in the return and the schedules thereto is correct and complete and that the particulars
shown therein are truly stated and are in accordance with the provisions of the Central Goods and Services Tax
Act, 2010 and the provisions of the State Goods and Services Tax Act, 2010 in respect of the Central Goods
and Services Tax and State Goods and Services Tax chargeable for the month of..
I further
declare that I am making this return in my capacity as
..and I am also competent
to make this return and verify it.
Place:
Date:
Sign here
Note: Please do not furnish transaction wise details of unregistered purchases and sales.
130
Report of the Task Force on Goods and Services Tax
Thirteenth Finance Commission
(All figures in Rs in crores)
Col.14
Col.15
Col.16
Col. 17
State
Sales Tax,
VAI and
Sales
Receipts
Total Sale
Sales Tax of
alchohol
Taxes on
Ent't Tax
lieu of
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jasthan
1805
Tamil Nad
4764
16434
172
Uttar Pradesh
3941
12464
138
West Bengal
Total
32660
119701
16365
29585
165651
1
1234565%
1662
3
29
86
5
25
33
0523
°
°
°
7
1295
162
8272
19128
131
Report of the Task Force on Goods and Services Tax
Thirteenth Finance Commission
Nature of business for income tax purposes
Sector
Sub-Sector
Code
Sector
Sub-Sector
Code
Agro-based industries
0101
Automobile and Auto parts
0102
5. Contractors
Civil Contractors
Excise Contractors
Forest Contractors
0501
0502
0503
Cement
0103
Mining Contractors
0504
Diamond Cutting
0104
Others
0505
Drugs and Pharmaceuticals
0105
Chartered Accountants, Company Secretaries.
0601
Electronics including Computer Hardware
0106
Fashion designers
0602
engineering goods
0107
Legal professionals
0603
Fertilizers, Chemicals, Paints
0108
6. Professionals
Flour & Rice Mills
0109
Medical professionals
Nursing Homes
0604
0605
Food Processing un
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vice providers
0804
3. Commission Agents
8. Financial Service
Leasing Companies
0805
Builders
0401
Money Lenders
0806
Estate Agents
0402
Non-Banking Finance Companies
0807
4. Builders
Property Developers
0403
Share Brokers, Sub-brokers etc.
0808
Others
0404
Others
0809
Cable T.V. productions
0901
Film distribution
0902
Film laboratories
0903
9. Entertainment
Motion Picture Producers
0904
Television Channels
0905
Others
0906
Sl.No
Report of the Task Force on Goods and Services Tax
Thirteenth Finance Commission
VALUE OF OUTPUT
TABLE-12: CROSS CLASSIFICATION OF OUTPUT/VALUE ADDED BY KIND OF ECONOMIC ACTIVITY
Industry
Gross Output
Intermediate
Consumption
Gross Domestic
Product
2007-08
2007-08
2007-08
1
Agriculture, forestry & fishing
a
Agriculture
b
Forestry & Logging
C
Fishing
2
3
d Total
Mining & Quarrying
Manufacturing
918846
192105
726742
32299
3039
29260
42178
6499
35679
993323
201643
791681
155075
36777
118
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451
11
GST Comparable Sectors [10-1d-(0.5*9b)]
7578410
4386362
3192050.5
Source: CSO
133
Sl. No
1
2
Activities
Adoption of the GST Model by Centre and States
Amendments to the Constitution
To be carried out by the Centre
b
To be approved by the States
3
4
Other Legislation &Rules
Finalise draft tax law
Auxiliary law
C
Draft rules
ld
Ministry of Law review
Report of the Task Force on Goods and Services Tax
Thirteenth Finance Commission
TIMELINE FOR IMPLEMENTATION
Timeline for Implementation of GST
Jan Feb Mar Apr May Jun July Aug Sept Oct Nov Dec
Obtain approval of the Union/State Cabinet
f Obtain Legislative Approval/ Issue Ordinance
Obtain President's/Governor's Assent
Publicity & Outreach
Private sector discussion on Model and draft Law/Rules
b
Private sector consultation on operation
C
Copies for trade/professions
d
Seminar for trade/professions
e
Finalise GST guide for trade and Industry
f Finalise dealers' registration leaflet
5
Advert
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ayments and Tax Accounting system
Test and load payments and Tax Accounting Systems
Develop, test and load other business process modules
Manuals
h
10
a
Prepare Staff manual
b Prepare supplimentry manual
Prepare audit and compliance manual
Training Delivery
Preliminary training
11
a
lb
General training
12
Audit traning delivery
Registration and implementation
a Issue registration application forms
13
lb
Issue registration certificates
C Conduct advisory visits
d
Issue first return forms
e
Receive first payments
f
Identify defaulters
g Pursue defaulters
Monitoring cell
Follow price movements
Inform traders
Action taken
134
Sl. No
Report of the Task Force on Goods and Services Tax
Thirteenth Finance Commission
Responsibility and Accountability for various Activities relating to Implementation of GST
Activities
1
2
Adoption of the GST Model by Centre and States
Amendments to the Constitution
a
To be carried out by the Centre
b To be approved
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y Officers and Staff
Operational
a Design audit system
b Design registration system
C
8
Design returns/payment/processing system
Forms
a Finalise registration application form
b Finalise registration certificate
C Finalise payment and return form
9
IT Infrastructure
a Appoint official-level Team for buiding IT infrastructure
b Appoint Professional Consultant
Ñ Finalise IT Architecture and RFP documents
d
Appoint Vendor
b
Complete user specifications of all business processes
Develop registration system
d
Test and load registration system
f
g
Test and load payments and Tax Accounting Systems
h
10
a
Develop Payments and Tax Accounting system
Develop, test and load other business process modules
Manuals
Prepare Staff manual
b Prepare supplimentry manual
C
Prepare audit and compliance manual
11 Training Delivery
a
Preliminary training
b General training
C Audit traning delivery
12 Registration and implementation
a Issue registration application
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