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 and taxing consumption. Under this structure, all different stages of production and distribution can be inte
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n 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 distribution. (Para 2.16) viii. The CGST and SGST should be credited to the accounts of the Centre and the States separately. Since the CGST and S
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nicipal/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 -goods comprising of emission fuels, tobacco products and alcohol should be subject to a dual levy of GST and excise. No input credit should be allowed for excise. Ho
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e 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 ₹ 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 ₹ 10 lakh to ₹ 40 lakh2 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 exe
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ith 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 explained in detail in Chapter-II. xxii. The rate of CGST and SGST on all non-SIN goods and services should be fixed at a single positive rate of 5 per cent and 7 per cent, res
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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 duties levied by the third-tier of Government must be abolished. (Para 2.11) 4. The power sector must form an integral part of the comprehensive GST base recommended by us over which both the Central and State Governments woul
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ed 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 applied on the consideration received at first transfer or sale. In both cases, credit should be allowed in respect of input tax paid on raw materials used in construction. b. Rental charges received (excluding imputed rental values) in r
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ases, 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 ₹ 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 inputs used in construction. f. The State Governments would continue to perform essential asset registry functions, and enforces property rights associated with them. These functions are comparable to those of a depository on the markets. The
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e 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 on both intra-state and inter-state transactions. To the extent total output SGST is in excess of the input SGST, the same shall be paid into any of the authorised bank in the prescribed manner. This will ensure a self-adjustment mechanism for inpu
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rnishing 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 dealers to make electronic payment of CGST and the SGST by electronically remitting it in to the RBI, SBI or any authorized bank. (xi) The procedure for making payment of CGST and SGST and furnishing information relating to transactions of both purchases from
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tries. 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 ₹ 10 lakh (excluding CGST and SGST) should be required to register and obtain a GST registration number. Persons with lower turnover may be allowed an option to register. The GST registration number should be a twelve digit alpha numeric number. The first ten digits should be the alpha-numeric Perman
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e 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 purposes of CGST and SGST. Procedures for collection of both the CGST and SGST should be uniform. (Para 4.8) 15. Another important element of the taxpayer information base is the VAT invoice, which forms the primary source of information and therefore a crucial con
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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) Consumption Method-Task Force Estimate; (iii) Consumption Method-NCAER Estimate; (iv) Shome Index Method; and (iv) Revenue Method. The various estimates of the GST Base for 2007-08 are summarized in Table-10. The Task Force estimate of the GST Base using the Consumption method is
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or 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-based devolution of an amount equivalent to collection of SGST at 2 percentage points should be made to the third-tier of Government after an appropriate Constitutional Amendment; iii. The formula should be based on the recommendations of the State Finance Commission. iv. Pending Const
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erall 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 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 would translate into enhanced economic welfare and returns to the factors of production, i.e
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the discount rate, the present value of total gain in GDP is computed as between ₹ 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 ₹ 24,669 crore and ₹ 48,661 crore. Imports are expected to gain somewhere between 2.4 and 4.7 per cent with corresponding absolute values ranging between ₹ 31,173 crore and ₹ 61,501 crore. (Para 7.11) 23. The benefit to the poor from the implementation of GST will flow from two sources: first through increase in the income levels and second through reduction in prices of goods consumed by them. The proposed switchover to the flawless GST should, therefore, be viewed as pro-poor and not regressive. Hence, the switchover will improve the vertical equity of the ind
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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 important source of gain for the Government would be the savings on account of reduction in the price levels of a large number of goods and services consumed by the Government. However, to the extent, the Central Government will be required to incentivise the states to adopt the GST,
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he 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. (Paras 8.11 and 8.12) 29. The Council should be responsible for any modification in the initial design of the dual GST and regulating the indirect tax system in the country. The initial design of the dual GST should be approved by the Chairman and three-fourth of the State Finance Ministers.
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Government shall transfer to the GST Compensation Fund a minimum sum of ₹ 6000 crores per annum over the next five years (i.e. a total amount of ₹ 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
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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 should be 5 percent and the corresponding SGST rate should be 7 percent; and ii. Transactions in immoveable property (i.e real estate and housing services) should be brought within the fold of GST; and iii. Stamp duty may not be subsumed but the rate of stamp duty in all states should be calibrated so as not to exceed 4 percent. As
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on 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 modifications in the tax schedule. The Indian consumer is known to be remarkably sensitive to apparently small changes in relative prices. The goal of a rational tax system is to empower households to engage in undistorted decision making, driven by their own needs and preferences. . Accordingly, the Task Force recommended that a well designed de
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T 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 items like motor spirit (petrol, diesel, and aviation turbine fuel), liquor, etc. While input-credit is available for intra-state transactions, no such credit is available for inter-state transactions. Therefore, the VAT, like its predecessor the Sales tax, continues to be characterised by narrow base, plethora of exemptions, multiple rate structure a
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s 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 infirmities. This initiative seems to be an amalgam of compromises and continued fear of possible revenue losses and adverse impact on the low income groups. Clearly, there are a number of important unresolved issues relating to the design of the GST and resolving these will need further discussions between Central and State Governments. Hopefully, by provid
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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 account for substantial proportion of State s revenues. Therefore, the solution has to be found within the existing federal framework where both levels of Governments have the concurrent powers to tax domestic trade in goods and services. 2.4 In view of the above, we recommend the following:- (a) The GST will be a dual levy imposed concurrently by the Centre and the States, but indepen
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al 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 also the easiest to compute-all taxes previously paid on purchases from other firms to be simply subtracted from taxes due on sale. No distinction needs to be drawn between capital goods and other inputs, and no depreciation need be computed. Consumption, it is argued, is also a broad measure of the ability to pay taxes, much like income. Furthermore, it excludes savings from the base, henc
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ned 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 comfortable in levy and collection of tax if he knows exactly on which service the levy is being imposed. 2.9 In this context, we would like to point out that firstly, it is not possible to draw up a positive list which is all comprehensive. Invariably there would be gaps in the base. Secondly, it would lead to classification disputes thereby imposing higher compliance and administrative burden. Thirdly,
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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 the transaction chain which commences with import/manufacture/production of goods or provision of services at one end and the consumption of goods and services at the other. (c) The sub-summation should result in free flow of tax credit at the intra and inter State levels. (d) Any tax/fee/charge which is in the nature of a user charge for supply of goods & services should not be subsumed under the G
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n 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 the SIN goods as a single levy termed as Central Excises and State Excises, respectively. e. All entry and Octroi duties levied by the third-tier of Government must be abolished.13 2.12 For the purposes of this Report, the set of taxes which the EC has recommended for being subsumed in the SGST will be referred to as EC-taxes . Similarly, the larger set of taxes which we have recommended for being subsumed in the SGST will be referred to
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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 agency which collects the CGST and should be remitted to the state in which the place of destination of the imports is located regardless of where the goods enter the country. However, the place of destination may be defined to mean the address of the importer on the import invoice; and e. SGST on B2C imports should be collected by the same agency which collects the CGST and should be remitted to the state in which the place of residence of the person im
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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 average of the rates at the various stages, there could exist an incentive to shift value added to the stages with the lower tax rate. This kind of tax distortion needs to be avoided. 2.16 In view of the above, we recommend that- i. the credit method should be adopted for computation of the VAT liability. ii. The computation of the CGST and SGST liability will be based on the invoice credit method i.e., allow credit for tax paid on all intermediate goods or serv
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h 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 arguments: 1. Depending on the capital intensity of the production process, the VAT on fixed assets enters into the price, causing uneven effects on consumer prices. 2. Any kind of restriction on full and immediate credit for VAT on fixed assets deters investment and hampers technological change, unless it can be fully shifted forward to consumers15. 3. Limiting the credit for VAT on fixed assets in any manner results in increased cost of exports thereby undermining internatio
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sentially loss in revenues. The estimated total credit for CENVAT paid on capital goods and CVD on imported capital goods in 2002-03 was ₹ 8,500 crore and could be expected to increase to about ₹ 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 ₹ 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 tax, the impact on revenue could be fully absorbed. In the light of the arguments in support of full and immediate credit for VAT on capital goods and the revenue implications thereof, we recommend that- i. Full and immediate input credit should be allowed for tax paid (both CGST and SGST) on all purchases of capital goods (including GST on capital goods) in the year in which the capital goods are acquired; and ii. any kind of transfer of the capital goods at a later stage sh
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ero 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, there are conflicting considerations. If a firm s goods are completely exempt, it is not required to register or file a return, but the prices of the goods sold by the exempt firm will include the tax incurred by the exempt firm on its purchases. 2.20 This may be particularly objectionable to the exempt firm s customers who cannot receive credit for the embedded tax. In this case, exemption would place the exempt firm at a competitive disadvantage. 2.21 If the objective is to have a broade
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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 trigger demands for other goods which form the consumption basket of the poor. To the extent the poor consume other goods also, any increase in the standard rate will also adversely affect them. Contrary to popular perception, food items are indeed subject to tax at the state level though at lower rates. As stated in earlier paragraphs, the distribution channel for unprocessed food in the rural sector is either a direct sale by the farmer to the final consumer in village hats or through s
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onal 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, while public may prefer exemption, in reality it imposes a higher tax burden particularly on the publicly funded health care and for care provided in facilities covered by insurance. Since health services do not form part of our sample used for calculation of our RNR in the later part of this Report, the choice of the method of treatment of health services will not impact the estimation of the GST base and hence the RNR rate. Accordingly, we recommend that the choice may be made keeping in vie
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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, 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; ii. Any service transactions between an employer and employee either as a service provider, recipient or vice versa; iii. 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 iv. edu
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ene (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 intermediates. As a result, the cascading effect of embedded input taxes is significant. 2.29 In view of the above, the Task Force recommends a dual levy of GST and excise on the entire range of emission fuels. As a general rule, no input credit will be allowed to any person in respect of GST on the emission fuels since emission fuels are predominantly used in final consumption and has the potential for creating a flourishing market in trading of invoice and input tax credit. However, this general rule should be relaxed
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sion 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 essentially intermediate in nature. Further, no input tax credit in respect of excise would be allowed to any person. Both the Central and the State Governments may determine the appropriate revenue neutral rate of excise in the case of these products. However, we would like to point out that excessively high rates of tax on tobacco and alcohol may encourage evasion and become a source for financing of undesirable activities. i. Treatment of natural gas 2.33 Natural gas, like petroleum products, is derived from the same source.
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dded 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 the Central and State level is significant cascading effect18 of taxes when power is used as an intermediate input. This phenomenon partly explains the cause for high cost of power generation and distribution. As a result, the international competitiveness of Indian industry is significantly undermined. 2.35 In view of the above, we recommend the following: (i) The electricity duty levied by the States should be subsumed in the SGST. (ii) The power sector must form an integral part of the comprehensive GST base recommended by us o
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ts 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 State Governments should be subsumed in the GST. (ii) All transport equipments and all forms of services for transportation of goods and services by railways, air, road and sea must form an integral part of the comprehensive GST base recommended by us over which both the Central and State Governments would have concurrent jurisdiction. (iii) The tax regime for the transport equipments and transport services should be the same as in the case of any other normal good. (iv) It is not necessary to levy higher rates of taxes on vehicles as is the existi
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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 potential GST base and also distorts consumption across financial services and other business services, the full taxation method significantly enhances the tax base and also results in equal treatment of all services. Therefore, we recommend that the consumption of financial services should be taxed on the basis of the full taxation method. 2.41 There are alternative approaches to full taxation of financial services. These are the addition method, the subtraction method and the cash flow method. We recommend that the choice of the method may be based on ad
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vels 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 transactions in black money. 2.45 At the State level, the taxes on the real estate sector include sales tax on works contract, state level VAT on various inputs used in the construction of real estate, stamp duty and registration fee. Registration and stamp duties exhibit the same distortionary cumulative and cascading effects as excises. The problem is further compounded by the fact that in most states, the statutory rates of stamp dut
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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 properties levied by the States should be subsumed in the GST to facilitate input credit and eliminate cascading effect. ii. 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 transfer
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e 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 purposes of determination of capital gains under the Income-tax Act, 1961. (e) The new regime will also be subject to the threshold exemption of ₹ 10,00,000/- for small businesses thereby eliminating the problem of excessively large number of landlords seeking GST registration. (f) Immovable property will also include land19 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
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, 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 property and any tax paid on minor repairs and maintenance being allowed as set off against the rental charges, if any, in the same year. Further, under the model, the real estate developer will also be entitled to set off input tax on all inputs (including land) used for the purposes of construction and development of the real estate. As a result, the distortionary cascading effect of the existing tax regime for immovable property transaction and real estate services will be fully eliminated. This would have significant downward effect on pricing of real estate. The new regime has
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t 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 consumer, ensures the neutrality of the tax, whatever the nature of the product, the structure of the distribution chain and the technical means used for its delivery (stores, physical delivery, Internet). 2.51 Internationally, VAT is designed on the destination principle which allows the tax to keep its neutrality in cross-border trade. According to this principle, exports are exempt with refund of input taxes ( zero-rated ) and imports are taxed on the same basis and with the same rates as local production. This VAT on imports is generally collected at the same time as customs
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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 are likely to be consumed. The increasing global nature of businesses and communication technologies makes it more difficult to apply a pure consumption test. The solution developed in most countries consists of identifying the place of consumption by reference to proxies rather than directly trying to identify the actual or intended place of consumption. The nature of those proxies and the way they are used vary widely across jurisdictions since they result from local history and legal frameworks. 2.54 While the rules and approaches vary across countries, the basic criteria for det
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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 regardless of where the services are performed or used. This is particularly in the case of intangible services like advisory or consulting services for which the place of performance is not important. Therefore, all such services rendered to a non-resident are zero-rated. By contrast, many B2C services tend to be tangible or physical in nature, e.g. haircuts, hotel accommodation, local transportation and entertainment services which are consumed in the place of their performance. Therefore, the place of supply in the case of B2C transaction is the place where the supplier is located. In some countries eve
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ntify 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-establishment business entities, the place of destination should be defined as the place of predominant use of the service. However, if there is no unique place of predominant use, the place of destination could be the mailing address of the recipient as stated on the invoice, which would normally be the business address of the contracting party. The risk of misuse of this rule would be minimal if it is limited to B2B supplies where the tax is fully creditable. 2.59 For B2C services, the place of supply should be the State in which the supplier is located, which, in turn, could be defined as the place where
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cal 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 ₹ 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. 2.62 A case is made out that the states should be allowed to adopt different threshold limits keeping in view the size of the revenue base. Consequently, states with low revenue potential like the North-eastern states in particular must be allowed to adopt a lower threshold limit to protect their revenues. The objective of providing a threshold exemption is two-fold; firstly to mitigate t
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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 of social and economic disorder. Therefore, we recommend that dealers in such high value items may, subject to the threshold exemption but without the ceiling of ₹ 40 lakh, also be allowed to opt for the compounded levy of one percent, each towards CGST and SGST. p. Treatment of Small Scale Industries 2.65 At present small scale industries are entitled to exemption from payment of CENVAT in respect of their turnover upto ₹ 1.5 crores. However, there is no such threshold exemption in respect of state level VAT. The main reason for exemption from payment of CENVAT is to liberate them fro
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he 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 to be levied on an identical GST tax base, the outcome of any investigation impacting SGST will also have a corresponding impact on CGST. Therefore, enforcement by the State tax administration would be adequate to even deal with CGST evasion. q. Area based exemptions 2.68 Under the CENVAT, industries set up in the North East, Jammu & Kashmir, Sikkim, Uttaranchal and Himachal Pradesh (hereinafter referred to as specified areas ) enjoy exemption from payment of CENVAT. This area based exemption creates economic distortions and affect economic viability of units located in non-exempt areas
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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 also commented on the undesirability of the area based exemptions. To quote :- The existing incentive programmes such as those available for the North East, J&K, Himachal Pradesh and Uttranchal need to be reviewed with a view to assessing their impact on industrialization in these regions. The extension of excise duty exemption to Himachal and Uttranchal has had an adverse impact on industrial investments in both the North Eastern region and the adjacent States. Consideration would need to be given to restricting these incentives to only hilly areas or to replacing these incentives by a special pro
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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 not resident within their jurisdictions to file returns. To bring some order in the matter, a law was enacted by the Parliament in 1956 authorising the central government to levy a tax on interstate sales called the central sales tax (CST). But the power to administer the tax was delegated by the Centre to the states of origin of the sales who were also allowed to retain the revenue. Initially, the tax was levied at the rate of only 1 per cent but it was raised successively to 4 per cent. In 2006-07, the Central Government and the State Governments came to an understanding to reduce CST in a phased manner and comple
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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 inequity and reduces the international competitiveness of exports. Further, the administration of and compliance with the CST is also beset with problems. The Department is constantly under pressure to monitor the exports to registered dealers. Similarly, the importers have to incur considerable transaction cost to procure C Forms from the department. The exporters are also burdened with the responsibility of obtaining the C Forms from the importers on time. Further, the treatment of branch transfers and consignment sale under the CST provides an easy avenue for evasion. In spite of the adverse economic implications of t
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e 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 the above issues f. The intra and inter state rates of tax should be equal to avoid evasion and camouflaging the intra state transactions as inter state transactions. 3.7 Based on its analysis, the Group has recommended the adoption of the IGST Model for implementation with the caveat that a strong IT infrastructure and complete information of the interstate transactions is a precondition and essential prerequisite for considering the IGST model. Without addressing these fundamental concerns of IT infrastructure and information support systems, the adoption of IGST model which is still at a conceptual stage is far from realistic at this stage in adoption of
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s: 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 to the importing state. iii. This model requires the bank to evolve an IT infrastructure to communicate electronically with all concerned in respect of interstate transaction of goods through a national level portal and to provide the related information to all concerned. 3.10 The Working Group recognised that the Bank Model is a better system ensuring evasion free inter-state business environment . However, the Group was of the view that it would entail higher cost of both compliance and administration. Further, it was also alarmed by the fact that few members created an uproar by stating Why should the importing States permit their buyers to pay tax to the sellers of the expo
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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 centralized agency for settlement of accounts between the Centre and the States. Therefore, we do not support the adoption of the IGST Model. We would recommend a modified version of the Bank Model (hereafter referred to as Modified Bank Model ) for inter-state trade in goods and services. 3.12 The functional components of the Modified Bank Model would be as under :- (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
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so 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. (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.
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s 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 for the Invoice). If the number of invoices for sale or purchase to registered dealers is more than 10 , the seller can enter these details offline and upload the file. (d) The total of GST will be computed automatically and Seller can enter additional details for Interest, penalty or other amounts as applicable. The complete total will be calculated automatically and mentioned in figures and words. (e) Seller will have to submit this information for payment by direct debit to his bank account (as per his selection on the Nodal Bank website) as is the procedure for any e-payment. (f) Nodal Bank will transmit ONLY the total GST amount information, along with details of the Seller as per the challan information, to the
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ount 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 (xiii) All banks receiving payments from the registered dealers would be required to transfer the funds to the Nodal Bank on T+1 basis. The Nodal Bank in turn would credit the funds to the respective States. (xiv) The software can be designed in a manner which would have the capacity to allocate the amount paid by any registered dealer between the States on the basis of the business identification number of the buyer. The amounts so allocated can be automatically credited to the account of the destination States without any manual intervention. As a result, it would not be necessary to set up any clearing house mechanism whereby at any given point in time sums would be due to, or from, any other States. Therefore, the destination State
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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 over the entire month and eventually upload the file anytime in the first week of the following month. As a result the compliance cost would be minimal. 3.14 The IT infrastructure would be hosted by the Nodal Bank and the State tax administration would be required to establish a central computer server to download the data from the Nodal Bank. The data so downloaded can be allowed to be used by its officers through IT Network or through any other communication system. This will also reduce immediate pressure to set up the IT infrastructure in all States on or before 1st April, 2010. Further, the Model does not envisage the establishment of a clearing house mechanism. Therefore, the Model is also administratively efficient. 3.15 As stated above, the
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ncy. 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. The deadweight loss on account of such economic inefficiencies far outweighs the loss on account of float allowed to the sellers in the origin State. Therefore, we are of the view that the apprehensions expressed by few States on the Bank Model are exaggerated in the absence of sufficient information and analysis. 3.16 The Modified Bank Model would not require large resources to be committed since the nodal bank would be paid on per transaction record basis. Further, since the cost would be entirely borne by the Central Government, it would not impose any additional burden on the States. In fact, the states will be able to save resources since input credit mismatches will be automatically detected thereby significantly improving its effectivity. This Mod
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le 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 structure for GST payment and transaction information management. Therefore, such doubts are entirely misplaced. 3.18 Another apprehension expressed relates to the refund of accumulated Input tax credit on the basis of interstate transaction of goods which would continue to be a challenge and require high level of audit trails. The accumulated input tax credit on the basis of interstate transaction can be utilised to make payment of output SGST in respect of local transactions. In most cases the accumulated credit would be fully exhausted. In cases where accumulated credit remains unutilised, the same would have to be refunded. The number of such cases may not be very large. Nevertheless, the Government can establish a centralised processing centre (CPC) for proces
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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 verification. iv. The cost of the scanners should be entirely borne by the Central Government. v. All check-posts should be jointly manned by both States so as to reduce the number of check-posts and enhance efficiency in the road movement of goods. CHAPTER – IV Administrative Structure 4.1 It is now well-recognised that tax administration is tax policy. An inefficient tax administration will not be able to provide the requisite level of deterrence thereby leading to non-compliance and under performance of the tax regime. Therefore, the full potential of the pure tax regime will remain unrealised. Hence, the structure, design and the business process of the tax administration is an important factor in the determination of the revenue performance. 4.2 In the context of th
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rs 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 recommend the following: i. All persons with annual aggregate turnover of goods and services exceeding ₹ 10 lakh (excluding CGST and SGST) should be required to register and obtain a GST registration number. Persons with lower turnover may be allowed an option to register. ii. The GST registration number should be a twelve digit alpha numeric number. The first ten digits should be the alpha-numeric Permanent Account Number (PAN) followed by a space and two more digits indicating the state code. This number scheme should be publicised widely and should be self-generated after obtaining a PAN22. iii. There will be a single GST registration number for all branches in a State. Therefore, a dealer having branches across States will have as many GST registration numbers as the number of St
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iii. 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 account number. ix. All persons with annual aggregate turnover of goods and services exceeding ₹ 10 lakh (excluding CGST and SGST) would be required to compulsorily acquire the 18 digit identification number. Persons with lower turnover will have the option of obtaining the identification number. 4.5 These recommendations will enable the GST administration to save on considerable time for registration and also enable computerisation of transactions by distinguishing one record from another. Given the simplicity of the proposed registration system, the GST administration can begin registration of dealers from 1st January, 2010. b. GST invoice 4.6 Another important element of the taxpayer information base is the VAT invoice, which forms the primary source of information and therefore a crucia
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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 to accumulate a huge VAT liability within a very short period. Hence, it is necessary to minimise the risk of payment defaults by dealers, in particular fly-by-night operators. Given that the collection under VAT will serve as the dominant source of revenue for state governments it is imperative to provide for a collection mechanism which would ensure a periodic flow of revenue to the exchequer subject to a minimum compliance burden on taxpayers and risk of revenue loss. Therefore, we recommend that the VAT period should be a calendar month. d. Administrative structure 4.8 The proposed GST will be a dual levy. Therefore, concern has been expressed at different fora on the administrative structure for implementing the CGST and the SGST consistent with the autonomy of the different levels of Government. T
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e 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 State will be treated as a single taxable entity eligible for SGST input credit across units/branches in that State. (e) The Central Government shall establish a common IT infrastructure which will serve the needs of both CGST and SGST. (f) The Central Government will be responsible for establishing a taxpayers information network (TIN) keeping in view the information requirement of CBEC and the State tax administration. The TIN will be shared between the Centre and the States. (g) 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 state
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o be common. (n) 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. (o) No authority should have any power to make preventive detention for the purposes of CGST and SGST. (p) Procedures for collection of both the CGST and SGST should be uniform. 4.9 The uniformity in the procedures recommended by us will considerably reduce compliance and administrative cost. This should undoubtedly result in improved voluntary compliance. CHAPTER – V Rates of Tax I. Single or Multiple Rates 5.1 The choice of a single or a multiple VAT rates is highly controversial. There is a belief that the public will accept a VAT type GST more easily if products consumed by low-income households are taxed at lower rates than products consumed by those that are better off. Administrators who actually implement the tax know that every additional rate will significantly increase cost and complex
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s were characterised by a progressive tax structure whereby basic necessities were taxed at lower rates, luxuries at higher rates and all other goods and services at a standard rate. The problem was further compounded by numerous exemptions. However, since the 1990s there is a growing trend towards a single positive rate, a zero rate and some, or no, exemptions. 5.3 The Task Force on Implementation of the Fiscal Responsibilities and Budget Management Act, 2003 sketched the elements of a reform strategy which would achieve the core economic policy goals of promoting efficiency, equity and high quality growth. These elements, inter-alia, included low and few rates. The Task Force expressed the view that High tax rates distort economic decisions and fuel and deployment of resources into tax avoidance and tax evasion. A large number of rates of taxes exacerbates the problem of bracket creep and classification disputes. These arguments suggest that a rational tax system is one with very few
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ngle rates, they examined whether existing data on VAT support the contention that countries with single rate mobilise more revenue than those that have multiple rates. The empirical results confirm that the dispersion of rates if found to negatively affect VAT revenues. The results also confirm in other conventional view that VAT generates, other things being constant, higher revenue in single VAT rate countries than in multiple rates countries. The difference in the estimated models for the two country groups statistically significant indicating a structural change27. Accordingly, they recommend that to generate superior revenues, a VAT should be levied in a single rate on as broad base as possible; it also must be accompanied by a strong tax administration to ensure enforcement and compliance. 5.5 Mello (2008)28 empirically analyses 38 OECD and non-OECD countries and concludes that VAT efficiency is inversely related to the statutory rate and the share of tax administration costs in
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ouseholds. However it does not recommend a low rate of tax, or exemption, for products consumed by low income households since the same products also form part of the consumption basket of the middle and high income households. As stated earlier, the introduction of a low rate or exemption for products commonly consumed by low income households also results in increase in the standard rate. Since low income households also consume goods liable to tax at the standard rate, the cumulative burden on the aggregate consumption by the low income households remains unaffected in spite of the exemption or low rate for the common goods consumed by them. The Group also recognized that, in general, the low income households purchase their requirement of daily necessities from the small neighbourhood retail outlets whose turnover is generally low/moderate. Therefore, the burden of GST on consumption by low income households should be minimized, more appropriately, by providing a moderate threshold
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on man will rise, while the rate of tax on luxuries will fall. The implementation of a regressive tax during an economic slowdown is even worse than doing so in a boom. In other countries where such a shift to a single rate has occurred, an increased propensity to evade has also been noticed. Those who argue for a single rate GST on grounds of economic efficiency and growth are ignoring the adverse distributional consequences. The implementation of a single rate will thus be highly unpopular with the common man. 5.11 Under the present Indirect Tax regime at the State level, the lower rate is generally 4 per cent. However, in the absence of a seamless flow of the input credit mechanism resulting in cascading of taxes and the CENVAT-inclusive tax base, the incidence on products liable to the lower rate of 4 per cent is substantially higher. Since we recommend in para 5.79 a single rate, which is extremely low in comparison to the existing standard rate of 12.5 per cent, there is little s
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idence, does not result in any adverse distributional consequences. 5.12 A tax on consumption can be regressive. The structure should be designed to alleviate the tax incidence on consumption by the relatively poorer section of the society. One of the methods could be to identify such items of consumption by the poor and either exempt them from GST or subject them to a lower rate. Under this method, consumption by the rich would also suffer the same level of tax since no distinction can be made between the rich and the poorer consumers at the point of sale. Therefore, this method is highly regressive. The second method is to provide for a moderate threshold exemption level for registration of dealers. Consequently, all small dealers would remain outside the purview of the GST and, therefore, the tax incidence on products sold through such dealers would be relatively lower. Since the poorer section of the society tend to make their purchases from such small and unregistered dealers, the
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been argued that the proposal to have a uniform rate of State GST reduces the autonomy of the States and, therefore, undermines the federal structure of our Constitution. Further, the States would lose the flexibility to swiftly respond to any crisis33. In the present context, the design of the structure of the GST will be determined through the collective process of a grand bargain between the Centre and all the States for the collective welfare of its people. The decision to have a uniform rate should, therefore, be viewed as a collective decision of all States and Centre to harmonize the tax rates, arrived on the basis of consensus in the Empowered Committee of State Finance Ministers. Further, the proposed GST structure would confer upon the States the power to tax services which accounts for about 54 per cent of the GDP. This would significantly improve the vertical imbalance in the federal fiscal relations in favour of the States34. The States would also have the flexibility to i
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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 (hereafter such rates shall be referred to as revenue neutral rates or RNR ). 5.18 The Thirteenth Finance Commission has been mandated to make its recommendations having regard to the basis of levels of taxation likely to be reached at the end of 2008-09. However, the fiscal year 2008-09 has been characterised by unprecedented economic meltdown necessitating immediate and temporary midyear corrections in the rates of CENVAT and Service Tax. Further, due to intra-year extreme volatility in the prices of various commodities, the levels of taxation achieved in 2008-09 are substantially lower than what would have been achieved if the trend of the preceeding five years had continued. Further, detail firm level data is required for the purposes of calculation of RNR. This is available only u
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rores only. The breakup of the collections is presented in Table-1. Since the SIN-goods will continue to be subject to excises as at present, the RNR for the CGST is sought to be calculated only in respect of ₹ 157733 crores, being the collections from non-SIN goods and services. Table -1 : Revenues from Central taxes to be subsumed in CGST Sl No Nature of Tax Non-SIN Goods POL Tobacco Total 1 CVD 53510 5199 0 58709 2 Union Excise Duties 52922 60231 10272 123425 3 Service Tax 51301 0 0 51301 4 Total 157733 65430 10272 233435 Note : Union Excise Duties includes Additional Excise Duties and the various cesses listed out for subsumation in the CGST 5.21 Similarly, the total collection from EC-taxes in 2007-08 was Rs.118356 crores (excluding collection from petroleum, alcohol and tobacco products). However, the total collection from TF-taxes (excluding collection from petroleum, alcohol and tobacco products) was ₹ 188285 crores in 2007-08 as per details presented in Table-2. Si
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ght of the GST Model designed by us. There are essentially two methods of estimating the GST base. One method is to estimate the final consumption in the country and make appropriate allowance for leakage. However, the pre-GST indirect tax system is generally characterised by high leakage while the shift to a consumption-type GST is compliance enhancing. Therefore, estimating the degree of leakage under the proposed GST is vexatious. The second method is to estimate the gross value addition by the producers of goods and services and make appropriate adjustments relating to imports and exports. The gross value addition by the producers can be estimated by either using the input-output table or the profit and loss account of the producers. 5.23 For the purposes of estimation of 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
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(3) t (output – input) : the subtractive – direct (accounts) method; and (4) t (output) – t (input) : the subtractive – indirect (the invoice or credit) method. 5.27 While there are four possible ways of levying a VAT, in practice, the method used (number 4) never actually calculates the value added; instead, the tax rate is applied to a component of value added (output and inputs) and the resultant tax liabilities are subtracted to get the final net tax payable. This is sometimes called the indirect way to assess the tax on value added. 5.28 The Subtractive – indirect method (SI method) is based on the profit and loss account of producers. Since extensive producer level data was available with the Income Tax Department, the Group analysed 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 Inc
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ore, the sample does not include the tax returns of any charitable organization. Since most entities engaged in providing education and health services operate as charities, the sample does not include education and health services providers. Further, since agricultural income is exempt from income tax, the sample does not capture the data relating to the agricultural sector. Table 3 : Turnover based Distribution of sample entities Turnover* range Number of cases Amount of Output base (Rs. in crores) Share in the total turnover (in percent) Less than zero 2014 -719 -0.01 Between 0 to ₹ 10 lakh 1616862 25761 0.28 Between 10 lakh to ₹ 25 lakh 237333 38933 0.42 Between 25 lakh to ₹ 40 lakh 146984 48061 0.51 Between 40 lakh to ₹ 100 lakh 333047 219065 2.34 Between 1 crore to ₹ 2 crore 199099 280778 3.00 Between 2 crore to ₹ 5 crore 165385 519055 5.55 Between 5 crore to ₹ 10 crore 71341 498382 5.33 Between 10 crore to ₹ 100 crore 71332 1840605
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consumption etc., by the CSO also appears to be under stated. Therefore, the sample size is extremely large and any estimation of the GST base on the basis of this sample will be fairly representative of the actual GST base. 5.30 The computation of the GST base under the SI method involves the following steps: a. The receipt items on the credit side of the Profit and Loss Account, which would be liable to output tax, are identified and appropriately adjusted for indirect taxes to arrive at the value of supply of domestically produced goods and services (net of indirect taxes) (hereinafter referred to as net value of supply of domestically produced goods and services ); b. Since 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 red
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oss value of purchase of intermediate goods and services to arrive at the aggregate input tax base . g. The aggregate output tax base is reduced by the aggregate input tax base to arrive at the GST Base . 5.31 On the basis of the profit and loss accounts of the 28,51,248 business entities, the net value of supply of domestically produced goods and services is the aggregate of the value (net of indirect taxes) of (i) Sales/gross receipts from business; (ii) Commission; (iii) Profit on sale of fixed assets; and (iv) Any other income since output tax would be charged only in respect of these four items credited to the profit and loss account.40 This is estimated to be ₹ 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 ₹ 77,62,
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3 The various receipts which have been excluded from the item any other income basically arise from transaction in financial services and immovable property. While the base for GST is proposed to include financial services and immovable property (real estate), the size of the base relating to these services is determined separately and not on the basis of the subtractive-indirect (invoice or credit) method. 5.34 Input tax base comprises of all goods and services used as intermediate inputs in the production of goods and services and on which output tax has been paid. The value of purchases of intermediate goods and services is the 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 ₹ 73,29,483 crores of which ₹ 4,32,910 crores relates to purchase of agricultural commodities and the balance ₹ 68,96,573 crores relates to purchases from the non-agricultural sector. Howe
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8377; 56,70,610 crores. However, the corresponding figure for the taxable sectors (excluding financial, rail and real estate sectors) is ₹ 51,80,108 crores. These purchases include purchase of trading goods and raw materials from registered and unregistered dealers in both the primary and secondary sector. To the extent these include purchases of trading goods and raw materials from the unregistered dealers, no input 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 ordin
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arly, the value of Miscellaneous Services availed is ₹ 8,67,077 crores which is charged to the profit and loss account under the head other expenses . These are generally petty expenses in nature most of which are acquired from unregistered dealers. It is estimated that 60 percent of this amount would be from unregistered dealers. Accordingly, a sum of ₹ 5,32,709 crores will not be eligible for input credit. 5.38 Accordingly, the value of purchases from the unregistered dealers in 2007-08 for all sectors is computed at ₹ 16,82,145 crores of which ₹ 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 i
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ealth and education services) are computed separately. Exempt sectors 5.41 We have earlier recommended exemption from GST of unprocessed food articles. Producers of food grains do not file income tax returns. Similarly, most of the trading in food grains is undertaken by small traders with low turnover. Such traders, in general, file their income tax returns in paper form. However, the sample represents electronically filed returns only. The impact of the 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 ₹ 8133 crores have electronically filed their returns. Assuming that these tr
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In the case of real estate transactions, the incremental value between two transactions will be subject to GST thereby, subsuming the stamp duty within the GST base. Further, rent, whether from residential or commercial property, will also form part of the GST base. However, rent in a business-to-business transaction will be a wash transaction. Since expenditure on rent is greater than the rental income in the case of sample entities, the net expenditure 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 ₹ 42926
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t ₹ 24,29,924 crores. 5.49 The GST Base for all the sectors is summarized in Table-5. As would be noted, the GST Base for the Taxable sectors is estimated at ₹ 30,50,228 crores. Table-5 : Estimation of the GST Base under the SI Method Sl No. Description Unit All Sectors Exempt Sector Taxable Sector Special Sectors General Sectors Total Financial Services Rail Services Land Sector 1 2 3 4 5 Sample Size Nos 2851248 77831 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 9743 431504 2. Value of purchase of intermediate Goods and Services Rs. in crs 7329483 9
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l 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 ₹ 10 lakh, consumption of goods and services from unregistered dealers will not be subject to GST. Therefore, it is necessary to estimate the value of such purchases forming part of the Private Final Consumption Expenditure (PFCE). For this purposes, we assume that the share of purchases from the unregistered dealers is in the same ratio as the share of the unorganised sector in the total National Domestic Product (NDP). The contribution of the organized and unorganized sectors in the NDP for 2006-07 is calculated on the bas
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nd 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 ₹ 5,00,036 crores comprising of ₹ 3,66,855 crores towards construction and ₹ 1,33,181 crores towards plant and machinery. The household sector in general would be in the un-organised sector (unregistered dealers or final consumers) and therefore, the expenditure on plant and machinery and construction by the household sector would be in the nature of final consumption. The expenditure on construction in the household sector would comprise of two components, namely, material and labour. In general, tax would be payable on the material component only since the labour component being from the un-org
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nsumption 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 ₹ 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 ₹ 33,13,817 crores. The GST Base relating to land for 2007-08 is estimated to be ₹ 4,29,260 crores as computed under the SI method. Therefore, the aggregate GST Base in 2007-08 is estimated at ₹ 37,43,077 crores. This estimate is significantly higher than the size of the GST base estimated under the SI method. Table -6 : Task Force Estimate of the GST Base using the Consumption Method Sl. No. Description Units Amount 1 Aggregate Private Final Consumption Expenditure Rs. in crs 2260042 2 Private Final Consumption Expenditure relating to purchases from unregistered dealers (unorganised sector) Rs. in crs 1247433
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timated at ₹ 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 ₹ 10 lakh for GST registration by dealers); and b. inclusion of land transactions within the scope of the GST. 5.60 The RNR for non-petroleum taxes of ₹ 1,76,893 crores for the base year 2003-04 has been estimated to be 7.22 percent44. Implicit in this estimate is the estimate of the GST Base at ₹ 2450042 crores for 2003-04. 5.61 We use the purchases from the unorganized sector as a proxy for the purchases from the unregistered dealers. The private final consumption expenditur
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450042 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 7 + Row 8) Rs. in crs 3077952 /1 The GST base relating to land in 2003-04 is estimated at ₹ 197305 crores. 5.63 After adjusting the NCAER estimates to reflect the design and structure of the GST recommended by us, the GST Base in 2007-08 is estimated at ₹ 30,77,952 crores as per calculations indicated in Table-7. This estimate of the GST Base also approximates the estimate under the SI method. 3. Shome Index Method 5.64 Parthasarathi Shome, one
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ome 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. The strategy for countries that have an x% VAT rate should invariably be to design the VAT structure and enhance its administration in a way that the achievement of (1/2 * X ) percent of GDP in revenue is feasible. 5.68 However, this Index is valid generally for countries which do not include real estate and housing services and financial services within the scope of VAT. 5.69 Based on the Shome Index, the GST Base is estimated in Table-8 at ₹ 27,82,809 crores. Tabl
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e 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 3 percent of education cess). Similarly, the input tax base is computed by estimating the implicit base underlying the CENVAT credit allowed to producers at the same duty rate. The difference between the output tax base and the input tax base so calculated is the GST base relating to goods which is estimated at ₹ 11,77,706 crores in 2007-08 (Table-9). Similarly the service tax base is estimated at ₹ 4,13,697 crores for 2007-08 as shown in the said Table. 5.73 Since the proposed GST is comp
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nd Tobacco (Rs. in crs) 191513 Construction (Rs. in crs) 131884 Sub-total (Rs. in crs) 1358344 D GST Base (Rs. in crs) 2949748 5.74 Based on the above, the aggregate GST Base for 2007-08 is estimated at ₹ 29,49,748 crores as shown in Table-9. As would be noted this estimate is larger than the estimate under the Shome Index Method but lower than the estimate under the SI method. 5.75 The various estimates of the GST Base for 2007-08 are summarized in Table-10. As may be noted, the Task Force estimate of the GST Base using the Consumption method is the highest (Rs.37,43,077 crores) whereas the Shome Index method provides the lowest estimate. All other estimates fall within this range. Since the five estimates are different, we adopt their average of ₹ 31,25,325 crores46(row E of Table-10), as the size of the comprehensive GST base for 2007-08 for the purposes of estimating the RNR. Since the tax base for both the CGST and the SGST are proposed to be identical, we use the same
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0747. 5.77 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. Therefore, in actual practice, the RNR of 11 percent will be revenue positive. 5.78 As would be noted, we have, in para 2.11, recommended the abolition of all entry and Octroi taxes by state governments and other sub-national Governments. Therefore, it is imperative to provide for an alternate buoyant source of revenue to the third-tier of Government. 5.79 In view of the aforesaid, 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-based devolution of an amount equivalent to collection of SGST at 2 percentage points should be made to the third-tier of Government after an appropriate Constitutional Amendment; iii. The
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tration to collect the tax due effectively. In this respect, a single rate and a simpler tax system is easier for tax administrations to administer and for businesses to comply. In this perspective, a VAT system is, in absolute terms, efficient when it covers the whole of the potential tax base (consumption by end users) at a single rate and where all the tax due is collected by the tax administration. Therefore, the ratio of the revenues actually collected and the revenues that would arise from a theoretically pure VAT system with a single rate applied to all final consumption and 100 per cent compliance would be a good measure to evaluate the performance of VAT. In literature, this ratio is referred to as the VAT Revenue Ratio (VRR). This ratio gives an indication of the efficiency of the VAT regime in a country compared to a standard norm. 6.2 In theory, the closer the VAT system of a country is to the pure VAT regime, the more its VRR is close to 1. Any other value – higher or lowe
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in national accounts (where they are treated as investments or gross fixed capital formation ) but they are subject to VAT in many countries. A combination of this factor together with the cascading effects of exemption in the value chain may lead to a VRR above one. Therefore, for the purposes of calculation of VRR in respect of the proposed flawless GST, we compute the potential tax base by expanding the scope of final consumption within the meaning of National Accounts to include also the Gross fixed capital formation (including transaction ( consumption ) in land) in the household sector. Accordingly, the potential tax base of a GST is estimated at ₹ 39,49,907 crores as indicated in Table-11. However, the actual tax base under the flawless GST is estimated at a reduced amount of ₹ 31, 25,325 crores. Accordingly, VRR of the flawless GST is calculated to be 0.79. 6.4 The VRR is affected by both policy decisions – over the base and the number of rates – and compliance leve
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terms [ 𝑖𝑔𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑜𝑓 𝑠𝑡𝑎𝑡𝑢𝑡𝑜𝑟𝑦 𝑟𝑎𝑡𝑒𝑠/𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑟𝑎𝑡𝑒∗ (1−𝐸𝑥𝑒𝑚𝑝𝑡𝑖𝑜𝑛𝑠) ] denotes the Policy efficiency ratio and the term (𝐶𝑜𝑚𝑝𝑙𝑖𝑎𝑛𝑐𝑒 𝑙𝑒𝑣𝑒𝑙) denotes the Compliance efficiency ratio . 6.5 Our recommendation is for a single rate for both CGST and SGST and zero rate is applicable only for international exports. Therefore, the weighted average of statutory rates is equal to the single rate (standard rate) and accordingly, the ratio 𝑊𝑒𝑖𝑔
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1.00 K Amount of Exemption** Rs. in crs 206830 L Impact of exemption [K divided by (F+K)] Nos 0.062 M Policy Efficiency Ratio Nos 0.938 N Compliance Efficiency Ratio Nos 0.84 *The estimates should be taken as approximates. **The exemptions relate only to exemptions for unprocessed food articles health services and education services. This does not include the impact of threshold exemption 6.6 Similarly, the flawless GST recommended by us envisages very limited number of exemptions. These are essentially restricted to food, education and health services, the threshold exemption for registration of small dealers and public administration. As regards the threshold exemption for registration of small dealers, it has both a positive and a negative impact on revenues. To the extent sales by unregistered 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
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is aligned to the international norm, the revenue neutral rate (RNR) would be substantially higher than the 11 percent estimated by us. In this context it would be useful to point out that given the deficiencies in the VRR as a measure of the revenue performance of VAT, it is difficult to draw typical profiles for efficient and inefficient countries in the collection of VAT revenues on the basis of this VRR. Since the VRR depends upon a number of factors, there is considerable variation in the VAT Revenue Ratio across countries. Therefore, it is best to use VRR as a tool to measure a single country s performance over a number of years rather than as a tool for comparison across countries. Nevertheless, 5 countries (i.e. Korea, Japan, Switzerland, Luxemburg and New Zealand) from amongst 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 (an
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he VRR for central taxes on goods and services is estimated to be 0.2352. 6.10 Given this estimate of an extremely low VRR, it is not surprising that the estimate of the GST Base by both Central Government and State Governments on the basis of the existing revenues is extremely low. As is well known, the existing tax structure is riddled with a plethora of incentives and multiple rates. Therefore, the Policy efficiency ratio is extremely low. Once these policy deficiencies are removed the VRR would automatically increase to a substantially higher level of 0.76. The purpose of introducing the flawless GST is precisely to achieve this policy objective. Our calculation of the VRR of the flawless GST is based on the existing level of compliance and not on the basis of any increase 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 eliminat
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s and turnover tax on domestic goods and services have enormous cascading effects, leading to a distorted structure of production, consumption and exports. The existing tax system introduces myriad distortions which favour some goods and services at the expense of others. These distortions yield inefficient resource allocation and consequently, inferior GDP growth. In India, the motivation underlying the hugely differentiated scheme of indirect taxation of production and sales that has evolved over the country s history was progressive and noble; the actual impact of such a structure is now widely acknowledged to be regressive, capricious, and sub optimal in terms of the efficiency of tax effort, leaving the door open for lobbyists and special pleading. The problem 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 servic
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, the failure to exempt all sales to business distorts decisions regarding choice of production methods, particularly decisions on vertical and horizontal integration and what inputs to produce or sell. Since the GST will be a tax on consumption, all stages of production and distribution will be mere pass-through. Therefore, there will be no tax incentive for vertical and horizontal integration. Third, the taxation of capital goods discourages savings and investment and retards productivity growth. The flawless GST envisages full and immediate credit for GST on capital goods (both buildings and plant and machinery), thereby fully eliminating the incidence of any indirect tax on the capital goods. This enhances the productivity of capital and hence reduces 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 prin
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the country- something which has eluded us since long. The size of the market will cease to be limited by tax considerations. Further, it will restore the comparative advantage of resource rich states and enable them to emerge as production hubs. Seventh, at present, the combined statutory rate of VAT is close to 22 per cent54. Further, this marginal rate is applied to a very narrow base on account of a plethora of exemptions. Since economic decisions and compliance behaviour are based on the marginal rate, the higher the rate the greater the distortion and evasion. This is further compounded by distortion in resource allocation on account of a plethora of exemptions. Since we have recommended a substantially lower, uniform, and combined single rate 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 managem
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l returns to capital would gain in the range of 0.37 and 0.74 percent. . 7.5 Further, the study also shows that implementation of GST across goods and services is expected, ceteris paribus, to provide gains to India s GDP somewhere within a range of 0.9 to 1.7 per cent. The corresponding change in absolute values of GDP over 2008-09 is expected to be between ₹ 42,789 crore and ₹ 83,899 crore, respectively. 7.6 These additional gains in GDP, originating from the GST reform, would be earned during all years in future over 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. 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 ₹ 1,469 thousand crores and 2,881 thousand crores. The corresponding dollar value
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tural resources based industries to locate in these states regardless of the fact that the consumer is located elsewhere. Another dynamic implication of the GST would be to generate greater employment as GST helps to increase labour intensive sectors. b. GST and International Trade 7.9 There are also benefits to foreign trade that can be reasonably expected. At present export of taxes to other countries is sought to be eliminated through the mechanism of duty draw back on the basis of estimated incidence of embedded taxes. This scheme is far from satisfactory. 7.10 Destination based taxation is a fundamental principle of a sound GST. It requires that exports from the taxing jurisdiction would be tax free by zero rating and imports into the jurisdiction 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 internatio
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od products except furniture; and cement. There are minor gains and losses in exports of other sectors. 7.13 The major import gaining sectors include leather and leather products; furniture and fixtures; agricultural sectors; coal and lignite; agricultural machinery; industrial machinery; other machinery; iron and steel; railway transport equipment; printing and publishing; and tobacco products. The moderate gainers include metal products; non-ferrous metals; and transport equipment other than railways. Imports are expected to decline in textiles and readymade garments; minerals other than coal, crude petroleum, gas and iron ore; and beverages. 7.14 In general, our imports are sourced from countries which effectively zero rate their exports. Further, India 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
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from GST. As a result primary food articles like rice and wheat would be exempt from GST (i.e. there will be no output tax). Hence, the tax incidence on such items of mass consumption will be limited to tax on inputs. Since expenditure on food constitutes a large proportion of the total consumption expenditure of the poor, the GST is designed as a pro-poor policy initiative. In any case, the poor will continue to have accessibility to these items at subsidised prices through the public distribution system. Therefore, the poor will not suffer any additional burden on their consumption of food items due to the implementation of GST. 7.17 Like food, basic health and education services are also intended to be fully exempt. As a result consumption of 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 se
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n the case of the rich, the poor will gain relatively more from large drop in prices. 7.20 The rural poor comprise essentially of small and marginal farmers and landless labourers. Similarly, the urban poor comprises of the unemployed. The implementation of GST will witness an increase in the real returns to land, labour and capital (as shown in the NCAER study). Therefore, the rural poor will also enjoy an increase in their income. Similarly, on account of increase in economic activity resulting in higher growth, there will be new opportunities for employment which will directly benefit the urban poor. 7.21 Further, in terms of the theory of optimal taxation, tax rates should not be uniform. They should, rather vary inversely with the elasticity 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 worl
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oor from the implementation of GST will therefore, flow from two sources: first through increase in the income levels and second through reduction in prices of goods consumed by them. The proposed switchover to the flawless GST should, therefore, be viewed as pro-poor and not regressive. Hence, the switchover will improve the vertical equity of the indirect tax system. 7.23 The switchover to GST also entails the taxation of all goods and services in the formal sector. To the extent purchases are made from the informal sector by producers in the formal sector, no input tax credit would be available. Consequently, the value addition in the informal sector on such inputs would be recaptured when used in the formal sector. Similarly, to the extent 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 bas
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otal output is relatively high in agricultural and services sectors. 7.26 Another factor that impacts the price levels refers to the quantum of intermediate input purchases from sectors under perfect competition versus imperfect competition. Relatively low proportions of intermediate inputs purchased by agriculture and service sectors (i.e. sectors under perfect competition) are sourced from manufacturing sectors and hence these sectors do not reap the benefit of relatively low cost inputs from manufacturing sectors. 7.27 Further, the terms of trade can also be expected to improve in favour of agriculture vis-a-vis manufactured goods. The prices of agricultural goods would increase between 0.61 and 1.18 percent whereas the overall prices 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
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consumption basket of the poor. However this argument rests on the foundation that the relative size of the formal and informal economies is exogenous to the tax structure in place. In India, the implementation of VAT is in fact expected to reduce the size of the informal economy relative to the formal economy by moving producers who choose to remain in the informal sector for tax avoidance reasons, incentivized by the size biased nature of indirect tax exemptions in the historic regime of taxation of domestic goods and services. When this is taken into account the welfare effects of GST can, in fact, be expected to be positive. 7.30 This highlights the fact that a GST based reform of the present indirect tax system can be expected 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 pro
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t is expected that there would be a net gain in the tax revenues. This should enable the Central Government to better manage its finances. 7.33 As regards the State Governments, the design and the road map of the GST recommended by us would lead to substantial gain in revenues. While the revenue neutral rate for the States is estimated to be 6 percent, we have recommended that the states should be allowed to impose GST at the rate of 7 percent. An increase in the RNR of the States by 1 percent implies a revenue gain of ₹ 31381 crores per annum in the base year 2007-08 (i.e. 16.67 percent increase in the revenues from the TF- taxes ). If the States decide to phase out the stamp duty over a period of three years, the revenues 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 ₹ 70,000 crores (excluding the incentive amount).
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to the retail stage and to this extent there will be an expansion in its taxing powers. This increase will be limited to about 12 percent of the GDP (assuming a retail margin of 25 percent on manufacturing value). In addition, the Centre will also acquire the power to tax land /real estate transaction which would account for an estimated 10 percent of GDP. Since the expansion in the power of the States is significantly larger than the Centre, the proposed GS T will alter the balance of power in favour of the states thereby reducing the vertical imbalance. 7.37 To conclude, the implications of a switch over to the flawless GST recommended by us are indeed far-reaching. Every stakeholder stands to gain. This has the potential 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
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ic distortions, create negative externalities, or impose higher compliance and enforcement burden. 8.4 In general, the States would like to have some degree of control to design the base and set the rates as an instrument to promote various social and economic policy objectives. However, cross-country experience shows that there is complete disillusionment with the use of the tax system as a tool to promote various social and economic objectives by allowing exemptions and incentives. Therefore, tax reforms undertaken across countries since the mid-1980 have focussed on re-designing the tax system so as to restrict its role to revenue collection. There is almost unanimity amongst fiscal experts on 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 o
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et the rates and the flexibility to use the tax system as a tool for achieving various social and economic objectives. In the context of the federal structure of India, what is relevant is overall fiscal autonomy rather than tax autonomy per se. Since States would continue to have the full freedom to promote various social and economic objectives through direct transfers, effectively, there would be no loss of fiscal autonomy of the States. 8.7 The design of the flawless GST, as recommended by us in the preceding Chapters, is essentially an attempt at absolute harmonization of the tax base, tax rates and tax infrastructure(i.e. the administration and compliance system) across Centre and all 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
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n system, taxpayer identification numbers, tax forms, tax reporting periods and procedures, invoice requirements, cross-border trade information systems and IT systems. Harmonization of these elements would result in significant savings in costs of implementing the GST (by avoiding duplication of effort in each government), as well as recurring savings in compliance costs. Harmonization would also permit exchange of information between different levels of Government so as to enable effective monitoring of cross-border transactions. A common tax identifier number across states and the Central government is a key element in the efficient exchange of information. 8.10 Harmonization of the GST 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
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ented by both the Centre and the States. 8.12 In view of the above, we recommend that 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. 8.13 The Council should be responsible for any modification in the initial design of the dual GST and regulating the indirect tax system in the country. The initial design of the dual GST should be approved by the Chairman and three-fourth of the State Finance Ministers. 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 i
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States to adopt GST 9.1 The movement from sales tax to VAT at the state level entailed the adoption of uniform RNR rate by all states. The RNR rate is the weighted average of rates across states. Since there was no significant expansion in the base, it implied that states with average weighted rate higher than the RNR would lose revenue while those below it would gain revenue. Hence, the States demanded compensation for adopting VAT. The States have now also demanded compensation for any loss which might be incurred as a result of the shift from the existing indirect tax system at the state level to the GST level. 9.2 States have expressed concern that the RNR for State GST may 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 calc
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itive externalities. 9.5 Some States have expressed their lack of confidence in the existing compensation arrangement for revenue loss to the States. It has been suggested that the compensation mechanism, to be credible, must be administered by a body independent of the Finance Ministry in which the State Governments have a say in governance. The suggestion merits consideration. 9.6 Therefore, 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 ₹ 6000 crores per annum over the next five years (i.e. a total amount of ₹ 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 reve
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l serve as an incentive for the states to adopt the flawless GST and also ensure that the payment for compensation, if any, is legitimate and transparent. 9.8 One of the lessons drawn from the implementation of VAT at the State-level is the frequent tendency by the States to deviate from the collectively agreed position relating to the base and the rates. This creates significant tax induced distortions in economic behaviour across states. Further, as stated earlier, it also creates negative externalities. Therefore, it is imperative to establish a mechanism whereby the defaulting state is made liable to pay for the negative externalities. Accordingly, 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
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ted international experience is costly and should, therefore, be avoided. Inspite of such prolonged period of discussion, the state VAT regime in the last four years has witnessed many States deviating from the classification and the rates agreed upon in the White Paper of the Empowered Committee, released in January, 2005. 10.2 Similarly, the discussions on the introduction of a comprehensive dual GST, both at the Centre and State level, have been in progress since early 2006. It is unfortunate that no agreement on the GST has yet been reached even though the target date for its introduction i.e., 1st April, 2010, is less than six months. 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
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ngaged in the process of designing the GST, the Council should approve the draft of the amendment to the Constitution to the effect that the Centre and the States shall exercise concurrent jurisdiction to subject all goods and services (other than SIN-goods) to a consumption type value added tax based on destination principle where exports will be zero rated and all imports will be subject to the levy like any other goods and services domestically produced and consumed. Further, it should also provide that the base for the levy should be common for both the Centre and the States and there would be a legislated agreement amongst the 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 GS
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ttee to subsume the EC-taxes 59 only. One of the main elements of the flawless GST recommended by us is that all taxes on goods and services, levied by the Centre or the States, should be subsumed in the GST. Therefore, we have recommended that the following other taxes levied by the States on goods and services should also be subsumed: a. Stamp duty; b. Taxes on Vehicles; c. Taxes on Goods and Passengers; and d. Taxes and duties on electricity. 10.8 There is also a view amongst States that while they agree that these taxes should eventually be subsumed, they would like to gradually move in that direction rather than 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
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corresponding SGST rate should be 7 percent; and ii. Transactions in immoveable property (i.e real estate and housing services) should be brought within the fold of GST; and iii. Stamp duty may not be subsumed but the rate of stamp duty in all states should be calibrated so as not to exceed 4 percent. As a result, transactions in real estate will be subject to a dual levy like in the case of SIN-goods; b) In the year 2011-12, same as (a) above, with the modification that the rate of stamp duty should be reduced to 2 percent; and c) In the year 2012-13, same as (a) above, with the modification that- 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
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of 1st October, 2010 for rolling out GST. Given the strategic importance of this game-changing reforms, the country can little afford any delay. Chapter-XI Conclusion 11.1 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. It is well recognised that this problem can be effectively addressed by shifting the tax burden from production and trade to final consumption. A well designed destination-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 t
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sumption type destination VAT based on invoice-credit method. It provides for a comprehensive base including financial services and immovable property. To the extent there are exemptions, albeit limited to items covered for distribution through the public distribution system, and health and education services, the purity of the GST is diluted. A threshold exemption of ₹ 10 lakh has also been provided for small businesses. Imports into the country are proposed to be taxed in the same manner as domestically produced goods. Like intermediate inputs, full and immediate 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
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for distribution between the States on the basis of the same formula applicable for tax devolution to the States. 11.6 The implications for fiscal management are far-reaching. It will significantly improve fiscal management through higher tax buoyancy. While the RNR for State level TF- taxes (including Stamp duty) is only 6 percent, we have allowed them a higher rate of 7 percent along with the flexibility to phase out the stamp duty over a period of next three years. This has the potential to increase the combined tax revenues of States by an estimated amount of ₹ 70,000 crores. In addition, we have also recommended that the States should be provided with an additional ₹ 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 ₹ 100,000 crores63. 11.7 We recognise that the levy will be imposed and enforced by a large number of Governments. Therefore,
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nsiderably eroded on account of the proposed continuation of the exemptions. We are also given to understand that the Empowered Committee is considering a two rate structure for general goods and services (other than high value goods).The design of the GST as envisaged by the Empowered Committee is, therefore, a significant dilution of the flawless GST. Consequently, the potential economic benefits from a switch over to the flawless GST, which we have discussed in the foregoing chapter, would not be realised. 11.9 We have recommended that the implementation of the 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
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t in this endeavour. Annexures Treatment of immovable properties under Goods and Services Tax The case for including the real estate sector in the tax base for the GST rests on a number of competing reasons. Firstly, the construction and exploitation of real estate comprises one of the larger sources of gross domestic product. Therefore, any exclusion of the real estate sector would lead to significant reduction in the tax base. This would lead to an increase in the GST rate for other sectors thereby distorting economic efficiency and incentive for compliance. 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 lev
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mmovable property transaction are high. Therefore, the effective rate on value addition is exorbitant, thereby encouraging under- reporting of transactional value and evasion of stamp duty. Since stamp duties are directly or indirectly related to other taxes, any stamp duty evasion triggers a similar adverse response to compliance with other taxes. As with other transaction taxes, it generates a bias in favour of not selling, 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. 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 governmen
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in their role as occupier consumers. Therefore, the purchaser of an immovable property could use the housing services produced from ownership either for self-consumption or for sale by renting out the property. The VAT consequences of these events are as follows. On purchase of a bundle of housing services in the form of dwelling, the registered taxpayer pays tax on the purchase price, but at the same time, he is entitled to a tax credit (and refund, if due) for the same amount. If he sells the housing services to lessee, he would have to charge 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
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sive taxation method or one of the two variants of the exemption method. The treatment of transactions in immovable property and real estate/housing services under the three methods is summarised in the Table below. Table VAT treatment of immovable property under two approaches Nature of transaction Comprehensive taxation Exemption method (variant-A) (variant-B) A. Existing residential property stock i. Sale ii. Rental charges iii. Imputed rental values iv. Alteration and maintenance T T E T 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 E T C. Existing commercial property stock i. Sale ii. Rental charges iii. Imputed rental values iv. Alteration and maintenance T T 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 T T E T T T E E T T T T E
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greater than the VAT on resale value, the excess is ignored and no refund for such excess is allowed. As a result, VAT is payable on the margin earned on sale of the property i.e., the difference between the sale price and the cost of procurement and improvements thereto. It applies only 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 entail
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hereby most small landlords would remain exempt. Secondly, application of tax on resale of dwellings would require the owners to keep track of input taxes paid on the acquisition of the dwellings, on improvements undertaken over the period of their ownership and input credit availed against 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 inflatio
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perty VAT is realised on the full resale value and input credit for tax paid on construction/purchase of the property is allowed as a set off. If the input credit is greater than the VAT on resale value, the excess is ignored and no refund for such excess is allowed. As a result, like 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 befor
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e between residential and commercial properties. The commercial properties are treated in the same manner as under the comprehensive taxation method. In the case of residential properties, VAT is levied at the time of construction/first sale of such properties which are constructed 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 betwee
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ation, monitoring of compliance and institutional mechanism for making any change in the initial design of the GST. References Ahmad, Ehtisham (2008): Tax Reforms and the Sequencing of Intergovernmental Reforms in China: Preconditions for a Xiaokang Society in Louo 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 Institu
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o Impost a General Consumption Tax in Developing Countries? ITP Paper 0602, International Tax Program, Institute for International Business, University of Toronto. and Pierre-Pascal Gendron (2007): The VAT in Developing and Transition 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
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nd Joseph E. Stiglitz (2005): On selective indirect tax reform in developing countries , Journal of Public Economics 89 (2005) 599-623, Ernst & Young (1998): Value Added Tax: A Study on the application 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 t
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elhi. (2008): Input-Output Transactions Table 2003-04 , Central Statistical Organisation, Ministry of Statistics & Programme Implementation, New Delhi. (2008): 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 Karnata
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esearch , IGIDR, Mumbai, 6 February. (2009b): GST for Accelerated Economic growth and Competitiveness , Special Address at 3rd National 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 i
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rnment of India. OECD (2004): Report on the Application of Consumption Taxes to the Trade in International Services and Intangibles , Centre for Tax policy and Administration, OECD. (2008): Revenue Statistics – Special Feature: Taxing Power of Sub-Central Governments (1965-2007), OECD (2008): Consumption Tax Trends , VAT/GST and Excise Rates, Trends and Administration Issues, OECD. 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 Workab
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c Affairs, Ministry of Finance, Government of India. 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. Rao, M. Govinda (1998): Model Statute for Value Added Sales Tax in India , New Delhi. (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. Shankar (2005): Thirty Years of Tax Reform in India , Economic and Political Weekly. Shome Parthasarthi (1992): Trends and Future Directions in Tax Policy Reforms: A Latin American Perspective , Bulletin for Internatio
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ctor, proceedings 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 ₹ 40 lakh is based on the consideration that dealers with turnover of ₹ 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,
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14 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 the
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nsactions 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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able. 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 category o
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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 exemption of the
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imated to be ₹ 18,89,096 crores( ₹ 1358344 crores plus ₹ 530752 crores) and the estimated potential base is ₹ 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 property i
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