Report of Task Force on Implementation of GST dated 15.12.2009
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Report of Task Force on Implementation of GST
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Report of the Task Force on Goods & Services Tax
Thirteenth Finance Commission
15th December, 2009
Task Force
Chairman
Arbind Modi, IRS Joint Secretary Department of Revenue
Members
V. Bhaskar, IAS Joint Secretary Thirteenth Finance Commission
B.S. Bhullar, IAS Joint Secretary Thirteenth Finance Commission
Dr Rathin Roy Economic Advisor Thirteenth Finance Commission
Dr Ajay Shah Senior Fellow National Institute of Public Finance and Policy
Dr. Kavita Rao, Senior Fellow National Institute of Public Finance and Policy
Ritvik Pandey, IAS Deputy Secretary Thirteenth Finance Commission
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kar and Shri Sushil Solanki for their comments and views on various aspects of our work.
Shri Satya Poddar was extremely helpful in providing us with all the intellectual resources and framing the issues on various aspects of the Goods and Services Tax. He was extremely generous with his time and resources in making numerous presentations to the Task Force on various design and implementation issues relating to GST. We would like to convey our sincere thanks to him.
We are also grateful to Dr. Asim Dasgupta, Shri Satish Chandra and other officials in the Empowered Committee of State Finance Ministers and other officials of various State Governments.
This Report could not have been completed without the assistance of Shri K. Ravi, Smt. Geetha Govind and Shri Ranjan Giri. We would like to place on record our deep appreciation of their painstaking and continued support through this period of 18 months.
Contents
Executive Summaryi
CHAPTER – I1
Introduction1
CHAPTER-II4
Goods and Servic
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Rates 54
II.Determination of the rate of GST 60
a.Taxes to be subsumed in the GST 61
b.Estimation of the GST base 62
1. Subtractive – indirect method (SI method) 63
· Exempt sectors 71
· Taxable sectors 72
2. Consumption Method. 75
i. Task Force Estimate 75
ii. NCAER Estimate 78
3. Shome Index Method 80
4. Revenue Method. 82
C.The Revenue Neutral Rate(RNR) 85
Chapter -VI 87
RevenuePerformance of GST 87
CHAPTER- VII 92
Implications of the Goods and Services Tax 92
a.GST and economic growth 92
b.GST and International Trade 96
C.GST: Equity and Poverty reduction 97
d.GST and Prices. 100
e.GST and informal sector. 101
f.GST and Fiscal management 102
g.GST and vertical balance of power 103
CHAPTER- VIII. 104
“Flawless” Goods and Services Tax and the autonomy of States 104
Report of the Task Force on Goods and Services Tax Thirteenth Finance Commission
CHAPTER – IX109
Incentivising States to adopt GST109
CHAPTER – X112
Goods and Services Tax – The way forward112
Chapter-XI117
Conclus
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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.
(Para 2.2)
3. The 'flawless' GST recommended by us comprises of the following elements:
i. It should be a dual levy imposed concurrently by the Centre and the States, but independently to promote cooperative federalism. (Para 2.4)
ii. Both the Central Goods and Services Tax (CGST) and the State Goods and Services Tax (SGST) should be levied on a common and identical base. (Para 2.4)
iii. The Centre and the States should adopt a consumption-type GST1, that is, there should be no distinction between raw materials and capital goods in allowing input tax credit. (Para 2.7)
1 Reference to GST in this Report includes both CGST and SGST
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ugh, 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 SGST are to be treated separately, taxes paid against the CGST should be allowed to be taken as input tax credit (ITC) for the CGST and could be utilized only against the payment of CGST. The same principle will be applicable for the SGST. Cross utilization of ITC between the CGST and the SGST should not be allowed. (Para 2.16)
ix. 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. Similarly, any kind of transfer of the capital goods at a later stage should also attract GST liability like all other goods an
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e 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. However, industrial fuels should be subjected only to GST (both Central and State) with the benefit of input credit like any other intermediate good.
(Paras 2.27 to 2.32)
xii. all inter-state transactions in goods and services should be effectively zero rated by adopting the Modified Bank Model. (Paras 3.1 to 3.19)
xiii. the consignment sales and branch transfers across states should be subject to treatment in the same manner as if it was a inter-state transaction in the nature of sale between two independent dealers. (Para 3.20)
Execut
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manufacturers/dealers, limit competitive distortions and avoid inequities. Further, the threshold exemption limit should be uniform for both CGST and SGST and across States. (Paras 2.61 and 2.62)
xvi. Further, with a view to reduce administrative and compliance burden, small dealers with annual aggregate turnover of goods and services between Rs.10 lakh to Rs.40 lakh2 may be allowed to opt for a compounded levy of one percent, each towards CGST and SGST. However, no input credit should be allowed against the compounded levy or purchases made from exempt dealers.
(Para 2.63)
xvii. 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 wit
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spect 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, respectively. In addition, there should be a zero rate_applicable to all go
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nce all taxes on goods and services, levied by the Centre or the States, should be subsumed in the GST, the following other taxes levied by the States on goods and services should also be subsumed:
i. Stamp duty;
ii. Taxes on Vehicles;
iii. Taxes on Goods and Passengers; and
(Para 2.11)
iv. Taxes and duties on electricity.
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. (Pa
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ral and State Governments would have concurrent jurisdiction. The tax regime for the transport equipments and transport services should be the same as in the case of any other normal goods.
(Para 2.38)
6. The consumption of financial services should be comprehensively taxed under the GST framework on the basis of the full taxation method. (Paras 2.39 to 2.41)
7. The real estate sector should be integrated into the GST framework by subsuming the stamp duty on immovable properties levied by the States to facilitate input credit and eliminate cascading effect. The new GST regime for immovable property transactions and real estate services should be designed on the lines of the comprehensive taxation method. Therefore, the new regime would comprise of the following elements: –
a. The GST should apply for all newly constructed property (both residential and commercial). If it is self-used by the person who constructed it, the GST should be applied on the cost of construction. If it is s
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be levied on the resale value and input tax credit should be allowed in respect of the GST paid upon construction or purchase of the property after making adjustment for inflation. If the property has been acquired by the seller before the introduction of GST, the GST should be levied on the difference between the sale price and the cost of acquisition and improvements thereto. In such cases, no input tax credit would be allowed.
c. The adjustment for inflation may be made on the basis of the same inflation index as provided for the purposes of determination of capital gains under the Income-tax Act, 1961.
d. The new regime will also be subject to the threshold exemption of Rs.10,00,000/- for small businesses thereby eliminating the problem of excessively large number of landlords seeking GST registration.
e. Immovable property will also include land and, therefore, the new regime will also be applicable to land transactions. However, where land is used for construction of a propert
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t greater transparency through market mechanism, it will also strike a major blow to the underground economy. Therefore, it is imperative that the reform of the present system of taxation of immovable property transaction and real estate services forms an integral part of the proposed GST design. (Paras 2.42 to 2.48)
8. In the context of the GST, it is necessary to resolve the problem relating to the treatment of inter-state sales/transfers in a manner that the incidence of the tax falls on the consumption of commodities without any distortionary cascading effect and the revenue accrues to the State where the final consumer is located. After analysing the various Models, we recommend a Modified Bank Model, which comprises, inter alia, of the following functional components :-
(i) In the course of inter-state B2B supply, the seller in the origin State shall collect the SGST leviable on the transaction from the buyer in the destination State as if the sale was within the origin State.
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e end of the month to which the sale transactions relate.
(vi)
The Central Government and State Governments shall jointly identify a nodal bank to receive the collection of CGST and SGST by collecting banks. The nodal bank will also receive all information relating to purchase and sale by registered dealers.
(vii)The nodal bank shall host the IT infrastructure, provide payment gateway to all banks in India and provide screen-based upload or file upload facility for receiving payment and transaction information.
(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 transactio
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ce 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. The Central Board of Excise & Customs (CBEC) shall be responsible for implementing the CGST and the State Tax administrations will be separately responsible for implementing the SGST. The various tax administrative functions such as assessment, enforcement, scrutiny and audit should be undertaken by the CBEC in respect of the CGST and by the State tax administration in respect of the SGST subject to our recommendation on small-scale industries. However, from a taxpayer's perspective all compliance and enforcement procedures under CGST and SGST should be uniform. The Central Government shall establish a common IT infrastructure which will serve the needs of both CGST and SGST.
(Para 4
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d should be self-generated after obtaining a PAN. (Para 4.4)
12. The unit of taxation for the purposes of GST should be persons as defined under the Income Tax Act. Consequently, for the purposes of CGST, all production units/branches of a person located anywhere in the country will be treated as a single taxable entity eligible for CGST input credit across units/branches. Similarly, for the purposes of SGST, all production units/branches of a person located anywhere within the State will be treated as a single taxable entity eligible for SGST input credit across units/branches in that State.
13. The payment of tax and the transaction reporting should be made through a combined payment and transaction reporting statement in Form No. GST-I. This statement should detail all business to business transactions relating to sales. This statement should be common for both CGST and SGST compliance and it should be mandatory to file this statement electronically on a monthly basis while making
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imposing and enforcing the VAT. Therefore, it should be mandatory for a supplier making a taxable supply to another taxable person to provide a
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VAT invoice with that supply or the payment for it. The requirement should be enforceable by some penalty. The VAT invoice should be standardised across all states so as to contain a minimum of information about the supply being invoiced. (Para 4.6)
16. The choice of a single or a multiple VAT rates is extremely critical to the efficiency and performance of the GST. In terms of best international practice, recent experience shows that the preference of the policymakers is for adoption of a single rate as it is more efficient. Therefore, we recommend one positive rate, each for CGST and SGST on all goods and services. In addition, there should be a zero rate applicable to all goods and services exported out of the country.
(Para 5.9
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hest (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 use their average (Rs 31,25,325 crores) 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 tax base for calculating the RNR for both levies.
(Paras 5.22 to 5.75)
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19. Given the estimate of the GST Base and the level of central taxes which are intended to be subsumed in the GST, we estimate the RNR for the CGST at 5.0 percent. Similarly, the RNR in respect of the state level TF-taxes which are proposed to be subsumed in the SGST is estimated to be 6.0 percent. Therefore, the combined RNR is estimated to be 11 percent. Incidentally, this estimate is the same as estimat
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t;
iii. The formula should be based on the recommendations of the State Finance Commission.
iv. Pending Constitutional Amendment, the collection from 7 percent SGST shall accrue to the State Government and devolution to the third-tier Government should continue to be made on the basis of the recommendations of the State Finance Commission.
V. Both the Central and the State Governments may continue to levy taxes, in addition to the CGST and SGST, on the various non-SIN goods as at present.
(Paras 5.76 to 5.79)
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20. 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. 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 conse
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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. land, labour and capital. The gains in real returns to land range between 0.42 and 0.82 per cent. Wage rate gains vary between 0.68 and 1.33 per cent. The real returns to capital would gain in the range of 0.37 and 0.74 percent.' 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 Rs. 42,789 crore and Rs. 83,899 crore, respectively. (Paras 7.1 to 7.5)
21. 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 other
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on 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 indirect tax system. Similarly, to the extent it will impose a higher burden on the informal economy by reducing the cascading effect, the switchover will also improve horizontal equity. (Para 7.22 and Para 7.29)
24. Prices of agricultural commodities and services are expected to rise. Most of the manufactured goods would be available at relatively low prices especially textiles and readymade garments. 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. Th
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, 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, there will be an increase in the budgetary outgo. Given the smallness of the size of the compensation, it is expected that there would be a net gain in the tax revenues. This should enable the Central Government to better manage its finances.
(Para 7.31 and 7.32)
26. As regards the State Governments, in the first year of implementation of GST and phasing out of the Stamp duty, the States should expect additional revenues to the extent of Rs 70,000 crores (excluding the incentive amount). However, in the subsequent years this gain would diminish on account
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Report of the Task Force on Goods and Services Tax Thirteenth Finance Commission
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. Thereafter, any change in the structure of the GST (both base and the rates) should be allowed to be carried out only if the Chairman and two-thirds of the State Finance Ministers agree to do so. Consequently, neither the Centre nor any State will have the authority to unilaterally make any change in the agreed design of the GST. However, in the event of a crisis, the Member State or the Centre may take immediate steps to impose a surcharge subje
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ss 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;
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c. The balance, if any remaining at the end of the fifth year, to be distributed amongst the states on the basis of the same formula used for distributing resources in the divisible pool.
iv) The amount will be transferred in quarterly instalments.
v) The amounts shall be disbursed by the Council on the basis of the recommendations by a three member Compensation Committee comprising of the Secretary, Department of Revenue, Government of India, Secretary to the Council and any fiscal expert appointed by the Central Government for this purpose.
vi) No contribution to the Fund shall be made by the Central Government in any year in which the States fail to adhere to the roadmap for implementation of the GST.
vii) The methodology to be used
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levied at the State and sub-national level should be subsumed in the SGST. However, if for some political
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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 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
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ort 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 destination-based value added tax on all goods and services is the most elegant method
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itch over from the cascading type sales tax to a partial VAT regime which was eventually introduced with effect from the 1st April, 20056. The VAT has two basic rates of 4 percent and 12.5 percent. There is an exempted category and a special rate of 1 percent for a few selected items. The items of basic necessities and goods of local importance are put under the exempted category. Special rate of 1 percent is applicable for Gold, silver and precious stones. The 4 per cent rate applies to other essential items and industrial inputs. The 12.5 percent is residual rate of VAT applicable to commodities not covered by other schedules. There is also a category with 20 percent floor rate of tax, but the commodities listed in this schedule will not be subjected to VAT. This category covers 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. There
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Haryana was the first State to introduce the partial VAT regime in 2003.
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Report of the Task Force on Goods and Services Tax Thirteenth Finance Commission
1.5 The Thirteenth Finance Commission has been mandated to make recommendations after considering the impact of the proposed implementation of the GST with effect from the 1st April, 2010 including its impact on foreign trade. For this purpose, it is necessary to know the structure of the Goods and Services Tax which will be in place. The authority to design the structure of the GST Model jointly vests in the Empowered Committee of States' Finance Ministers and the Central Government. The Empowered Committee brought out its preliminary views on the design of the GST in a paper' 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 c
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nstruct a comprehensive Model in the light of the roadmap prepared by EC, the views expressed by the Central Government, the ongoing discussion on unresolved issues and best international practice. Therefore, the Group seeks to design the Model in such manner as 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.
2.2 With a view to attaining the objectives set out above, we recommend a VAT type Goods and Services Tax (GST). In the context of the design of the GST, some of the important issues are discussed in the following paragraphs.
a. Single GST versus Dual GST
2.3 In a federal country like India where the power to tax domestic trade is divided between the Centra
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(UTs) [hereinafter referred to as SGST].
(b) Both the CGST and SGST will operate over a common base. That is, the base will be identical.
b. Type of GST – Consumption, income or production
2.5 There are three possible variants of VAT, depending upon what macro-aggregate the government wants to tax: gross income, net income or consumption. A gross product type VAT treats both consumption and capital formation as final uses of the good; hence capital goods purchased by the dealer would not be treated as inputs. Input tax credit will not be available on taxes paid on capital goods. A income type VAT would give credit for tax paid on current inputs and tax paid on capital goods to the extent attributable to depreciation of capital goods, in any given year. Credit for tax on capital goods will therefore be spread over the life of the capital good. A consumption type VAT goes a step further in that only final consumption is treated as the final use of a good; full credit, therefore, is g
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erspective, both the income and gross product VAT have an anti-investment bias. This is all the more significant in countries that impose substantial income taxes. An income tax taxes saved income and hence investment twice-one as the income is being earned and again as the rewards for saving appear as interest and profit, which are again taxed. Since income tax is fairly well established in India, we recommend that-
(a) The Centre and the States should adopt a consumption type GST, i.e. there should be no distinction between raw materials and capital goods in allowing GST credit. Only this GST variant is equivalent to a retail sales tax.
(b) The tax base of both CGST and SGST should comprehensively extend over all goods and services going up to the final consumer (retail level), reflecting the tax base of a typical consumption VAT.
(c) Since the tax base will extend to all goods and services, no distinction will be maintained between goods and services. A registered dealer will be
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d to be made between goods and services. Therefore, the issue relating to separate taxation of
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services does not arise. Fourthly, under the GST regime, it is not necessary for the assessing officer to know what he should be taxing. The design should be so structured that he would need to know that all supply transactions will attract GST except those prescribed. Since the negative list is intended to be a very small list, it would not be difficult for him to administer. In the case of a positive list, the assessing officer must familiarize himself with a much longer list and any gap in his knowledge base could lead to erroneous judgement. Therefore, we are not inclined to agree with the view of the Department of Revenue officials that the taxation of services should be based on a positive list. Accordingly, we recommend that all goods and services should be subject to tax other than those specified in
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ld not be subsumed under the GST.
9 In general, these principles are consistent with the principles laid down by the EC in their Discussion Paper dated 30th April, 2008.
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2.11 Based on the aforesaid principles, we recommend the following :-
a. The following central taxes should be subsumed in the CGST10:
1. Central Excise Duty (including Additional Excise Duties);
2. Service Tax;
3. Additional Customs Duty (commonly referred to as 'CVD');
4. Surcharges and all cesses
b. The following State level taxes, as also recommended by the Empowered Committee (EC) in its discussion paper dated 30th April, 2008, should be subsumed in the SGST :-
i. VAT/Sales Tax (including Central Sales Tax and Purchase tax11);
ii. Entertainment tax (other than levied by local bodies);
iii. Entry taxes not in lieu of Octroi;
iv. Other Taxes and Duties (includes Luxury Tax, Taxes on lottery, betting and gambling, and all
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nd (iv) Taxes and Duties on electricity.
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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
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e by all States other than Maharashtra.
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a. the GST should be structured on the destination principle. As a result, the tax base will shift from production to consumption whereby imports will be liable to tax and exports will be relieved of the burden of goods and service tax. Consequently, revenues will accrue to the State in which the consumption takes place or is deemed to take place;
b. international exports should be zero rated;
c. international imports should be subject to both CGST and SGST at the time of importation irrespective of whether or not the imported goods are produced domestically;
d. SGST on B2B imports should be collected by the same 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 th
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icable VAT rate to the difference between his total sales (inclusive of the VAT element in his sales price)
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and his total purchases (inclusive of the VAT element in his purchase price). Hence, unlike the credit method, the amount of VAT connected with a taxable transaction is not required to be explicitly stated on the associated invoice.
2.15 The credit method therefore, is more transparent, whereby the effective tax rate on any commodity is easily identifiable as the rate applicable to the last transaction in that commodity. In the case of the subtraction method, the rate of VAT is not separately indicated and to this extent there is a loss of transparency. Further, since the effective rate under the subtraction method is a weighted 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 need
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licable for the SGST.
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V. Cross utilization of ITC between the CGST and the SGST should not be allowed.
e. Treatment of capital goods
2.17 In the past, a number of countries, introduced accelerated depreciation or investment allowance to compensate for domestic trade taxes paid on capital goods. With the gradual introduction of VAT and the feasibility of extending credit for VAT on fixed assets,14 depreciation rates were rationalised. Later in some countries, VAT was used to slow down the development of capital intensive production processes. To this end, they disallowed the credit for the VAT on fixed assets (defined as all assets which are subject to depreciation) and non-material assets, like technical know-how. The case for allowing full and immediate credit for the VAT on capital goods rests on several arguments:
1. Depending on the capital intensity of the production process, the VAT on fixed
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applied against VAT on future sales. Further, in the face of inflation, the real value of the tax credits carried forward declines rapidly becoming equivalent in effect to a tax on fixed assets. Any denial of full and immediate credit for the VAT on capital goods violates the neutrality of VAT.
2.18 Therefore, in recent years, most countries have introduced a full and immediate credit for the VAT on capital goods applied for the purpose of registered businesses. Under the Central Excise Act, credit for CENVAT paid on capital goods or CVD on imported capital goods is spread over two years resulting in the kind of distortions discussed above. The rationale for this spread over is essentially loss in revenues. The estimated total credit for CENVAT paid on capital goods and CVD on imported capital goods in 2002-03 was Rs. 8,500 crore and could be expected to increase to about Rs. 9,000 crore in 2004-05
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the tax, but all his purchases including capital goods are taxed. Exemption will therefore increase the amount of tax finally paid on intermediate goods-the opposite effect that the exemption was supposed
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to provide. In the case of final goods, exemption eliminates the tax on value added in the final stage only. In other words, if a commodity is exempt only at the retail level, then only the retail level is freed of VAT. Although the retailer would not charge VAT on its sale, the retailer would not be entitled to a credit for tax paid on the purchase of an exempt item. If a commodity or service is zero rated, the zero rated trader's value added is not taxed and the trader receives a credit for the tax paid on the purchase of materials and other inputs used. Zero rating, in theory, is the only way to ensure that a product is truly free of VAT, since any tax paid would be credited on the last sale. The
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ating procedure can be onerous. Zero-rating implies build up or payout of refunds, which may entail huge administrative costs, requiring verification and disbursement of refund cheques. Furthermore, there is the issue of controlling evasion or fraud. Zero rating creates an incentive for sellers to exaggerate the values of their final sales and to correspondingly inflate the value of taxable inputs purchases, in order to avail themselves of the refund of a
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larger input tax element. The resources needed to cross-check such claims can impose additional and perhaps unsustainable demands on prevailing systems.
2.22 Further, tax exemptions are economically inefficient, inequitable, lead to revenue loss, breed rent-seeking behaviour, increase compliance cost and enhance administrative burden. The case for tax incentives is further weakened in the existing tax regime of moderate tax rates.
2.23 In general,
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exempt because of the threshold exemption for dealer registration. A lower rate for food in contrast to the relatively high standard rate would mean a two rate structure and gradual expansion of the lower rate category as is the international experience. As a compromise, we recommend that any food item which is covered under the public distribution system should be exempt regardless of the outlet through which it is sold. This principle may be applied to other non-food items also.
2.24 In the case of health services, there are two approaches. The first approach is the full taxation model whereby the health services form part of the comprehensive GST base. As a result, there is effectively zero tax liability in the case of publicly funded subsidised
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health care facilities since input tax credit will be more than the output tax. As regards, health care availed in other health care facilities covered b
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the choice may be made keeping in view the considerations discussed above.
2.25 The considerations discussed in the context of health services similarly apply to education services except that these services are not covered by insurance. In fact, the problem is more complex since the sector is more diverse covering child care facilities, formal education (both school and college levels), professional education, occupational programs, diploma programs and recreational programs. Therefore, defining educational services is more complex. However, given the multitude of schools and colleges in the country and the disproportionately large administrative burden, we recommend that the educational services may be exempted from the levy of GST and such exemption should be limited to formal education services provided by schools and colleges.
2.26 Keeping in view the above-mentioned economic and administrative implications of exemptions and zero rating, we summarize our recommendations on exemp
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hich is covered under the public distribution system should be exempt regardless of the outlet through which it is sold; and
iv. education services provided by non-Governmental schools and colleges; and
v. health services provided by non-Governmental agencies.
g. Treatment of petroleum products
2.27 One of the classes of products whose consumption needs to be checked to restrict negative externalities is petroleum products. The entire range of petroleum products is subject to multiple taxation at both the Central and State level. As a result, the incidence of tax on products essentially used as intermediate inputs cannot be estimated and leads to a cascading effect on downstream products. Consequently, it is necessary to rationalise the tax treatment of petroleum products.
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2.28 The petroleum products can essentially be classified into two categories: (i) industrial inputs or fuels such as crude o
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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 in the case of consumption of transportation fuels by the Ministry of Railways, the State Road Transport Corporations, the Airlines, truckers, taxi operators and a dealer16 trading in these goods on the consideration that the consumption is essentially intermediate in nature and the unlikelihood of these entities indulging in purchase of bogus invoices. However, in the case of truckers and taxi operators, the benefit of input tax credit has the potential of misuse and therefore credit may be allowed through the abatement mechanism only. Further, no input tax credit in respect of excise would be allowed to any other person. (
2.30 We also recommend that the industrial fuels should be subjected only to GST (both Central and State) with the benefit of input credit li
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redit 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. However, unlike petroleum products, natural gas does not generate negative externalities. Therefore, the tax regime for natural gas should be distinctively different from the regime applicable to petroleum products. Accordingly, natural gas should be subjected only to GST (both Central and State) with all the benefits of input credit as in the case of other normal goods. We recommend accordingly.
17 SIN-goods are goods whose consumption create negative externalities and for the purposes of this Report, collectively o
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milarly, 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 over which both the Central and State Governments would have concurrent jurisdiction.
(iii) The tax regime for the power sector should be the same as in the case of any other normal good.
18 The Task Force has not made any independent assessm
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rvices
2.37 Transport services, like most other services, is used both as intermediate input and in final consumption. Further, the transport equipments are also subject to multiple taxation at both Central and State level. The present regime leads to cascading effect of embedded taxes on the downstream industry which do not get rebated thereby leading to enhanced cost for such industries. Hence, it is imperative to rationalise the taxation regime for transport services.
2.38 Accordingly, we recommend the following:
(i) The tax on vehicles and the tax on goods and passengers levied by the 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 transpo
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ancial services as possible. It also encourage countries to consider compensatory taxes where an exemption must be provided and even additional ad hoc taxes for revenue purposes. Therefore, given the progressive nature of taxation of financial services and the distortionary impact of compensatory and ad hoc taxes, we recommend that the consumption of financial services should be comprehensively taxed under the GST framework.
2.40 We recognise that there are predominantly three alternative methods for levying GST on financial services: the exemption method, the zero rating method and the full taxation method. While the exemption method and the zero rating method reduces the 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
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onsumption expenditure. Therefore, the exemption of the housing sector from the GST base would distort the consumption pattern. Further, it would also undermine vertical equity in as much as consumption of housing services is relatively high in the case of the rich.
2.44 Thirdly, real estate is subject to multiple taxation at both levels of Government. At the Central Government level, there has been an attempt to introduce service tax on housing services and allow credit for inputs used for the supply of such services. However, at the State level input tax credit is not available for all taxes, thereby leading to significant cascading effect. Further, there is no incentive to the purchaser to obtain an invoice. Consequently, the audit trail of such 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 'sale
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in India, there is a strong tendency for this industry to remain outside the organised sector and consequently the regulatory framework. Therefore, it serves as a breeding ground for tax evasion and criminal activities.
2.46 Fourthly, rationalisation of the tax regime governing the real estate industry could yield numerous benefits: improve tax compliance in the property tax which is critical for the revenue base of local government, a reduced role for black money, and a reduced role for the criminal element in the real estate sector and significantly lowering of costs by mass housing.
2.47 Keeping in view the implications of the different methods for taxing real estate and housing services discussed in Annexe-I, we recommend the following strategy for integrating the real estate sector into the GST framework:
i. The stamp duty on immovable properties levied by the States should be subsumed in the GST to facilitate input credit and eliminate cascading effect.
ii. The new GST regime
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tenance. No input tax credit should be allowed in respect of tax paid on construction or acquisition of the property or tax paid on improvements thereto.
(c) All secondary market transactions in immovable properties (whether constructed before or after the introduction of GST) should be liable to GST. However, if the property has been constructed after the introduction of GST, the GST should be levied on the resale value and input tax credit should be allowed in respect of the GST paid upon construction or purchase of the property after making adjustment for inflation. If the property has been acquired by the seller before the introduction of GST, the GST should be levied on the difference between the sale price and the cost of acquisition and improvements thereto. In such cases, no input tax credit would be allowed.
(d) The adjustment for inflation may be made on the basis of the same inflation index as provided for the purposes of determination of capital gains under the Income-tax
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he imposition of large scale indirect taxes through registration and stamp duties constitutes a case of erroneous tax policy. Therefore, States may continue to levy a registration fee at a specific rate not exceeding Rs 1000 per transaction in immovable property, which is merely a user charge for the IT systems used in property registration.
2.48 The proposed new regime will lead to more efficient allocation of resources in as
much as it will be comprehensive in its scope for taxation of immovable property transactions and real estate services. It will be neutral between old and new properties, and
19 The increase in the value of land is attributable to the direct or indirect improvements in the form of development of townships, landscaping, and construction of infrastructure that make it usable for agricultural, industrial, or residential purposes. Raw land is similar to the minerals underneath, which are of little or no value unless they can be extracted for commercial/industrial
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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 the potential for creating an efficient secondary market in immovable property and real estate services which will facilitate better price discovery. The role of the underworld elements associated with this sector will be eliminated. Since the new regime will impart greater transparency through market mechanism, it will also strike a major blow to the underground economy. Therefore, it is imperative that the reform of the present system of taxation of immovable property transaction and real estate services forms an integral part of the proposed GST design.
n. Place of supply rules
2.49 The value added tax system is based on tax collection in a staged process, with successive taxpayers entitled to deduct input tax on purchases and account for output tax on sales. Each
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ch 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 duties, although in some countries collection is postponed until declared on the importer's next VAT return. Deduction of the VAT incurred at importation, in the same way as input tax deduction on domestic supply, ensures neutrality and no distortion of international trade. This implies that the total tax paid in relation to a commodity is determined by the rules applicable in the jurisdiction of its consumption and therefore all revenue accrues to the jurisdiction where the sale to the final customer occurs.
2.52 In the international trade in tangible goods, the place of taxation (or the place of supply) is the place of delivery, or shipment, of the goods to the recipient (buyer)
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er than directly trying to identify the
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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 determining the place of taxation (or place of supply) in the case of services is as follows :-
a) In the case of a sale of real property, the place of supply is the jurisdiction in which the property is located. Similarly, services directly connected with real property (i.e services provided by real estate agents or architects) are also taxed in the place in which the property is located.
b) In the case of mobile services (that is, passenger travel services, freight transportation services, telecommunication services, motor vehicles lease/rentals and E-commerce supplies), there is no fixed pla
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erefore, 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
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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 even such services to non-residents is zero-rated.
2.56 In addition to the above, there are a variety of other complex cross-border transactions for which supplementary rules are required to ensure uniformity and consistency across jurisdictions. They relate to global transactions(or master service agreements) for individual supplies to legal entities of a corporate group around the world, triangular transactions, supplies among branches and between branches and head office, and cost reimbursement/ a
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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 the services are performed. If there is no unique place of performance of the service, the place of supply could be defined
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as the State where the supplier's establishment most directly in negotiation with the recipient is located.
2.60 The rules relating to the place of supply of goods and services, discussed above, are in conformity with best international practice and expert advice. Therefore, we recommen
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untries, 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 the incidence of tax on the poor who generally make purchases of their goods and services from small dealers and secondly to reduce administrative burden of dealing with a multitude of small dealers who account for a dis-
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proportionately low share in the revenues. Hence, allowing some states to adopt a lower threshold implies
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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 Rs. 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 Rs.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 from the onerous compliance burden under the CENVAT regime particularly in the context that, in general, the small scale industries are managed by one or two entrepreneurs with the support of a handful of semi-skilled office staff.
20 The limit of Rs 40 lakh is based on the consideration that dealers with turnover of Rs 40 lakh or m
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industry in the new GST framework, we also recommend that the scrutiny/audit of the small scale industry should be conducted only by the state tax administration. However, the State tax administration may seek the assistance of the central tax administration or any other state tax administration if the operations of the small scale industry transcend the state boundaries. Since the CGST and the SGST are proposed 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-
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to fresh areas and the ones already in force should be extinguished when their applicability ends.”
2.70 Further, the existing exemption for Uttranchal and Himachal has been objected to by many States. In particular, Chief Ministers of Haryana, Uttar Pradesh and Punjab have often expressed their opposition to such exemptions as these had the effect of diverting industries to Himachal Pradesh and Uttranchal.
2.71 Para 3.3.2.(viii) of the draft of “An Approach to the 11th Five Year Plan” has 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 gi
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. Treatment of Special Economic Zones
2.75 Since the GST is designed to ensure that all producers and distributors are treated as complete pass- through and exports are zero-rated, there is no case for allowing any form of incentive to the developers of, or units in, the Special Economic Zones. We recommend accordingly.
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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
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de the state and is not a declared good, the transaction, by law attracts the rate applicable in the exporting state. If the rate applicable in the exporting state is less than the CST rate, the transaction is not required to be documented through the “C Form”. Since sales tax applies only when there is a sale, no tax is attracted when goods move from one state to another as transfer between branches of the same enterprise or on a 'consignment' basis.
3.3 The CST constitutes a distorting factor in the location of industries and the flow of internal trade, impeding the growth of a truly common market in the country. It also causes
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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. Similarl
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f inter-state trade have been analysed by the Group :-
i.Bank model
ii.TDS model
iii.SGST authority model
iv.CGST authority model
V.TINXSYS (De-matted C-form) model
vi.TINXSYS with reverse charge model
vii.Full De-mat model
viii.Inter-State De-mat model
ix.IGST model.
3.6 After a detailed analysis of the merits and demerits of all the models, the Group recognised that the success of every model depended on the following pre-requisites :-
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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, th
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remitted tax amount by the designated bank to the respective buying State.
d. Refund of input SGST by the selling state to the seller in the event of inter- state transactions
e. Allowance of Input tax credit to the buyer in the buying State to the extent of the SGST received by remittance and transfer of tax amount.
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3.9 The Bank Model was found to be more suitable Model, to monitor the interstate transactions of goods including stock transfer, on the following assumptions:
i. This model would ensure evasion free tax environment and easy administration of credit flow to the buyers in the buying States.
ii. This model envisages a level of automation that would ensure capturing all the information relating to interstate transactions in the exporting state and transferring the same to the importing state.
iii. This model requires the bank to evolve an IT infrastructure to communicate electronicall
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the Working Group. The IGST Model recommended by the Group, while requiring a IT and complex accounting infrastructure, would also require a separate legislation for levy of IGST on inter- state transactions. This will have to be similar to the present CST legislation. Further, the IGST Model envisages that the IGST may be paid either by using the CGST or the SGST. Similarly, credit for the IGST by the buyer can be claimed to make payment of either CGST or SGST. Rules would also be required to be framed for prioritising the set off against CGST, IGST and SGST. This implies a complex accounting of input tax credit and apportionment
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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 settleme
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r. This will ensure a self-adjustment mechanism for input credit thereby minimizing the need for issue of refunds.
(iv) The buyer in the destination State shall make use of the SGST so paid in the State of origin for making payment of output SGST in the destination State.
(v) All registered dealers across the country shall pay the sum due as CGST and SGST to the credit of the Central Government and all other States within one week from the end of the month to which the sale transactions relate.
(vi) The Central Government and State Governments shall jointly identify a nodal bank to receive the collection of CGST and SGST by collecting banks. The
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Report of the Task Force on Goods and Services Tax Thirteenth Finance Commission
nodal bank will also receive all information relating to purchase and sale by registered dealers.
(vii) The nodal bank shall host the IT infrastructure, provide payment gateway to all banks in India and provide screen-based upload or file upload facility
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any authorized bank.
(xi) The procedure for making payment of CGST and SGST and furnishing information relating to transactions of both purchases from and sales to registered dealers in Form No. GST-I shall be as under :-
(a) Seller will open Nodal Bank website or approach GST facilitation centre (which will provide Bank website access and also guide Seller) to submit Form No.GST-I. The Nodal Bank would only serve as the payment gateway to facilitate payment in any bank in which the dealer has an internet banking account.
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(b) Seller will enter his basic details such as his BIN, Name, Phone and email (Financial year will be current year by default and can be changed, date of deposit will be the current date) on Form No.GST-I.
(c) In case the number of Invoices for sale to registered dealers and purchases from registered dealers is less than 10, the Seller shall enter the details of such individual
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et banking website of the bank will be opened automatically and the Seller will have to enter his login and password relevant for internet banking to access his bank account. Then the total GST amount
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as per the challan will be debited to his account and credited to Government account by the bank.
(h) The bank will confirm to Nodal Bank details of successful deposit of GST amount to Government account.
(i) Nodal Bank, upon receipt of confirmation from bank of the GST payment by Seller, would generate the Form No. GST-I, which can be printed out by the Seller for his own record purposes.
(j) The Seller would issue an Invoice to the Buyer with details of the Invoice Number and the GST amount for that Invoice. The Buyer can verify if the GST amount has been credited to the Government by using the Seller BIN, Invoice number, date of invoice and Invoice Amount to verify the corresponding entry from the
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h Finance Commission
the destination State would not be dependent on any other State for collection of revenue.
(xv) There will be no requirement for the buyer to make pre-payment of taxes separately for each transaction in the destination State. It will also eliminate the problem of extensive documentation like the 'C' Form in the case of CST.
(xvi) Since every registered dealer would be required to furnish information relating to both the purchases and sales to registered dealers, this would enable automatic matching of input credit claims and identify all mismatches for follow up action. This will eliminate any possibility of fraudulent claim of input credit and evasion.
(xvii) The Nodal Bank should be paid on per transaction record basis and the entire cost should be borne by the Central Government.
(xviii) Further, in case of any default, the administrative responsibility and control over the collection and recovery of SGST should vest in the origin State.
3.13 As described
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visage the establishment of a clearing house mechanism. Therefore, the Model is also administratively efficient.
3.15 As stated above, the Bank Model was abandoned by the Working Group in view of an alarm set off by few States. In this context, it must be recognised that trade flow is, in general, a two way process between States. Buyers in the destination State have to pay tax to the sellers in the origin State in all cases. Therefore, if buyers in State 'A' have made payment to sellers in State 'B' and, therefore, certain amounts have become due to State 'A', there would be similar situations where sellers in State 'A' would be required to make good certain amounts to either State 'B' or any other State. Hence, it would result in almost no gain or loss to any State as they would mostly cancel each other over a period of time and over a number of transactions.21 The problem lies in the fact that the seller is allowed a float for a certain period before remitting the amounts to the de
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will be able to save resources since input credit mismatches will be automatically detected thereby significantly improving its effectivity. This Model
21 This may not apply to States which are net exporters. However, in the Modified Bank Model proposed by us, the input tax which would be required to be refunded by these States to the registered dealers within their jurisdiction on account of inter-state transactions would be required to be paid directly to the importing State and not to the dealer.
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does not require any separate clearing house mechanism as under the Bank Model. Under this Model, there is no possibility of default or failure on the part of the Sellers of the selling State to remit the SGST collected to the destination State since a single consolidated payment is required to be made in respect of all CGST and SGST liability.
3.17 In some quarters, doubts have been expressed about the
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ed 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 processing of returns (Form No GST-I), along the same lines as the CPC established by the Income tax Department at Bangalore. This will fully meet the challenge of issuing refunds.
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3.19 Another argument advanced against the Bank Model is that there is no international precedence (even in EU) in favour of adopting this model t
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. 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.
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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 the GST we are not embarking on an exercise of comprehensively designing all the elements of the tax administration. We intend to restrict our recommendations only to a few important issues.
4.3 a. Registration of taxpayers
Th
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Report of the Task Force on Goods and Services Tax Thirteenth Finance Commission
i. All persons with annual aggregate turnover of goods and services
exceeding Rs.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 States in which he operates.
iv.The registrant dealer should be required to furnish a form, only by way of information, indicating the registration n
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, 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.
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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 Rs.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 Ja
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invoice with that supply or the payment for it. The requirement should be enforceable by some penalty.
ii. The VAT invoice should be standardised across all states so as to contain a minimum of information about the supply being invoiced.
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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 mo
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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.
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(c) Each taxpayer should be allotted a PAN based taxpayer identification number, as recommended above.
(d) The unit of taxation for the purposes of GST should be persons as defined under the Income Tax Act. Consequently, for the purposes of CGST, all production units/branches of a person located anywhere in the country will be treated as a single taxable entity eligible for CGST input credit across units/branches. Similarly, for the purposes of SGST, all production units/branches of a person located anywhere within the State will be treated as a single taxable entity eligible for SGST input credit across units/branches in that State.
(e
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he return forms should be common for CGST and SGST compliance.
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(j) The information furnished shall be stored in a common database to which both the CBEC and the State tax administration will have access.
(k) For the purposes of audit, both CBEC and the State tax administration can design an independent risk management strategy. However, both must coordinate to ensure that the same taxpayer is not subject to simultaneous audit under CGST and SGST.
(l) The administration of this levy should be based on audited accounts and not on the basis of any form of physical controls.
(m) Since the tax base will be common, there should be a common appellate authority. Similarly, the Authority for Advance Ruling will also be common.
(n) Best international practices should be embedded in the Central-GST, particularly in respect of laws relating to levy of penalties, and circumstances and method of prosecution.
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eon at every stage of production, distribution and sale is also extremely high. Therefore, they support the elegance of a single rate (other than the zero rates). Economists espouse the optimality of tax rates based on elasticity. In general, business and industry also espouse a single rate since it is simple to comply and eliminates the problem of classification which arises under the multiple rates regime leading to protracted legal disputes and taxpayers' grievances. Further, multiple rates also implies that the standard rate is relatively high. Since taxes result in economic distortion which increases exponentially with the increase in the applied tax rate, a relatively high standard rate creates much larger economic distortion. It also provides an incentive for evasion and frequent lobbying by trade and industry for favourable modifications in the tax schedule.
5.2 Early VAT systems were characterised by a progressive tax structure whereby basic necessities were taxed at lower ra
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low rates. For example, debates on customs duties have universally argued that if customs tariffs have to exist, there should be a single uniform rate on all goods. Similarly, it is well accepted that there should be a single VAT rate covering all kind of production”. In view of the fact that both the Centre and the States had multiple rates, the service tax base was extremely narrow, and the States had not moved to VAT, the Task Force, even while recognising the efficacy of a single VAT rate, recommended multiple rates as a transitory step towards a single VAT rate24 . The recommendation does not, in any way, undermine the efficacy of a single VAT rate25.
5.4 Bogetic and Hassan (1993)26 analysed a diverse group of 34 countries on a wide spectrum of VAT structures bases and revenues. In terms of VAT structure, two groups of countries were identified: single rate and multiple rate countries. Given the revenue performance data and the consensus preference of tax experts for single rates
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ssan ( 1993). Determinants of Value-Added Tax Revenue: A Cross-Section Analysis, The World Bank Working Paper No.1203.
27 They also point out that the change in the pattern of VAT revenues cannot be exclusively explained in terms of difference in rate structures.
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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 tax revenue (proxying for tax administration efficiency)29. The VAT efficiency is affected adversely by the level of the statutory rate. The co-efficient in the tax is small in magnitude, although it is highly significant, so that the loss in efficiency due to an increase in the VAT rate is relatively modest. The elasticity of VAT revenues to VAT rate is (-) 0.3 approximately. Silvani and Wakefield (2002) analyse a sample of 22 countries in the 1990s
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at the standard rate, the cumulative burden on the aggregate consumption by the low income households remains unaffected in spite of the exemption or
28 'Mello, Luiz de (2008). Avoiding the Value Added Tax: Theory and Cross-Country Evidence, OECD, Economics Department Working Paper No. 604.
29 VAT efficiency also tends to be higher in countries where the regulatory framework in product markets is pro-business and governance (regulatory quality, rule of law and government effectiveness) is strong. Moreover, VAT productivity does not seem to differ in a statistically significant manner between OECD members and non-members. Finally, the ratio of administrative costs to tax revenue is the best-performing indicator of tax administration quality used in the empirical analysis, with other metrics, such as the ratio of audit and other non-audit verification assessments to net revenue having a much lower predictive power.
30 . This does not include the incidence of embedded taxes which are
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the light of the above, the Group recommends one positive rate, each for CGST and SGST on all goods and services. In addition, there should be a zero rate applicable to all goods and services exported out of the country.
5.10 A view has been expressed that a single rate of State GST for all goods and services will, in our country with its large low income population, be highly regressive. It is mainly the articles of common consumption which are in the lower rate bands of VAT. The single revenue-neutral rate will definitely be much higher than the rate now prevailing at the lower bands. In short, the incidence of taxation on the articles consumed by the common man will rise, while the rate of tax on luxuries will fall. The implementation of a regressive tax during an economic 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
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posed GST design structure envisages a comprehensive base with a seamless flow of the input credit mechanism. Consequently, the cascading effect would be negligible. Further, the tax base will be exclusive of CENVAT. The cumulative effect would be that the real tax incidence under the proposed GST model would approximate the statutory rate and would not be significantly different from the present levels of incidence on such products. The proposed single rate GST regime will be transparent in comparison to the present opaque system. A move to a single rate of GST is regressive if the initial point is a destination based VAT type regime across a comprehensive base and allowing for seamless flow of input credit where the cascading effect is either non-existent or negligible. Since the existing indirect tax structure is characterised by significant cascading effect, the move to a single rate of GST which approximates the real incidence, does not result in any adverse distributional consequ
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ively lower incidence of tax than the consumption of the same commodity by the relatively richer section of the society. In the aforesaid paragraphs, we have
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recommended a modest threshold exemption level of Rs.10 lakh. This recommendation is aimed to address the issue.
5.13 The distributional consequences of the proposed GST should be analysed keeping in view its impact on economic growth and employment. To the extent it enhances economic efficiency, it will also create new opportunities for employment which would obviously benefit the relatively poorer section of the society and improve equity32. There is yet another instrument to improve the distributional outcome of this by direct cash transfer to the target groups. With the proposed UIN system such a policy is feasible and a more efficient option.
5.14 In view of the above, the apprehension that the move to a single rate would be regressive is
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o have the flexibility to impose surcharges to meet any financial need in an emergency-like situation.
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.
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5.16 It is now well recognised that the performance of GST is dependant, amongst others,
on the ratio[ Weighted average of statutory rates 35 Standard rate . Therefore, the ratio is less than one if there are multiple rates. Hence, it is necessary to adopt a single rate so as to optimize the performance of the GST.
II. Determination of the rate of GST
5.17 One of the c
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ntially 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 upto the fiscal year 2007-08. Therefore, the Group has used the fiscal year 2007-08 as the base year for calculation of the RNR.
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 of goods and services. Further, detail analysis of this is presented in Chapter – VI.
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5.19 The RNR for the CGST and the SGST is determined in accordance with the formula-
RNR = R X 100
B Where,
RNR : Revenue Neutral Rate for the Centre or the States as the case may be;
R : Collection from the Central or State taxes, as the case may be, which are proposed to be s
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ion Excise Duties529226023110272123425
3Service Tax513010051301
4Total1577336543010272233435
Note: Union Excise Duties includes Additional Excise Duties and the various cesses listed out for subsumation in the CGST
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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 Rs 188285 crores in 2007-08 as per details presented in Table-2. Since we are of the view that all the “TF-taxes” should be subsumed in the SGST, our RNR for the SGST is sought to be calculated in respect of an amount of Rs 188285 crores.
Table-2: Revenues from State taxes to be subsumed in SGST
SI. NoNature of TaxesNon-SIN GoodsPOLTobaccoAlcoholTotal
1Stamp Duty3847338473
2Taxes on Vehicles1554915549
3Taxes on Goods &
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rteenth Finance Commission
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
5.24 We use the average of the estimates under these methods as the estimate of the GST Base for the purposes of calculating RNR.
1. Subtractive – indirect method (SI method)
5.25 At the producer level, the GST base is equivalent to the value added which is the value that a producer adds to his raw material
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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 Income Tax Department for assessment year 2008-09. The activities of these entities are classified into 9 sectors and further sub classified into 74 sub-sectors (refer Annex – II). Further, the sample includes 3,50
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dded is calculated.
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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* rangeNumber of casesAmount of Output base (Rs in crores)Share in the total turnover (in percent.)
Less than zero2014-719-0.01
Between 0 to Rs 10 lakh1616862257610.28
Between 10 lakh to Rs 25 lakh237333389330.42
Between 25 lakh to Rs 40 lakh146984480610.51
Between 40 lakh to Rs 100 lakh3330472190652.34
Between 1 crore to Rs 2 crore1990992807783.00
Between 2 crore to Rs 5 crore1653855190555.55
Between 5 crore to Rs 10 crore713414983825.33
Between 10 crore to Rs 100 crore71332184060519.68
Above 100 crore8160588452462.91
Gross Tota
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GDP, private final 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 regi
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he organised sector. The under reporting of the value of output by the CSO is further accentuated if we adjust for the unorganised sector.
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available, are identified and appropriately adjusted for indirect taxes to arrive at the 'value of purchase of intermediate goods and services'.
e. Under the GST Model, full and immediate input credit is proposed to be allowed for GST paid on purchase of capital goods in the year of purchase. Therefore, the 'value of purchase of capital goods' is aggregated with the 'value of purchase of intermediate goods and services' to arrive at 'gross value of purchase of intermediate goods and services'.
f. Since no input tax credit would be available in respect of purchases made from unregistered dealers, the 'value of purchases from the unregistered dealers' is reduced from the ‘gross value of purchase of intermediate goods and services' to arrive at the ‘agg
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accounts does not include rent, dividend, interest, profit on sale of investments liable to STT, profit on other investment,
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'.
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profit on currency fluctuation and agricultural income. In practice, a large number of professional entities report their gross receipts under this item since they do not view themselves as carrying on business or engaged in sales. Since the Group has recommended a comprehensive GST base to include all goods and services, the value of supply of goods and services must therefore, include the item 'any other income'. As regards, rent, dividend, interest, profit on sale of investment liable to STT, profit on other investment, profit on currency fluctuation and agricultu
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ies during the financial year 2007-08 is Rs.73,29,483 crores of which Rs 4,32,910 crores relates to purchase of agricultural commodities and the balance Rs 68,96,573 crores relates to purchases from the non-agricultural sector. However, the 'value of purchases of intermediate goods and services' by the taxable sectors (excluding financial, rail and real estate sectors) is Rs. 67,12,418 crores.
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Table-4: Intermediate goods and services forming part of Input Tax Base
APurchases of trading goods and raw material
BSpecial services
1Freight
2Consumable Stores
3Power & Fuel
4Building repair
5Machinery repair
6Total expenditure on insurance
7Workmen and staff welfare expenses
8Entertainment
9Hospitality
10Conference
11Sales promotion including publicity (other than advertisement)
12Advertisement
13Commission
14Hotel boarding and lodging
15Travelling expenses including foreign travelling
16Conveyance expenses
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outside the scope of GST either by virtue of exemption or by virtue of their turnover being below the threshold limit. If for some reason, the agriculturist falls within the scope of the GST, he would be liable to collect GST for which the purchaser in our sample would be eligible to claim input credit. Since agriculturists do not ordinarily file an income tax return, his sales do not form part of the output base estimated above. Therefore, purchases of primary articles would not be entitled to any input credit. Such purchases are estimated to be Rs.4,32,910 crores. Further, we also estimate 10 percent of the purchases of trading goods and raw materials from the secondary sector to have been purchased from the unregistered dealers on which no input credit would be available. Such purchases amount to Rs.5,23,770 crores. Therefore, the aggregate purchases of trading goods and raw material from unregistered dealers is Rs 9,56,680 crores in 2007-08 for all secto
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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.
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5.39 In general, the unorganized sector in terms of the National Accounts Statistics is a good proxy for the unregistered dealers under the GST. The share of the unorganised sector in the non-agriculture Net Domestic Product in 2007-08 is 48.69 percent and 90.27 percent in the agricultural sector.41 Applying theses ratios to the firm level profit and loss account, the purchases from the unorganised sector/unregistered dealers is estimated at Rs37,48,729.crores of which Rs 3,90,788 crores relates to agricultural commodities and the balance Rs 33, 57, 941 crores relate to purchase of non-agricultural goods and services
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ve 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
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.
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not form part of the sample. However, 3928 trusts with a total turnover of Rs 8133 crores have electronically filed their returns. Assuming that these trusts operate in the health and education sector, the volume of the total turnover is insignificant to make any material difference to the estimation of the GST base. Therefore, no separate adjustment is made to provide f
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ommercial 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
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buildings) transactions. In 2007-08, the Gross Fixed Capital Formation by way of construction in the household sector is Rs 429260 crores. This does not include the value of land. Assuming that the land value accounts for 50 percent of the total value of th
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axable sectors' is estimated at Rs 30,50,228 crores.
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Table-5 : Estimation of the GST Base under the SI Method
SI.NoDescriptionUnitAll SectorsExempt SectorTaxable Sector
Special SectorsGeneral SectorsTotal
Financial ServicesRail ServicesLand Sector
12345
Sample SizeNos.28512487785110005526733422773397
A.Output Tax Base
1Net value of supply of domestically produced goods and servicesRs. In crs87218741127137762224
2Value of ImportsRs. In ers12006781200678
3 Net value of domestically available goods and services (1+2)Rs. In ers99225521127138962902
4 Value of ExportsRs. In ers989505989505
5 Aggregate Output Tax Base (3-4)Rs. In crs89330471127137973397
B.Input Tax Base
1Value of purchase of Capital GoodsRs. In ers4575049743431504
2Value of purchase of Intermediate Goods and ServicesRs. In crs7329483980916712418
3Gross value of purchase of intermediate goods and services (1+2)Rs. In crs778698710783571439
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expenditure (PFCE), government final consumption expenditure (GFCE), gross fixed capital formation (GFCF), change in stock (CIS), export and import.
5.52 To estimate the GST base, we need to estimate the contribution of all commodities in the primary, secondary and tertiary sectors of economy to the value addition chain. Since GST will be applicable only on the output of registered dealers with a turnover of more than Rs 10 lakh, consumption of goods and services from unregistered dealers will not be subject to GST. Therefore, it is necessary to 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 basis of information available in statement 76.1
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not included as part of the GST base. Similarly, expenditure on construction by the Public Sector and the Private Corporate Sector is also proposed as intermediate input by allowing full and immediate input credit on capital goods. Therefore, for the purposes of this exercise what is relevant is the estimate of the Gross fixed Capital Formation in the household sector.
5.55 The expenditure on construction as reported in Statement 19 of National Accounts Statistics, 2009 is Rs. 5,00,036 crores comprising of Rs. 3,66,855 crores towards construction and Rs. 1,33,181 crores towards plant and machinery. The household sector in general would be in the un-organised sector (unregistered dealers or 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 b
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the PFCE on goods and services from registered dealers (organized sector), the net purchases of goods and services by the Government and the component relating to final consumption in the Gross Fixed Capital Formation in the household sector.
5.58 In Table-6, the size of the non-land GST Base for 2006-07 is estimated at Rs 28,98,520 crores, which accounts for 76.69 percent of the GDP at factor cost at current prices (Rs. 3779385 crores). Applying the same ratio, the size of the non-land GST Base in 2007-08 is estimated to be Rs 33,13,817 crores. The GST Base relating to land for 2007-08 is estimated to be Rs. 4,29,260 crores as computed under the SI method. Therefore, the aggregate GST Base in 2007-08 is estimated at Rs. 37,43,077 crores. This estimate is significantly higher than the size of the GST base estimated under the SI method.
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Table-6: Task Force Estimate of the GST Base using the Consumpti
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2)Rs. in crs3313817
14GST base relating to land for 2007-08 /1Rs. in crs429260
15Estimated GST Base in 2007-08 (Row 13 + Row 14)Rs. in crs3743077
/1 The GST base relating to land in 2006-07 is estimated at Rs.366855 crores.
ii. NCAER Estimate
5.59 The Thirteenth Finance Commission had assigned a study to Dr. Rajesh Chadha of the NCAER to carry out a study on the implication of GST for international study. Using CGE Model, NCAER has, inter alia, also estimated the RNR for a comprehensive GST factoring the impact of
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exemption for the food sector, education and health services. However, it does not factor the impact of-
a. exemption for small businesses (i.e. the threshold exemption of Rs 10 lakh for GST registration by dealers); and
b. inclusion of land transactions within the scope of the GST.
5.60 The RNR for non-petroleum taxes of Rs 1,76,893 crores for the base year 2003-04 has been estimated
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value of the real estate, the GST base relating to land is estimated at Rs 429260 crores.
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 same goods and services which we have recommended, the RNR is estimated to be 7.22 percent for non-petroleum taxes. Similarly, the third and fourth scenarios envisage that the GST will subsume all taxes including petroleum taxes and the scope of commodity specific exemptions will expand to larger baskets. The estimates of RNR under the third and fourth scenarios are 9.01 and 9.4 percent, respectively. However, the two latter scenarios are irrelevant for our purposes since we do not int
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gn and structure of the GST recommended by us, the GST Base in 2007-08 is estimated at Rs 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 of our leading fiscal economists, has written extensively on tax policy and revenue trends. Among his observations is one that pertains to the revenue productivity of the VAT. The relationship between VAT rate and its revenue implication in terms of GDP could be referred to as the Shome Index as has sometimes been reflected in the context of Latin America. Thus, if the general rate of the VAT is, say 10 percent, the revenue collection from the VAT can be expected to be 5 percent of GDP45. This revenue achievement is possible if-
45 This is calculated by the formula (1/2)*10 percent = 5percent of GDP
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i. the VAT base is b
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ntries 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 Rs 27,82,809 crores.
Table-8: Estimating the GST Base on the basis of the Shome Index
Sl No.DescriptionAmount [Rs in crs]
1GDP at factor Cost at current prices43,20,892
2Estimated base on the basis of Shome Index [50 percent of row 1]21,60,446
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3Estimated base relating to Financial Services1,93,103
4Estimated base relating to Real Estate4,29,260
5GST Base27,82,809
[Row 2+Row 3+ Row 4]
5.70 This estimation of the base is lower than the base estimated under the SI method primaril
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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 Rs 11,77,706 crores in 2007-08 (Table-9). Similarly the service tax base is estimated at Rs 4,13,697 crores for 2007-08 as shown in the said Table.
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5.73 Since the proposed GST is comprehensive in its base, it will extend to a much larger base particularly in the financial services, rail transport, land, petroleum, tobacco and alcohol, trade and construction sectors. The estimated increase in the tax base in respect of each of these sectors is indicated separately in Table. The aggregate of the increase is estimated at Rs. 13, 58,344 crores for 2007-08 as shown in t
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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 Rs 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 tax base for calculating the RNR for both levies.
Table-10: Estimation of GST Base and the RNR
SI NoDescriptionUnitsAmount
ASubtraction-Indirect Method(Rs in crs)3073037
BConsumption Method
i. Task Force Estimate(Rs in crs)3743077
ii Chadha Estimate(Rs in crs)3077952
CShome Index Method(Rs in crs)2782809
DRevenue Method(Rs in crs)2949748
EAverage of al
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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 formula should be based on the recommendations of the State Finance Commission.
47 Poddar, Satya and Amaresh Bagchi (Nov 2007), “Revenue-neutral rate for GST”, The Economic Times, 15th November, 2007, Delhi
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rd rate. The efficiency of the VAT system can be optimized depending on the ability of tax administration 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 o
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ption” within the meaning of national accounts does not exactly match the potential VAT tax base. For example, several investment goods (such as new buildings) are not considered as consumption 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 Rs 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
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.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 Weighted average of statutory rates
is equal to 1 (one).
Standard rate
Table-11 : Computation of VAT Revenue Ratio (VRR) under the 'Flawless' GST*
SI. NoDescriptionUnitAmount
APrivate Final Consumption ExpenditureRs in crs2605859
BGovernment Final Consumption ExpenditureRs in crs479099
CGross Fixed Capital Formation(Household Sector)Rs in crs435689
DGross Fixed Capital Formation(Land)Rs in crs429260
EPotential GST Base (A+B+C+D)Rs in crs3949907
FActual Tax BaseRs in crs3125325
GVAT Revenue Ratio (F divided by E)Nos0.79
HStandard Ratein percent12.00
IWeighted Average of Statutory ratesin percent12.00
JWeighted average of Statutory rates as a ratio of Standard rateNos1.00
KAmount of Exemption *Rs in crs206830
LImpact of exemption [K divide
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a large part of the food items is distributed by small dealers and therefore there is significant overlap in the revenue effect of the threshold exemption and the food sector. The same also holds well in the health and education sector. The net impact of the exemptions under the 'flawless' GST on the tax base is estimated to be Rs 206830 crores only. This accounts for 6.2 percent erosion in the potential tax base. Hence, the ratio (1 – Exemptions) is calculated to be 0.938. Consequently, the 'Policy Efficiency Ratio' is estimated to be 0.938.
6.7 We do not have any method of making a direct estimate of compliance. However, compliance level is the ratio of the VRR to the 'Policy Efficiency Ratio'. Therefore, the implicit compliance level is estimated to be 0.84.
6.8 It has been pointed out by some that given the cross-country estimates of the VRR, our estimate of VRR is extremely high. It is argued that if the VRR is aligned to the international norm, the revenue neutral rate (RNR) wo
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outlier. The reason underlying such high VRR is the minimization of the exemptions and the elimination of the multiple rates.
6.9 The existing VRR in the case of Central Government levy on goods and services is extremely low. The current base is estimated to be as low as 0.3649. Further, the factor Weighted average of statutory rates is also estimated to be 0.7550. Therefore, the 'Policy efficiency Standard rate ratio' is estimated to be a low of 0.2751. We have no estimate of the compliance level but we have anecdotal information that there is substantial evasion. If we assume that the compliance is 0.84, the 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 st
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mated potential base is Rs 29,49,748 crores. Therefore, the share of exemptions in the potential base is estimated to be 0.64. Hence, the share of the actual base is 0.36. 50 The standard rate is 16.48 percent and the weighted average of statutory rates is estimated to be 12.28 percent. Therefore, the ratio of weighted average of statutory rates to standard rate is 0.75.
51 This is the product of 0.36 and 0.75.
52 This is the product of the 'Policy Efficiency Ratio' (0.27) and the 'Compliance Efficiency Ratio'(0.84).
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CHAPTER – VII Implications of the Goods and Services Tax
7.1 The economic case for a 'flawless' GST is straightforward: Income is taxed irrespective of source and use; therefore, consumption should also be taxed on the same principle. This is the feasible second-best solution, compared to the unattainable first best distortion-free world of lump sum taxation. The 'flawless' GST is roo
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s 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 services, is the most elegant method of taxing consumption. Under this structure, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax essentially 'sticks' on final consumption within the taxing jurisdiction.
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7.3 The introduction of the GST will also bring about a macroeconomic dividend by reducing what have been called the “negative grey area dynamic effects” of cascading taxation. A
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ds 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 principle places local producers at a competitive disadvantage, relative to producers in other jurisdictions. The GST envisages comprehensive taxation of imports on consideration of consumption in India and irrespective of whether the imported goods and services are produced in India or not, thereby, providing a level playing field to domestic producers particularly in the import-substitution industry. Fifth, differences in the ta
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, 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 management and reduce the 'crowding-out' effect.
7.4 The overall macroeconomic effect of reduction in economic distortions due to GST would be to provide an impetus to economic growth. Using CGE Model, the NCAER study commissioned by the Thirteenth Finance Commission esti
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Thirteenth Finance Commission
vary between 0.68 and 1.33 per cent. The real 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 Rs. 42,789 crore and Rs. 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 Rs. 1,469 thousa
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or resource rich backward states; it will serve as an attraction to natural resources based industries to locate in these states regardless of the
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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
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tal products; other machinery; and railway transport equipment. Exports are expected to decline in agricultural sectors; iron and steel; wood and wood products except furniture; and cement. There are minor gains and losses in exports of other sectors.
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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, Ind
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ce of tax on primary food articles comprises of two elements: tax on inputs and tax on the output (primary food articles). However, under the 'flawless' GST, all food items covered under the public distribution system are proposed to be exempt 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
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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
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T will result in a sharp decline in the prices of cotton textiles ( by 6.44 percent), wool, silk & synthetic fibre textiles (by 11.4 percent), and textile products including wearing apparel (by 17.45 percent). To the extent, the share of expenditure on clothing in the total expenditure on consumption is relatively higher than in 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
56 At present, the value of a constructed property includes stamp duty on land and other indirect taxes on inputs. Hence, these taxes form part of the cost of the property. On registration of the constructed property, stamp duty is payable on the entire cost including the embedded taxes. There is no mechanism for complete off-set of these taxes. This results in an increase in the overall cost of the prop
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ing of tax incidence is well documented. Further, the representative consumer assumption that operates an optimal tax model is not just invalid, but actively dangerous in a policy context where poverty reduction and inclusive growth are key policy objectives. For instance, if, as intuition would lead us to expect, the demand for the basket of goods consumed by the poor is less elastic than that consumed by the rich, then the regressive policy implications of implementing optimal tax reform would be horrific i.e impose a higher tax on goods of consumption by the poor. Hence, the principle remains valid that all consumption should be taxed uniformly without regard to source and use. Even in this context, the GST reform is potentially far pro poor than theoretically elegant competing alternatives.
7.22 The benefit to the poor 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 co
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e present level. Hence, the switch over to the 'flawless' GST will also improve horizontal equity.
d. GST and Prices
7.24 Prices of agricultural commodities and services are expected to rise. Most of the manufactured goods would be available at relatively low prices especially textiles and readymade garments.
7.25 There are two opposing forces which determine the changes in price levels. First, increased payments to the primary factors of production, viz. land, labour and capital, increase the cost of production and hence tend to have upward pull on prices. Second, sectors under imperfect competition (manufacturing sectors) get benefits of cost reduction through increasing returns to scale which are not reaped by sectors assumed to be in perfect competition. The relative impact of the force determines the overall price change. It may also be noted that the share of primary inputs (land, labour and capital) in total output is relatively high in agricultural and services sectors.
7.2
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of farmers in India. Similarly, the urban poor will also benefit from new employment opportunities. With regard to the food crops the poor would continue to remain secured through the public distribution system. The prices of many other consumer goods are expected to decline. These include sugar; beverages; cotton textiles; wool, silk and synthetic fibre textiles; and textile products and wearing apparel.
e. GST and informal sector
7.29 Another challenge to the consensus on GST based indirect tax reform in developing countries like India has been the argument that given the existence of an informal sector, a comprehensive GST can be welfare reducing, when revenue neutral. The argument rests on the premise that when the choice of a commodity set for VAT increase is restricted by the existence of a large informal sector, then there are negative welfare effects in transition to a revenue neutral VAT. If this holds true then there are serious policy implications if such negative welfare
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designed to be revenue neutral at existing levels of compliance. Given the design of the 'flawless' GST, the producers and distributors will only be pass through for the GST. Further, given the single and low rate of tax the benefit from evasion will significantly reduce. Therefore, there will be little incentive for the producers and distributors to evade their turnover. Accordingly, this policy initiative should witness a higher compliance and an upsurge in revenue collections. This will also have an indirect positive impact on direct tax collections. Further, given the fact that GST will trigger an increase in the GDP, this in turn would yield higher revenues even at existing levels of compliance. Another important source of gain for the Government would be the savings on account of reduction in the price levels of a large number of goods and services consumed by the Government.
7.32 However, to the extent, the Central Government will be required to incentivise the states to adopt
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tates should expect additional revenues to the extent of Rs 70,000 crores (excluding the incentive amount). However, in the subsequent years this gain would diminish on account of the phasing out of stamp duty but will be more than adequately compensated as compliance starts improving.
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7.34 Therefore, overall the implementation of GST should enable the Government at both levels to better meet the challenges of fiscal correction.
g. GST and vertical balance of power
7.35 The GST envisages a mechanism whereby both the Centre and the States will cease to have any independent power to make changes in the design and structure once agreed upon. Since both levels of Government would be similarly placed, this has no impact on the balance of power.
7.36 Under the proposed GST, both the Centre and the States will have concurrent power to tax all goods and services. Therefore, the taxing powers of the state
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way we organise and do business.
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CHAPTER – VIII
“Flawless” Goods and Services Tax and the autonomy of States
8.1 The design of the GST based on a common base and a uniform rate across states without the power to make any unilateral changes, is viewed by some states as undermining the fiscal autonomy of the States. Therefore, it is argued that the states should agree to a floor rate of tax and should have the flexibility to increase their rates to meet any revenue crisis.
8.2 Full autonomy in the exercise of taxation powers would mean that the Centre or the States, as the case may be,-
a. Retain the power to enact the tax;
b. Enjoy the risks and rewards of 'ownership' of the tax (i.e. not be insulated from fluctuations in revenue collections),
c. Be accountable to their constituents; and
d. Be able to use the tax as an instrument of social or economic policy.57
8.3 Tax autonomy to any level o
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perts on assigning a limited role of revenue collection to the tax system and using the direct transfer mechanism for achieving the
57 See Poddar, Satya and Ehtisham Ahmad (2009)
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various social and economic objectives. Given this new strand of economic thinking, the ability to use the tax system as a tool for achieving various social and economic objectives should cease to be a measure of tax autonomy.
8.5 In the past under the sales tax regime in the states, the flexibility to use the tax system as a tool for achieving various social and economic objectives has generated economic distortions and also triggered a race to the bottom. Further, if the States are allowed the autonomy to increase the rates by setting the SGST rates as the floor rates, they would have a tendency to opt for this lazy option rather than improve their enforcement mechanism. Such increase in rates would mean a greater incen
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t 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 and compliance systems.
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8.8 Harmonization of tax laws is critical. Variation in the wording and structure of tax provisions can be an unnecessary source of confusion and complexity, which can be avoided if the Centre and all the States adopt a common GST law as in the case of the Central Sales Tax or agree to separately legislate an identical GST law. In either situation, there would be harmonization in respect of critical elements like common time and place of s
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ent 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 the fiscal autonomy of the Centre or the States.
8.11 If harmonization across Centre and all states is envisaged, what should be the institutional mechanism to usher and maintain such harmonization? At present, the responsibility for designing the initial structure of the GST has essentially been left to the
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Empowered Committee of State Finance Ministers and official level
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nce 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 in the agreed design of the GST. However, in the event of a crisis, the Member State or the Centre may take immediate steps to impose a surcharge subject to ex-post facto approval by the Council within one month. Further, such surcharge should not be allowed to remain in force beyond a period of one year.
8.14 This Council should, in due course, have a permanent secretaria
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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 calculated by us in the preceding paragraph is estimated to be 6 percent if all the taxes listed in paragraph are subsumed. Our calculations of revenue estimates, based on estimated C-efficiencies
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e 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 Rs 6000 crores per annum over the next five years (i.e. a total amount of Rs 30,000 crores) if, and only if, the States-
a. introduce the 'flawless' GST as recommended by us; and
b. follow the road map, as suggested by us, for its introduction;
iii) The amounts in the Fund should be used only for the following purposes :-
a. To compensate the states for any revenue loss on account of the adoption of
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be decided by the Council.
9.7 These recommendations will 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
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any effort to increase efficiency and economic growth, such prolonged period of discussion on issues in respect of which there is adequate well documented 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 indu
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rnment to play a more proactive role in this effort. Towards this, the leadership of the Union Finance Minister would be vital. This will provide the necessary impetus to the process of 'grand bargaining' for the GST.
10.5 While the Council is engaged 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 classifica
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. This will enable all stakeholders to monitor the progress and ensure that the new implementation date is not missed out. The new timeline starting 1st January, 2010 is contained in Annexures.
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10.7 The SGST is being designed by the Empowered Committee 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.
1
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n the very first year of its introduction.
10.10 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 :-
59 See para 2.11
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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 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
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of GST.
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10.12 We do not envisage any loss of revenue at the rates of CGST and SGST recommended by us. However, the rates being sufficiently low, we expect more than normal growth in revenues through better compliance and ease of administration. These low rates will also provide sufficient fiscal space to the Government to meet any contingency which may arise in the future by raising the rates as was done in Japan, Singapore and New Zealand61.
10.13 The Central Government and State Governments must come together in national interest to build a consensus on the GST and adhere to the new deadline of 1st October, 2010 for rolling out GST. Given the strategic importance of this game-changing reforms, the country can little afford any delay.
61 Japan increased the VAT rate from 3percent to 5 percent, Singapore from 3 percent to 7 percent and New Zealand from 10 percent to 12.5 percent.
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following :-
a. The base should extend to all goods and services including immovable property;
b. There should be a single low rate;
c. The tax should be destination based;
d. The tax should be designed on invoice-credit method;
e. Full and immediate input tax credit in respect of capital goods;
f. The GST must replace all transaction based taxes on goods and services and factors of production.
g. There should be seamless flow of the tax through all stages of production and distribution so as to stick on “final” consumption;
h. The exports should be zero rated and imports should be fully taxed;
i. There should be a threshold exemption for small dealers;
j. Full computerisation of the compliance and administrative systems.
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11.3 In the light of the above, we have recommended a 'flawless' GST in the context of the federal structure which would optimise efficiency, equity and effectiveness. Th
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exports will be zero rated.
11.4 There is empirical evidence to suggest that the switchover from the present distortionary taxation of goods and services to a 'flawless' GST will, amongst others, increase productivity of all factors of production and hence enhance GDP. The switchover has also been analysed to be pro-poor and therefore, further the cause of poverty reduction. Further in the Indian context, a dual VAT type tax concurrently levied by both the Centre and the States would enable the creation of a common market.
11.5 Given the benefits of the changeover to the flawless GST, it would be economically rational for all levels of Government to introduce and successfully implement the flawless GST and for the Central Government to invest in incentivising the State Government to adopt the flawless GST. We have, therefore, recommended that the Central Government should provide a sum of Rs 30,000 crores over the next five years which will be used to compensate the States
62 Howeve
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ntive to adopt a 'flawless' GST. Therefore, the switch over to the flawless GST will augment the combined resource base of the States by an aggregate sum of Rs 100,000 crores63.
11.7 We recognise that the levy will be imposed and enforced by a large number of Governments. Therefore, there would be constant pressure on States to deviate from the pure VAT model and trigger harmful tax competition. This would jeopardise the sustainability of the benefits from the implementation of the 'flawless' GST. Therefore, it is also necessary to establish an institutional mechanism which would be responsible for making any change in the design and structure of the VAT. Our recommendation to establish a Council of Finance Ministers is intended to subsume the independent powers of the both the Central and State Governments to levy tax on goods and services in favour of collective exercise of the powers. Therefore, there is no exacerbation in the vertical imbalance in the fiscal powers.
11.8 The Firs
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uld be postponed to 1st October, 2010. We believe that it should be possible to adhere to this timeline. The benefits from the switch over to the GST are contingent upon the purity of the GST design. In the context of VAT, international experience shows that any design-related 'VAT mistakes are very hard to rectify'. Therefore, it must be ensured that there are no design related mistakes at birth. However, if there is a trade-off between the timeline and the design of the GST, the dilemma must be resolved in favour of design.
11.10 Further, in order to implement the 'flawless' GST it would be necessary to undertake constitutional amendments to enable both the Centre and the States to exercise concurrent jurisdiction over the taxation of all goods and services, creation of the proposed Council of Finance Ministers and assignment of part of the GST proceeds to the third-tier of government. These amendments must, inter alia, provide that the taxation of goods and services by both the Cen
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te 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 levels of Government. At the Central Government level, there has been an attempt to introduce service tax on housing services and allow credit for inputs used for the supply of such services. However, at the State level input tax credit is not available for all taxes, thereby leading to significant cascading effect. Further, there is no incentive to the purchaser to obtain an invoice. Consequently, the audit trail of such transactions is lost and producers of inputs are als
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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 government, a reduced role for black money, and a reduced role for the criminal element in the real estate sector and significantly lowering of costs by mass housing.
At a conceptual level, under a VAT, sales, rentals, and rental values of immovable property would be taxable and credit would be available for the VAT embedded in purchases. Immovable property that generates housing services
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hase price,
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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 inputs, such as repair and maintenance services) to the government.
In practice, the registration of all owner occupiers and the computation of all imputed rental values present formidable administrative problems and are, therefore, not feasible. If imputed rental values cannot be tax
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Finance Commission
Table VAT treatment of immovable property under two approaches
Nature of transactionComprehensive taxationExemption method
(variant-A)(variant-B)
A. Existing residential property stock
i. SaleTTE
ii. Rental chargesTEE
iii. Imputed rental valuesEEE
iv. Alteration and maintenanceTTT
B. New residential property
i. Construction/ First SaleTTT
ii. ResaleTTE
iii. Rental chargesTEE
iv. Imputed rental valuesEEE
v. Alteration and maintenanceTTT
C. Existing commercial property stock
i. SaleTTT
ii. Rental chargesTET
iii. Imputed rental valuesEEE
iv. Alteration and maintenanceTTT
D. New commercial property
i. Construction/First SaleTTT
ii ResaleTTT
iii. Rental chargesTET
iv. Imputed rental valuesEEE
v. Alteration and maintenanceTTT
E. Inputs (both goods and services) usedTTT
for construction
Under the comprehensive taxation method, all new properties (both residential and commercial) constructed after the introduction of the VAT are liable to tax on construction/first sale of
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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 entails full taxation of imputed rental value of owner-occupied properties. New properties attract tax on their full capital value (i.e., the purchase price) at the time o
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x 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 inflation. Thirdly, in the case of existing stock of properties, the tax applies on
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d 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
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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 con
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tinction is made 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
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distortionary since the benefit from such exemption would depend on the mix of taxab
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payable ( in figures)
Total Amount of CGST and SGST payable (in words)CroresLakhs ThousandsHundredsTensUnits
Paid by debit to account (Account No. of the deductor)Date of debit
Name of the Bank in which payment is made
Computation of tax liability
Sale transactionsValue of transactionCGSTSGST
a.Registered dealers (intra-state)
b.Unregistered dealers (all transactions)
c.Exports out of India
dInter-state sales (registered. dealers)
e.Inter-state branch transfer
f.Total
Purchase transactions
a.Registered dealers (intra-state)
b.Unregistered dealers (all transactions)
c.Exports out of India
d.Inter-state sales (registered dealers)
Inter-state branch transfer
f.Total
Total GST payable (CGST plus SGST)
Interest
Penalty
Others
Total amount
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Details of Transactions of sale or purchase undertaken during the month (if the number of records exceeds 10 for registered dealers, upload transaction file)Upload
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sales.
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Table-13: States' Own Tax Revenues on goods and services -2007-08
(All figures in Rs in crores)
S. No.StatesState ExciseSales Tax, VAT and Purchase TaxCentral Sales TaxOther ReceiptsTotal Sales TaxSales tax and CST on POLSales Tax on alchoholTotal Non-POL Non-Alch'l Sales TaxEnt't TaxEntry tax in lieu of OctroiTaxes on VehiclesTaxes on Goods and PassengersTaxes and Duties on ElectricityStamps and Regn FeesOther Taxes and DutiesTotal EC-taxes*Total TF-taxes*
Col. 1Col. 2Col. 3Col. 4Col.5 (2+3+4)Col.6Col.7Col.8 ( 5-6-7)Col.9Col. 10Col.11Col.12Col.13Col.14Col.15Col.16Col. 17
General Category State
1Andhra Pradesh40411753814335619026530132481047807816048019530861711072715692
2Bihar525249144-12535113314712551497927393864654C22494178
3Chhattisgarh8424485215430249390208550277511395463220923737
4Goa76360817879370C509111278211301918381032
5Gujarat47189190513010151055332129760C240131015220472018263
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15373013912511015441809
3Himachal Pradesh39097911C109223932821001145582871379581295
4Jammu & Kashmir2441802031805341801384097732659366314841981
5Manipur40O1151152718700410308896
6Meghalaya425221816826C1052031212
7Mizoram2510116221C4100100C4148
8Nagaland310759528066C012201C6682
9Sikkim29254275621C35104C024046
10Tripura382632C2659141920023C015219423
11Uttaranchal44216270C162740438118565155C55424512011836
Total13936119150169879672378192539711102541338235711556667492
Union Territories
1Chandigarh12842912C55311404395O0444444
2Delhi129552851723C700916952935021600425O0135037854597234
3Daman and DiuC12050C1700162000162162
4Pondicherry224189181C3694360O035C037C36043
5Port BlairC0000C0000000
Total164760232078C81001822297598165O460C0138737864248271
Grand Total3570113184318593312821817185644211450113826106239141554967199188384732554121356191287
* This includes an estimated amount of Rs 3000 crores as Sales Tax on Tobacco products for which we do not have State-wise breakup. Therefore, the amoun
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services0703
Printing & Publishing0115Courier Agencies0704
Rubber0116Computer/training/educational and coaching i0705
Steel0117Forex Dealers0706
Sugar0118Hospitality services0707
Tea, Coffee0119Hotels0708
Textiles, handloom, Power looms0120I.T. Enabled services, BPO service providers0709
Tobacco0121Security agencies0710
Tyre0122Software development agencies0711
Vanaspati & Edible Oils0123Transporters0712
Others0124Travel agents, tour operators0713
2. TradingChain Stores0201Others0714
Retailers02028. Financial ServiceBanking Companies0801
Wholesalers0203Chit Funds0802
Others0204Financial Institution0803
3. Commission AgentsGeneral Commission Agents0301Financial service providers0804
Leasing Companies0805
4. BuildersBuilders0401Money Lenders0806
Estate Agents0402Non-Banking Finance Companies0807
Property Developers0403Share Brokers, Sub-brokers etc.0808
Others0404Others0809
9. EntertainmentCable T.V. productions0901
Film distribution0902
Film laboratories0903
Motion Picture Producers0904
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nking & Insurance27431631912242404
bReal estate, Ownership of dwellings & business services42349357105366388
cTotal69780989017608792
9Community, Social & Personal services
aPublic administration & defence33309891131241967
bOther services569906222397347509
CTotal903004313528589476
10Total (Allsectors)918978447903334399451
11GST Comparable Sectors [10-1d-(0.5*9b)]757841043863623192050.5
Source: CSO
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Report of the Task Force on Goods and Services Tax Thirteenth Finance Commission
TIMELINE FOR IMPLEMENTATION
Timeline for Implementation of GST
SI. NoActivitiesJanFebMarAprMayJunJulyAugSeptOctNovDec
1Adoption of the GST Model by Centre and States
2Amendments to the Constitution
a To be carried out by the Centre
b To be approved by the States
3Other Legislation &Rules
a Finalise draft tax law
lb Auxiliary law
c Draft rules
d Ministry of Law review
e Obtain approval of the Union/State Cabinet
fObtain Legislative Approval/ Issue Ordinance
Obtain President's/Governor's Assen
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for buiding IT infrastructure
bAppoint Professional Consultant
CFinalise IT Architecture and RFP documents
dAppoint Vendor
bComplete user specifications of all business processes
CDevelop registration system
PTest and load registration system
fDevelop Payments and Tax Accounting system
gTest and load payments and Tax Accounting Systems
hDevelop, test and load other business process modules
10Manuals
a Prepare Staff manual
bPrepare supplimentry manual
cPrepare audit and compliance manual
11Training Delivery
Preliminary training
bGeneral training
cAudit traning delivery
12Registration and implementation
Issue registration application forms
bIssue registration certificates
CConduct advisory visits
dIssue first return forms
eReceive first payments
fIdentify defaulters
gPursue defaulters
13Monitoring cell
aFollow price movements
bInform traders
cAction taken
134
Report of the Task Force on Goods and Services Tax Thirteenth Finance Commission
Responsibili
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Staff for the Organization
d Appoint Officers and staff to administer
e Appoint Managerial and Supervisory Staff and Officers
f Appoint Auditors & Processors
g Appoint Date entry staff
h Appoint Recovery Officers and Staff
7Operational
a Design audit system
b Design registration system
c Design returns/payment/processing system
8Forms
a Finalise registration application form
b Finalise registration certificate
c Finalise payment and return form
9IT Infrastructure
aAppoint official-level Team for buiding IT infrastructure
bAppoint Professional Consultant
cFinalise IT Architecture and RFP documents
dAppoint Vendor
bComplete user specifications of all business processes
cDevelop registration system
dTest and load registration system
fDevelop Payments and Tax Accounting system
gTest and load payments and Tax Accounting Systems
hDevelop, test and load other business process modules
10Manuals
a Prepare Staff manual
b Prepare supplimentry manual
C Prepare audit and compliance manual
11Trainin
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neutral rate for the Centre and the states;
(d) suggest ways to incentivize states to adopt a model GST; and
(e) recommend a framework for administering the GST including payment of compensation, monitoring of compliance and institutional mechanism for making any change in the initial design of the GST.
136
Report of the Task Force on Goods and Services Tax Thirteenth Finance Commission
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Report of the Task Force on Goods and Services Tax Thirteenth Finance Commission
Ebrill, Liam P, Keen, Michael J. Bodin, Jean-Paul and Summers, Victoria P. (2001): “The Modern VAT”, International Monetary Fund, Washington D.C.
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uccessful VAT?”, Presentation at the Workshop, National Institute of Public Finance and Policy, New Delhi.
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Report of the Task Force on Goods and Services Tax Thirteenth Finance Commission
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for International Fiscal Documentation (DIFD), Amsterdam.
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