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India GST for Beginners

Jayaram Hiregange & Deepak Rao


India GST for Beginners

Published by White Falcon Publishing


No. 335, Sector - 48 A
Chandigarh - 160047

First Edition,
Copyright 2016 Jayaram Hiregange & Deepak Rao

All rights reserved

No part of this publication may be reproduced, stored in a


retrieval system or transmitted in any form or by any
means without prior permission of the Author.

Requests for permission should be addressed to


Jayaram Hiregange & Deepak Rao
(deepak.rao@acertax.com).
Preface
India is home for several indirect taxes. Currently, both the
central government and the state governments levy indirect
taxes on transactions of goods and services. Excise duty is
charged on manufacturing, Value Added Tax (VAT) is
charged on the sale of goods within the state, Central
Sales Tax (CST) is charged on the sale of goods from one
state to another, Service tax is charged on provision of
services as well as on receipt of services in a few cases,
whereas Custom duties or Import duties are charged on
import of goods into India.

In addition to the above indirect taxes, there are other


central and local taxes such as cess, octroi, entry tax etc.,
which are charged by the central and the state
governments. Various acts, rules and regulations govern
the above taxes, but every type of tax has its own
compliance requirements. Over the years, too many acts,
rules and regulations have made it cumbersome for
businesses to understand and apply indirect tax laws to the
day-to-day business transactions. Separately, the tax courts
in the country are also loaded with indirect tax litigations
owing to the presence of a wide variety of indirect taxes.
Therefore, in order to provide an effective indirect
taxation platform for businesses in India, it is very critical
that the existing indirect taxes are standardised and
rationalised.

A new indirect tax legislation called the Goods &


Services Tax (GST) is under discussion, for more than a
decade, for implementation in India. GST will replace
most of the existing indirect taxes in India.

GST may be a new concept for India, but has its presence
in various developed as well as developing countries.
GST has helped those countries in streamlining the
indirect taxes. It has also provided businesses an
opportunity to efficiently manage their indirect taxes. For
the record, GST is already implemented in many countries
across the world.

In India, GST is perceived to be a comprehensive indirect


tax legislation that would replace the existing indirect
taxes and subsume many central as well as state taxes
under its umbrella. GST is also seen as a possible remedy
for the indirect tax issues faced by businesses in relation
to application of taxes and undertaking compliances. The
central and the state governments have been working on
the idea of GST in India for more than a decade, and after
all the ups & downs, heartbreaks and political differences,
GST could be implemented in India in the coming years.
The governments and businesses are very optimistic
regarding the implementation of GST in India in the very
near future.

Indirect taxes have existed in India for more than half a


century, but the understanding of these taxes and
compliance by businesses towards the same has been
limited and haphazard. The primary reason behind this is
complex legislations and varied procedures. In spite of
both the central and the state governments exercising
control on the administration and collection of indirect
taxes, compliance with law by the businesses has been
largely inadequate.

GST could be the much needed solution to the issues faced


by businesses on the matters of indirect taxes. GST, by its
very design, would limit the number of acts and rules in
circulation and would simplify the frequency and manner
of compliance. Furthermore, GST would also largely
automate compliances and make it simpler for businesses
to comply with the requirements under the GST
legislation.

Given that India would implement GST in the very near


future, understanding the basic concepts of GST is very
essential and critical for businesses in order to comply
with the GST requirements. GST, as a new concept, would
be unique in nature and would be considerably different
from the existing indirect taxes.
The objective of this book is to explain the key concepts
of GST in an easy and simple manner with the intention
that the business community, which would be impacted by
GST, can have good understanding of what is in store for
them under the GST regime. The book also makes an
attempt to explain the concepts of GST with the help of
pictures, drawings, flowcharts and illustrations so as to
provide practical insights and examples into how GST
would impact the day-to-day business transactions.

Through this book, an attempt is being made to simplify


GST concepts for the businesses, especially the mid-size
and small-size businesses, which may not have adequate
access to the GST knowledge-base. We also believe that
this book will be useful for tax consultants and students of
GST in understanding the basic concepts of GST.

The purpose of this book would be served if the readers


are able to understand the basic concepts of the proposed
GST.

Jayaram Hiregange

Deepak Rao
Chapter 1
Overview of Indirect taxes

Before we proceed with the basic concepts of GST, it is


imperative to understand the existing indirect taxes in
India. Basic knowledge of the existing indirect taxes in
India will help the reader to connect with the changes
that the GST regime would bring about. This chapter
provides a brief overview of the existing indirect taxes
in India and their applicability.
Types of Indirect Taxes
Indirect taxes in India can be broadly classified into the
following categories:

Excise Duty on manufacturing

Value Added Tax (VAT) on within the state sale of


goods

Central Sales Tax on between the state sale of


goods

Service Tax on provision of service

Custom Duties on import of goods into India

Entry Tax / Octroi on entry of goods into a local


area

Excise Duty (ED) on Manufacturing

Excise Duty is a tax levied by the central government


on manufacture of goods under the provisions of The
Central Excise Act, 1944 and is administered by the
Central Excise authorities. There are rules,
notifications, circulars etc. that govern and support the
administration and collection of the Excise Duty.

Excise Duty is, in general, levied on the manufacturer


of goods. Excise Duty is collected on removal of the
manufactured goods from the factory. Every factory
manufacturing goods and chargeable to excise duty is
required to register with the Central Excise Office
having jurisdiction over the factory. Excise Duty is
levied only on crossing a certain threshold (monetary
limit) of turnover and hence small scale units that do
not cross the threshold are not charged with Excise
Duty. Excise Duty, where applicable without any
concessions or exemptions, is currently charged at the
rate of 12.5%. The manufacturer, who has the excise
registration, has to pay Excise Duty and file returns as
prescribed under the excise laws.

Excise Duty on Manufacturing


Value Added Tax (VAT) on Within the State
Sale of Goods

VAT is a tax levied by the state government on the


sale of goods within the state under the provisions of
the respective state VAT legislation. VAT is
administered by the local state VAT authorities. For
example, VAT is levied by the state of Karnataka on
sale of goods within the state of Karnataka by one
person to another person under the provisions of The
Karnataka Value Added Tax Act, 2003. Each state has
its own set of act, rules, notifications, circulars etc. in
order to support the administration as well as the
collection of VAT. VAT is levied on the sale of goods,
leasing or renting of goods or on deemed sale of goods
(in some transactions, goods are transferred from one
person to another person in the course of providing
services, such transfers are classified as deemed sale).

VAT is usually levied on the seller of goods at every


point of sale (in some cases, the purchaser may be
responsible to pay VAT). VAT would be payable when a
manufacturer sells goods to wholesaler, when a
wholesaler sells goods to a retailer and also when a
retailer sells goods to a customer. Every trader or
dealer, who is liable for VAT, is required to be
registered with the state VAT authorities. VAT is levied
only when the turnover of the seller is above the
threshold specified by the respective state VAT
legislation. VAT, where applicable without any
concessions or exemptions, is currently charged at the
rate of 4.5% / 5.5% or 14.5% / 15.5% based on the
state in which the transaction takes place as well as the
nature of the goods sold (Some states have different
rates from the above rates). The trader / dealer, who
possesses the VAT registration, has to pay VAT and file
returns as prescribed under the state VAT laws.
VAT on within the State Sale of Goods

Central Sales Tax (CST) on Between the


States Sale of Goods

- CST is a tax levied on the sale of goods from one


state to another state under the provisions of The
Central Sales Tax Act, 1956. CST is a central levy, but
is administered and collected by the government of the
state from which the goods originate for sale to the
other state. For example, on sale of goods from the
state of Karnataka to the state of Maharashtra, the
Karnataka VAT authorities would collect the applicable
CST.

CST is levied on the sale of goods, leasing or renting of


goods or on deemed sale of goods from one state to
another. Similar to VAT, CST is levied on the seller of
the goods and is charged on goods that move from one
state to another. CST, where applicable without any
exemptions / concessions, is currently charged at the
rate of 2% (where the buyer can issue the prescribed
statutory form) or at the local VAT rates based on the
nature of the goods being sold. The trader / dealer, who
has the CST registration, has to pay CST and file
returns as prescribed under the respective state
VAT/CST laws.

CST on between the States Sale of Goods


Service Tax on Provision of Service

Service Tax is levied on the provision of service from


one person to another person under the provisions of
The Finance Act, 1994 and is supported by rules,
notifications and circulars. It is administered by the
central government. Service tax is, in general, levied
on the provider of service and is subject to the service
qualifying as a taxable service. However, in specific
cases, Service Tax is made applicable on the person
who receives the service. Service which qualifies as
export of service is not charged to Service Tax. Service
received from outside India by an establishment in
India and qualifying as an imported service is charged
to Service Tax in India in the hands of the person who
received the service. A service provider or service
recipient, who is liable to pay service tax, is required to
be registered with the Service Tax Department.
Service Tax, where applicable without exemptions /
concessions, is currently charged at the base rate of
14%. The person registered for Service Tax has to pay
Service Tax and file returns as prescribed under The
Finance Act, 1994. In the case where the service
recipient is required to pay the Service Tax, such
recipient is required to file returns with respect to
services on which Service Tax has been discharged.

Service Tax on Provision of Service


Custom Duties (CD) on Import of Goods into
India

Custom Duties are levied on the import of goods into


India. The goods that would be chargeable to Custom
Duty and the rate, at which it would be charged, is
specified in The Customs Tariff Act, 1975. In addition
to the basic custom duty, import of goods is also
charged to other import duties such as Counter-vailing
Duty (CVD) guided by The Central Excise Tariff Act,
1985 and Special Additional Duty (SAD) guided by
The Customs Tariff Act, 1975. The goods imported into
India could also be charged to other cess and duties, as
may be applicable. CVD is similar to excise duty on
domestic manufacturing and SAD is similar to VAT on
local sale. The effective peak rate of Custom Duties
for general categories of goods is at 29.44% and the
effective duty rate varies from product to product.

An importer of goods is required to get him registered


with the Directorate General of Foreign Trade (DGFT)
and obtain Importer-Exporter Code (IEC) for
importing goods into India. The importer is required to
follow the prescribed procedures under the relevant
acts, rules, notifications and circulars for the purpose
of importation and also for export of goods outside
India.

Custom Duties on Import of Goods into India


Entry Tax / Octroi on Entry of Goods into a
State

Entry Tax is levied by the state government on entry


of goods into the state from another state or on
importation of goods from outside India into the state.
For example, Entry Tax is levied by the state of
Madhya Pradesh on specified goods entering the state
under the provisions of the Madhya Pradesh Tax on
Entry of Goods, 1952. Octroi is similar to Entry Tax in
nature, but it is levied by the local municipal
corporation of the state. For example, Octroi is levied
on entry of goods into the Mumbai region by the
Mumbai Municipal Corporation under the provisions of
the Mumbai Municipal Corporation Act, 1888.

Entry Tax / Octroi is usually payable by the person


causing the entry of goods into the state or the local
area. The person causing the entry of goods is also
required to be registered with the state or municipal
authority, pay taxes and file returns as prescribed
under the legislations governing Entry Tax and octroi.

Entry Tax on Entry of Goods into a State


Tax Credit and Incentives
In addition to the basic understanding, it would be
beneficial to be familiar with the mechanism of tax
credits, tax incentives and departmental framework
under the existing indirect tax regime.

Input Tax Credit / Cenvat Credit

The basic rule of indirect tax is that the indirect tax


should be charged on value addition and no value
should attract tax more than once. A simple process to
levy indirect taxes would have been to charge the tax
on the last point of sale or service (for example, the
sale from retailer to the customers). However,
monitoring and collection of taxes at the last point of
sale is cumbersome and could lead to significant
leakage of revenue for the tax authorities. Hence, a
more controllable and manageable option is to levy tax
at each point of value addition and give credit for the
value on which tax is already paid. To put it in simple
terms, a manufacturer is charged Excise Duty on the
value of finished goods (usually called assessable value
as determined under the provisions of the legislation)
cleared from his factory. However, the manufacturer is
allowed to take credit of Excise Duty and Service Tax
paid on the inputs, capital goods and input services
purchased for manufacturing the goods. This way (that
is by taxing at each stage and giving credit at each
stage), the tax authorities stay in control of levy as
well as collection of taxes and the tax payer is not
burdened with double time taxes.

The current Input Tax credit (also referred to as


Cenvat Credit) system allows the credit of input taxes
with certain restrictions and conditions. While most of
the paid input taxes can be taken as credit, some of the
Input Taxes are denied for credit and remain as a cost
in the product and services. An illustration of the
mechanics of Input Tax Credit under the existing
Indirect Tax Regime

A - Input Excise Duty / Service Tax credit mechanism


B Input VAT credit mechanism (same state
transactions)
Tax Free Zones / Tax incentives

Tax free zones were created in India to boost the


growth of industrially backward areas. Tax incentives
were provided to businesses so that the businesses
should locate their factories / operations in such
industrially backward areas and support the
development of the region. The central government
provided exemption on Excise Duty and the state
governments provided exemption / deferment of
VAT/CST on setting up the manufacturing facilities in
the identified backward areas. Tax benefits have
lapsed in most of the tax free zones as of now.

To boost export of goods and services from India, the


central government also created schemes and zones
that offered tax incentives. For example, Export
Oriented Unit (EOU) for manufacture and export of
goods, Software Technology Park (STP) for export of
information technology and information technology
enabled services, Electronic Hardware Technology
Park (EHTP) for manufacture and export for
electronic hardware, Bio-Technology Park (BTP) for
bio-technology research and development, Special
Economic Zone (SEZ) export of goods and services,
Free Trade Warehouse Zone (FTWZ) for warehousing
and trading in goods etc.

In addition to the above, under the current indirect tax


regime, there are various concessions and exemptions
on various goods and services based on the category of
goods and services, nature of use, end-user industry
etc. The current tax incentive / exemption schemes
result into substantial loss of indirect tax revenue to
the central and state governments.

Export Incentives
Export of goods and services from India are
incentivised under the existing indirect tax regime. The
twin objectives of the central government and state
governments were to remove the burden of taxes from
the goods and services exported from India in order to
make them competitive in the overseas market and to
earn foreign exchange. Some of the existing export
incentives are; Export Promotion Capital Goods
Scheme (EPCG), Advance Authorization Scheme,
Duty Drawback Scheme, Merchandise Exports from
India Scheme (MEIS), Service Exports from India
Scheme (SEIS), Refund of Input service tax, Rebate of
output tax etc. In all the above schemes, either the
input or the output taxes on the goods and services are
eliminated or refunded to make it tax free.

Availing export incentives is very procedural as well as


document intensive and requires lot of pre-work before
exports and also post-work after the export is
completed. While some schemes are simple to realise
the benefit, in few schemes, the procedures are
cumbersome and a significant amount of time and
resources need to be spent for obtaining the exemption
or refund of taxes.

Departmental Framework
Under the existing indirect tax regime, the Central
Board of Excise & Customs (CBEC) acts as the
mother organisation for all the central legislations
(excise duty, service tax and customs). The
departments formed under the respective state
governments regulate the state level indirect taxes of
VAT, CST and Entry tax.

CBEC, in consultation with the Ministry of Finance,


basically decides the central indirect tax policies and
implements it through various commissionerates. The
central indirect tax commissionerates / departments
are organised under the CBEC based on the type /
nature of tax. The below illustrative chart provides an
overview of commissionerates organised under the
CBEC for excise duty.

In this chapter, we have briefly understood the


different types of indirect taxes that are operating in
India and have also touched upon a few basic concepts
of input tax credit, tax free zones, export incentives
and departmental framework. As is evident, the
current indirect tax system in India consists of multiple
central and state taxes, which are administered under
multiple acts and rules and require voluminous
compliance procedures at regular intervals. The
diverse nature of taxes, multiple points of taxation,
different administrations, varied procedures and
frequent compliances have created a challenging
environment for businesses to manage the indirect
taxes on a day-to-day basis.

GST is expected to streamline and simplify the above


system as well as make indirect taxes easy to
understand and follow. Going through this book, we
shall unfold the concepts of GST and explain how the
current indirect tax system will transform into GST
system.
Chapter 2
GST History of India
India opened the economy to the world and started
privatisation of industries and sectors from the year
1991 onwards. Control of the government over the
economy and markets was relaxed step by step and the
private sector grew stronger with each step. The
policies regarding commerce and industry went through
significant changes to accommodate the entry of the
private sector and growth of the service sector in the
country. However, the tax policies stayed behind and
could not keep pace with the growing economy as well
as changing reality of doing business. The growth of
the technology sector changed the way businesses
were carried on and many new business transactions
emerged, which were not expected and anticipated by
the indirect tax laws as they were primarily written,
decades ago, for the manufacturing sector.

The existing excise law took birth in 1944, VAT laws of


the states were formed during the 1950s & 60s and
CST law belongs to 1956. Numerous amendments have
been introduced into the above legislations to meet the
needs of the changing economy of India. However, in
spite of the efforts to update the indirect tax laws to
make it relevant for todays transactions, they have
fallen short of expectations on multiple counts.

The need to reform the existing indirect tax system in


India was felt a couple of decades ago. New
comprehensive indirect tax legislation was the need of
the hour when India went on the path of liberalisation
in 1991. However, serious work to integrate the
indirect tax legislation and simplify it was not there
until the year 2000, almost a decade after
liberalisation. The task was not easy. Comprehensive
and common indirect tax legislation was possible only
when the central and state governments worked
together and agreed upon the modalities of legislation
and its administration. It is no surprise that even after
almost 16 years from the time India thought about
GST, the law is yet to be designed for implementation.

GST History of India


The first empowered committee (EC) of state finance
ministers, who had the responsibility to design GST,
was commissioned in the year 2000 and was headed by
Mr. Asim Dasgupta, the then finance minister of the
Government of West Bengal. The EC had the
challenging task of conceptualizing GST for a
politically diverse landscape of India. Years of
deliberation on GST yielded very little result.

In the year 2004, the central government took the first


concrete step towards GST by integrating certain
portions of indirect tax legislations. The input tax
credit and utilisation features under the central excise
and service tax legislations were harmonised into a
common legislation and cross-utilisation of credits
between service tax and central excise was made
possible. This was the most noticeable beginning of a
long journey towards integration and rationalisation of
indirect taxes.

In the year 2005, after years of discussions, majority of


states in India collaborated to implement VAT replacing
the earlier Sales Tax System. This was the second
major step towards realising the dream of GST for
India. The earlier Sales Tax System with its unique
laws, rate structures, exemption lists and different
procedures across the states had created an
unbelievable amount of complexity to do business in
India. VAT was broadcasted as a standardised
legislation to tax sale of goods and implemented with
the objective of having common legislation and
procedures across the states. However, the objectives
of VAT were only partially realised. The states again
ended up having their own set of rates for goods and
adopted different set of procedures for VAT
management and compliance.

During the union budget speech in 2006-07, Mr. P


Chidambaram, the then Finance Minister, made the
formal announcement for implementation of GST from
April 1, 2010 and entrusted the job of preparing the
road map for GST implementation to the EC.
Separately, the thirteenth finance commission was
entrusted with the responsibility to make
recommendations on the implications of GST on the
Indian economy.

The EC setup Joint Working Groups (JWC), which


consisted of members from the centre and state
governments, to provide the framework for GST in
India. After deliberations, the JWC submitted its initial
report to the EC in November 2007. The EC, after
obtaining input from Government of India, Mr. Pranab
Mukherjee, the then Finance Minister and after
considering the issues plaguing implementation of GST,
released its First Discussion Paper with the basic
framework of the GST structure in November 2009.

The thirteenth finance commission under thechairmanshi


of Mr. Arbind Modi, Joint Secretary, Department of
Revenue, released a report on GST called the Report
of the Task Force in December 2009. The Task Force
report made recommendations on various issues
relating to the design and implementation of GST. The
task force undertook the study over a long period of 18
months and spent considerable time interacting with
experts and officials from the central and state
governments to carve out the issues and offer
meaningful suggestions and solutions on GST matters.

Post release of the first discussion paper in November


2009, which was followed by the Report of the Task
Force on December 2009, the industry felt that GST
would pick up speed and would be implemented in a
year or two. However, differences in views between
the centre and state governments remained on matters
like compensation for loss of CST, GST rates, products
to be included and excluded from GST, thresholds,
autonomy for states under the GST legislation, etc. and
the implementation deadline, which was initially set for
April 1, 2010, kept moving year after year without a
concrete road map and implementation timeline in
sight.

The Constitution Amendment Bill (CAB), 2011


introduced to amend the constitution to facilitate levy
of GST got little support in the parliament with the
continuing differences on matters between the centre
and state governments. Without the acceptance and
concurrence to the CAB, further progress on GST was
impossible as only the passing of the bill by the
parliament and state legislatures could have allowed
the drafting of the GST legislation.

The central government also set up a special purpose


vehicle, called the GST Network (GSTN), in the year
2011. GSTN has the responsibility of developing the IT
infrastructure needed for implementation of the GST
in India. At present, the GSTN is moving forward and
is working with the IT software developers to design a
system for management of GST compliances.

In the year 2012, the central government moved the


proceedings a step closer to GST by introducing a
negative list based taxation of service and the place of
provision of service rules. With the introduction of the
negative list based taxation of service, all services
became taxable to Service Tax except those services,
which are specifically exempted from service tax or
are a part of the negative list. The place of provision of
service rules provided guidance on determining where
the service has been rendered for the purpose of
charging the Service Tax. Though place of provision of
service rules may have a limited role under the existing
indirect tax regime, it will still play a significant role
once GST is implemented.

The political turmoil in the country and the lack of


effective coordination between the centre and states
led to slow down of GST reform and dragged on
without a clear implementation timeline in sight. GST
implementation came to a standstill for almost a year
and a half between 2012 and 2014 for lack of political
will to implement GST. The frequent changes made to
the chairmanship of the EC also contributed to the
delay.

The elections of 2014 provided a clear mandate to one


of the parties to govern India. This led to the formation
of a stable government at the centre and the
anticipation for GST implementation got a boost. The
central government, at present, is very vocal about its
intention to bring about GST in India in the next couple
of years. The central government has more than once
commented in the public domain that the government is
keen to implement GST at the earliest.

The central government, in order to enable the


introduction of GST by April 1, 2016, re-introduced the
Constitution Amendment Bill, 2014 in the parliament
on December 19, 2014 during the winter session.
However, the bill could not be cleared by the
parliament in the winter session of 2014.

Mr. Arun Jaitley, the Finance Minister, in the Union


Budget speech of 2015-16, reiterated the commitment
of the centre and state governments to implement GST
by April 1, 2016. Also, some measures such as increase
in the rate of service tax from the current 12.36% to
14.0%, withdrawal of a few exemptions available under
the negative list of services, guidelines for issuance of
electronic invoices and maintenance of electronic
records etc. were announced giving an indication that
the central government is determined to implement
GST at the earliest.

The CAB was taken up in the budget session of the


parliament in 2015 and after lots of deliberations, the
Lok Sabha cleared the CAB on May 16, 2015 A detail
discussion on the contents of the CAB and how it is
relevant for introduction of GST in India is covered
under the Chapter Constitution Amendment Bill
separately.

However, the CAB could not be cleared in the Rajya


Sabha as the opposition demanded for the bill to be
referred to a select committee for further deliberation
before it can be passed in the Rajya Sabha. The central
government appointed a select committee with 21
members, which deliberated on the contents of the
CAB and placed its observations before the Rajya
Sabha on July 22, 2015. However, the CAB was not
cleared by the Rajya Sabha in the monsoon session
during July to September 2015 as well as in the winter
session during November to December 2015. CAB is
now expected to be discussed for approval in the
budget session of 2016.

The CAB is stuck in the Rajya Sabha due to


disagreement on the contents of the CAB between the
ruling government and the opposition. The budget
session of 2016 should give an indication on the
possibility of approval of the CAB. After the CAB is
cleared by the Rajya Sabha, at least 50% of state
governments have to clear the CAB in order to make
way for drafting of GST legislations and
implementation.

Recently, the Joint Committee on GST also released


reports, into the public domain, on the procedures for
registration, returns, payments and refund in the GST
regime. The central government, at present, is seeking
inputs from the industry and other stakeholders on the
above reports.
Chapter 3
GST Conceptual Shift
The first discussion paper released by the Empowered
Committee of state finance ministers in November
2009 provided basic framework for GST in India. Since
the release of the paper, lots of debates and discussions
on the effectiveness of the proposed model and the
improvements needed have taken place between the
centre and state governments as well as within the
business community. The proposed GST model is still in
progress and could possibly undergo changes based on
inputs from governments and industry. However, the
basic concepts and the overall structure of GST should
largely remain as conceptualised under the first
discussion paper.

In this chapter, we shall understand the proposed GST


structure for India. But before getting into the key
features of the proposed GST structure, we need to
touch upon the conceptual shift that would take place
under the GST regime in comparison to the existing
indirect tax regime.
Conceptual Shift under the GST
Regime
GST will be a Consumption Based Tax

Indirect tax is considered as a destination tax, where


the tax is levied on consumption of goods and services
as well as collected at the place where such
consumption takes place. However, India followed the
concept of origin based taxation, on within the country
transaction, rather than consumption based taxation.
For example, when a trader sells goods from the state
of Karnataka to the state of Maharashtra, the
applicable CST on such sale is charged and collected by
the state of Karnataka (the state from which the goods
originated for sale to Maharashtra). In this case,
though the goods would get consumed in the state of
Maharashtra, the tax is collected by the state from
which the goods originated, i.e. the state of Karnataka.
Similarly, when a manufacturer produces goods in the
state of Karnataka and removes the same from his
factory to be shipped to Maharashtra, the Excise Duty
is collected by the central excise authority of the state
where the manufacturers factory is located.

Under GST, the concept of origin based taxation will be


replaced by consumption based taxation (with
exceptions). GST is expected to be levied at the place
of consumption and hence the tax revenue would shift
to the consumption states rather than the origin states.
However, it is also possible under the GST legislation
that for some types of transactions, the GST could be
collected in the state of origin.

Consumption based taxation would be easy to


understand and implement for goods, wherein it can be
established with reasonable accuracy as to where
(which state) the goods have been consumed. However,
in case of services, consumption based taxation would
be complex and it would be very challenging to
determine where the services have been consumed.
Furthermore, in case of goods which are stored and
delivered electronically, it would be a complex exercise
to determine the place of consumption. Given the
complexity in assessing the place of consumption, the
central government may opt for a mix of origin based
taxation and consumption based taxation under the
GST regime.

Indirect Tax Regime Origin Based


GST Regime Consumption Based
The consumption based taxation model under GST
would radically change our understanding of the levy
and collection of indirect taxes and would significantly
impact the revenue collection of states based on
whether the states consume goods and services or
manufacture goods and services.

GST will be on supply of goods and services

Under the indirect tax regime, the tax on goods and


services is levied on the occurrence of a taxable event
such as manufacture of goods, sale of goods, entry of
goods, provision of service or import / export of goods
into and from India, etc. The activities of manufacture,
sale, service, etc. were defined under the respective
legislations and an activity was charged with tax if the
activity satisfied the definition provided under the
legislation. For example, processing or production of
goods in a factory is subject to Excise Duty only if such
process satisfies the definition of manufacture under
the central excise legislation and also the item being
manufactured is mentioned under the central excise
tariff Act as chargeable to Excise Duty.

Under GST, the principle of taxation will shift to


supply of goods and services. The term supply would
have wider applicability compared to that of the sale,
manufacture or provision of service and hence a
number of transactions between parties, which were
traditionally not chargeable to indirect tax being not a
sale or a service, may be chargeable to GST. For
example, stock transfer of goods between depots of the
same company, inter-unit cross charges between
branch offices of the same company, transfer of goods
from the job-worker to the principal manufacturer etc.
could be treated as a supply of goods under the GST
regime and charged to GST.

The centre and state governments are expected to


take adequate care and caution in defining the term
supply under GST to ensure that it does not result
into interpretation issues and litigation.

Taxable Events - Indirect Tax vs. GST

Difference between goods & services

The current indirect tax legislations attempt to make


a distinction between goods and services. While sale of
goods is taxed by the state governments, provision of
services is taxed by central government (based on the
current powers given by the constitution of India).
Under the present indirect tax regime, the businesses
have to differentiate between goods & services for the
purpose of applying either VAT/CST or Service Tax. In
some cases, both VAT/CST and Service Tax are applied
as both the central and state legislations try to cover
such transactions for taxability.

Under GST, the constitution of India will be amended


to give powers to both central and state governments
to levy tax on both goods and services and hence
irrespective of whether it is a supply of goods or
service, both the central and state governments will
levy GST on the transaction. Given that all
transactions in goods and services will be charged to
GST, there may not arise a need to distinguish between
goods & services as it is done today.

However, the above scenario can work only in a case


where the GST is implemented across India in all the
states and there are no GST rate differences between
goods and services. If the services are taxed at a lower
GST rate and goods are taxed at a higher GST rate or
vice-versa, then it would open up an opportunity for
interpretation and a need would arise for classification
of transactions as either goods or service.

GST will be Structure Neutral


The current indirect tax regime offers various
incentives in terms of exemptions, concessions, tax free
zones, rebates, refunds, etc. The above incentives have
not reduced the indirect tax revenue to the
governments but have also provided an opportunity for
the businesses to structure the transactions different
ways so as to reduce the net outflow of indirect taxes.

Under GST, the governments are considering to widen


the tax base by significantly reducing the benefits /
incentives available under the current indirect tax
regime. Furthermore, the refunds / rebate of taxes
would also be made available only in exceptional cases
(say, export of goods or services). An exemption free
regime of GST will offer little opportunity for the
businesses to structure the transactions for reduction
of indirect tax outflow. While it is not fully clear as to
which way the GST legislation will move forward with
regards to tax exemptions, the general consensus
between the centre and state governments is to limit
the exemptions for very few items and transactions.

This shift in the fundamentals of indirect taxation


under GST will bring about substantial changes to how
businesses will operate in India and the way indirect
taxes will be levied, collected and accounted for.
Chapter 4
GST Structure for India
The first discussion paper and the report of the task
force released in November 2009 and December 2009
respectively provided a framework of the proposed
GST structure for India. In this chapter, we shall
capture some of the key features of the GST proposed
to be implemented in India.
Key Features of GST
Dual GST

GST will basically replace the existing indirect taxes


and will be split into two broad taxes. The first tax will
be called Central Goods & Services Tax (CGST)
covering the existing central indirect taxes of Excise
Duty, Customs Duty (except Basic Customs Duty) and
Service Tax. The second tax will be called State Goods
& Services Tax (SGST) covering the existing state
indirect taxes of VAT, Entry Tax, Entertainment Tax,
Luxury Tax, Octroi, etc. (Municipal level octroi and
other taxes may still continue). Any supply of goods or
services would be taxed with CGST and SGST under
the GST regime.

CGST and SGST would be applicable on intra-state


transactions (supply of goods or services within the
same state). However, inter-state transactions (supply
of goods or services from one state to another) and
import of goods and services would be taxed to
Integrated Goods & Services Tax (IGST). IGST at
present is envisaged as a combination of (or sum of)
CGST and SGST and would replace the existing CST
on inter-state transactions and CVD as well as SAD on
import transactions.

The Basic Custom Duty (BCD), Municipal Taxes,


Stamp Duty, Toll Taxes, R&D cess, etc. would still
continue to be levied under their respective legislations
and will not form part of the proposed GST legislation.

Existing Indirect Taxes to be subsumed under the GST


regime
Input Tax Credit
The unique feature of GST is that it proposes to offer
full input tax credit of CGST, SGST and IGST paid
against the inputs, capital goods and input services as
well as utilisation of such credit against the output
CGST, SGST and IGST liability on supply of goods or
services.

Under the current indirect tax regime, tax paid on


many inputs, input services and certain capital goods
are restricted for credit by the legislation. This results
into increase in the cost of product and services as the
ineligible input tax credit gets embedded into the cost
of the product and services. In contrast, the GST
regime offers seamless input tax credit.

Having said the above, the GST regime is also likely to


restrict unconditional usage of accumulated credit.
GST, as we understand it, will not allow cross-
utilisation of credits between CGST and SGST (which
means input CGST can be utilised only against output
CGST and input SGST can be utilised only against
output SGST). On IGST, it is understood that the input
IGST would be first utilised against output IGST and
the balance, if any, would be allowed to be sequentially
used against output CGST first and then against output
SGST.

Furthermore, the input tax credit under GST could also


get restricted as the businesses would have to keep an
account of SGST (which is a tax levied by the state
government) at the state level instead of using it as a
common pool across India. When SGST is managed at
the state level, similar to the existing VAT, the
businesses could be exposed to situations of SGST
credit in one state without utilisation possibility and
output SGST liability in another state without any
input SGST credit to utilise. These situations would
lead to imbalance on availability and utilisation of
SGST resulting into inefficiencies in the GST system.

It is likely that the GST legislation will impose specific


restrictions on how the CGST, SGST and IGST can be
individually utilised and how they can be cross-utilised
against each other. While such restrictions may defeat
the purpose of the GST of offering full input tax credit,
the credit features under GST are expected to be
better than the input tax credit eligibility under the
current indirect tax legislations.

The illustrations below will provide more clarity on the


applicability of CSGST, SGST, IGST and possibilities
of input tax credits.

Input tax credit mechanism under the GST regime

Sale of goods within the State (Intra-state)

Sale of goods between States (Inter-state)


Standardised GST Rates
GST will standardise the rate of indirect taxes on
goods and services and remove the inefficiency of
multiple rates under the existing indirect tax regime.
While VAT is considered as a standardised platform
across India to levy tax on sale of goods, the rates for
many products are different in different states, leading
to complexity and arbitrage opportunities.

Under GST, goods are expected to have at least 3 to 4


different GST rates and services are expected to have
at least 2 different GST rates based on the nature of
goods & services. The central and state governments
are yet to arrive at a consensus on the classification of
goods and services under different rates. There also
exists a possibility where states may have right to
charge GST on goods within a specified band rate. For
example, for certain agreed goods, states may have the
right to charge GST within the band rate of 12% to
16% (rates are illustration only, actual rates could be
different). The respective state may choose the
specific GST rate within the above band rate of 12% to
16%.Though there would be multiple rates under GST,
the rate itself should largely remain common across the
country.
Possible GST Rates??
Place of Supply
Indirect tax in India has been a mixture of origin based
and destination based tax. While the domestic
transactions in goods and services are charged based
on the origin concept, the export transactions in goods
and services are exempted from indirect taxes based
on the fact that the destination of such goods or
services would be outside India.

Under GST, the concept of indirect taxation would


move from origin based to destination based. Hence,
goods and services would be taxed at the place of
supply or the place where such goods and services
would eventually get consumed. GST legislation will
include place of supply rules that would lay down the
rules for determining the place of supply for goods and
services for the purpose of charging GST. GST will be
charged and collected by the centre and state
governments based on the provisions of the place of
supply rules.

The GST place of supply rules are expected to follow


the below broad principles:

In the case of goods, place of supply would


generally be the place of delivery or physical
location of goods.

In the case of services, the place of supply would


generally be the place of location of the recipient
of service or place of location of of the provider of
service or place of performance of service or
place of location of the immovable property in
relation to which service is provided or place of
use or enjoyment of service

As it is evident from the above, in case of goods,


determining the place of provision of service may not
be a big challenge. However, in the case of services,
especially if the services are electronically delivered,
drafting legislation to determine the place of supply
becomes a complex exercise.
Zero Rating of Exports
Under the existing indirect tax regime, exports from
India are incentivised and the goods and services
exported are either exempted or zero-rated from from
an indirect tax perspective. The input taxes paid on
inputs, input services and capital goods which are used
for the purpose of manufacture and export of goods or
provision of services are refunded to the manufacturer
or service provider by way of refund / rebates.

Under GST, exports will be zero rated, i.e. GST at 0%


will be applicable on export of goods and services. The
GST paid on inputs, input services and capital goods
would likely to be paid back to the taxpayer by way of
rebates, refunds or any other mechanism that the GST
legislators may conceive.

Exports to be zero rated under the GST regime


GST on Imports
To put it mildly, the taxation of import of goods, under
the present indirect tax regime is complicated. There
are not only multiple levies (such as BCD, CVD, SAD
and Cess etc.) but also a variety of rates based on the
nature of imported goods, nature of usage of the
imported goods and on the status of the end-user of
such imported goods.

Under GST, BCD would continue to exist and CVD as


well as SAD would be replaced by IGST. IGST levied
on the imported goods should be eligible as input tax
credit and for utilisation against the domestic IGST,
CGST and SGST liabilities, subject to restrictions
prescribed under the GST legislation.

Import Duties Indirect tax regime vs GST regime


Uniform Procedures
One of the attractive features of GST is that the
indirect tax procedures both for governments and
businesses would be simplified. The existing indirect
tax legislations are unique to the centre and states and
the state governments have their own set of processes
and procedures for various compliance activities, right
from registration to payment of taxes to the
completion of the assessment. The diversity of
procedures and compliances, which is spread across the
country, is a huge day-to-day challenge for businesses.

Under the GST regime, the existing indirect tax legislati


are going to be pooled together. In all probability, there
would be one GST legislation at the central level to
administer CGST, one GST legislation for each state to
administer SGST and one GST legislation to
administer IGST. Though each state could have its own
SGST rules to administer SGST, there is also an
attempt to develop consensus across state
governments to adopt common / standardised
procedures and compliances to drive simplification.

Uniformity in the processes and procedures of CGST


and SGST across the states will substantially reduce
the time and cost involved in management of
compliances for the businesses.
Automation of Compliance
GST promises to automate the procedural and
compliance requirements of indirect taxation. Today,
management of indirect taxes involves a huge number
of monthly, quarterly and annual compliances that are
not only tedious, but also require manual filing and
interactions with the tax departments. It must be
acknowledged that the centre and state governments
have already automated a lot of procedures, including
procurement of registration certificates, amendment to
registration certificates, filing of periodical returns,
duty drawback etc. However, still a lot of procedures
lie outside the automated system.

Under GST, the taxpayer can expect a very robust and


automated indirect tax management system that will
substantially reduce manual filings and interactions
with the tax departments. The central government has
setup the GST Network (GSTN), which is working
progressively on automation of compliance processes
under the GST regime.

The abovementioned key features form the


fundamental building blocks of GST. The current GST
design envisaged for India carries a lot of advantages
within it and if implemented in the right spirit, GST
should turn into a welcome regime for both
governments and businesses.

Illustration of tax cost under the current indirect tax


regime and the GST regime

(Numbers and rates are assumed for simplicity. Actual


impact could be different)
Chapter 5
Benefits of GST
GST would be the biggest indirect tax reform in India.
GST is not only a preferred indirect tax system across
the globe not only for its simplicity but also due to the
benefits it brings to governments, businesses and to the
consumers. GST would be beneficial to all sections of
the society when it is implemented in its true letter and
spirit.

Irrespective of how good or bad the GST design and


implementation would turn-out, GST in its proposed
shape would offer a number of benefits to all the
stakeholders. The benefits of GST can be broadly
classified and discussed under the following heads:

Benefits to Governments

Benefits for Businesses

Benefits to Consumers
Benefits to Governments
Expansion of Tax Base

GST by design plans to tax supply of all transactions


in goods and services and keep the concessions and
exemptions to a bare minimum. Levy of GST across
the board without any significant tax holidays or
concessions will enhance the tax revenue both for the
central and state governments. Furthermore, reduction
of the threshold (the turnover of goods or services
below which GST would not be levied) under GST
would expand the base for governments to charge
GST.

Increase in Revenue

- The expansion of tax base should automatically result


into increased revenues to governments. Furthermore,
the amount of non-compliance / non-payment of taxes,
which is a common feature in the Indian tax system, is
also likely to reduce in the event of a low GST rate. A
low GST rate would induce the businesses and
consumers to pay taxes and cut down on cash
transactions. Scrapping of concessions and exemptions
under GST would also substantially increase the
revenue for governments. A similar increase in revenue
to state governments was seen when states switched
over from the earlier sales tax regime to VAT regime.

Streamlining of Administration

Indirect tax administration is distributed between


multiple departments and divisions. The frequent
addition of legislations in the indirect tax area in the
past 6 to 7 decades has resulted into the creation of a
number of authorities to administer and manage
indirect taxes.

The centre and state governments have made many


attempts for reforming the indirect tax administration
in the country. GST offers a good opportunity for
governments to streamline and standardise various
indirect tax administrative authorities. Given the
limited number of legislations under the GST, the GST
administration is expected to be lean and engaged in
constructive tax management.
Benefits for Businesses
Possible Reduction in Tax Cost

Any product purchased by a consumer in India today


is loaded with at least 30 35% of indirect taxes (say,
12.50% of excise duty, 14.5% of VAT, entry tax, non-
creditable input taxes etc.). Similarly, consumption of
service would not only attract a tax of 14.0%, but also
includes the non-creditable VAT / CST on the input and
capital goods used for providing the service. Added to
the above, there exists cascading effect of tax (i.e. Tax
on tax) under the current indirect tax regime.

GST rates should be lower, in the range of 18% to


20%, compared to the current indirect taxes of 30
35% embedded in the goods. The lower rates should
straight away provide the benefit of lower tax cost of
goods resulting into lower prices to consumers.
However, the tax cost on services could increase from
the existing 14% to the range of 18% to 20%. GST
would also support the reduction in tax by the feature
of full credit of input taxes, thereby eliminating the
cost of tax on tax.

Optimisation of Resources, Cost and Time


The cumbersome nature of the existing indirect tax
legislation results into the businesses spending an
enormous amount of resources, cost and time on
managing indirect taxes, meeting the day-to-day
procedural requirements and handling the frequent
compliances across various legislations.

GST with its simplified procedural and compliance


framework could drastically reduce the need for
resources as well as the cost and time spent by
businesses on management of indirect taxes.
Furthermore, automation of compliances under GST
would enable filing of returns etc. from the comfort of
the office, reduce travel and interaction time with the
department and speed up the process.

Reduction in Litigation

The Indian courts at all levels are flushed with


indirect tax litigations. Numerous legislations and
diverse interpretations by businesses and departments
have resulted into rampant litigations. Also, the
litigations have to be fought for decades before a
verdict could be expected. Litigation has resulted into
wastage of time and money.

GST, with fewer and simplified legislations, has the


potential to reduce the number of litigations.
Furthermore, reduced number of compliance and self-
assessment can also reduce the queries and objections
raised by the department on day-to-day basis leading
to lower number of litigations.

Efficient Structuring of Operations

In todays indirect tax environment, the businesses


have to organise themselves and undertake operations
in a certain specified manner to optimise the outflow of
indirect taxes and benefit from the concessions and tax
exemption schemes. Therefore, businesses are forced
to organise and operate as per the need of legislations.

GST, with its structure neutral effect and commonality


of tax laws across the country, could offer a chance to
businesses to organise and operate as may be
operationally feasible rather than organising
operations based on the requirements of the indirect
tax legislations. The ability to operate from anywhere
in India without being seriously disadvantaged vs. any
other location would be a boon to the businesses under
GST.

Self-Assessment
- The indirect tax compliances under the existing
indirect tax regime has gradually shifted from
departmental assessment to self-assessment. The
indirect tax payments and tax returns filed by the
businesses are no longer required to be scrutinised and
authorised by the department prior to payment of
taxes or filing of returns. However, businesses are
subject to audits and investigations by the department
to flush out tax evasions.

GST would offer more comprehensive self-assessment


procedures without frequent intervention by the
department. Furthermore, automation of procedures
and compliances would pave way to the true self-
assessment and businesses would benefit from reduced
intervention from the governmental authorities.

Benefits of GST
Benefits to Consumers
Possible cheaper goods and services

- Goods and services cost roughly 30 35% more to


the consumers today with the loading of indirect taxes.
Whether it is buying a shampoo from the general stores
or eating out at a restaurant, indirect taxes burn a hole
in the pockets of the consumers.

GST, if implemented at the peak rate of around 18 to


20%, could result into reduction in prices of goods.
Reduced prices have the potential to increase the
consumption of goods and in-turn support the
businesses to thrive and grow.

Improved service levels

A typical transfer of goods from one state to another


state by road involves travelling through various
commercial tax check-post points and meeting
compliance requirements at each of these check-posts.
The result is long lead time to deliver goods to
consumers, post placement of orders. In the event of
simplified procedures for movement of goods between
states under the GST regime or removal of check-post
verification procedures, the delivery time for goods to
consumers will reduce, improving the service levels.

Access to goods & services

Inter-state and import transactions are cumbersome


under the present indirect tax regime owning to
substantial taxes, documentation requirements and
procedural complexities. Given the above complexities,
the trader of goods and provider of services confine
their operations to a single state. Under GST, with the
standardisation of taxes and simplification of
documentation and procedural requirements, traders
and service providers, who currently operate within a
smaller area, would have an opportunity to expand
operations across the country in a seamless manner
and offer goods & services to consumers across the
country. Consumers would be benefited with an
assortment of goods & services to choose from.

GST will result into all-round benefits to all the


sections of the society and will offer opportunities for
growth and development of businesses in India. GST
will not only support the growth of domestic businesses,
but would also bring in investments from overseas for
creation and development of new businesses in India.
The benefits offered by GST far outweigh the
challenges posed by it and is a promoter of growth of
businesses and the economy. It is, therefore, very
important that GST is implemented in India sooner
rather than later.
Chapter 6
Challenges of GST
GST is a welcome change for India. GST, irrespective
of the form and shape in which it would be
implemented, would benefit the industry, governments
and consumers by simplifying the existing indirect tax
regime, which is complex and cumbersome to deal with.
In theory, GST is the best thing to enter into Indias
tax system. However, in practice, GST is not without
challenges.

GST will pose a lot of challenges to all stakeholders,


right from the stage of conceptualisation till the stage
of implementation and management on ongoing basis.
The effectiveness of GST would depend on how well
the challenges will be collectively addressed by the
stakeholders.

The GST challenges can be broadly classified under


the following heads:

Conceptualisation Stage

Implementation Stage
Administration and Management Stage
Conceptualisation Stage
Types and Number of GST

The proposed GST in India consists of CGST, SGST


and IGST. In simple terms, CGST and SGST can be
perceived as clusters of existing central and state
taxes. IGST would fundamentally replace the existing
inter-state tax of CST. The GST regime would consist
of three main categories of taxes of CGST, SGST and
IGST against the existing three main categories of
taxes of Central Excise, Service Tax and VAT. In
addition to the above three main categories of GST,
the GST bill has also introduced an additional tax of
1% on inter-state transactions. In essence, we shall be
still looking at four different types of indirect taxes
under GST CGST, SGST, IGST and 1% additional
inter-state tax. While GST is definitely an
improvement over the current indirect tax regime, but
at conceptual level, GST still contains multiple taxes /
levies, which would require interpretation,
administration and collection. In comparison, countries
such as Canada, Australia, etc. run on single unified
GST, which considerably simplifies the application of
indirect taxes.
However, in the federal structure of India, wherein
both the centre and the state governments have
powers to levy taxes on transactions, it is difficult to
implement a unified GST. The governments, businesses
and consumers would have to continue to deal with
multiple taxes even in the GST regime, though the
number of rules and regulations would be cut down.

Rate of Tax

One of the biggest and the most significant


challenges under GST is to establish the rate at which
goods and services would need to be taxed. At present,
the VAT rates range from 4.5% to 15.5%, the Excise
Duty standard rate is 12.50%, the Service Tax
standard rate is 14.0% and the standard rate of
Customs Duty is 29.44%. Given the diverse rates
across the legislation, it is a herculean task for the
centre and state governments to cover the transactions
under an appropriate common rate under the GST
regime.

The report of the task force released in December


2009 after a detailed study of the existing tax base
under the indirect tax regime and the possible tax base
post introduction of GST had prescribed a GST rate of
around 12% with the centres share at 7% and the
states share at 5%. However, at this point in time,
there does not seem to exist consensus between the
centre and states on the rates that are needed to be
fixed for GST regime. Different views and rates are
adduced by the centre and state governments.

In line with the existing indirect tax regime which has a


combination of zero rate, base rate, standard rate and
peak rate, the GST regime is also likely to come up
with multiple rates based on the nature of the goods
and services involved in the transaction (The first
discussion paper of the empowered committee hinted
at 3 to 4 different rates for goods and at least 2 rates
for services). Further, there is high possibility that the
GST rate for goods and services would be different
from each other.

Based on the latest developments reported widely in


the media, the Empowered Committee is understood to
be reviewing some inputs, which prescribe the peak
rate of GST at 26.7%. This rate is extremely high and
would not be welcomed by businesses and consumers.
While the industry dealing in goods may not perceive
much benefit with such a high rate of GST, but the
service industry would be affected badly with the
increase of the rate from the current 14.0% to 26.7%.
However, Mr. Arun Jaitley, current Union Finance
Minister, has repeatedly stressed that the final GST
rate would be much lesser than the peak rate of 26.7%
that is being debated.

Threshold

Under the current indirect tax regime, the indirect


taxes are levied only when the turnover from the
transactions or business cross a specified threshold
(limit) under the respective legislation. For example,
Service Tax is charged only when the taxable turnover
of all the services provided is in excess of INR 10
lakhs. Excise Duty is levied only when the turnover of
the manufacturer exceeds INR 1.5 crores. Similarly,
VAT is levied by the state governments only when the
sales turnover is above the fixed limit as per the local
VAT legislation (usually between INR 2 lakhs to INR 10
lakhs).

However, GST would be a combined legislation and all


the central and state related indirect taxes would be
pooled into a common tax of GST. This pooling of
legislations under GST would raise the issue of fixing
the threshold for applicability of GST. State
governments are looking to keep the threshold low as
per the existing threshold under the state VAT
legislation, but the central government would be
looking for higher threshold based on the existing
higher threshold under the excise and service tax
legislation. Fixing of threshold is a double-edge sword
as fixing a lower threshold would be a burden on
industry and consumers, whereas fixing a higher
threshold would result in loss of revenue to the
government.

The task force, in its report of December 2009, had


recommended a threshold of INR 10 lakhs. In simple
terms, it means that all businesses which, register a
turnover of above INR 10 lakhs in a year, would be
required to pay GST. However, the central government
may have an issue with this recommendation as the
current threshold for payment of Excise Duty by the
manufacturers is INR 1.5 crores. Based on the latest
developments, it is understood that the empowered
committee may be considering a threshold of INR 25
lakhs for GST.

Inter-State Transactions

Inter-state transactions, which attract CST, have


been a trade barrier in India affecting the free
movement of goods between states and adding to the
cost of the product on account of CST being non-
creditable. GST will address the issue of CST as the
IGST on inter-state transactions, replacing the existing
CST, would be fully creditable and hence would resolve
the cost issue for businesses and consumers.

However, the process for administration of IGST contem


as of now is complex and requires the backbone of a
fine banking and information technology infrastructure
for it to be successful. In the absence of a fool-proof
system, administration of IGST would become
extremely complex for governments as well as
cumbersome for businesses.

Place of Supply Rules

Place of supply rules will be one of the biggest


conceptual challenges under the GST regime. The
Place of supply rules will help in determining where (in
which state for in-country domestic transactions) GST
should be charged and paid. The Place of supply rules
attains significance due to the fact that now, under the
to be revised constitution, both central and state
governments would have the power to levy GST on
both goods and services and it would be required to
establish which state would get the SGST based on the
provisions of the place of supply rules.

In the case of a transaction in tangible goods, it would


be relatively easy to determine where the transaction
in goods has to be charged to GST based on the
principle that GST is a consumption based tax.
However, in the case of intangible services,
complexities emerge with regards to determining the
place of supply of service for the purpose of GST. For
example, in the case of a teleconference call, where
the telecom company is based in one state, the call
initiating customer is based in another state and the
participants are spread across multiple states, it
becomes tricky to decide as to which state should get
the GST revenue for the teleconference bill issued by
the telecom company to the customer. Determining the
place of supply for every major service activity would
be extremely challenging.

The central government with an eye on GST had


introduced Place of Provision of Service Rules, 2012
under the service tax legislation. This would likely be
used as a base for drafting the rules of the place of
supply under GST by the central government. The
central government could also refer to the place of
supply rules prevalent in the European Union (EU). It
is very critical for the central government to achieve
reasonably sound place of supply rules to avoid future
dispute between the states and litigations in the courts.

GST Legislations

Under the proposed GST structure, there would be


one GST legislation for CGST and individual state
GST legislation for SGST. These legislations would
replace the existing legislations on Excise Duty,
Service Tax, VAT, Countervailing Duty, Special
Additional Duty, Entry Tax, Octroi, etc. IGST could be
administered through a separate legislation. Drafting
of these new legislations for GST provides a great
opportunity to the centre and state governments to do
away with a lot of unnecessary rules and regulations,
detailed procedures, multiple statutory forms etc. that
are existing under the present indirect tax regime. The
objective being, keep it simple, under the GST regime,
the centre and state governments should use this
opportunity to clean up legislations and bring in a
robust but easy to use GST legislations.

However, designing simplified legislations under GST is


easier said than done and it needs to be seen as to how
well the governments handle the dual interest of
revenue generation and simplified legislations.

GST Challenges
Implementation Stage
Transitional Provisions

Migration from the existing indirect tax regime to the


GST regime will throw up numerous challenges for all
the stakeholders involved. The government would
expect to migrate to the new regime with zero revenue
leakage and in the quickest possible time. The industry
would expect to migrate with zero additional tax cost
and in the smoothest possible way without any
disruptions to the businesses. The consumers would
expect not to be hit by adverse price fluctuations on
account of movement to the new regime.

Migration into the GST regime would be a long drawn


process and a lot depends on how best the transition
(change from the old regime to the new regime)
provisions are delivered by the governments. For a
clear buy-in into the GST regime, it is essential that
the industry and consumers are not put to additional
tax cost, tax credit losses, procedural complexities and
undue hardships during the course of transition from
the current system to the GST system.

IT Infrastructure
Information Technology (IT) infrastructure setup by
governments for administration of GST would play a
crucial role in the success of GST implementation in
India.

The attractiveness of GST lies in the fact that a lot of


tax procedural work like registrations, amendments,
returns, refunds, rebate, other filings, etc. would be
automated and on-line web portals would be made the
gateway for day-to-day compliance procedures. Setting
up the IT infrastructure that would automate the GST
procedures and cater for the needs of all the
stakeholders is a huge challenge given the scale and
variety of transactions in India.
Administration and Management
Stage
GST Administration

Under the current indirect tax regime, we have a


separate tax department for each of the legislation like
VAT department, service tax department, excise
department, customs department, etc. Each of these
departments also has its own audit and investigation
wings that support the administrative teams on
collection of tax revenue.

Under GST, the legislations would be consolidated and


the number of indirect taxes would be reduced. As a
consequence, the present indirect tax administration
structure would not be required and both the centre
and state governments would need to re-organise the
department based on the requirements of the GST
legislation. However, this would not be an easy job for
the governments as many of the existing tax
departments may not be required under GST and the
automation of the GST compliance procedures may do
away with the need for so many divisions for
administration and audit of indirect taxes.
Accounting Standards

The current accounting standards applied for


recording transactions and accounting of revenues and
taxes are based on the concepts of sale of goods and
provision of services. Under GST, the levy will be
based on supply of goods and services. Though the
taxes under GST would have to be recognised based on
the supply of goods and services, but the revenues may
not be accounted / recognised based on the supply
concept.

There has not been much discussion in the GST forums


on the change required to the concepts of accounting
post GST. Going by how the GST legislations would
shape up, there seems to be a need for an entirely new
set of accounting standards to manage the books of
accounts under the GST. The governments and the
accounting standard institutes have to work very
closely and effectively to provide a new set of
accounting framework for managing the books of
account under the GST regime.

The magnitude and scale of GST is bound to throw up lot


of challenges right through the journey of GST from
conceptualisation to implementation to on -
going administration. The
challenges are not impossible to overcome and with
effective co-ordination and understanding between the
central government, state governments, industry and
consumers, effective solutions can be found to most of
the above challenges.
Chapter 7
GST Preparedness for
Businesses
GST will bring about massive and unprecedented
changes in the field of indirect taxes in India.
Everything that we have learnt on indirect taxes in the
last 6 to 7 decades has to be un-learnt and re-learnt
through GST. Everybody who called himself expert on
indirect taxation in India will have to start learning
indirect taxes afresh as GST will be a completely new
concept and will re-write the history of indirect taxes
in India.

The industry has to prepare itself for implementation


and management of GST on an ongoing basis. India has
not seen such a large scale tax reforms in the past and
hence a very good preparation and planning by the
industry is a must to ensure a smooth transition from
the current indirect tax regime to the GST regime.

The industry has to primarily focus on the following


key areas:
GST Knowledge

GST is a new legislation and would bring in a lot of


new concepts on indirect taxes. The traditional
knowledge the industry has on indirect taxes in India
will not be sufficient when the country migrates into
GST. The industry must invest early and upfront in
gaining GST knowledge at a conceptual level, even
before the central government formally announces a
date for implementation of GST. Sound and in-depth
knowledge of the GST concepts is a must for industry
to analyse the business transactions and determine the
implications under the GST.

GST Impact Analysis

The second step for the businesses in preparation for


GST is to analyse the impact of GST on tax costs,
business model, supply chain, IT infrastructure, tax
compliance and resource requirements. At this point in
time, the businesses can list down the current
transactions along with the applicable indirect taxes
and map the transactions to GST to figure out what
taxes will be applicable under the GST regime. Once
the GST acts and rules are out in the public domain,
the industry will have to go through a detailed impact
analysis to see how they would be affected in terms of
tax costs and business operations.

GST impact would differ from industry to industry and


from transaction to transaction. Some types of
businesses (say, companies engaged in export of
services) may have limited implications whereas
businesses of manufacturing, distribution and trading
may get significantly impacted. The GST impact
analysis will guide the businesses on the actions and the
next steps to be taken.

Business Structuring

GST could cause significant impact on the tax costs


and may need restructuring of the supply chain
including the business structure. Businesses may not
only need to re-look at its manufacturing, services,
distribution and trading operations but may also need
to look at reorganising the internal departments of tax,
accounting and finance post implementation of GST.

Businesses should get ready with a restructuring plan,


if required, post the impact analysis and prepare a
sound strategy to operate during the transition period
from the old indirect tax regime to the new regime and
on an ongoing basis under the GST regime.
Transition Provisions

The GST acts and rules should provide the transition


provisions for businesses to move from the existing
indirect tax regime to the GST regime. The transition
provision would cover the matters of registration
requirements, closing stock-in-hand, work-in-progress
materials, input tax credits, pending invoices and
payments, sales-returns, purchase-returns, pending
litigations, etc. Businesses need to study the transition
provisions carefully and adopt measures to ensure
smooth movement of the business into the GST regime
with minimum implication on tax costs and leakage of
input tax credits.

Transitional provisions in the last major indirect tax


reform were not up to the mark and the industry had to
struggle through the transition provision when India
moved to the VAT regime from the sales tax regime in
the year 2005. The governments and the industry have
learnt their lessons in the previous transition period.
Hopefully when India moves into the GST regime, the
transitional provisions would be well thought out and
would help the businesses migrate without causing too
much financial or operational hardship.
IT Infrastructure / Management Information
Systems

Businesses would need to undertake substantial


changes to their IT infrastructure / Management
Information Systems (MIS) during the course of and
post implementation of GST. The existing IT systems
built around the existing legislations and on the concept
of sale of goods and provision of services would not be
relevant under the GST. The concepts of taxability,
input tax credits, invoicing, payment, documentation,
etc. will be very different under the GST regime as
compared to the existing legislations and hence
recording of transactions in the books of accounts,
charging of GST and payment of taxes will undergo
substantial changes.

Therefore, once the GST acts and rules are in the


public domain, the businesses would need to upgrade /
adopt IT systems that can cater for the requirements
under the GST.

GST Preparedness for Businesses


Resource Management

In todays scenario, businesses, which are engaged in


transactions in goods and services across the country,
need a very large team of resources to manage indirect
tax compliances which is unique to each state. The
number of indirect tax legislations and the high
frequency of compliances required make it necessary
for companies to invest heavily in the tax organisation.
This situation is likely to undergo change in the GST
scenario.

GST is expected to simplify procedures and


compliances. Furthermore, GST would also automate
most of the day-to-day procedures and compliance
requirements and such requirements would be capable
of being managed on-line, through the internet, without
the need for regular interaction with the tax office.
Hence, the businesses would be required to think on
the staffing and resource requirements in the tax
organisation post implementation of GST. However, it
should also be noted that in the event of registration
requirements in each of the states for charging and
payment of SGST, the businesses will have much higher
number of registrations in comparison to current
scenario and this could increase the compliance
requirements instead of reducing it.

The importance of GST preparedness cannot be under-


stated. Only those businesses that understand GST
well and plan well in advance will have a chance to
manage the transition from the indirect tax regime
smoothly and will be able to manage GST effectively
after its implementation.

Businesses have to start the preparation NOW!


Chapter 8
Constitution Amendment
Bill
The current constitutional framework in India with
regards to taxation of goods and services does not have
provisions to implement the features of the proposed
Dual GST in India. In order to enable taxation of
services by state governments, taxation of goods by
the central government and to accommodate other
aspects of GST, the Constitution of India has to be
amended. Amendment of the Constitution of India is
the first critical step in implementation of GST in India.

In this regard, the central government has introduced Th


Constitution (One Hundred and Twenty -Second
Amendment) Bill, 2014 (GST Bill) in the parliament
for approval on December 19, 2014. The GST Bill has
been approved by the Lokha Sabha in May 2015. The
Rajya Sabha, the state legislatures and the President
of India has to approve the bill for it to become an
implementation document.
Key features of the GST bill
Powers of taxation to the States and the
Central Government

A new article, Article 246 A, has been introduced


under the GST bill giving powers to the parliament
(centre) and states to make laws with respect to goods
and services. Similarly, the central government has
been granted the exclusive power to make laws with
respect to inter-state supply of goods and services.

Furthermore, a new article, Article 269 A, has been


introduced under the GST Bill, wherein it has been
specified that the tax collected on inter-state supply of
goods and services would be collected by the central
government and apportioned between the centre and
state governments in a manner / ratio as would be
recommended by the GST Council. Previously, the tax
on inter-state sale of goods & services was collected,
retained and used by the state governments.

Furthermore, under the newly introduced Article 269


A, the central government has been granted the power
to formulate the principles for determining the place of
both goods & services in the case of inter-state
transactions.

Furthermore, the Union List (the list of items on which


only the central government has the power to make
laws and levy taxes) has been amended under the GST
Bill to accommodate the following:

Entry 84 of the Union List has been amended


under the GST Bill to provide power to the central
government to levy Excise Duties on petroleum
products and tobacco products. This levy of excise
would be over and above the GST that may be
levied on supply of petroleum and tobacco
products.

Entry 92 and 92C of the Union List, which


contained levy of tax by the central government
on the sale or purchase of newspapers and on
advertisement published in such newspapers and
on provision of services, has been omitted as these
taxes would now be subsumed under the GST.

Furthermore, the State List (the list of items on which


only state governments have the power to make laws
and levy taxes) has been amended under the GST Bill
to accommodate the following:
Entry 52 of the State List, which contained
powers to states to levy tax on entry of goods into
the local area for consumption, use or sale
(commonly called as entry tax), has been omitted
as the Entry Tax would now be subsumed within
GST.

Entry 54 of the State List has been amended to


provide power to state governments to levy taxes
(VAT) on sale of petroleum and alcoholic liquor for
human consumption. VAT would continue to be
levied on the petroleum and alcoholic liquor by
states under the above entry of the State List as
alcohol is outside the purview of GST.

Entry 55 of the State List, which contained


powers to states to levy tax on advertisements,
has been omitted as a tax on advertisements
would now be subsumed within GST.

Entry 62 of the State List, which contained


powers to states to levy tax on luxuries,
entertainments, amusements, betting and
gambling, has been amended to restrict the levy to
taxes on entertainments and amusements to the
extent such taxes are levied and collected by a
Panchayat or a Municipality or a Regional Council
or a District Council. The powers of the states on
the above levy have been removed as the states
would have power to charge GST on the above
items under the GST regime.

Formation of GST Council

A new article, Article 279 A, has been introduced in


the GST Bill, which permits the constitution of a
council by the President of India, to be called as the
Goods & Services Tax Council (GST Council).

The GST council will consist of the following members:

The Union Finance Minister as the Chair Person;

The Union Minister of State (Revenue or Finance)


as Member; and

The Minister in charge of Finance or Taxation or


any other Minister nominated by each state
government

The GST Council will formulate GST related policies


and make recommendations on GST related matters.
Some of the key recommendatory functions of the GST
Council to the centre and the state governments would
be regarding the following matters:

Taxes, cesses and surcharges levied by central,


states, local bodies to be subsumed under the
GST;

The goods & services that may be subjected to


tax or exempted from GST;

Model GST legislations, principles of GST levy, app


of inter-state GST revenue between central and
state governments;

The threshold limit of turnover below which goods


& services may be exempted from GST;

The rates, including special rates if any, of GST;

Any other matter relating to GST as the council


may decide.

Furthermore, Article 279 A also provides the decision


making process in the GST Council, the voting rights,
voting requirements for the decision of GST Council
and grants the power to the GST Council to decide
about the modalities to resolve any disputes arising out
of its recommendation.
Definition of GST

A new clause, Clause 12A, has been introduced in the


GST Bill under Article 366 of the Constitution to
specifically define GST and Services.

As per Clause 12a, GST is defined as any tax on


supply of goods or services or both except taxes
on the supply of the alcoholic liquor for human
consumption. In terms of the above definition,
GST will cover any tax on supply of goods and
services (essentially covering all industries /
sectors) except the taxes on alcohol for human
consumption. However, petroleum products would
be covered under GST from a date to be notified
in the future by the central government.

As per Clause 26a, Service has been defined to


mean anything other than goods. This definition is
very wide and hence can cover, under its ambit,
any transaction that is not considered as goods.

The categorisation of a transaction as goods or


services would not matter in a GST scenario,
where the taxes levied on transaction in goods and
services are same and the place of supply rules
does not distinguish between supply of goods and
services. However, if different GST rates are
fixed for transaction in goods and services and the
place of supply rules differs based on whether a
transaction is goods or service, then the
categorisation of a transaction as a transaction in
relation to goods or services would be of
significance.

Additional Tax on Inter-State Supply of Goods

An additional tax of 1% on inter-state supply of


goods has been suggested in the GST Bill. This
additional tax will be levied and collected by the
central government and will be assigned to the state
from which the inter-state supply originated (i.e. the
state from which the goods started its movement for
transportation to another state) for a period of two
years or such other period as the GST Council may
recommend. This tax will be in addition to the IGST
that would be collected by the central government on
inter-state supply of goods.

Key changes in the Constitution Amendment Bill


Furthermore, powers have been granted under the
GST Bill to the central government to exclude any
goods from levy of such additional tax of 1% as
considered necessary. The reason behind the above
additional tax of 1% seems to be to indirectly
compensate the states for the loss of the CST revenue
when the country moves into the GST regime. In the
current indirect tax regime, the CST revenue on inter-
state sale of goods is collected by state governments.
Under the GST regime, state governments will not
have any CST revenue of its own, but would get a
share of IGST revenue collected by the central
government on inter-state supply of goods and
services.
Compensation to the State Governments

The GST Bill also provides that the parliament may,


by law, on the recommendation of the GST Council,
provide compensation to the states for loss of revenue
from CST arising on account of implementation of GST
for such period which may extend up to five years.

The revised GST Bill is not free from drawbacks. The


GST Bill contains a few problems, which should be
solved for smooth introduction and implementation of
GST in India.
Key drawbacks in the GST Bill
Definition of GST

While GST has been defined as any tax on supply of


goods and services, the critical ingredient of the
definition, which is the word supply, has been left un-
defined along with the GST definition. As discussed
earlier, with the introduction of GST, there will be a
conceptual shift of taxing of goods and services on the
basis of supply rather than on the sale or provision of
service. The lack of definition of supply under the
constitution amendment bill will leave the word supply
for interpretation, creating conflicts and litigation
between governments and businesses.

The scope of the term supply is expected to be much


wider than sale or service and hence could cover a lot
of other transactions that were not earlier covered
under indirect tax legislations for the purpose of tax or
were usually exempted from the purview of indirect
taxes. Transactions such as stock transfer,
intermediary supplies by the job worker to the
principal, consignment transactions between the
principal and the agent, etc. have the potential to be
captured and taxed as supply of goods. But it is still
unclear as to whether the term supply will be defined
under the CGST, SGST or IGST legislations.

Key Drawbacks in the GST Bill

GST Council

As per the GST Bill, the GST Council decides upon


all the matters in connection with GST. However, the
output from the GST Council is only recommendatory
and is not binding either on the centre or state
governments. Given the lack of binding feature, any
output by GST Council could be debated by
governments leading to unwarranted delay in decision
making and execution of the recommendation of the
GST Council.
The routine output of the GST Council will in itself
become a cumbersome exercise given the wide
participation in the decision making process both by the
centre and state governments. The size of the GST
Council will itself give rise to significant delays in
decision making on regular and routine GST matters.
The lack of power for the GST Council to enforce the
decision on the centre and state governments may
prove detrimental to the long term health of GST.

1% additional TAX on inter-state supply of


goods

The GST bill has proposed to levy 1% additional duty


on inter-state supply of goods, which would go as
revenue to states from which the goods would
originate. This provision is a huge disappointment as
the additional 1% tax would be replacing the existing
CST on inter-state sale and would also add cost and
complexities to the inter-state transactions.

One of the biggest advantages and selling points under


GST was the removal of CST which acts as a trade
barrier between states preventing free movement of
goods across the country. CST is also an ineligible input
tax. IGST on inter-state supply under the GST regime
was expected to remove this barrier and facilitate
smooth movement of goods and trade across the
country. However, this 1% additional tax would snatch
away the biggest advantage under GST that the
industry and consumers were looking for.

Furthermore, the 1% additional duty on inter-state


transactions is not eligible for input tax credit. This
would add to the cost of goods and violate the principle
of seamless input tax credit under GST.

Exceptions

GST was expected to encompass all kinds of indirect


taxes and therefore relieve the businesses from the
agony of multiple levies and compliance requirements.
However, the GST bill does not provide a picture of
full-scale GST implementation and creates exceptions
wherein certain sectors would stay outside the range of
GST.

Alcohol for human consumption is kept out of the


definition of GST and the petroleum products would
continue to be taxed with Excise Duty and VAT.
Furthermore, the Entertainment Tax and Octroi levied
by municipal authorities will continue to exist. Non-
inclusion of all sectors, products and services into the
GST net would distort the applicability of indirect
taxes, prevent taking of input tax credit, require
continued existence of multiple legislations and would
lead to additional tax burden. The GST regime has to
eventually find a way to encompass all sectors under
the GST net.

Introduction of the GST Bill in the parliament by the


central government and approval of the bill by the lok
sabha are significant steps towards implementation of
GST in India. Passage of the GST Bill by the Rajya
Sabha and state legislature will pave the way for the
formulation of GST legislations and continuation of the
GST journey for implementation of GST in India.
Chapter 9
Future of Indirect Taxes in
India
Tax laws contribute greatly in shaping the financial and
economic future of a country. Business and consumer
friendly tax laws create an environment and eco-
system, where businesses can thrive and grow.
Complex and unfriendly tax system will not only result
into slow growth of the economy, but also discourage
overseas investors from entering the country with new
investments.

India has complex taxation systems, both on the direct


and indirect tax front. India has also been considered
as a difficult country to setup, run and manage
businesses. The kind of tax system we have,
immediately post impendence and till the early 1990s,
was largely driven by the objectives of protecting,
monitoring and policing the businesses by presuming
default tax evasion on the part of the businessman.
However, when the country liberalised in the early
1990s, the need for user friendly tax laws was deeply
felt and various attempts have been made since then to
simplify Indias tax systems and make it more user
friendly. But the tax reforms have been painfully slow
and habitually delayed.

GST will open a new chapter in the history of tax


reforms in India. The indirect tax landscape in India
would change forever and would hopefully bring in the
much expected user friendly tax laws. GST will
eventually evolve into a tax system of the future.

New World Focused

- The world is changing at a fast pace and new


technologies are emerging rapidly. The nature of the
businesses and the mode of business operations are
continuously evolving and undergoing changes. It is
necessary that the indirect tax system in the country
keeps pace with the emerging technologies as well as
the new and different ways of doing businesses.

GST legislation is expected to be new world focused in


its design and application. GST is also expected to take
cognisance of the emerging technology and e-
commerce sectors and accommodate relevant
provisions to cater for the transaction needs of these
sectors. A flexible GST that can adopt and mould itself
can provide the much needed environment and eco-
system for businesses to grow in India.

Technology Based

Technology will be the backbone of indirect taxes in


the near future. India managed indirect taxes manually
over the last couple of decades. But the current scale
of growth of businesses in India can only be managed
by advanced technology as well as automation of
compliances.

GST is expected to automate most of the compliance


processes and industry would be immensely benefited
by automation of processes. Technology will bring in
efficiencies with resources, time and cost to the
industry and will also result into effective data
management as well as revenue collection for the
governments.

Self-Assessment Mode

From a department based assessment regime,


indirect taxes in India have gradually moved to the
self-assessment mode over a period of time. All the
major indirect taxes of VAT, Service Tax, Excise Duty
and Customs are on self-assessment basis without any
intervention from the government departments on the
basic aspects of computation of taxes, payment of
taxes and filing of returns on a day-to-day basis. GST
would take the self-assessment mode to the next level
with ample freedom for businesses to run the business
and pay taxes without undue intervention by the
governments in the day-to-day matters.

Future of Indirect Taxes in India

Reduced Tax Evasion

Tax evasion is a sign of deficiency in the tax system


of a country. Tax evasion occurs due to high tax rates,
complex tax systems and unwillingness of the
businesses to participate in the growth of the economy.
India has history of tax evasion. Hence, GST could be
an effective tool in reducing the opportunities and the
mind-set for tax evasion.

GST by its very design would reduce the opportunities


for tax evasion. GST would do away with exemptions
and cover most of the business transactions under the
GST net. Furthermore, GST would also reduce the
number of legislations and the complexities associated
to the compliance. A GST legislation with minimum
exemptions, low tax rates and simplified legislation and
compliance framework can boost the tax compliance
environment and lead to reduced tax evasion.

Selective Audit and Investigation

Audits and investigations by the departmental


officers are extensive under the current indirect tax
regime. Audit and investigations have become a rule
rather than an exception. GST, with its extensive focus
on self-assessment, would use audit and investigation
as a special and rare case tool rather than as a rule. If
GST in India manages to enhance the tax base and
keep the tax rate low, a large number of businesses
would comply with the requirements of GST and the
need for extensive audit and investigation would be
significantly reduced.

GST will set the trend for selective audit and


investigation by the departmental officers and would
help the businesses to focus on the core activities of
managing the business rather than expending time and
resources on audit and investigations.

Reduction in Corruption

One of the frequently asked questions with regards


to GST is whether it would reduce corruption in the tax
departments in the country or not.

The answer is both yes and no!

Corruption largely depends on the culture and mind-set


of the people in an economy and irrespective of the
nature and type of indirect tax legislation, corruption
may operate independently. The GST legislation has
the potential to reduce corruption by way of
automating the procedures and compliances as well as
by imposing time-based performance of functions by
the departmental officers.

The GST legislation can also impose a host of deemed


provisions, whereby the procedural and compliance
functions will be deemed to be completed in the event
of no action by the department. The GST legislation
can also automate the processes of refund / rebate
through the support of the banking channel, thereby
reducing the chances of corruption between the
businesses and tax office with regards to grant of
refund and rebate.

As is the case with any system, there always exists a


scope for corruption if people want to be corrupt. We
hope that GST has a better ability to control
corruption, though it may not eliminate corruption
completely.

The future of Indirect taxes in India really looks bright


with the hope of GST being implemented in the near
future. India is in dire need of a completely fresh
indirect tax system that could help businesses and
governments to evolve out of the ageing current
indirect tax regime. GST, when implemented in its true
substance and spirit, has the potential to take India on
the path of sustained growth and development.
Appendix 1
Selected FAQs on GST
released by the
Empowered Committee of
Finance Ministers under
the First Discussion Paper

Question 1: What is the justification of GST?

Answer: There was a burden of tax on tax in the


pre-existing Central excise duty of the Government of
India and sales tax system of the State Governments.
The introduction of Central VAT (CENVAT) has
removed the cascading burden of tax on tax to a
good extent by providing a mechanism of set off for
tax paid on inputs and services upto the stage of
production, and has been an improvement over the pre-
existing Central excise duty. Similarly, the introduction
of VAT in the States has removed the cascading effect
by giving set-off for tax paid on inputs as well as tax
paid on previous purchases and has again been an
improvement over the previous sales tax regime.

But both the CENVAT and the State VAT have certain
incompleteness. The incompleteness in CENVAT is that
it has yet not been extended to include chain of value
addition in the distributive trade below the stage of
production. It has also not included several Central
taxes, such as Additional Excise Duties, Additional
Customs Duty, Surcharges etc. in the overall
framework of CENVAT, and thus kept the benefits of
comprehensive input tax and service tax set-off out of
the reach of manufacturers/ dealers. The introduction
of GST will not only include comprehensively more
indirect Central taxes and integrate goods and services
taxes for set-off relief, but also capture certain value
addition in the distributive trade.

Similarly, in the present State-level VAT scheme,


CENVAT load on the goods has not yet been removed
and the cascading effect of that part of tax burden has
remained unrelieved. Moreover, there are several
taxes in the States, such as, Luxury Tax,
Entertainment Tax, etc. which have still not been
subsumed in the VAT. Further, there has also not been
any integration of VAT on goods with tax on services at
the State level with removal of cascading effect of
service tax. In addition, although the burden of Central
Sales Tax (CST) on inter-State movement of goods has
been lessened with reduction of CST rate from 4% to
2%, this burden has also not been fully phased out.
With the introduction of GST at the State level, the
additional burden of CENVAT and services tax would
be comprehensively removed, and a continuous chain of
set-off from the original producers point and service
providers point upto the retailers level would be
established which would eliminate the burden of all
cascading effects, including the burden of CENVAT and
service tax. This is the essence of GST. Also, major
Central and State taxes will get subsumed into GST
which will reduce the multiplicity of taxes, and thus
bring down the compliance cost. With GST, the burden
of CST will also be phased out.

Thus GST is not simply VAT plus service tax, but a


major improvement over the previous system of VAT
and disjointed services tax - a justified step forward.

Question 2: What is GST? How does it work?

Answer: As already mentioned in answer to Question


1, GST is a tax on goods and services with
comprehensive and continuous chain of set-off benefits
from the producers point and service providers point
upto the retailers level. It is essentially a tax only on
value addition at each stage, and a supplier at each
stage is permitted to set-off, through a tax credit
mechanism, the GST paid on the purchase of goods and
services as available for set-off on the GST to be paid
on the supply of goods and services. The final consumer
will thus bear only the GST charged by the last dealer
in the supply chain, with set-off benefits at all the
previous stages.

The illustration shown below indicates, in terms of a


hypothetical example with a manufacturer, one
wholeseller and one retailer, how GST will work. Let
us suppose that GST rate is 10%, with the
manufacturer making value addition of Rs.30 on his
purchases worth Rs. 100 of input of goods and services
used in the manufacturing process. The manufacturer
will then pay net GST of Rs. 3 after setting-off Rs. 10
as GST paid on his inputs (i.e. Input Tax Credit) from
gross GST of Rs. 13. The manufacturer sells the goods
to the wholeseller. When the wholeseller sells the same
goods after making value addition of (say), Rs. 20, he
pays net GST of only Rs. 2, after setting-off of Input
Tax Credit of Rs. 13 from the gross GST of Rs. 15 to
the manufacturer. Similarly, when a retailer sells the
same goods after a value addition of (say) Rs. 10, he
pays net GST of only Re. 1, after setting-off Rs. 15
from his gross GST of Rs. 16 paid to wholeseller. Thus,
the manufacturer, wholeseller and retailer have to pay
only Rs. 6 (= Rs. 3+Rs. 2+Re. 1) as GST on the value
addition along the entire value chain from the producer
to the retailer, after setting-off GST paid at the earlier
stages. The overall burden of GST on the goods is thus
much less. This is shown in the table below. The same
illustration will hold in the case of final service provider
as well.

Question 3: How can the burden of tax, in general, fall


under GST?

Answer: As already mentioned in Answer to Question


1, the present forms of CENVAT and State VAT have
remained incomplete in removing fully the cascading
burden of taxes already paid at earlier stages. Besides,
there are several other taxes, which both the Central
Government and the State Government levy on
production, manufacture and distributive trade, where
no set-off is available in the form of input tax credit.
These taxes add to the cost of goods and services
through tax on tax which the final consumer has to
bear. Since, with the introduction of GST, all the
cascading effects of CENVAT and service tax would be
removed with a continuous chain of set-off from the
producers point to the retailers point, other major
Central and State taxes would be subsumed in GST
and CST will also be phased out, the final net burden of
tax on goods, under GST would, in general, fall. Since
there would be a transparent and complete chain of
set-offs, this will help widening the coverage of tax
base and improve tax compliance. This may lead to
higher generation of revenues which may in turn lead
to the possibility of lowering of average tax burden.

Question 4: How will GST benefit industry, trade and


agriculture?

Answer: As mentioned in Answer to Question 3, the


GST will give more relief to industry, trade and
agriculture through a more comprehensive and wider
coverage of input tax set-off and service tax set-off,
subsuming of several Central and State taxes in the
GST and phasing out of CST. The transparent and
complete chain of set-offs which will result in widening
of tax base and better tax compliance may also lead to
lowering of tax burden on an average dealer in
industry, trade and agriculture.

Question 5: How will GST benefit the exporters?


Answer: The subsuming of major Central and State
taxes in GST, complete and comprehensive setoff of
input goods and services and phasing out of Central
Sales Tax (CST) would reduce the cost of locally
manufactured goods and services. This will increase
the competitiveness of Indian goods and services in the
international market and give boost to Indian exports.
The uniformity in tax rates and procedures across the
country will also go a long way in reducing the
compliance cost.
Question 6: How will GST benefit the small
entrepreneurs and small traders?

Answer: The present threshold prescribed in different


State VAT Acts below which VAT is not applicable
varies from State to State. The existing threshold of
goods under State VAT is Rs. 5 lakhs for a majority of
bigger States and a lower threshold for North Eastern
States and Special Category States. A uniform State
GST threshold across States is desirable and,
therefore, the Empowered Committee has
recommended that a threshold of gross annual turnover
of Rs. 10 lakh both for goods and services for all the
States and Union Territories may be adopted with
adequate compensation for the States (particularly, the
States in North-Eastern Region and Special Category
States) where lower threshold had prevailed in the VAT
regime. Keeping in view the interest of small traders
and small scale industries and to avoid dual control, the
States considered that the threshold for Central GST
for goods may be kept at Rs.1.5 crore and the
threshold for services should also be appropriately
high. This raising of threshold will protect the interest
of small traders. A Composition scheme for small
traders and businesses has also been envisaged under
GST as will be detailed in Answer to Question 14. Both
these features of GST will adequately protect the
interests of small traders and small scale industries.

Question 7: How will GST benefit the common


consumers?

Answer: As already mentioned in Answer to Question


3, with the introduction of GST, all the cascading
effects of CENVAT and service tax will be more
comprehensively removed with a continuous chain of
set-off from the producers point to the retailers point
than what was possible under the prevailing CENVAT
and VAT regime. Certain major Central and State
taxes will also be subsumed in GST and CST will be
phased out. Other things remaining the same, the
burden of tax on goods would, in general, fall under
GST and that would benefit the consumers.
Question 8: What are the salient features of the
proposed GST model?

Answer: The salient features of the proposed model


are as follows:

Consistent with the federal structure of the


country, the GST will have two components: one
levied by the Centre (hereinafter referred to as
Central GST), and the other levied by the States
(hereinafter referred to as State GST). This dual
GST model would be implemented through
multiple statutes (one for CGST and SGST
statute for every State). However, the basic
features of law such as chargeability, definition of
taxable event and taxable person, measure of levy
including valuation provisions, basis of
classification etc. would be uniform across these
statutes as far as practicable.

The Central GST and the State GST would be


applicable to all transactions of goods and services
except the exempted goods and services, goods
which are outside the purview of GST and the
transactions which are below the prescribed
threshold limits. The Central GST and State GST
are to be paid to the accounts of the Centre and
the States separately.

Since the Central GST and State GST are to be


treated separately, in general, taxes paid against
the Central GST shall be allowed to be taken as
input tax credit (ITC) for the Central GST and
could be utilized only against the payment of
Central GST. The same principle will be applicable
for the State GST.

Cross utilisation of ITC between the Central GST


and the State GST would, in general, not be
allowed.

To the extent feasible, uniform procedure for


collection of both Central GST and State GST
would be prescribed in the respective legislation
for Central GST and State GST.

The administration of the Central GST would be


with the Centre and for State GST with the
States.

The taxpayer would need to submit periodical


returns to both the Central GST authority and to
the concerned State GST authorities.
Each taxpayer would be allotted a PAN- linked
taxpayer identification number with a total of
13/15 digits. This would bring the GST PAN-linked
system in line with the prevailing PAN-based
system for Income tax facilitating data exchange
and taxpayer compliance. The exact design would
be worked out in consultation with the Income-Tax
Department.

Keeping in mind the need of tax payers


convenience, functions such as assessment,
enforcement, scrutiny and audit would be
undertaken by the authority which is collecting the
tax, with information sharing between the Centre
and the States.

Question 9: Why is Dual GST required?

Answer: India is a federal country where both the


Centre and the States have been assigned the powers
to levy and collect taxes through appropriate
legislation. Both the levels of Government have
distinct responsibilities to perform according to the
division of powers prescribed in the Constitution for
which they need to raise resources. A dual GST will,
therefore, be in keeping with the Constitutional
requirement of fiscal federalism.
Question 10: How would a particular transaction of
goods and services be taxed simultaneously under
Central GST (CGST) and State GST (SGST)?

Answer: The Central GST and the State GST would


be levied simultaneously on every transaction of supply
of goods and services except the exempted goods and
services, goods which are outside the purview of GST
and the transactions which are below the prescribed
threshold limits. Further, both would be levied on the
same price or value unlike State VAT which is levied on
the value of the goods inclusive of CENVAT. While the
location of the supplier and the recipient within the
country is immaterial for the purpose of CGST, SGST
would be chargeable only when the supplier and the
recipient are both located within the State.

Illustration I: Suppose hypothetically that the rate of


CGST is 10% and that of SGST is 10%. When a
wholesale dealer of steel in Uttar Pradesh supplies
steel bars and rods to a construction company which is
also located within the same State for , say Rs. 100, the
dealer would charge CGST of Rs. 10 and SGST of Rs.
10 in addition to the basic price of the goods. He would
be required to deposit the CGST component into a
Central Government account while the SGST portion
into the account of the concerned State Government.
Of course, he need not actually pay Rs. 20 (Rs. 10 +
Rs. 10 ) in cash as he would be entitled to set-off this
liability against the CGST or SGST paid on his
purchases (say, inputs). But for paying CGST he would
be allowed to use only the credit of CGST paid on his
purchases while for SGST he can utilize the credit of
SGST alone. In other words, CGST credit cannot, in
general, be used for payment of SGST. Nor can SGST
credit be used for payment of CGST.

Illustration II: Suppose, again hypothetically, that the


rate of CGST is 10% and that of SGST is 10%. When
an advertising company located in Mumbai supplies
advertising services to a company manufacturing soap
also located within the State of Maharashtra for, let us
say Rs. 100, the ad company would charge CGST of
Rs. 10 as well as SGST of Rs. 10 to the basic value of
the service. He would be required to deposit the CGST
component into a Central Government account while
the SGST portion into the account of the concerned
State Government. Of course, he need not again
actually pay Rs. 20 (Rs. 10+Rs. 10) in cash as it would
be entitled to set-off this liability against the CGST or
SGST paid on his purchase (say, of inputs such as
stationery, office equipment, services of an artist etc).
But for paying CGST he would be allowed to use only
the credit of CGST paid on its purchase while for
SGST he can utilise the credit of SGST alone. In other
words, CGST credit cannot, in general, be used for
payment of SGST. Nor can SGST credit be used for
payment of CGST.
Question 13: What is the concept of providing
threshold exemption for GST?

Answer: Threshold exemption is built into a tax regime


to keep small traders out of tax net. This has three-fold
objectives:

It is difficult to administer small traders and cost


of administering of such traders is very high in
comparison to the tax paid by them.

The compliance cost and compliance effort would


be saved for such small traders.

Small traders get relative advantage over large


enterprises on account of lower tax incidence.

The present thresholds prescribed in different State


VAT Acts below which VAT is not applicable varies
from State to State. A uniform State GST threshold
across States is desirable and, therefore, as already
mentioned in Answer to Question 6, it has been
considered that a threshold of gross annual turnover of
Rs. 10 lakh both for goods and services for all the
States and Union Territories might be adopted with
adequate compensation for the States (particularly, the
States in North-Eastern Region and Special Category
States) where lower threshold had prevailed in the VAT
regime. Keeping in view the interest of small traders
and small scale industries and to avoid dual control, the
States also considered that the threshold for Central
GST for goods may be kept Rs.1.5 Crore and the
threshold for services should also be appropriately
high.

Question 14: What is the scope of composition and


compounding scheme under GST?

Answer: As already mentioned in Answer to Question


6, a Composition/Compounding Scheme will be an
important feature of GST to protect the interests of
small traders and small scale industries. The
Composition/Compounding scheme for the purpose of
GST should have an upper ceiling on gross annual
turnover and a floor tax rate with respect to gross
annual turnover. In particular there will be a
compounding cut-off at Rs. 50 lakhs of the gross annual
turnover and the floor rate of 0.5% across the States.
The scheme would allow option for GST registration
for dealers with turnover below the compounding cut-
off.

Question 15: How will imports be taxed under GST?

Answer: With Constitutional Amendments, both CGST


and SGST will be levied on import of goods and
services into the country. The incidence of tax will
follow the destination principle and the tax revenue in
case of SGST will accrue to the State where the
imported goods and services are consumed. Full and
complete set-off will be available on the GST paid on
import on goods and services.

Question 16: Will cross utilization of credits between


goods and services be allowed under GST regime?

Answer: Cross utilization of credit of CGST between


goods and services would be allowed. Similarly, the
facility of cross utilization of credit will be available in
case of SGST. However, the cross utilization of CGST
and SGST would generally not be allowed except in the
case of inter-State supply of goods and services under
the IGST model which is explained in answer to the
next question.

Question 17: How will be Inter-State Transactions of


Goods and Services be taxed under GST in terms of
IGST method?

Answer: The Empowered Committee has accepted the


recommendation for adoption of IGST model for
taxation of inter-State transaction of Goods and
Services. The scope of IGST Model is that Centre
would levy IGST which would be CGST plus SGST on
all inter-State transactions of taxable goods and
services. The inter-State seller will pay IGST on value
addition after adjusting available credit of IGST,
CGST, and SGST on his purchases. The Exporting
State will transfer to the Centre the credit of SGST
used in payment of IGST. The Importing dealer will
claim credit of IGST while discharging his output tax
liability in his own State. The Centre will transfer to
the importing State the credit of IGST used in payment
of SGST. The relevant information is also submitted to
the Central Agency which will act as a clearing house
mechanism, verify the claims and inform the respective
governments to transfer the funds.

The major advantages of IGST Model are:

Maintenance of uninterrupted ITC chain on inter-


State transactions.
No upfront payment of tax or substantial blockage
of funds for the inter-State seller or buyer.

No refund claim in exporting State, as ITC is used


up while paying the tax.

Self monitoring model.

Level of computerisation is limited to inter-State


dealers and Central and State Governments
should be able to computerise their processes
expeditiously.

As all inter-State dealers will be e-registered and


correspondence with them will be by e-mail, the
compliance level will improve substantially.

Model can take Business to Business as well as


Business to Consumer transactions into account.

Question 19: How are the legislative steps being taken


for CGST and SGST?

Answer: A Joint Working Group has recently been


constituted (September 30, 2009) comprising of the
officials of the Central and State Governments to
prepare, in a time-bound manner a draft legislation for
Constitutional Amendment.

Question 20: How will the rules for administration of


CGST and SGST be framed?

Answer: The Joint Working Group, as mentioned


above, has also been entrusted the task of preparing
draft legislation for CGST, a suitable Model
Legislation for SGST and rules and procedures for
CGST and SGST. Simultaneous steps have also been
initiated for drafting of legislation for IGST and rules
and procedures. As a part of this exercise, the Working
Group will also address to the issues of dispute
resolution and advance ruling.
Appendix 2
Selected Chapter from the
Task Force Report on how
GST will Impact the
Indian Economy
Chapter VII Implications of the
Goods and Services Tax
The economic case for a flawless GST is
straightforward: Income is taxed irrespective of
source and use; therefore, consumption should
also be taxed on the same principle. This is the
feasible second-best solution, compared to the
unattainable first best distortion-free world of
lump sum taxation. The flawless GST is rooted in
this breathtakingly simple analytical proposition.
In the Indian economic policy context, poverty
reduction and inclusive growth are key policy
objectives and will, undoubtedly, continue for
some time. What, then, are the implications of the
switchover from the cascading and distortionary
taxation of goods and services to the flawless
GST for, amongst others, economic growth, equity
and poverty?
GST and economic growth
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 consequently,
inferior GDP growth. In India, the motivation
underlying the hugely differentiated scheme of
indirect taxation of production and sales that has
evolved over the countrys history was
progressive and noble; the actual impact of such a
structure is now widely acknowledged to be
regressive, capricious, and sub optimal in terms of
the efficiency of tax effort, leaving the door open
for lobbyists and special pleading. The problem of
the present distortionary indirect tax system can
be effectively addressed by shifting the tax burden
from production and trade to final consumption.
The flawless GST, which subsumes all indirect
taxes on goods and 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.

The introduction of the GST will also bring about


a macroeconomic dividend by reducing what have
been called the ``negative grey area dynamic
effects" of cascading taxation. As a result it
reduces the overall incidence of indirect taxation
by removing the many distortionary features of
the present indirect tax system. There are seven
important macroeconomic channels through which
the flawless GST minimises the distortions. First,
the failure to tax all goods and services distorts
consumption decisions; it weakens the signalling
power of relative prices. GST will reduce these
distortions and enable all economic agents to
respond more effectively to price signals. This will
improve the allocative efficiency of the tax
system. Second, the failure to exempt all sales to
business distorts decisions regarding choice of
production methods, particularly decisions on
vertical and horizontal integration and what inputs
to produce or sell. Since the GST will be a tax on
consumption, all stages of production and
distribution will be mere pass-through. Therefore,
there will be no tax incentive for vertical and
horizontal integration. Third, the taxation of
capital goods discourages savings and investment
and retards productivity growth. The flawless
GST envisages full and immediate credit for GST
on capital goods (both buildings and plant and
machinery), thereby fully eliminating the incidence
of any indirect tax on the capital goods. This
enhances the productivity of capital and hence
reduces the incremental capital-output ratio
(ICOR). This is perhaps the most important gain
through the introduction of the GST in India.
Fourth, for a given constellation of exchange rates
and price levels, violation of the destination
principle places local producers at a competitive
disadvantage, relative to producers in other
jurisdictions. The GST envisages comprehensive
taxation of imports on consideration of
consumption in India and irrespective of whether
the imported goods and services are produced in
India or not, thereby, providing a level playing
field to domestic producers particularly in the
import-substitution industry. Fifth, differences in
the tax structure of different States and the
Central Government greatly increase the cost of
doing business 1. The proposed GST, though dual
in nature, envisages a uniform structure, design
and compliance system at all levels of
Government and across States.

Therefore, the cost of doing business in India will


significantly reduce. The GST based tax reform
provides a real policy opportunity to deal with this
problem without waiting for prior and sweeping
political economy changes. Sixth, GST, once
introduced, will create a common market across
the length and breadth of the country- something
which has eluded us since long. The size of the
market will cease to be limited by tax
considerations. Further, it will restore the
comparative advantage of resource rich states and
enable them to emerge as production hubs.
Seventh, at present, the combined statutory rate
of VAT is close to 22 per cent 2. 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 percent 3 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.

The overall macroeconomic effect of reduction in


economic distortions due to GST would be to
provide an impetus to economic growth. Using
CGE Model, the NCAER study commissioned by
the Thirteenth Finance Commission estimates the
impact of the introduction of a GST which would
eliminate all taxes on production and distribution
and rest on final consumption only. The study is
based on two important assumptions of full
employment and that 50 percent of indirect taxes
remain embedded and stick on production and
distribution. The study concludes that
implementation of a comprehensive GST in India
will lead to efficient allocation of factors of
production thus leading to gain in GDP and
exports. This 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 gain 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 Indias 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.

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 thousand crores
and 2,881 thousand crores. The corresponding
dollar values are $325 billion and $637 billion or as
much as one-third to one- half of the countrys
GDP for the year 2009-10.

The manufacturing sectors would benefit from econ


of scale. Output of sectors including textiles and
readymade garments; minerals other than coal,
petroleum, gas and iron ore; organic heavy
chemicals; industrial machinery for food and
textiles; beverages; and miscellaneous
manufacturing is expected to increase. The
sectors in which output is expected to decline
include natural gas and crude petroleum; iron ore;
coal tar products; and nonferrous metal
industries.". The results of the NCAER Study are
also suggested of the GSTs positive environmental
impact on the economy.

Further, the changeover to GST will be neutral to


vertical and horizontal integration. This will
therefore, encourage industries to be located in
states which enjoy a comparative advantage. This
has far reaching implication for resource rich
backward states; it will serve as an attraction to
natural resources based industries to locate in
these states regardless of the fact that the
consumer is located elsewhere. Another dynamic
implication of the GST would be to generate
greater employment as GST helps to increase
labour intensive sectors.
GST and International Trade
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.

Destination based taxation is a fundamental


principle of a sound GST. It requires that exports
from the taxing jurisdiction would be tax free by
zero rating and imports into the jurisdiction would
be taxed at the same rate as products produced
and consumed within the jurisdiction. The
flawless GST embodies this principle.
Consequently, both export-oriented industries and
import-substituting industries would become
internationally more competitive. As a result,
while exports can be expected to register an
increase, imports are likely to decrease. These
outcomes are supported by the NCAER study.

Gains in exports are expected to vary between 3.2


and 6.3 per cent with corresponding absolute value
range as Rs. 24,669 crore and Rs. 48,661 crore.
Imports are expected to gain somewhere between
2.4 and 4.7 per cent with corresponding absolute
values ranging between Rs. 31,173 crore and Rs.
61,501 crore.

The sectors with relatively high proportional


increase in exports include textiles and readymade
garments; beverages; industrial machinery for
food and textiles; transport equipment other than
railway equipment; electrical and electronic
machinery; and chemical products: organic and
inorganic. The moderate gainers are agricultural
machinery; metal 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. 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.

In general, our imports are sourced from countries


which effectively zero rate their exports. Further,
India has also entered into a large number of free
trade agreements under which it will, in general,
not be possible for India to use customs duty as a
means to providing protection/level playing field.
Therefore, it is necessary to ensure that the
imports into the country are subject to the same
level of taxation as domestically produced goods.
The flawless GST will ensure this by subjecting
the imports to both CGST and SGST. This will
provide a level playing field to the domestic
industry and, in particular, the manufacturing
sector vis-a-vis imports.
GST: Equity and Poverty reduction
Poverty reduction will continue to remain the
central objective of economic policy making in
India. Any policy for poverty reduction must
enable the provision of, at least, food, clothing,
shelter, education and health.

At present, primary food articles like rice and


wheat are liable to tax by many states either by
way of purchase tax or sales tax at a lower rate.
As a result, the incidence 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 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.

Like food, basic health and education services are


also intended to be fully exempt. As a result
consumption of these services will bear a
relatively lower burden. Since these services are
necessary to meet the basic human needs, the tax
exemption for these services will enable the poor
to have cheaper accessibility. In any case, as at
present, these services will continue to be exempt
from tax and therefore no additional burden will
arise on account of the switchover to GST.

Housing is yet another important item of basic


needs of the poor. The GST provides for including
within its scope the transactions in real estate.
Therefore, for a registered real estate builder, all
taxes on inputs (including on land) will be off-set
against the tax payable on the constructed
property.4 This will effectively reduce cost of
housing to the extent of embedded taxes and
hence, benefit the poor.

Another necessary item of consumption by the


poor is clothing. The NCAER study shows that the
implementation of the GST will result in a sharp
decline in the prices of cotton textiles ( by 6.44
percent), 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.

The rural poor comprise essentially of small and


marginal farmers and landless labourers. Similarly,
the urban poor comprises of the unemployed. The
implementation of GST will witness an increase in
the real returns to land, labour and capital (as
shown in the NCAER study). Therefore, the rural
poor will also enjoy an increase in their income.
Similarly, on account of increase in economic
activity resulting in higher growth, there will be
new opportunities for employment which will
directly benefit the urban poor.

Further, in terms of the theory of optimal taxation,


tax rates should not be uniform. They should,
rather vary inversely with the elasticity of demand
for particular goods and services, and tax rates
should be higher on products that are
complementary with leisure that cannot be taxed
directly, (as opposed to work which generates
income that can be taxed). This holds well in a
world where it is possible to implement optimal tax
reforms without any residual distortions caused by
successful attempts at incidence shifting.
However, in practice, shifting of tax incidence is
well documented. Further, the representative
consumer assumption that operates an optimal tax
model is not just invalid, but actively dangerous in
a policy context where poverty reduction and
inclusive growth are key policy objectives. For
instance, if, as intuition would lead us to expect,
the demand for the basket of goods consumed by
the poor is less elastic than that consumed by the
rich, then the regressive policy implications of
implementing optimal tax reform would be horrific
i.e impose a higher tax on goods of consumption by
the poor. Hence, the 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.

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 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.

The switchover to GST also entails the taxation of


all goods and services in the formal sector. To the
extent purchases are made from the informal
sector by producers in the formal sector, no input
tax credit would be available. Consequently, the
value addition in the informal sector on such inputs
would be recaptured when used in the formal
sector. Similarly, to the extent purchases are made
from the formal sector by the informal sector, they
will be GST borne and since no output tax will be
payable in the informal sector, the tax will stick on
the producer. Therefore, comprehensive
consumption type destination based GST will also
result in a higher tax burden on the informal
economy than the present level. Hence, the switch
over to the flawless GST will also improve
horizontal equity.
GST and Prices
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.

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.

Another factor that impacts the price levels refers


to the quantum of intermediate input purchases
from sectors
under perfect competition versus imperfect competi
Relatively low proportions of intermediate inputs
purchased by agriculture and service sectors (i.e.
sectors under perfect competition) are sourced
from manufacturing sectors and hence these
sectors do not reap the benefit of relatively low
cost inputs from manufacturing sectors.

Further, the terms of trade can also be expected


to improve in favour of agriculture vis- a-vis
manufactured goods. The prices of agricultural
goods would increase between 0.61 and 1.18
percent whereas the overall prices of all
manufacturing sector would decline between 1.22
and 2.53 percent. Consequently, the terms of
trade will move in favour of agriculture between
1.9 to 3.8 percent.

The increase in agricultural prices would benefit


millions of farmers in India. Similarly, the urban
poor will also benefit from new employment
opportunities. With regard to the food crops the
poor would continue to remain secured through
the public distribution system. The prices of many
other consumer goods are expected to decline.
These include sugar; beverages; cotton textiles;
wool, silk and synthetic fibre textiles; and textile
products and wearing apparel.
GST and Informal Sector
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 incidence
impacts the consumption basket of the poor.
However this argument rests on the foundation
that the relative size of the formal and informal
economies is exogenous to the tax structure in
place. In India, the implementation of VAT is in
fact expected to reduce the size of the informal
economy relative to the formal economy by
moving producers who choose to remain in the
informal sector for tax avoidance reasons,
incentivized by the size biased nature of indirect
tax exemptions in the historic regime of taxation
of domestic goods and services. When this is taken
into account the welfare effects of GST can, in
fact, be expected to be positive.

This highlights the fact that a GST based reform


of the present indirect tax system can be expected
to have significant positive welfare effects even
while maintaining revenue neutrality.
GST and Fiscal Management
The changeover to GST is designed to be revenue
neutral at existing levels of compliance. Given the
design of the flawless GST, the producers and
distributors will only be pass through for the GST.
Further, given the single and low rate of tax the
benefit from evasion will significantly reduce.
Therefore, there will be little incentive for the
producers and distributors to evade their turnover.
Accordingly, this policy initiative should witness a
higher compliance and an upsurge in revenue
collections. This will also have an indirect positive
impact on direct tax collections. Further, given the
fact that GST will trigger an increase in the GDP,
this in turn would yield higher revenues even at
existing levels of compliance. Another important
source of gain for the Government would be the
savings on account of reduction in the price levels
of a large number 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.

As regards the State Governments, the design and


the road map of the GST recommended by us
would lead to substantial gain in revenues. While
the revenue neutral rate for the States is
estimated to be 6 percent, we have recommended
that the states should be allowed to impose GST
at the rate of 7 percent. An increase in the RNR
of the States by 1 percent implies a revenue gain
of Rs. 31381 crores per annum in the base year
2007-08 (i.e. 16.67 percent increase in the
revenues from the TF- taxes). If the States
decide to phase out the stamp duty over a period
of three years, the revenues from stamp duty will
be additionality for the States. Therefore, in the
first year of implementation of GST and phasing
out of the Stamp duty, the States should expect
additional revenues to the extent of 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.

Therefore, overall the implementation of GST


should enable the Government at both levels to
better meet the challenges of fiscal correction.
GST and vertical balance of power
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.

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
states would now also extend to services which
comprises 54 percent of the GDP and also
constitutes the fastest growing sector in the
economy. Similarly, the taxing powers of the
Centre will also extend to the retail stage and to
this extent there will be an expansion in its taxing
powers. This increase will be limited to about 12
percent of the GDP (assuming a retail margin of
25 percent on manufacturing value). In addition,
the Centre will also acquire the power to tax land
/real estate transaction which would account for
an estimated 10 percent of GDP. Since the
expansion in the power of the States is
significantly larger than the Centre, the proposed
GS T will alter the balance of power in favour of
the states thereby reducing the vertical
imbalance.

To conclude, the implications of a switch over to


the flawless GST recommended by us are indeed
far-reaching. Every stakeholder stands to gain.
This has the potential to transform not only the
tax system in the country but also the way we
organise and do business.
Appendix 3
Constitution Amendment
Bill (2014)
Bill No. 192 of 2014

THE CONSTITUTION (ONE HUNDRED AND


TWENTY-SECOND AMENDMENT) BILL, 2014

BILL

further to amend the Constitution of India.

BE it enacted by Parliament in the Sixty-fifth Year of


the Republic of India as follows:-

This Act may be called the Constitution (One


Hundred and Twenty-second Amendment)
Act, 2014.
It shall come into force on such date as the
Central Government may, by notification in
the Official Gazette, appoint, and different
dates may be appointed for different
provisions of this Act and any reference in
any such provision to the commencement of
this Act shall be construed as a reference to
the commencement of that provision.

After article 246 of the Constitution, the following


article shall be inserted, namely:

"246A.

Notwithstanding anything contained in


articles 246 and 254, Parliament, and. subject
to clause (2), the Legislature of every State,
have power to make laws with respect to
goods and services tax imposed by the Union
or by such State.

Parliament has exclusive power to make laws


with respect to goods and services tax where
the supply of goods, or of services, or both
takes place in the course of inter-State trade
or commerce.
Explanation.The provisions of this article, shall,
in respect of goods and services tax referred to in
clause (5), of article 279A, take effect from the
date recommended by the Goods and Services Tax
Council.".

In article 248 of the Constitution, in clause (1), for


the word ``Parliament, the words, figures and
letter ``Subject to article 246A. Parliament shall
be substituted.

In article 249 of the Constitution, in clause (1),


after the words ``with respect to, the words,
figures and letter ``goods and services tax
provided under article 246A or shall be inserted.

In article 250 of the Constitution, in clause (1),


after the words ``with respect to, the words,
figures and letter ``goods and services tax
provided under article 246A or shall be inserted.

In article 268 of the Constitution, in clause (1), the


words ``and such duties of excise on medicinal and
toilet preparations" shall be omitted.

Article 268A of the Constitution, as inserted by


section 2 of the Constitution (eighty-eighth
Amendment) Act, 2003 shall be omitted.

In article 269 of the Constitution, in clause (1),


after the words ``consignment of goods, the
words, figures and letter ``except as provided in
article 269A shall be inserted.

After article 269 of the Constitution, the following


article shall be inserted, namely: 269A.

Goods and services tax on supplies in the


course of inter-State trade or commerce shall
be levied and collected by the Government of
India and such tax shall be apportioned
between the Union and the States in the
manner as may be provided by Parliament by
law on the recommendations of the Goods
and Services Tax Council.

Explanation.-For the purposes of this


clause, supply of goods, or of services, or both
in the course of import into the territory of
India shall be deemed to be supply of goods,
or of services, or both in the course of inter-
State trade or commerce.

Parliament may, by law, formulate the


principles for determining the place of supply,
and when a supply of goods, or of services, or
both takes place in the course of inter-State
trade or commerce".

In article 270 of the Constitution.

in clause (1), for the words, figures and letter


``articles 268, 268A and article 269, the
words, figures and letter ``articles 268, 269
and article 269A shall be substituted;

after clause) (1), the following clause shall be


inserted, namely;

``(1 A) The goods and services tax levied and


collected by the Government of India, except
the tax apportioned with the States under
clause (1) of article 269A, shall also be
distributed between the Union and the States
in the manner provided in clause (2)..

In article 271 of the Constitution, after the words


``fin those articles, the words, figures and letter
``except the goods and services tax under article
246A, shall be inserted.
12. After article 279 of the Constitution, the
following article shall be inserted, namely:
279A.

The President shall, within sixty days from


the date of commencement Goods and of the
Constitution (One Hundred and Twenty-
second Amendment) Act, 2014, by order,
constitute a Council to be called the Goods
and Services Tax Council.

The Goods and Services Tax Council shall


consist of the following members, namely:

the Union Finance Minister..


Chairperson;

the Union Minister of State in charge of


Revenue or Finance. Member;

the Minister in charge of Finance or


Taxation or any other Minister
nominated by each State
Government Members.

The Members of the Goods and Services Tax


Council referred to in sub-clause (c) of clause
(2) shall, as soon as may be, choose one
amongst themselves to be the Vice-
Chairperson of the Council for such period as
they may decide.

The Goods and Services Tax Council shall


make recommendations to the Union and the
States on

the taxes, cesses and surcharges levied


by the Union, the States and the local
bodies which may be subsumed in the
goods and services tax;

the goods and services that may be


subjected to, or exempted from the
goods and services tax;

model Goods and Services Tax Laws,


principles of levy, apportionment of
Integrated Goods and Services Tax and
the principles that govern the place of
supply;

the threshold limit of turnover below


which goods and services may be
exempted from goods and services tax;
the rates including floor rates with bands
of goods and services tax;

any special rate or rates for a specified


period, to raise additional resources
during any natural calamity or disaster;

special provision with respect to the


States of Arunachal Pradesh, Assam,
Jammu and Kashmir, Manipur,
Meghalaya, Mizoram, Nagaland, Sikkim
,Tripura, Himachal Pradesh and
Uttarakhand; and

any other matter relating to the goods


and services tax, as the Council may
decide.

The Goods and Services Tax Council shall


recommend the date on which the goods and
services tax be levied on petroleum crude,
high speed diesel, motor spirit (commonly
known as petrol), natural gas and aviation
turbine fuel.

While discharging the functions conferred by


this article, the Goods and Services Tax
Council shall be guided by the need for a
harmonised structure of goods and services
tax and for the development of a harmonised
national market for goods and services.

One half of the total number of Members of


the Goods and Services Tax Council shall
constitute the quorum at its meetings.

The Goods and Services Tax Council shall


determine the procedure in the performance
of its functions.

Every decision of the Goods and Services Tax


Council shall be taken at a meeting, by a
majority of not less than three-fourths of the
weighted votes of the members present and
voting, in accordance with the following
principles, namely;

the vote of the Central Government


shall have a weightage of one- third of
the total votes cast, and

the votes of all the State Governments


taken together shall have a weightage of
two-thirds of the total votes cast,
in that meeting.

No act or proceedings of the Goods and


Services Tax Council shall be invalid merely
by reason of

any vacancy in, or any defect in, the


constitution of the Council; or

any defect in the appointment of a


person as a member of the Council; or

any procedural irregularity of the


Council not affecting the merits of the
case.

Goods and Services Tax Council may decide


about the modalities to resolve disputes
arising out of its recommendation..

In article 286 of the Constitution, -

in clause (1 ).

for the words ``the sale or purchase of


goods where such sale or purchase takes
place", the words ``the supply of goods
or of services or both, where such supply
takes place shall be substituted:

in sub-clause (h), for the word ``goods,


at both the places where it occurs the
words ``goods or services or both shall
be substituted:

in clause (2). for the words ``sale or purchase


of goods takes place, the words ``supply of
goods or of services or both shall be
substituted;

clause (3) shall be omitted.

In article 366 of the Constitution.

after clause (12). the following clause shall be


inserted, namely:

(I2A) ``goods and services tax means any


tax on supply of goods, or services or both
except taxes on the supply of the alcoholic
liquor for human consumption:;

after clause (26), the following clauses shall


be inserted, namely:

(26A) ``Services means anything other than


goods;

(26B) ``State with reference to articles


246A. 268, 269, 269A and article 279A
includes a Union territory with Legislature;.

In article 368 of the Constitution, in clause (2), in


the proviso, in clause (a), for the words and
figures ``article 162 or article 241, the words,
figures and letter ``article 162, article 241 or
article 279A" shall be substituted.

In the Sixth Schedule to the Constitution, in


paragraph 8, in sub-paragraph (3),

in clause (c), the word ``and" occurring at the


end shall be omitted:

in clause (d). the word ``and shall be


inserted at the end;

after clause (d), the following clause shall be


inserted, namely:

``(e) taxes on entertainment and


amusements.".

In the Seventh Schedule to the Constitution,


in List 1 Union List,

for entry 84, the following entry shall be


substituted, namely:

``84, Duties of excise on the following


goods manufactured or produced in
India, namely:

petroleum crude;

high speed diesel;

motor spirit (commonly known as


petrol);

natural gas;

aviation turbine fuel; and

tobacco and tobacco products.";

entries 92 and 92C shall be omitted;

in List !! State List. -

entry 52 shall be omitted:


for entry 54. the following entry shall be
substituted, namely:

``54. Taxes on the sale of petroleum


crude, high speed diesel, motor spirit
(commonly known as petrol), natural
gas, aviation turbine fuel and alcoholic
liquor for human consumption, but not
including sale in the course of inter-State
trade or commerce or sale in the course
of 2u international trade or commerce of
such goods":

entry 55 shall be omitted;

for entry 62, the following entry shall be


substituted, namely:

``62. Taxes on entertainments and


amusements to the extent levied and
collected by a Panchayat or a
Municipality or a Regional Council or a
District Council.".

An additional tax on supply of goods, not


exceeding one per cent, in the course of inter-
State trade or commerce shall,
notwithstanding anything contained in clause
(1) of article 269A, be levied and collected by
the Government of India fora period of two
years or such other period as the Goods and
Services Tax Council may recommend, and
such tax shall be assigned to the States in the
manner provided in clause (2).

The net proceeds of additional tax on supply


of goods in any financial year, except the
proceeds attributable to the Union territories,
shall not form part of the Consolidated Fund
of India and be deemed to have been assigned
to the States from where the supply
originates.

The Government of India may, where it


considers necessary in the public interest,
exempt such goods from the levy of tax under
clause (1).

Parliament may, by law, formulate the


principles for determining the place of origin
from where supply of goods take place in the
course of inter-State trade or commerce.
Parliament may, by law. on the recommendation of
the Goods and Services Tax 40 Council, provide
for compensation to the States for loss of revenue
arising on account of implementation of the goods
and services tax for such period which may extend
to five years.

Notwithstanding anything in this Act, any


provision of any law relating to tax on goods or
services or on both in force in any State
immediately before the commencement of this
Act, which is inconsistent with the provisions of
the Constitution as amended by this Act shall
continue to be in force until amended or repealed
by a competent Legislature or other competent
authority or until expiration of one year from
such commencement, whichever is earlier.

If any difficulty arises in giving effect to the


provisions of the Constitution as amended by
this Act (including any difficulty in relation to
the transition from the provisions of the
Constitution as they stood immediately
before the date of assent of the President to
this Act to the provisions of the Constitution
as amended by this Act), the President may,
to by order, make such provisions, including
any adaptation or modification of any
provision of the Constitution as amended by
this Act or law, as appear to the President to
be necessary or expedient for the purpose of
removing the difficulty:

Provided that no such order shall be made


after the expiry of three years from the date
of such assent.

Every order made under sub-section (/) shall,


as soon as may be after it is made, be laid
before each House of Parliament.
STATEMENT OF OBJECTS AND
REASONS
The Constitution is proposed to be amended to
introduce the goods and services tax for conferring
concurrent taxing powers on the Union as well as the
States including Union territory with Legislature to
make laws for levying goods and services tax on every
transaction of supply of goods or services or both. The
goods and services tax shall replace a number of
indirect taxes being levied by the Union and the State
Governments and is intended to remove cascading
effect of taxes and provide for a common national
market for goods and services. The proposed Central
and State goods and services tax will be levied on all
transactions involving supply of goods and services,
except those which are kept out of the purview of the
goods and services tax.

The proposed Bill, which seeks further to amend


the Constitution, inter alia, provides for

subsuming of various Central indirect taxes


and levies such as Central Excise Duty,
Additional Excise Duties, Excise Duty levied
under the Medicinal and Toilet Preparations
(Excise Duties) Act, 1955, Service Tax,
Additional Customs Duty commonly known as
Countervailing Duty, Special Additional Duty
of Customs, and Central Surcharges and
Cesses so far as they relate to the supply of
goods and services;

subsuming of State Value Added Tax/Sales


Tax, Entertainment Tax (other than the tax
levied by the local bodies). Central Sales Tax
(levied by the Centre and collected by the
States), Octroi and Entry tax, Purchase Tax,
Luxury tax, Taxes on lottery, betting
andgambling; and State cesses and
surcharges in so far as they relate to supply
of goods and services;

dispensing with the concept of `declared


goods of special importance under the
Constitution;

levy of Integrated Goods and Services Tax on


inter-State transactions of goods and
services;

levy of an additional tax on supply of goods,


not exceeding one per cent, in the course of
inter-State trade or commerce to be collected
by the Government of India for a period of
two years, and assigned to the States from
where the supply originates;

conferring concurrent power upon Parliament


and the State Legislatures to make laws
governing goods and services tax;

coverage of all goods and services, except


alcoholic liquor for human consumption, for
the levy of goods and services tax. In case of
petroleum and petroleum products, it has
been provided that these goods shall not be
subject to the levy of Goods and Services Tax
till a date notified on the recommendation of
the Goods and Services Tax Council.

compensation to the States for loss of


revenue arising on account of implementation
of the Goods and Services Tax for a period
which may extend to five years;

creation of Goods and Services Tax Council


to examine issues relating to goods and
services tax and make recommendations to
the Union and the States on parameters like
rates, exemption list and threshold limits. The
Council shall function under the
Chairmanship of the Union Finance Minister
and will have the Union Minister of State in
charge of Revenue or Finance as member,
along with the Minister in-charge of Finance
or Taxation or any other Minister nominated
by each State Government. It is further
provided that every decision of the Council
shall be taken by a majority of not less than
three-fourths of the weighted votes of the
members present and voting in accordance
with the following principles:

the vote of the Central Government


shall have a weightage of one-third of
the total votes cast, and

the votes of all the State Governments


taken together shall have a weightage of
two-thirds of the total votes cast in that
meeting.

Illustration: in terms of clause (9) of the


proposed article 279A, the ``weighted votes
of the members present and voting" in favour
of a proposal in the Goods and Services Tax
Council shall be determined as under:

WT = WC+WS

Where.

$$WT = WC+WS = (\frac{WST}{SP}) * SF$$

Wherein

WT = Total weighted votes of all members in


favour of a proposal.

WC = Weighted vote of the Union = y i.e.,


33.33% if the Union is in favour of the
proposal and be taken as ``0" if, Union is not
in favour of a proposal.

WS = Weighted votes of the States in favour


of a proposal.

SP = Number of States present and voting.

WST = Weighted votes of all States present


and voting i.e.,
$$\frac{2}{3} i.e., 66.67\%$$

SF = Number of States voting in favour of a


proposal.

Clause 20 of the proposed Bill makes


transitional provisions to take care of any
inconsistency which may arise with respect to
any law relating to tax on goods or services
or on both in force in any State on the
commencement of the provisions of the
Constitution as amended by this Act within a
period of one year.

the Bill seeks to achieve the above objects. ARUN


JAITLEY

New Delhi;

The 18th December, 2014

PRESIDENTS RECOMMENDATION UNDER


ARTICLE 117 OF THE

CONSTITUTION OF INDIA

[Copy of letter No. S-31011/07/20 !4-SO(ST),


dated the 18th December, 2014 from Shri Arun
Jaitley, Minister of Finance to the Secretary-
General. Lok Sabha.]

The President, having been informed of the


subject matter of the proposed Bill, recommends
under clauses(1) and (3) of article 117, read with
clause (1) of article 274,of the Constitution of
India, the introduction of the Constitution (One
Hundred and Twenty-second Amendment) Bill.
2014 in Lok Sabha and also the consideration of
the Bill.
FINANCIAL MEMORANDUM
Clause 12 of the Bill seeks to insert a new article 279A
in the Constitution relating to Constitution of Goods
and Services Tax Council. The Council shall function
under the Chairmanship of the Union Finance Minister
and will have the Union Minister of State in-charge of
Revenue or Finance as member, along with the
Minister in-charge of Finance or Taxation or any other
Minister nominated by each State Government.

The creation of Goods and Services Tax Council


will involve expenditure on office expenses,
salaries and allowances of the officers and staff.
The objective that the introduction of goods and
services tax will make the Indian trade and
industry more competitive, domestically as well as
internationally and contribute significantly to the
growth of the economy, such additional
expenditure on the Council will not be significant.

At this stage, it will be difficult to make an


estimate of the expenditure, both recurring and
non-recurring on account of the Constitution of
the Council.
Further, it is provided for compensation to the
States for loss of revenue arising on account of
implementation of the Goods and Services Tax for
such period which may extend to five years. The
exact compensation can be worked out only when
the provisions of the Bill are implemented.
MEMORAMDUM READING
DELEGATED LEGISLATION
Clause 12 of the Bill seeks to insert a new article 279A
relating to the constitution of a Council to be called the
Goods and Services Tax Council. Clause (1) of the
proposed new article 279A provides that the President,
shall within sixty days from the date of the
commencement of the Constitution (One Hundred and
Twenty-second Amendment) Act, 2014, by order,
constitute a Council to be called the Goods and
Services Tax Council. Clause (8) of the said article
provides that the Council shall determine the
procedure in the performance of its functions.

The procedures, as may be laid down by the


Goods and Services Tax Council in the
performance of its functions, are matters of
procedure and details. The delegation of
legislative power is, therefore, of a normal
character.
Appendix 4
Recommendations /
Observations by the Rajya
Sabha Select Committee
on the GST Constitution
Amendment Bill, 2014
(
Recommendations/Observations at a
Glance
CLAUSE 1 TO CLAUSE 8 : THESE CLAUSES
HAVE BEEN ADOPTED WITH NO CHANGE.

Clause 9 - The Committee feels that since


imposition of GST on the supplies of goods and
services in the course of inter-State trade would
not lead to cascading of taxes, the Clause may be
adopted with no change.

CLAUSE 10 & CLAUSE 11 : THESE CLAUSES


HAVE BEEN ADOPTED WITH NO CHANGE

Clause 12 - After having deliberated on the issue


of finances of local bodies, the Committee strongly
feels that the revenues of local bodies need to be
sustained and protected for ensuring that
standards of local governance are maintained. The
Committee, thus, strongly recommends that the
State Governments take adequate measures to
ensure that adequate revenues flow to the local
bodies, and their resources are not adversely
affected. The Committee noted that Article 243H
and 243X contain provisions for State Legislatures
to authorize Panchayats and Municipalities to
collect and appropriate taxes in the State list. The
Committee further noted that Article 243I and
243Y provide for setting up of State Finance
Commissions to make recommendations regarding
devolution of funds to local bodies. The
Committee noted that the above provisions
notwithstanding, local bodies find managing their
resource requirements quite challenging. In light
of above, with respect to Article 279A 4(e), the
Committee strongly recommends that the word
band used in the proposed Article may be defined
in GST laws. The Committee recommends the
following definition of band:

Band : Range of GST rates over the floor rate


within which Central Goods and Service Tax
(CGST) or State Goods and Services Tax (SGST)
may be levied on any specified goods or services
or any specified class of goods or services by the
Central or a particular State Government as the
case may be.

With respect to Article 279A(5), taking note of


the provision that inclusion of petroleum products
into GST can take place only on recommendation
of GST Council which could happen only with the
consent of both the Centre and the States, the
Committee recommended that the clause be
adopted with no change.

The Committee is aware that while discharging


the functions conferred by this article, the Goods
and Services Tax Council shall be guided by the
need for a harmonised structure of goods and
services tax and for the development of a
harmonised national market for goods and
services.

In view of the clarifications submitted by the


Department of Revenue and Legislative
Department, the Committee finds no merit in
disturbing the voting pattern proposed in the Bill,
as the same has been worked out on a formula
where no one is at an disadvantageous or
dominating position be it Centre or States.
Moreover, under clause 2 Parliament and the
Legislature of every State shall have power to
make laws with respect to GST simultaneously.

In the GST Council, all the decisions have to be


taken collectively by the Centre and States and in
order to take decision on any issue 75% votes are
necessary. So, in order to strike a fine balance
Centre vote share has been kept at 1/3rd and that
of the States at 2/3rd. In that backdrop, the
Committee recommends that these amendments
may not be necessary since our Constitution is a
federal Constitution and so, it is necessary to
make the provisions providing for a manner that
disallow the dominance of one over the other.
Keeping this in view, the voting formula has been
worked out. Hence, the clause may be adopted
with no change.

The Committee, having noted the point mentioned


by the Department of Revenue that the GST
Council shall decide only the modalities to
resolve disputes, did not agree to recommend
inclusion of Article 279B as was proposed in
Constitution(115th Amendment) Bill, 2011.

Clause 13 - The term supply would be defined in


the various GST laws relating to CGST and
SGST. Hence, the Committee feels that it would
not be appropriate to insert the definition of
supply in this clause. This clause has been adopted
with no change.

Clause 14 - Endorsing the view of the


Department, the Committee feels that services
has been so defined in order to give it wide
amplitude so that all supplies that are not goods
can potentially be covered within the ambit of
services and no activity remains outside the
taxable net. This would also minimize disputes.
Further, having noted the points mentioned by the
Department of Revenue regarding inclusion of
petroleum products under GST, the clause may be
adopted with no change.

Clause 15 & Clause 16 -These clauses have been


adopted with no change.

Clause 17- 2.108 Regarding the aforesaid Entry,


the Committee is of the view that Entry 92C was
inserted by the Constitution (Eighty-Eighth
Amendment) Act, 2003 to empower the Union to
impose service tax on certain services read with
article 268A of the Constitution.

Notwithstanding, the service tax levied under the


Finance Act, 1994 were continuing as such. The
amendment was carried out in the Constitution but
the provision was never brought into force. Since
Parliament has enacted the said constitutional
provision and as such the provision stands as the
part of Constitution; and therefore, unless it is
omitted by a Constitution Amendment Act by
Parliament, it will continue to sit in the
Constitution. On the need for formal repeal, the
Law Commission, in its One Hundred and Forty-
eighth Report on Repeal of Certain Pre-1947
Central Acts, has observed that the statues,
unlike human beings, do not die a natural death,
with the possible exception of statute whose life is
pre-determined by the Legislature at the time of
their enactment. A statute, unless it is expressly
enacted for a temporary period, survives until it is
killed by repeal. To this extent, statutes enjoy
immortality. Therefore, it is necessary to omit
the said provision to ward of any future doubts
about GST.

The Committee is of the view that the entry in the


list II- State List empowers the State Government
to make laws in respect of the subjects mentioned
therein. The Committee is also of the considered
view that taxes on electricity and water have been
treated separately from taxes on other goods and
services in the Constitution. Entry 53 of the List II
(State List) deals with taxes on sale or
consumption of electricity, and this entry is not
being touched by the Constitution (122nd
Amendment) Bill, 2014. The Committee also noted
the rationale for the provisions relating to alcohol
for human consumption and tobacco as provided
by the Department of Revenue. Hence, the clause
may be adopted with no change.

Clause 18- 2.139 The Committee feels that the


provision of 1% additional tax in its present form
is likely to lead to cascading of taxes. Therefore,
the Committee strongly recommends that in the
concerned GST law, an explanation should be
given that for the purpose of Clause 18, the word
supply would mean: Supply: ``All forms of supply
made for a consideration".

Clause 19 - 2.158 In view of the clarifications


given by the Legislative Department, the
Committee feels that there is no justification for
substitution of the word may with shall. Having
regard to the concerns expressed by the various
States and some of the Members of the
Committee in their submissions made before the
Select Committee, the Committee recommends
amendment in clause 19. The amended clause 19
should read as follows:

19. Parliament may, by law, on the


recommendation of the Goods and Services Tax
Council, provide for compensation to the States
for the loss of revenue arising on account of
implementation of the Goods and Services Tax for
a period of five years.

Clause 20 & Clause 21 : This clause has been


adopted with no change.

The Committee feels that the concerns expressed


by all the Members of the Committee related to
local bodies and Municipalities are not
unwarranted. Based on the years of experience
and being witnessed to their work in their
respective constituencies they were of the view
that their interest needs to be protected. The
same view was also endorsed by nearly all the
stakeholders who have either submitted their
memorandum or appeared before the Committee
on the Bill.

But, at the same time we may not forget that the


Constitution of India clearly defines the ambit
under which the Centre and each of the State has
to function. Any encroachment into the State List
would disturb the whole system and could strain
the Centre-State relations.
The Committee feels that although the issues
raised by the Members to protect and preserve
the interest of local bodies are valid, it would not
be appropriate for the Committee to advise,
recommend and guide the State Governments
what they have to do with regard to the interests
of the local bodies.

As per the provisions of the Bill, while the Parliamen


would pass law relating to CGST, every State Gove
has to pass a similar law relating to SGST. Hence,
while drafting the SGST, the role of the drafters
and the concerned State Governments becomes
all the more important as they have a duty to
protect the revenue sources of the Panchayats,
Municipalities, etc, enshrined under Constitution
of India. The Committee also feels that here the
role of the GST Council is also very important,
because while recommending to the Centre and
State Governments for subsuming of the taxes,
cesses and surcharges levied by the Union, the
States and the local bodies in the goods and
services tax under article 279 (4) (a), it may also
ensure protection of revenue sources of local
bodies under provisions of article 279 (4) (c) and
(h).
In the light of the above, the Committee feels that
in a cooperative federalism, each unit of it
interacts cooperatively and collectively resolves
their problems by taking appropriate action at
their end. On the same analogy, Government at
the helm of the affairs is duty bound both morally
and constitutionally to protect the interest of local
bodies by giving them suitable space of functioning
and power to levy and generate taxes for their
day today functioning. Having full faith in our
Constitution from where each tier of the
Government draws its powers, the Committee
believes that all the State Governments would
enact laws on the basis of Model GST Laws
recommended by the GST Council and while
making such laws States would abide by the
constitutional provisions relating to Panchayats
and Municipalities.

Concerned about the very existence and survival


of local bodies, the Committee feels that Local
government is a State subject figuring as item 5 in
List II of the Seventh Schedule to the
Constitution. Article 243 G of the Indian
Constitution enshrines the basic principle for
devolution of power to the local bodies. In the
nations journey towards becoming an economic
power, local bodies play an important part in
enabling infrastructure availability to the citizens.
Local bodies are institutions of the local self
governance, which look after the administration of
an area or small community such as villages,
towns, or cities. The local bodies in India are
broadly classified into two categories. The local
bodies constituted for local planning, development
and administration in the rural areas are referred
as Rural Local Bodies (Panchayats) and the local
bodies, which are constituted for local planning,
development and administration in the urban areas
are referred as Urban Local Bodies
(Municipalities) and the Constitution of India gives
protection to them through various articles, so
while drafting the SGST laws due consideration
should also be given to this fact. In that backdrop,
the Committee strongly recommends that while
drafting the SGST laws due consideration to the
third tier of the Government as has been
guaranteed by the Constitution be given and
provisions of devolution of taxes to the local
bodies be made.

The Committee is perturbed to know that State


Finance Commissions (SFC) in some of the States
are either non-existent or even when exist their
recommendations were not accepted by the
respective State Governments. The Committee
understands that each tier of the Government
draws it powers through the Constitution and
there is a clear demarcation of fields through List
I, II and III within which each tier has to function.
Any encroachment by any of them would paralyze
the whole system and defeat the very foundation
of our Constitution. Hence, the Committee while
not venturing into the domain of the State List
desires that for the betterment of our States in
general and country in particular it would be
prudent to abide by the recommendations of the
SFCs.

Endorsing the view envisaged by Fourteen Finance


Commission, the Committee feels it would be wise
to keep the GST Compensation Fund out of the
purview of the Bill as has been done in the present
case, because it is a temporary component and
that too only for five years.

The Committee feels that each and every State is b


represented in the GST Council by their Revenue/F
Minister. Be it a small State or a big State, in the
GST Council, all of them enjoy equal status and
power to cast one vote. In the event of difference,
it can very well be presumed that the GST Council
will try to evolve consensus on contentious issues
before going for casting of votes, as all the States
are members of the Council. Thus, modality to
resolve any differences internally lies with the
Council. If any Dispute Settlement Authority is
created separately it will certainly hamper the
functioning of the GST Council in general and
Legislatures (Parliament and States) in particular.
Thus, it would be judicious not to have a separate
and distinct authority having far reaching powers
and which could preempt and supersede the
powers of Parliament and State Legislatures in
the long run.

The Committee also feels that when concept of


Empowered Committee (EC) was coined for the
first time, it may not have been presumed how it
would function, whether it would serve the
purpose for which it would be created, how States
would be represented/heard, how issues would be
taken up and resolved, etc. But experience has
shown that the faith with which the concept of EC
was coined has actually delivered. Empowered
Committee headed by one among the State
Finance/ Revenue Ministers of all States
deliberate meticulously on each of the issues
raised by its Members and with the passage of
time it had taken the shape of arbitration centre
where disputes related to them or between two or
many States are raised, deliberated and settled
amicably without any arbitration charges or fees
borne by the disputant States. It would not be over
exaggeration of facts if the Committee would say
that on the one hand EC had worked as a forum
where any issue of State importance could be
raised and on the other hand it had gained the
confidence of States in solving their problems and
allaying their fears. Such confidence building
measure had been initiated by the EC that it could
well be termed as a forum where disputes are
settled broadly with consensus.

The Committee feels that it would be too early to


presume as to whether the price levels will go
down or up in the post GST era. What has to be
seen and watched by the Government with eyes
open is whether the benefit, if any, arises would
certainly be passed on to the consumers or not.
Hence, the Committee feels that at the most if
price stability is achieved it would serve the very
purpose of GST in the entire country as inflation,
nowadays has not left even a single field
untouched.

The Committee feels GSTN shall play a crucial


role in implementation of GST as it shall provide
the IT infrastructure for implementation of GST.
It noted that Non Government shareholding of
GSTN is dominated by private banks. This is not
desirable because of two reasons. Firstly, public
sector banks have more than 70% share in total
credit lending in the country. Secondly, GSTNs
work is of strategic importance to the country and
the firm would be a repository of a lot of sensitive
data on business entities across the country. In
light of above, the Committee strongly
recommends that Government may take
immediate steps to ensure Non Government
financial institution shareholding be limited to
public sector banks or public sector financial
institutions.

Endorsing the views of the SBI, the Committee


having same feeling as the bank recommends that
the best practices followed internationally may be
followed and if possible banking services may be
kept outside GST. Furthermore, if this is not
possible then, interest, trading in securities and
foreign currency and services to retail customers
should not be liable to GST and suitable provision
should be there to avail of CenVAT credit of input
services taken to provide activities involved in
such services. Further, single registration coupled
with IGST provision should be made available to
enable CenVAT credit for consumers of banking
services.

The Committee is of the considered opinion that if


the GST rate is more than the service tax rate of
14%, the increase in the tax rate will further
increase the cost of banking services. This results
into cost of doing business to be much higher in
India as compared to other competing countries.
Therefore, the Committee recommends that to be
internationally competitive, the GST rate for
banking industry should be minimum.

The Committee feels that although the GST


Council has been entrusted with the task of fixing
the rate including floor rates with bands in mutual
consent with other State Governments who are
part and parcel of the Council. But implementation
of GST in other countries has shown GST rate is a
very important factor in earning the trust of the
consumers. If the GST rate is kept high, it will
surely erode the confidence of the consumers
badly and may lead to high inflation. Therefore,
the Committee is of the considered view that
while fixing the rate, the GST Council may opt for
a broad base and moderate rate as it is an
essential feature of a good tax system and as far
as possible multiplicity of tax rates may be
avoided. Non-Interference in the State
Governments powers stated in Concurrent List.

In that backdrop, the Committee recommends that


all out effort should be made to improve upon the
IT preparedness of the States, so that the
apprehensions related to its level of preparedness
may gets addressed. For its smooth
implementation, the Committee immediately
recommends implementation of comprehensive
training programmes at all levels to
allay the fears of consumers, stakeholders,
organisations, etc. A message should go loud and
clear to all that we as a country are ready to
adopt tax reform of unparallel nature. The
Committee also recommends that for having no
discernible blemishes in the implementation of
GST, it is imperative that not only IT
preparedness is at very high level but also
prerequisites like IT infrastructure, unified tax
credit clearing mechanism, etc may be put in place
for its implementation.

Having heard the views of the main stakeholders


i.e. State Governments/UTs, the Committee feels
that States are like the arteries of the India and if
the arteries find themselves choked the whole
body will fall. Hence, for the sake of our survival,
what needs to be done is to protect and preserve
our arteries. Based on that analogy, the
Committee feels that although the apprehensions
brought to the notice of the Committee are not
unwarranted but due care have been taken
constitutionally to overcome any constraints come
in their way. All these initiatives ushered by the
Government of India having been evolved and
brought in the form of current Bill are based on
the views expressed in the Empowered Committee
meetings. To allay the fear of all State
Governments in general and manufacturing states
in particular, safeguards like 1% additional tax on
supply of goods, compensation to States/UTs for
losses in the revenue, States have been given the
voting weightage of 2/3rd , decision in GST
Council to be arrived at by the majority of not less
than 3/4th , etc on the recommendation of the
GST Council have been provided. More so, all this
has been done constitutionally so that there may
not be any doubt in the minds of the States/UTs.

Therefore, the Committee feels due consideration


has been
given by the Government of India to the aforesaid
apprehensions raised by the States/UTs while comin
forward with this comprehensive Constitutional
Amendment Bill. The Committee feels that
apprehensions cast over the introduction of goods
and services taxes are early hiccups and with the
introduction of it, the States/UTs would realise
that they have many more options available to
them to generate and augment their revenue
source. Survival of the Union is on the States, the
Committee close by saying that would the body
(Centre) survive if arteries get choked, so
vibrancy of the States comes first for the survival
of the Centre.
About the Authors
Jayaram Hiregange - LLB, ICWA

Jayaram Hiregange is a Partner at Acer Tax &


Corporate Services LLP. Jayaram holds a
Bachelors degree in Law (LLB) and a degree in Cost
and Management Accountant (CMA). Jayaram is a
veteran in the field of indirect taxation with more than
20 years of experience in industry and Big 4 consulting
firm.

Jayaram has advised numerous multi-national and


Indian companies on a wide variety of matters covering
GST, VAT, Service Tax, Excise and Customs. Jayaram
has rich experience in dealing with compliance,
advisory and litigation matters across the indirect tax
spectrum and has advised clients in various sectors,
including IT / ITES, Manufacturing, Real-Estate,
Pharmaceuticals, FMCG, Automobile etc.

Jayaram is a reputed name in the industry circles for


his knowledge on indirect tax matters.

Deepak Rao ICWA, MBA (Finance)


Deepak Rao is a Partner at Acer Tax & Corporate
Services LLP. Deepak holds a degree in Cost and
Management Accountant (CMA) and a degree in
MBA - Finance. Deepak is a veteran in the field of
indirect taxation with more than 20 years of
experience in Industry and Big 4 consulting firms.

Deepak is specialized in supply-chain related advisory


and structuring in relation to indirect tax matters and
has worked with various industries / sectors including
IT / ITES, Manufacturing, Real-Estate, Retail,
Automobile, E-Commerce, SMEs etc. Deepak also
advises various multi-national companies on matters
covering GST, VAT, Service Tax, Excise and Customs.

Deepak is a prolific speaker and has conducted various


seminars and sessions to clients across the industry and
in association with CII, FICCI and other industry
forms. Deepak has also written various articles in
relation to tax & regulatory matters for leading
financial newspapers.
Disclaimer
The contents of this book are based on the information
available on India Goods & Services Tax (GST) in the
public domain and are the personal views of the
authors. The readers may note that the final GST
structure and implications could vary based on the final
version of the GST that the central and the state
governments agree to implement. While all due care
has been exercised, errors may have crept into the
contents unintentionally. We request the users to freely
point out any errors to increase the quality of the
content and the efficiency of this book.

Source Credit

The contents for Appendix 1 to 4 have been specifically


sourced from the various documents / reports released
by the central government and other committees /
authorities from time to time. The source is attributed
to the respective authority / committee.

1. This is a league table in which we have long


languished at the bottom.
2. Prior to the tax cut in December 2008 as part of
the economic stimulus, the combined rate was 28
per cent approximately.

3. However, there will be a special rate of 1 percent


on high value items like gold and platinum and
zero rate on exports.

4. 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 property

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