Sridharan has discussed
the broad contour of the proposed dual GST and
elaborates on the issues and concerns that the
dual GST structure should address. He concludes
that the effort would be successful only if the
tax administration is effectively computerized
and the officials administering the legislation
at the grass root level are knowledgeable.
those who were expecting fireworks of a Single
unified national GST, the announcement that a
dual GST model has been agreed upon by the Empowered
Committee of State Finance Ministers would be
a damp squib.
the political ground realities and the difficulty
in pushing through the required constitutional
amendment to implement a Single unified national
GST, the dual GST Model, a central GST and a state
GST, is the best compromise. A less than perfect
dispensation, though not ideal, should be welcomed
as a precursor to the ultimate goal of a Single
unified national GST.
a central VAT (Cenvat) and a state VAT already
in place, it appears that the proposed dual rate
structure would merely fine tune the present system.
the layman, the excise duty (and allied levies)
and service tax would comprise the Central GST;
The State GST would comprise of State VAT, State
Service Tax (new levy) and few more local levies.
GST may not have any significant impact as CENVAT
Credit of Excise duty and Service Tax available
at present would be continued.
State GST is likely to encompass local levies
like entry tax, Octroi, luxury tax, Entertainment
tax, and other cess on goods besides the proposed
service tax levy. Input tax hitherto not available
on entry tax (in certain States) and other levies
is a positive development.
No one size fits all
models of GST are implemented across the globe.
No one size fits all and each country should design
the tax structure that suits its political and
business environment. The implementation of the
dual GST structure is the most practical decision.
working group constituted by the Empowered Committee
had visited several federal countries where GST
has been implemented to gain better understanding
of the various GST systems.
model of GST to be implemented in India would
be unique to the ground realities in India, though
broadly it appears that the dual GST prevalent
in Canada has been considered.
had observed in an interaction with the industry
not to expect a text book structure.
are the highlights of the proposed dual GST Structure
(gleaned from the press reports) and some concerns
Rate of Tax
present, the standard rate of Excise duty is 16%
(service tax 12.5%) and State VAT is 12.5% adding
up to 28.5%. While it was speculated that the
probable tax incidence could be 20- 22%, Dr.Shome
has put at rest the possibility of a lower combined
GST by observing that one should not indulge in
speculation that the GST rates would be radically
slashed as demanded from certain quarters of the
industry. "Even if the present effective
tax rate is kept at the revenue neutral stage,
say 28 per cent, what the assesses should look
forward to is the transparency and certainty of
the structure that could do away with the cascading
effect and helping the industry to shore up the
competitiveness," he said.
on why the tax rates are lower in some countries,
Dr. Shome said that voluntary compliance even
by large corporations in India was not at the
desirable level and that countries that had reduced
VAT/GST rates have subsumed many taxes in that
framework and tax structure was made linear by
doing away with tax breaks.
is reported that the Centre and the States would
fix their respective GST rates after ensuring
there would be no revenue loss from the proposed
is reported that while the Service tax rate under
Central GST and State GST would be uniform there
could be more than one rate of tax on goods.
Dasgupta said, "The rates for Central GST
and state GST would be prescribed separately,
reflecting revenue considerations and acceptability."
What would be the revenue neutral rate of GST
Dr.Shome has indicated that the combined GST may
be around the present combined rate of 28%, here
is an interesting study that the revenue neutral
combined GST could be 12% without any exemption
on unprocessed food and other essentials like
medicines and clothing.
relevant extract from an article titled "Revenue-neutral
rate for GST" By Satya Poddar & Amaresh
Bagchi in the Economic Times dated 15/11/2007.
"Here are some basic
ingredients of the RNR calculations for 2005-06,
the latest year for which the necessary data are
available. The total excise/service tax/ VAT/sales
tax revenues of the Centre and the states in that
year were Rs 134 thousand crore and Rs 139 thousand
that approximately 40% of the central excise revenues
and 20% of the state VAT/sales tax revenues are
from motor fuels, the balance of the revenues
from other goods and services that need to be
replaced by the GST are Rs 89 thousand crore for
the Centre and Rs 111 thousand crore for the states,
making up a total of Rs 200 thousand crore.
2005-06, the total private consumer expenditure
on all goods and services was Rs 2,072 thousand
crore at current market prices. Making adjustments
for sales and excise taxes included in these values
and for the private consumption expenditure on
motor fuels, the total tax base (at pre-tax prices)
for all other goods and services is Rs 1,763 thousand
values yield a revenue-neutral GST rate of approximately
11% (200 as per cent of 1,763 is 11.3%). The RNR
for the Centre is 5% and for the States 6.3%.
Allowing for some leakages, the combined RNR could
be in the range of 12%. These estimates are by
no means precise. Even so, they give a broad idea
of the levels at which the rate or rates of GST
could be set to achieve revenue neutrality for
both levels of government."
RNR would, of course, go up if essentials like
unprocessed food are left out of the base or taxed
at a concessional rate. Assuming that, as the
national accounts data show, food constitutes
about one-third of the total consumption, the
RNR of 12% jumps to 18% if food is totally exempted,
and to about 16% if food is taxed at 5%. The RNR
rates would be even higher if the preferential
treatment were to be extended to other essentials
like medicines and clothing.
reforms entail hard choices to be made, which
should be based on long-term considerations of
nation-building, rather than narrow parochial
interests or issues of the day. A tax at 20% with
limited base broadening would not serve the needs
of fundamental tax reform like GST."
Selective Concessions/Exemptions to continue
a linear tax structure with few exemptions would
be ideal, the GST structure is likely to continue
with sector specific concessions and exemptions.
sector specific concessions, Dr.Shome observed
that shades of policy interventions is a fact
of life and we have to weave such positive suggestions
in the framework and that by 2010, we will have
a structure that will overhaul all taxes into
one, of course with some exemptions.
Likely Levies under Central GST
central taxes likely to be subsumed under GST
are central excise duties and allied levies and
is reported to have observed that the Government
is likely to impose an excise duty over and above
the GST on alcohol, tobacco products and petroleum
Likely Levies under Central GST
taxes likely to be subsumed under GST are value
added tax or sales tax, luxury tax, octroi, entry
tax, electricity tax taxes on lotteries, betting,
gambling and purchase tax.
entertainment tax is likely will be abolished
and it will come under services in GST.
is also reported that the states want liquor and
crude products to be outside the purview of GST.
GST regime may not subsume all taxes and several
taxes like road tax, passenger tax, stamp duty
and toll tax will be kept beyond the ambit of
Service Tax under GST
Tax is levied at 12.36% (inclusive of Education
Cess) per cent tax on around 100 services.
do not levy or collect service taxes at present,
but get a share from the Centre's collections.
It is now proposed that states will keep the entire
collection from 33 services from this year.
would tax another 44 proposed new services, collect
and appropriate as part of compensation for central
sales tax phase-out in 2010.
there would be issues on taxing cross border services
it is expected that the State GST would only include
services that are essentially of "Local Nature"
is reported that Service tax rate under Central
GST and State GST is likely to be uniform.
is possible that the rate of service tax may be
increased in 2008 budget to align with the proposed
peak rate of tax under Central GST.
Integration of Local Levies under State GST -
A Welcome Initiative
State Service Tax proposed to be levied on 44
new local services would add to the cost, a redeeming
feature is that Input Tax Credit would be eligible
on the State Service Tax and a host of other levies
like Entry Tax, Electricity Tax, and Luxury Tax
etc that would be integrated under State GST.
Of course, the service should qualify as an eligible
No Cross Credit of Central and State GST
of Taxes would continue as the dual GST structure
does not provide for fungibility of tax credit
between the Central GST and State GST.
Parthasarathi Shome, Advisor to Union Finance
Minister said that in the dual Goods and Service
Tax (GST) at the Central and State level, input
tax credit would be allowed only at one chain
and no carry forward of the credit from one chain
to the other would be allowed. The structure would
only address the cascading effect only in the
respective chain and not in the parallel one.
the absence of cross credit of input taxes between
the two levies under dual GST, the much hyped
intention of eliminating cascading of taxes and
provision seamless input tax credit would appear
a distant dream.
11th Finance Commission headed by Dr.Kelkar would
also take into consideration the likely impact
of the proposed implementation of GST on Centre-State
revenues. It is hoped that the Finance Commission
would examine the possibility of enabling fungibility
of tax credit between the Central GST and State
Tax Base for Dual GST Levy
nothing has been explicitly said on the tax base
of for the State GST, Dr Dasgupta is reported
to have observed that the dual GST Structure would
ensure that there is no double taxation and it
would help trim the present cascading effect of
tax to benefit industry and consumers.
it mean that the levy of Central GST and State
GST would be on the same tax base as only this
can help trim the present cascading effect of
tax? At present States levy VAT on the sale consideration
inclusive of Excise Duty.
Taxation of Interstate Sale
the phase out of CST by 2010, the concern is that
would CST sale be zero rated or would it be considered
an exempt sale.
subtle difference between the two options is that
if the Inter State Sale is Zero rated, the dealer
would get Input Tax Credit, if the Inter State
sale is an exempt sale, Input Tax Credit cannot
Expectations/Issues from Dual GST
essential prerequisites that would make the exercise
of dual GST meaningful are
of Form C and Form F
return for Central GST and State GST
State GST legislation
procedures and return formats
administration should be facless
States continue to refund unutilized Input
am sure the list would be longer. We would have
answers when the final proposal is unveiled.
Formal Recommendation to Centre by December End
has said that the formal final report would be
sent to the Centre by end December,2007 and as
Dr.Shome observed it is the political masters
who would to take the call on GST.
I apprehend that the administrative machinery
may not gear up to the challenge of creating the
necessary infrastructure by 2010, it is not impossible.
essential prerequisite is the large scale computerization
of the State Administration to facilitate e filing
of returns, monitoring of returns, mapping of
meaningful risk management system can work without
efficient tax administration software. If the
procedures and formats are not uniform across
States, normalization of data would be difficult
and it is hoped that the States agree on uniform
procedures retaining only the powers to selectively
grant concessions on rate of tax based on local
political and business exigencies.
efficient computerized system becomes all the
more important as Inter State sale would be exempt.
The process of issue of Form C /F should be dematerialised
and monitored online.
important aspect is proper training of both the
Central GST and State GST officials on the law
am sure most of you would have come across instances
of Service Tax officials and the State VAT officials
being not very conversant with the provisions
of law. Best talent should be attracted to Government
Service by matching Industry level compensation.
Success of any progressive legislation depends
entirely on the quality of manpower administering
the legislation particularly at the grass root
us look forward to a Practical GST, though truncated!
author is a Madurai based indirect tax consultant.