Good and Services Tax

Goods and Services Tax (GST) is a comprehensive tax levy on manufacture, sale and consumption of goods and services at a national level. Through a tax credit mechanism, this tax is collected on value-added goods and services at each stage of sale or purchase in the supply chain. The system allows the set-off of GST paid on the procurement of goods and services against the GST which is payable on the supply of goods or services. However, the end consumer bears this tax as he is the last person in the supply chain. Almost 140 countries have already implemented the GST. Brazil and Canada follow a dual system where GST is levied by both the Union and the State governments. France was the first country to introduce GST system in 1954. India is planning to implement a dual GST system. Under dual GST, a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of a transaction. It has been suggested to implement consumption type GST, that is, there should be no distinction between raw materials and capital goods in allowing input tax credit. The tax base should comprehensively extend over all goods and services upto final consumption point. GST will be structured on the destination principle. According to Task Force this will result in the shift from production to consumption whereby imports will be liable to both CGST and SGST and exports should be relieved of the burden of goods and services tax by zero rating. Consequently, revenues will accrue to the state in which the consumption takes place or is deemed to take place. Under GST, the taxation burden will be divided equitably between manufacturing and services, through a lower tax rate by increasing the tax base and minimizing exemptions. The Task Force on GST said the computation of CGST and SGST liability should be based on the Invoice credit method. i.e., allow credit for tax paid on all intermediate goods and services on the basis of invoices issued by the supplier. As a result, all different stages of production and distribution can be interpreted as a mere tax passthrough and the tax will effectively stick on final consumption within the taxing jurisdiction. This will facilitate elimination of the cascading effect at various stages of production and distribution.

The EC has decided to adopt a two rate structure- a lower rate for necessary items and goods of basic importance and a standard rate for goods in general. There will be also a special rate for precious metals and list of exempted items. The Task Force has provided a clear rate structure for GST. According to it the rate of CGST and SGST on all non-SIN goods and services should be fixed at a single positive rate of 5% and 7% respectively. The combined GST rate is being discussed by government. The rate is expected around 14-16 per cent. After the total GST rate is arrived at, the States and the Centre will decide on the CGST and SGST rates. According to EC alcoholic beverages should be kept out of GST. Also crude oil, diesel, petrol and ATF will not attract GST but the states will be free to levy taxes on them. Currently, services are taxed at 10 per cent and the combined charge indirect taxes on most goods is around 20 percent. Benefits to State & India: It is estimated that India will gain $15 billion a year by implementing the Goods and Services Tax as it would promote exports, raise employment and boost growth. It will divide the tax burden equitably between manufacturing and services. Why are some States against GST; will they lose money? The governments of Madhya Pradesh, Chhattisgarh and Tamil Nadu say that the information technology systems and the administrative infrastructure are not ready to implement GST. Some States fear that if the uniform tax rate

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is lower than their existing rates, it will hit their tax kitty. States are also worried that they will lose their fiscal autonomy if they cannot impose taxes on their own. The EC favoured the imposition of GST to be based on negative list. It is considered necessary to provide exemption, the centre and states should draw a common exemption which should be restricted to the following: a) All public services of Government (Central, state and municipal/ panchayati raj) including civil-administration, health services and formal education services provided by Govt. schools and colleges, Defence, Para-military, Police, Intelligence and Government Departments except Railways, Post and Telegraph, Other commercial departments, Public sector Enterprises, Banks and Insurance, Health and Education services. b) Any service transactions between an employer and employee either as a service provider, recipient or vice versa. c) Any unprocessed food article which is covered under the public distribution system should be exempt regardless of the outlet through which it is sold; d) Education services provided by non-Governmental schools and colleges; and e) Health services provided by non-Governmental agencies. Taxes to be subsumed under GST The following central taxes should be subsumed in the CGST: a) Central Excise Duty (including Additional Excise Duty) b) Service tax c) Additional Customs Duty (commonly referred as CVD) d) Surcharges and all cesses. The following state taxes should be subsumed in the SGST. a) VAT / Sales tax (including CST) b) Entertainment tax (other than levied by local bodies) c) Entry tax no in lieu of Octroi d) Other Taxes and Duties (includes Luxury tax, Taxes on lottery, betting and gambling, and all cesses and surcharges by states). The Task Force has recommended for the subsumation of following other taxes levied by the states on goods and services: a) Stamp duty b) Taxes on vehicles c) Taxes on Goods and Passengers d) Taxes on duties on electricity. It has also suggested that all entry and Octroi duties levied by the third-tier government should be abolished. The GST bill to be enacted needs the support of two-third of parliament and the approval of half of India's states.

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