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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 knowledgebase. 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 thechairmanship 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, reintroduced 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 legislations 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 contemplated 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 lots
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 The
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 interstate 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 interstate 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, apportionment 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 interState 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 email, 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 importsubstitution 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 economies 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 exportoriented 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 competition. Relatively
low proportions of intermediate inputs purchased by agriculture and service sectors (i.e.
sectors under perfect competition) are sourced from manufacturing sectors and hence these
sectors do not reap the benefit of relatively low cost inputs from manufacturing sectors.
Further, the terms of trade can also be expected to improve in favour of agriculture vis- avis 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
A
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 interState 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 interState 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 ViceChairperson 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 Twentysecond 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 Parliament
would pass law relating to CGST, every State Government 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 being
represented in the GST Council by their Revenue/Finance/Taxation 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 coming
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 multinational 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