This comparison is based on the
recommendations of the First Discussion Paper produced by
the Empowered committee of states finance ministers
(hereafter referred as EC) and the Report of the Task Force
on GST constituted by the Thirteenth Finance commission.
Before going on discussion we should define GST and the
Objective behind it.
What is GST?
GST is a tax on goods and services with comprehensive and
continuous chain of set-off benefits from the Producer’s
point and Service provider’s point upto the retailer 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.
Under GST 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.
Objective behind GST
a) The incidence of tax only falls on domestic consumption.
b) The efficiency and equity of the system is optimized.
c) There should be no export of taxes across taxing
jurisdictions.
d) The Indian market should be integrated into a single
common market.
e) It enhances the cause of co-operative federalism.
Our comparative discussion will be based only on significant
points constructing overall GST.
GST MODEL
A dual structure has been recommended by the EC. The two
components are: Central GST (CGST) to be imposed by the
center and state GST (SGST) by the states.
The Task Force has also recommended for the dual levy
imposed concurrently by the centre and the states, but
independently to promote co-operative federalism. Both the
CGST and SGST should be levied on a common and identical
base.
Both have suggested for consumption type GST, that is, there
should be no distinction between raw materials and capital
goods in allowing input tax credit. The tax base should
comprehensively extend over all goods and services upto
final consumption point.
Also both are of the view that the GST should be structured
on the destination principle. According to Task Force this
will result in the shift from production to consumption
whereby imports will be liable to both CGST and SGST and
exports should be relieved of the burden of goods and
services tax by zero rating. Consequently, revenues will
accrue to the state in which the consumption takes place or
is deemed to take place.
The Task Force on GST said the computation of CGST and SGST
liability should be based on the Invoice credit method.
i.e., allow credit for tax paid on all intermediate goods
and services on the basis of invoices issued by the
supplier. As a result, all different stages of production
and distribution can be interpreted as a mere tax
pass-through and the tax will effectively ‘stick’ on final
consumption within the taxing jurisdiction. This will
facilitate elimination of the cascading effect at various
stages of production and distribution.
Treatment of Central GST and State GST
Both the EC and the Task Force on GST have recommended
treating the Central GST and the State GST separately. The
CGST and SGST should be credited to the accounts of the
centre and the states separately. Taxes paid against the
CGST should be allowed to be taken as input tax credit (ITC)
for the CGST and could be utilized only against the payment
of CGST. The same principle will be applicable to the SGST.
Cross utilization of ITC between CGST and the SGST should
not be allowed.
While the Task Force on GST insisted that the full and
immediate input credit should be allowed for tax paid (both
CGST and SGST) on all purchases of capital goods (including
GST on capital goods) in the year in which the capital goods
are acquired. Similarly, any kind of transfer of the capital
goods at a later stage should also attract GST liability
like all other goods and services.
Exemption from GST
The EC favoured the imposition of GST to be based on
‘negative list’ and for few exemptions if necessary but
didn’t provide any list of exemption. However, the Task
Force also said that there shouldn’t be any exemption from
CGST and SGST but if for some reason, it is considered
necessary to provide exemption, the centre and states should
draw a common exemption which should be restricted to the
following:
a. All public services of Government (Central, state and
municipal/ panchayati raj) including civil-administration,
health services and formal education services provided by
Govt. schools and colleges, Defence, Para-military, Police,
Intelligence and Government Departments. Public services
will not include the following:
1) Railways;
2) Post and Telegraph;
3) Other commercial departments;
4) Public sector Enterprises;
5) Banks and Insurance;
6) Health and Education services.
b) Any service transactions between an employer and employee
either as a service provider, recipient or vice versa.
c) Any unprocessed food article which is covered under the
public distribution system should be exempt regardless of
the outlet through which it is sold;
d) Education services provided by non-Governmental schools
and colleges; and
e) Health services provided by non-Governmental agencies.
Tax on SIN goods (Emission fuels, tobacco products and
alcohol)
According to EC alcoholic beverages should be kept out of
GST. Also crude oil, diesel, petrol and ATF will not attract
GST but the states will be free to levy taxes on them. While
Tobacco Products will be subjected to GST with input tax
credit (ITC).
The Task Force on GST has recommended that the SIN-goods
comprising of emission fuels, tobacco products and alcohol
should be subject to a dual levy of GST and excise. No input
credit should be allowed for excise. However, industrial
fuels should be subjected only to GST (both central and
state) with the benefit of input credit like any other
intermediate good.
Check-Post
The EC has not clarified anything about check-post whereas
the Task Force on GST has come out with something new in
this area. According to it the function of all state border
check-posts should be reduced to checking contrabands by
setting up ‘Large scanners’ for trucks to pass through
without any need for physical verification. The cost of the
scanners should be entirely borne by the central government.
All check-posts should be jointly manned by both states so
as to reduce the number of check-posts and enhance
efficiency in the road movement of goods.
Inter-State transactions
The EC has suggested 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 with appropriate provision for
consignment or stock transfer of goods and services.
The Task Force on GST is of the view that all inter-State
transactions in goods and services should be effectively
zero rated by adopting the Modified Bank Model. (We are not
going into the details here.)
Consignment Sales and Branch transfers across States
The EC has not yet provided any provision regarding the
consignment sales and branch transfers across States.
The Task Force on GST has said that the consignment sales
and branch transfers across States should be subject to
treatment in the same manner as if it was an inter-State
transaction in the nature of sale between two independent
dealers.
Threshold Limit for Goods and Services
The EC has recommended for uniform threshold of annual gross
turnover of Rs.10 lakh for all goods and services for SGST
applicable for all states and Union Territories. Below this
threshold limit, State GST is not applicable. The threshold
limit for central GST may be kept at Rs.1.5 crore for goods
and central GST may be kept at higher levels for services.
Keeping in view the compliance cost and administrative
feasibility, the Task Force on GST proposed that the small
dealers (including service providers) and manufacturers
should be exempted from the purview of both CGST and SGST,
if their annual turnover (excluding both CGST and SGST) does
not exceed Rs.10 lakh. However, like in most other
countries, those below the threshold limit may be allowed to
be registered voluntarily to facilitate sales to other
registered manufacturer/dealers, limit competitive
distortions and avoid inequalities. Further, the threshold
exemption limit should be uniform for both CGST and SGST and
across states.
Composition / Compounding scheme
The EC is of the view that composition / compounding scheme
for the purpose of GST should have an upper ceiling on gross
annual turnover and a floor rate with respect to gross
annual turnover. In particular there would be a compounding
cut-off at Rs.50 lakh of gross annual turnover and a floor
rate of 0.5% across the states. The scheme would also allow
option for GST registration for dealers with turnover below
the compounding cut-off.
The Task Force on GST with a view to reduce administrative
and compliance burden, suggested that small dealers with
annual aggregate turnover of goods and services between 10
lakh to 40 lakh may be allowed to opt for a Compounded levy
of One percent, each towards CGST and SGST. However, no
input credit should be allowed against the compounded levy
or purchases made from exempt dealers.
GST on Precious Metals
A provision of special rate for precious metals has been
recommended by the EC. While the Task Force on GST is of the
view that certain high value goods comprising of gold,
silver, platinum ornaments, precious stones and bullions are
prone to smuggling due to high tax incidence thereby
generating negative externalities in terms of social and
economic disorder. So, the Task Force recommended that
dealers in such high value items, may subject to the
threshold exemption but without the ceiling of Rs.40 lakh,
also be allowed to opt the compounded levy of one percent,
each towards CGST and SGST.
Special Industrial Area Scheme
The EC has suggested that the tax exemption, remission etc.
related to industrial incentive should be converted , if at
all needed , into cash refund schemes after collection of
tax , so that GST Scheme on the basis of a continuous chain
of set-off is not disturbed. Regarding Special Industrial
Area Schemes, it is clarified that such exemptions,
remissions etc. would continue upto legitimate expiry time
both for the centre and the states. Any new exemption,
remission etc. or continuation of earlier exemption,
remission etc. would not be allowed. In such cases, the
central and the state Governments could provide
reimbursement after collecting GST.
The Task Force on GST recommended that in case it is
considered necessary to provide support to industry for
balanced regional development, it would be appropriate to
provide direct investment linked cash subsidy, while the
area based exemption in respect of CENVAT should not be
continued under the GST framework.
Taxes to be subsumed under GST
Both the EC and the Task Force on GST have got same view
regarding taxes to be subsumed under CGST whereas they
differ on SGST.
The following central taxes should be subsumed in the CGST:
a) Central Excise Duty (including Additional Excise Duty)
b) Service tax
c) Additional Customs Duty (commonly referred as ‘CVD’)
d) Surcharges and all cesses.
The following state taxes should be subsumed in the SGST.
a) VAT / Sales tax (including CST)
b) Entertainment tax (other than levied by local bodies)
c) Entry tax no in lieu of Octroi
d) Other Taxes and Duties (includes Luxury tax, Taxes on
lottery, betting and gambling, and all cesses and surcharges
by states).
The Task Force has recommended for the subsumation of
following other taxes levied by the states on goods and
services:
a) Stamp duty
b) Taxes on vehicles
c) Taxes on Goods and Passengers
d) Taxes on duties on electricity.
It has also suggested that all entry and Octroi duties
levied by the third-tier government should be abolished.
GST Rate Structure
The EC has decided to adopt a two rate structure- a lower
rate for necessary items and goods of basic importance and a
standard rate for goods in general. There will be also a
special rate for precious metals and list of exempted items.
They haven’t prescribed the exact value of the SGST and CGST
rates including the rate for services.
The Task Force has provided a clear rate structure for GST.
According to it the rate of CGST and SGST on all non-SIN
goods and services should be fixed at a single positive rate
of 5% and 7% respectively. In addition, there should be a
zero rate, applicable to all goods and services exported out
of the country.
GST and SEZ
The EC is of the view that Exports would be zero-rated.
Similar benefits may be given to Special Economic Zone (SEZs).
However, such benefits will only be allowed to the
processing zones of the SEZs. No benefit to the sales from
an SEZ to Domestic Tariff Area (DTA) will be allowed.
However, similar is the view of the Task Force on Exports
but they are not in the favour of any exemption for the
developers of, or units in, the Special Economic Zone.
Tax Administration
According to the EC the administration of GST shall be
divided into states and centre with a proposition to have
uniform compliance procedures across states under the
respective laws.
The Task Force on GST has produced a clear cut picture
regarding tax administration.
The CBEC shall be responsible for implementing the CGST and
the state tax administrations will be separately responsible
for implementing the SGST. The various tax administrative
functions such as assessment, enforcement, scrutiny, and
audit should be undertaken by the CBEC in respect of CGST
and by the state tax administration in respect of the SGST,
subject to recommendation on Small Scale Industries.
All compliance and enforcement procedures under CGST and
SGST should be uniform (from taxpayer perspective).
The central government should establish a common IT
infrastructure which will serve the needs of both CGST and
SGST.
The jurisdiction between the CBEC and the state
administration may be divided between the two in such manner
that the interface of the taxpayer is confined to one tax
administration only. The basis of division could be turnover
or any other criteria which is considered reasonable so that
the compliance and administrative burden is minimized.
All persons with annual aggregate turnover of goods and
services exceeding Rs.10 lakh (excluding CGST and SGST)
should be required to register and obtain a GST registration
number. Person with lower turnover may be allowed an option
to register.
The unit of taxation for the purpose of GST should be
persons as defined under the Income Tax ACT.
For the purpose of CGST, all production units/ branches of a
person located anywhere in the country will be treated as a
single taxable entity eligible for CGST input credit across
units /branches. Whereas, for the purpose of SGST ,all
production units / branches of a person located anywhere
within the state will be treated as a single taxable entity
eligible for SGST input credit across units/ branches in
that state.
Also the Task Force has suggested that the payment of tax
and the transaction reporting should be made through a
combined payment and transaction reporting statement in Form
no. GST-1. This statement should detail all business to
business transactions relating to sales. This statement
should be common for both CGST and SGST compliance and it
should be mandatory to file this statement electronically on
a monthly basis while making payment of taxes. The VAT
period should be a calendar month.
We have provided you a cursory view on different issues
related to GST without going into the details of them. We
will try to give you detailed discussions in our further
updated papers on GST.
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