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