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
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
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 and acceptability."
What would be the revenue neutral rate of GST
Dr.Shome has indicated that the combined GST may be around
the present combined rate of 28%, here is an interesting
study that the revenue neutral combined GST could be 12%
without any exemption on unprocessed food and other essentials
like medicines and clothing.
relevant extract from an article titled "Revenue-neutral
rate for GST" By Satya Poddar & Amaresh Bagchi
in the Economic Times dated 15/11/2007.
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
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
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
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 Input Service.
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
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
meaningful risk management system can work without efficient
tax administration software. If the procedures and formats
are not uniform across States, normalization of data would
be difficult and it is hoped that the States agree on
uniform procedures retaining only the powers to selectively
grant concessions on rate of tax based on local political
and business exigencies.
efficient computerized system becomes all the more important
as Inter State sale would be exempt. The process of issue
of Form C /F should be dematerialised and monitored online.
important aspect is proper training of both the Central
GST and State GST officials on the law 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
us look forward to a Practical GST, though truncated!
author is a Madurai based indirect tax consultant. Email: