A Comparative View on Goods and Service Tax

8/3/2019 A Comparative View on Goods and Service Tax

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A Comparative view on Goods and Service Tax (GST)

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 Producers point and Service providers 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


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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 destinationprinciple. 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 didnt provide any list of exemption. However, the

Task Force also said that there shouldnt 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


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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


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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 ofRs.

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


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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 atRs.

50 lakh of gross annual turnover and a floor rate of 0.5% acrossthe 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 ofRs. 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


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framework.

Taxes to be subsumed under GST

Both the EC and the Task Force on GST have got same view regarding taxes tobe 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 havent 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


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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.


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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 underthe 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.

A Comparative View on Goods and Service Tax

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