Goods and Services Tax

The Indian indirect tax system as mentioned above is complicated and multi-layered with levies both at the Central and State levels. There has been a constant evolution of the indirect tax laws over a period of time such as allowing cross credits between goods and services and introduction of VAT in all states. Despite such efforts, the existing structure and mechanism for indirect taxes in India is fraught with various inefficiencies such as multiplicity of taxes at the Central and State levels, cascading effect of taxes, non availability of VAT credit against CENVAT liability, non availability of CST credit, multiplicity of tax rates, etc.
With an attempt to integrate the multiple indirect taxes on goods and services into a single levy, the Finance Minister in the Central Budget for the year 2006-07 announced the proposed implementation of the GST for the first time from 1 April 2010. More recently, the Honorable Finance Minister had announced in the Union Budget 2010-11 that a GST would be introduced with effect from 1 April, 2011.
A model of dual GST is proposed to be introduced comprising of the Central GST (CGST) levied by the Centre and the State GST (SGST) to be levied by the States. The dual GST would replace a number of existing central and state level taxes such as excise duty, service tax, additional duty of customs, State level VAT, Entertainment tax ,Central Sales Tax, etc.
The said GST would operate as a VAT whereby credit of all taxes paid on the procurements would be available for discharging the GST liabilities on supplies. The GST will not make a distinction between goods and services and there would be free flow of credits between goods and services. This will have the effect of removing the distortions in the existing tax regime, wherein cross credits between goods and services is not available.
An Empowered Committee of State Finance Ministers has been formed to lay out the plan for the implementation of GST. The Empowered Committee had published a Discussion Paper outlining the proposed features of the dual GST in November 2009 for views of the industry and trade. In furtherance to the Discussion Paper, the Honorable Finance Minister made a speech to the Empowered Committee outlining the broad contours of the proposed GST.
Some of the features of the proposed GST as outlined by the discussion paper and the Honorable Finance Minister’s speech to the Empowered Committee on 21 July 2010 are as follows:

  • GST is a broad based and a single unified consumption tax on supply of goods and services
  • GST would be levied on the value addition at each stage of supply chain
  • GST proposes to subsume the following taxes:
    – Central taxes : CENVAT, CVD, SAD, Service Tax, Surcharges, and Cesses
    – State taxes : VAT, Entertainment tax; Luxury tax; Taxes on lottery, betting and gambling; State Cesses and Surcharges, Entry Tax. No decision has been taken yet on whether purchase tax would be subsumed in GST
  • Petroleum products and alcoholic beverages have been proposed to be kept out of GST.
  • It has been proposed that there should be a two-tier rate structure for goods and different rates for goods and services, which would converge into a single rate for goods and services after two years of GST implementation as tabulated below:
Year Goods-Lower rate Goods-Standard rate Services
Year 1 6% 10% 8%
Year 2 6% 9% 8%
Year 3 8% 8% 8%
  • The CGST and SGST rates are propsed to be kept same as mentioned above.
  • CGST and SGST would be applicable to all transactions of goods and services except:
    – Small list of exempted goods and services
    – Goods which are outside the purview of GST (petroleum products and alcoholic beverages)
    – Transactions which are below the prescribed threshold limits. Presently a threshold limit of INR 10 million has been prescribed under CGST and INR 1 million for SGST (no threshold limit prescribed for services)
  • Integrated GST (IGST) which is combination of CGST and SGST would be applicable on all inter-state transactions of goods and services and would be levied by Central Government. Interstate stock transfers would be treated at par with interstate sales for the levy of GST.
  • Exports would be zero rated, whereas GST would be levied on imports.
  • Full input credit of the taxes paid in the supply chain would be available. However, there would be no cross credit available between CGST and SGST.
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