8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 1/59
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 2/59
First Discussion PaperOn
Goods and Services TaxIn India
The Empowered CommitteeOf
State Finance Ministers
New Delhi
November 10 , 2009
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 3/59
Contents
Pages
Foreword i-iv
Introduction 1-11
Preparation for GST 11-13
Goods & Services Tax Model for India 13-27
Annexure on Frequently Asked 29-53
Questions and Answers on GST
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 4/59
i
Foreword
If the Value Added Tax (VAT) is considered to be
a major improvement over the pre-exis t ing Centra l
excise duty a t t he na tiona l level a nd t he sales ta x system
at the Sta te leve l , then the Goods and Services Tax(GST) will be a further significant breakthrough - the
next logica l step - tow a rds a comprehensive indirect ta x
reform in the country.
K e e p i n g t h i s o v e r a l l o b j e c t i v e i n v i e w , a n
a nnouncement wa s made by Shri P . Chidamba ra m, the
then Union Finance Minis ter in the Centra l Budget
(2007-2008) to the effect that GST would be introduced
from April 1, 2010 an d t ha t t he Em pow ered C omm itt ee
o f S t a t e F i n a n c e M i n i s t e r s , o n h i s r e q u e s t , w o u l d
work wi th the Central Government to prepare a road
m a p f o r i n t r o d u c t i o n o f G S T i n I n d i a . A f t e r t h i s
announcement , the Empowered Commi t tee o f S t a te
Fina nce Ministers decided t o set up a J oint Working
Group (May 10, 2007), with the then Adviser to the
Union Finance Minister and the Member-Secretary of
E m p o w e r e d C o m m i t t e e a s C o - c o n v e n o r s a n d t h econ c er n e d J oi n t S e cr e t a r i e s of t h e D e p a r t m e n t o f
Revenue of Union Finance Minis try and al l Finance
S ecreta r ies of the St a tes a s i ts members . This J oint
Working Group, after intensive internal discussions as
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 5/59
i i
w ell a s intera ction w ith experts a nd r epresenta tives of
Chambers o f Commerce and Indus try , submi t ted i t s
report to the Empowered Committee (November 19,
2007).
This repor t was then d iscussed in de ta i l in the
meetin g of E mpowered Comm itt ee (November 28, 2007).
On th e ba sis of this discussion a nd w ritt en observa tionsof the States , cer tain modif icat ions were made and a
f inal version of the views of Empowered Committee
a t t h a t s t a g e w a s p r e p a r e d a n d w a s s e n t t o t h e
Government of India (April 30, 2008). The comments
of t he G overnment of In dia w ere received on D ecember
12, 2008 and were duly considered by the Empowered
Committee (December 16, 2008). I t was decided that
a C o m m i t t e e of P r i n c ip a l S e cr e t a r i e s /S e cr e t a r i e s
o f F in a nce /Ta xa t ion a nd C ommiss ioners of Tra de
Taxes of the States would be set up to consider these
c o m m e n t s , a n d s u b m i t t h e i r v i e w s . T h e s e v i e w s
were submi t ted and were accep ted in p r inc ip le by
t h e E m p ow e r e d C o m m i t t e e (J a n u a r y 2 1, 20 09 ).
C o n s e q u e n t u p o n t h i s i n - p r i n c i p l e a c c e p t a n c e , a
Working Group, consisting of the concerned officials of
the State Governments was formed who, in close association
w ith senior represent a t ives of the G overnment of Ind ia ,
s u b m i t t e d t h e i r r e c o m m e n d a t i o n s i n d e t a i l o n t h e
structure of GST. An important interact ion has also
recently taken place between Shri Pranab Mukherjee,
t h e U n i o n F i n a n c e M i n i s t e r a n d t h e E m p o w e r e d
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 6/59
iii
Committee (October 19, 2009) on the related issue of
c o m p e n s a t i o n f o r l o s s o f t h e S t a t e s o n a c c o u n t o f
phasing out of CST. The Empowered Committee has
now taken a detailed view on the recommendations of
th e Working G roup of officia ls a nd oth er rela ted m a tt ers.
This detai led view of the Empowered Committee on
the structure of GST is now presented in terms of the
Firs t Discuss ion Paper , a long wi th an Annexure onFrequently Asked Questions and Answers on GST, for
discussions w ith indust ry, tr a de, a gricultur e a nd people
a t l a rge.
The Discussion Paper is divided into four sections.
S ince GS T w ould be furth er improvement over t he VAT,
Section 1 begins with a brief reference to the process of
introduction of VAT at the Centre and the States and
also indicates the precise points where there is a need
for fu r the r improvement . Thi s sec t ion a l so shows
h o w t h e G S T c a n b r i n g a b o u t t h i s i m p r o v e m e n t .
With this as the background for justi f ication of GST,
Section 2 then describes the process of preparation for
G S T . T h e r e a f t e r , S e c t i o n 3 p r e s e n t s i n d e t a i l t h e
c o m p r e h e n s i v e s t r u c t u r e o f t h e G S T m o d e l . F o r
illustrating this GST model further, there is in the end
a n A n n e x u r e o n F r e q u e n t l y A s k e d Q u e s t i o n s a n d
Answers .
This Discussion Paper has been the result of truly
col lect ive ef for ts on the basis of hardwork of al l the
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 7/59
iv
c o n c e r n e d o f f i c i a l s o f t h e S t a t e s , t h e o f f i c i a l s o f
E mpow ered Committee Secreta riat a nd t he Adviser an d
officia ls of th e Un ion F ina nce Ministry , th e counsel a nd
a ctive par ticipat ion of Fina nce Ministers a nd concerned
Senior Minis ters of the States at each s tage , and the
e n c o u r a g e m e n t a n d a d v i c e o f t h e U n i o n F i n a n c e
Minister .
With t he release of this First Discussion P a per a nd
the Annexure on Frequent l y Asked Ques t ions and
Answers, we now sincerely invite interaction with the
r e p r e s e n t a t i v e s o f i n d u s t r y , t r a d e , a g r i c u l t u r e a n d
common people . This interact ion and campaign wi l l
immedia te ly s ta r t a t t he na t iona l level and a t th e St a te
levels. As a part of this interaction, we look forward to
receiving the views of industry, trade, agriculture as
well as consumers in a time-bound manner.
Asim Kumar D a sgupta
Chairman,
Empowered Committee of
St a te Fina nce Ministers
&
Minist er of Fin a nce & E xcise,G overnment of West B enga l
New D elhi,
November 10, 2009
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 8/59
1
1. Introduction
1.1 Int roduction of th e Va lue Added Ta x (VAT) a t
th e Cent ra l an d th e S ta te level ha s been considered to be
a ma jor step – an import a nt brea kthr ough – in th e sphere
of indirect ta x reform s in In dia . If th e VAT is a ma jor
improvement over t he pre-exist ing C ent ra l excise dut y a t
the na t iona l level and t he sa les ta x system a t t he Sta televel, th en t he G oods a nd S ervices Ta x (G S T) w ill indeed
be a further significant improvement – the next logical
step – towa rds a comprehensive indirect ta x reforms in
th e count ry.
1.2 Keeping this object ive in view, a n a nnouncement
was made by the then Union Finance Minister in the
Cent ra l B udget (2007-08) t o t he effect t ha t G S T w ould be
introduced with effect from April 1, 2010 and that the
E mpow ered C ommitt ee of S ta te F ina nce Ministers, on his
request , would work wi th the Central Government to
prepar e a roa d ma p for int roduction of G S T in India . After
this a nnouncement , the E mpow ered Committ ee of St a te
Fina nce Ministers decided t o set up a J oint Working
G roup (Ma y 10, 2007), w ith th e th en Adviser t o the U nion
F i n a n c e M i n i s t e r a n d M e m b e r - S e c r e t a r y o f t h e
E mpowered Committ ee a s its C o-convenors a nd concerned
four J oint S ecreta ries of th e Depa rt ment of Revenue of
Union Finance Ministry and all Finance Secretaries of
th e St a tes a s its m embers. This J oint Working G roup got
i tself divided into three Sub-Groups and had several
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 9/59
2
rounds of interna l discussions a s w ell a s intera ction wit h
experts and representatives of Chambers of Commerce
& Indus t ry . On the bas i s o f these d i scuss ions and
intera ction, the S ub-G roups submitt ed th eir r eport s w hich
w ere th en integra ted a nd consolida ted into th e report of
J oint Working G roup (November 19, 2007).
1.3 This report w a s discussed in deta i l in the meetingof t he E mpowered C ommitt ee on November 28, 2007, a nd
the States were also requested to communicate their
observations on the report in writing. On the basis of
th ese discussions in t he Em pow ered Committ ee a nd t he
w r i t t e n o b s e r v a t i o n s , c e r t a i n m o d i f i c a t i o n s w e r e
cons ide red necessary and were d i scussed w i th the
Co-convenors a nd t he representa tives of th e Depar tm ent
o f R e v e n u e o f U n i o n F i n a n c e M i n i s t r y . W i t h t h e
modifica tions duly ma de, a fina l version of the views of
Empowered Committee on the model and road map for
t he G S T w a s prepared (April 30, 2008). These view s of
E mpow ered Committ ee w ere th en sent to the G overnment
of India , an d th e comm ents of G overnment of In dia w ere
received on D ecember 12, 2008. These comment s w ere duly
considered by th e Em pow ered Comm itt ee (D ecember 16,
2008), a nd it w a s decided th a t a Commit tee of P rincipal
S e cr e t a r i e s /S e cr e t a r i e s o f F i n a n c e /Ta x a t i on a n d
Comm issioners of Tra de Ta xes of th e St a t es w ould be set
up to consider th ese comment s, a nd subm it t heir views.
These view s were submit ted and w ere a ccepted in principle
by t he E mpow ered C omm itt ee (J a nua ry 21, 2009). As
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 10/59
3
a follow-up of this in-principle acceptance, a Working
Group consisting of the concerned officials of the State
G overnments w a s formed w ho, in a ssociat ion w ith senior
represen ta t i ves o f Government o f Ind i a , submi t ted
th eir recomm enda tions in deta il on t he str uctur e of G ST.
A n i m p o r t a n t i n t e r a c t i o n h a s a l s o r e c e n t l y t a k e n
p l a c e b e t w e e n S h r i P r a n a b M u k h e r j e e , t h e U n i o n
F i n a n c e M i n i s t e r a n d t h e E m p o w e r e d C o m m i t t e e(October 19, 2009) on the related issue of compensation
for loss of the States on account of phasing out of CST.
The Em pow ered Committ ee ha s now t a ken a deta iled view
on t he recomm enda t ions of th e Working G roup of officia ls
and other related matters. This detai led view is now
presented in terms of the First Discussion P a per, a long
with an Annexure on Frequently Asked Questions and
Answers on GST, for discussion with industry, trade,
agriculture and people at large. Since the GST at the
Centre a nd S ta tes w ould be a further improvement over
t he VAT, a brief reca lling of th e process of int roduct ion of
VAT in In dia is w ort hw hile.
Value Added Tax at the Central and the State level
1.4 P rior to the introduction of VAT in the Centre
a nd in th e St a tes, th ere w a s a burden of multiple ta xat ion
in th e pre-existing Centr a l excise duty a nd t he St a te sa les
ta x systems. B efore an y commodity w a s produced, inputs
w ere first t a xed, a nd t hen a fter the commodity got produced
with input tax load, output was taxed again. This was
causing a burden of multiple taxation (i.e. “tax on tax”)
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 11/59
4
wi th a cascad ing e f f ec t . Moreover , in the s a le s t ax
structure, when there was also a system of multi-point
sa les ta xa tion at subsequent levels of distr ibutive tr a de,
then a long w ith input ta x loa d, burden of sales ta x pa id
on purcha se at ea ch level wa s a lso added, thus a ggrava ting
th e ca sca ding effect furth er.
1.5 When VAT is introduced in pla ce of Centra l excisedut y, a set-off is given, i.e., a deduction is ma de from t he
overa ll t a x burd en for input t a x. In t he ca se of VAT in
pla ce of sa les t a x syst em, a set-off is given from t a x burden
not only for input t a x paid but a lso for t a x paid on previous
purcha ses. With VAT, the problem of “t a x on t a x” a nd
re la ted burden of cascad ing e f fec t i s thus removed .
Fu rt herm ore, since t he benefit of set -off ca n be obta ined
only if ta x is duly pa id on inputs (in th e ca se of Centr a l
VAT), a nd on both input s a nd on previous pur cha ses (in
the case of State VAT), there is a built-in check in the
VAT str uctur e on t a x complia nce in t he Cent re a s w ell a s
i n t h e S t a t e s , w i t h e x p e c t e d r e s u l t s i n t e r m s o f
improvement in t r ansparency and reduc t ion in t ax
eva sion. For these beneficia l effect s, VAT ha s now been
int roduced in more th a n 150 count ries, including severa l
federa l countr ies. In Asia , it ha s now been int roduced in
a lmost a ll th e count ries.
1.6 In India , VAT wa s introduced at the Centra l level
fo r a se lec ted number o f commodi t i e s in te rms o f
MODVAT with effect from March 1, 1986, and in a
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 12/59
5
step-by-step manner for al l commodities in terms of
CE NVAT in 2002-03. S ubsequent ly, a fter C onstit ut iona l
Amendment empowering the Centre to levy taxes on
services, t hese service t a xes w ere a lso a dded to CENVAT
in 2004-05. Alth ough th e grow t h of t a x revenue from th e
Central excise has not always been specially high, the
revenue growt h of combined CE NVAT a nd service ta xes
ha s been significa nt .
1.7 Introduction of VAT in the Sta tes ha s been a more
cha llenging exercise in a federa l count ry like In dia , w here
each S ta te , in te rms o f Cons t i tu t iona l p rov i s ion , i s
sovereign in levying an d collecting S ta te ta xes. B efore
int roduction of VAT, in th e sa les t a x regime, a pa rt from
th e problem of multiple ta xa tion a nd burd en of a dverse
ca sca ding effect of ta xes a s a lready m entioned, th ere w a s
also no harmony in the rates of sales tax on dif ferent
comm odities a mong th e St a tes. Not only were th e ra tes
of sales tax numerous (often more than ten in several
States) , and di f ferent f rom one another for the same
commodity in di f ferent States , but there was also an
unhea lthy competit ion a mong the St a tes in terms of sales
tax rates – so-cal led “rate war” – of ten resul t ing in,
revenue-w ise, a count er-product ive situa t ion.
1.8 I t is in th is background tha t a t t empts were made
by the States to introduce a harmonious VAT in the
States, keeping at the same time in mind the issue of
sovereignty of the St a tes rega rding the Sta te ta x ma tt ers.
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 13/59
6
The first prelimina ry discussion on S t a t e-level VAT t ook
place in a meet ing o f Chie f Minis ters convened by
Dr. Ma nmohan Singh, the th en Un ion Fina nce Minister
in 1995. In t his meeting, t he ba sic issues on VAT w ere
discussed in general terms and this was fol lowed up
by per iod ic in terac t ions o f S ta te Finance Minis ters .
T h e r e a f t e r , i n a s i g n i f i c a n t m e e t i n g o f a l l t h e
Chief Ministers, convened on November 16, 1999 bySh ri Yashw a nt S inha , th e then U nion Fina nce Minister ,
tw o import a nt decisions, am ong oth ers, w ere ta ken. First ,
before t he int roduction of S t a t e-level VAT, t he un hea lth y
sales ta x “rate w a r” a mong the St a tes would ha ve to end,
and sales tax rates would need to be harmonised by
implement ing uniform floor ra t es of sa les t a x for different
ca tegories of commodities w ith effect from J a nua ry 1, 2000.
S econdly, on th e ba sis of a chievement of the first object ive,s teps would be taken by the Sta tes for in t roduct ion
of S ta te- leve l VAT af ter adequate prepara t ion . For
implementing these decisions, a Standing Committee
of State Finance Ministers was formed which was then
m a d e a n E m p o w e r e d C o m m i t t e e o f S t a t e F i n a n c e
Ministers.
1.9 Therea fter, the Empowered Commit tee has metregula rly. All t he decisions w ere t a ken on t he ba sis of
consensu s. On th e st rengt h of t hese repea t ed discussions
and collective efforts, involving the Ministers and the
concerned officia ls, it w a s possible w ith in a period of about
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 14/59
7
a yea r a nd a ha lf to a chieve nea rly 98 per cent success in
the first objective, namely, harmonisation of sales tax
str uctu re th rough implement a tion of uniform floor r a tes
of sales ta x.
1.10 After rea ching this sta ge, steps were initia ted
for sy stema tic prepar a tion for int roduction of St a te-level
VAT. In order aga in to avoid an y unhea lthy competitionamong the S t a te s which may l e ad to d i s to r t ions in
ma nufacturing and t ra de, at tempts ha ve been made from
the very beginning to harmonise the VAT design in the
S ta tes, keeping also in view th e distinct ive feat ures of ea ch
S ta te a nd t he need for federa l flexibility. This ha s been
d o n e b y t h e S t a t e s c o l l e c t i v e l y a g r e e i n g , t h r o u g h
discussions in the Empowered Committee, to certain
common points of convergence regarding VAT, anda l l o w i n g a t t h e s a m e t i m e c e r t a i n f l e x i b i l i t y t o
accommodate the local characteristics of the States. In
the course of these discussions, references to the Tenth
Five Year Plan Report of the Advisory Group on Tax
Policies & Tax Administration (2001) and the report of
Kelka r (Ch a irma n) Ta sk Force w ere helpful.
1.11 Along w ith th ese mea sures, steps were ta ken for
necessary t ra ining, computeriza tion a nd intera ction with
tr a de a nd indust ry. While th ese prepar a tory steps w ere
taken , the Empowered Commi t tee go t a s i gn i f i c an t
suppor t f rom Shr i P . Chidambaram, the then Union
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 15/59
8
Finance Minis ter , when he responded pos i t ive ly in
provid ing Centra l f inancia l suppor t to the Sta tes in
the event of loss of revenue in transi t ional years of
implementa t ion of VAT.
1.12 As a consequence of a l l these steps, the St a tes
st a rt ed implement ing VAT beginning April 1, 2005. After
overcoming the ini t ial d i f f icul t ies , a l l the States andUnion Territories have now implemented VAT. The
E mpow ered C omm itt ee ha s been m onitoring closely t he
process o f implementa t ion of S ta te- leve l VAT, and
devia t ions from th e a greed VAT ra t es ha s been cont a ined
to less than 3 per cent of the total list of commodities.
Responses of industr y a nd a lso of tr a de ha ve been indeed
encoura ging. The ra te of grow th of ta x revenue ha s near ly
doubled from the average annual rate of growth in the
pre-VAT five yea r period a ft er t he in t roduct ion of VAT.
J ustification of GST
1.13 Despite t his success w ith VAT, th ere a re sti ll
certa in shortcomings in th e str uctur e of VAT both a t th e
Cent r a l and a t the S t a te l eve l . The shor tcoming in
CE NVAT of t he G overn ment of India lies in n on-inclusion
of several Central taxes in the overal l f ramework of
CE NVAT, such a s a dditiona l customs dut y, surcha rges,
etc., an d thus keeping t he benefit s of comprehensive input
ta x a nd service ta x set-off out of reach for ma nufa cturers/
dealers. Moreover, no step ha s yet been t a ken t o ca pture
th e va lue-a dded cha in in the distribution t ra de below th e
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 16/59
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 17/59
10
is not s imply VAT plus service ta x but a n im provement
over the previous system of VAT and disjointed service
ta x. H ow ever, for th is GS T to be intr oduced at th e St a te-
level, it is essential that the States should be given the
power of levy of taxation of all services. This power of levy
of service taxes has so long been only with the Centre.
A Const itut iona l Amendment w ill be made for giving th is
power also to the States. Moreover, with the introductionof GST, burden of Central Sales Tax (CST) will also be
rem oved. The G ST a t the Sta te-level is, therefore, just ified
for (a) additional power of levy of taxation of services for
the States, (b) system of comprehensive set-off relief,
including set-off for cascading burden of CENVAT and
service taxes, (c) subsuming of several taxes in the GST
and (d) removal of burden of CST. Because of the removal
of ca scad ing effect , th e burden of ta x under G S T on goodswill , in general, fall .
1. 15 Th e G S T a t t h e C en t ra l a nd a t t he S t a t e level
w ill thu s give more relief to industr y, tr a de, a griculture
and consumers through a more comprehens ive and
wider coverage of input tax set-off and service tax set-
off, subsuming of several taxes in the GST and phasing
out of CST. With the GST being properly formulatedb y a p p r o p r i a t e c a l i b r a t i o n o f r a t e s a n d a d e q u a t e
c o m p e n s a t i o n w h e r e n e c e s s a r y , t h e r e m a y a l s o b e
revenue/resource ga in for both th e Centre a nd t he St a tes,
prima rily t hrough w idening of ta x base a nd possibilit y of
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 18/59
11
a significant improvement in tax-compliance. In other
w ords, t he G S T ma y ush er in t he possibility of a collective
g a i n f o r i n d u s t r y , t r a d e , a g r i c u l t u r e a n d c o m m o n
consumers as well as for the Central Government and
the State Governments. The GST may, indeed, lead to
the possibility of collectively positive-sum game.
2. Preparation for GST
2.1 Keeping th i s sign if ica nce of GS T in v iew , a n
announcement was made by the then Union Finance
Minister in the Union Budget, as mentioned before, to
the effect tha t G ST w ould be int roduced from April 1, 2010,
and that the Empowered Committee of State Finance
Ministers would work with the Central Government to
prepare a road map for introduction of the GST. Afterth is an nouncement, t he Em pow ered Committ ee, as st a ted
earlier, ha d set up a J oint Working G roup wh ich submitt ed
a r e p o r t o n a m o d e l a n d r o a d m a p f o r G S T . A f t e r
a ccommoda ting t he views of the St a tes a ppropria tely on
this report, the views of the Empowered Committee on
th e model a nd road m a p were sent t o th e Governm ent of
I n d i a o n 3 0 t h A p r i l , 2 0 0 8 . T h e c o m m e n t s o f t h e
Government of India were received on 12t h December,2008. These comments were duly considered by the
Empowered Commi t tee in i t s mee t ing he ld on 16 t h
December, 2008 and i t was decided that a Committee
of P rincipa l Secreta ries/Secreta ries (Fina nce/Taxation) a nd
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 19/59
12
Commissioners of Trade Taxes should consider the
comments received from the Government of India and
submit i t s v iews and a l so work out the Centra l GST
and S ta te GST ra te s . The Commi t tee he ld de ta i l ed
d e l i b e r a t i o n s o n 5 t h a n d 6 t h J a n u a r y , 2009, a n d
s u b m i t t e d i t s r e c o m m e n d a t i o n s t o t h e E m p o w e r e d
Commit tee . The Empowered Commit tee cons idered
these recommendat ions in i t s meet ing he ld on 21s t
J a nua ry , 2009 a nd a ccepted t hem in pr inciple. The
Empowered Commit tee a l so dec ided to cons t i tu te a
Working Group cons is t ing o f Pr inc ipal Secre tar ies/
S ecret a ries (Fin a nce/Ta xa t ion) an d C ommissioners of
Tr a d e Ta x e s o f a l l S t a t e s /U Ts t o g i v e t h e i r
recommendations on (a) the commodities and services
t ha t should be kept in th e exempt ed list, (b) t he rules
and principles of taxing the transact ions of services
including the transactions in inter-State services, and(c) f inalization of the model suggested for inter-state
t ra nsa ct ion/movement of goods including st ock tra nsfers
in consultation with the State Bank of India and some
other nationalized banks. I t was also decided that the
senior representatives from the Government of India
may also be associated. The Working Group deliberated
on the issues on 10 t h February , 2009 and decided to
form three Sub Working Groups to deliberate each item
in dept h. The Reports of t he Working G roup on t he
t h r e e i s s u e s h a v e a l r e a d y b e e n r e c e i v e d , a n d t h e
E m p o w e r e d C o m m i t t e e h a s t a k e n a v i e w o n t h e s e
recommendat ions for concluding the de ta i l s o f GST
structure.
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 20/59
13
2.2 While ma king th is prepa ra t ion of GST, it w a s
a lso necessa ry, a s ment ioned ear lier, to pha se out th e CS T,
because i t d id not carry any set-of f re l ie f and there
was a distortion in the VAT regime due to export of tax
from one Sta te to oth er Sta te. The Empow ered Committ ee
accordingly took a decision to phase out CST on the
understa nding with the Centre tha t , since pha sing out of
CS T w ould result in a loss of revenue to th e St a tes on ap e r m a n e n t b a s i s , a n a p p r o p r i a t e m e c h a n i s m t o
compensa te t he S ta tes for such loss w ould be worked out.
The ra t e of CS T ha s a lrea dy been reduced t o 2% a nd w ill
be pha sed out w ith effect from th e da te of int roduction of
GST on the basis of such GST structure which, with
n e c e s s a r y f i n a n c i a l s u p p o r t t o t h e S t a t e s , s h o u l d
adequately compensate for the loss of the States on a
perma nent ba sis. With t hese steps at prepar a tion in mind,it is import a nt now to t urn to t he proposed model of G S T.
3. Goods & Services Tax Model For India
3.1 I t i s impor t an t to t ake note of the s ign if ican t
a dministra tive issues involved in designing a n effective
GST model in a federal system with the objective of
ha ving a n overa ll ha rmonious str ucture of ra tes. Together
with this, there is a need for upholding the powers ofCentra l and St a te Governments in their ta xat ion ma tt ers.
Further, there is also the need to propose a model that
would be easily implementable, while being generally
acceptable to stakeholders.
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 21/59
14
Salient features of the GST model
3.2 Keeping in view t he report of the J oint Working
Group on Goods and Services Tax, the views received
from the States and Government of India , a dual GST
structure with defined functions and responsibilities of
th e Centre a nd t he St a tes is recommended. An a ppropria te
mecha nism tha t w ill be binding on both the Centre a nd
th e S ta tes would be w orked out w hereby th e ha rmoniousra te str uctur e along w ith t he need for furt her modifica tion
could be upheld, if necessary with a collectively agreed
Cons t i tu t iona l Amendment . S a l i e n t f e a t u r e s o f t h e
proposed m odel a re a s follow s:
(i) The G ST shal l ha ve tw o components : one levied
by th e Cent re (hereina fter referred to a s Cent ra l G ST),
a nd t he oth er levied by t he St a tes (hereina fter referred toas State GST). Rates for Central GST and State GST
would be prescribed appropriately, reflecting revenue
considera t ions an d a ccept a bility . This dua l G S T model
w ould be implement ed thr ough m ultiple st a t ut es (one for
CG ST a nd S G ST sta tut e for every S ta te). However, the
ba sic fea tur es of law such a s cha rgeability, definition of
t axab le even t and t axab le person , measure o f l evy
including va lua t ion provisions, bas is of cla ssifica t ion etc.
w o u l d b e u n i f o r m a c r o s s t h e s e s t a t u t e s a s f a r a s
practicable.
(ii) The Cent r a l GST and the S t a te GST wou ld be
a pplica ble to a ll tra nsa ctions of goods a nd services ma de
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 22/59
15
for a cons idera t ion except the exempted goods and
services, goods which are outside the purview of GST
and the transact ions which are below the prescr ibed
threshold limits.
(iii) The Central G ST a nd Sta te GS T a re to be pa id to
the accounts of the Centre an d the Sta tes sepa ra tely. I t
would have to be ensured that account-heads for al l
services and goods would have indicat ion whether i trela tes to Centra l GS T or S ta te G ST (w ith identifica tion
of the S ta te to w hom th e ta x is to be credited).
(iv) Since the Centra l G ST a nd Sta te G ST a re to be
treat ed separa te ly , ta xes pa id aga inst t he Centra l GS T
sha ll be allowed to be t a ken a s input t a x credit (ITC) for
the Central GST and could be utilized only against the
payment of Central GST. The same principle wil l be
a pplica ble for th e S ta te G ST. A ta xpayer or export er would
ha ve to ma inta in separ a te deta ils in books of a ccount for
ut iliza t ion or refund of credit. Fur ther, the rules for ta king
a nd utiliza tion of credit for th e Centr a l GS T a nd th e St a te
G S T w ould be a ligned.
(v) C r os s ut i liz a t i on of I TC b et w e en t h e C en t r a l
GST and the State GST would not be allowed except in
t he ca se of int er-S t a t e supply of goods a nd services und er
th e IG ST model w hich is explained la ter.
(vi) Idea lly, the problem rela ted to credit a ccumula tion
on a ccount of refund of G S T should be a voided by bot h t he
Cent re an d th e Sta tes except in t he ca ses such a s export s,
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 23/59
16
purcha se of ca pita l goods, input t a x a t h igher ra te th a n
out put t a x etc. wh ere, a ga in refund/a djustment should be
completed in a time bound m a nner.
(vii) To the extent feasible, uniform procedure for
collection of both Cent ra l G ST a nd S ta te G S T w ould be
prescribed in th e respective legisla tion for Cent ra l G ST
a nd Sta te GST.
(vii i) The adm inistra tion of the Centra l GS T to the
Centre a nd for S ta te G ST to the St a tes would be given.
This would imply tha t t he Centre and t he Sta tes would
ha ve concurrent jurisdiction for t he entire va lue cha in a nd
for a ll ta xpa yers on t he ba sis of th resholds for goods a nd
services prescribed for t he St a tes a nd t he Cent re.
(ix) The present th reshold prescr ibed in di fferent
State VAT Acts below which VAT is not applicable
va ries from S ta te to Sta te. A uniform S ta te G ST th reshold
a cross St a tes is desira ble an d, t herefore, it is considered
that a threshold of gross annual turnover of Rs.10 lakh
both for goods a nd services for a ll th e St a tes a nd U nion
Territories ma y be a dopted w ith a dequa te compensa tion
for t he St a tes (part icularly, the St a tes in North -E a stern
R e g i o n a n d S p e c i a l C a t e g o r y S t a t e s ) w h e r e l o w e r
threshold had prevailed in the VAT regime. Keeping in
v i e w t h e i n t e r e s t o f s m a l l t r a d e r s a n d s m a l l s c a l e
indus tr ies and to avoid dual contro l , the Sta tes a l so
considered t ha t th e thr eshold for C entra l G S T for goods
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 24/59
17
ma y be kept a t Rs.1.5 crore a nd t he thr eshold for Cent ra l
G S T for services ma y a lso be appropriat ely high. It ma y
be mentioned th a t even now t here is a sepa ra te th reshold
of services (Rs. 10 lakh) and goods (Rs. 1.5 crore) in the
S ervice Ta x a nd CE NVAT.
(x) The Sta tes are a l so of the v iew tha t Composit ion/
Compounding Scheme for th e purpose of G S T should ha vea n upper ceiling on gross an nua l turn over an d a floor t a x
ra te w ith respect to gross a nnua l turnover. In pa rticular ,
there would be a compounding cut-off at Rs. 50 lakh of
gross an nua l tur n over a nd a floor r a te of 0.5% a cross the
States . The scheme would also al low option for GST
r e g i s t r a t i o n f o r d e a l e r s w i t h t u r n o v e r b e l o w t h e
compounding cut-off.
(xi) The ta xpa yer w ould need to submit periodica l
return s, in common forma t a s fa r a s possible, to both th e
Central GST authority and to the concerned State GST
authorities.
(xii) Ea ch ta xpa yer would be a l lott ed a P AN-linked
ta xpayer identificat ion number w ith a tota l of 13/15 digits.
This would bring the GST PAN-linked system in line
with the prevailing PAN-based system for Income tax,
facil ita ting da ta excha nge an d t a xpa yer compliance.
(xiii) K e ep i n g i n m i n d t h e n e e d o f t a x p a y e r ’ s
convenience, functions such a s a ssessment , enforcement ,
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 25/59
18
scrutiny a nd a udit w ould be underta ken by t he aut hority
which is col lect ing the tax, wi th information shar ing
betw een the Centr e a nd the Sta tes.
Central and State Taxes to be subsumed under GST
3.3 The var ious Centra l , S ta t e and Loca l levies were
exam ined to ident ify th eir possibility of being subsum ed
under GST. While identifying, the following principlesw ere kept in mind:
(i) Ta x es or l ev ies t o b e s u bs u m ed s h ou ld b e
primarily in the nature of indirect taxes, either on the
supply of goods or on t he su pply of serv ices.
(i i) Ta xes or levies to be subsumed should be part of
the transact ion chain which commences wi th import/ma nufa ctur e/production of goods or provision of services
a t one end a nd the consumption of goods and services a t the
other.
(i ii) The subsuma tion should result in free f low of ta x
credit in intra a nd int er-St a te levels.
(iv) The ta xes, levies a nd fees tha t a re not specifica l ly
related to supply of goods & services should not be
subsumed under G S T.
(v) R ev en u e fa i r n es s f or b ot h t h e U n ion a n d t h e
St a tes individually w ould need t o be at tempted.
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 26/59
19
3. 4 O n a pp li ca t i on of t h e a b ov e pr i n ci pl es , it i s
recommended that the following Central Taxes should be,
to begin with, subsumed under the Goods and Services
Tax:
(i) C en tra l E xcise D ut y
(ii) Addit iona l Excise Du t ies
(i ii) The Excise Dut y levied under the Medicinal a ndToilet ries P repa ra t ion Act
(iv) S er vice Ta x
(v) Addit ional Customs Duty , commonly known a s
Counterva iling Dut y (CVD)
(vi) Special Additiona l Duty of Customs - 4%(SAD)
(v ii) Surcharges , and
(vii i) Cesses.
Follow ing St a te ta xes a nd levies would be, to begin w ith,
subsumed under G ST:
(i) VAT /S a les t a x
(ii) Ent er ta inment ta x (unless it i s levied by the loca l
bodies).
(iii) L uxur y t a x
(iv) Ta xes on lot t ery , bet t ing a nd gambling.
(v) S ta te Cesses and Surcharges in so fa r a s they
rela t e to supply of goods a nd services.
(v i) Entry ta x not in lieu of Octroi.
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 27/59
20
Purchase tax: Some of the States felt that they are
ge t t ing subs tant ia l revenue f rom Purchase Tax and ,
therefore, it should not be subsumed under GST while
majori ty of the States were of the view that no such
exemptions should be given. The di f f icul t ies of the
foodgrains producing States and cer tain other States
w ere a pprecia ted a s substa nt ial revenue is being ea rned
by th em from P urcha se Ta x a nd it w a s, therefore, felt th a tin ca se Purchase Ta x ha s to be subsumed then a dequa te
a nd cont inuing compensa t ion ha s to be provided to such
S ta t es. This issue is being discussed in consu lta t ion w ith
the G overnment of India.
Tax on items containing Alcohol: Alcohol ic
bevera ges would be kept out of t he purview of GS T. S a les
Ta x/VAT ca n be cont in ued t o be levied on a lcoholic
beverages a s per t he existing pra ctice. In ca se it h a s been
ma de Va ta ble by some St a tes, there is no objection to tha t.
E xcise Dut y, w hich is present ly being levied by t he St a tes
ma y not be a lso a ffected.
Tax on Tobacco products: Toba cco products w ould
be subjected t o GS T w ith ITC. C entre ma y be a llow ed to
levy excise dut y on toba cco products over a nd a bove G S T
w ithout ITC.
Tax on Petroleum Products: As far as petroleum
products a re concerned, it w a s decided t ha t th e basket of
petroleum products, i.e. crude, motor spirit (including
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 28/59
21
ATF) and HSD would be kept outside GST as is the
prevailing practice in India. Sales Tax could continue to
be levied by the S ta tes on these products w ith preva iling
floor ra t e. S imilar ly, Cent re could a lso cont inue its levies.
A final view w hether Na tur a l Ga s should be kept outside
th e GS T w ill be ta ken a fter furth er delibera tions.
Taxation of Services :As indica ted ea rlier, both th eCent re an d th e St a tes w ill ha ve concurrent pow er to levy
ta x on a ll goods an d services. In t he ca se of S ta tes, th e
principle for t a xat ion of int ra -St a te a nd inter-St a te ha s
a l ready been fo rmula ted by the Work ing Group o f
P rin cipa l Secreta ries/S ecret a ries of Fina nce/Ta xa t ion
a n d C o m m i s s i o n e r s o f T r a d e T a x e s w i t h s e n i o r
represent a tives of Depa rt ment of Revenue, G overnment
of India. For int er-St a te tra nsa ctions a n innova tive modelof In tegra ted GST wi l l be adopted by appropr ia te ly
a ligning a nd int egra ting C G ST a nd S G ST. The w orking
of th is model is elabora t ed below .
3.5 Inter-State Transactions of Goods and Services
T h e E m p o w e r e d C o m m i t t e e h a s a c c e p t e d t h e
recommendations of the Working Group of concerned
officials of Central and State Governments for adoptionof IGST model for taxation of inter-State transaction
of G oods a nd S ervices. The scope of IG S T Model is t ha t
Centre w ould levy IG ST w hich w ould be CG ST plus S G ST
on a l l in ter-Sta te t ransac t ions o f t axable goods and
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 29/59
22
services with appropriate provision for consignment or
st ock tr a nsfer of goods a nd services. The inter-S ta te seller
w ill pa y IG ST on va lue a ddition a fter adjusting a va ila ble
credit of IGST, CGST, and SGST on his purchases. The
Exporting S ta te w ill tra nsfer t o the Centre the credit of
SGST used in payment of IGST. The Importing dealer
w ill cla im credit of IG ST w hile discha rging his output ta x
lia bil ity in his ow n S ta te. The Cent re will tra nsfer to theimporting State the credit of IGST used in payment of
S G ST. The releva nt informa tion will a lso be submitt ed
to the Cent ra l Agency w hich w ill act a s a clea ring house
mecha nism, verify t he cla ims a nd inform t he respective
governments t o tr a nsfer the funds.
The ma jor a dva nt a ges of IG ST Model a re:
a) Maintenance of uninterrupted ITC cha in on inter-
St a te tra nsact ions .
b) No upfront pa yment of ta x or substa nt ial blockage
of funds for th e int er-S t a t e seller or buyer.
c) No refund claim in export ing Sta te , a s ITC is used
up while paying th e ta x.
d ) Self monitor ing model.e) Level of computer izat ion is limited to inter-St a te
d e a l e r s a n d C e n t r a l a n d S t a t e G o v e r n m e n t s
should be able to computerize their processes
expeditiously.
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 30/59
23
f) As al l inter-St a te dea lers wi ll be e-regis tered andcorrespondence with them will be by e-mail, thecomplia nce level will improve subst a nt ia lly.
g) Model ca n ta ke ‘B usiness to B usiness ’ a s wel l a s‘B usiness t o Consumer’ tra nsa ctions into a ccount .
3.6 GST Rate Structure
The E mpowered Comm itt ee ha s decided to ad opt atw o-ra te structure –a low er ra te for necessar y items an d
goods of basic import a nce a nd a sta nda rd ra te for goodsin genera l. There w ill a lso be a specia l ra t e for precious
metals and a list of exempted items. For upholding ofspecial needs of ea ch S ta te a s well a s a ba lan ced approa cht o f e d e r a l f l e x i b i l i t y , a n d a l s o f o r f a c i l i t a t i n g t h eintroduction of GST, it is being discussed whether the
exempt ed list u nd er VAT regime including G oods of Loca l
Im port a nce ma y be reta ined in t he exempted list un derS ta te G ST in the initia l yea rs. It is also being discussedwhether the Government of India may adopt, to begin
w ith, a simila r a pproa ch t ow a rds exempted l ist under t heCGST.
The St a tes a re of the view tha t for CG ST rela ting t o
goods, the G overnment of India ma y a lso ha ve a t w o-ra testr uctu re, with conformit y in t he levels of ra te under t he
SG ST. For ta xa tion of services, th ere ma y be a single ra tefor both CG ST a nd S G ST.
The exac t va lue o f the SGST and CGST ra tes ,
including th e ra te for services, will be ma de know n d uly
in course of a ppropria t e legisla tive a ctions.
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 31/59
24
3. 7 Zero Rating of Exports
E xport s w ould be zero-ra ted. Sim ilar benefits m a y
be given to Specia l Economic Zones (SE Zs). However, such
benefits will only be allowed to the processing zones of
th e SE Zs. No benefit t o th e sales from a n S E Z to Domestic
Ta riff Area (D TA) w ill be a llowed.
3.8 GST on Imports: The GST will be levied on
import s w ith necessa ry C onst itut iona l Amendment s. Both
CGST and SGST will be levied on import of goods and
services in t o th e coun t ry . The incidence of t a x w ill follow
th e destina tion principle a nd t he ta x revenue in ca se of
S G S T w ill a ccrue to the St a te w here the import ed goods
a nd s ervices a re consum ed. Full a nd complete set-off w ill
be available on the GST paid on import on goods and
services.
3.9 Special Industrial Area Scheme
After the introduction of GST, the tax exemptions,
remissions etc. rela ted t o indust ria l incentives should be
convert ed, if a t a ll needed, into ca sh refund schemes aft er
collection of ta x, so th a t th e G S T scheme on t he ba sis of a
continuous chain of set-offs is not disturbed. Regarding
S pecia l Indust ria l Area S chemes, it is cla rified th a t such
exempt ions , r emiss ions e tc . wou ld con t inue up to
legitima te expiry t ime both for the Centr e a nd t he St a tes.
Any new exemption, remission etc. or continuation of
ear lier exemption, remission etc. would not be a llow ed.
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 32/59
25
In such cases , the Centra l and the St a te G overnments
could provide reimbur sement a ft er collect ing G S T.
3.10 IT Infrastructure
After acceptance of IGST Model for Inter-State
t r a n s a c t i o n s , t h e m a j o r r e s p o n s i b i l i t i e s o f I T
infrast ructur a l requirement w ill be sha red by the Centra l
G overnment th rough the use of its own I T infra str ucture
facility. The issues of tying up the State Infrastructure
facil i t ies with the Central facil i t ies as well as further
improvement o f the S t a te s ’ own IT in f r as t ruc ture ,
including TINXS YS, is now t o be ad dressed expeditiously
a nd in a t ime bound ma nner .
3.11 Constitutional Amendments, Legislations
and Rules for administration of CGST and SGST
I t is essent ial t o have Consti tut iona l Amendments
for empow ering th e St a tes for levy of service ta x, G ST on
import s a nd consequentia l issues a s w ell a s corresponding
Centra l a nd St a te legisla tions with a ssociat ed rules an d
procedures. With t hese specific ta sks in view, a J oint
Working G roup ha s r ecently been const itut ed (S eptember
30, 2009) comprising of the officials of the Central and
St a te G overnment s to prepa re, in a t ime bound ma nner
a dra ft legisla tion for C onsti tut iona l Amendment, dra ft
legislation for CGST, a suitable Model Legislation for
SGST and rules and procedures for CGST and SGST.
Simulta neous steps ha ve also been initia ted for dra fting
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 33/59
26
of a legisla t ion for IG ST a nd rules an d procedures. As
a par t of this exercise , the Working Group wi l l a lso
address the issues of dispute resolution and advance
ruling.
3.12 Harmonious structure of GST and the
States’ autonomy in a Federal Framework
As a par t of th e exercise on C onst itut iona l Amendment ,
a specia l at t ention would be given, a s ment ioned ea rlier
in para 3 .2 , to the fo rmula t ion o f a mechan i sm for
upholding the need for a harmonious structure for GST
along with the concern for the States’ autonomy in a
federa l str ucture.
3.13 Dispute Resolution and Advance Ruling
As a pa rt of t he exercise on dr a fting of legisla tion,
rules a nd procedures for t he a dministr a tion of CG ST a nd
S G S T, specific provisions w ould a lso be ma de to the issues
of disput e resolution a nd a dva nce ruling.
3.14 Need for compensation during
implementation of GST
Despite the sincere attempts being made by theE mpow ered Committ ee on t he determina tion of G ST ra te
str uctur e, revenue neutra l ra tes, it is difficult t o estima te
accurate ly as to how much the States wi l l gain from
service ta xes a nd h ow much t hey w ill lose on a ccount of
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 34/59
27
removal of ca sca ding effect, pa yment of input t a x credit
and phasing out of CST. In view of this , i t would be
essential to provide adequately for compensation for
l o s s t h a t m i g h t e m e r g e d u r i n g t h e p r o c e s s o f
implementation of GST for the next f ive years. This
issue may be comprehens ive ly taken care o f in the
r e c o m m e n d a t i o n s o f t h e T h i r t e e n t h F i n a n c e
Commission. The payment of this compensation wil lneed to be ensured in terms of special grants to be
released to the St a tes duly in every month on t he basis
of neutrally monitored mechanism.
3.15 With th e release of this First Discussion P a per
and the Annexure on Frequently Asked Questions and
Answ ers on G ST, int era ction wit h t he represent a t ives of
industry, t ra de a nd a griculture would begin immediat ely
a t t he nat iona l level, an d then a lso simulta neously a t t he
St a te levels. Similar ly a w a reness ca mpa ign for common
consum ers would a lso be initia ted a t t he sam e tim e. As a
part of the discussion and campaign, the views of the
industry, tra de a nd a griculture as w ell as consumers ar e
being sought in a structured an d time bound ma nner.
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 35/59
29
Annexure
Frequently Asked Questions and Answers on GST
Question 1 : What is the justification of GST ?
Answer : There was a burden of “ tax on tax” in
t h e p r e - e x i s t i n g C e n t r a l e x c i s e d u t y o f t h e
G overnment of India a nd sa les ta x system of the Sta te
Governments . The introduction of Central VAT
(CENVAT) has removed the cascading burden of
“ t a x o n t a x ” t o a g o o d e x t e n t b y p r o v i d i n g
a mecha nism of “set off” for t a x paid on inputs a nd
services upto the st a ge of production, a nd ha s been
a n improvement over th e pre-exist ing Cen t ra l excise
dut y. S imilar ly, th e int roduct ion of VAT in th e St a t es
has removed the cascading effect by giving set-off
for t a x paid on inputs a s w ell a s ta x paid on previous
purcha ses a nd ha s a ga in been a n improvement over
th e previous sa les ta x regime.
B ut both t he CE NVAT a nd t he St a te VAT
ha ve cert a in incomplet eness. The incompleteness in
CENVAT is that i t has yet not been extended to
include chain of value addition in the distributive
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 36/59
30
t r ade be low the s tage o f product ion . I t has a l so
not included severa l Centr a l ta xes, such a s Additiona l
E xcise Dut ies, Additiona l Cust oms D uty , S urcha rges
etc. in t he overa ll fra mew ork of CE NVAT, a nd t hus
kept the benefits of comprehensive input tax and
service ta x set-off out of th e reach of ma nufa ctu rers/
dea lers. The int roduction of G S T w ill not only include
comprehensively more indirect Central taxes andintegrate goods and services taxes for set-off relief,
b u t a l s o c a p t u r e c e r t a i n v a l u e a d d i t i o n i n t h e
distributive tra de.
S imilar ly, in t he present St a te-level VAT
scheme, CE NVAT loa d on t he goods h a s not y et been
removed a nd t he ca sca ding effect of tha t part of ta x
burden ha s rema ined unrelieved. Moreover, there a reseveral taxes in the States, such as, Luxury Tax,
Entertainment Tax, etc. which have still not been
subsumed in the VAT. Further, there has also not
been any integration of VAT on goods with tax on
services at the S ta te level w ith r emova l of ca sca ding
effect of service ta x. In a ddition, a lthough th e burden
of C entr a l S a les Ta x (CS T) on inter-St a t e movement
of goods has been lessened with reduction of CSTra t e from 4% t o 2%, t his bu rden ha s a lso not been
fully pha sed out . With t he int roduction of GS T a t
the State level, the additional burden of CENVAT
a nd services ta x w ould be comprehensively removed,
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 37/59
31
a nd a cont inuous cha in of set-off from th e origina l
producer’s point a nd service provider’s point upt o t he
retailer’s level would be established which would
e l i m i n a t e t h e b u r d e n o f a l l c a s c a d i n g e f f e c t s ,
including the burden of CENVAT and service tax.
This is t he essence of G S T. Also, ma jor Cent ra l a nd
St a te ta xes w ill get subsumed into G ST w hich w ill
reduce the mult iplicity of ta xes, a nd t hus bring downthe compliance cost. With GST, the burden of CST
w ill a lso be pha sed out .
Thu s G S T is n ot s imply VAT plus service
tax, but a major improvement over the previous
syst em of VAT a nd disjoint ed services ta x – a just ified
step forw a rd.
Question 2. What is GST? How does it work ?
Answer : As a l r ea d y m en t ion ed in a ns w er t o
Question 1, G S T is a t a x on goods a nd services w ith
comprehens ive and cont inuous chain o f se t-of f
benef i t s f rom the producer ’s point and service
prov ider ’ s po in t up to the re t a i l e r ’ s l eve l . I t i s
essentia lly a ta x only on va lue a ddition a t ea ch sta ge,a nd a supplier a t ea ch st a ge is perm itt ed to set -off,
through a tax credit mechanism, the GST paid on
the purchase of goods and services as available for
set-off on t he G S T t o be pa id on t he supply of goods
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 38/59
32
a nd services. The fina l consum er w ill thu s bear only
the GST charged by the last dealer in the supply
cha in, w ith set -off benefits a t a ll the previous st a ges.
The illust ra tion show n below indica tes, in
terms of a hypothetica l example w ith a ma nufacturer,
one w holeseller a nd one ret a iler, how G S T w ill w ork.
Let us su ppose tha t G ST ra te i s 10%, w i th t he
ma nufa ctu rer ma king value add ition of Rs.30 on his
purcha ses worth Rs.100 of input of goods a nd services
used in the ma nufa ctu ring process. The ma nufa ctu rer
w ill t hen pa y n et G ST of Rs. 3 a fter sett ing-off Rs. 10
a s G S T pa id on his input s (i.e. In put Ta x Cr edit) from
gross G ST of Rs. 13. The ma nufa cturer sells t he goods
to the wholeseller. When the wholeseller sells thesa me goods a fter ma king va lue a ddition of (sa y), Rs.
20, he pa ys n et G S T of only Rs. 2, a fter s ett ing-off of
Input Tax Credit of Rs. 13 from the gross GST of
Rs. 15 to the ma nufa cturer. Simila rly, when a reta iler
sells the same goods after a value addition of (say)
Rs. 10, he pa ys n et G S T of only Re.1, a fter s ett ing-off
Rs.15 from h is gross G ST of Rs. 16 pa id to w holeseller.
Thus, the manufacturer, wholeseller and retai lerha ve to pay only Rs. 6 (= Rs. 3+ Rs. 2+ Re. 1) a s G ST
on the value addition along the entire value chain
from the producer to th e reta iler, a fter sett ing-off GS T
paid a t t he ea rlier st a ges. The overa ll burden of G S T
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 39/59
33
on t he goods is t hus much less. This is shown in t he
table below. The same illustration will hold in the
cas e of fina l service provider a s w ell.
Table
Stage of Purchase Value Value Rate GST Input Net
supply value of addition at of on Tax GST=
chain Input which GST output credit GST onsupply output
of goods – Input
and tax
services creditmade to
next stage
Ma nufa ct urer 100 30 130 10% 13 10 13–10 = 3
Whole seller 130 20 150 10% 15 13 15–13 = 2
Reta iler 150 10 160 10% 16 15 16–15 = 1
Question 3 : How can the burden of tax, ingeneral, fall under GST ?
Answer : As a l r ea d y m en t ion ed in An s w er t o
Quest ion 1, the present forms of CENVAT and
State VAT have remained incomplete in removing
fully the ca sca ding burden of ta xes a lrea dy pa id at
ear l i e r s t ages . Bes ides , the re a re severa l o the r
ta xes , which both the Centra l G overnment a nd th eSt a te G overnment levy on production, ma nufa cture
a nd distr ibutive t ra de, w here no set-off is a va ilable
in th e form of input ta x credit. These t a xes a dd to
the cost of goods and services through “tax on tax”
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 40/59
34
w hich th e f ina l consumer ha s to bea r. Since, with
th e introduction of G S T, a ll the ca sca ding effects of
CE NVAT a nd service ta x w ould be removed w ith a
cont inuous cha in of set -off from t he producer’s point
to the reta i ler ’s point, oth er ma jor Cent ra l an d St a te
ta xes w ould be subsumed in G S T a nd C ST w ill a lso
be pha sed out , th e fina l net burden of ta x on goods,
under G ST w ould, in genera l, fa ll . S ince there w ouldbe a transparent and complete chain of set-of fs ,
th is will help widening t he covera ge of ta x ba se a nd
improve tax compliance. This may lead to higher
genera tion of revenues w hich ma y in tur n lea d to the
possibility of low ering of a vera ge ta x burden.
Question 4 : How will GST benefit industry, trade
and agriculture ?
Answer : As m en tion ed in An sw er t o Quest ion 3,
th e GS T w ill give more relief to indust ry, t ra de an d
agr icu l ture through a more comprehens ive and
wider coverage of input tax set-off and service tax
se t-of f , subsuming of severa l Centra l and Sta te
taxes in the GST and phas ing out o f CST. The
tr a nspa rent a nd complete cha in of set-offs wh ich w illr e s u l t i n w i d e n i n g o f t a x b a s e a n d b e t t e r t a x
complia nce ma y a lso lea d t o low ering of ta x burden
o n a n a v e r a g e d e a l e r i n i n d u s t r y , t r a d e a n d
agriculture.
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 41/59
35
Question 5 : How will GST benefit the exporters?
Answer : Th e subsum in g of m a jor C en t ra l a n d
S ta te ta xes in G S T, complete an d comprehensive set -
off of input goods a nd services a nd pha sing out of
Central Sales Tax (CST) would reduce the cost of
locally manufactured goods and services. This will
increase the competitiveness of Indian goods andservices in the international market and give boost
to India n exports. The uniformity in ta x ra tes a nd
procedures across t he count ry w ill a lso go a long w a y
in reducing t he complia nce cost.
Question 6 : How will GST benefit the small
entrepreneurs and small traders?
Answer : Th e pr es en t t h res h old pr es cr ibed in
different State VAT Acts below which VAT is not
applicable varies from State to State. The existing
threshold of goods under State VAT is Rs. 5 lakhs
for a ma jority of bigger St a tes a nd a low er threshold
f o r N o r t h E a s t e r n S t a t e s a n d S p e c i a l C a t e g o r y
St a tes. A uniform S ta te G ST thr eshold a cross St a tes
i s d e s i r a b l e a n d , t h e r e f o r e , t h e E m p o w e r e d
Committee has recommended that a threshold of
gross a nnu a l tur nover of Rs. 10 la kh both for goods
a nd services for a ll th e St a tes a nd U nion Territories
ma y be adopted w ith a dequa te compensa tion for t he
States (par t icular ly , the States in North-Eastern
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 42/59
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 43/59
37
Question 8 : What are the salient features of the
proposed GST model?
Answer : Th e sa lien t fea t u res of t h e pr oposed m odel
a re as follow s:
(i) C on sis t en t w it h t h e fed er a l s t ru ct u re of t h e
country, the GST will have two components:
one levied by t he Cent re (hereina fter referred
to a s Centr a l GS T), an d th e oth er levied by t he
St a tes (hereina fter referred t o as St a te G ST).
This dual GST model would be implemented
th rough multiple sta tut es (one for CG ST a nd
SGST statute for every State) . However, the
basic features of law such as chargeabil i ty ,definition of ta xa ble event a nd t a xa ble person,
mea sure of levy including va lua t ion provisions,
basis of classification etc. would be uniform
a cross these sta tut es a s far a s pra ctica ble.
(ii) Th e C en t r a l G S T a n d t h e S t a t e G S T w ou ld
be a pplica ble to a ll tra nsa ctions of goods a ndserv i ces excep t the exempted goods and
services, goods wh ich a re out side th e purv iew
of G ST a nd t he tra nsa ctions w hich a re below
th e prescribed t hreshold limit s.
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 44/59
38
(iii) The Centra l G ST a nd Sta te G ST are to be paid
to the accounts of the Centre and the States
separately.
(iv ) S in ce t h e C en t r a l G S T a n d S t a t e G S T a r e t o
be treated separately, in general , taxes paid
a ga inst th e Cent ra l GS T sha ll be a l low ed to be
ta ken a s input t a x credit (ITC) for t he Centr a lGST and could be uti l ized only against the
pay ment of Cent ra l G ST. The sam e principle
w ill be a pplica ble for t he St a te G S T.
(v) Cross u t ilisa t ion of ITC betw een the Centra l
G ST a nd t he St a te G ST w ould, in general , not
be a llow ed.
(vi) To the extent fea sible, uniform procedure for
collection of both Centra l G ST a nd S ta te G ST
w o u l d b e p r e s c r i b e d i n t h e r e s p e c t i v e
legislat ion for Cent ra l GS T a nd S ta te G ST.
(vii) The a dministra t ion of the Centra l G ST would
be w i th the Centre a nd for St a te G ST with t he
S ta te s .
(viii) The ta xpa yer would need t o submit periodica l
returns to both t he Centr a l GS T a uthority a nd
to the concerned St a te G S T a ut horities.
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 45/59
39
(ix) E a ch t a x pa y e r w ou ld be a l lot t e d a P AN -
linked taxpayer identif ication number with
a t ota l of 13/15 digits . This w ould bring t he
GST PAN-l inked sys tem in l ine w i th the
preva iling P AN-ba sed system for In come t a x
f a c i l i t a t i n g d a t a e x c h a n g e a n d t a x p a y e r
complia nce. The exa ct design w ould be w orked
ou t in consu l t a t i on w i th the Income-TaxDepartment .
(x) K eepin g in m in d t h e n eed of t a x pa y e rs
convenience, functions such as assessment,
enforcement , scru t iny and audi t would be
underta ken by t he a uth ority w hich is collecting
the ta x, w ith informa tion sha ring betw een the
Centre a nd the St a tes .
Question 9 : Why is Dual GST required ?
Answer : India is a federa l count ry w here bot h t he
Centr e a nd th e St a tes ha ve been assigned th e pow ers
t o l e v y a n d c o l l e c t t a x e s t h r o u g h a p p r o p r i a t e
leg is la t ion . Both the leve ls o f Government have
dis t inct responsibi l i t ies to perform according tot he division of pow ers prescribed in th e Const itu t ion
for w hich t hey need to ra ise resources. A dua l G S T
w ill, therefore, be in keeping w ith th e Constitut iona l
requirement of fisca l federa lism.
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 46/59
40
Question 10 : How would a particular transaction
of goods and services be taxed
simultaneously under Central GST
(CGST) and State GST (SGST)?
Answer : Th e C en t r a l G S T a nd t h e S t a t e G S T
w ould be levied simulta neously on every t ra nsa ction
of supply of goods a nd services except t he exemptedgoods and services , goods which are outs ide the
purview of G ST a nd t he tra nsa ctions w hich a re below
th e prescribed t hreshold limits. Fur t her, both w ould
be levied on t he sa me price or va lue unlike S ta t e VAT
w hich is levied on t he va lue of th e goods inclusive of
CE NVAT. While th e locat ion of t he supplier a nd t he
recipient within the country is immaterial for the
purpose of CGST, SGST would be chargeable onlyw hen t he supplier a nd t he recipient a re both loca ted
wi thin the Sta te .
Illustration I : Suppose hypoth etica lly tha t th e ra te
of CG S T is 10% a nd t ha t of SG S T is 10%. When a
wholesale dealer of steel in Uttar Pradesh supplies
steel ba rs a nd rods to a const ruction compa ny w hich
is also located within the same State for , say Rs.100, the dealer would charge CGST of Rs. 10 and
S G S T of Rs. 10 in a ddition t o the ba sic price of th e
goods. He would be required to deposit the CGST
component int o a Cent ra l Governm ent a ccount w hile
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 47/59
41
th e SG S T port ion into t he a ccount of t he concerned
St a te G overnment. Of course, he need not a ctua lly
pay Rs. 20 (Rs. 10 + Rs. 10 ) in cash a s he w ould be
entit led t o set-off this liabilit y a ga inst t he CG S T or
SGST paid on his purchases (say, inputs). But for
paying CGST he would be allowed to use only the
credit of CG S T paid on his purcha ses wh ile for S G S T
he can uti l ize the credit of SGST alone. In otherw ords, C G S T credit ca nn ot, in genera l, be used for
pay ment of SG S T. Nor ca n S G S T credit be used for
paym ent of CG ST.
Illustration II: S uppose, a ga in hypothetica lly, th a t
t he ra t e of CG S T is 10% a nd t ha t of SG S T is 10%.
When an advertising company located in Mumbai
s u p p l i e s a d v e r t i s i n g s e r v i c e s t o a c o m p a n yma nufa cturing soa p also loca ted wit hin the St a te of
Ma ha ra shtr a for , let us say Rs. 100, the ad compa ny
would charge CGST of Rs. 10 as well as SGST of
Rs. 10 t o t he ba sic va lue of th e service. H e would be
required to deposi t the CGST component into a
Centr a l G overnment a ccount w hile the S G ST port ion
into the a ccount of the concerned S ta te G overnment .
Of course, he need not a ga in a ctua lly pa y Rs. 20 (Rs.10+ Rs. 10) in cash a s it w ould be ent itled to set-off
th is liabil ity a ga inst t he CG ST or S G ST paid on his
purchase (say, of inputs such as stationery, office
equipment , services of a n a rt ist etc). B ut for pa ying
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 48/59
42
CG S T he would be a llow ed to use only th e credit of
CG ST pa id on its purcha se w hile for SG S T he ca n
utilise the credit of SG ST a lone. In other w ords, CG ST
credit cannot, in general , be used for payment of
S G S T. Nor can S G S T credit be used for pa yment of
CGST.
Question 11 : Which Central and State taxes areproposed to be subsumed under GST ?
Answer : Th e va r ious Cen t ra l, S ta t e a nd Loca l
levies were examined to identify their possibility of
being subsumed under G ST. While ident ifying, the
follow ing principles w ere kept in min d:
(i) Ta x es or lev ies t o b e s ub su m ed sh ou ld beprima rily in t he na tur e of indirect ta xes, eith er
on the supply of goods or on the supply of
services.
(i i) Ta xes or levies to be subsumed should be par t
of the tr a nsa ction cha in wh ich comm ences with
import/manufacture/production of goods or
prov i s ion o f se rv i ces a t one end and theconsum ption of goods a nd services a t th e oth er.
(i ii ) The subsuma tion should result in f ree flow of
ta x credit in int ra a nd inter-St a te levels.
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 49/59
43
(iv) Th e t a x es , l ev ies a n d f ees t h a t a r e n ot
specifica lly relat ed t o supply of goods & services
should n ot be subsumed under G ST.
(v) R ev en ue fa i rn es s for bot h t h e U n ion a n d t h e
St a tes individually w ould need to be at tempted.
O n a p p l i c a t i o n o f t h e a b o v e p r i n c i p l e s , t h eEm pow ered Committ ee ha s recommended tha t t he
following Central Taxes should be, to begin with,
subsumed under t he G oods a nd S ervices Ta x:
(i) Cent ra l E xcise D ut y
(ii) Ad dit ion a l E xcis e D u t ies
(i ii ) The Excise Duty levied under the Medicinal
a nd Toiletr ies P repar a tion Act
(iv) S ervice Ta x
(v) Addit ional Customs Duty , commonly known as
Countervail ing D uty (CVD)
(vi) Special Additiona l Duty of Customs - 4%(SAD)
(vii) S ur ch a r ges, a n d
(viii) Cesses .
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 50/59
44
The fol low ing S ta te t a xes a nd levies w ould be , to
begin w ith, subsum ed under GS T:
(i) VAT /S a les t a x
(ii) Enter t a inment t ax (un less it i s lev ied by the
loca l bodies).
(iii) Luxury t a x
(iv) Taxes on lot tery, bet t ing a nd ga mbling .
(v) S t a t e C es ses a n d S ur ch a r ges in so fa r a s t hey
rela t e to supply of goods a nd s ervices.
(v i) Ent ry t ax not in lieu of Oct roi.
Purchase tax: Some of the Sta tes fel t tha t t hey are
gett ing substa nt ial revenue from P urcha se Ta x a nd,
th erefore, it should not be subsumed under G ST w hile
ma jority of the St a tes w ere of the view th a t n o such
exemptions should be given. The difficulties of the
foodgra in p roduc ing S t a te s was apprec i a ted as
substantial revenue is being earned by them from
P urcha se Ta x an d i t w a s, therefore, fel t th a t in case
P urcha se Ta x ha s to be subsumed th en a dequa te a nd
cont inuing compensa t ion ha s to be provided t o such
S t a t es. This issue is being discussed in consult a t ion
w ith th e G overnment of India .
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 51/59
45
Tax on items containing Alcohol: Alcoholic
bevera ges w ould be kept out of the purview of G S T.
S a les Ta x /VAT could be cont inued t o be levied on
alcoholic beverages as per the existing practice. In
ca se i t ha s been ma de Va ta ble by some St a tes, there
is no object ion t o tha t . Excise Dut y, w hich is presently
levied by t he St a tes ma y n ot a lso be affected.
Tax on Tobacco products: Tobacco products
w ould be subjected t o G S T w ith ITC. C entr e ma y be
a llow ed to levy excise dut y on t obacco product s over
a nd a bove GS T w ith I TC.
Tax on Petroleum Products:As fa r a s pet roleum
products a re concerned, it w a s decided t ha t th e basket
of pe tro leum products , i .e . c rude , motor sp i r i t(including ATF) an d H S D w ould be kept outside G S T
a s is th e preva iling pra ctice in In dia . S a les Ta x could
cont inue to be levied by t he S ta tes on th ese products
w ith preva iling floor ra te. Simila rly, Cent re could a lso
cont inue its levies. A final view w hether Na tur a l G a s
should be kept out side the G S T w ill be ta ken a fter
furt her delibera tions.
Taxation of Services : As indicated earlier, both
th e Cent re an d th e Sta tes w ill ha ve concurrent pow er
to levy t a x on goods a nd services. In th e ca se of St a tes,
the principle for taxation of intra-State and inter-
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 52/59
46
St a te ha s a lrea dy been formula ted by the Working
G r o u p o f P r i n c i p a l S e cr e t a r i e s /S e cr e t a r i e s of
Fina nce /Ta xa t ion a nd C ommiss ioners o f Tra de
Ta xes w ith senior represent a t ives of Depa rt ment of
Revenue , Government o f Ind i a . For in te r -S ta te
tra nsa ctions a n innova tive model of Integra ted GS T
w i l l b e a d o p t e d b y a p p r o p r i a t e l y a l i g n i n g a n d
integrat ing CG ST a nd IG ST.
Question 12 : What is the rate structure proposed
under GST ?
Answer : Th e E mpow ered C om mit t ee ha s decided
to adop t a two-ra te s t ruc ture –a lower r a te fo r
necessa ry i t ems a nd i t ems of basic importa nce a nd a
sta nda rd ra te for goods in genera l. There will also be
a spec i a l r a te fo r p rec ious me ta l s and a l i s t o f
exempted items. For upholding of special needs of
each Sta te as w ell as a ba lan ced a pproa ch to federal
flexibility, it is being discussed wh ether th e exempted
list under VAT regime including Goods of Local
Importance may be retained in the exempted l ist
under St a te G ST in the initia l yea rs. I t is a lso being
discussed whether the Government of India may
adopt , to begin wi th, a s imilar approach towards
exempted list u nder t he CG S T.
For CG ST rela ting to goods, th e St a tes
considered tha t t he Government of India might a lso
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 53/59
47
have a two-rate structure, with conformity in the
l e v e l s o f r a t e w i t h t h e S G S T . F o r t a x a t i o n o f
services, th ere ma y be a single ra te for both CG ST
a nd SG ST.
The exact va lue of the S G ST a nd C G ST
rates, including the rate for services, will be made
known duly in course o f appropr ia te leg is la t iveactions.
Question 13: What is the concept of providing
threshold exemption for GST?
Answer : Th reshold exem pt ion is built int o a t a x
regime to keep sma ll tra ders out of ta x net. This ha s
t hr ee-fold object ives:
a ) I t is difficult t o a d min ist er sm a ll t r a der s a n d
cost of administering of such traders is very
high in compar ison t o the ta x pa id by them.
b) Th e com plia n ce cos t a n d com plia n ce effor t
w ould be sa ved for such sma ll t ra ders.
c) S m a ll t r a der s get rela t ive a d va n t a ge over la r ge
ent erprises on a ccount of low er ta x incidence.
The present th resholds prescribed in different St a t e
VAT Acts below w hich VAT is not a pplica ble va ries
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 54/59
48
from St a te to St a te. A uniform St a te GS T th reshold
a cross St a tes is desirable and, t herefore, a s a lrea dy
mentioned in Answer to Question 6, i t has been
considered th a t a th reshold of gross a nnu a l turnover
of Rs. 10 la kh both for goods a nd serv ices for a ll the
St a tes a nd U nion Territories might be adopted w ith
a dequa te compensa tion for t he St a tes (part icularly,
the Sta tes in Nor th-Eas tern Region and Specia lCa tegory S ta tes) w here low er threshold ha d preva iled
in the VAT regime. Keeping in view the interest of
sma ll tra ders a nd sma ll sca le industries a nd t o a void
dual control , the States also considered that the
threshold for Central GST for goods may be kept
Rs.1.5 Crore and the threshold for services should
a lso be a ppropria tely high.
Question 14 : What is the scope of composition and
compounding scheme under GST?
Answer : As a l r ea dy m en t ion ed in An s w er t o
Quest ion 6, a C omposit ion/Compounding S cheme will
b e a n i m p o r t a n t f e a t u r e o f G S T t o p r o t e c t t h e
interests of sma ll tra ders an d sma ll sca le industries.
The C omposi t ion /C ompound ing schem e for t hepurpose of G S T should ha ve a n upper ceiling on gr oss
a nnua l turn over a nd a f loor ta x rat e w ith respect t o
gross a nnua l turnover. In pa rticular th ere w ill be a
compounding cut-off at Rs. 50 lakhs of the gross
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 55/59
49
a nnua l tur nover a nd t he floor r a te of 0.5% a cross the
States . The scheme would al low option for GST
regis trat ion for dealers wi th turnover below the
compoun ding cut -off.
Question 15 : How will imports be taxed under GST ?
Answer : Wit h C on st it ut ion a l Am endm en ts, bot hCGST and SGST will be levied on import of goods
and services into the country. The incidence of tax
wil l fol low the dest inat ion principle and the tax
revenue in case of SGST will accrue to the State
w here th e import ed goods a nd services a re consum ed.
Full a nd complet e set -off will be a va ilable on t he G S T
pa id on import on goods a nd services.
Question 16 : Will cross utilization of credits
between goods and services be
allowed under GST regime?
Answer : C ros s u t il i z a t ion of cr ed i t o f C G S T
be tween goods and se rv i ces wou ld be a l lowed .
S imilar ly, th e fa cility of cross utilizat ion of credit w ill
be available in case of SGST. However, the crossutilization of CGST and SGST would generally not
be allowed except in t he cas e of int er-S t a t e supply of
goods a nd services under t he IG S T model w hich is
expla ined in a nsw er to th e next question.
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 56/59
50
Question 17 : How will be Inter-State Transactions
of Goods and Services be taxed under
GST in terms of IGST method ?
Answer : The E mpow ered C om mit tee ha s a ccept ed
t he recommend a t ion for a dopt ion of IG S T model for
taxat ion of in ter-Sta te t ransac t ion of Goods and
Services. The scope of IGST Model is that Centrewould levy IGST which would be CGST plus SGST
on a ll inter-St a te tr a nsa ctions of ta xable goods a nd
services. The int er-S t a t e seller w ill pa y IG S T on
value addi t ion af ter adjust ing avai lable credi t of
IGST, CGST, and SGST on his purchases . The
E xport ing St a te will tr a nsfer to the Centre the credit
of SGST used in payment of IGST. The Importing
dealer will claim credit of IGST while discharginghis output t a x liabili ty in his ow n S ta te. The Cent re
w ill tra nsfer t o th e importing S ta te the credit of IGS T
used in pay ment of SG S T. The releva nt informa tion
is also submitted to the Central Agency which will
a ct a s a clea ring house mecha nism, verify t he claims
and inform the respective governments to transfer
th e funds.
The ma jor a dva nt a ges of IG S T Model a re:
a ) M a i n t en a n ce of un in t e rr u pt e d I TC ch a i n on
inter-State transactions.
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 57/59
51
b) N o u pfr on t pa y m en t of t a x or s ub st a n t ia l
blockage of fund s for th e int er-S t a t e seller or
buyer.
c) No refund cla im in expor t ing Sta te , a s ITC is
used up w hile paying the ta x.
d) S elf m on it or in g m od el.
e) Level of computerisa tion is limited to inter-St a te
dea le r s and Cent r a l and S t a te Governments
should be able to computerise their processes
expeditiously.
f) As a ll inter-Sta te dealers wi ll be e-regis tered a nd
c o r r e s p o n d e n c e w i t h t h e m w i l l b e b y
e-mai l , the compl i ance l eve l w i l l improve
substant ial ly .
g) Model ca n ta ke ‘B us iness to B us iness’ a s well as
‘ B u s i n e s s t o C o n s u m e r ’ t r a n s a c t i o n s i n t o
account.
Question 18 : Why does introduction of GST require
a Constitutional Amendment?
Answer : T h e C o n s t i t u t i o n p r o v i d e s f o r
delinea tion of pow er t o ta x betw een t he Centre a nd
St a tes. While the Cent re is empow ered t o ta x services
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 58/59
52
a nd goods upto the production st a ge, th e St a tes ha ve
th e pow er to ta x sa le of goods. The St a tes do not ha ve
th e pow ers to levy a ta x on supply of services wh ile
the Centre does not have power to levy tax on the
sale of goods. Thus, the Constitution does not vest
e x p r e s s p o w e r e i t h e r i n t h e C e n t r a l o r S t a t e
G overnment to levy a ta x on t he ‘supply of goods a nd
services’. Moreover, the Constitution also does notempower the S t a te s to impose t ax on impor t s .
Therefore , i t i s essential to have Const i tut ional
Amendm ents for empow ering the Cent re to levy ta x
on sa le of goods a nd S ta tes for levy of service ta x a nd
ta x on import s a nd other consequent ia l issues.
As pa rt of th e exercise on C onst itut iona l
Amendment, there would be a special attention to
the formulation of a mechanism for upholding the
need for a ha rmonious str ucture for G S T a long w ith
the concern for the powers of the Centre and the
St a tes in a federal structure.
Question 19: How are the legislative steps being
taken for CGST and SGST ?
Answer : A J oint Working G roup ha s recent ly been
constituted (September 30, 2009) comprising of the
officials of the Central and State Governments to
prepa re, in a t ime-bound ma nn er a dra ft legislat ion
for Constit ut iona l Amendm ent.
8/12/2019 Empowered Committee of FM 091109 GST First Draft
http://slidepdf.com/reader/full/empowered-committee-of-fm-091109-gst-first-draft 59/59
Question 20: How will the rules for administration
of CGST and SGST be framed?
Answer : The J oint Working G roup, a s m entioned
a bove, ha s a lso been ent rust ed t he ta sk of prepar ing
d r a f t l e g i s l a t i o n f o r C G S T , a s u i t a b l e M o d e l
Legislation for SGST and rules and procedures for
CG ST a nd S G S T. Simulta neous steps ha ve a lso beeninitiat ed for dr a fting of legislat ion for IG ST a nd r ules
and procedures . As a par t o f th is exerc ise , the
Working Group will also address to the issues of
dispute resolution a nd a dva nce ruling.