Volume 2, Issue 13


16th November, 2009


Tax Alert
Proposed Goods and Services Tax (GST) Code

The Central Government has issued first draft discussion paper on Goods and Services Tax (GST) outlining key features of the proposed consolidated indirect tax code which is likely to be effective from 1.4.2010. Certain important points have been discussed here as set out by the discussion paper, in the form of FAQ:

Q1: What is GST? How does it work ?

GST is a tax on goods and services with comprehensive and continuous chain of set-off.

Q 2 : What are the salient features of the proposed GST model?

The salient features of the proposed model are as follows:

  • Dual Level Tax:

    GST will have two components: one levied by the Centre (CGST), and the other levied by the States (SGST). This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). However, the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions,

Salient features of proposed GST Code:

Dual Level Tax - one levied by the Centre and the other levied by the States
Applicable to all goods and services, with a few exceptions
Central GST and State GST to be paid separately for Input Tax credit (ITC). Cross utilization of ITC for CGST and SGST is not allowed except in the case of inter-State supply of goods and services
PAN based Taxpayer Identification Number (TIN) to be allotted
 
  basis of classification etc. are likely to be uniform across these statutes. The administration of the Central GST would be with the Centre and that of State GST with the States. The taxpayer would need to submit periodical returns to both the Central GST authority and to the concerned State GST authorities. Functions such as assessment, enforcement, scrutiny and audit would be undertaken by the authority which is collecting the tax, with information sharing between the Centre and the States.
  • Applicable to all goods and services:

    The Central GST and the State GST would be applicable to all transactions of goods and services except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits.

  • Input tax credit:

    The Central GST and State GST are to be paid to the accounts of the Centre and the States separately. Since the Central GST and State GST are to be treated separately, in general, taxes paid against the Central GST would be allowed to be taken as input tax credit (ITC) for the Central GST and could be utilized only against the payment of Central GST. The same principle will be applicable for the State GST. Cross utilization of credit of CGST between goods and services would be allowed. Similarly, the facility of cross utilization of credit would be available in case of SGST. However, the cross utilization of CGST and SGST would generally not be allowed except in the case of inter-State supply of goods and services under the IGST model.

  • PAN based Taxpayer Identification Number (TIN):

    Each taxpayer will be allotted a PAN linked taxpayer identification number with a total of 13/15 digits.

Q 3: How will Inter-State Transactions of Goods and Services be taxed under GST?

The Empowered Committee has accepted the recommendation 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. The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. The relevant information is also submitted to the Central Agency which will act as a clearing house mechanism, verify the claims and inform the respective governments to transfer the funds.

Q 4: Which Central and State taxes are proposed to be subsumed under GST ?

Empowered Committee has recommended that the following Central Taxes should be, to begin with, subsumed under the Goods and Services Tax:

  • Central Excise Duty
  • Additional Excise Duties
  • The Excise Duty levied under the Medicinal and Toiletries Preparation Act
  • Service Tax
  • Additional Customs Duty, commonly known as Countervailing Duty (CVD)
  • Special Additional Duty of Customs - 4% (SAD)
  • Surcharges, and
  • Cesses.

The following State taxes and levies would be, to begin with, subsumed under GST:

  • VAT / Sales tax
  • Entertainment tax (unless it is levied by the local bodies)
  • Luxury tax
  • Taxes on lottery, betting and gambling.
  • State Cesses and Surcharges in so far as they relate to supply of goods and services.
  • Entry tax not in lieu of Octroi

Q 5: How will imports be taxed under GST ?

Both CGST and SGST will be levied on import of goods and services into the country. The incidence of tax will follow the destination principle and the tax revenue in case of SGST will accrue to the State where the imported goods and services are consumed. Full and complete set-off will be available on the GST paid on import on goods and services.
 

Both CGST and SGST will be levied on import of goods and services into the country.