||What is the justification of GST ?
There was a burden of “tax on tax” in
the pre-existing Central excise duty of the
Government of India and sales tax system of the State
Governments. The introduction of Central VAT
(CENVAT) has removed the cascading burden of
“tax on tax” to a good extent by providing
a mechanism of “set off” for tax paid on inputs and
services upto the stage of production, and has been
an improvement over the pre-existing Central excise
duty. Similarly, the introduction of VAT in the States
has removed the cascading effect by giving set-off
for tax paid on inputs as well as tax paid on previous
purchases and has again been an improvement over
the previous sales tax regime.
But both the CENVAT and the State VAT
have certain incompleteness. The incompleteness in
CENVAT is that it has yet not been extended to
include chain of value addition in the distributive
trade below the stage of production. It has also
not included several Central taxes, such as Additional
Excise Duties, Additional Customs Duty, Surcharges
etc. in the overall framework of CENVAT, and thus
kept the benefits of comprehensive input tax and
service tax set-off out of the reach of manufacturers/
dealers. The introduction of GST will not only include
comprehensively more indirect Central taxes and
integrate goods and services taxes for set-off relief,
but also capture certain value addition in the
Similarly, in the present State-level VAT
scheme, CENVAT load on the goods has not yet been
removed and the cascading effect of that part of tax
burden has remained unrelieved. Moreover, there are
several 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 State level with removal of cascading
effect of service tax. In addition, although the burden
of Central Sales Tax (CST) on inter-State movement
of goods has been lessened with reduction of CST
rate from 4% to 2%, this burden has also not been
fully phased out. With the introduction of GST at
the State level, the additional burden of CENVAT
and services tax would be comprehensively removed,
and a continuous chain of set-off from the original
producer’s point and service provider’s point upto the
retailer’s level would be established which would
eliminate the burden of all cascading effects,
including the burden of CENVAT and service tax.
This is the essence of GST. Also, major Central and
State taxes will get subsumed into GST which will
reduce the multiplicity of taxes, and thus bring down
the compliance cost. With GST, the burden of CST
will also be phased out.
Thus GST is not simply VAT plus service
tax, but a major improvement over the previous
system of VAT and disjointed services tax – a justified
||What is GST? How does it work ?
As already mentioned in answer to
Question 1, GST is a tax on goods and services with
comprehensive and continuous chain of set-off
benefits from the producer’s point and service
provider’s point upto the retailer’s level. It is
essentially a tax only on value addition at each stage,
and a supplier at each stage is permitted to set-off,
through a tax credit mechanism, the GST paid on
the purchase of goods and services as available for
set-off on the GST to be paid on the supply of goods and services. The final consumer will thus bear only
the GST charged by the last dealer in the supply
chain, with set-off benefits at all the previous stages.
The illustration shown below indicates, in
terms of a hypothetical example with a manufacturer,
one wholeseller and one retailer, how GST will work.
Let us suppose that GST rate is 10%, with the
manufacturer making value addition of Rs.30 on his
purchases worth Rs.100 of input of goods and services
used in the manufacturing process. The manufacturer
will then pay net GST of Rs. 3 after setting-off Rs. 10
as GST paid on his inputs (i.e. Input Tax Credit) from
gross GST of Rs. 13. The manufacturer sells the goods
to the wholeseller. When the wholeseller sells the
same goods after making value addition of (say), Rs.
20, he pays net GST of only Rs. 2, after setting-off of
Input Tax Credit of Rs. 13 from the gross GST of
Rs. 15 to the manufacturer. Similarly, when a retailer
sells the same goods after a value addition of (say)
Rs. 10, he pays net GST of only Re.1, after setting-off
Rs.15 from his gross GST of Rs. 16 paid to wholeseller.
Thus, the manufacturer, wholeseller and retailer
have to pay only Rs. 6 (= Rs. 3+Rs. 2+Re. 1) as GST
on the value addition along the entire value chain
from the producer to the retailer, after setting-off GST
paid at the earlier stages. The overall burden of GST on the goods is thus much less. This is shown in the
table below. The same illustration will hold in the
case of final service provider as well.
|Stage of supply chain
||Purchase value of Input
||Value at which supply of goods and services made to next stage
||Rate of GST
||GST on output
||Input tax credit
||Net GST = GST on ouptut - Input tax credit
13-10 = 3
15-13 = 2
16-15 = 1
||How can the burden of tax, in general, fall under GST ?
As already mentioned in Answer to
Question 1, the present forms of CENVAT and
State VAT have remained incomplete in removing
fully the cascading burden of taxes already paid at
earlier stages. Besides, there are several other
taxes, which both the Central Government and the
State Government levy on production, manufacture
and distributive trade, where no set-off is available
in the form of input tax credit. These taxes add to
the cost of goods and services through “tax on tax” which the final consumer has to bear. Since, with
the introduction of GST, all the cascading effects of
CENVAT and service tax would be removed with a
continuous chain of set-off from the producer’s point
to the retailer’s point, other major Central and State
taxes would be subsumed in GST and CST will also
be phased out, the final net burden of tax on goods,
under GST would, in general, fall. Since there would
be a transparent and complete chain of set-offs,
this will help widening the coverage of tax base and
improve tax compliance. This may lead to higher
generation of revenues which may in turn lead to the
possibility of lowering of average tax burden.
||How will GST benefit industry, trade and agriculture ?
As mentioned in Answer to Question 3,
the GST will give more relief to industry, trade and
agriculture through a more comprehensive and
wider coverage of input tax set-off and service tax
set-off, subsuming of several Central and State
taxes in the GST and phasing out of CST. The
transparent and complete chain of set-offs which will
result in widening of tax base and better tax
compliance may also lead to lowering of tax burden
on an average dealer in industry, trade and
||How will GST benefit the exporters?
The subsuming of major Central and
State taxes in GST, complete and comprehensive setoff
of input goods and services and phasing out of
Central Sales Tax (CST) would reduce the cost of
locally manufactured goods and services. This will
increase the competitiveness of Indian goods and
services in the international market and give boost
to Indian exports. The uniformity in tax rates and
procedures across the country will also go a long way
in reducing the compliance cost.
||How will GST benefit the small entrepreneurs and small traders?
The present threshold prescribed 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 majority of bigger States and a lower threshold
for North Eastern States and Special Category
States. A uniform State GST threshold across States
is desirable and, therefore, the Empowered
Committee has recommended that a threshold of
gross annual turnover of Rs. 10 lakh both for goods
and services for all the States and Union Territories
may be adopted with adequate compensation for the
States (particularly, the States in North-Eastern Region and Special Category States) where lower
threshold had prevailed in the VAT regime. Keeping
in view the interest of small traders and small scale
industries and to avoid dual control, the States
considered that the threshold for Central GST for
goods may be kept at Rs.1.5 crore and the threshold
for services should also be appropriately high. This
raising of threshold will protect the interest of small
traders. A Composition scheme for small traders and
businesses has also been envisaged under GST as
will be detailed in Answer to Question 14. Both these
features of GST will adequately protect the interests
of small traders and small scale industries.
||How will GST benefit the common consumers?
As already mentioned in Answer to
Question 3, with the introduction of GST, all the
cascading effects of CENVAT and service tax will be
more comprehensively removed with a continuous
chain of set-off from the producer’s point to the
retailer’s point than what was possible under the
prevailing CENVAT and VAT regime. Certain major
Central and State taxes will also be subsumed in GST
and CST will be phased out. Other things remaining
the same, the burden of tax on goods would, in
general, fall under GST and that would benefit the
||What are the salient features of the proposed GST model?
The salient features of the proposed model
are as follows:
(i) Consistent with the federal structure of the
country, the GST will have two components:
one levied by the Centre (hereinafter referred
to as Central GST), and the other levied by the
States (hereinafter referred to as State GST).
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,
basis of classification etc. would be uniform
across these statutes as far as practicable.
(ii) 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.
(iii) The Central GST and State GST are to be paid
to the accounts of the Centre and the States
(iv) Since the Central GST and State GST are to
be treated separately, in general, taxes paid
against the Central GST shall 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.
(v) Cross utilisation of ITC between the Central
GST and the State GST would, in general, not
(vi) To the extent feasible, uniform procedure for
collection of both Central GST and State GST
would be prescribed in the respective
legislation for Central GST and State GST.
(vii) The administration of the Central GST would
be with the Centre and for State GST with the
(viii) The taxpayer would need to submit periodical
returns to both the Central GST authority and
to the concerned State GST authorities.
(ix) Each taxpayer would be allotted a PANlinked
taxpayer identification number with
a total of 13/15 digits. This would bring the
GST PAN-linked system in line with the
prevailing PAN-based system for Income tax
facilitating data exchange and taxpayer
compliance. The exact design would be worked
out in consultation with the Income-Tax
(x) Keeping in mind the need of tax payers
convenience, 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.
||Why is Dual GST required ?
India is a federal country where both the
Centre and the States have been assigned the powers
to levy and collect taxes through appropriate
legislation. Both the levels of Government have
distinct responsibilities to perform according to
the division of powers prescribed in the Constitution
for which they need to raise resources. A dual GST
will, therefore, be in keeping with the Constitutional
requirement of fiscal federalism.
||How would a particular transaction of goods and services be taxed simultaneously under Central GST (CGST) and State GST (SGST)?
The Central GST and the State GST
would be levied simultaneously on every transaction
of supply 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. Further, both would
be levied on the same price or value unlike State VAT
which is levied on the value of the goods inclusive of
CENVAT. While the location of the supplier and the
recipient within the country is immaterial for the
purpose of CGST, SGST would be chargeable only
when the supplier and the recipient are both located
within the State.
Illustration I : Suppose hypothetically that the rate
of CGST is 10% and that of SGST is 10%. When a
wholesale dealer of steel in Uttar Pradesh supplies
steel bars and rods to a construction company which
is also located within the same State for , say Rs.
100, the dealer would charge CGST of Rs. 10 and
SGST of Rs. 10 in addition to the basic price of the
goods. He would be required to deposit the CGST
component into a Central Government account while the SGST portion into the account of the concerned
State Government. Of course, he need not actually
pay Rs. 20 (Rs. 10 + Rs. 10 ) in cash as he would be
entitled to set-off this liability against the CGST or
SGST paid on his purchases (say, inputs). But for
paying CGST he would be allowed to use only the
credit of CGST paid on his purchases while for SGST
he can utilize the credit of SGST alone. In other
words, CGST credit cannot, in general, be used for
payment of SGST. Nor can SGST credit be used for
payment of CGST.
Illustration II: Suppose, again hypothetically, that
the rate of CGST is 10% and that of SGST is 10%.
When an advertising company located in Mumbai
supplies advertising services to a company
manufacturing soap also located within the State of
Maharashtra for, let us say Rs. 100, the ad company
would charge CGST of Rs. 10 as well as SGST of
Rs. 10 to the basic value of the service. He would be
required to deposit the CGST component into a
Central Government account while the SGST portion
into the account of the concerned State Government.
Of course, he need not again actually pay Rs. 20 (Rs.
10+Rs. 10) in cash as it would be entitled to set-off
this liability against the CGST or SGST paid on his
purchase (say, of inputs such as stationery, office
equipment, services of an artist etc). But for paying CGST he would be allowed to use only the credit of
CGST paid on its purchase while for SGST he can
utilise the credit of SGST alone. In other words, CGST
credit cannot, in general, be used for payment of
SGST. Nor can SGST credit be used for payment of
||Which Central and State taxes are proposed to be subsumed under GST ?
The various Central, State and Local
levies were examined to identify their possibility of
being subsumed under GST. While identifying, the
following principles were kept in mind:
(i) Taxes or levies to be subsumed should be
primarily in the nature of indirect taxes, either
on the supply of goods or on the supply of
(ii) Taxes or levies to be subsumed should be part
of the transaction chain which commences with
import/ manufacture/ production of goods or
provision of services at one end and the
consumption of goods and services at the other.
(iii) The subsumation should result in free flow of
tax credit in intra and inter-State levels.
(iv) The taxes, levies and fees that are not
specifically related to supply of goods & services
should not be subsumed under GST.
(v) Revenue fairness for both the Union and the
States individually would need to be attempted.
On application of the above principles, the
Empowered Committee has recommended that the
following Central Taxes should be, to begin with,
subsumed under the Goods and Services Tax:
(i) Central Excise Duty
(ii) Additional Excise Duties
(iii) The Excise Duty levied under the Medicinal and Toiletries Preparation Act
(iv) Service Tax
(v) Additional Customs Duty, commonly known as
Countervailing Duty (CVD)
(vi) Special Additional Duty of Customs - 4% (SAD)
(vii) Surcharges, and
The following State taxes and levies would be, to
begin with, subsumed under GST:
(i) VAT / Sales tax
(ii) Entertainment tax (unless it is levied by the
(iii) Luxury tax
(iv) Taxes on lottery, betting and gambling.
(v) State Cesses and Surcharges in so far as they
relate to supply of goods and services.
(vi) Entry tax not in lieu of Octroi.
Purchase tax: Some of the States felt that they are
getting substantial revenue from Purchase Tax and,
therefore, it should not be subsumed under GST while
majority of the States were of the view that no such
exemptions should be given. The difficulties of the
foodgrain producing States was appreciated as
substantial revenue is being earned by them from
Purchase Tax and it was, therefore, felt that in case
Purchase Tax has to be subsumed then adequate and
continuing compensation has to be provided to such
States. This issue is being discussed in consultation
with the Government of India.
Tax on items containing Alcohol: Alcoholic
beverages would be kept out of the purview of GST.
Sales Tax/VAT could be continued to be levied on
alcoholic beverages as per the existing practice. In
case it has been made Vatable by some States, there
is no objection to that. Excise Duty, which is presently
levied by the States may not also be affected.
Tax on Tobacco products: Tobacco products
would be subjected to GST with ITC. Centre may be
allowed to levy excise duty on tobacco products over
and above GST with ITC.
Tax on Petroleum Products: As far as petroleum
products are concerned, it was decided that the basket
of petroleum products, i.e. crude, motor spirit
(including ATF) and HSD would be kept outside GST
as is the prevailing practice in India. Sales Tax could
continue to be levied by the States on these products
with prevailing floor rate. Similarly, Centre could also
continue its levies. A final view whether Natural Gas
should be kept outside the GST will be taken after
Taxation of Services : As indicated earlier, both
the Centre and the States will have concurrent power
to levy tax on goods and services. In the case of States,
the principle for taxation of intra-State and inter-State has already been formulated by the Working
Group of Principal Secretaries /Secretaries of
Finance / Taxation and Commissioners of Trade
Taxes with senior representatives of Department of
Revenue, Government of India. For inter-State
transactions an innovative model of Integrated GST
will be adopted by appropriately aligning and
integrating CGST and IGST.
||What is the rate structure proposed under GST ?
The Empowered Committee has decided
to adopt a two-rate structure –a lower rate for
necessary items and items of basic importance and a
standard rate for goods in general. There will also be
a special rate for precious metals and a list of
exempted items. For upholding of special needs of
each State as well as a balanced approach to federal
flexibility, it is being discussed whether the exempted
list under VAT regime including Goods of Local
Importance may be retained in the exempted list
under State GST in the initial years. It is also being
discussed whether the Government of India may
adopt, to begin with, a similar approach towards
exempted list under the CGST.
For CGST relating to goods, the States
considered that the Government of India might also have a two-rate structure, with conformity in the
levels of rate with the SGST. For taxation of
services, there may be a single rate for both CGST
The exact value of the SGST and CGST
rates, including the rate for services, will be made
known duly in course of appropriate legislative
||What is the concept of providing threshold exemption for GST?
Threshold exemption is built into a tax
regime to keep small traders out of tax net. This has
a) It is difficult to administer small traders and
cost of administering of such traders is very
high in comparison to the tax paid by them.
b) The compliance cost and compliance effort
would be saved for such small traders.
c) Small traders get relative advantage over large
enterprises on account of lower tax incidence.
The present thresholds prescribed in different State
VAT Acts below which VAT is not applicable varies from State to State. A uniform State GST threshold
across States is desirable and, therefore, as already
mentioned in Answer to Question 6, it has been
considered that a threshold of gross annual turnover
of Rs. 10 lakh both for goods and services for all the
States and Union Territories might be adopted with
adequate compensation for the States (particularly,
the States in North-Eastern Region and Special
Category States) where lower threshold had prevailed
in the VAT regime. Keeping in view the interest of
small traders and small scale industries and to avoid
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
also be appropriately high.
||What is the scope of composition and compounding scheme under GST?
As already mentioned in Answer to
Question 6, a Composition/Compounding Scheme will
be an important feature of GST to protect the
interests of small traders and small scale industries.
The Composition/Compounding scheme for the
purpose of GST should have an upper ceiling on gross
annual turnover and a floor tax rate with respect to
gross annual turnover. In particular there will be a
compounding cut-off at Rs. 50 lakhs of the gross annual turnover and the floor rate of 0.5% across the
States. The scheme would allow option for GST
registration for dealers with turnover below the
||How will imports be taxed under GST ?
With Constitutional Amendments, 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.
||Will cross utilization of credits between goods and services be allowed under GST regime?
Cross utilization of credit of CGST
between goods and services would be allowed.
Similarly, the facility of cross utilization of credit will
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 which is
explained in answer to the next question.
How will be Inter-State Transactions of Goods and Services be taxed under GST in terms of IGST method ?
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 major advantages of IGST Model are:
a) Maintenance of uninterrupted ITC chain on
b) No upfront payment of tax or substantial
blockage of funds for the inter-State seller or
c) No refund claim in exporting State, as ITC is
used up while paying the tax.
d) Self monitoring model.
e) Level of computerisation is limited to inter-State
dealers and Central and State Governments
should be able to computerise their processes
f) As all inter-State dealers will be e-registered and
correspondence with them will be by
e-mail, the compliance level will improve
g) Model can take ‘Business to Business’ as well as
‘Business to Consumer’ transactions into
Why does introduction of GST require a Constitutional Amendment?
The Constitution provides for
delineation of power to tax between the Centre and
States. While the Centre is empowered to tax services and goods upto the production stage, the States have
the power to tax sale of goods. The States do not have
the powers to levy a tax on supply of services while
the Centre does not have power to levy tax on the
sale of goods. Thus, the Constitution does not vest
express power either in the Central or State
Government to levy a tax on the ‘supply of goods and
services’. Moreover, the Constitution also does not
empower the States to impose tax on imports.
Therefore, it is essential to have Constitutional
Amendments for empowering the Centre to levy tax
on sale of goods and States for levy of service tax and
tax on imports and other consequential issues.
As part of the exercise on Constitutional
Amendment, there would be a special attention to
the formulation of a mechanism for upholding the
need for a harmonious structure for GST along with
the concern for the powers of the Centre and the
States in a federal structure.
||How are the legislative steps being taken for CGST and SGST ?
A Joint Working Group has recently been
constituted (September 30, 2009) comprising of the
officials of the Central and State Governments to
prepare, in a time-bound manner a draft legislation
for Constitutional Amendment.
||How will the rules for administration of CGST and SGST be framed?
The Joint Working Group, as mentioned
above, has also been entrusted the task of preparing
draft legislation for CGST, a suitable Model
Legislation for SGST and rules and procedures for
CGST and SGST. Simultaneous steps have also been
initiated for drafting of legislation for IGST and rules
and procedures. As a part of this exercise, the
Working Group will also address to the issues of
dispute resolution and advance ruling.