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Report of the Task Force on Goods and Services Tax Thirteenth Finance Commission

Dated:- 17-12-2015 - Executive Summary 1. The taxation of goods and services in India has, hitherto, been characterised as a cascading and distortionary tax on production resulting in mis-allocation of resources and lower productivity and economic growth. It also inhibits voluntary compliance. Therefore, it is necessary to replace the existing indirect tax system by a new regime which would foster the achievement of the following objectives: (a) The incidence of tax falls only on domestic consum .....

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preted as a mere tax pass-through, and the tax essentially sticks on final consumption within the taxing jurisdiction. (Para 2.2) 3. The flawless GST recommended by us comprises of the following elements: i. It should be a dual levy imposed concurrently by the Centre and the States, but independently to promote cooperative federalism. (Para 2.4) ii. Both the Central Goods and Services Tax (CGST) and the State Goods and Services Tax (SGST) should be levied on a common and identical base. (Para 2. .....

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principle. As a result, the tax base will shift from production to consumption whereby imports will be liable to both CGST and SGST and exports should be relieved of the burden of goods and service tax by zero rating. Consequently, revenues will accrue to the State in which the consumption takes place or is deemed to take place; (Para 2.13) vii. The computation of the CGST and SGST liability should be based on the invoice credit method i.e., allow credit for tax paid on all intermediate goods o .....

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ST are to be treated separately, taxes paid against the CGST should be allowed to be taken as input tax credit (ITC) for the CGST and could be utilized only against the payment of CGST. The same principle will be applicable for the SGST. Cross utilization of ITC between the CGST and the SGST should not be allowed. (Para 2.16) ix. Full and immediate input credit should be allowed for tax paid (both CGST and SGST) on all purchases of capital goods (including GST on capital goods) in the year in wh .....

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icipal/panchayati raj) including Civil administration, health services and formal education services provided by Government schools and colleges, Defence, Para-military, Police, Intelligence and Government Departments. However, public services will not include Railways, Post and Telegraph, other commercial Departments, Public Sector enterprises, banks and Insurance, health and education services; b. Any service transactions between an employer and employee either as a service provider, recipient .....

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ever, industrial fuels should be subjected only to GST (both Central and State) with the benefit of input credit like any other intermediate good. (Paras 2.27 to 2.32) xii. all inter-state transactions in goods and services should be effectively zero rated by adopting the Modified Bank Model. (Paras 3.1 to 3.19) xiii. the consignment sales and branch transfers across states should be subject to treatment in the same manner as if it was a inter-state transaction in the nature of sale between two .....

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cost and administrative feasibility, small dealers (including service providers) and manufacturers should be exempted from the purview of both CGST and SGST if their annual aggregate turnover (excluding both CGST and SGST) of all goods and services does not exceed ₹ 10 lakh. However, like in most other countries, those below the threshold limit may be allowed to register voluntarily to facilitate sales to other registered manufacturers/dealers, limit competitive distortions and avoid ineq .....

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pt dealers. (Para 2.63) xvii. Certain high value goods comprising of (i) gold, silver and platinum ornaments; (ii) precious stones; and (iii) bullions (hereafter referred to as high value goods ) are prone to smuggling due to high tax incidence thereby generating negative externalities in terms of social and economic disorder. Therefore, we recommend that dealers in such high value items may, subject to the threshold exemption but without the ceiling of ₹ 40 lakh, also be allowed to opt fo .....

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th CGST evasion. (Paras 2.66 and 2.67) xix. The area based exemption in respect of CENVAT should not be continued under the GST framework. In case it is considered necessary to provide support to industry for balanced regional development, it would be appropriate to provide direct investment linked cash subsidy. (Para 2.74) xx. Since the GST is designed to ensure that all producers and distributors are treated as complete pass- through and exports are zero-rated, there should be no exemption for .....

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ectively. In addition, there should be a zero rate applicable to all goods and services exported out of the country. (Paras 5.9 and 5.79) xxiii. The following central taxes should be subsumed in the CGST3: a. Central Excise Duty (including Additional Excise Duties); b. Service Tax; c. Additional Customs Duty (commonly referred to as CVD ); d. Surcharges and all cesses (Para 2.11) xxiv. The following State level taxes, as also recommended by the Empowered Committee (EC) in its discussion paper da .....

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n goods and services should also be subsumed: i. Stamp duty; ii. Taxes on Vehicles; iii. Taxes on Goods and Passengers; and iv. Taxes and duties on electricity. (Para 2.11) xxv. Any amount collected through these taxes on the SIN goods should not be subsumed either in the CGST or the SGST. Similarly any amount which is collected as tax/fee/charge/cess which is essentially in the nature of a user charge for supply of goods and services (including environmental goods and services) also should not .....

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have concurrent jurisdiction. The tax regime for the power sector should be the same as in the case of any other normal good. The electricity duty levied by the States should be subsumed in the SGST. Article 278 and Article 288 of the Constitution should be amended to enable levy of GST on supply of electricity to Government at all levels like any other normal goods. (Para 2.35) 5. The tax on vehicles and the tax on goods and passengers levied by the State Governments should be subsumed in the .....

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d under the GST framework on the basis of the full taxation method. (Paras 2.39 to 2.41) 7. The real estate sector should be integrated into the GST framework by subsuming the stamp duty on immovable properties levied by the States to facilitate input credit and eliminate cascading effect. The new GST regime for immovable property transactions and real estate services should be designed on the lines of the comprehensive taxation method. Therefore, the new regime would comprise of the following e .....

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spect of leasing of immovable property used for both residential and commercial purposes should be charged to GST. Input tax credit would be allowed only in respect of input tax paid on goods and services used for maintenance. No input tax credit should be allowed in respect of tax paid on construction or acquisition of the property or tax paid on improvements thereto. All secondary market transactions in immovable properties (whether constructed before or after the introduction of GST) should b .....

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ses, no input tax credit would be allowed. c. The adjustment for inflation may be made on the basis of the same inflation index as provided for the purposes of determination of capital gains under the Income-tax Act, 1961. d. The new regime will also be subject to the threshold exemption of ₹ 10,00,000/- for small businesses thereby eliminating the problem of excessively large number of landlords seeking GST registration. e. Immovable property will also include land and, therefore, the new .....

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registration fees can be interpreted as user charges for these records keeping functions - which justify small charges. The imposition of large scale indirect taxes through registration and stamp duties constitutes a case of erroneous tax policy. Therefore, States may continue to levy a registration fee at a specific rate not exceeding ₹ 1000 per transaction in immovable property, which is merely a user charge for the IT systems used in property registration. Since the new regime will impa .....

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consumption of commodities without any distortionary cascading effect and the revenue accrues to the State where the final consumer is located. After analysing the various Models, we recommend a Modified Bank Model, which comprises, inter alia, of the following functional components:- (i) In the course of inter-state B2B supply, the seller in the origin State shall collect the SGST leviable on the transaction from the buyer in the destination State as if the sale was within the origin State. (i .....

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credit thereby minimizing the need for issue of refunds. (iv) The buyer in the destination State shall make use of the SGST so paid in the State of origin for making payment of output SGST in the destination State. (v) All registered dealers across the country shall pay the sum due as CGST and SGST to the credit of the Central Government and all other States within one week from the end of the month to which the sale transactions relate. (vi) The Central Government and State Governments shall j .....

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nishing Form No. GST-I, which would be a combined monthly payment and return form for all intra-state and inter-state transactions.. (ix) As far as the registered dealer is concerned, he would be required to make a single payment of the aggregate of all sums due to the Centre and all other States. Even though he would have collected tax in the Origin State for inter-state transactions with buyers in a number of destination States, he can fulfil his obligation of directly remitting the tax so col .....

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nd sales to registered dealers in Form No. GST-I shall be as explained in para 3.12. 9. It is now well-recognised that tax administration is tax policy. An inefficient tax administration will not be able to provide the requisite level of deterrence thereby leading to non-compliance and under performance of the tax regime. Therefore, the full potential of the pure tax regime will remain unrealised. Hence, the structure, design and the business process of the tax administration is an important fac .....

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ries. However, from a taxpayer s perspective all compliance and enforcement procedures under CGST and SGST should be uniform. The Central Government shall establish a common IT infrastructure which will serve the needs of both CGST and SGST. (Para 4.8) 10. The jurisdiction between the CBEC and the State Administration may be divided between the two in such manner that the interface of the taxpayer is confined to one tax administration only. The basis for division could be turnover or any other c .....

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nt Account Number (PAN) followed by a space and two more digits indicating the state code. This number scheme should be publicised widely and should be self-generated after obtaining a PAN. (Para 4.4) 12. The unit of taxation for the purposes of GST should be persons as defined under the Income Tax Act. Consequently, for the purposes of CGST, all production units/branches of a person located anywhere in the country will be treated as a single taxable entity eligible for CGST input credit across .....

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common for both CGST and SGST compliance and it should be mandatory to file this statement electronically on a monthly basis while making payment of taxes. The VAT period should be a calendar month. (Para 4.8) 14. The administration of this levy should be based on audited accounts and not on the basis of any form of physical controls. Since the tax base will be common, there should be a common appellate authority. Similarly, the Authority for Advance Ruling should also be common. Best internati .....

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rol document of VAT. In an invoice based VAT system, the issue of invoices in the proper form is an essential part of the procedure for imposing and enforcing the VAT. Therefore, it should be mandatory for a supplier making a taxable supply to another taxable person to provide a VAT invoice with that supply or the payment for it. The requirement should be enforceable by some penalty. The VAT invoice should be standardised across all states so as to contain a minimum of information about the supp .....

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he country. (Para 5.9) 17. One of the crucial issues relates to the determination of the rate of CGST and SGST. Since the GST is primarily intended as an exercise in reforming the consumption tax in India and not an exercise for additional resource mobilisation through discretionary changes, the CGST and SGST rates should be such rates which would yield the same revenue as collected from the various taxes which will be subsumed in the CGST and SGST , that is, it should be a revenue neutral rates .....

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the highest (Rs.37,43,077 crores) whereas the Shome Index method provides the lowest estimate. All other estimates fall within this range. Since the five estimates are different, we use their average (Rs 31,25,325 crores) as the size of the comprehensive GST base for 2007-08 for the purposes of estimating the RNR. Since the tax base for both the CGST and the SGST are proposed to be identical, we use the same tax base for calculating the RNR for both levies. (Paras 5.22 to 5.75) 19. Given the est .....

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r in the revenue gains from increased compliance and GDP. To the extent, the flawless GST will reduce cascading effect, there will be significant increase in the corporate profits and hence corporate tax collections. Hence, in actual practice, the RNR of 11 percent will be revenue positive. However, all entry and Octroi taxes by state governments and other sub-national Governments are also proposed to be abolished. Accordingly, it is imperative to provide for an alternate buoyant source of reven .....

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tutional Amendment, the collection from 7 percent SGST shall accrue to the State Government and devolution to the third-tier Government should continue to be made on the basis of the recommendations of the State Finance Commission. v. Both the Central and the State Governments may continue to levy taxes, in addition to the CGST and SGST, on the various non-SIN goods as at present. (Paras 5.76 to 5.79) 20. High import tariffs, excises and turnover tax on domestic goods and services have enormous .....

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rall incidence of indirect taxation by removing the many distortionary features of the present indirect tax system. The switchover to a flawless GST will have significant macroeconomic effects. The overall macroeconomic effect of reduction in economic distortions due to GST would be to It would provide an impetus to economic growth. Using CGE Model, the NCAER study commissioned by the Thirteenth Finance Commission estimates the impact of the introduction of a GST which would eliminate all taxes .....

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land, labour and capital. The gains in real returns to land range between 0.42 and 0.82 per cent. Wage rate gains vary between 0.68 and 1.33 per cent. The real returns to capital would gain in the range of 0.37 and 0.74 percent. Further, the study also shows that implementation of GST across goods and services is expected, ceteris paribus, to provide gains to India s GDP somewhere within a range of 0.9 to 1.7 per cent. The corresponding change in absolute values of GDP over 2008-09 is expected .....

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he discount rate, the present value of total gain in GDP is computed as between ₹ 1,469 thousand crores and 2,881 thousand crores. The corresponding dollar values are $325 billion and $637 billion or as much as one-third to one-half of the country s GDP for the year 2009-10. (Para 7.6) 22. Gains in exports are expected to vary between 3.2 and 6.3 per cent with corresponding absolute value range as ₹ 24,669 crore and ₹ 48,661 crore. Imports are expected to gain somewhere between .....

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rect tax system. Similarly, to the extent it will impose a higher burden on the informal economy by reducing the cascading effect, the switchover will also improve horizontal equity. (Para 7.22 and Para 7.29) 24. Prices of agricultural commodities and services are expected to rise. Most of the manufactured goods would be available at relatively low prices especially textiles and readymade garments. The prices of agricultural goods would increase between 0.61 and 1.18 percent whereas the overall .....

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to decline. These include sugar; beverages; cotton textiles; wool, silk and synthetic fibre textiles; and textile products and wearing apparel. (Paras 7.24, 7.27 and 7.28) 25. The changeover to GST is designed to be revenue neutral at existing levels of compliance. Given the design of the flawless GST, the producers and distributors will only be pass through for the GST. Therefore, this policy initiative should witness a higher compliance and an upsurge in revenue collections. This will also hav .....

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there will be an increase in the budgetary outgo. Given the smallness of the size of the compensation, it is expected that there would be a net gain in the tax revenues. This should enable the Central Government to better manage its finances. (Para 7.31 and 7.32) 26. As regards the State Governments, in the first year of implementation of GST and phasing out of the Stamp duty, the States should expect additional revenues to the extent of ₹ 70,000 crores (excluding the incentive amount). Ho .....

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e States will cease to have any independent power to make changes in the design and structure once agreed upon. The existing mechanism for arriving at a collective decision on the structure of the GST should be permanently institutionalised so that changes in the initial design of the GST are collectively agreed and implemented by both the Centre and the States. The Empowered Committee of State Finance Ministers may, upon the introduction of the GST, be transformed into a permanent constitutiona .....

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Thereafter, any change in the structure of the GST (both base and the rates) should be allowed to be carried out only if the Chairman and two-thirds of the State Finance Ministers agree to do so. Consequently, neither the Centre nor any State will have the authority to unilaterally make any change in the agreed design of the GST. However, in the event of a crisis, the Member State or the Centre may take immediate steps to impose a surcharge subject to ex-post facto approval by the Council within .....

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Government shall transfer to the GST Compensation Fund a minimum sum of ₹ 6000 crores per annum over the next five years (i.e. a total amount of ₹ 30,000 crores) if, and only if, the States- a. introduce the flawless GST as recommended by us; and b. follow the road map, as suggested by us, for its introduction; iii) The amounts in the Fund should be used only for the following purposes:- a. To compensate the states for any revenue loss on account of the adoption of the flawless GST; .....

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Revenue, Government of India, Secretary to the Council and any fiscal expert appointed by the Central Government for this purpose. vi) No contribution to the Fund shall be made by the Central Government in any year in which the States fail to adhere to the roadmap for implementation of the GST. vii) The methodology to be used for estimating the revenue loss and the compensation shall be decided by the Council. (Paras 9.3 to 9.6) 31. The States should also be liable to a penalty in case they devi .....

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he GST scheduled for 1st April, 2010 should be postponed by six months to 1st October, 2010. However, the Council should release a timeline of various activities for introduction of GST simultaneously with the announcement for postponement. (Para 10.6) 34. All taxes on goods and services including cesses and surcharges levied at the State and sub-national level should be subsumed in the SGST. However, if for some political economy reasons it is considered expedient to introduce the GST in a phas .....

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a result, transactions in real estate will be subject to a dual levy like in the case of SIN-goods; b) In the year 2011-12, same as (a) above, with the modification that the rate of stamp duty should be reduced to 2 percent; and c) In the year 2012-13, same as (a) above, with the modification that- i. Stamp duty should be eliminated and replaced by a Registration Fee at a specific rate; ii. the revenues attributable to 2 percentage point out of the 7 percentage point of SGST should be set apart .....

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n of the Fiscal Responsibility and Budget Management Act, 2003 observed that high import tariffs, excises and turnover tax on domestic goods and services have enormous cascading effects, leading to a distorted structure of production, consumption and exports. This problem can be effectively addressed by shifting the tax burden from production and trade to final consumption, and from savings to consumption. The existing tax system introduces innumerable distortions resulting in inefficient resour .....

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tination-based value added tax on all goods and services is the most elegant method of eliminating distortions and taxing consumption. Under this structure, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax essentially sticks on final consumption within the taxing jurisdiction4. Therefore, the Task Force recommended the introduction of a destination based VAT type dual Goods and Services Tax (hereafter referred to as GST ). 1.2 In gene .....

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has two basic rates of 4 percent and 12.5 percent. There is an exempted category and a special rate of 1 percent for a few selected items. The items of basic necessities and goods of local importance are put under the exempted category. Special rate of 1 percent is applicable for Gold, silver and precious stones. The 4 per cent rate applies to other essential items and industrial inputs. The 12.5 percent is residual rate of VAT applicable to commodities not covered by other schedules. There is .....

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d cascading effect on account of break in the input-credit chain. The introduction of VAT is, at best, a toddler s tentative step towards indirect tax reform. 1.4 As a step towards the eventual introduction of the GST, the Centre also took immediate steps to integrate the CENVAT and the services tax and expand the scope of the service tax in a phased manner. Recognising the need for a giant leap to cleanse the indirect tax system of its distortionary impact on the economy, the Finance Minister, .....

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necessary to know the structure of the Goods and Services Tax which will be in place. The authority to design the structure of the GST Model jointly vests in the Empowered Committee of States Finance Ministers and the Central Government. The Empowered Committee brought out its preliminary views on the design of the GST in a paper7 of April, 2008 and the Union Government gave its response to these proposals. After further consultations, the Empowered Committee presented the first discussion pape .....

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ng comprehensive discussion of the issues, this Report of the Task Force will make useful contribution towards the Union and the State Governments reaching such a grand bargain so that we have a world class GST regime in India. CHAPTER-II Goods and Services Tax: The Model 2.1 In the absence of a firm Model of the GST, it is necessary for us to construct a comprehensive Model in the light of the roadmap prepared by EC, the views expressed by the Central Government, the ongoing discussion on unres .....

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attaining the objectives set out above, we recommend a VAT type Goods and Services Tax (GST). In the context of the design of the GST, some of the important issues are discussed in the following paragraphs. a. Single GST versus Dual GST 2.3 In a federal country like India where the power to tax domestic trade is divided between the Central Government and the State Government, the designing of a destination based GST becomes extremely complicated. A conventional national GST8 cannot be implemente .....

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ently. It will have two components: one levied by the Centre (hereinafter referred to as CGST), and the other levied by the States and Union Territories (UTs) [hereinafter referred to as SGST]. (b) Both the CGST and SGST will operate over a common base. That is, the base will be identical. b. Type of GST - Consumption, income or production 2.5 There are three possible variants of VAT, depending upon what macro-aggregate the government wants to tax: gross income, net income or consumption. A gros .....

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l good. A consumption type VAT goes a step further in that only final consumption is treated as the final use of a good; full credit, therefore, is given for taxes paid on capital goods as well, in the year of purchase. 2.6 The consumption base has been a much favoured tax base from both the perspective of economic neutrality and ease of administration. It is also the only VAT that is equivalent to a retail sales tax, in that it restricts the burden of the tax to final consumption goods. In effe .....

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does not discourage investment. 2.7 From an economic growth perspective, both the income and gross product VAT have an anti-investment bias. This is all the more significant in countries that impose substantial income taxes. An income tax taxes saved income and hence investment twice-one as the income is being earned and again as the rewards for saving appear as interest and profit, which are again taxed. Since income tax is fairly well established in India, we recommend that- (a) The Centre an .....

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ed between goods and services. A registered dealer will be required to collect taxes on every invoice irrespective of whether the supply is for goods or services. Therefore, no classification of goods and services should be provided for in law. This will eliminate all classification disputes. 2.8 In the course of discussion with officials in the Department of Revenue a view was expressed that in the context of service tax, it should be levied on all services but there should be a positive list o .....

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ith the introduction of the GST no distinction is required to be made between goods and services. Therefore, the issue relating to separate taxation of services does not arise. Fourthly, under the GST regime, it is not necessary for the assessing officer to know what he should be taxing. The design should be so structured that he would need to know that all supply transactions will attract GST except those prescribed. Since the negative list is intended to be a very small list, it would not be d .....

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iew of the fact that the CGST and SGST are intended to be levied on consumption of all goods and services, these two taxes must subsume all taxes presently levied on various goods and services by the Centre and the States, respectively. For the purposes of identifying the taxes which needs to be subsumed in the CGST and SGST, we recommend that the following principles9 should be adopted:- (a) Taxes or levies to be subsumed should be primarily in the nature of indirect taxes, either on the supply .....

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T. 2.11 Based on the aforesaid principles, we recommend the following:- a. The following central taxes should be subsumed in the CGST10: 1. Central Excise Duty (including Additional Excise Duties); 2. Service Tax; 3. Additional Customs Duty (commonly referred to as CVD ); 4. Surcharges and all cesses b. The following State level taxes, as also recommended by the Empowered Committee (EC) in its discussion paper dated 30th April, 2008, should be subsumed in the SGST:- i. VAT/Sales Tax (including C .....

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Vehicles; iii. Taxes on Goods and Passengers; and iv. Taxes and duties on electricity. d. Any amount collected through these taxes on the SIN goods should not be subsumed either in the CGST or the SGST. Similarly any amount which is collected as tax/fee/charge/cess which is essentially in the nature of a user charge for supply of goods and services (including environmental goods and services) also should not be subsumed under the CGST or SGST. Further, both Centre and the States should take ste .....

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s TF-taxes . c. Origin versus Destination Principle 2.13 A GST can be implemented under either the origin or the destination principle. Under the former, the GST is imposed on the value added of all taxable products that are produced domestically; under the latter, the GST is imposed on the value added of all taxable products that are consumed domestically. Obviously, the two principles are identical in a closed economy. In an open economy, the difference between them lies solely in their treatm .....

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ax base will shift from production to consumption whereby imports will be liable to tax and exports will be relieved of the burden of goods and service tax. Consequently, revenues will accrue to the State in which the consumption takes place or is deemed to take place; b. international exports should be zero rated; c. international imports should be subject to both CGST and SGST at the time of importation irrespective of whether or not the imported goods are produced domestically; d. SGST on B2B .....

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orting the goods is located regardless of where the goods enter the country. d. Method of Computation 2.14 There are essentially three methods of computing VAT liability: addition method, subtraction method and the credit method (also known as the invoice method). The principal debate concerning choice of methods in computing VAT liability is normally restricted to the credit and subtraction methods. The credit method requires that the amount of VAT charged be explicitly stated on the invoice as .....

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ethod, the amount of VAT connected with a taxable transaction is not required to be explicitly stated on the associated invoice. 2.15 The credit method therefore, is more transparent, whereby the effective tax rate on any commodity is easily identifiable as the rate applicable to the last transaction in that commodity. In the case of the subtraction method, the rate of VAT is not separately indicated and to this extent there is a loss of transparency. Further, since the effective rate under the .....

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ces on the basis of invoices issued by the supplier. As a result, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax will effectively stick on final consumption within the taxing jurisdiction. This will facilitate elimination of the cascading effect at various stages of production and distribution. iii. The CGST and SGST are to be credited to the accounts of the Centre and the States separately. iv. Since the CGST and SGST are to be tre .....

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the gradual introduction of VAT and the feasibility of extending credit for VAT on fixed assets,14 depreciation rates were rationalised. Later in some countries, VAT was used to slow down the development of capital intensive production processes. To this end, they disallowed the credit for the VAT on fixed assets (defined as all assets which are subject to depreciation) and non-material assets, like technical know-how. The case for allowing full and immediate credit for the VAT on capital goods .....

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al competitiveness. Hence, it serves as a disincentive to exports. 4. Capital goods need to be defined thereby creating scope for considerable disputes. 5. Denial of immediate credit for VAT on capital goods leads to implicit taxation. This is further aggravated if excess credits are not refunded but must be applied against VAT on future sales. Further, in the face of inflation, the real value of the tax credits carried forward declines rapidly becoming equivalent in effect to a tax on fixed ass .....

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entially loss in revenues. The estimated total credit for CENVAT paid on capital goods and CVD on imported capital goods in 2002-03 was ₹ 8,500 crore and could be expected to increase to about ₹ 9,000 crore in 2004-05. Since the credit is allowed over a period of two years, the loss in revenues is, therefore, estimated to be ₹ 4,500 crore and restricted to the transitional year only. However, in the context of revenue gain from reduction in depreciation rates proposed in the se .....

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uld also attract GST liability like all other goods and services. f. Exemption from GST 2.19 Suppliers of goods and services are either taxable or tax exempt. By definition, exemption relieves the exempt trader s value added from the tax, but all his purchases including capital goods are taxed. Exemption will therefore increase the amount of tax finally paid on intermediate goods-the opposite effect that the exemption was supposed to provide. In the case of final goods, exemption eliminates the .....

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ro rating, in theory, is the only way to ensure that a product is truly free of VAT, since any tax paid would be credited on the last sale. The considerations influencing the choice between zero rating and exemption are: (1) The desirability of freeing users of specific goods or services completely from VAT (as with zero rating), or only partially (as with exemption); (2) The merits of excluding certain firms from the registration and filing of returns. Even from the perspective of firms themsel .....

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tax base, however, exempting certain goods may become preferable to zero rating them. In addition, the administrative burden of the zero rating procedure can be onerous. Zero-rating implies build up or payout of refunds, which may entail huge administrative costs, requiring verification and disbursement of refund cheques. Furthermore, there is the issue of controlling evasion or fraud. Zero rating creates an incentive for sellers to exaggerate the values of their final sales and to correspondin .....

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tax regime of moderate tax rates. 2.23 In general, a case is often made for exempting food on the consideration that the levy of GST would have a significant impact on those living at or below the subsistence levels. Food constitutes a large variety of items and attempt at any definition will lead to complexity in legislation. If the exemption is extended to all categories of food items, the revenue base will shrink significantly and the standard rate would need to be substantially higher. This .....

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all retail stores who would even otherwise remain exempt because of the threshold exemption for dealer registration. A lower rate for food in contrast to the relatively high standard rate would mean a two rate structure and gradual expansion of the lower rate category as is the international experience. As a compromise, we recommend that any food item which is covered under the public distribution system should be exempt regardless of the outlet through which it is sold. This principle may be ap .....

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nal burden on the consumer since the expenditure would be borne by the insurance company and can be claimed as input credit. Essentially, there would be zero incidence of GST on health care. Consequently, there would be opportunities for reduction in the price of health care. The second approach is the exemption approach which does not allow for full rebating of input taxes and therefore, effectively there is a significant element of GST embedded in the price of the final health care. Therefore, .....

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the considerations discussed above. 2.25 The considerations discussed in the context of health services similarly apply to education services except that these services are not covered by insurance. In fact, the problem is more complex since the sector is more diverse covering child care facilities, formal education (both school and college levels), professional education, occupational programs, diploma programs and recreational programs. Therefore, defining educational services is more complex .....

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there should not be any exemption from CGST or SGST. If for some reason, it is considered necessary to provide exemption, the Centre and the States should draw up a common exemption; b. The common list of exemption should be restricted to the following:- i. All public services of Government (Central, State and municipal/panchayati raj) including Civil administration, health services and formal education services provided by Government schools and colleges, Defence, Para-military, Police, Intelli .....

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ation services provided by non-Governmental schools and colleges; and v. health services provided by non-Governmental agencies. g. Treatment of petroleum products 2.27 One of the classes of products whose consumption needs to be checked to restrict negative externalities is petroleum products. The entire range of petroleum products is subject to multiple taxation at both the Central and State level. As a result, the incidence of tax on products essentially used as intermediate inputs cannot be e .....

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ne (collectively referred to as emission fuels ) are used both as intermediate inputs and in final consumption. The emission fuels generate negative externalities, whose consumption needs to be checked. Therefore, generally, such emission fuels are subject to an excise against which no input tax credit is allowed in respect of inputs (including capital goods) used in the manufacture of such fuels. However, in large number of cases, such emission fuels are also used as intermediates. As a result, .....

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n the case of consumption of transportation fuels by the Ministry of Railways, the State Road Transport Corporations, the Airlines, truckers, taxi operators and a dealer16 trading in these goods on the consideration that the consumption is essentially intermediate in nature and the unlikelihood of these entities indulging in purchase of bogus invoices. However, in the case of truckers and taxi operators, the benefit of input tax credit has the potential of misuse and therefore credit may be allo .....

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ion fuels, all tobacco goods and alcohol are also SIN-goods17. Therefore, on the same analogy, we recommend a dual levy of GST and excise on the entire range of these goods. As a general rule, no input credit will be allowed to any person in respect of GST on these goods since they are predominantly used in final consumption. However, this general rule should be relaxed in the case of a dealer trading in these goods on the consideration that the consumption is essentially intermediate in nature. .....

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owever, unlike petroleum products, natural gas does not generate negative externalities. Therefore, the tax regime for natural gas should be distinctively different from the regime applicable to petroleum products. Accordingly, natural gas should be subjected only to GST (both Central and State) with all the benefits of input credit as in the case of other normal goods. We recommend accordingly. j. Treatment of the power sector 2.34 Power is one of the most important inputs in the process of pro .....

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ded in the cost of the power equipments. This problem is further compounded by the absence of a levy on power generation, distribution or consumption thereby denying input tax credit even for equipments and stores which are subject to CENVAT. Similarly, at the State level, there is no benefit of input tax credit in respect of the State VAT on inputs used in the process of power generation and distribution. The cumulative impact of the taxation regime at both the Central and State level is signif .....

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er which both the Central and State Governments would have concurrent jurisdiction. (iii) The tax regime for the power sector should be the same as in the case of any other normal good. (iv) Article 278 and Article 288 of the Constitution should be amended to enable levy of GST on supply of electricity to Government at all levels like any other normal goods. 2.36 The inclusion of the power sector in the GST model would significantly reduce the cost of power projects and consequently the cost of .....

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s are also subject to multiple taxation at both Central and State level. The present regime leads to cascading effect of embedded taxes on the downstream industry which do not get rebated thereby leading to enhanced cost for such industries. Hence, it is imperative to rationalise the taxation regime for transport services. 2.38 Accordingly, we recommend the following: (i) The tax on vehicles and the tax on goods and passengers levied by the State Governments should be subsumed in the GST. (ii) A .....

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g practice since it is proposed to subject the use of these vehicles to tax at higher rates through excise on emission fuels. Accordingly, the present practice of levying higher rates of taxes on vehicles should be done away. l. Treatment of financial services 2.39 The financial sector constitutes a significant component of the gross domestic product and also private final consumption. Further, in developing countries, taxation of consumption of financial services is viewed as progressive becaus .....

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ervices and the distortionary impact of compensatory and ad hoc taxes, we recommend that the consumption of financial services should be comprehensively taxed under the GST framework. 2.40 We recognise that there are predominantly three alternative methods for levying GST on financial services: the exemption method, the zero rating method and the full taxation method. While the exemption method and the zero rating method reduces the potential GST base and also distorts consumption across financi .....

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inistrative and compliance consideration. m. Treatment of immovable properties 2.42 The case for including the real estate sector in the tax base for the GST rests on a number of competing reasons. Firstly, the construction and exploitation of real estate comprises one of the larger sources of gross domestic product. Therefore, any exclusion of the real estate sector would lead to significant reduction in the tax base. This would lead to an increase in the GST rate for other sectors thereby dist .....

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els of Government. At the Central Government level, there has been an attempt to introduce service tax on housing services and allow credit for inputs used for the supply of such services. However, at the State level input tax credit is not available for all taxes, thereby leading to significant cascading effect. Further, there is no incentive to the purchaser to obtain an invoice. Consequently, the audit trail of such transactions is lost and producers of inputs are also encouraged to suppress .....

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on immovable property transaction are high. Therefore, the effective rate on value addition is exorbitant, thereby encouraging under-reporting of transactional value and evasion of stamp duty. Since stamp duties are directly or indirectly related to other taxes, any stamp duty evasion triggers a similar adverse response to compliance with other taxes. As with other transaction taxes, it generates a bias in favour of not selling, and inhibits the development of a liquid secondary market. In the .....

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overnment, a reduced role for black money, and a reduced role for the criminal element in the real estate sector and significantly lowering of costs by mass housing. 2.47 Keeping in view the implications of the different methods for taxing real estate and housing services discussed in Annexe-I, we recommend the following strategy for integrating the real estate sector into the GST framework: i. The stamp duty on immovable properties levied by the States should be subsumed in the GST to facilitat .....

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ed, the GST should be applied on the consideration received at first transfer or sale. In both cases, credit should be allowed in respect of input tax paid on raw materials used in construction. (b) Rental charges received (excluding imputed rental values) in respect of leasing of immovable property used for both residential and commercial purposes should be charged to GST. Input tax credit would be allowed only in respect of input tax paid on goods and services used for maintenance. No input ta .....

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of the property after making adjustment for inflation. If the property has been acquired by the seller before the introduction of GST, the GST should be levied on the difference between the sale price and the cost of acquisition and improvements thereto. In such cases, no input tax credit would be allowed. (d) The adjustment for inflation may be made on the basis of the same inflation index as provided for the purposes of determination of capital gains under the Income-tax Act, 1961. (e) The ne .....

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in the same manner as other inputs used in construction. iii. The State Governments would continue to perform essential asset registry functions, and enforces property rights associated with them. These functions are comparable to those of a depository on the markets. The registration fees can be interpreted as user charges for these records keeping functions - which justify small charges. The imposition of large scale indirect taxes through registration and stamp duties constitutes a case of er .....

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and between rented and self occupied properties. It will be administratively less burdensome since no distinction would be required to be made between residential and commercial properties. Similarly, the treatment of input tax credit will be relatively simple with the tax paid on construction/acquisition of the property being allowed as a set off, after inflation indexing, against the GST on resale of the property and any tax paid on minor repairs and maintenance being allowed as set off again .....

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the potential for creating an efficient secondary market in immovable property and real estate services which will facilitate better price discovery. The role of the underworld elements associated with this sector will be eliminated. Since the new regime will impart greater transparency through market mechanism, it will also strike a major blow to the underground economy. Therefore, it is imperative that the reform of the present system of taxation of immovable property transaction and real esta .....

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to suppliers and the VAT charged to customers. 2.50 In practice, most countries with value added taxes impose the tax at all stages and normally allow immediate deduction of taxes on purchases by all but the final consumer. These features give value added taxes their main economic advantage, that of neutrality. The full right to deduction of input tax through the supply chain, with the exception of the final consumer, ensures the neutrality of the tax, whatever the nature of the product, the st .....

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uties, although in some countries collection is postponed until declared on the importer s next VAT return. Deduction of the VAT incurred at importation, in the same way as input tax deduction on domestic supply, ensures neutrality and no distortion of international trade. This implies that the total tax paid in relation to a commodity is determined by the rules applicable in the jurisdiction of its consumption and therefore all revenue accrues to the jurisdiction where the sale to the final cus .....

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he jurisdiction where the service or the intangible property is consumed or used, irrespective of the contract, payment, beneficial interest or the location of the supplier and customer at the time of the supply. Whether intangible property is used or a service is actually performed in a jurisdiction is essentially a matter of fact. However, it is not always easy to determine where services and intangibles are likely to be consumed. The increasing global nature of businesses and communication te .....

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rmining the place of taxation (or place of supply) in the case of services is as follows:- a) In the case of a sale of real property, the place of supply is the jurisdiction in which the property is located. Similarly, services directly connected with real property (i.e services provided by real estate agents or architects) are also taxed in the place in which the property is located. b) In the case of mobile services (that is, passenger travel services, freight transportation services, telecomm .....

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of location/residence of the recipient; and iv. Place of location/residence of the supplier. 2.55 In defining the place of supply of services and intangible property, a distinction is often made between supplies made to businesses (B2B) and final consumers (B2C). In general, the place of supply in the case of B2B transaction is the place where the recipient is located or established regardless of where the services are performed or used. This is particularly in the case of intangible services li .....

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such services to non-residents is zero-rated. 2.56 In addition to the above, there are a variety of other complex cross-border transactions for which supplementary rules are required to ensure uniformity and consistency across jurisdictions. They relate to global transactions(or master service agreements) for individual supplies to legal entities of a corporate group around the world, triangular transactions, supplies among branches and between branches and head office, and cost reimbursement/ .....

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tify the place in which the recipient is established/ located. In general, it would be desirable to tax B2B supplies of services and intangibles in the State of destination, and not of origin. 2.58 Given that any tax on B2B supplies would generally be fully creditable, excessive sophistication would not be warranted for defining the place of destination of such supplies. For multi-establishment business entities, the place of destination should be defined as the place of predominant use of the s .....

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he services are performed. If there is no unique place of performance of the service, the place of supply could be defined as the State where the supplier s establishment most directly in negotiation with the recipient is located. 2.60 The rules relating to the place of supply of goods and services, discussed above, are in conformity with best international practice and expert advice. Therefore, we recommend that the Centre and the States may consider framing the rules on the basis of the guidel .....

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al to collect revenues from a large number of small taxpayers. Hence, keeping in view the compliance cost and administrative feasibility, small dealers (including service providers) and manufacturers should be exempted from the purview of both CGST and SGST if their annual aggregate turnover (excluding both CGST and SGST) of all goods and services does not exceed ₹ 10 lakh. However, like in most other countries, those below the threshold limit may be allowed to register voluntarily to faci .....

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e incidence of tax on the poor who generally make purchases of their goods and services from small dealers and secondly to reduce administrative burden of dealing with a multitude of small dealers who account for a disproportionately low share in the revenues. Hence, allowing some states to adopt a lower threshold implies that the poor in these states will bear the incidence of tax on their consumption unlike those similarly placed in other states and therefore, would be inequitable. This will a .....

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input credit should be allowed against the compounded levy or purchases made from exempt dealers. 2.64 The Group recognizes that certain high value goods comprising of (i) gold, silver and platinum ornaments; (ii) precious stones; and (iii) bullions (hereafter referred to as high value goods ) are prone to smuggling due to high tax incidence thereby generating negative externalities in terms of social and economic disorder. Therefore, we recommend that dealers in such high value items may, subje .....

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the onerous compliance burden under the CENVAT regime particularly in the context that, in general, the small scale industries are managed by one or two entrepreneurs with the support of a handful of semi-skilled office staff. 2.66 In the context of the GST, we have recommended the reporting of payment and transaction information of both CGST and SGST through the combined Form No. GST-I. Therefore, in any case the small scale industry has to comply with the reporting of payment and transaction .....

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e new GST framework, we also recommend that the scrutiny/audit of the small scale industry should be conducted only by the state tax administration. However, the State tax administration may seek the assistance of the central tax administration or any other state tax administration if the operations of the small scale industry transcend the state boundaries. Since the CGST and the SGST are proposed to be levied on an identical GST tax base, the outcome of any investigation impacting SGST will al .....

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They are difficult to administer and prone to misuse. Moreover, durability of investment attracted by such measures beyond the exemption period is also doubtful. 2.69 The Prime Minister s Economic Advisory Council, which had recently examined the issue of area based exemption in the context of its impact on pharmaceutical industry, has observed that:- The policy of granting area based exemptions was ill advised. It created a host of distortions. We have to design and introduce subterfuges to ne .....

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0 Further, the existing exemption for Uttranchal and Himachal has been objected to by many States. In particular, Chief Ministers of Haryana, Uttar Pradesh and Punjab have often expressed their opposition to such exemptions as these had the effect of diverting industries to Himachal Pradesh and Uttranchal. 2.71 Para 3.3.2.(viii) of the draft of An Approach to the 11th Five Year Plan has also commented on the undesirability of the area based exemptions. To quote :- The existing incentive programm .....

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ramme for roadways and railway development in these States. 2.72 The area based exemptions erode the tax base. The revenue foregone on account of area-based exemptions is estimated to be ₹ 8,073 crores in 2007-08. 2.73 Further, the case for providing area based exemption is extremely weakened in the face of our recommendation for a sharp reduction in the combined rates of CGST and SGST and the ease of compliance through a combined transaction reporting and payment Form No. GST-I. 2.74 In v .....

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case for allowing any form of incentive to the developers of, or units in, the Special Economic Zones. We recommend accordingly. CHAPTER - III Treatment of Inter-State transactions 3.1 The Indian Constitution as it originally stood envisaged taxation of interstate sales only in the state where it was consumed. Unfortunately, this led some states to issue notices to dealers not resident within their jurisdictions to file returns. To bring some order in the matter, a law was enacted by the Parliam .....

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ely eliminate it by 1st April, 2010. Accordingly, the CST was reduced to 3 per cent. in 2007-08 and subsequently to 2 per cent. in 2008-09. However, on account of revenue implications, it has now been decided to continue with the CST at the present level of 2 per cent until GST is introduced. 3.2 The rate of CST is 2 per cent if the sale is between two registered dealers across states and the transaction is documented through the use of C Forms . The latter is issued by the importing state to th .....

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only when there is a sale, no tax is attracted when goods move from one state to another as transfer between branches of the same enterprise or on a consignment basis. 3.3 The CST constitutes a distorting factor in the location of industries and the flow of internal trade, impeding the growth of a truly common market in the country. It also causes inter-jurisdictional inequity and reduces the international competitiveness of exports. Further, the administration of and compliance with the CST is .....

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e CST, the States have come to acquire a vested interest in maintaining the status-quo since it account for about 15 per cent of their tax revenues. 3.4 In the context of the GST, it is necessary to resolve the problem relating to the treatment of inter-state sales/transfers in a manner that the incidence of the tax falls on the consumption of commodities without any distortionary cascading effect and the revenue accrues to the State where the final consumer is located. 3.5 The Empowered Committ .....

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success of every model depended on the following pre-requisites:- a. E-filing of return every month with dealer wise transaction details b. E-payment of taxes c. National Portal for access to information by member States and dealers d. National agency for overseeing the flow of information and taxes e. Strong IT infrastructure for the above issues f. The intra and inter state rates of tax should be equal to avoid evasion and camouflaging the intra state transactions as inter state transactions. .....

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GST in the course of interstate transaction in goods and GST for the nation. . 3.8 The Road Map to GST released by the Empowered Group of Ministers proposed the Bank Model as a mechanism to deal with inter-state transaction of goods and services. The functional components of the Model are :- a. Collection of SGST by the seller of the selling State. b. Remittance of SGST collected by the seller to the respective buying State s Account in the designated bank, along with the details of buyers and i .....

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: i. This model would ensure evasion free tax environment and easy administration of credit flow to the buyers in the buying States. ii. This model envisages a level of automation that would ensure capturing all the information relating to interstate transactions in the exporting state and transferring the same to the importing state. iii. This model requires the bank to evolve an IT infrastructure to communicate electronically with all concerned in respect of interstate transaction of goods thr .....

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ting States and wait for the tax money so paid till remittance by the sellers and transfer by the bank to their exchequer?; and why can t the Importing States levy SGST on the interstate purchases treating them as import from outside for commencement and flow of SGST credit in the importing States?. Therefore, the Group abandoned the Bank Model. 3.11 We have also analysed the various Models presented in the Report of the Working Group. The IGST Model recommended by the Group, while requiring a I .....

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a complex accounting of input tax credit and apportionment between CGST and SGST which would considerably enhance both compliance and administrative burden. Further, the Centre and the States may also have to compensate each other at different points in time. It also envisages the establishment of a centralized agency for settlement of accounts between the Centre and the States. Therefore, we do not support the adoption of the IGST Model. We would recommend a modified version of the Bank Model ( .....

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he transaction) and his business identification number (BIN). (iii) The seller shall use the input SGST for payment of the output SGST on both intra-state and inter-state transactions. To the extent total output SGST is in excess of the input SGST, the same shall be paid into any of the authorised bank in the prescribed manner. This will ensure a self-adjustment mechanism for input credit thereby minimizing the need for issue of refunds. (iv) The buyer in the destination State shall make use of .....

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o receive all information relating to purchase and sale by registered dealers. (vii) The nodal bank shall host the IT infrastructure, provide payment gateway to all banks in India and provide screen-based upload or file upload facility for receiving payment and transaction information. (viii) It would be mandatory for all registered dealers to make the payment by electronically furnishing Form No. GST-I, which would be a combined monthly payment and return form for all intra-state and inter-stat .....

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GST-I. This mechanism will have the benefit of extremely low compliance cost. (x) It would be mandatory for all registered dealers to make electronic payment of CGST and the SGST by electronically remitting it in to the RBI, SBI or any authorized bank. (xi) The procedure for making payment of CGST and SGST and furnishing information relating to transactions of both purchases from and sales to registered dealers in Form No. GST-I shall be as under:- (a) Seller will open Nodal Bank website or appr .....

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for sale to registered dealers and purchases from registered dealers is less than 10, the Seller shall enter the details of such individual invoices online (Invoice number, date of the invoice, BIN of the registered purchaser or seller and amount of GST collected or paid for the Invoice). If the number of invoices for sale or purchase to registered dealers is more than 10 , the seller can enter these details offline and upload the file. (d) The total of GST will be computed automatically and Se .....

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bank for debit to the Seller s bank account. Nodal Bank will NOT transmit any information about the Invoices to the bank. (g) The Internet banking website of the bank will be opened automatically and the Seller will have to enter his login and password relevant for internet banking to access his bank account. Then the total GST amount as per the challan will be debited to his account and credited to Government account by the bank. (h) The bank will confirm to Nodal Bank details of successful dep .....

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unt to verify the corresponding entry from the nodal bank website. (xii) Input credit for GST would be available to the Buyer against that Invoice by using the combination of Seller BIN, Invoice Number, date of invoice and Amount of GST for that Invoice (xiii) All banks receiving payments from the registered dealers would be required to transfer the funds to the Nodal Bank on T+1 basis. The Nodal Bank in turn would credit the funds to the respective States. (xiv) The software can be designed in .....

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would not be dependent on any other State for collection of revenue. (xv) There will be no requirement for the buyer to make pre-payment of taxes separately for each transaction in the destination State. It will also eliminate the problem of extensive documentation like the C Form in the case of CST. (xvi) Since every registered dealer would be required to furnish information relating to both the purchases and sales to registered dealers, this would enable automatic matching of input credit clai .....

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evasion proof as the Bank Model. Since the Model envisages a single payment mechanism through a combined monthly payment-cum-return Form No. GST-I, the registered dealer can develop the data relating to the transactions on a real time basis over the entire month and eventually upload the file anytime in the first week of the following month. As a result the compliance cost would be minimal. 3.14 The IT infrastructure would be hosted by the Nodal Bank and the State tax administration would be req .....

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Bank Model was abandoned by the Working Group in view of an alarm set off by few States. In this context, it must be recognised that trade flow is, in general, a two way process between States. Buyers in the destination State have to pay tax to the sellers in the origin State in all cases. Therefore, if buyers in State A have made payment to sellers in State B and, therefore, certain amounts have become due to State A , there would be similar situations where sellers in State A would be required .....

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cy. It has been well documented that border check posts are extremely inefficient mechanisms for tax collection since they slow down the movement of goods across borders which in turn translates into high cost of inventory management. The deadweight loss on account of such economic inefficiencies far outweighs the loss on account of float allowed to the sellers in the origin State. Therefore, we are of the view that the apprehensions expressed by few States on the Bank Model are exaggerated in t .....

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l does not require any separate clearing house mechanism as under the Bank Model. Under this Model, there is no possibility of default or failure on the part of the Sellers of the selling State to remit the SGST collected to the destination State since a single consolidated payment is required to be made in respect of all CGST and SGST liability. 3.17 In some quarters, doubts have been expressed about the efficacy of the Bank process in transfer and reconciliation of SGST remittances and its abi .....

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e the Income tax Department s database. We believe other large IT firms like Infosys and WIPRO also have similar software design and IT project executing capacity. The Nodal Bank can hire any such firm for developing the IT structure for GST payment and transaction information management. Therefore, such doubts are entirely misplaced. 3.18 Another apprehension expressed relates to the refund of accumulated Input tax credit on the basis of interstate transaction of goods which would continue to b .....

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ing of returns (Form No GST-I), along the same lines as the CPC established by the Income tax Department at Bangalore. This will fully meet the challenge of issuing refunds. 3.19 Another argument advanced against the Bank Model is that there is no international precedence (even in EU) in favour of adopting this model to the complexities of Indian situation. Unlike in the EU, we have a common thread in the form of CGST which binds inter-state transactions. This, coupled with the system of consoli .....

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f sale between two independent dealers. iii. the function of all state border check posts should be reduced to checking contrabands by setting up large scanners for trucks to pass through without any need for physical verification. iv. The cost of the scanners should be entirely borne by the Central Government. v. All check-posts should be jointly manned by both States so as to reduce the number of check-posts and enhance efficiency in the road movement of goods. CHAPTER - IV Administrative Stru .....

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GST we are not embarking on an exercise of comprehensively designing all the elements of the tax administration. We intend to restrict our recommendations only to a few important issues. a. Registration of taxpayers 4.3 The creation of an efficient taxpayer information system for the purposes of administering a VAT necessarily entails the creation of a taxpayer s master file through a mechanism of registration of all dealers liable to GST. Registration brings a person within the control of the .....

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s and manufacturers. Since the operation of a successful VAT entails coordination between the tax administrations at both the national and the state level through computerised information sharing we recommend the following: i. All persons with annual aggregate turnover of goods and services exceeding ₹ 10 lakh (excluding CGST and SGST) should be required to register and obtain a GST registration number. Persons with lower turnover may be allowed an option to register. ii. The GST registrat .....

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tes in which he operates. iv. The registrant dealer should be required to furnish a form, only by way of information, indicating the registration number for every State in which he operates. He should not be allowed to use the registration number, though self-generated, unless he has furnished the form. v. Since the number is PAN based, it is not necessary to have any pre-registration verification. However, the states may, if necessary, undertake post-registration verification to eliminate any p .....

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ii. It should be mandatory for all registrant dealers to obtain an e-mail ID and also open an internet banking account with any bank. The form must capture the e-mail ID and the internet bank account number. ix. All persons with annual aggregate turnover of goods and services exceeding ₹ 10 lakh (excluding CGST and SGST) would be required to compulsorily acquire the 18 digit identification number. Persons with lower turnover will have the option of obtaining the identification number. 4.5 .....

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control document of VAT. In an invoice based VAT system, the issue of invoices in the proper form is an essential part of the procedure for imposing and enforcing the VAT. Typically, under the VAT laws the allowance of a credit for input tax is conditional on the existence of a VAT invoice issued during the period for which the credit is claimed. An invoice is also required by the tax authorities to audit the collection of VAT. Further as indicated above, the VAT invoices form the primary sourc .....

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minimum of information about the supply being invoiced. c. Periodicity of GST Payment 4.7 Since the amount of VAT collected by a dealer is related to his turnover, the dealer is likely to accumulate a huge VAT liability within a very short period. Hence, it is necessary to minimise the risk of payment defaults by dealers, in particular fly-by-night operators. Given that the collection under VAT will serve as the dominant source of revenue for state governments it is imperative to provide for a c .....

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erefore, we recommend that the tax administration and procedures for the dual GST should be designed in the following manner:- (a) The Central Board of Excise & Customs (CBEC) shall be responsible for implementing the CGST and the State Tax administrations will be separately responsible for implementing the SGST23. The various tax administrative functions such as assessment, enforcement, scrutiny and audit should be undertaken by the CBEC in respect of the CGST and by the State tax administr .....

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entity eligible for CGST input credit across units/branches. Similarly, for the purposes of SGST, all production units/branches of a person located anywhere within the State will be treated as a single taxable entity eligible for SGST input credit across units/branches in that State. (e) The Central Government shall establish a common IT infrastructure which will serve the needs of both CGST and SGST. (f) The Central Government will be responsible for establishing a taxpayers information networ .....

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ent electronically on a monthly basis while making payment of taxes. (h) Taxpayers opting for the compounded levy may be required to pay their taxes and file their returns on a quarterly basis. (i) Electronic filing of all other returns, if any, should also be mandatory. Therefore, the return forms should be common for CGST and SGST compliance. (j) The information furnished shall be stored in a common database to which both the CBEC and the State tax administration will have access. (k) For the .....

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be common. (n) Best international practices should be embedded in the Central-GST, particularly in respect of laws relating to levy of penalties, and circumstances and method of prosecution. (o) No authority should have any power to make preventive detention for the purposes of CGST and SGST. (p) Procedures for collection of both the CGST and SGST should be uniform. 4.9 The uniformity in the procedures recommended by us will considerably reduce compliance and administrative cost. This should un .....

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ty. The cost of auditing the classification of exempt and taxable items and the applicable rates thereon at every stage of production, distribution and sale is also extremely high. Therefore, they support the elegance of a single rate (other than the zero rates). Economists espouse the optimality of tax rates based on elasticity. In general, business and industry also espouse a single rate since it is simple to comply and eliminates the problem of classification which arises under the multiple r .....

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were characterised by a progressive tax structure whereby basic necessities were taxed at lower rates, luxuries at higher rates and all other goods and services at a standard rate. The problem was further compounded by numerous exemptions. However, since the 1990s there is a growing trend towards a single positive rate, a zero rate and some, or no, exemptions. 5.3 The Task Force on Implementation of the Fiscal Responsibilities and Budget Management Act, 2003 sketched the elements of a reform st .....

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rates and low rates. For example, debates on customs duties have universally argued that if customs tariffs have to exist, there should be a single uniform rate on all goods. Similarly, it is well accepted that there should be a single VAT rate covering all kind of production . In view of the fact that both the Centre and the States had multiple rates, the service tax base was extremely narrow, and the States had not moved to VAT, the Task Force, even while recognising the efficacy of a single V .....

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gle rates, they examined whether existing data on VAT support the contention that countries with single rate mobilise more revenue than those that have multiple rates. The empirical results confirm that the dispersion of rates if found to negatively affect VAT revenues. The results also confirm in other conventional view that VAT generates, other things being constant, higher revenue in single VAT rate countries than in multiple rates countries. The difference in the estimated models for the two .....

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tax revenue (proxying for tax administration efficiency)29. The VAT efficiency is affected adversely by the level of the statutory rate. The co-efficient in the tax is small in magnitude, although it is highly significant, so that the loss in efficiency due to an increase in the VAT rate is relatively modest. The elasticity of VAT revenues to VAT rate is (-) 0.3 approximately. Silvani and Wakefield (2002) analyse a sample of 22 countries in the 1990s and show that, if the VAT tax rate is raised .....

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useholds. However it does not recommend a low rate of tax, or exemption, for products consumed by low income households since the same products also form part of the consumption basket of the middle and high income households. As stated earlier, the introduction of a low rate or exemption for products commonly consumed by low income households also results in increase in the standard rate. Since low income households also consume goods liable to tax at the standard rate, the cumulative burden on .....

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exemption for registration of dealers. Accordingly, the Group has, in para 2.61 above, recommended a threshold exemption limit of ₹ 10 lakh. 5.8 Further, in terms of best international practice, recent experience shows that the preference of the policymakers is for adoption of a single rate as it is more efficient.31. 5.9 In the light of the above, the Group recommends one positive rate, each for CGST and SGST on all goods and services. In addition, there should be a zero rate applicable t .....

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n man will rise, while the rate of tax on luxuries will fall. The implementation of a regressive tax during an economic slowdown is even worse than doing so in a boom. In other countries where such a shift to a single rate has occurred, an increased propensity to evade has also been noticed. Those who argue for a single rate GST on grounds of economic efficiency and growth are ignoring the adverse distributional consequences. The implementation of a single rate will thus be highly unpopular with .....

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ope for providing a further lower rate. In addition, the proposed GST design structure envisages a comprehensive base with a seamless flow of the input credit mechanism. Consequently, the cascading effect would be negligible. Further, the tax base will be exclusive of CENVAT. The cumulative effect would be that the real tax incidence under the proposed GST model would approximate the statutory rate and would not be significantly different from the present levels of incidence on such products. Th .....

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dence, does not result in any adverse distributional consequences. 5.12 A tax on consumption can be regressive. The structure should be designed to alleviate the tax incidence on consumption by the relatively poorer section of the society. One of the methods could be to identify such items of consumption by the poor and either exempt them from GST or subject them to a lower rate. Under this method, consumption by the rich would also suffer the same level of tax since no distinction can be made b .....

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consumption of any commodity by the poor would bear a relatively lower incidence of tax than the consumption of the same commodity by the relatively richer section of the society. In the aforesaid paragraphs, we have recommended a modest threshold exemption level of ₹ 10 lakh. This recommendation is aimed to address the issue. 5.13 The distributional consequences of the proposed GST should be analysed keeping in view its impact on economic growth and employment. To the extent it enhances e .....

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een argued that the proposal to have a uniform rate of State GST reduces the autonomy of the States and, therefore, undermines the federal structure of our Constitution. Further, the States would lose the flexibility to swiftly respond to any crisis33. In the present context, the design of the structure of the GST will be determined through the collective process of a grand bargain between the Centre and all the States for the collective welfare of its people. The decision to have a uniform rate .....

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pose surcharges to meet any financial need in an emergency-like situation. 5.16 It is now well recognised that the performance of GST is dependant, amongst others, on the ratio[ 𝑊𝑒𝑖𝑔𝑕𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑜𝑓 𝑠𝑡𝑎𝑡𝑢𝑡𝑜𝑟𝑦 𝑟𝑎𝑡𝑒𝑠/𝑆𝑡𝑎𝑛&# .....

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obilisation through discretionary changes, the CGST and SGST rates should be such rates which would yield the same revenue as collected from the various taxes which will be subsumed in the CGST and SGST (hereafter such rates shall be referred to as revenue neutral rates or RNR ). 5.18 The Thirteenth Finance Commission has been mandated to make its recommendations having regard to the basis of levels of taxation likely to be reached at the end of 2008-09. However, the fiscal year 2008-09 has been .....

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to the fiscal year 2007-08. Therefore, the Group has used the fiscal year 2007-08 as the base year for calculation of the RNR. 5.19 The RNR for the CGST and the SGST is determined in accordance with the formula- RNR = R/B X 100 Where, RNR : Revenue Neutral Rate for the Centre or the States as the case may be; R : Collection from the Central or State taxes, as the case may be, which are proposed to be subsumed in the CGST and SGST; B : Estimated Tax base of the GST a. Taxes to be subsumed in the .....

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ores only. The breakup of the collections is presented in Table-1. Since the SIN-goods will continue to be subject to excises as at present, the RNR for the CGST is sought to be calculated only in respect of ₹ 157733 crores, being the collections from non-SIN goods and services. Table -1 : Revenues from Central taxes to be subsumed in CGST Sl No Nature of Tax Non-SIN Goods POL Tobacco Total 1 CVD 53510 5199 0 58709 2 Union Excise Duties 52922 60231 10272 123425 3 Service Tax 51301 0 0 5130 .....

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ce we are of the view that all the TF-taxes should be subsumed in the SGST, our RNR for the SGST is sought to be calculated in respect of an amount of ₹ 188285 crores. Table-2: Revenues from State taxes to be subsumed in SGST Sl. No. Nature of Taxes Non-SIN Goods POL Tobacco Alcohol Total 1 Stamp Duty 38473 38473 2 Taxes on Vehicles 15549 15549 3 Taxes on Goods & passengers 6719 6719 4 Taxes and Duties on Electricity 9188 9188 5 Sales Tax /VAT (incl. CST and Purchase Tax) 110826 56442 .....

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ht of the GST Model designed by us. There are essentially two methods of estimating the GST base. One method is to estimate the final consumption in the country and make appropriate allowance for leakage. However, the pre-GST indirect tax system is generally characterised by high leakage while the shift to a consumption-type GST is compliance enhancing. Therefore, estimating the degree of leakage under the proposed GST is vexatious. The second method is to estimate the gross value addition by th .....

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24 We use the average of the estimates under these methods as the estimate of the GST Base for the purposes of calculating RNR. 1. Subtractive - indirect method (SI method) 5.25 At the producer level, the GST base is equivalent to the value added which is the value that a producer adds to his raw materials or purchases before selling the new or improved product or service. That is, the inputs (the raw materials, transport, rent, advertising, and so on) are bought, people are paid wages to work o .....

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(3) t (output - input) : the subtractive - direct (accounts) method; and (4) t (output) - t (input) : the subtractive - indirect (the invoice or credit) method. 5.27 While there are four possible ways of levying a VAT, in practice, the method used (number 4) never actually calculates the value added; instead, the tax rate is applied to a component of value added (output and inputs) and the resultant tax liabilities are subtracted to get the final net tax payable. This is sometimes called the ind .....

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me Tax Department for assessment year 2008-09. The activities of these entities are classified into 9 sectors and further sub classified into 74 sub-sectors (refer Annex - II). Further, the sample includes 3,50,894 companies and 3,84,425 partnership firms. Since it is mandatory for firms with an annual turnover of more than ₹ 40 lakhs and all companies to electronically file their return of income, the dataset includes all companies and such firms, who have filed their return upto 15th Aug .....

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re, the sample does not include the tax returns of any charitable organization. Since most entities engaged in providing education and health services operate as charities, the sample does not include education and health services providers. Further, since agricultural income is exempt from income tax, the sample does not capture the data relating to the agricultural sector. Table 3 : Turnover based Distribution of sample entities Turnover* range Number of cases Amount of Output base (Rs. in cro .....

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19.68 Above 100 crore 8160 5884524 62.91 Gross Total 2851557 9354445 100 Less : indirect Taxes 333047 281168 Turnover net of indirect taxes 9073277 *Turnover is defined as total credits in the Profit and Loss Account as reduced by the value of closing stock. This is the same definition used for computing the GDP 5.29 The distribution of taxpayers across turnover is shown in Table-3. For this purpose, turnover is defined to mean the aggregate of all income receipts credited to the Profit and Loss .....

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onsumption etc., by the CSO also appears to be under stated. Therefore, the sample size is extremely large and any estimation of the GST base on the basis of this sample will be fairly representative of the actual GST base. 5.30 The computation of the GST base under the SI method involves the following steps: a. The receipt items on the credit side of the Profit and Loss Account, which would be liable to output tax, are identified and appropriately adjusted for indirect taxes to arrive at the va .....

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ced from the net value of domestically available goods and services to arrive at the net value of goods and services available for domestic consumption or the aggregate output tax base . d. Similarly, the expense items on the debit side of the Profit and Loss Account, in respect of which input tax credit would be potentially available, are identified and appropriately adjusted for indirect taxes to arrive at the value of purchase of intermediate goods and services . e. Under the GST Model, full .....

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ss value of purchase of intermediate goods and services to arrive at the aggregate input tax base . g. The aggregate output tax base is reduced by the aggregate input tax base to arrive at the GST Base . 5.31 On the basis of the profit and loss accounts of the 28,51,248 business entities, the net value of supply of domestically produced goods and services is the aggregate of the value (net of indirect taxes) of (i) Sales/gross receipts from business; (ii) Commission; (iii) Profit on sale of fixe .....

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24 crores. 5.32 The item any other income as reported in the accounts does not include rent, dividend, interest, profit on sale of investments liable to STT, profit on other investment, profit on currency fluctuation and agricultural income. In practice, a large number of professional entities report their gross receipts under this item since they do not view themselves as carrying on business or engaged in sales. Since the Group has recommended a comprehensive GST base to include all goods and .....

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The various receipts which have been excluded from the item any other income basically arise from transaction in financial services and immovable property. While the base for GST is proposed to include financial services and immovable property (real estate), the size of the base relating to these services is determined separately and not on the basis of the subtractive-indirect (invoice or credit) method. 5.34 Input tax base comprises of all goods and services used as intermediate inputs in the .....

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er, the value of purchases of intermediate goods and services by the taxable sectors (excluding financial, rail and real estate sectors) is ₹ 67,12,418 crores. Table 4 : Intermediate goods and services forming part of input Tax Base A Purchases of trading goods and raw material B Special services 1 Freight 2 Consumable Stores 3 Power & Fuel 4 Building repair 5 Machinery repair 6 Total expenditure on insurance 7 Workmen and staff welfare expenses 8 Entertainment 9 Hospitality 10 Confere .....

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377; 56,70,610 crores. However, the corresponding figure for the taxable sectors (excluding financial, rail and real estate sectors) is ₹ 51,80,108 crores. These purchases include purchase of trading goods and raw materials from registered and unregistered dealers in both the primary and secondary sector. To the extent these include purchases of trading goods and raw materials from the unregistered dealers, no input tax credit would be available since no output tax would have been paid by .....

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rily file an income tax return, his sales do not form part of the output base estimated above. Therefore, purchases of primary articles would not be entitled to any input credit. Such purchases are estimated to be ₹ 4,32,910 crores. Further, we also estimate 10 percent of the purchases of trading goods and raw materials from the secondary sector to have been purchased from the unregistered dealers on which no input credit would be available. Such purchases amount to ₹ 5,23,770 crores .....

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rly, the value of Miscellaneous Services availed is ₹ 8,67,077 crores which is charged to the profit and loss account under the head other expenses . These are generally petty expenses in nature most of which are acquired from unregistered dealers. It is estimated that 60 percent of this amount would be from unregistered dealers. Accordingly, a sum of ₹ 5,32,709 crores will not be eligible for input credit. 5.38 Accordingly, the value of purchases from the unregistered dealers in 200 .....

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terms of the National Accounts Statistics is a good proxy for the unregistered dealers under the GST. The share of the unorganised sector in the non-agriculture Net Domestic Product in 2007-08 is 48.69 percent and 90.27 percent in the agricultural sector.41 Applying theses ratios to the firm level profit and loss account, the purchases from the unorganised sector/unregistered dealers is estimated at ₹ 37,48,729.crores of which ₹ 3,90,788 crores relates to agricultural commodities an .....

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alth and education services) are computed separately. Exempt sectors 5.41 We have earlier recommended exemption from GST of unprocessed food articles. Producers of food grains do not file income tax returns. Similarly, most of the trading in food grains is undertaken by small traders with low turnover. Such traders, in general, file their income tax returns in paper form. However, the sample represents electronically filed returns only. The impact of the exemption for unprocessed food articles ( .....

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sts operate in the health and education sector, the volume of the total turnover is insignificant to make any material difference to the estimation of the GST base. Therefore, no separate adjustment is made to provide for the exemption for the health and education sector under the proposed GST. 5.43 Separate data relating to life-saving drugs is not available. Therefore, we estimate the GST base relating to this sector at ₹ 5000 crores on the basis of anecdotal information. 5.44 Therefore, .....

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In the case of real estate transactions, the incremental value between two transactions will be subject to GST thereby, subsuming the stamp duty within the GST base. Further, rent, whether from residential or commercial property, will also form part of the GST base. However, rent in a business-to-business transaction will be a wash transaction. Since expenditure on rent is greater than the rental income in the case of sample entities, the net expenditure on rent is included in the value of purch .....

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crores. This does not include the value of land. Assuming that the land value accounts for 50 percent of the total value of the real estate, the GST base relating to land is estimated at ₹ 429260 crores. 5.47 The comprehensive GST is intended to bring within its fold rail transport services also. However, this is intended to be confined to rail services provided for transportation of goods only. The rail transportation sector is entirely under the Ministry of Railways which is not require .....

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₹ 24,29,924 crores. 5.49 The GST Base for all the sectors is summarized in Table-5. As would be noted, the GST Base for the Taxable sectors is estimated at ₹ 30,50,228 crores. Table-5 : Estimation of the GST Base under the SI Method Sl No. Description Unit All Sectors Exempt Sector Taxable Sector Special Sectors General Sectors Total Financial Services Rail Services Land Sector 1 2 3 4 5 Sample Size Nos 2851248 77831 100055 2673342 2773397 A Output Tax Base 1. Net value of supply of .....

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091 6712418 3. Gross value of purchase of intermediate goods and services (1+2) Rs. in crs 7786987 107835 7143921 4. Value of purchases from Unregistered dealers Rs. in crs 1682145 81696 1600449 5. Aggregate input Tax Base (3-4) Rs. in crs 6104842 26138 5543473 C GST Base (A5-B-5) Rs. in crs 2828205 86575 193103 20750 429260 2429924 3073037 2. Consumption Method i. Task Force Estimate 5.50 In addition to the SI method, we also estimate the GST Base by estimating the total final consumption. 5.51 .....

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use, that is, private final consumption expenditure (PFCE), government final consumption expenditure (GFCE), gross fixed capital formation (GFCF), change in stock (CIS), export and import. 5.52 To estimate the GST base, we need to estimate the contribution of all commodities in the primary, secondary and tertiary sectors of economy to the value addition chain. Since GST will be applicable only on the output of registered dealers with a turnover of more than ₹ 10 lakh, consumption of goods .....

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s of information available in statement 76.1 of National Accounts Statistics, 2009. The PFCE on goods and services from registered dealers (organized sector) for inclusion in the GST base is estimated at ₹ 10,12, 609 crores (Table-6). 5.53 Government Final Consumption Expenditure (GFCE) comprises of two elements, namely, compensation to employees and Net purchase of Goods and Services. Since compensation to employees will be outside the scope of the GST base, we exclude public administrati .....

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d the Private Corporate Sector is also proposed as intermediate input by allowing full and immediate input credit on capital goods. Therefore, for the purposes of this exercise what is relevant is the estimate of the Gross fixed Capital Formation in the household sector. 5.55 The expenditure on construction as reported in Statement 19 of National Accounts Statistics, 2009 is ₹ 5,00,036 crores comprising of ₹ 3,66,855 crores towards construction and ₹ 1,33,181 crores towards pla .....

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nized or own labour will not be captured under the GST. Accordingly, we estimate the labour component as one-third of ₹ 3,66,855 crores i.e. ₹ 1,22,285 crores. Hence, the final consumption component in the Gross Fixed Capital Formation in the household sector in 2006-07 is estimated at ₹ 3,77,751 crores. 5.56 Some element of the food sector, and education and health services are proposed to be exempt from the GST. Similarly, services categorised under the labels Other Commercia .....

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sumption in the Gross Fixed Capital Formation in the household sector. 5.58 In Table-6, the size of the non-land GST Base for 2006-07 is estimated at ₹ 28,98,520 crores, which accounts for 76.69 percent of the GDP at factor cost at current prices (Rs. 3779385 crores). Applying the same ratio, the size of the non-land GST Base in 2007-08 is estimated to be ₹ 33,13,817 crores. The GST Base relating to land for 2007-08 is estimated to be ₹ 4,29,260 crores as computed under the SI .....

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3 Private Final Consumption Expenditure (Origanlized sector) (Row 1 - Row 2) Rs. in crs 1012609 4 Government Final consumption Expenditure on goods and services Rs. in crs 421059 5 Gross Fixed Capital Formation in household sector (excluding labour) Rs. in crs 377751 6 Intermediate inputs from unregistered dealers Rs. in crs 1713887 7 Gross Total (Row 3 + Row 4 + Row 5 + Row 6) Rs. in crs 3525306 8 Exemption for food, health, education and some services Rs. in crs 626786 9 Estimated non-land GST .....

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imated at ₹ 366855 crores ii. NCAER Estimate 5.59 The Thirteenth Finance Commission had assigned a study to Dr. Rajesh Chadha of the NCAER to carry out a study on the implication of GST for international study. Using CGE Model, NCAER has, inter alia, also estimated the RNR for a comprehensive GST factoring the impact of exemption for the food sector, education and health services. However, it does not factor the impact of- a. exemption for small businesses (i.e. the threshold exemption of .....

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(PFCE) at market prices in 2003-04 was ₹ 1699485 crores. We first adjust for the embedded net indirect taxes by applying the ratio of GDP at factor cost at current prices to the GDP at market prices at current prices for the financial year 2003-04 to the PFCE to arrive at the PFCE at factor cost at current prices. Thereafter, we estimate the purchases from the unorganised sector at ₹ 894152 crores by applying the share of the unorganised sector in the net domestic product in the yea .....

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50042 2 Impact of the threshold exemption (purchases from the unorganised sector) Rs. in crs 894152 3 Non-land GST Base in 2003-04 adjusted for threshold exemption Rs. in crs 1555890 4 GDP at factor cost in 2003-04 Rs. in crs 2538170 5 Estimated non-land GST Base in 2003-04 (Row 3 divided by Row 4) In percent 60.30 6 GDP at factor cost in 2007-08 Rs. in crs 4320892 7 Estimated non-land GST Base in 2007-08 (Row5* Row6) Rs. in crs 2648692 8 GST base relating to land for 2007-08/1 Rs. in crs 429260 .....

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f our leading fiscal economists, has written extensively on tax policy and revenue trends. Among his observations is one that pertains to the revenue productivity of the VAT. The relationship between VAT rate and its revenue implication in terms of GDP could be referred to as the Shome Index as has sometimes been reflected in the context of Latin America. Thus, if the general rate of the VAT is, say 10 percent, the revenue collection from the VAT can be expected to be 5 percent of GDP45. This re .....

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me Index would reveal a small percent collection in terms of GDP. Thus, in the U.K., with a VAT rate of 17.5%, the revenue intake has hovered around 6%. In terms of the Shome Index, at a VAT rate of X percent, the VAT revenue in terms of GDP is nearly as low as (1/3rd * X ) percent. In other countries, say with some other characteristic such as low compliance, a similar outcome would be experienced. 5.67 In most countries, as a thumb rule, VAT revenue hovers between (1/3rd * X ) percent and (1/2 .....

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-8: Estimating the GST Base on the basis of the Shome Index Sl No. Description Amount [Rs in crs] 1 GDP at factor Cost at current prices 43,20,892 2 Estimated base on the basis of Shome Index [50 percent of row 1] 21,60,446 3 Estimated base relating to Financial Services 1,93,103 4 Estimated base relating to Real Estate 4,29,260 5 GST Base [Row 2+Row 3+ Row 4] 27,82,809 5.70 This estimation of the base is lower than the base estimated under the SI method primarily due to the fact that the estima .....

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base on the basis of the recommended design and structure of the GST. 5.72 As would be seen, the output tax base is computed by estimating the implicit base underlying the aggregate of (i) the amount of collection by way of countervailing duty and Union excise duties for non-POL goods; and (ii) the estimated revenue foregone as reported in the Receipts Budget of the Union Government). This implicit base is calculated at the aggregate Union Excise Duty rate of 16.48 percent (inclusive of 3 perce .....

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ehensive in its base, it will extend to a much larger base particularly in the financial services, rail transport, land, petroleum, tobacco and alcohol, trade and construction sectors. The estimated increase in the tax base in respect of each of these sectors is indicated separately in Table. The aggregate of the increase is estimated at ₹ 13, 58,344 crores for 2007-08 as shown in the said Table. Table 9 : Estimation of GST Base : Revenue Method A Non-POL (Existing Base) Units Amount Count .....

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d Tobacco (Rs. in crs) 191513 Construction (Rs. in crs) 131884 Sub-total (Rs. in crs) 1358344 D GST Base (Rs. in crs) 2949748 5.74 Based on the above, the aggregate GST Base for 2007-08 is estimated at ₹ 29,49,748 crores as shown in Table-9. As would be noted this estimate is larger than the estimate under the Shome Index Method but lower than the estimate under the SI method. 5.75 The various estimates of the GST Base for 2007-08 are summarized in Table-10. As may be noted, the Task Force .....

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tax base for calculating the RNR for both levies. Table 10 : Estimation of GST Base and the RNR Sl No. Description Units Amount A Subtraction-Indirect Method (Rs. in crs) 3073037 B Consumption Method Tast Force Estimate (Rs. in crs) 3743077 Chadha Estimate (Rs. in crs) 3077952 C Shome Index Method (Rs. in crs) 2782809 D Revenue Method (Rs. in crs) 2949748 E Average of all estimated GSt Base (Rs. in crs) 3125325 F Centre s RNR (in percent) 5.05 G State s RNR (in percent) 6.02 c. The Revenue Neutr .....

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747. 5.77 These estimates do not factor in the revenue gains from increased compliance and GDP. To the extent, the flawless GST will reduce cascading effect, there will be significant increase in the corporate profits and hence corporate tax collections. Therefore, in actual practice, the RNR of 11 percent will be revenue positive. 5.78 As would be noted, we have, in para 2.11, recommended the abolition of all entry and Octroi taxes by state governments and other sub-national Governments. Theref .....

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ormula should be based on the recommendations of the State Finance Commission. iv. Pending Constitutional Amendment, the collection from 7 percent SGST shall accrue to the State Government and devolution to the third-tier Government should continue to be made on the basis of the recommendations of the State Finance Commission. v. Both the Central and the State Governments may continue to levy taxes, in addition to the CGST and SGST, on the various non-SIN goods as at present. Chapter - VI Revenu .....

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ration to collect the tax due effectively. In this respect, a single rate and a simpler tax system is easier for tax administrations to administer and for businesses to comply. In this perspective, a VAT system is, in absolute terms, efficient when it covers the whole of the potential tax base (consumption by end users) at a single rate and where all the tax due is collected by the tax administration. Therefore, the ratio of the revenues actually collected and the revenues that would arise from .....

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- indicates deviation from a single tax rate applied on all final consumption or a failure to collect all tax due. A VRR close to 1 is taken as an indicator of a VAT bearing uniformly on a broad base with effective tax collection. On the other hand, a low VRR may indicate an erosion of the tax base at the standard rate. This can result from exemptions, reduced rates, registration thresholds for small traders, poor compliance or poor tax administration or a combination of these. 6.3 The VRR is c .....

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n national accounts (where they are treated as investments or gross fixed capital formation ) but they are subject to VAT in many countries. A combination of this factor together with the cascading effects of exemption in the value chain may lead to a VRR above one. Therefore, for the purposes of calculation of VRR in respect of the proposed flawless GST, we compute the potential tax base by expanding the scope of final consumption within the meaning of National Accounts to include also the Gros .....

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s. The VRR is actually the product of a Policy efficiency ratio (comparing the theoretical revenue from actual VAT law and revenue from a pure VAT system) and a Compliance efficiency ratio (comparing actual VAT revenues with theoretical revenue from actual tax law). Therefore, mathematically expressed,- 𝐕𝐑𝐑=𝑊𝑒𝑖𝑔𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑜𝑓 𝑠𝑡&# .....

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erms [ 𝑖𝑔𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑜𝑓 𝑠𝑡𝑎𝑡𝑢𝑡𝑜𝑟𝑦 𝑟𝑎𝑡𝑒𝑠/𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑟𝑎𝑡𝑒∗ (1−𝐸𝑥𝑒𝑚𝑝𝑡𝑖𝑜𝑛𝑠) ] denotes the Pol .....

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𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑜𝑓 𝑠𝑡𝑎𝑡𝑢𝑡𝑜𝑟𝑦 𝑟𝑎𝑡𝑒𝑠/𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑟𝑎 = is equal to 1 (one). Table 11 : - Computation of VAT Revenue Ratio (VRR) under the Flawless GST* Sl. No. Description Unit Amount A Private Final Consumption Expenditur .....

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1.00 K Amount of Exemption** Rs. in crs 206830 L Impact of exemption [K divided by (F+K)] Nos 0.062 M Policy Efficiency Ratio Nos 0.938 N Compliance Efficiency Ratio Nos 0.84 *The estimates should be taken as approximates. **The exemptions relate only to exemptions for unprocessed food articles health services and education services. This does not include the impact of threshold exemption 6.6 Similarly, the flawless GST recommended by us envisages very limited number of exemptions. These are ess .....

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art of the food items is distributed by small dealers and therefore there is significant overlap in the revenue effect of the threshold exemption and the food sector. The same also holds well in the health and education sector. The net impact of the exemptions under the flawless GST on the tax base is estimated to be ₹ 206830 crores only. This accounts for 6.2 percent erosion in the potential tax base. Hence, the ratio 1−𝐸𝑥𝑒𝑚𝑝𝑡𝑖 .....

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is aligned to the international norm, the revenue neutral rate (RNR) would be substantially higher than the 11 percent estimated by us. In this context it would be useful to point out that given the deficiencies in the VRR as a measure of the revenue performance of VAT, it is difficult to draw typical profiles for efficient and inefficient countries in the collection of VAT revenues on the basis of this VRR. Since the VRR depends upon a number of factors, there is considerable variation in the V .....

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also the RNR) cannot be considered as an outlier. The reason underlying such high VRR is the minimization of the exemptions and the elimination of the multiple rates. 6.9 The existing VRR in the case of Central Government levy on goods and services is extremely low. The current base is estimated to be as low as 0.3649. Further, the factor 𝑊𝑒𝑖𝑔𝑕𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑜𝑓 &# .....

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e VRR for central taxes on goods and services is estimated to be 0.2352. 6.10 Given this estimate of an extremely low VRR, it is not surprising that the estimate of the GST Base by both Central Government and State Governments on the basis of the existing revenues is extremely low. As is well known, the existing tax structure is riddled with a plethora of incentives and multiple rates. Therefore, the Policy efficiency ratio is extremely low. Once these policy deficiencies are removed the VRR wou .....

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ng the policy deficiencies under the existing regime for taxation of goods and services. What is required is a strong political consensus to do so. CHAPTER - VII Implications of the Goods and Services Tax 7.1 The economic case for a flawless GST is straightforward: Income is taxed irrespective of source and use; therefore, consumption should also be taxed on the same principle. This is the feasible second-best solution, compared to the unattainable first best distortion-free world of lump sum ta .....

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and turnover tax on domestic goods and services have enormous cascading effects, leading to a distorted structure of production, consumption and exports. The existing tax system introduces myriad distortions which favour some goods and services at the expense of others. These distortions yield inefficient resource allocation and consequently, inferior GDP growth. In India, the motivation underlying the hugely differentiated scheme of indirect taxation of production and sales that has evolved ov .....

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s, is the most elegant method of taxing consumption. Under this structure, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax essentially sticks on final consumption within the taxing jurisdiction. 7.3 The introduction of the GST will also bring about a macroeconomic dividend by reducing what have been called the negative grey area dynamic effects of cascading taxation. As a result it reduces the overall incidence of indirect taxation b .....

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the failure to exempt all sales to business distorts decisions regarding choice of production methods, particularly decisions on vertical and horizontal integration and what inputs to produce or sell. Since the GST will be a tax on consumption, all stages of production and distribution will be mere pass-through. Therefore, there will be no tax incentive for vertical and horizontal integration. Third, the taxation of capital goods discourages savings and investment and retards productivity growt .....

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iple places local producers at a competitive disadvantage, relative to producers in other jurisdictions. The GST envisages comprehensive taxation of imports on consideration of consumption in India and irrespective of whether the imported goods and services are produced in India or not, thereby, providing a level playing field to domestic producers particularly in the import-substitution industry. Fifth, differences in the tax structure of different States and the Central Government greatly incr .....

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he country- something which has eluded us since long. The size of the market will cease to be limited by tax considerations. Further, it will restore the comparative advantage of resource rich states and enable them to emerge as production hubs. Seventh, at present, the combined statutory rate of VAT is close to 22 per cent54. Further, this marginal rate is applied to a very narrow base on account of a plethora of exemptions. Since economic decisions and compliance behaviour are based on the mar .....

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nt and reduce the crowding-out effect. 7.4 The overall macroeconomic effect of reduction in economic distortions due to GST would be to provide an impetus to economic growth. Using CGE Model, the NCAER study commissioned by the Thirteenth Finance Commission estimates the impact of the introduction of a GST which would eliminate all taxes on production and distribution and rest on final consumption only. The study is based on two important assumptions of full employment and that 50 percent of ind .....

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returns to capital would gain in the range of 0.37 and 0.74 percent. . 7.5 Further, the study also shows that implementation of GST across goods and services is expected, ceteris paribus, to provide gains to India s GDP somewhere within a range of 0.9 to 1.7 per cent. The corresponding change in absolute values of GDP over 2008-09 is expected to be between ₹ 42,789 crore and ₹ 83,899 crore, respectively. 7.6 These additional gains in GDP, originating from the GST reform, would be ea .....

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are $325 billion and $637 billion or as much as one-third to one-half of the country s GDP for the year 2009-10. 7.7 The manufacturing sectors would benefit from economies of scale. Output of sectors including textiles and readymade garments; minerals other than coal, petroleum, gas and iron ore; organic heavy chemicals; industrial machinery for food and textiles; beverages; and miscellaneous manufacturing is expected to increase. The sectors in which output is expected to decline include natur .....

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ural resources based industries to locate in these states regardless of the fact that the consumer is located elsewhere. Another dynamic implication of the GST would be to generate greater employment as GST helps to increase labour intensive sectors. b. GST and International Trade 7.9 There are also benefits to foreign trade that can be reasonably expected. At present export of taxes to other countries is sought to be eliminated through the mechanism of duty draw back on the basis of estimated i .....

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ally more competitive. As a result, while exports can be expected to register an increase, imports are likely to decrease. These outcomes are supported by the NCAER study. 7.11 Gains in exports are expected to vary between 3.2 and 6.3 per cent with corresponding absolute value range as ₹ 24,669 crore and ₹ 48,661 crore. Imports are expected to gain somewhere between 2.4 and 4.7 per cent with corresponding absolute values ranging between ₹ 31,173 crore and ₹ 61,501 crore. .....

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d products except furniture; and cement. There are minor gains and losses in exports of other sectors. 7.13 The major import gaining sectors include leather and leather products; furniture and fixtures; agricultural sectors; coal and lignite; agricultural machinery; industrial machinery; other machinery; iron and steel; railway transport equipment; printing and publishing; and tobacco products. The moderate gainers include metal products; non-ferrous metals; and transport equipment other than ra .....

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that the imports into the country are subject to the same level of taxation as domestically produced goods. The flawless GST will ensure this by subjecting the imports to both CGST and SGST. This will provide a level playing field to the domestic industry and, in particular, the manufacturing sector vis-a-vis imports. c. GST: Equity and Poverty reduction 7.15 Poverty reduction will continue to remain the central objective of economic policy making in India. Any policy for poverty reduction must .....

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from GST. As a result primary food articles like rice and wheat would be exempt from GST (i.e. there will be no output tax). Hence, the tax incidence on such items of mass consumption will be limited to tax on inputs. Since expenditure on food constitutes a large proportion of the total consumption expenditure of the poor, the GST is designed as a pro-poor policy initiative. In any case, the poor will continue to have accessibility to these items at subsidised prices through the public distribut .....

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vices will continue to be exempt from tax and therefore no additional burden will arise on account of the switchover to GST. 7.18 Housing is yet another important item of basic needs of the poor. The GST provides for including within its scope the transactions in real estate. Therefore, for a registered real estate builder, all taxes on inputs (including on land) will be off-set against the tax payable on the constructed property.56 This will effectively reduce cost of housing to the extent of e .....

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the case of the rich, the poor will gain relatively more from large drop in prices. 7.20 The rural poor comprise essentially of small and marginal farmers and landless labourers. Similarly, the urban poor comprises of the unemployed. The implementation of GST will witness an increase in the real returns to land, labour and capital (as shown in the NCAER study). Therefore, the rural poor will also enjoy an increase in their income. Similarly, on account of increase in economic activity resulting .....

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where it is possible to implement optimal tax reforms without any residual distortions caused by successful attempts at incidence shifting. However, in practice, shifting of tax incidence is well documented. Further, the representative consumer assumption that operates an optimal tax model is not just invalid, but actively dangerous in a policy context where poverty reduction and inclusive growth are key policy objectives. For instance, if, as intuition would lead us to expect, the demand for t .....

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or from the implementation of GST will therefore, flow from two sources: first through increase in the income levels and second through reduction in prices of goods consumed by them. The proposed switchover to the flawless GST should, therefore, be viewed as pro-poor and not regressive. Hence, the switchover will improve the vertical equity of the indirect tax system. 7.23 The switchover to GST also entails the taxation of all goods and services in the formal sector. To the extent purchases are .....

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d GST will also result in a higher tax burden on the informal economy than the present level. Hence, the switch over to the flawless GST will also improve horizontal equity. d. GST and Prices 7.24 Prices of agricultural commodities and services are expected to rise. Most of the manufactured goods would be available at relatively low prices especially textiles and readymade garments. 7.25 There are two opposing forces which determine the changes in price levels. First, increased payments to the p .....

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tal output is relatively high in agricultural and services sectors. 7.26 Another factor that impacts the price levels refers to the quantum of intermediate input purchases from sectors under perfect competition versus imperfect competition. Relatively low proportions of intermediate inputs purchased by agriculture and service sectors (i.e. sectors under perfect competition) are sourced from manufacturing sectors and hence these sectors do not reap the benefit of relatively low cost inputs from m .....

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Similarly, the urban poor will also benefit from new employment opportunities. With regard to the food crops the poor would continue to remain secured through the public distribution system. The prices of many other consumer goods are expected to decline. These include sugar; beverages; cotton textiles; wool, silk and synthetic fibre textiles; and textile products and wearing apparel. e. GST and informal sector 7.29 Another challenge to the consensus on GST based indirect tax reform in developi .....

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consumption basket of the poor. However this argument rests on the foundation that the relative size of the formal and informal economies is exogenous to the tax structure in place. In India, the implementation of VAT is in fact expected to reduce the size of the informal economy relative to the formal economy by moving producers who choose to remain in the informal sector for tax avoidance reasons, incentivized by the size biased nature of indirect tax exemptions in the historic regime of taxat .....

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ucers and distributors will only be pass through for the GST. Further, given the single and low rate of tax the benefit from evasion will significantly reduce. Therefore, there will be little incentive for the producers and distributors to evade their turnover. Accordingly, this policy initiative should witness a higher compliance and an upsurge in revenue collections. This will also have an indirect positive impact on direct tax collections. Further, given the fact that GST will trigger an incr .....

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is expected that there would be a net gain in the tax revenues. This should enable the Central Government to better manage its finances. 7.33 As regards the State Governments, the design and the road map of the GST recommended by us would lead to substantial gain in revenues. While the revenue neutral rate for the States is estimated to be 6 percent, we have recommended that the states should be allowed to impose GST at the rate of 7 percent. An increase in the RNR of the States by 1 percent im .....

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However, in the subsequent years this gain would diminish on account of the phasing out of stamp duty but will be more than adequately compensated as compliance starts improving. 7.34 Therefore, overall the implementation of GST should enable the Government at both levels to better meet the challenges of fiscal correction. g. GST and vertical balance of power 7.35 The GST envisages a mechanism whereby both the Centre and the States will cease to have any independent power to make changes in the .....

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o the retail stage and to this extent there will be an expansion in its taxing powers. This increase will be limited to about 12 percent of the GDP (assuming a retail margin of 25 percent on manufacturing value). In addition, the Centre will also acquire the power to tax land /real estate transaction which would account for an estimated 10 percent of GDP. Since the expansion in the power of the States is significantly larger than the Centre, the proposed GS T will alter the balance of power in f .....

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ower to make any unilateral changes, is viewed by some states as undermining the fiscal autonomy of the States. Therefore, it is argued that the states should agree to a floor rate of tax and should have the flexibility to increase their rates to meet any revenue crisis. 8.2 Full autonomy in the exercise of taxation powers would mean that the Centre or the States, as the case may be,- a. Retain the power to enact the tax; b. Enjoy the risks and rewards of ownership of the tax (i.e. not be insula .....

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c distortions, create negative externalities, or impose higher compliance and enforcement burden. 8.4 In general, the States would like to have some degree of control to design the base and set the rates as an instrument to promote various social and economic policy objectives. However, cross-country experience shows that there is complete disillusionment with the use of the tax system as a tool to promote various social and economic objectives by allowing exemptions and incentives. Therefore, t .....

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jectives should cease to be a measure of tax autonomy. 8.5 In the past under the sales tax regime in the states, the flexibility to use the tax system as a tool for achieving various social and economic objectives has generated economic distortions and also triggered a race to the bottom. Further, if the States are allowed the autonomy to increase the rates by setting the SGST rates as the floor rates, they would have a tendency to opt for this lazy option rather than improve their enforcement m .....

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t the rates and the flexibility to use the tax system as a tool for achieving various social and economic objectives. In the context of the federal structure of India, what is relevant is overall fiscal autonomy rather than tax autonomy per se. Since States would continue to have the full freedom to promote various social and economic objectives through direct transfers, effectively, there would be no loss of fiscal autonomy of the States. 8.7 The design of the flawless GST, as recommended by us .....

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and compliance systems. 8.8 Harmonization of tax laws is critical. Variation in the wording and structure of tax provisions can be an unnecessary source of confusion and complexity, which can be avoided if the Centre and all the States adopt a common GST law as in the case of the Central Sales Tax or agree to separately legislate an identical GST law. In either situation, there would be harmonization in respect of critical elements like common time and place of supply rules, common rules for rec .....

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system, taxpayer identification numbers, tax forms, tax reporting periods and procedures, invoice requirements, cross-border trade information systems and IT systems. Harmonization of these elements would result in significant savings in costs of implementing the GST (by avoiding duplication of effort in each government), as well as recurring savings in compliance costs. Harmonization would also permit exchange of information between different levels of Government so as to enable effective moni .....

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the fiscal autonomy of the Centre or the States. 8.11 If harmonization across Centre and all states is envisaged, what should be the institutional mechanism to usher and maintain such harmonization? At present, the responsibility for designing the initial structure of the GST has essentially been left to the Empowered Committee of State Finance Ministers and official level representatives of the Central Government. This body is now internationally recognised as an important institutional arrange .....

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nted by both the Centre and the States. 8.12 In view of the above, we recommend that the Empowered Committee of State Finance Ministers may, upon the introduction of the GST, be transformed into a permanent constitutional body known as the Council of Finance Ministers. This Council shall comprise of the Union Finance Minister and all State Finance Ministers. The Union Finance Minister would be the Chairman of this Council. 8.13 The Council should be responsible for any modification in the initia .....

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the agreed design of the GST. However, in the event of a crisis, the Member State or the Centre may take immediate steps to impose a surcharge subject to ex-post facto approval by the Council within one month. Further, such surcharge should not be allowed to remain in force beyond a period of one year. 8.14 This Council should, in due course, have a permanent secretariat of its own in New Delhi. 8.15 The proposed mechanism will also ensure that all changes are thoroughly analysed and debated be .....

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tates to adopt GST 9.1 The movement from sales tax to VAT at the state level entailed the adoption of uniform RNR rate by all states. The RNR rate is the weighted average of rates across states. Since there was no significant expansion in the base, it implied that states with average weighted rate higher than the RNR would lose revenue while those below it would gain revenue. Hence, the States demanded compensation for adopting VAT. The States have now also demanded compensation for any loss whi .....

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lated by us in the preceding paragraph is estimated to be 6 percent if all the taxes listed in paragraph are subsumed. Our calculations of revenue estimates, based on estimated C-efficiencies of the existing state level indirect tax structure and of the proposed State GST, for each state indicates that there would be no revenue loss for any state on account of the switch over to GST at the estimated RNR rate of 6 percent and existing level of compliance. This is primarily due to the fact that th .....

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tive externalities. 9.5 Some States have expressed their lack of confidence in the existing compensation arrangement for revenue loss to the States. It has been suggested that the compensation mechanism, to be credible, must be administered by a body independent of the Finance Ministry in which the State Governments have a say in governance. The suggestion merits consideration. 9.6 Therefore, we recommend the following:- i) A GST Compensation Fund should be created under the administrative contr .....

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ue loss on account of the adoption of the flawless GST; b. The balance, if any in the Fund, to be carried forward to the subsequent year; c. The balance, if any remaining at the end of the fifth year, to be distributed amongst the states on the basis of the same formula used for distributing resources in the divisible pool. iv) The amount will be transferred in quarterly instalments. v) The amounts shall be disbursed by the Council on the basis of the recommendations by a three member Compensati .....

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serve as an incentive for the states to adopt the flawless GST and also ensure that the payment for compensation, if any, is legitimate and transparent. 9.8 One of the lessons drawn from the implementation of VAT at the State-level is the frequent tendency by the States to deviate from the collectively agreed position relating to the base and the rates. This creates significant tax induced distortions in economic behaviour across states. Further, as stated earlier, it also creates negative exte .....

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proportionate amount of penalty attributable to the period of deviation. Similarly, if the deviation is for a period more than a year, the state will be liable for the completed years and the proportionate amount relating to the remainder period. iii. The amounts collected in penalty shall be deposited in the GST Compensation Fund for formula based devolution to the States. 9.9 This mechanism will provide symmetric treatment of positive and negative externalities whereby creation of positive ex .....

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ed international experience is costly and should, therefore, be avoided. Inspite of such prolonged period of discussion, the state VAT regime in the last four years has witnessed many States deviating from the classification and the rates agreed upon in the White Paper of the Empowered Committee, released in January, 2005. 10.2 Similarly, the discussions on the introduction of a comprehensive dual GST, both at the Centre and State level, have been in progress since early 2006. It is unfortunate .....

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eed to reform the same by adopting a flawless Goods and Services Tax along the lines recommended in this Report. The adoption of a flawless Goods and Services Tax is critical to the survival of the Indian industry in the face of increasing international competition consequent to a number of free trade agreements entered into by India. 10.4 Hitherto, the approach of the Central Government has been to act as a catalyst in the process of the design of the GST. This responsibility has essentially be .....

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gaged in the process of designing the GST, the Council should approve the draft of the amendment to the Constitution to the effect that the Centre and the States shall exercise concurrent jurisdiction to subject all goods and services (other than SIN-goods) to a consumption type value added tax based on destination principle where exports will be zero rated and all imports will be subject to the levy like any other goods and services domestically produced and consumed. Further, it should also pr .....

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legislation in Australia, under which all the States and the Commonwealth (the Centre) have to agree before any change in the rate or the base of GST can be implemented. 10.6 The implementation of the GST is scheduled for 1st April, 2010. However, given the fact that the discussion paper on GST has not yet been released for public debate, it is unlikely that the Centre and the States would be able to complete all legislative and administrative processes before the 1st April, 2010. Therefore, it .....

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tee to subsume the EC-taxes 59 only. One of the main elements of the flawless GST recommended by us is that all taxes on goods and services, levied by the Centre or the States, should be subsumed in the GST. Therefore, we have recommended that the following other taxes levied by the States on goods and services should also be subsumed: a. Stamp duty; b. Taxes on Vehicles; c. Taxes on Goods and Passengers; and d. Taxes and duties on electricity. 10.8 There is also a view amongst States that while .....

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ndoubtedly lost out on potentially higher economic growth, higher real wage rates, fiscal consolidation and consumer welfare. All stakeholders other than the oligarchs, both within and outside the system, stand to gain from a swift comprehensive changeover to the GST. The multitude of the poor will gain from this reform measure more than any other stakeholder. To the extent the switchover is staggered, the potential gains from the comprehensive GST would remain unrealised thereby adversely impac .....

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orresponding SGST rate should be 7 percent; and ii. Transactions in immoveable property (i.e real estate and housing services) should be brought within the fold of GST; and iii. Stamp duty may not be subsumed but the rate of stamp duty in all states should be calibrated so as not to exceed 4 percent. As a result, transactions in real estate will be subject to a dual levy like in the case of SIN-goods; b) In the year 2011-12, same as (a) above, with the modification that the rate of stamp duty sh .....

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the efficient functioning of the GST and do not have to impose any cascading taxes like cess, entry tax or Octroi.60 10.11 Further, we also recommend that the phased program for introduction of the GST as outlined above should be incorporated in the GST legislation so that there is no uncertainty on the evolution of the GST which will enable trade and industry to appropriately structure their business. 10.12 We do not envisage any loss of revenue at the rates of CGST and SGST recommended by us. .....

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f 1st October, 2010 for rolling out GST. Given the strategic importance of this game-changing reforms, the country can little afford any delay. Chapter-XI Conclusion 11.1 The taxation of goods and services in India has, hitherto, been characterised as a cascading and distortionary tax on production resulting in mis-allocation of resources and lower productivity and economic growth. It also inhibits voluntary compliance. It is well recognised that this problem can be effectively addressed by shif .....

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e GST Model. The most important ten elements of a pure GST are the following:- a. The base should extend to all goods and services including immovable property; b. There should be a single low rate; c. The tax should be destination based; d. The tax should be designed on invoice-credit method; e. Full and immediate input tax credit in respect of capital goods; f. The GST must replace all transaction based taxes on goods and services and factors of production. g. There should be seamless flow of .....

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umption type destination VAT based on invoice-credit method. It provides for a comprehensive base including financial services and immovable property. To the extent there are exemptions, albeit limited to items covered for distribution through the public distribution system, and health and education services, the purity of the GST is diluted. A threshold exemption of ₹ 10 lakh has also been provided for small businesses. Imports into the country are proposed to be taxed in the same manner .....

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here is empirical evidence to suggest that the switchover from the present distortionary taxation of goods and services to a flawless GST will, amongst others, increase productivity of all factors of production and hence enhance GDP. The switchover has also been analysed to be pro-poor and therefore, further the cause of poverty reduction. Further in the Indian context, a dual VAT type tax concurrently levied by both the Centre and the States would enable the creation of a common market. 11.5 Gi .....

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or distribution between the States on the basis of the same formula applicable for tax devolution to the States. 11.6 The implications for fiscal management are far-reaching. It will significantly improve fiscal management through higher tax buoyancy. While the RNR for State level TF- taxes (including Stamp duty) is only 6 percent, we have allowed them a higher rate of 7 percent along with the flexibility to phase out the stamp duty over a period of next three years. This has the potential to in .....

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there would be constant pressure on States to deviate from the pure VAT model and trigger harmful tax competition. This would jeopardise the sustainability of the benefits from the implementation of the flawless GST. Therefore, it is also necessary to establish an institutional mechanism which would be responsible for making any change in the design and structure of the VAT. Our recommendation to establish a Council of Finance Ministers is intended to subsume the independent powers of the both t .....

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siderably eroded on account of the proposed continuation of the exemptions. We are also given to understand that the Empowered Committee is considering a two rate structure for general goods and services (other than high value goods).The design of the GST as envisaged by the Empowered Committee is, therefore, a significant dilution of the flawless GST. Consequently, the potential economic benefits from a switch over to the flawless GST, which we have discussed in the foregoing chapter, would not .....

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trade-off between the timeline and the design of the GST, the dilemma must be resolved in favour of design. 11.10 Further, in order to implement the flawless GST it would be necessary to undertake constitutional amendments to enable both the Centre and the States to exercise concurrent jurisdiction over the taxation of all goods and services, creation of the proposed Council of Finance Ministers and assignment of part of the GST proceeds to the third-tier of government. These amendments must, in .....

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in this endeavour. Annexures Treatment of immovable properties under Goods and Services Tax The case for including the real estate sector in the tax base for the GST rests on a number of competing reasons. Firstly, the construction and exploitation of real estate comprises one of the larger sources of gross domestic product. Therefore, any exclusion of the real estate sector would lead to significant reduction in the tax base. This would lead to an increase in the GST rate for other sectors the .....

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ls of Government. At the Central Government level, there has been an attempt to introduce service tax on housing services and allow credit for inputs used for the supply of such services. However, at the State level input tax credit is not available for all taxes, thereby leading to significant cascading effect. Further, there is no incentive to the purchaser to obtain an invoice. Consequently, the audit trail of such transactions is lost and producers of inputs are also encouraged to suppress s .....

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movable property transaction are high. Therefore, the effective rate on value addition is exorbitant, thereby encouraging under- reporting of transactional value and evasion of stamp duty. Since stamp duties are directly or indirectly related to other taxes, any stamp duty evasion triggers a similar adverse response to compliance with other taxes. As with other transaction taxes, it generates a bias in favour of not selling, and inhibits the development of a liquid secondary market. In the conte .....

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, a reduced role for black money, and a reduced role for the criminal element in the real estate sector and significantly lowering of costs by mass housing. At a conceptual level, under a VAT, sales, rentals, and rental values of immovable property would be taxable and credit would be available for the VAT embedded in purchases. Immovable property that generates housing services should be treated in the same manner. The theoretically most attractive solution would be to register all legal person .....

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n their role as occupier consumers. Therefore, the purchaser of an immovable property could use the housing services produced from ownership either for self-consumption or for sale by renting out the property. The VAT consequences of these events are as follows. On purchase of a bundle of housing services in the form of dwelling, the registered taxpayer pays tax on the purchase price, but at the same time, he is entitled to a tax credit (and refund, if due) for the same amount. If he sells the h .....

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nputs, such as repair and maintenance services) to the government. In practice, the registration of all owner occupiers and the computation of all imputed rental values present formidable administrative problems and are, therefore, not feasible. If imputed rental values cannot be taxed, the taxation of rental charges would appear to favour owner-occupiers over lessees. Further, the practical difficulties of taxing small landlords might be severe. Therefore, as a second-best approach, it would be .....

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ive taxation method or one of the two variants of the exemption method. The treatment of transactions in immovable property and real estate/housing services under the three methods is summarised in the Table below. Table VAT treatment of immovable property under two approaches Nature of transaction Comprehensive taxation Exemption method (variant-A) (variant-B) A. Existing residential property stock i. Sale ii. Rental charges iii. Imputed rental values iv. Alteration and maintenance T T E T T E .....

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T E. Inputs (both goods and services) used for construction T T T Under the comprehensive taxation method, all new properties (both residential and commercial) constructed after the introduction of the VAT are liable to tax on construction/first sale of the building on the reasoning that the cost of construction or the price of first sale represent the present discounted value of the flow of imputed rental services over the life of the property. Thereafter, the rental charges for leasing of such .....

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reater than the VAT on resale value, the excess is ignored and no refund for such excess is allowed. As a result, VAT is payable on the margin earned on sale of the property i.e., the difference between the sale price and the cost of procurement and improvements thereto. It applies only to enhancement in the value of the property. The treatment in respect of resale of properties built prior to the introduction of VAT would be the same with the modification that no input tax credit is allowed in .....

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full taxation of imputed rental value of owner-occupied properties. New properties attract tax on their full capital value (i.e., the purchase price) at the time of purchase, for which no deduction is allowed to the owner during the period of self-occupation of the property. Thirdly, the existing properties also attract tax on their full capital value at the time of resale. Further, this method simplifies legislation in as much as no distinction is required to be made between residential or com .....

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ereby most small landlords would remain exempt. Secondly, application of tax on resale of dwellings would require the owners to keep track of input taxes paid on the acquisition of the dwellings, on improvements undertaken over the period of their ownership and input credit availed against VAT payable on rental value. Further, in many cases, there are frequent changes in the use of the dwelling as owner-occupied residence or rental dwelling. Since input tax credits are allowed only for houses us .....

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. Thirdly, in the case of existing stock of properties, the tax applies on the full resale value. This may be appropriate only where the existing properties did not previously bear the taxes that were being replaced by the VAT. If indeed substitute taxes (though of the cascading variety) are applied to some or all components of the existing properties, subjecting them to full taxation again under VAT would amount to double taxation. This can be resolved by allowing credit for the taxes already p .....

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erty VAT is realised on the full resale value and input credit for tax paid on construction/purchase of the property is allowed as a set off. If the input credit is greater than the VAT on resale value, the excess is ignored and no refund for such excess is allowed. As a result, like in the comprehensive taxation method, the VAT on resale is payable only on the margin earned on sale of the property. The treatment in respect of resale of properties built prior to introduction of VAT is the same w .....

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and properties constructed after the introduction of VAT since resale of the property is liable to VAT. The administrative and compliance difficulties are similar to those faced under the comprehensive taxation method with the modification that the number of landlords seeking registration would be relatively small since actual rent is exempt. However, administrative complexity would increase in case of mixed use of properties i.e. where the building is partly used for residential and partly for .....

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between residential and commercial properties. The commercial properties are treated in the same manner as under the comprehensive taxation method. In the case of residential properties, VAT is levied at the time of construction/first sale of such properties which are constructed after the introduction of VAT. All resale of properties, whether constructed before or after the introduction of the VAT is exempt. As a result, the scope of VAT does not extend to existing properties. Further, VAT is .....

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residential and non-residential properties to allow for the exemption and input tax credit. This would add to the complexity in the tax administration. The real estate sector should be integrated into the GST framework keeping in view the implications of the different methods. Terms of Reference of the Task Force The Task Force shall examine the impact of the proposed implementation of the Goods and Services Tax (GST) with effect from 01.04.2010. For this purpose, it shall examine, inter alia, .....

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tion, monitoring of compliance and institutional mechanism for making any change in the initial design of the GST. References Ahmad, Ehtisham (2008): Tax Reforms and the Sequencing of Intergovernmental Reforms in China: Preconditions for a Xiaokang Society in Louo Jiwei and Wang Shuilin (eds), Fiscal Reforms in China, The World Bank. Ahmad, Ehtisham, Satya Poddar A.M. Abdel-Rahman, Rick Matthews, and Christopher Waerzeggers (2008): Indirect Taxes for the Common Market , Report to the GCC Secreta .....

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te of Public Finance and Policy, New Delhi. Barrand, Peter (1991): The treatment Non-Profit Bodies and Government Entities under the New Zeland GST , International VAT Monitor, January 1991. Bird, Richard M. (1994): Where Do We Go From Here? Alternatives to the GST , KPMG, Toronto, April. -(1996): Harmonized Sales Tax , Technical Paper, Department of Finance, Ottawa. -(1998): Dual VAT and Cross-Border Trade: Two Problems, One solution , International Tax and Public Finance, 5(3) July, pp.429-442 .....

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Way to Impost a General Consumption Tax in Developing Countries? ITP Paper 0602, International Tax Program, Institute for International Business, University of Toronto. - and Pierre-Pascal Gendron (2007): The VAT in Developing and Transition Countries , Cambridge University Press, Cambridge. - and Michael Smart (2008): Impact on Investment of Replacing a Retail Sales Tax by a Value-Added Tax: Evidence from Canadian Experience , Working Paper No. 15, the Institute of International Business, Unive .....

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inance (1987): Federal Sales Tax Reform , Government of Canada, 1987. Canada (1996): Harmonized Sales Tax , Technical Paper, Department of Finance, Ottawa. Cnossen, Sijbren (2001) Tax Policy in the European Union: A Review of Issues and Options Erasmus University, Rotterdam. -(1993): VAT Treatment of Immovable Property , The Value Added Tax: Coming to America? Desai, Mihir A. and James R. hines (2002): Value-Added Taxes and International Trade: The Evidence . Devarajan et al (1991): A Value-Adde .....

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. Shahe and Joseph E. Stiglitz (2005): On selective indirect tax reform in developing countries , Journal of Public Economics 89 (2005) 599-623, Ernst & Young (1998): Value Added Tax: A Study on the application of VAT to the non-profit sector and Public Bodies . Evans, Michael (2009): The Value-Added Tax Treatment of Financial Services and Real Property , International Seminar on GST Architecture in a Federal System. European Community (1987): Completing the Internal Market - The Introductio .....

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: Report of the Finance Ministers Committee to Chart a Time Path for the Introduction of VAT , Ministry of Finance, New Delhi. -(1999): Report of the Committee of Finance Secretaries for Identification of Backward Areas , Ministry of Finance New Delhi. -(2001): Report of the Advisory Group on Tax Policy and Tax Administration for the Tenth Plan , Planning Commission, New Delhi. -(2002): Report of the Task Force on Indirect Taxes , Ministry of Finance, New Delhi. -(2004): Report of the Task Force .....

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ax in India , New Delhi. -(2008): Input-Output Transactions Table 2003-04 , Central Statistical Organisation, Ministry of Statistics & Programme Implementation, New Delhi. -(2008): National Accounts Statistics , Central Statistical Organisation, Ministry of Statistics & Programme Implementation, New Delhi. -(2009): Input-Output Transactions Table 2006-07 , Central Statistical Organisation, Ministry of Statistics & Programme Implementation, New Delhi. -(2009): Statement No. (76.3), sh .....

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NAS). Government of Karnataka (2001): Final Report of the Tax Reforms Commission , Finance Department, Bangalore. Hamilton, Bob and Chun-Yan Kuo (1991): The Goods and Services Tax: A General Equilibrium Analysis , Canadian Tax Journal, 39(1). Keen, Michael (2009) : What makes a successful VAT? , Presentation at the Workshop, National Institute of Public Finance and Policy, New Delhi. Keen, Michael and Stephen Smith (2000): Viva VIVAT! , International Tax and Public Finance, Vol. 7, 741-751 - and .....

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dhi Institute of Development Research , IGIDR, Mumbai, 6 February. - (2009b): GST for Accelerated Economic growth and Competitiveness , Special Address at 3rd National Conference of ASSOCHAM, New Delhi, 29 June. Kuo, C.Y., Tom McGirr, Satya Poddar (1988): Measuring the Non-neutralities of Sales and Excise Taxes in Canada , Canadian Tax Journal, 38, 1988. Longo, C.A. (1992): Federal problems with VAT in Brazil , paper presented at the International Conference on Tax Reforms, NIPFP, New Delhi. McL .....

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mplementing sub-national VATs on internal trade: The compensating VAT (CVAT), International Trade and Public Finance, Vol 7. -(2003): Harmonizing the RSTs and GST: Lessons from Canada from Canadian Experience , Hoover Institution, Stanford University. Millar, Rebecca (2007): Cross-border Services - A Survey of the Issues , in Krever, Richard and David While (ed): GST in Retrospect and Prospect, Brookers Ltd., New Zealand 2007. Mintz, Jack M. (1994): Canada s GST: Sales Tax Harmonization is the K .....

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Thirteenth Finance Commission, Government of India. OECD (2004): Report on the Application of Consumption Taxes to the Trade in International Services and Intangibles , Centre for Tax policy and Administration, OECD. - (2008): Revenue Statistics - Special Feature: Taxing Power of Sub-Central Governments (1965-2007), OECD - (2008): Consumption Tax Trends , VAT/GST and Excise Rates, Trends and Administration Issues, OECD. Poddar, Satya (1990): Options for VAT at the State Level in Gills, M.C. Shou .....

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inancial Services-Searching for a Workable Comprimise , in Krever Richard and David While (ed): GST in Retrospect and Prospect, Brookers Ltd, New Zealand. -(2009): Treatment of Housing under VAT , mimeograph, presented at the conference on VAT organized by the American Tax Policy Institute, Washington, Feb.18-19, 2009 - and Nancy Harley (1989): Problems in Moving from a Flawed to a Neutral and Broad-Based Consumption Tax , Australian Tax Forum, Volume 6, Number 3, 1989. - and M. English (1997): .....

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onsiderations in India , Department of Economic Affairs, Ministry of Finance, Government of India. Purohit, Mahesh C. and Vishnu Kanta Purohit (2009): Goods and Services Tax in India: Estimating Revenue Implications of the Proposed GST , Thirteenth Finance Commission, Government of India. Rao, M. Govinda (1998): Model Statute for Value Added Sales Tax in India , New Delhi. -(2001): Report of the Expert Group on Taxation of Services , Government of India, March, 2001. - (2008): Unfinished Reform .....

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American Perspective , Bulletin for International Fiscal Documentation (DIFD), Amsterdam. - (2002): India s Fiscal Matters , Oxford University Press, New Delhi. -(2003): Tax Policy and Development of a Single Tax System , Bulletin for International Fiscal Documentation (DIFD), Amsterdam. Singh, Nirmal (2009): Rationalizing Taxation of Petroleum Products , National Institute of Public Finance and Policy, New Delhi. Smart and Bird (2006): The GST Cut and Fiscal Imbalance , ITP Paper 0604, Interna .....

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Decentralization and Accountability of Public Sector, proceedings of the Annual Bank Conference on Development in Latin America and the Caribbean, World Bank, Washington D.C. 1 Reference to GST in this Report includes both CGST and SGST 2 The limit of ₹ 40 lakh is based on the consideration that dealers with turnover of ₹ 40 lakh or more are subject to tax audit under the Income Tax Act, 1961 and therefore they would suffer fromany additional burden in terms of documentation under t .....

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ommittee of State Finance Ministers , New Delhi, April 30, 2008. 8 This refers to a single National level GST to be levied and collected by the Central Government. 9 In general, these principles are consistent with the principles laid down by the EC in their Discussion Paper dated 30th April, 2008. 10 This is consistent with the proposal of the EC in their Discussion paper dated 30th April,2008. 11 The Discussion Paper dated 30th April, 2008 released by the Empowered Committee indicates that Pur .....

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y been done by all States other than Maharashtra. 14 Other reasons for rationalizing the depreciation rates were significant control over rate of inflation in the price of capital goods and reduction in corporate tax rates. 15 However, forward shifting is unlikely if competing imports can be sold without the element of tax on capital goods. 16 For example, a dealer operating a petrol station will be allowed input credit in respect of GST on petrol purchased by him from an oil marketing company. .....

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rease in the value of land is attributable to the direct or indirect improvements in the form of development of townships, landscaping, and construction of infrastructure that make it usable for agricultural, industrial, or residential purposes. Raw land is similar to the minerals underneath, which are of little or no value unless they can be extracted for commercial/industrial use or consumption. VAT is applied to the full selling price of minerals. In the same manner, VAT should apply to the f .....

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their jurisdiction on account of inter-state transactions would be required to be paid directly to the importing State and not to the dealer. 22 At present, PAN has been allotted to more than 80 million people, including companies, firms and other business entities. Therefore, it is highly unlikely that there would be any existing business entity which would not have obtained a PAN. 23 The jurisdiction between the CBEC and the State Administration may be divided between the two in such manner t .....

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ction Analysis, The World Bank Working Paper No.1203. 27 They also point out that the change in the pattern of VAT revenues cannot be exclusively explained in terms of difference in rate structures. 28 Mello, Luiz de (2008). Avoiding the Value Added Tax: Theory and Cross-Country Evidence, OECD, Economics Department Working Paper No. 604. 29 VAT efficiency also tends to be higher in countries where the regulatory framework in product markets is pro-business and governance (regulatory quality, rul .....

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the incidence of embedded taxes which are not vatable. This combined statutory incidence has since reduced to a lower range of 18 per cent to 20 per cent in 2008-09 as a consequence of the sharp temporary cut in the CENVAT rate. 31 Michael Keen (2009): What makes a successful VAT? , Presentation at the Workshop on September 30, 2009 at the National Institute of Public Finance and Policy (NIPFP), New Delhi. 32 Unemployment results in an implicit taxation of the poor at the rate of 100 per cent. 3 .....

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s the rate applicable to the residuary category of goods and services. Further, detail analysis of this is presented in Chapter - VI. 36 This method is so called because value added itself is not calculated but only the tax liability on the components of value added is calculated. 37 Since agricultural income is exempt from income tax and persons whose income is predominantly from agriculture are not required to file their tax returns, this does not include the gross value of output produced in .....

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he CSO is further accentuated if we adjust for the unorganised sector. 40 In the case of rent, the expenditure on rent is reduced by the rental income reported. Therefore, we do not separately include this item in the net value of supply of domestically produced goods and services . 41 See Statement 76.1 of National Accounts Statistics 2009 42 In reality, it is likely that the purchases from unregistered dealers would be substantially larger than our estimate. To the extent it is so, the GST bas .....

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io of no threshold exemption but exemption of the same goods and services which we have recommended, the RNR is estimated to be 7.22 percent for non-petroleum taxes. Similarly, the third and fourth scenarios envisage that the GST will subsume all taxes including petroleum taxes and the scope of commodity specific exemptions will expand to larger baskets. The estimates of RNR under the third and fourth scenarios are 9.01 and 9.4 percent, respectively. However, the two latter scenarios are irrelev .....

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xcluding threshold exemption) from Table-9 is estimated to be ₹ 18,89,096 crores( ₹ 1358344 crores plus ₹ 530752 crores) and the estimated potential base is ₹ 29,49,748 crores. Therefore, the share of exemptions in the potential base is estimated to be 0.64. Hence, the share of the actual base is 0.36. 50 The standard rate is 16.48 percent and the weighted average of statutory rates is estimated to be 12.28 percent. Therefore, the ratio of weighted average of statutory ra .....

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