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Goods and Services Tax

Background of Goods & Services Tax (GST):

1.1 The Kelkar Task Force on implementation of the FRBM Act, 2003 had pointed out that although the indirect tax policy in India has been steadily progressing in the direction of VAT principle since 1986, the existing system of taxation of goods and services still suffers from many problems. The tax base is fragmented between the Centre and the States. Services, which make up half of the GDP, are not taxed appropriately. In many situations, the existing tax structure has cascading effects. These problems lead to low tax-GDP ratio, besides causing various distortions in the economy. In this context, the Kelkar Task Force had suggested a comprehensive Goods and Services Tax (GST) based on VAT principle.

1.2 GST system is targeted to be a simple, transparent and efficient system of indirect taxation as has been adopted by over 130 countries around the world. This involves taxation of goods and services in an integrated manner as the blurring of line of demarcation between goods and services has made separate taxation of goods and services untenable.

Relevance of GST & The Way Forward:

2.1  Introduction of an integrated Goods and Services Tax (GST) to replace the existing multiple tax structures of Centre and State taxes is not only desirable but imperative in the emerging economic environment.  Increasingly, services are used or consumed in production and distribution of goods and vice versa.  Separate taxation of goods and services often requires splitting of transactions value into value of goods and services for taxation, which leads to greater complexities, administration and compliances costs.

2.2  Further, Indian economy is getting more and more globalised.  In recent times, a number of Free Trade Agreements (FTAs) have been signed, which will allow duty free  imports into India  or at very low duties.  Hence, there is a need to have a nation-wide simple and transparent system of taxation to enable the Indian industry to compete not only internationally, but also in the domestic market.  Integration of various Central and State taxes into a GST system would make it possible to give full credit for inputs taxes collected.  GST,  being a destination-based consumption tax based on VAT principle, would also greatly help in removing economic distortions caused by present complex tax structure and will help in development of a common national market.

2.3  Accordingly, a proposal to introduce a national level Goods and Services Tax (GST) by April 1, 2010 was first mooted by the then Finance Minister Shri P. Chidambaram in his Budget Speech for the financial year 2006-07.  Since the proposal involved reform/ restructuring of not only indirect taxes levied by the Centre but also the States, the responsibility of preparing a Design and Road Map for the implementation of GST was assigned to the Empowered Committee of State Finance Ministers chaired by Dr. Asim K. Dasgupta, Finance Minister of West Bengal. In April, 2008, the Empowered Committee submitted a report to the Central Government titled “A Model and Roadmap for Goods and Services Tax (GST) in India” containing broad recommendations about the structure and design of GST.  In response to the report, the Department of Revenue    made some suggestions to be incorporated in the design and structure of proposed GST.

2.4 Based on inputs from GoI and States, The Empowered Committee of State Finance Ministers released its First Discussion Paper on Goods and Services Tax in India on the 10th of November, 2009 at New Delhi (Available at finmin.nic.in ). The Paper was released in the presence of Union Finance Minister with the objective of generating a debate and obtaining inputs from all stakeholders.

finmin.nic.in/GST

The model  proposed a dual GST which will have two components viz. the Central GST to be levied and collected by the Centre and the State GST to be levied and collected by the respective States. The model proposed that  Central Excise duty, additional excise duty, Service Tax, and additional duty of customs (equivalent to excise), and State VAT, entertainment tax, taxes on lotteries, betting and gambling and entry tax (not levied by local bodies) should be subsumed within GST. This Discussion paper recommended adoption of IGST model for Inter-State transactions. Government of India examined this model and sent its views/suggestions for further improving the proposed GST model.

2.5  In order to take the GST related work further, a Joint Working Group consisting of officers from Central  as well as State Government was constituted. This was further bifurcated into three Sub-working Groups to work on draft legislations required for GST, process/forms etc required for GST and IT infrastructure development needed for smooth functioning of proposed GST. A Draft of constitutional amendment Bill has been prepared and  shared with EC, since this bill  needs to be discussed with States so that mutually agreed draft could be finalised and bill  introduced in the Parliament.

2.6  Further, an Empowered Group for development of IT Systems required for    Goods and Services Tax regime has been set up under the chairmanship of   Dr. Nandan Nilekani  to design the IT infrastructure  requirement for GST.