>GOODS & SERVICE TAX (EDELWEISS)

Key highlights of the discussion paper and our analysis are reproduced below:

■ Dual GST model: The central government will levy central GST (CGST) and state governments will levy state GST (SGST). Hence, there will be one CGST statute and one SGST statute for each state.

■ GST will achieve harmonisation of tax base, laws, and administration across the nation (though multiple SGST statutes). This will encourage investments in the organised sector.

■ It will be applicable to all transactions of goods and services made for a consideration, except the exempted list and transactions below the threshold limit. This will result in broadening of the tax base and help lower effective tax rates.

■ Two rate structure for goods and single rate structure for services: Standard rate for goods in general and a lower rate for necessities and goods of basic importance.

■ Standard rates for CGST and SGST will be prescribed based on the revenue neutrality principle. We uphold our view that the combined CGST and SGST rate will be in the 14-16% range.

■ GST will facilitate seamless flow of input tax credit (ITC) across the value chain..

■ Integrated GST (IGST) mechanism for inter-state transactions will ensure no input credit loss even in inter-state transactions.

■ CST, which is a big hindrance to all inter-state trades, will be phased out.

■ GST will enable cross utilisation of input credit between goods and services.

■ GST will minimize cascading of taxes.

■ Cross utilization of ITC between CGST and SGST will not be allowed, except in the case of inter-state supply of goods and services.

■ GST will be levied on imports also. This will benefit domestic industry as imports will be taxed at par with domestic production.

■ Point of levy of CENVAT (excise duty) will shift to the stage of first transaction, which will lead to significant unblocking of working capital.

■ Exemption will be replaced by an explicit refund-based system, which will make it more difficult for respective state governments to give new exemptions. Current exemptions will continue up to legitimate expiry.

■ The paper is non committal whether roll out deadline of 1st April, 2010 will be met. Considering various procedural and legal hassles we holds our view that target date of 1st April, 2010 will be missed and GST roll out may happen with 6 months to 1 year delay.

Tax credit on inter-state transaction
For inter-state transactions an innovative model of integrated GST (IGST) will be adopted by
appropriately aligning and integrating CGST and SGST.

■ In case of inter-state trade, the central government will levy IGST which will be CGST plus SGST on all inter-state transactions of taxable goods and services.

■ The inter-state seller will pay IGST on value addition after adjusting available credit for IGST, CGST and SGST on his purchases.

■ The exporting state will transfer to the credit of the Center the SGST deducted in the payment of IGST.

■ Dealer in the importing state will be allowed to set-off IGST paid while discharging his output tax liability in his state.

■ IGST used by dealer in the importing state will be transferred by central government to
the importing state. Unlike currently, there will be no loss of input credit for inter-state trade as tax collected in value chain flows to the state of final consumption.

To read the full report: GOODS & SERVICE TAX