A Reference Guide On VAT and GST

TO BE FINALIZED
A Reference Guide
On
Value Added Tax (VAT)
And
Goods & Services Tax (GST)
in India
"Practical considerations influence the form, shape

and structure of a tax"
Bihar State Planning Board
July, 2017
Chapter Contents Page
Foreword
Preface
An overview of GST
Key concepts in VAT
1 Taxation System and VAT
1.1 Perspectives of taxation
1.1.1 Why tax
1.1.2 Perspectives of Govt., Business and People
1.1.3 Economists' view
1.2 Classification of taxes
1.3 Design and effects of taxation
1.3.1 Considerations in designing taxes
1.3.2 Effects of taxation
1.3.3 Higher vs. Lower taxes and Direct vs. Indirect taxes
1.3.4 Equivalencies of VAT with other taxes
1.3.5 Shift to VAT from income taxes
1.3.6 Desirability of tax on consumption in addition to tax on income
1.4 Features of a good taxation system
1.5 VAT and the indirect taxation system
1.5.1 What is VAT
1.5.2 Origin and global acceptance of VAT
1.5.3 Why VAT
1.5.4 Why no VAT in USA
1.5.5 Advantages of VAT over other forms of sales taxes
1.5.6 Basic issues related to VAT
1.5.7 Variants of the VAT base and the preferred option
1.5.8 Methods of computation of VAT and the preferred option
1.5.9 Alternative models of the VAT system
1.5.10 Is VAT an efficient & fair source of revenue
1.5.11 When is VAT most effective in rising revenue
1.5.12 VAT rates and revenue by regions
1.6 Is VAT inherently regressive
1.7 Revenue productivity and Taxation reforms in India
1.7.1 Low revenue productivity of the Indian tax system
1.7.2 General Approach to the tax policy and reforms
1.7.3 Major ongoing efforts for taxation reforms in India
1.8 Trend of the major taxes in India
1.8.1 Disproportionate share of the indirect taxes
1.8.2 Trend of Union vs State taxes
1.8.3 Trend of the major taxes of GOI
1.8.4 Direct and indirect taxes of GOI
1.8.5 Indirect Taxes of the States
2 Evolution of VAT in India
2.1 Taxation powers of the Centre and the States
2.1.1 Constitutional provisions
2.1.2 Constitution and the indirect taxes
2.1.3 Indirect taxes and the taxable event
2.2 Problems with the pre-VAT indirect taxation system and the Bagchi
Committee Report (1994)
(ii)
2.2.1 Urgent need for reforms in the domestic trade taxes
2.2.2 Cost of the pre-VAT system
2.2.3 Negative features of the pre-VAT system
2.2.4 Explanation of the negative features
2.2.5 Quantification of the damage caused by these distortions
2.2.6 Vicious Circle in the pre-VAT state sales tax system
2.3 Guiding principles for reforms in the indirect taxes
2.3.1 Need for the VAT system
2.3.2 State level reforms suggested by the Bagchi Committee
2.3.3 Reforms in MODVAT
2.4 Revenue Neutral Rates for VAT (Bagchi Committee)
2.4.1 VAT regime could be revenue neutral with zero-rating of the interstate sales
2.4.2 Would State VAT rates be too high
2.4.3 Would abolition of tax on inter-State sales affect some States
2.5 Legal, administrative and institutional requirements of the VAT regime
2.6 Evolution of VAT in India
2.6.1 Central Government
2.6.2 State Governments
2.6.3 Design of CENVAT and VAT constrained by the Constitution
2.7 State VAT regime recommended by the EC (2005)
2.8 Implementation of VAT
2.8.1 Indirect Taxes subsumed in VAT
2.8.2 Indirect Taxes not subsumed in VAT
2.8.3 Goods and Services not included in VAT
2.8.4 Years of implementation of VAT in the States
2.8.5 Benefits of the VAT implemented
2.8.6 Combined effect of the Central and State indirect taxes
2.9 Impact of VAT on the State revenue
2.9.1 VAT/Sales tax collection
2.9.2 Impact of VAT on some poor and rich States
2.9.3 Analysis by NIPFP
2.10 Sales Tax/VAT effort of the States
3 Goods and Services Tax in India
3.1 Problems with the current 'VAT' regime in India
3.1.1 Prevailing indirect tax regime is 'partial' VAT
3.1.2 Factors contributing to this unsatisfactory situation
3.1.3 Problem in the existing indirect tax regime
3.1.4 Key Problems in the current indirect taxes regime
3.1.5 ‘GST’ affords a historic opportunity
3.2 What is GST
3.3 Evolution of VAT/GST in India
3.4 Broad objectives of GST
3.4.1 Widen tax base
3.4.2 Mitigate cascading and double taxation
3.4.3 Enable better administration and compliance
3.4.4 Promote competitiveness of the domestic industry
3.4.5 Facilitate Common National Market
3.4.6 Increase in investment
3.5 Scope of the GST regime
(iii)

3.5.1 Taxes that ought to be subsumed in GST
3.5.2 Taxes actually being subsumed in GST
3.5.3 Indirect taxes not being subsumed in GST
3.5.4 Goods & Services not being subsumed in GST
3.6 Levy of Additional Tax in lieu of CST
3.7 Current vs. proposed vs. ideal GST regime
3.7.1 Flawless GST
3.7.2 Comparative picture of the current, expected and model regimes
3.7.3 Selection of the appropriate GST model
3.8 Implication of GST for various Stakeholders
3.8.1 RBI Report, 2017
3.8.2 NCAER Report, 2009
3.8.3 Govt. Revenue
3.8.4 Local Bodies
3.8.5 MSME/SSI and employment
3.8.6 Business and Tax Payers
3.9 A Counterview to the projected benefits of the GST Regime
3.9.1 Projections of NCAER and the 13th FC are over-optimistic
3.9.2 Advantages of the GST regime for exports is unclear
3.9.3 Evidence does not support the stated advantage to the resource-rich
backward States
3.9.4 Elimination of Cascading and RNR for GST are mutually inconsistent
3.9.5 Superiority of VAT over RST
3.9.6 GST is an old wine
3.9.7 Views of a retired Professor of Economics, JNU
3.9.8 Experience of VAT
4 Interjurisdictional trade and Integrated GST in India
4.1 Interjurisdictional trade and destination vs. origin principle
4.1.1 Interjurisdictional trade
4.1.2 Destination and origin principles and VAT
4.2 Desirability of the destination principle
4.2.1 Destination vs Origin Principles
4.2.2 Key difference between destination and origin principles
4.2.3 Difficulties in implementing destination taxation
4.2.4 Issues on Destination vs. Origin principles
4.3 Inter-State trade in India, CST and the problems
4.3.1 Constitutional provision regarding inter-State trade
4.3.2 CST Rates
4.3.3 Key problems with CST
4.3.4 Interest in continuation of CST
4.4 Inter-State trade and integrated GST in India
4.4.1 Why IGST
4.4.2 Design of IGST in India
4.4.3 Alternative IGST models
4.4.4 Pre-requisites for MBM
4.4.5 Computing and allocating IGST
4.5 Place of supply/taxation
4.5.1 Criteria for determining the place of taxation/supply internationally.
4.5.2 Recommendations on place of supply of inter-state supplies in India
(iv)

4.6 Place of supply and the CAA, 2016
4.7 Place of supply rules and the IGST Act, 2017
4.8 Zero-rated supply
4.9 Apportionment of tax and settlement of funds
4.9.1 Sec 17 of IGST
4.9.2 Sec 18 of IGST
4.10 Tax wrongfully collected and paid to Central/State Govt.
4.11 IGST paid by tourist
4.12 e-way bill
4.13 Application of certain provisions of the GST Act to the IGST Act
5 Revenue Neutral Rate and Rate structure for GST
5.1 What is Revenue Neutral Rates (RNR)
5.2 Single vs. Multiple GST Rates
5.2.1 Tait, 1988
5.2.2 Le, 2003
5.2.3 TFR, 2009
5.2.4 Implication of Multiple rates for the standard rate
5.2.5 Ebrill, 2001
5.2.6 Global experience
5.2.7 Should GST rate be capped
5.3 Computing Tax base and RNR
5.3.1 Formula for computing RNR and tax base
5.3.2 Consumption vs. GVA methods of computing Tax base
5.3.3 Computing Tax base
5.3.4 Approach of the CEA Committee
5.3.5 Some projections of RNR
5.3.6 Average VAT/GST Rates across countries
5.4 RNR and the CEA Committee, 2015
5.4.1 ToRs of the CEA Committee
5.4.2 Approaches considered by the CEA Committee for computing tax base
5.4.3 RNR based on the 3 approaches
5.4.4 Critique of the 3 approaches
5.5 CEA Committee on RNR and Rate Structure
5.5.1 Adjustments made to the ITT approach for estimating RNR
5.5.2 RNR and a few conditional rate structures
5.5.3 Allocation of the combined RNR between the Centre and the States .
5.5.4 Suggestions on the rate structure
5.5.5 Band of rates
5.5.6 Assigning products to rates
5.5.7 GST Council on assigning products to rates
5.6 Risk Analysis of setting RNR little high or low
5.6.1 Risk of setting lower RNR Rates
5.6.2 Risk of setting higher RNR rates
5.6.3 Post-facto evaluation of GST
6 Exemption, Exclusion and Treatment of Merit/Demerit Goods & Services
6.1 Incorporating Social and Sectoral Objectives in GST
6.1.1 GST/VAT is not designed for distributional or sectoral objectives
6.1.2 Targeted instruments better serve such objectives
6.1.3 Inappropriateness of tax policy as an instrument to help the poor
(v)
6.1.4 Effective tax burden may not serve social objectives
6.1.5 Appropriate way to minimizing tax burden on the poor
6.1.6 True VAT is not regressive
6.1.7 Are reduced rates/exemption caused by the weaknesses of policy making
6.2 Historic Opportunity for cleaning up the tax system
6.2.1 Magnitude of exemption
6.2.2 GST and Direct Taxes Reforms are complementary
6.2.3 Rationalization of exemptions is especially salient for the Centre
6.2.4 Exclusion of certain items also is unjustified
6.3 Exemption and zero-rating
6.3.1 What is zero-rating
6.3.2 What is exemption
6.3.3 Effect of exemption and zero rating
6.3.4 Exemption and zero-rating under the GST laws
6.4 Effectiveness of exemption and zero-rating
6.4.1 Effectiveness of exemption is doubtful
6.4.2 Rationale for exemption and reduced rates despite their undesirability
6.4.3 Choice between zero- rating and exemption
6.4.4 Items eligible for exemption
6.4.5 Exemption and the CGST Act, 2017
6.5 Exemption of health and education services
6.5.1 Exemption of health services
6.5.2 Exemption of education services
6.5.3 Exemption of health & education services and the CEA Committee, 2015
6.5.4 Health & education and the GST Law
6.5.5 Conclusion
6.6 Area-based exemptions
6.6.1 NE & hilly States
6.6.2 Special Economic Zones
6.6.3 Area based exemptions and the GST Law
6.6.4 GST Council on area-based exemptions
6.7 Taxation of sin/demerit goods:
6.7.1 Levy of tax on sin/demerit goods
6.7.2 Exclusion of alcohol
6.7.3 Tobacco goods and alcohol
6.7.4 Inclusion of Petroleum Products
6.7.5 Tax rate on sin/demerit goods
6.8 Natural gas
6.9 Telecom services
6.9.1 Definition of telecom services
6.9.2 Some specific provisions relating to telecom in the CGST Act
6.9.3 International telecom services
6.10 e-commerce
6.10.1 Significance of e-commerce
6.10.2 e-Commerce - Ebrill, 2001
6.10.3 e-Commerce and the CGST Act
6.10.4 Impact of GST on e-Commerce.
6.11 Credit for VAT on capital goods
6.11.1 Definition of capital goods
6.11.2 TFR, 2009
(vi)

6.11.3 CEA Committee, 2015
6.11.4 Capital goods and the CGST Act and Rules.
6.11.5 Conclusion
6.12 Taxes on vehicles and goods & passengers :
6.12.1 Recommendations of TFR, 2009
6.12.2 Subsidizing public transport
6.12.3 Transport and the GST Law
6.13 Exclusion of Power/Electricity
6.13.1 Power is an important inputs in production of goods and services
6.13.2 Recommendation on power sector
6.13.3 Power and the GST Law
7 Treatment of Hard-to-Tax Sectors
7.1 Hard-to-tax sectors (Tait, 1988):
7.2 Agriculture
7.2.1 Ebrill, 2001
7.2.2 Le, 2003
7.2.3 Tait, 1988
7.2.4 Agriculture and the GST Law
7.3 Public Sector
7.3.1 Le, 2003
7.3.2 TFR, 2009
7.3.3 Public utilities
7.3.4 Public sector and the GST Law
7.4 Real-estate and housing
7.4.1 Ebrill, 2001
7.4.2 Le, 2003
7.4.3 TFR, 2009
7.4.4 CEA Committee, 2015
7.4.5 Concerns on the impact of GST on real estate
7.4.6 Real Estate and the GST Law
7.5 Financial Services
7.5.1 Tait, 1988
7.5.2 Le, 2003
7.5.3 Schenk, 2006
7.5.4 Current approach to the financial services in India
7.5.5 Treatment of financial services
7.5.6 Treatment of insurance
7.5.7 Financial services and the GST Law
7.6 Treatment of small traders/businesses
7.6.1 Small traders/businesses encounter problems in seven areas
7.6.2 Exempting small businesses
7.6.3 Determining exemption threshold
7.6.4 Voluntary registration for small businesses
7.6.5 Threshold for exemption in India
7.6.6 Should the States have different thresholds
7.6.7 Small traders and Compounding
7.7 Tax rate for Precious Metals:
7.7.1 Precious metal and TFR, 2009
7.7.2 Precious metals and the CEA Committee, 2015
(vii

7.7.3 GST Council rate for precious metal
7.8 Leasing Goods and Agents
7.8.1 Leasing
7.8.2 Agents
7.8.3 Leasing and Agent and the CGST Law.
7.9 Second hand goods
7.9.1 Can used goods be subject to VAT
7.9.2 Disadvantages of not taxing used goods
7.9.3 Procedure for bringing such goods into VAT
7.9.4 Second hand goods and the GST Law
7.10 Services performed abroad
7.10.1 Practice in the EC
7.10.2 Provision in the GST Law
8 Constitutional, Legislative and Administrative aspects of GST
8.1 Pre-requisites for smooth implementation of GST
8.1.1 Legal, administrative and institutional requirements
8.1.2 Timeline for implementing VAT/GST
8.2 Need and objectives of the CAA, 2016
8.2.1 Need for amending the Constitution
8.2.2 Objects and reasons behind the Constitutional Amendment
8.2.3 Salient features of the CAA, 2016
8.3 Legislative steps:
8.3.1 GST Law
8.3.2 IGST Law
8.3.3 Power of Central/State Govt. to make Rules
8.3.4 Power to make Regulations
8.4 CAA, 2016 and the GST Council
8.4.1 Composition of the GST Council
8.4.2 Functions of the GST Council
8.4.3 Quorum
8.4.4 Major decisions of the GST Council
8.5 Taxation jurisdiction of the Central/State Governments for GST
8.6 Administrative structure
8.6.1 Central Govt. level
8.6.2 Should GST/VAT be administered by the Customs Department
8.6.3 Should Income Tax Deptt. administer the GST
8.6.4 Advantages and drawbacks in brief of the different models
8.6.5 State Government level
8.7 Administrative systems and procedures
8.7.1 Harmonization of Procedures
8.7.2 Major features of the proposed registration, return filing and payment
procedures
8.8 Self-assessment
8.8.1 Effective self-assessment system
8.8.2 Why is self-assessment so important for VAT administration?
8.8.3 Self-assessment and the CGST Act, 2017
8.9 Transitional Issues
8.9.1 Educating public and traders
8.9.2 Transitional provisions in the CGST Act, 2017
(viii)

8.10 Advance Ruling and the CGST Act, 2017
8.10.1 Subjects stipulated for advance ruling
8.10.2 Situations in which ruling pronounced are binding
8.11 Preparatory action by the Businesses
8.11.1 Experience in China
8.11.2 Issues for the businesses
8.11.3 Administrative and Compliance Costs
8.11.4 Role of the Chartered Accountants
8.12 VAT performance measures
8.12.1 Concepts of tax buoyancy and elasticity
8.12.2 Tax Buoyancy vs. Tax elasticity
8.12.3 Diagnostic tools for measuring in particular the VAT performance
8.12.4 Revenue Performance
8.12.5 Policy vs Compliance gap
8.12.6 Efficiency and C-efficiency ratios of some countries
8.12.7 Calculation of VRR by TFR, 2009 for India
8.13 GST Network (GSTN)
8.13.1 What is GSTN
8.13.2 Non-Govt. Company for GSTN
8.13.3 Payment Process
8.13.4 GSTN to reduce compliance burden
8.13.5 GST Suvida Providers (GSPs)
8.13.6 Developing Software
8.13.7 Tax leakage and GSTN
8.13.8 GSTN and role of stakeholders
9 VAT/GST evasion and fraud
9.1 Causes of tax evasion
9.2 VAT is less vulnerable to evasion and fraud
9.2.1 Fractional nature and self-recovering features of VAT
9.2.2 Some distinctive features of VAT make it less vulnerable
9.2.3 Frauds distinctive to VAT
9.2.4 Description of tax frauds and evasion
9.3 Credit mechanism creates opportunities for fraud characteristic of VAT
9.4 Zero-rating of exports and Carousel fraud
9.5 Estimate of the VAT loss in UK :
9.6 Timing and methods of VAT refunds
9.6.1 Functioning refund system is essential to the VAT system
9.6.2 Situation of excess of input tax over output tax
9.6.3 VAT frauds and speed of refunds
9.6.4 Delay in refunds
9.6.5 Hybrid system of refunds
9.6.6 Special programmes to deal with refunds to exports
9.6.7 Strategic approach to refund audit
9.7 Options for avoiding VAT fraud
9.7.1 Keen, 2007
9.7.2 Ebrill, 2001
9.7.3 Defensive measures
9.7.4 Fraud & evasion and the CGST Act, 2017
9.8 Control and incentive system for better compliance
(ix)

9.8.1 Provision of adequate controls
9.8.2 Control over Retailers (Tait, 1988)
9.8.3 Co-opting tax payer's interest
9.8.4 Mutual assistance by the States
9.9 Audit
9.9.1 Why is an effective audit program critical for VAT operations?
9.9.2 Basic guidelines for an audit programme
9.9.3 Elements of an effective audit figure
8.9.4 Effective VAT audit programme improves income tax compliance also
9.9.5 What are the main reasons for the lack of an effective audit program?
9.9.6 Strategic approach to refund audit
9.9.7 Audit and the GST Law
9.10 Enforcement and penalty
9.10.1 Administrative vs. legal action
9.10.2 Power of inspection, search and seizure
9.10.3 Offences and penalties
9.10.4 How much effort should be put into enforcement
9.10.5 Enforcement and the GSTN
10 Concerns of the States about GST
10.1 Concerns of the States about GST:
10.1.1 Concerns of the States expressed before the 13th FC
10.1.2 Observations of the 13th FC
10.1.3 Critique of the observations of the 13th FC
10.1.4 14th FC and GST
10.2 Current status in regard to the concerns of the States
10.3 Common National Market – what, why and its downside
10.3.1 Positive effect of a Common Market
10.3.2 Impact on manufacturing
10.4 Negative effect of GST on the State Finances
10.4.1 Views of Govt. of MP
10.4.2 Losses/gains to the States due to the GST regime
10.5 Relative revenue gains & losses of the States and the Centre
10.5.1 Revenue Gains/losses of the Centre vs the States
10.5.2 Why Should the Centre have a higher tax accrual
10.5.3 Inter se gains/losses of the States due to the GST regime
10.6 GST and the Union Finance Commission (UFC) transfers:
10.6.1 Fiscal federalism and fiscal transfers
10.6.2 Pre vs. post GST sharing of the UFC transfers (2013-14)
10.6.3 Major Losses for the poorer states due to the 14th FC
10.6.4 Impact of GST on the UFC transfers
10.6.5 UFC transfers to the poorer States would decrease
10.6.6 Structural shift in the Central transfers to the States due to the 14th FC
10.6.7 Implication of the Special Levies
10.7 Would the poorer States face accentuating fiscal inequity
10.7.1 Share of 18 major States in Pre vs Post GST regime
10.7.2 Should the poorer States bear the cost of GST
10.8 Compensation to the States for the possible loss of revenue
10.8.1 Views of the CEA Committee
10.8.2 Views of TFR, 2009
(x)

10.8.3 CAA, 2016 and compensation to the revenue loosing states
10.8.4 State RNRs
10.8.5 Estimation of the State-specific losses
10.8.6 Formula for determining Compensation
10.8.7 Compensation to the Local Bodies
11 Effect of VAT/GST on Prices
11.1 Apprehension regarding the effects of VAT on prices:
11.1.1 Does VAT affect prices
11.1.2 Measuring the effects of VAT on prices
11.1.3 Response of traders and public
11.2 Impact of VAT on prices
11.2.1 Overall price level
11.2.2 Relative price changes
11.3 Empirical evidence from other countries
11.3.1 Effect on prices due to introduction of VAT
11.3.2 Effect on prices due to changes in the rates of existing VAT
11.4 Likely impact of VAT on prices in India
11.4.1 Potential price impact of GST
11.4.2 Current taxes on the consumption basket
11.4.3 Aggregate impact on inflation to depend on RNR and standard rate
11.4.4 Views of NCAER, 2009
11.4.5 Views of a Rtd. Professor of JNU
11.4.6 GST Council on the rate structure and prices
11.5 Post-VAT inflation in India
11.6 Effective mechanism to monitor and contain price impact
11.6.1 Action by Govts. to monitor and contain prices
11.6.2 Mechanism to monitor price increases
11.6.3 UK Counter-Inflation Bill, 1973
11.7 Action being taken by the Central/State Govts. in India to control prices
11.7.1 GST Council and GST rates for managing prices
11.7.2 Anti-profiteering Measure in the CGST Act, 2017
11.8 Price inclusive or exclusive of VAT
11.9 Conclusion
Foreword
Preface
An Overview of GST
TAX
Indirect Direct
Are collected from someone other than the Any levy that is both imposed on &
person or entity (viz. consumer) that would collected from a specific people or
normally be responsible for paying taxes. organizations.
Indirect Taxes to be subsumed in GST

Central State Central State
 Central Excise Duty  VAT/ Sales Tax

 Additional Excise Duty  Entry tax (not in lieu of Octroi)
 Service Tax Entertainment Tax (not levied by LBs.) Income tax Agriculture tax
 ACD/CVD/ SAD  Luxury Tax Corporate tax  Property tax
 Excise duty under MTP Lottery, Betting etc.  Inheritance tax  Profession tax
 Surcharges& Cesses  Cesses & surcharges Gift tax, etc.  Others
**ACD= Additional Customs Duty; CVD= Counter Vailing Duty; SAD= Special Additional Duty; VAT= Value Added Tax
Why GST for indirect taxes only?: As the name GST (Goods & Services Tax) connotes, GST is in lieu of indirect
taxes on production, storage & consumption of Goods & Services. Direct taxes are levied on Incomes.
Why GST? GST and Rates

 Prevailing multiple taxes at production, storage &  Rightly destination based, consumption type, broad
consumption points lead to based, applied through to the retail stage, and operated
through the invoice method.
- Cascading effect and hence, higher incidence of tax
 Ideally one rate for all good & services
and greater incentive to evade taxes
- But GST to have multiple rates (exempt, lower,
- Higher cost of compliance (for tax payer) and
standard, high, etc.) given the socio-economic
enforcement (for administration).
objectives'.
- Hampered tax efficiency
 Moreover, India being federal, GST would
- Price distortions & suboptimal resource allocation
- Hindrance to a common national market. realistically be levied both by the Centre (CGST) and
States (SGST) and IGST for Interstate trade.
Major GST Issues:
1. Computing tax base, RNR and rate structure 2. Compensation:
a. Estimating Tax base, particularly for services. a. Amount, duration and mechanism
b. Identifying exempted & excluded Goods and b. Compensation for transitional vs. structural losses?
Services 3. Equity & Autonomy
c. Threshold limit for small enterprises and a. Vertical imbalance – relative gains of the Centre & the States.
bringing informal sector in the tax base. b. Fiscal autonomy of the States in a federal polity – viz. U.S a
d. Rules for Inter-state transactions, and truly democratic federal polity has not adopted GST.
determining Place of Supply Rules. c. Scope for equitable increase in the revenues of the States
e. Treatment of e-commerce, capital goods, particularly Low Income States.
electricity, financial services, real estate, etc. d. Implications of GST for the UFC transfers
f. Deriving RNR for the Centre and the States. 4. GST Network
g. Determining Rate Structure. 5. GST evasion and enforcement.
h. Implications of major variations in Tax base 6. Miscellaneous
across the States a. Dispute resolution and Legal framework
b. Implementation modalities including managing changeover.
c. Administrative etc. jurisdictions of the Centre and the States
The Key Concepts in VAT
 VAT : VAT in principle (there are always exceptions), is a broad-based tax on all commodity
(including services) sales, whether to consumers or to other businesses. However, registered
businesses are able to credit the VAT charged on their purchases (“input VAT”) against the VAT
due on their sales (“output VAT”). Any excess credits this creates are refunded to the taxpayer.
 GST :What is internationally known as VAT, is the GST proposed in India.
 Zero-rating means that VAT is levied at a rate of zero. No tax is due on output, but the credit—
which, with no output tax, becomes a refund—is still available for input VAT.
 Exemption, in contrast, means that no tax is due on output but nor is a credit available for input
VAT. Thus the VAT ‘sticks’ on business purchases. The Australian term “input-taxed” is more
evocative.
 Input Tax Credit (ITC) : Under ITC system, tax paid on inputs is offset by means of a credit
against tax due on output, tax paid being recorded in invoices issued by seller to buyer.
 Exclusion :Certain items are altogether excluded from the purview of GST/VAT e.g. alcoholic
liquor for human consumption and electricity in India.
 Threshold : Certain business entities below a threshold in terms of turnover, capital assets,
numbers of employed profit, etc. are exempted from VAT/GST.
 Composition : With a view to reducing administrative and compliance burden, small business
below certain threshold are allowed to opt for a compounded levy (of say 1%) on the aggregate
turn-over. But no ITC is allowed against a compounded levy (or purchases made from the exempted
dealers).
 Destination principle: which is the international norm—commodities are taxed by the
jurisdiction in which they are consumed. This is generally implemented under VAT by zero-rating
exports and charging VAT on imports (there are other ways of implementing the destination
principle). While this implies that exporters will be due refunds, it does not amount to an export
subsidy. Further, levying VAT on imports simply puts them on the same basis as their domestically
produced counterparts. Both are thus fully WTO-consistent
 Origin principle: under this, commodities are taxed according to where they are produced.
Although some countries of the former Soviet Union applied VAT on this basis for some trade
flows among themselves in the early years of transition, no country now applies such a system.
 Invoice Credit method :VAT is generally implemented in the “invoice-credit” form, in which
registered traders charge tax on their sales and issue corresponding invoices to their customers,
who, if also registered, can use these invoices to establish a right to credit or refund against their
own output VAT liability.
(ii)
 Subtraction method: under this, each trader is taxed on the difference between their purchases
and sales (e.g., Japan, Italian IRAP).
 Addition method: VAT is levied on the sum of wages and profits (not practiced anywhere).
 RNR and multiple rates: the term RNR refers to that single rate, which preserves revenue at
desired (current) levels. It is a given single rate that gets converted into a whole rate structure i.e.
multiple rates, depending on the policy choices about exemptions, what commodities to charge at a
lower rate (if at all), and what to charge at a higher rate.
 Standard rate : RNR should be distinguished from the “standard” rate defined as that rate in a
GST/VAT regime (which has more than one rate i.e. multiple rates), which is applied to all goods
and services whose taxation is not explicitly specified. Typically, the majority of the base will be
taxed at the standard rate, although this is often not true.
 Effective Rate : Effective rate is usually higher than the nominal rate due to cumulative and
unknowable tax liabilities, different tax liabilities depending on the degree of industrial vertical
integration, difficulty in assessing the amount of cascade tax to be rebated on exports or imposed on
imports, and so on.
 Supply of Goods : Most legislation holds that goods are "supplied" when : (a) Exclusive
ownership is passed to another person, (b) The Transfer takes place over time under an agreement
such as a lease or hire purchase, (c) Goods are produced from someone else's materials, (d) A major
interest in land is provided, that is, the use of land for a long period of time, (e) Goods are taken
from a company for private use, and (f) A business asset is transferred.
 Supply of Services: Any transfer or provision for a consideration that is not the supply of a good
is automatically the supply of a service.
 Sale, Consignment and Supplies: (a) “Sale” is for consideration; (b) “Consignments” are in the
nature of branch transfers, and (c) “Supplies” would constitute both “Sale” and “Consignment”
transactions.
 Supply and the GST Law of India:
- Sch. I of the model GST Law lists matters to be treated as supply even if made without
consideration.
- Schedule II lists matters to be treated as supply of goods or services.
- Schedule III lists activities or transactions which shall be treated neither as a supply of goods nor
a supply of services.
- Sch. IV Lists activities or transactions undertaken by the Central/State Government or any local
authority which shall be treated neither as a supply of goods nor a supply of services.
(iii)
 Place of supply: Goods are considered supplied where they are physically located when they are
allocated to a customer. The usual place of supply for services is where the service is 'rendered', or,
as a secondary alternative, the usual place of residence of an individual supplying the service or the
country where the supplying country is legally incorporated.
 Time of Supply: Time of supply is that the VAT is liable at the rate applicable at a particular
time. The time of supply is the earlier of : (i) when the invoice is issued. This is the best, and
clearest, dated documentary evidence, (ii) when the goods are made available to the customer or the
services rendered, and when payment is made.
 Value of goods & services supplied :As per Sec 15(1) of Model GST Law the value of a
supply of goods and/or services shall be the transaction value, that is the price actually paid or
payable for the said supply of goods and/or services where the supplier and the recipient of the
supply are not related and the price is the sole consideration for the supply.
 Discounts: are of three forms – (i) unconditional (if the item is purchased, the discount is
claimed), (ii) (conditional on) prompt payment and (iii) contingent (on customer doing something
else.
 Taxable person: is one who must register for VAT and be accountable to the authorities for the
tax they have collected. Essentially, the tax-payer must be a legal entity that can be sued.
 Taxable Activity for VAT : Test used for 'business activity' are : (i) continuity in transactions,
(ii) supplies be of a significant amount, (iii) profit is not necessary, (iv) control of assets concerned
should be in the hands of supplier, (v) supplies should be to members outside the organization, (vi)
activities should have the characteristic of a normal commercial undertaking.
 Works contract : means a contract wherein transfer of property in goods is involved in the
execution of such contract and includes contract for building, construction, fabrication, completion,
erection, installation, fitting out, improvement, modification, repair, maintenance, renovation or
commissioning of any immovable property.
 Reverse charge: means that the liability to pay tax is by the recipient instead of the supplier of
goods or services.
 Abatement: Abatement of tax refers to a reduction in or reprieve from tax, debt or any other
payment obligation. A taxpayer seeking abatement of taxes has the burden of proving the
disproportionate payment of taxes by a preponderance of evidence.
A Reference Guide
On
Value Added Tax (VAT)
And
Goods & Services Tax (GST)
in India
Part – I : Main document

Chapter 1
Taxation System and VAT
(Occam's razor applied to the domestic taxation VAT + a few excises only?)
1.1 Perspectives of taxation

1.1.1 Why tax: Taxation is the process or means by which the sovereign, through its law-making
powers, raises income to defray expenses of the Government. Taxation apportions the cost of
government among those who in some measure are privileged to enjoy its benefits and must,
therefore, bear its burden.
1.1.2 Perspectives of Govt., Business and People: Tax policy matters to the government,
businesses and common people alike. Governments have to collect taxes to provide public goods &
services. People are concerned about parting with their hard earned money for the goods & services
they may not clearly see. A simple tax system with broad base, low rates, ease of paying taxes and
non-adversarial administration can help to improve the business climate.
1.1.3 Economists' view: Most taxes (including VAT) distort what would have happened without it.
Because the price for someone rises, the quantity of goods traded decreases. Correspondingly,
people may be worse off by more than the government is made better off by tax income (known as
deadweight loss–see Box 1.1). If the income lost by the economy is greater than the government's
income; the tax is inefficient.
 The entire tax income of the government may not be a deadweight drag, if it is used for
productive spending or has positive externalities – i.e., governments may do more than
simply consume the tax income.
 While distortions occur, consumption taxes are often considered superior because they distort
incentives to invest, save and work less than most other types of taxation – a consumption tax
discourages consumption rather than production.
Box 1.1: Deadweight loss

 In the diagram on the right:
- Deadweight loss: the area of the triangle formed by the tax
income box, the original supply curve, and the demand
curve.
- Governments tax income: the grey rectangle that says "tax
revenue"
- Total consumer surplus after the shift: the green area
- Total producer surplus after the shift: the yellow area
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1.2 Classification of taxes:
Table 1.1: Classification of taxes
Based upon the way tax Based upon the way tax Based upon the head under
is imposed & collected. affects one's income*. which tax is imposed.
State Govt. Central Govt.
 Direct Taxes:  Progressive Taxes:  Direct Taxes (Income):  Direct Taxes:

Imposed directly on the Take an increasing a) Agricultural Income Tax a) Corporate tax
taxpayer and paid proportion of one's b) Taxes on Professions, b) Taxes on income
directly to the Govt. by (taxable) income as Trades, Employment, etc. (other than Corpn. Tax)
the persons (juristic or one’s (taxable)  Direct Taxes (Property c) Estate duty
natural) on whom it is income increases. & Capital Transactions: d) Interest tax
imposed. It cannot be (e.g. Income & a) Land revenue e) Wealth tax
shifted by the taxpayer Corporation taxes) b) Stamps &Registration f) Gift tax
to someone else. (e.g.  Proportional Fees g) Hotel receipts tax
Income tax, Professions Taxes: Take the same c) Urban Property Tax, etc. h) Expenditure tax
tax, corporate tax). proportion of one's  Indirect Taxes
(Commodities &  Indirect Taxes:
 Indirect Taxes: tax (taxable) income as
Services): a) Custom Duties
collected by an one's (taxable) a) Sales Tax/VAT b) Union Excise Duties
intermediary (viz retail income increases.
b) State Excise c) Service tax
store) from the person  Regressive Taxes: c) Taxes on Vehicles d) Stamp & registration
who ultimately bears it Take a decreasing d)Taxes on Goods & fees
(viz customer). It is proportion of one's Passengers e) Central Sales Tax
shifted from the taxpayer (taxable) income as e) Taxes & Duties on f) CENVAT
to someone else. An one's (taxable) Electricity g) Other Taxes &
indirect tax evidently income increases. f) Entertainment Tax, Duties
increases price of goods (e.g. Sales Tax, g) Other Taxes & Duties
&services and consumer VAT, Excise Duty)
actually pays. (e.g.
Service Tax, Excise
Duty, VAT.)
*See Annex 1.1 (A) & (B) for a theoretical exposition.
1.3 Design and effects of taxation:
1.3.1 Considerations in designing taxes : Two main considerations in designing taxes are:
(i) Normative: How to design taxes to promote social welfare in terms of the public interest in
efficiency and equity. Efficiency implies raising revenue in a way that does not harm aggregate real
income and equity ensures a fair distribution of that aggregate income.

(ii) Positive: The economic effects of the various taxes that governments use i.e. (a) What effects
do taxes have on people's desires to consume, save, supply their labour, or on firms' desire to
invest? (b) Who bears the burden of various taxes?
(iii) Influential taxation theories are (i) 'Ability to Pay', and (ii) 'Beneficiary to Pay' (a later version
is 'Voluntary Exchange') as explained in Annex 1.2.
1.3.2 Effects of taxation are given in Table1.2.
Table 1.2: Effects of taxation
Sl. Items +ve/ How? Sl. Items +ve/ How?
-ve -ve
General Both Direct taxes reduce one's 6 Resource -ve Regressive taxes raise
1 price disposable income & hence allocation production& sales cost
level lower aggregate demand, and reduce demand, thus
lowering general price level. re-directing the flow of
Indirect taxes raise production resources away from that
and sales cost and increase production.
general price level.
Standard -ve Direct taxes reduce one's 7 Un- +ve Taxes are used to check
2 of living disposable income, resulting in desirable against undesirable
a lower standard of living. consump- social behaviour viz.
Indirect taxes may cause tion duties on tobacco raise
inflation but allow higher cigarette prices and thus
nominal wage. The living lowering its
standard will be lower if the consumption.
increase in nominal wage rate
is less than the inflation rate.
Invest- -ve Direct taxes reduce one's net 8 Eco. -ve Income & Professions
3 ment profits & investment incentive, Growth & tax lowers people's
resulting in less investment. Employ- disposable income and
Indirect taxes may reduce ment Wealth tax and Service
investment based incentives in tax reduces investor's net
the market. profits, leading to a
lower economic growth
and lower employment.
Working -ve Direct taxes may reduce one's 9 Capital +ve Higher the tax rate,
4 incentive working incentives, especially flow more the capital
if salaries tax is progressive. outflow will be, as the
Indirect taxes will not affect investors' net profits get
working incentive as it is not a smaller and vice versa.
tax on income.
Income Both Progressive taxes reduce 10 Govt. Both Higher tax rates will
5 distribu- inequality as the rich have to revenue bring in more revenue in
tion pay a larger proportion of their the short run. However,
income as tax than the poor. lower disposable income
Regressive taxes will widen and net profits reduce
the income gap as the poor future economic
have to pay a larger proportion activities and also lead to
of their income. tax evasion, which
ultimately results in
lower revenue.

1.3.3 Higher vs. Lower taxes and Direct vs. Indirect taxes: It is evident from Table 1.2 that
Government has to strike a delicate balance between higher vs lower taxes and direct vs indirect
taxes based on its larger objectives. For instance –
i) Higher vs. Lower tax rates: Higher tax rates may bring in more tax revenue to the Govt. in the
short run. But the lower disposable income and net profits may reduce future economic activities
which may ultimately result in lower revenue. Moreover, higher cost to the payer may lead to tax
evasion, which will again result in lower revenue.
ii) Direct vs. Indirect taxes :
 Direct taxes (viz. income tax) are progressive and reduce inequality of an economy as the rich
have to pay a larger proportion of their income as tax than the poor. But high taxes may adversely
affect investment, work incentive, economic growth and employment.
 Indirect taxes (viz. VAT) on the other hand are 'regressive' and widen the income gap as the
poor have to pay a larger proportion of their income as taxes on consumption. It will also increase
general price level, adversely affect standard of living and redirect investment & resource
allocation (a contrary view is given in para 1.6).
Box 1.2: Tax Evolution and Efficiency

 Countries are supposed to move from simple to complex tax structures and from systems that
distort allocation to those that are more neutral.
 The easiest point of taxation for countries with a simple economic structure is at importation.
Customs duties are one of the oldest forms of tax, visible and not too difficult to administer.
 Excises, usually with specific rates and relying on physical controls, follow.
 However, as trade becomes more complex, countries are pushed, as far as indirect taxes are
concerned, toward introducing a truly general sales tax for its revenue buoyancy and lack of
distortion. -Tait, 1988
1.3.4 Equivalencies of VAT with other taxes :

 It has been observed that the effective incidence of the VAT can differ from its formal or legal
incidence (Box 3.1). In the same vein, a VAT can be economically equivalent to some other
combination of taxes, and understanding those equivalencies can clarify the distinctive features of a
VAT. The focus here is on equivalencies for a consumption-type VAT.
 The first equivalency is obvious: a consumption-type VAT is economically equivalent to a pure
retail sales tax. This emphasizes, in particular, that it is not only the VAT that is conducive to
production efficiency: that is simply a feature of its being a tax on consumption.
 For a VAT levied at a uniform rate on all commodities, more subtle equivalencies arise. In a
closed economy, an instructive example of an equivalency for such a VAT is:

 A cash flow business tax and a tax on wage earnings, both levied at the same rate. To see this,
recall that value added (VA) is simply sales (S) less nonfactor current inputs (N) and investment (I).
Adding and subtracting the wage bill W then shows:
VA = (S – N – W – I) + W where the first term is exactly the base of a cash flow tax: sales minus all
nonfinancial expenditures. Adding to such a system a personal tax-free allowance, this is
essentially the “flat tax” of Hall and Rabushka (1995).
 If, further, the VAT rate is constant over time, then equivalency also holds between a VAT and:
- A tax on pure profits, a capital levy, and a tax on wage earnings, all levied at the same rate. This
equivalence follows directly from the first since, over time, the revenue from a cash flow tax comes
from two sources: pure profits from past and future investments, and the normal return on capital
already in place (with the latter equal, in present value, to the value of the capital itself). This way
of thinking about the VAT emphasizes that—like any tax on consumption—it is in part a
retrospective tax on past savings, a feature, which is of some importance in considering the
distributional effects of a VAT.
 The presence of international trade renders the equivalencies somewhat less transparent, because
of the exclusion of exports from a consumption-type VAT. This means, for instance, that a
destination-based VAT at a uniform rate is equivalent to the sum of a cash flow business tax—with
all sales of domestic firms taxable—a wage tax (as before) and uniform export subsidy/import tax.
1.3.5 Shift to VAT from income taxes (Ebrill, 2001): Globally, the tax structure is shifting
towards tax on consumption. Annex 1.7 and para 1.5.5 show that VAT is the best form of
consumption taxes. In its basic structure the VAT is essentially equivalent to a tax on wages and
pure profits (Para 1.3.4 and Annex 1.4); and seen in that light it clearly has many similarities to an
income tax. Indeed it is in some respects a superior form of income tax. Some would find merit, in
particular, in its exclusion from tax of the return to savings (being ultimately a tax on
consumption).
 Moreover, the component of the VAT that bears on business income has some advantage
relative to the corporation taxes commonly observed, having the strengths that many see—in the
avoidance of distortions to the level and composition of investment—in the cash-flow form of
corporate tax. As corporate taxes come under increasing pressure from international tax
competition, so this role of the VAT as, in part, an implicit corporate tax may come to be both more
clearly apparent and more valued. Where these resonances will lead is far from clear. The treatment
of international trade under the VAT, for instance, is an important source of difference from a
residence-based corporate tax (a point which perhaps underlies a lingering concern in the United
States that European firms enjoy a competitive advantage in world markets from the zero-rating of
exports under the VAT). At lower levels of government, there are already signs that income type
accounts-based VATs may have a role to play as a form of local income tax, the recent Italian
IRAP being a prominent example. Bird and Mintz (1999) make a general case for such taxes at
lower-levels of government. The future of the VAT could hardly be as dramatic as its recent past,
but the power of its inner logic is likely to be felt even more strongly.
Box 1.3 : Shifting to VAT from income taxes

 It can be argued that shifting to VAT from income taxes is a desirable part of long-run economic
management. The disincentive effects of income taxes on work effort, savings, and risk taking are
emphasized; VAT revenues replacing part of income tax could boost economic activity. According to
Walters (1986-p78), "It is a pity that the bad press accorded to the VAT increase of 1979 had tended to
inhibit any further shift from income and capital taxes toward VAT."(see Annex 1.3 for the trend).
 On the other hand, it has been held that the composition of taxes for a given budget deficit critically
affects the trade balance. Under a value added tax system, a budget deficit worsens the trade balance and
raises the world interest rate; under an income-tax system, the same deficit improves the trade balance
and lowers the world interest rate (Frenkel and Razin 1988-p297)
Source : Tait, 1998(p229)
1.3.6 Desirability of tax on consumption in addition to tax on income: inspite of their

equivalence is given at Annexure 1.4. As stated above, a uniform tax on consumption is
equivalent, in present value, to a uniform tax on wage income (and net bequests), and in that
sense adds little to what can be achieved by simply taxing wage income. But when income tax can
be evaded but commodity taxes cannot, welfare is improved by the introduction of a small uniform
tax on consumption. Beyond this, moreover, information obtained in enforcing commodity taxes—
on a trader’s turnover, for example—may be helpful in enforcing the income tax (and vice versa).
 Further, particularly the VAT has often been seen as a catalyst for wider reform, laying a
groundwork that can subsequently be used, in particular, for the development of a more effective
income tax. Restructured organizations, the development of self-assessment, and the enhancement
of audit capacity are all prerequisites for income tax systems, especially at personal level, that
overcome the severe limitations which many developing countries encounter in this area.
1.4 Features of a good taxation system: A good tax system should be economically efficient,
neutral in its application, distributionally attractive, and simple to administer as explained
below:
(i) Taxes be low: The private sector is the primary source of all wealth, and is what drives
increases in economic growth and standard of living in a market-based economy. Taxes should
therefore, consume as small a portion of national income as possible and accordingly be broad-
based, allowing tax rates to be as low as possible at all points. While a tax system should raise
enough revenue such that essential government expenditure can be adequately met, it should do so
without burdening the economy too much (not particularly the tax payer), as not to become a
disincentive for performance (internal and external investment, work returns and savings).
(ii) Be economically efficient: Individuals must face same prices for economy to reach Pareto-
optimal outcome. Broad-based taxes are distorting (i.e. drive wedge between price paid by
consumer and prices kept by firms) so they violate this property. The goal then is to design a tax
that introduces the least distortion and keeps society as close to the Pareto-optimal outcome as
possible.
(iii) Be neutral: The fundamental purpose of taxes is to raise necessary revenue for governments,
not micromanage a complex market economy through tax rebates and penalties. The tax system
should minimize distortions in the economy, and interfere as little as possible with the decisions
(investment etc.) of free people in the marketplace. Taxation should seek to be neutral and equitable
between the forms of business activities to contribute to efficiency by ensuring that optimal
allocation of the means of production is achieved.
(iv) Be Transparent: A good tax system requires informed taxpayers who understand what is
being taxed; how taxes are assessed, collected and complied with; and how tax burdens affect them
and the economy.
(v) Ensure an open process and be representative: Tax legislation should be based on careful
economic analysis and transparent legislative procedures. It should be subject to open hearings with
full opportunity to comment particularly by the poor and other interest groups so that policies are
continuously improved for the benefit of the widest possible constituency of citizens.
(vi) Be simple and enforceable: The tax system and law should be as clear and simple as possible,
so that taxpayers know their obligations and entitlements and businesses make optimal decisions
and respond to intended policy choices. It requires that individuals be able to calculate tax bills
fairly easily and that it be difficult to hide information on taxable assets. It increases enforceability
of tax and minimize gratuitous complexity.
- In fact it should not appear unjust or unnecessarily complex. This is to minimize discontent and to
get the most possible revenue at the least possible compliance & administrative costs.The cost of
tax compliance is a real cost to the society i.e., deadweight loss. Complex taxes moreover create
perverse incentives to indulge in aggressive tax planning, shelter and disguise legitimately earned
income (evasion and avoidance).
(vii) Be stable but flexible: Tax policy is a tool of economic stabilization. Therefore, while the
structural features of the tax system should be durable in a changing policy context, yet be flexible
and dynamic enough to allow governments to respond quickly to address potential difficulties in
the economy and be able to change tax liabilities easily and these changes must quickly be felt

throughout the economy. Moreover, it must keep pace with technological and commercial
developments, taking into account that future developments will often be difficult to predict.
 Taxation should produce the right amount of tax at the right time, while avoiding both double
taxation and unintentional non-taxation. Changes in tax law should not be retroactive. As a matter
of fairness, taxpayers should rely with confidence on the law as it exists when contracts are signed
and transactions are made.
(viii) Be Equitous (i.e. Fair & Redistributive): Tax policy be designed to work with
redistribution programmes to achieve End-Results Equity. Equity has two main elements (see
Annex 1.5):
(a) Horizontal equity: It suggests that taxpayers in similar circumstances should bear a similar
tax burden.
(b) Vertical equity: It is a normative concept. According to some, the taxpayers in better
circumstances should bear a larger part of the tax burden as a proportion of their income. In
practice, the interpretation of vertical equity depends on the extent to which countries want to
diminish income variation and whether the taxes should be applied to income earned in a specific
period or to lifetime income. Equity is traditionally delivered through the design of the
personal tax and transfer systems.
[Note : (i) Both principles raise important and difficult questions
– in what sense are people to be deemed to be equal or unequal?
– how unequally can unequal be taxed?
(ii) The issue of horizontal equity is the quest for the ideal tax base (i.e. the item to be taxed).
People with identical tax bases will pay identical tax bill.
(iii) The issue of vertical equity is the quest for the ideal tax structure, as defined by chosen tax
rates and deductions. Differences in chosen tax rates and deductions make it so that different
people pay different tax bill. Theoretical basis may be seen at Annex 1.5.]
(ix) Ensure Inter-nation equity: It is concerned with the allocation of national gain and loss in the
international context and aims to ensure that each country receives an equitable share of tax
revenues from cross-border transactions e.g. the division of taxing rights between source and
residence countries.
(x) Not inhibit trade: In the increasingly global marketplace, taxes on corporations, individuals,
and goods and services should be competitive with other nations. The tax system should not
penalize or subsidize imports, exports, investment abroad or foreign investment in the country.
(xi) Be amenable to Repricing: Repricing must be possible to tackle the harm or benefit of certain
activities (externalities) to the wider society.

(xii) State and local taxes matter. The same general principles that apply to federal taxes also
apply at the state and local level. Local, State and Federal tax systems should be harmonized to the
extent possible, including consistent definitions, procedures and rules.
Since this Reference Guide is about the indirect taxes and VAT/GST in India, subsequent paras
and chapters deal with the indirect taxes and VAT/GST only.
1.5 VAT and the indirect taxation system:

1.5.1 What is VAT: VAT is a multipoint tax on value addition (i.e. increase in value) which is
levied/collected at the stages of manufacture, distribution & sale and with a provision for deduction
of tax paid on 'input' against the tax collections on 'output' at each stage, before remitting to the
Govt. account (Box 1.4). Despite its name, VAT is ultimately intended as a tax on consumption.
Box 1.4: Value addition and input tax credit in the VAT system
 Suppose that firm A sells its output (assumed, for simplicity, to be produced using no material
inputs) for a price of Rs.100 (excluding tax) to firm B, which in turn sells its output for Rs.400 (again
excluding tax) to final consumers.
 Assume now that there is a VAT with a 10 percent rate. Firm A will then charge from B Rs.110,
remitting Rs.10 to the government in tax. Firm B will charge final consumers Rs.440, remitting tax of
Rs.30: output tax of Rs.40 less a credit for the Rs.10 of tax charged on its inputs. The government thus
collects a total of Rs.40 in revenue.
 In its economic effects, the tax is thus equivalent to a 10 percent tax on final sales (there is no tax
incentive, in particular, for B to change its production methods or for the two firms to merge), but the
method of its collection secures the revenue more effectively (Box 1.6).
 Effect of VAT goes beyond the consumers (Ebrill, 2001): Contrary to the view often held by
policymakers, the real burden of the tax is not necessarily borne only by consumers. The real loss
of income that is the counterpart to—because of the distortion of activity, generally exceeds—the
revenue raised by government, may also be felt by the owners, employees, and/or financiers of the
firms whose output is being taxed. The effective incidence of a VAT, like that of any other tax, is
determined not by the formal nature of the tax but by market circumstances, including the elasticity
of demand for consumption and the nature of competition between suppliers.
1.5.2 Origin and global acceptance of VAT (Ebrill, 2001):
 Intellectually, the basic idea of the value-added tax appears to have originated with a German
businessman, von Siemens, writing in the 1920s. There were other developments in the 1920s,
including the suggestion of the invoice-credit method by Adams (1921). Particularly influential
contributions were made by "le pere de la TVA", Maurice Laure (1953, 1957).
 The VAT has now become a key source of government revenue in over 120 countries (Table
1.3). About 4 billion people, 70 percent of the world’s population, lived in countries with a VAT,
and it raised about $18 trillion in tax revenue—roughly one-quarter of all government revenue.

Much of the spread of VAT, moreover, has taken place over the preceding ten years. From having
been largely the preserve of more developed countries in Europe and Latin America, it has become
a pivotal component of the tax systems of both developing and transition economies. Broad
features of VAT in some countries are given at Annex 1.6.
Table 1.3 : Regional Spread of the VAT
(Number of countries with VATs as of the period indicated)
Sub- EU15 plus Central North
Asia and Small
Saharan Norway and Europe Africa and Americas
Pacific Islandsa
Africa Switzerland and FSU Middle East
Total 33(43)b 18 (24) 17 (17) 27 (28) 9 (21) 23 (26) 9 (27)
1996-Present 18 7 0 6 2 1 3
1986-1995 13 9 5 21 5 6 6
1976-1985 1 2 0 0 2 6 0
1966-1975 0 0 11 0 0 10 0
Before 1965 1 0 1 0 0 0 0
Source: Bird, 2006
Note: Regions defined as in Ebrill et al. (2001), except Serbia and Montenegro, included in Central Europe.
a Island economies with populations under 1 million, plus San Marino.
b Figure in parentheses is number of countries in the region.
1.5.3 Why VAT (see Annex 1.7 also):

 The underlying core motivation behind adoption of VAT seems to have differed in each case:
(a) In Western Europe, adoption of the VAT was intimately associated with the drive for greater
economic integration among the member states of the European Communities: the VAT is
particularly well suited to avoiding the trade distortions associated with the cascading indirect taxes
that it replaced.
(b) In South America, the VAT was seen as a more efficient revenue-raising tax that would be
consistent with the increasingly outward orientation of economic policies.
(c) The rapid adoption of the VAT in the transition economies reflected the need to replace the
traditional sources of revenue (such as levies on state enterprises) that were declining as a result of
economic transformation with a tax regime geared to the emerging market economy;
(d) In some cases it may also have reflected the status of the VAT as a precondition for joining the
European Union.
(e) In many developing countries, adoption of the VAT has been given additional impetus by the
long-run revenue implications of trade reform – the economic efficiency arguments favouring the
VAT have been bolstered as trade tax revenues have come under pressure with deepening trade
liberalization commitments.
 Countries generally introduce VAT because they are dissatisfied with their existing tax
structure. This dissatisfaction falls broadly into one, or possibly all of four categories: (i) the
existing sales taxes are unsatisfactory; (ii) a customs union requires discriminatory border taxes to
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be abolished; (iii) a reduction in other taxation is sought; or (iv) the evolution of the tax system has
not kept pace with the development of the economy (Box 1.2).
 Since it is levied, ultimately, on consumption and not on intermediate transactions between
firms—while tax is charged on such purchases it is, in effect, fully refunded—a VAT does not
distort the prices that producers face in buying and selling from one another. Accordingly, the tax
has the desirable feature of not violating production efficiency (the condition that the economy be
on its production possibility frontier, unable to produce any more of any good without producing
less of some other). Taxes on intermediate transactions, in contrast, if not offset will drive a wedge
between the buying and selling prices of producers.
1.5.4 Why no VAT in USA (Tait, 1988) :
 Study based on general equilibrium model concluded that (i) introduction of a flat rate VAT in
the United States, with an equal yield reduction in the personal income tax, would improve the
efficiency of the economy; (ii) there would be "modest welfare gains, the VAT has the lowest
marginal social cost (only one third of a cascading wholesale manufacturer tax, for instance).
(iii) the excess burden of raising extra revenue from a sales tax (on commodities other than alcohol,
tobacco, or gasoline) was only a third to a quarter of raising the same amount by labor taxes on
industry or by traditional income taxes. (iv) a flat rate VAT, a differentiated VAT, and a
progressive expenditure tax are more efficient, at the margin, than the U.S.pre-1986 personal
income tax and, further, that the flat rate VAT appears to be far more efficient at the margin than an
income tax surcharge.
 Box 1.5 gives some reasons for advocating a US VAT and also the opposition to it.
Box 1.5 : VAT in USA
A. Some Reasons for Advocating a U.S. Value-Added Tax:
Commentator Year Net Finance Replace Replace Finance
Revenue Social Corporate Personal Defense
Increase Security Income Tax Income Tax
McLure 1982 X X X
Galvin 1983 X X
Landholm 1984 X X
Roth 1985 X X
Walker 1986 X
McLure 1987 X
B. The opposition to a U.S. VAT is summed up in five points:

(i) Liberals oppose the VAT on the grounds of regressivity.
(ii) Conservatives fear the VAT as a "money machine."(permitting enhanced public expenditure and
increasing the size of government)
(iii) Both liberals and conservatives worry that a VAT would be inflationary.
(iv) State and local officials are concerned about intrusion of VAT into their traditional preserve.
(v) Both federal and state officials fear that the VAT would be an administrative nightmare.
C. Present status of VAT in US may be seen in Annex 1.6.

 Australia too initially decided against a VAT, despite the advocacy of such bodies as the
Business Council of Australia. The reasons included the following (Tait, 1988):
(i) Self-policing properties of VAT had been overstated.
- Incentive to evade tax was as high under a VAT as under RST (retail sales tax).
- Overstated claims for tax credit was as significant a potential loophole as were falsified invoices.
(ii) Compliance and Administrative costs could be "unacceptably high."(especially to monitor
refunds)
(iii) Fears about the transitional problems.
(iv) Concerns about its regressivity (a 12.5 percent VAT was expected to increase prices by about
6.5 percent and there were doubts about the promised compensation for welfare benefits).
 Further, Federal Governments have difficulty in reconciling a new federal VAT with the
existing State and local sales taxes.
1.5.5 Advantages of VAT over other forms of sales taxes: VAT has the following advantages
over the other form of sales taxes: (i) VAT replaces existing unsatisfactory sales taxes e.g.,
cascading turnover taxes, single-stage taxation (manufacture and wholesale taxes or insecure retail
sales taxes), (ii) Invoice-based credit VAT, the most common form of VAT, is in principle, self-
enforcing and hence a buoyant tax, (iii) Unlike income taxes, consumption-based VAT does not
distort consumption-saving/investment decision, and (iv) VAT on destination principle may relieve
exports from indirect tax burden on inputs if the tax is properly applied. Detailed discussions may
be seen in Annex 1.7.
 VAT vs. RST: If properly designed and implemented, VAT at any stage is effectively collected
on the pure value added generated at that stage, as such VAT can be viewed as equivalent to the
single retail sales stage tax (RST) but implemented in a different fashion. One may, therefore,
legitimately ask, why would it not be simpler to collect the tax only at the retail stage? Box 1.6
explains in brief the advantages of VAT and the disadvantages of the RST. Detailed exposition is
given in Annex 1.7.
Box 1.6: Advantages of VAT over RST
A. Problems of RST :
 The higher the rate, the more collection weight is put upon the weakest link in the chain—the retailer,
especially numerous small retailers. All the revenue is at risk.
 It has been suggested that this is also true of VAT if the retailer successfully claims all his credit on
purchases, but clearly it is more difficult to do so under the accounting requirements of VAT. The audit and
invoice trail is poorer under a RST than a VAT, especially for services.
 There have to be troublesome "end-use exemptions."
 Revenue is not secured at the easiest stage, that is, at the time of importation, and this can be crucial for
many developing countries.

A single point RST is efficient at relatively low rates, but is increasingly difficult to administer as the
rates rise.
B. Advantages of VAT:
 It improved accounting standards.
 A VAT may be less open to lobbying influences than the RST.A successful lobbying effort on the RST
removes the tax from the entire industry. But lobbying under a VAT is more diffuse as there is the issue of
zero rating versus exemption and the likelihood that upstream traders will still be left with tax liabilities on
inputs if the good is only exempted but not zero- rated.
 Many hold that the VAT compliance costs were high and the opportunity for fraud greater. However, a
Treasury paper argued that the VAT fell more certainly on final sales than the RST, it was more secure
(19 percent of the registered firms made 90 percent of the sales).
Tait, 1988
 VAT has improved revenues as compared to its predecessor sales taxes (Table 1.4). Once in
place, VAT in many countries has grown in revenue importance for several reasons: (i) as countries
develop; a larger proportion of transactions would generally be expected to fall within the scope of
the tax, (ii) VAT rates have tended to creep up over time, (iii) Reforms – or at least changes – in
the base of VAT and other features (e.g., registration, simplified system) that may affect revenues
are not uncommon.
Table 1.4: Revenue difference between VAT and predecessor sales tax by region (Percent of GDP)
Sub- Central EU (Plus North Africa

Asia and Small
Saharan Americas Europe and Norway and and Middle
Pacific Islands
Africa BRO Switzerland) East
1.10 0.70 1.42 -1.88 1.05 0.10 1.96
Source: Ebrill, 2001
1.5.6 Basic issues related to VAT:
 Ebrill, 2001 has identified key issues related to VAT as in Box 1.7 :
Box 1.7: Issues related to VAT
 Has the VAT lived upto its promise as an efficient and fair source of revenue?
 What does a VAT do well, and what, conversely, does it do badly?
 What are the key issues that arise in designing a VAT?
 What should be exempt, and what should be taxed?
 How should small traders be treated?
 What about the agricultural and financial sectors?
 Does a VAT require restructuring the organization of the tax administration?
 What are the main administrative problems that a VAT is likely to encounter, and how can they be
resolved?
 Is it an inherently costly and regressive tax, or, to the contrary, can it be designed to be simpler and
fairer than the taxes it often replaces?
 Are there countries for which a VAT is simply a bad idea?
 These and other issues have both policy and administrative aspects; that is, they involve both
the design and the implementation of the tax. Ebrill, 2001

 Some of the key design issues are : (i) How to compute the tax - by the subtraction method or
by the tax credit method? (ii) Should it follow the principle of origin or of destination? (iii) What
should be the threshold for a dealer to be liable to pay tax? (iv) How to treat farmers and small
producers/traders? (v) What should be the treatment of foreign trade? (vi) What should be the
exemptions? (vii) Should the base be tax inclusive or should it exclude the tax?
 Commonly adopted form of VAT is the destination-based, consumption type, broad based,
applied through to the retail stage, and operated through the tax-credit or invoice method. A well-
designed VAT should ensure that (i) a single rate is levied on a comprehensive base (goods and
services); (ii) no exemptions are given beyond standard ones; (iii) GST refunds are processed
expeditiously; (iv) an adequate threshold is delineated to exclude small and micro business; and (v)
initial rates are suitably calibrated to avoid disruptions to economic activity and macroeconomic
stability. Detailed discussions on these issues are made in the relevant chapters.
1.5.7 Variants of VAT base and the preferred option: The VAT base has three variants (Table
1.5).
Table 1.5 : Variants of VAT base
GNP (Gross Product) variant NNP (Income) variant Consumption variant
 A GNP-typed VAT taxes  Excludes from the base  Excludes from the base the value
all final goods and services the value of intermediate of both intermediate goods and
except for intermediate inputs and depreciation. investment items. Thus only final
goods. Investment costs also The base is therefore consumption is treated as the final
enter the tax base—no capital similar to the one in income use of a goods & services. The base
expensing or depreciation is taxation. is therefore, close to the one in RST.
allowed.  Gives credit for tax paid  Most countries apply the
 Advantage: the base is on (i) current inputs, and consumption type VAT but give
relatively large. (ii) capital goods attribu- credit for capital goods in various
 Disadvantage: the invest- table to depreciation, ways. Immediate and full credit of
ment items will bear full tax spread over the life of the the tax charged on capital goods is
burden. capital good. allowed rarely.
 Advantages of the Consumption variant: The consumption variant 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 (RST) in that it restricts the burden of the tax to the
final consumption goods. In effect, the tax is only on the pure value added within the production
stage in question. Consumption VATs are also the easiest to compute – all taxes previously paid on
purchases from other firms to be simply subtracted from taxes due on sale. No distinction needs to
be drawn between capital goods and other inputs, and no depreciation need be computed.
Consumption, it is argued, is also a broad measure of the ability to pay taxes, much like
income.

 Furthermore, it excludes savings from the base, hence does not distort the investment and
saving behaviour. Since the pure consumption base would relieve production from tax burden, it
makes the VAT more production-efficient.
 Most countries apply the consumption type VAT but introduce various ways of giving
credit for capital goods. Rarely do countries allow for immediate and full credit of the tax
charged on capital goods. They generally limit the credit in a certain period to the level of the VAT
chargeable on output and allow the remaining credit to be carried forward to offset the tax in later
periods. On the other hand, some countries selectively grant immediate exemption of the VAT on
the purchase of capital goods as part of an overall package of fiscal incentives to priority industries.
 Disadvantage of the income and gross product variants: 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.
 Both entail cascading effect as they more or less charge the tax on investment items. Thus,
they are not production-efficient. The income-typed VAT allows for partial and delayed refunds of
tax: investment items are not immediately expensed but gradually deducted from the tax base over
a specified period in the project’s life—the investment items, therefore, bear partial tax burden in
present value terms. However, the GNP or income tax base is relatively larger than the one of the
pure consumption-typed VAT and is not commonly applied in practice—China and Brazil are
among a few exceptional cases, which apply the GNP-typed VAT (China apply the GNP-based
VAT at the State level).
1.5.8 Methods of computation of VAT and the preferred option (Tait, 1988):
 Value added is the value that a producer (whether a manufacturer, distributor, advertising agent,
hairdresser, farmer, etc.) adds to his raw materials or purchases (other than labor) before selling the
new or improved product or service. That is, the inputs (the raw materials, transport, rent,
advertising, etc.) are bought, people are paid wages to work on these inputs and, when the final
good or service is sold, some profit is left. Value added can thus be looked at from the additive side
(wages plus profits) or from the subtractive side (output minus inputs).
Value added = wages + profits = output - input.
 Computation of VAT could accordingly be done through four methods as shown in Table 1.6.
Illustration of these methods is given at Annex 1.8.

Table 1.6: Methods of Computation of VAT
Addition method Subtraction method*
1. Direct (Accounts) 2. Indirect (Accounts) 3. Direct (Accounts) 4. Indirect (invoice

Method Method Method credit method)
VAT = t (wages + VAT = t (wages) + t VAT = t (output VAT = t (output) - t

profits) (profits) – input) (input)
* A third variant is ‘intermediate’ subtraction as distinct from ‘direct’ subtraction – the former is inclusive
of taxes , while, the latter is exclusive of taxes (on outputs & inputs)
 Why is the invoice credit method (No.4) the preferred option: when the alternatives seem
so much more straight forward? There are four principal reasons:
(i) The most important consideration is that the invoice method attaches the tax liability to the
transaction making it legally and technically far superior to other forms. The invoice becomes the
crucial evidence for the transaction and for the tax liability.
(ii) Second, the invoice method creates a good audit trail. It requires firms to retain invoices and
hence improves the general record keeping practice. “Self-policing,” a desired character of the
VAT, is specifically related to the invoice-based credit VAT.
(iii) Third, to use methods 1 and 2, which are accounts based, profits need to be identified.
Accurate information on wages and profits are hard to obtain in developing countries, and thereby
runs into the same problems faced in income taxation. As company accounts do not usually divide
sales by different product categories coinciding with different sales tax rates, and as they certainly
never divide inputs by differential tax liabilities, it is clear at once that the only VAT that could be
levied on an additive basis would be a single rate VAT. If a multiple rate VAT is wanted, it rules
out using methods 1 and 2 (Box 1.8).
 The addition method, moreover, would be politically hard to sell to the public, as taxpayers
would simply view the VAT as an additional layer of tax burden on top of corporate and personal
income taxes. On the other hand, the structure of the tax implies that the VAT, theoretically, can
be used to replace both personal income tax and corporate income tax.
(iv) Fourth, the easiest way to calculate a VAT, using the subtractive (accounts) method, appears
to be the calculation of the value added (output minus input) and then to apply the tax rate to that
figure (method 3). In practice, companies do not find it convenient to calculate their value added in
this way month by month, as purchases, sales, and inventories can fluctuate greatly. Firms may
have to carry stocks that change, according to the type of production, the seasonality of trade, or
anticipated interruptions of supplies. Again, this procedure is practical only using a single rate. In
fact, calculating the direct value added is easiest through the trader's annual accounts, and so this
method of deriving a VAT (in addition to methods 1 and 2) is also an "accounts method."
 Thus, method 4, the invoice or credit method, is the only practical one. The tax liability can
be calculated week by week, monthly, quarterly, or annually. It is the method that allows the most
up-to-date assessments and also allows more than a single rate to be used (Box 1.8).
Box 1.8 : Invoice or Credit method allows more than a simple rate to be used.
 Assume a firm purchases a single type of input (I) subject to a tax rate of t i and produces two types
of output subject to different rates of t1 and t2, respectively. To properly refund the tax on inputs to the
firm, the tax administration needs to know how to apportion the input (I) into the two types of outputs.
Misaligned information, and the resulted monitoring problem inherently make the subtraction (accounts)
method practically hard to apply.
 On the other hand, under the invoice-based credit method, the VAT on outputs and inputs is,
essentially, assessed and collected separately, and the refunds are credited on the basis of the invoice on
input purchases. As the tax base does not need to be directly calculated, the system handles a multiple
rate structure more efficiently than does the subtraction method. Source: Le, 2003 (p11-12)
1.5.9 Alternative models of the VAT system:

(A) Alternative models of the VAT system and their dis/advantages: in brief are given in Table
1.4. Detailed discussions are given at Annex 1.9. They are either (a) overly centralized, depriving
the sub-federal levels of fiscal autonomy; or (b) where there is a dual structure, they are (i) either
administered independently creating too many differences in tax bases and rates that weaken
compliance and make inter-state transactions difficult to tax; (ii) or administered with a modicum
of coordination which minimizes these disadvantages but does not do away with them.
Table 1.7: Comparison of the VAT Systems
Model of VAT Dis/advantages Countries
Independent VATs at the Centre & the Differences in base and rates weaken administration Brazil,
States and compliance. Inter-state transactions are difficult Russia &
to manage. Argentina
National VAT: levied and administered Though elegant conceptually, takes away fiscal Australia,
by the Centre. It replaces both Central discretion of the States in raising taxes Germany,
Excise and State Sales Taxes covering all Austria,
goods & services, with arrangement for Switzerland
revenue sharing.
State VAT : levied by the States only. Enhances revenue capacity of the States. But would USA
The Centre withdraws from domestic (a) benefit higher income states disproportionately,
trade taxation (except a few special (b) lead to unhealthy competition among the States
excises on sumptuary & luxury items). for attracting industry. (c) reduce ability of the Centre
to equalize level of public services through higher
transfer to the poorer States.
Concurrent Dual VAT with Common Facilitate administration and compliance, including Canada,
base and common or similar rates for inter-State transactions, while continuing to GST in
provide reasonable fiscal autonomy to the States. India.
Non-concurrent Dual VAT viz. VAT Apart from loosing the integrity of VAT, it faces the
on goods are levied by the States only problems of classification etc. [see para 2.2.4(b)].
and VAT on services by the Centre only.

(B) Selection of the appropriate VAT model:
 The ideal option would be a national VAT with an appropriate Centre-State and inter-
State revenue sharing arrangement. If this is unacceptable to the States because of the loss of
fiscal autonomy, then a Federal VAT might have a State VAT "piggybacked" on it. But, a scheme
of tax reform that takes away the most important taxation powers of the States and increases their
dependence on the Centre, would not be acceptable to the States. The States then would have to
depend on the Centre for over 70 per cent of their tax revenue as compared to 32 per cent at
present. Nor would that be desirable in principle. It would go against the tenets of fiscal
decentralization which is widely believed to be crucial for the effective functioning of a multi-level
system of governance, allocation of resources for public spending according to the preferences of
the people and promoting fiscal responsibility at all levels (See para 10.5.2 also).
 The concurrent dual VAT, thus though a compromise on the ideal VAT regime, would be
in keeping with the fiscal federalism and be 'acceptable'. It is expected to minimize the
disadvantages of completely independent and completely centralised system. A common base,
common rates (across goods and services) and very similar rates (across the States and between the
Centre & the States) will facilitate administration and improve compliance while also rendering
manageable collection of taxes on the inter-State sales. At the same time, exceptions in the form of
permissible additional excise taxes on demerit/sin goods (petroleum and tobacco for the Centre,
and potable alcohol for the States) will provide requisite fiscal autonomy to the States. Even if they
are brought within the scope of VAT, the States should retain autonomy in being able to levy top–
up taxes on these demerit/sin goods.
 Briefly, the concurrent dual VAT, though would not be the perfect or first best solution to the
problems of the present system, would go a long way to remove many of its ill effects and lay the
foundation for an even more rational VAT regime in the future.
1.5.10 Is VAT an efficient and fair source of revenue: Ebrill, 2001 has concluded that :
(i) Ability of the VAT to bolster revenues in an efficient manner is borne out by the data. The
extent of the effect, however, cannot be estimated with any precision.
(ii) The revenue gain associated with the VAT increases with the level of GDP per capita and
decreases with the share of agriculture in GDP.
- While these correlations are strong, the results are not totally clear since the effects remain once
literacy has been controlled for, implying that the variables are not capturing administrative
sophistication as such. In the case of agriculture, the result may simply reflect the typical
exemption of agricultural output.

(iii) The revenue gain also appears lower, all else equal, the more important international trade is
for an economy (through this finding is more tentative).
- This may reflect the availability in such economies of other devices—most obviously tariffs—that
are no less effective at raising revenue than the VAT.
1.5.11 When is VAT most effective in raising revenue (Ebrill, 2001):
 What are the factors—both in terms of tax design and the wider economic environment—that
are conducive to revenue productivity of the VAT?
 The revenue produced by a VAT depends on three broad sets of factors: (i) the rules
describing rates, bases, threshold, and other structural features of the tax; (ii) the scale of taxable
activities (the amount of final expenditure, for instance, on items taxable at the standard rate); and
(iii) the degree to which the rules are complied with.
- The interactions between these factors are important. Tax rates, for instance, are typically set in
light of tax bases and revenue requirements. The ease of enforcement will depend on the formal
structure of the tax: multiple rates, for example, may lead to the misclassification of items, and a
high standard rate may encourage evasion. To understand fully the revenue yield of a VAT these
interactions would need to be explored in detail. Information limitations make this difficult. In
particular, sufficient information is rarely available to estimate the VAT revenue that would be
raised if the rules were implemented perfectly: the extent of evasion is generally unobserved.
 There is considerable cross-country variation in the revenue performance of the VAT. Among
the factors conducive to strong revenue performance are:
- a relatively high ratio of trade to GDP, presumably because of the relative ease of collecting VAT
at the point of import;
- relatively high literacy, surrogate for administrative capacity of taxpayers and tax collectors;
- passage of time, in the sense that the performance of the VAT seems to improve over time.
- rate differentiation, as measured by the difference between highest and lowest statutory rates.
1.5.12 VAT rates and revenue by regions (Ebrill, 2001): is given in Table 1.8.
Table 1.8: VAT features by regions
Sub-Saharan Asia & Central Europe North Africa & Small
EU* Americas Average
Africa Pacific & BRO Middle East Islands
Standard rate1 16.0 10.4 18.8 20.1 15.7 13.5 16.1 16.0
Number of rates2 1.3 1.7 2.9 1.5 3.2 1.7 1.4 1.8
VAT revenue:3
Percent of GDP 3.9 3.3 7.0 6.4 5.7 4.9 4.7 5.1
% of total tax revenue 28.4 21.7 20.7 27.8 28.1 33.0 18.0 26.5
Source: Ebrill, 2001. *(Plus Norway & Switzerland)
1
Average, in percent. 2Average number of rates (including standard rate and excluding zero rate on exports).
3
Figures are unweighted averages over those countries for which data on VAT revenues are available.

 Experience after adopting a VAT shows that :
(i) VAT rate tends to rise over time.
(ii) Perhaps more significant is the tendency for proliferation in the number of rates, lending
support to the notion that VATs tend to become more complex over time.
(iii) Finally—and with obvious implications for the perceived effectiveness of the tax—only five
countries have ever removed a VAT. Three of these, however, reintroduced the VAT—Ghana in
1998, Malta and Vietnam in 1999.
1.6 Is VAT inherently regressive (Le, 2003) :

 The common case against the VAT is that it is regressive, reducing the real consumption of
low-income households by a greater percentage than for high-income households. This general
accusation depends on many particular assumptions about the taxes replaced, the exemptions and
zero ratings, and any special compensatory features. Since VAT is a broad-based tax levied on
essentials too, it is assumed that it must be regressive.
 A few relevant questions arise, however. (i) What is the main purpose of VAT? Is VAT
designed to be a major effective vehicle for revenue mobilization, or is it established to target
equity issues? (ii) Are there any anomalies in the way we conventionally define regressivity/
progressivity—and, if it is the case, then is there any measurement more applicable for equity
analysis? (iii) In terms of equity, how does VAT fare with the alternative consumption taxes?
(i) VAT is “…intended to be a neutral, efficient, buoyant revenue raising tax.” (Tait, 1991-
p.6). As a principle, in designing VAT, one should refrain from excessive measures to mitigate
regressivity of VAT at the expense of its efficiency. Particularly in poor developing countries, the
base of the personal income tax is typically narrow—only a small portion of the population falls
into the tax net, and tax administrations do not have sufficient capacity to collect the tax properly.
It is, therefore, critically important to maintain a buoyant VAT system to efficiently collect
revenues, which are in turn channelled to help the poor through such pro-poor social programs as
housing, health care, and education (Para 1.7 show that India has a low revenue productivity and
its tax GDP ratio is stagnant).
- Moreover, the distributional impact of VAT should not be analysed in isolation, but in a broader
context of the whole fiscal system encompassing both tax and expenditure programs. Progressivity
is best achieved by complementing the VAT with a functioning income tax system, selective
excises, and prudent pro-poor expenditures. Income taxes and pro-poor expenditures are
generally regarded as the most direct and cost-effective instruments in dealing with equity concerns
(Para 1.8 shows that India has disproportionately high share of indirect taxes in its revenue.
Accordingly, its income tax system needs to be made effective in conjunction with VAT).
Box 1.9: Limits to Redistribution Through Indirect Taxation
 Assume that there are only two income groups—“rich” and “poor”—and only two goods. Assume also
that the poor spend all of their income on good 2, while the rich buy both goods. The sole object of
government, for argument’s sake, is to redistribute income to the poor. Clearly the best way to do this is to
tax good 1 (at tax-inclusive rate t) in order to finance a subsidy s on good 2.
 How much redistribution can be achieved? Since the poor spend all of their income on the subsidized
good, the amount they gain is simply the subsidy received. Expressed as a proportion of their income, this is
simply the subsidy rate s. For the government’s budget to balance, it must be that sw2 = tw1, where wi
denotes the proportion of total income (of rich and poor combined) that is spent on good 1. Thus, s =
t(w1/w2); and so, since t cannot exceed unity, the gain to each poor person can be no more than w1/w2.
 Assume, for example, that 80 percent of all income accrues to the rich, who spend 90 percent of their
income on good 1. Since the rich are the only group who buy good 1, it follows that w1 = 0.72. Then the
poor can gain no more than 250 percent of their income.
 This is a surprisingly small amount, given the propitious circumstances of the example. Even though
the rich spend relatively little of their income on the subsidized good, the volume of that spending on that
good soaks up much of the subsidy that the taxes that they pay finance.
 In less extreme cases, the potential redistributive gain is even less. Change the numbers above, for
instance, to have the rich receive 70 percent of all incomes and spend 50 percent of their income on good 2,
and the potential gain to the poor falls to only 54 percent of their incomes. Ebrill, 2001
(ii) The conventional definition of regressivity/progressivity becomes increasingly question-

able. Critics often cite two major problems.
 First, it is hard to reliably measure annual income flow. In addition, the welfare impact of any
fiscal policy is ultimately determined by the allocation of consumption. As a result, a more proper
approach to determine progressivity of a tax system is to consider the share of tax burden in
total consumption across income groups (see para 6.1.4). Apparently, if this approach is
applied, a broad-based and single-rate structured VAT should, by and large, be proportional but not
regressive. A growing body of empirical evidence—in the context of developed countries—tends
to support the proportionality of a consumption-based VAT.
- Second, lifetime income, but not annual income, is a relevant concept in welfare analysis. The
idea is derived from the observed income fluidity: over time, those in the lowest income groups
may move up to higher income groups, while the well-to-do may slip to lower income groups.
Empirical studies demonstrate that the regressivity of VAT would be substantially reduced when
the share of tax burden in total income were analysed on the basis of lifetime, rather than annual
basis.
 Another problem, common to all users of household budget surveys, is that the sample always
understates income toward the bottom of the scale, resulting in apparent persistent dissaving by

low-income households. Once again, this probably leads to the regressivity of VAT being
overstated.
(iii) Conceptually and practically, VAT is no less equitable than any of the alternative
consumption taxes. When no exemption and/or zero rate is applied, VAT is, in effect, equivalent
to a RST in terms of revenue collection. But in reality, countries with VAT commonly attempt to
incorporate in it various progressivity features with multiple exemptions, zero rates, and reduced
rates for the goods or services consumed mostly by the poor. The provisions prove ineffective,
however, and yet costly in terms of revenue loss and administration complexity (see para 6.1.4).
 Moreover, such use of zero rating does not ensure that the underprivileged groups who are
supposed to be helped actually are helped.
 Tait (1991) indicates that in UK, while zero- rating of food and other basic goods consumed by
the poor makes the VAT even progressive, the zero-rating of food alone reduces the VAT base by
up to 40 percent. An Irish report points out, tax revenues from applying the VAT to
expenditures exempted on grounds of regressivity would raise a sum far in excess of that
needed to compensate the poor for the diminution of their household consumption due to
VAT.
 Given that exemptions, zero rating, and multiple rates are inefficient ways to reduce the
potential regressivity of VAT, can low income households be compensated? New Zealand used a
wage supplement and changes in social security to ensure compensation to low-income households
following the VAT introduction. Suggestions for progressive VAT rates on payrolls under the "X
tax" might achieve something similar.
 But the crucial problem remains as to whether or not compensation can reach those with
small rural incomes, the urban informal sector poor, or the old, if there is no or only a
rudimentary social security system. These problems become even more important in developing
countries where such groups are likely to be large and all the more difficult to reach and
compensate.
 It is, therefore, critical that regressivity be studied in an overall context of the applicable
fiscal policies including direct, indirect taxes, and public expenditures.
 The balance of advantage suggests that VAT should be designed to serve its main purpose (i.e.,
collecting revenues effectively and efficiently), while measures be taken to strengthen income
taxes, and to rationalize pro-poor public expenditures.

Box 1.10 : Is VAT regressive
 It is not whether the VAT itself is regressive or not (and in some cases, it seems it is not, for
example, the United Kingdom and Italy), but whether the entire tax and expenditure system is achieving
the pattern of household income net of taxes and gross of transfers and government expenditures that
society desires. The case for VAT does not stand or fall on its regressiveness.
 The case for VAT is that it is an efficient way of collecting a large and buoyant revenue for
government; other parts of the budget should take care of progressiveness, and the VAT should be kept
as simple and efficient as it is intended to be—for that is its justification.
 The worst of all worlds is to end up with an eroded VAT base, complicated rates and exemptions,
and a tax that is expensive to administer, all in the name of equity; instead of simplicity and efficiency,
you end up with complexity, expense, and evasion—and all for the wrong reasons.
Tait, 1988 (p220)
1.7 Revenue productivity and Taxation reforms in India:

1.7.1 Low revenue productivity of the Indian tax system: The Indian tax system is characterized
by narrow tax base, low revenue productivity and stagnancy in the tax GDP ratio (Table 1.9 and
Graphs 1.1 & 1.2). Comprehensive list may be seen at Annex 1.12.
Table 1.9: Tax GDP Ratio in major countries
Country Tax as % of GDP Country Tax as % of GDP
Australia 25.8 Brazil 34.4
Canada 32.2 China 22.0
Egypt 15.8 European Union 35.7
France 47.9 Germany 40.6
India 17.7 Indonesia 12.0
Italy 43.5 Japan 28.3
Mexico 19.7 Pakistan 12.4
Russia 19.5 South Africa 26.9
Sri Lanka 11.6 United Kingdom 34.4
United States 26.9
 Narrow tax bases of both the direct and the indirect taxes in India are the consequences of wide
ranging exemptions, concessions and deductions given to pursue a variety of objectives through tax
policy while their effectiveness in achieving the desired objectives are doubtful (see para 6.1 for
illustration).
 Lack of clarity in tax laws and huge building of tax arrears, an overwhelming proportion of
which is stuck in tax disputes is another problem.
 The problems of (i) base erosion and profit shifting by multinationals, (ii) organizational and
functional problems with tax administration, and (iii) limited application of information system and
technology, are also quite serious.
1.7.2 General Approach to the tax policy and reforms: As mentioned in para 1.4, the best
practice approach to the tax policy and reforms is to broaden the base, reduce the rates and their

differentiation and evolve a simple and transparent system. It should reduce administrative,
compliance and distortion costs. The guiding principles should be neutrality, simplicity and equity.
Due note must also be taken of the compulsions of a federal polity and the revenue needs of
different levels of the Government.
1.7.3 Major ongoing efforts for taxation reforms in India: Rationalization and harmonization of
the tax laws and tax base/rates across the country both at the Central and the State level is required
in the above context. The major on-going efforts are (a) Direct Tax Code (DTC), and (b) Goods &
Services Tax (Indirect taxes). While this Reference Guide is about GST, the content part of the
proposed DTC is given at Annex 1.10 for ready reference. The proposed DTC, which is entirely
within the competence of GOI, is buried (perhaps for the present). Ideally both should have been
done concurrently for synergy and harmonization. Para 3.3 gives an overview of the evolution
of VAT/GST in India.
1.8 Trend of the major taxes in India: Annexure 1.11 contains master data on the Central and
the States Taxes. Analysis of these data is given below :
1.8.1 Disproportionate share of the indirect taxes: In 2014-15, over 66% of the revenues of the
government (the Centre and the States combined) came from the indirect taxes, of which nearly
14.4% is derived from the Central excise duties, 14.3% from customs, 13% from service tax, and
38% from States’ sales taxes (see Annex 1.11). Dependence of the States on the indirect taxes is
greater and nearly 90% of the States' own-source tax revenues come from indirect taxes, among
which the dominant source is the sales tax (see Graph 1.5). While dependence on the indirect taxes
is a common characteristic of the tax structure of the developing countries, the degree of this
dependence in India (>60%) is way above that of even the poorest among the less developed
countries(i.e. 28%).
1.8.2 Trend of Union vs State taxes :
 Graph 1.1 shows that the direct taxes of the States are much below as percentage of GDP
compared to that of the Centre. It is reverse for the indirect taxes. It is apparently due to the
Constitutional division of taxation powers (Table 2.1).
10.00 Graph 1.1 Direct and Indirect taxes of the Centre and the States (as % of GDP)
Tax Revenue as %
8.00 ID(S)
Indirect (Centre)
6.00 D(C)
of GDP
4.00 Direct (State)

ID(C)
2.00 Indirect (State)
0.00 Direct (Centre)
D(S)
08-09
03-04
04-05
05-06
06-07
07-08
09-10
10-11
11-12
12-13
13-14
14-15
Year

 Graph 1.2 shows that the gap between the total taxes of the States and the Centre as % of GDP
is narrowing i.e. the States are doing better.
Graph 1.2: Total Taxes of the Centre and the States as % of GDP
14.00
Total Revenue as % of GDP
13.00
12.00
T(C)
11.00
Centre
10.00 State
T(S)
9.00
8.00
03-04
04-05
05-06
06-07
07-08
08-09
09-10
10-11
11-12
12-13
13-14
14-15
Year
1.8.3 Trend of the major taxes of GOI: Graph 1.3 shows that:
(i) 2008-09 and 09-10 were the years of recession for Income Tax, Customs, Union Excise Duty
and Service Taxes. But Corporation Tax continued to rise.
(ii) Growth of Corporation Tax is higher in comparison to other taxes.
(iii) Growth trend of Service Tax and Income Tax is almost the same.
(iv) The least growth is seen in UED till 2014-15.
500000 Graph 1.3 : Revenue from major taxes of GoI

450000 Corporation Tax
400000
Income Tax
Revenue (Rs Cr.)
350000
Customs Duty
300000
250000 Union Excise Duty
200000 Service Tax
150000
100000
50000
0
04-05
11-12
03-04
05-06
06-07
07-08
08-09
09-10
10-11
12-13
13-14
14-15
15-16
16-17
(BE)
Source: Union Budget

1.8.4 Direct and indirect taxes of GOI: Graph 1.4 shows that Direct Taxes of GoI surpassed
Indirect Taxes in 2007-08, which is a positive feature. However, the gap between the two
narrowed in 2015-16 (RE).

900000 Graph 1.4 : Direct and Indirect taxe revenues of GoI
800000
700000
Revenue (Rs Cr.)
600000
500000
400000 Direct Tax
300000 Indirect tax
200000
100000
0
Years
Source : Union Budget
Note : (i) Direct Taxes of GoI include Corporation Tax, Income Tax, etc.
(ii) Indirect Taxes of GoI include Custom Duties, Union Excise Duties, Service Tax, etc.
1.8.5 Indirect Taxes of the States: Graphs 1.5 and 1.6 show that :
(i) VAT/Sales Tax has shown as expected, the highest growth as compared to other taxes and
constitutes 65.48% of total State taxes in 2014-15 (RE).
(ii) Stamp & Registration tax and State Excise have shown almost the same growth throughout.
(iii) Taxes on Vehicles have registered a slightly higher growth as compared to Goods & Passenger
Taxes.
Graph 1.5: Break up of Indirect Taxes of All States (incl.
503000
403000
VAT/ Sales Tax
303000 Stamps and Registration
Taxes on Vehicles
203000 State Excise
Goods and Passengers Taxes
103000
3000
02-03
03-04
04-05
05-06
06-07
07-08
08-09
09-10
10-11
11-12
12-13
13-14
14-15
15-16
(RE)
(BE)
120000 Graph 1.6 : Indirect Taxes of All States (excluding VAT/ST)

100000 Stamps and Registration
80000 Taxes on Vehicles
State Excise
60000
40000
20000
0
02-03
03-04
04-05
05-06
06-07
07-08
08-09
09-10
10-11
11-12
12-13
13-14
14-15
15-16
(RE)
(BE)

Chapter 2
Evolution of VAT in India
(To VAT or not to VAT or a 'partial' VAT!)
2.1 Taxation powers of the Centre and the States:

2.1.1 Constitutional provisions: The Constitutional provisions regarding the taxation powers of the
Centre and the States is summarised in Table 2.1. Complete list of the taxation powers is given in
Annex 2.1.
Table 2.1 : Major Taxation powers of the Centre and the States (Schedule VII)
A. Central Taxes (Union list)
(I)Taxes Levied, Collected and Retained by the Centre
Direct Indirect
(i) Corporation Tax (Corporate tax) (i) Basic Customs Duties.
(ii) Surcharge on Income Tax. (ii)………….
(iii) Taxes on capital value of assets
(iv) Fees on matters of the Union list.
(II) Central taxes/duties levied and collected by Centre but shared with the States*
Direct Indirect
a. Taxes on Income (other than a. Excise Duties included in the Union list (except those on medicinal
agricultural income and corporation tax). and toilet preparations).
b. Service Tax,
c. CVD/SAD
**Note: sharing of income tax is obligatory, while that of excise duties is permissible.
(III) Taxes Levied and Collected by the Centre but Assigned to the States (as per principles laid by
Parliament)
Direct Indirect
(i) Duties on succession to property (i) Taxes on goods & passengers carried by railways, sea and
(other than agricultural land). airways.
(ii) Estate duty on property (other than (ii) Taxes on sale or purchase of newspapers and on advertisements
agricultural land). published in them.
(iii) Taxes on transaction in stock exchanges and future markets.
(IV) Taxes Levied by the Centre but Collected and Appropriated by the States** concerned.
Direct Indirect
(i) Taxes on inter-state sale or purchase or consignment of goods.
(ii) Stamp duties on bills of exchange, cheques, promissory notes.
(iii) Excise duties on alcoholic, medicinal and toilet preparations.
**collected by the Centre when such duties are levied within any Union Territory.
B. State taxes (State list)
(V) Taxes Levied, Collected and Retained by States
Direct Indirect
(i) Land revenue. (i) Tax on sales and purchase of goods (other than newspaper)
(ii) Tax on agricultural income. (ii) Duties of Excise (a) alcoholic liquors for human consumption
(iii) Tax on land and buildings and (b) opium, narcotics etc.
(iv) Capitation taxes. (iii) Taxes on entry of goods into local area, Tolls.
(v) Tax on mineral rights. (iv) Tax on the consumption or sale of electricity.
(vi) Tax on professions, trades, (v) Tax on vehicles.
employment and calling (vi) Taxes on goods & passengers carried by road or waterways.
(vii) Stamp duty (excl. list I) (vii) Taxes on luxuries, entertainment, betting, gambling,etc.

2.1.2 Constitution and the indirect taxes: As regards the indirect taxes, the Constitution broadly
empowers (Table 2.1):
(a) Central Government to levy (Central) excise duties on manufacturing, custom duties on imports
and service tax on services, and
(b) State Governments to levy sales tax or value added tax on the sale and purchase of
goods,(State) excise duties on potable alcohol, entertainment tax, luxury tax, etc. within the State.
(c) On the inter-State sale of goods,(i) central sales tax (CST) is levied by the Central
Government, but collected and retained by the exporting States, and (ii) many States levy entry
taxes on the entry of goods in the local areas.
 This multiplicity and exclusive division of indirect taxes at the State and the Central levels
has expectedly resulted in a complex indirect tax structure in the country (see para 2.2).
2.1.3 Indirect taxes and the taxable event:
Tax Structure (Schedule VII of the Constitution)
Tax/Duty Central Service Sales Tax, CST Customs Enter- Entry

Excise Tax State VAT Duties tainment Tax
Entry in Entry 84 Residuary Entry54 of 92 of Entry 83 Entry 52 Entry 62

Constitution of List 1 Entry 97 List II List I of List I of List II, of List II,
of List 1
Taxable Manufac- Provision Sale Inter Import & Entertain- Entry of

Event ture of Service within state State Export ment goods
sale
Median Single Rates 5%, Rates Median 10-50% Generally

Rate Rate -12% Rate - 15% 12.5% & 20% 2% Rate 25% =34% 5%
2.2 Problems with the pre-VAT indirect taxation system and the Bagchi Committee Report,
1994 (Bagchi Committee in brief):
2.2.1 Urgent need for reforms in the domestic trade taxes: Bagchi Committee observed that the
domestic trade taxes in India was in urgent need of reforms since the system that was operating was
archaic, irrational and complex - according to knowledgeable experts, the most complex in the
world - and injurious to the economy in many ways. It followed no rational pattern, having evolved
over the years mostly through changes made ad hoc from time to time in response to exigencies
and violated all time-honoured canons of taxation - certainty, neutrality, simplicity and equity.
 Apart from the inherent flaws in the structure, the laws and procedures were so complex and

there were so many grey areas that assessments were often taken to the courts. They remained
locked up for adjudication for years creating uncertainty for the revenue as well as the taxpayers.
2.2.2 Cost of the pre-VAT system: Such a system caused incalculable damage to the economy by
arbitrarily interfering with the decisions of economic agents and thereby distorting the pattern of
trade and industry, adding to their costs, undermining their competitive strength, and misallocating
scarce resources. In the absence of transparency, it could not serve the goal of equity either. Briefly
the cost of the pre-VAT regime were as follows:
- Loss of output growth and welfare;
- Inefficiency and high cost in industry and trade;
- Impediments to the free flow of trade within the country and the growth of common market that
the Indian Union offers;
- Inter-jurisdictional conflicts;
- Handicap for exports; and
- High costs of compliance and enforcement.
2.2.3 Negative features of the pre-VAT system: These costs emanated from the following
negative features of the pre-VAT system –
- Levy of taxes at the manufacturer level/first sale point;
- Exclusion of services from the tax base;
- Taxation of inputs and capital goods;
- High level and multiplicity of rates;
- Taxation of inter-State sale
- Lack of harmony in States’ sales tax systems; and
- Complex laws and archaic administration.
2.2.4 Explanation of the negative features: These negative features are explained below:
(a) Taxation at the manufacturer level/first sale point: Under the Constitution, the bases of
excise duties and sales taxes, the two principal components of the domestic trade taxes, are
distinctly defined –(i) production of goods for the Central excise duties, and (ii) sale or purchase
for the State sales taxes. In practice, the two bases have come to overlap. Because of the problems
in administering taxes at the retail level, most States moved the point of levy of their sales taxes to
the first point of sale, that is, on manufacturers and importers of goods in their respective
jurisdictions.
 Taxation at the manufacturer level or at the first point of sale encounters intractable problems
as the term "manufacturing" is not easy to define. Goods may undergo a change of form due to a
variety of processing activities performed after their initial production or manufacturing (e.g.,

grinding, packaging, blending). There are many processes which constitute only "marginal
manufacturing". Attempts to bring them all under "manufacturing" for excise taxation have given
rise to disputes and uncertainty. Clarifications have been provided in the law in the form of
section/chapter notes to contain the areas of dispute but the uncertainty persisted.
 Determination of manufacturing value also is equally troublesome. Manufacturers often
sell their products through their own distributors or through wholesalers and sometimes directly to
the consumers. In determining the assessable value at the manufacturer level, adjustments have to
be made for legitimate trade margins at different trade levels. Sales between the related entities also
need careful examination. These problems are aggravated by exclusion of services from the base.
 Taxation of sales at the first point, moreover, increases the risk to revenue in that the
entire tax burden is concentrated at one stage. The rates of tax also have to be higher to raise a
given amount of revenue than if the base was wider. Higher rates induce evasion and thus call for
stringent anti-evasion measures which are not very easy to enforce.
 Since in a manufacturers sales tax, the tax liability can differ sharply according to the source of
the inputs and the amount of integration between manufacturing, wholesale, and retail stages,
businesses can reduce their tax liability by setting up related, but separate, distribution companies.
This meant markup of the distribution company did not enter the tax base.
Box 2.1: Should the retail stage be included within the sales tax (VAT) net
There are several reasons for including the retail stage within the tax net, if possible.
 First, it is best to avoid the need to differentiate between wholesalers and retailers, since the borderline
definitions between them may be imprecise and many taxpayers perform both types of operations.
 Second, it eliminates the undesirable use of special adjustments (for example, standard markup or
discount allowances) when manufacturers and wholesalers also act as retailers.
 Third, it removes the incentive to split firms and pushes distributional functions forward beyond the
point where the tax is applicable, so that most of the value added can be attributed to the untaxed retailer.
 Fourth, because retail value added frequently represents such a substantial portion of total value added,
including it in the tax base greatly increases the base and allows a lower tax rate to be used to collect a given
revenue.
 Fifth, cross-checking feature built into the VAT system. It is retailers who more frequently resort to
practices designed to evade tax, particularly if the large numbers and small volume of their operations make
it difficult for the tax administration to detect these strategies easily.
 Sixth, facilitates cross-checking of sales by wholesalers and limits easy misrepresentation of the retail
value added. If, on the other hand, retailers are excluded, evasion is made easier (by adjusting margins
between wholesale and retail activities) for a sector that represents a substantial element of the total value
added in the economy, and more significant revenue losses may result. It also requires higher tax rates to
derive the same revenue.
Therefore, there is a strong case to extend the VAT through the retail level, with the proviso that the
smaller traders, including retailers, should be subject to some simpler treatment.
Tait, 1988 (p109-110)

(b) Blurring of line between goods and services: Definition of the powers of excise taxation as
well as sales tax under the Constitution refers only to "goods" without any mention of services. As
a result, neither Central excise nor sales tax could be applied to services. The distinction implicitly
drawn in the Constitution between goods and services is not in accord with the realities of modern
economies. Services are often an integral part of manufacturing and trade, and the line between
goods and services is getting increasingly blurred (Box 2.2). Manufacturers may provide a wide
variety of services for the goods manufactured by them such as training, advertising, installation
and maintenance.
Box 2.2: Treatment of Intangible goods
 The advancements in Information Technology (IT) and digitization have blurred the distinction
between goods and services. Under the present Indian jurisprudence, goods are defined to include
intangibles, e.g., copyright and software, bringing them within the purview of State taxation. However,
intangibles are often supplied under arrangements which have the semblance of a service contract.
- For example, software upgrades (which are goods) can also be supplied as part of a contract for
software repair and maintenance services. Software development contracts could take the character of
contracts for manufacturing and sale of software goods or for rendering software development services,
depending on the roles and responsibilities of the parties.
 Likewise, the so-called ‘value-added services’ (VAS) provided as part of telecommunication services
include supplies, e.g., wallpaper for mobile phones, ring tones, jokes, cricket scores and weather reports,
some of which could be considered as goods.
 An on-line subscription to newspapers could be viewed as a service, but online purchase and download
of a magazine or a book could constitute a purchase of goods.
 Disputes have also arisen as to whether leasing of equipment without transfer of possession and
control to the lessee would be taxable as a service or as a deemed sale of goods.
Source : ICAI, 2015
 Taking advantage of the definitional ambiguities and the exclusion of services, manufacturers
have tried to minimize the assessable value of their products by making sales at artificially
low values to a related distributor/wholesaler and by claiming discounts for the so-called,
"post-manufacturing services" (e.g., transportation, installation and warranty services). Similar
problems are encountered in the first-point levy of sales taxes too.
 Apart from the technical problems, taxation of goods only at manufacturer/first-point level,
that is, on a base that does not include distribution margins and associated services, tends to
distort producer and consumer choices. Items which carry large trade margins (as is usually the
case with luxury products) are favoured over essential consumer goods. It also provides an
incentive for producers to push as many trading functions forward as possible to keep down the
assessable value of their products. Exclusion of services from the base also creates a bias
against goods and in favour of services (which are usually consumed more by the rich).

 Most importantly, Service Tax is an increasing source of revenue on account of increasing
share of the Services in GDP. In India, share of service in GDP increased from 44% in 1990-91 to
53% in 2003-04 to 57% in 2013-14.
(c) Taxation of inputs and capital goods: Left with a base constrained by exclusion of trade
margins and services and faced with mounting pressures for revenue, both the Centre and the States
have gone on to extend the coverage of their excises and sales taxes to include inputs and capital
goods. This leads to cascading and constitutes another major source of distortion. This
cascading inhibits specialization and thus efficiency in industrial production.
 Cascading (see para 3.1.2e also): A related but distinct phenomenon is that of "cascading".
This refers to the "tax on tax" that arises when tax is charged both on an input into some process
and on the output of that same process. As a result, the tax embodied in any given item will depend
on the number of production stages that are subject to tax. In addition to resulting in arbitrary
variations in effective tax burdens (see Box 3.1) across the range of goods sold, this also creates an
obvious incentive for firms to vertically integrate their activities in order to eliminate taxable
stages, with a consequent distortion in the choice of firms' organizational forms that may involve
real efficiency losses (Table 2.2).
Table 2.2: Turnover tax on nonintegrated and vertically integrated business
Nonintegrated Vertically integrated
Mill sale to carpenter $10
$1,000 x 1%
Carpenter sale to retailer $50
$5,010 x 1%
Retailer sale to consumers 101
$10,060 x 1%
Carpenter sales directly to consumers $100
$10,000 x 1%
Total tax imposed & collected $161 $100
 While attempts have been made to alleviate the ill-effects of input taxation through
MODVAT in Central excise and concessional treatment or exemption in the State sales taxation,
the distortions persist as the reliefs are inadequate or ineffective. Moreover, no relief was available
for taxes paid on plant and equipment. In many States there was a turnover tax which fell on all
commodities including inputs at more than one point of sale but did not get relieved. This caused
cascading and induced vertical integration with all its attendant evils.
(d) High and multiple rates : With a narrow base, the rates have to be high to raise the same
amount of revenue. Where the trade margins are high (in the case of certain consumer durables, the
margins can be more than 100 per cent of the ex-factory price), the rate of tax at first point has to
be much higher than if the margins were taxed. Finding it difficult to raise the level of sales taxes

at the first point any further, the States resorted to additional levies like turnover tax,
additional sales tax, surcharges and so on, making the system totally non-transparent and the
tax incidence arbitrary and unpredictable.
 All this further aggravated the distortions inherent in a manufacturer's tax. It also provided
incentives for evasion and avoidance and generated pressures for exemptions and
concessions. One thus witnesses multiplicity of rates based on classification (sometimes hair-
splitting) of commodities and sectors with bizarre results. Not surprisingly, the (pre-VAT) system
proved to be a breeding ground for disputes and litigation. Over 30,000 excise cases were
pending (when the Bagchi Committee Report was prepared i.e. 1994) before the Appellate Tribunal
alone and over 12,000 before the High Courts. In some States number of sales tax cases pending
before the appellate authorities was extremely high (e.g. more than 50,000 in W. Bengal).
(e) Taxation of inter-State sales: Another major source of distortion is the system of taxing inter-
State sales under the Central Sales Tax (CST) Act. Though legislated by Parliament, it is
administered by the States who also retain the revenue. Operation of the inter-State sales tax
implies taxation according to "origin", that is, where the goods are produced, no matter where they
are consumed ("destination"). This constitutes a serious impediment to the free flow of trade
within the country and is inimical to competition and efficiency.
 It also conflicts with principles of inter-jurisdictional equity because the high income
(producing) States viz. Gujarat, Maharashtra, Tamil Nadu and Haryana can export their taxes to
others, constraining the domestic tax base of the low income (consuming) States viz. Assam, U.P.,
Bihar and M.P. The four "high income" States with less than 15.95% of the country’s population
accounted for 59.29% of the total revenue from CST, while the four low income States with
29.27% of the population get mere 13.5% of the CST revenue. Details may be seen in Annex 4.1
(A) & (B).
 The States have been trying to "export" taxes via CST and at the same time undercutting
each other in sales tax rates to attract trade and industry. This created a situation in which all
States were finding it difficult to rationalize their tax structures, and in some States, products like
automobiles being taxed at the same low rate as cereals. Taxation of inter-State sale combined with
the tax on inputs encumbers exports since under such a system, the incidence of tax on export
production cannot be reliably quantified, much less relieved.
 Since transfers between the branches of a firm do not constitute "sale", one way of avoiding
the CST is to transport goods across the State borders as transfer on consignment. With a
large part of the inter-State trade flourishing in several States in the form of consignment transfers,
the States have been clamoring for a tax on consignments too. If introduced, this would exacerbate
the hindrance caused by inter-State sales tax to the flow of trade within the country and the growth
of a common market, and accentuate disparities in the revenue levels among the States. While
the trend all over the world is towards unification of markets to promote competition and
efficiency, India is almost the only country going in the opposite direction.
 The CEA Committee, 2015 has given some suggestive evidence based on data provided by six
States: Maharashtra, Andhra Pradesh, Karnataka, Gujarat, Tamil Nadu and Kerala. In these States,
stock transfers, on average, account for as much of inter-state trade as the trade subject to CST. In
the case of Gujarat and Andhra Pradesh, stock transfers are more than twice as much (Table 2.3).
The distortion thus affects 50% of the total inter-State trade.
Table 2.3: Ratio of taxable to non-taxable turnover due to stock transfer and consignment sales (Rs. crore)
Maharashtra T.N. Kerala Karnataka A.P. Gujarat Total
Taxable turnover 316598 214771 293151 186045 60669 304479 1375713
Non-taxable turnover* 241319 142321 44683 98300 160910 651620 1339154
Ratio of non-taxable
76% 66% 15% 53% 265% 214% 97%
to taxable turnover
 Source : The CEA Committee Report, 2015 * (stock transfer + consignment sales)
(f) Complex laws and administration: The distortions are compounded by the complexity of the
laws and administration. In order to counter avoidance and evasion, the laws have been tightened to
help enforcement and elaborate procedures & forms have been laid down. These have, however,
not been very effective in the absence of a modern system of information and administration. On
the contrary, they have added to the complexities.
2.2.5 Quantification of the damage caused by these distortions: Evidently, damage caused by
the distortions discussed above are extremely difficult to quantify. There can be little doubt,
however, that the resulting losses to the economy are enormous.
2.2.6 Vicious Circle in the pre-VAT State Sales Tax system:
 Tax Avoidance
 Inter-State
Competition
 Pressures for
Industry
Incentive

2.3 Guiding principles for reforms in the indirect taxes (Bagchi Committee):
2.3.1 Need for the VAT system: The Bagchi Committee, therefore, recommended that if the ills of
the prevailing (pre-VAT) system were to be remedied, the problems have to be attacked at their
roots and not by symptoms. The guiding principles should be neutrality, simplicity, certainty and
equity. Due note must also be taken of the compulsions of a federal polity and the revenue needs of
different levels of government.
 VAT could provide a solution to most of the ills of the pre-VAT system. If levied on a
comprehensive base including goods and services at a uniform rate, a VAT would help restore
neutrality, simplify the laws, reduce litigation and provide an elastic and stable source of revenue.
 The Bagchi Committee clearly recognized that the (truncated) VAT regime proposed (Box 2.3)
by it -due to the compulsions of a federal polity of India's dimension and diversity- would not be
the first best solution to these problems. However, the VAT proposed was the only feasible
option within the existing framework of the Constitution and would lay the foundation for an
even more rational regime in the future.
2.3.2 State level reforms suggested by the Bagchi Committee: The major suggestions of the
Bagchi Committee are given in Box 2.3:
Box 2.3: State Level reforms suggested by the Bagchi Committee, 1994 (p61).
Measures which could go a long way to remove the non-neutralities and harmful effects of the sales tax
systems and achieve a measure of simplicity would be to:
a. Convert sales taxes into VAT by moving over to a multistage system of sales taxation with rebate for tax
on all purchases with only minimal exceptions.
b. Extend the tax base to include all goods sold or leased with minimal exceptions, and services which are
integral to the sale of goods. The base should also include services which are predominantly of a
consumption nature and can be taxed conveniently by the States.
c. Allow input tax credits for all raw materials and parts, consumables, goods for resale, and production
machinery and equipments. (No rebate will be allowed in respect of overhead expenses like repairs, etc.,
office equipment, construction materials and fixtures and purchases in the use for transportation and
distribution of goods).
d. Replace the existing structure of tax rates with two or three rates within specified bands, applicable in all
States and Union Territories.
e. Remove the exemptions except for a basic threshold limit and items like unprocessed food and also
withdraw other concessions like tax holiday, etc.
f. Zero-rate exports out of the country and also inter-State sales and consignment transfers to registered
traders with suitable safeguards against misuse.
g. Tax inter-State sales to non-registered persons as local sales.
h. Modernize tax administration, computerize operations and information system and simplify forms and
procedures.
 The measures for harmonization of the rates will call for agreement among the States and also
the Centre (the latter for the Union Territories). If the States signal their agreement on such a
package, the Centre should permit the States to tax three additional excise duty items, viz., textiles,
tobacco and sugar under the State VAT.
 Further, under the CST regime, there is a ceiling on sales taxes that can be levied by the States
on certain commodities considered vital for inter-State trade and commerce (called declared
goods) even when sold within their own territories. The ceiling is equal to the tax on inter-State
sale. With the reforms outlined above, these restrictions should go. However, the Central
legislation to fix the ceiling rate for declared goods may be retained to ensure that the States accept
and adhere to a harmonized rate structure.
 The most convenient method of operating a destination-based system of State VAT is to
zero-rate inter-State sales between the registered dealers. As a safeguard against misuse, a
system of advance payment of tax (reverse charging) by the importing dealer can be devised. Under
this system inter-State movement of goods through consignment transfers should be treated on the
same footing as inter-State sale between registered dealers. As an interim system, the exporting
States may levy a tax on inter-State sales at a low rate for which the importing States would grant
rebate and the revenue will be shared through a pooling arrangement.
 The rate bands proposed were 4 to 5 per cent for essential goods and 12-14 per cent for all
other goods. Basic, unprocessed food items might be exempt while tobacco, alcohol, petroleum,
aviation fuel and narcotics be subjected to a non-rebatable VAT at a floor rate of 20 per cent. (see
Box 5.5). The tax on the high rated items will not be rebatable although the tax paid on their inputs
will be credited against the VAT payable on them. Resellers would however be entitled to deduct
the tax paid on their purchases from the VAT payable on their sale.
 Eventually the States should be given the power to tax services in general. A beginning can
be made by bringing under the State VAT, services which are ancillary or incidental to the
production or supply of goods and also those which form a significant part of final consumption.
VAT on such items of consumption need not be rebatable. The Parliament can pass a legislation
empowering the States to levy tax on services so selected. Pending a general extension of the tax
base to services, the taxes on entertainments, electricity duty and taxes on passengers and goods
carried on road may continue to be levied by the States.
2.3.3 Reforms in MODVAT: Reforms suggested by the Bagchi Committee, in MODVAT are
given in Box 2.4. These measures might help avoid many of the problems and warries which a
concurrent VAT or extension of MODVAT to wholesale traders would give rise to.

Box 2.4: Reforms suggested by the Bagchi Committee, in MODVAT
 MODVAT be made into a full-fledged manufacturer level VAT with the following measures:
a. Widening of the base to include all goods produced, manufactured or imported and a few selected
services;
b. Provision for full and immediate credit of input duty to registered manufacturers and producers for
- all raw materials and parts used in manufacturing;
- production machinery and equipment for use exclusively in taxable manufacturing; and
c. Rationalization of the rates to introduce a structure of not more than three rates at the most and
eventually a uniform rate. However, excises would also be levied on selected luxury items and
commodities with negative externalities.
 Eventually, in order to keep the burden of taxation by both levels of government within reasonable
limits and allow more room to the States, the rate of Central VAT should be brought down to a uniform
rate of 10%.
 Under a tax rental agreement, the Centre levies an additional excise duty in lieu of sales tax on three
commodities, viz., textiles, tobacco and sugar. But the States are unhappy with the arrangement. In a
reformed regime, the States should ultimately get back the powers to tax these commodities even though
the Centre would also be free to levy Central VAT on them at appropriate rates.
2.4 Revenue Neutral Rates for VAT (Bagchi Committee, 1994) :

2.4.1 VAT regime could be revenue neutral with zero-rating of the interstate sales: Exercises
based on available data showed that such a regime can be revenue neutral even with zero-rating of
the inter-State sales, provided the reform scheme was implemented as a whole. However, some
States where the level of taxation is high may have to pitch their rates high (e.g., in Gujarat, a rate
structure of 5, 14 and 32 per cent would be called for to make the reform revenue neutral). The
average rate of tax in high tax States might be in the region of 12 or 13 percent. This, however,
takes no account of the likely gains from better enforcement that VAT should facilitate. With even
a 10 percent increase in revenue with better administration, RNR would come down appreciably
e.g., for Gujarat, the rates could be 5, 13 and 26 (see Table 2.4):
Table 2.4: Revenue Neutral VAT Rates for Selected States: 1992-93 (Bagchi Committee)
State Without administrative improvement With administrative improvement*
Tax rate regime Average rate Tax rate regime Average rate
Andhra Pradesh** (4,9,20) 10.3 (4,8,20) 9.5
Gujarat (5,14,32) 13.0 (5,13,26) 12.0
Maharashtra (4,11,23) 11.7 (4,10,22) 10.7
Rajasthan (4,8,20) 10.7 (4,7,20) 10.0
Tamil Nadu (4,10,20) 13.1 (4,12,22) 12.1
Notes:
1. Figures in brackets give VAT rates: low, standard and high rated goods, respectively.
2. Figures for Gujarat relate to 1991-92.
3. These computations are based on tax turnover data furnished by the State Sales Tax Administration.
4. * Assuming a resulting increase of 10 percent in the tax yield.
5. ** Annex 2.2 gives details of calculation.
2.4.2 Would State VAT rates be too high: Combined with the Central VAT, which, under the
proposed scheme, would contain rates going up to 20 per cent (even though the average would
come to 15 per cent), the standard rates of this order might appear to be a little too high.
However, this is in reality the level prevailing now (only the incidence of excise duties remains
invisible). The position will not worsen with the proposed reform rather the rates can be brought
down if the base is truly widened and substantial improvement takes place in administration.
2.4.3 Would abolition of the tax on inter-state sales affect some States: Abolition of the tax on
inter-State sales may adversely affect some States deriving large amounts of revenue from this
source. In the case of States like Maharashtra, the loss will probably be made up with the extension
of the base to include consumption items like textiles and the capture of trade margins beyond the
first point under the multi-stage system that VAT implies. For the States like(old) Bihar and
Madhya Pradesh, where CST on minerals yield substantial revenue, appropriate pricing of their
natural resources and a wider base for their VAT should take care of the revenue loss, if any.
Estimates show that with the widening of the base and withdrawal of exemptions and some
improvement in administration, it should be possible to protect the revenues of even the exporting
States with tax rates within the suggested bands. In most countries where VAT has been introduced
on a comprehensive base, the additional revenue accrual has outstripped the estimates.
2.5 Legal, administrative and institutional requirements of the VAT regime:

The proposed VAT regime will require appropriate legislation for implementation and overhaul of
administrative organization and methods. Suitable institutional arrangements also would have to be
evolved to formulate action plans and oversee their implementation. See para 8.1 for specific
action points.
2.6 Evolution of VAT in India: The indirect tax system in India has been going through a series
of reforms over the decades as chronologically detailed in para 3.3. Important milestones are
given below :
2.6.1 Central Government:
 The concept of Value Added Tax was introduced for central excise duty in 1986 first as
MODVAT and then as CENVAT .Prior to this, excise duty was levied on both inputs used and
output produced. This meant that an amount paid as tax on input was subject to taxation again at
the output level (with limited set offs). This was applicable to each intermediate good in the
manufacturing process. This “tax on tax” led to cascading of taxes. This problem was sought to be

addressed by the VAT (CENVAT) regime under which tax paid on the inputs is deducted from the
tax payable on the output produced.
 It may be noted that this MODVAT was infact not a VAT at all, but a form of modified central
excise duty on manufacturing (levied at both advalorem and specific rates) with credit allowed for
excise duty and customs in a limited number of industries to get around the powerful interests of
the States and their State sales taxes, etc. It could eliminate the cascading effect of multi-paid
excise levies (Tait, 1988-p30).
 Subsequently, a tax on services (commonly known as Service Tax) was introduced in 1994 by
the Central Govt. Service Tax with the passage of time has expanded its domain to cover more and
more services and now applies to all service categories except a negative list (Annex 2.3). It has
contributed to growth in revenue of GOI from service tax as % of the total tax from 3.10% in 2003-
04, to 13.49% in 2014-15, to 14.76% in 2016-17(RE).
 In 2004, Input Tax Credit (ITC) scheme for CENVAT and Service Tax was merged to permit
cross flow of credit across these taxes.
 Incidentally, now there is standardized nomenclature (HSN) for services also.
2.6.2 State Governments:
 States, switched over from a multiple point Sales tax covering all transactions of sale of goods
within the State upto the retail stage in a phased manner, starting from 2005-06 (details in para
2.8.4) based on the recommendations of the Empowered Committee on the State VAT (details in
para 2.7).
 State sales tax also had a cascading effect through the distribution chain as in the case of
CENVAT of Central Government. (see Annex 2.4 for illustration)
2.6.3 Design of CENVAT and VAT constrained by the Constitution: The design of CENVAT
and of the State VATs was dictated by the constraints imposed by the Constitution which allows
neither the Centre nor the States to levy taxes on a comprehensive base of all goods and services
and at all points in their supply chain (see para 2.1). The Centre is constrained from levying tax on
goods beyond the point of manufacturing and the States in extending tax to services. This division
of tax powers makes both CENVAT and the State VATs partial in nature and contributes to their
inefficiency and complexity. The principal deficiencies of the current indirect tax system, which
need to be the primary focus of the next level of reforms, have already been discussed in para 2.2.
2.7 State VAT regime recommended by the EC (2005): The State VAT regime recommended
by the Empowered Committee of State Finance Ministers (EC) was largely based on the Bagchi
Committee Report, 1994 (detailed in para 2.2). It was elaborated in a White Paper brought out in
Jan., 2005 by the Union Government. Its main features were:
i. Abolition of certain taxes: Abolitions of several existing taxes, such as turnover tax, surcharge
on sales tax, additional surcharge, special additional tax, etc. CST, however, continues although its
rate has been progressively brought down (from 4% to 2%).
ii. VAT Rates: Uniform schedule of rates of VAT for all States, making the system simple and
uniform and prevent unhealthy tax competition among the States. Under the VAT system-
a) covering about 550 goods, only two basic VAT rates of 4% and 12.5% to apply,
b) there was a specific category of VAT-exempted goods, and
c) a special VAT rate of 1 percent only applied to gold and silver ornaments.
iii. Goods with basic rates of 4% & 12.5%: The largest number of goods (about 270) were placed
at 4% common for all the States, comprising of items of basic necessities such as medicines and
drugs, all agricultural and industrial inputs, capital goods and declared goods. The remaining
commodities, common for all the States, were to attract general VAT rate of 12.5%.
iv. Exempted category: The proposal was to give flexibility to the States to select a set of
maximum of 10 commodities for exemption from a list of goods specified by the EC, which were
of local social importance for the individual States without having any inter-State implications.
Remaining commodities in the list were common for all States.
v. Provision of Input Tax Credit (ITC): was made for preventing cascading effect of tax.
vi. Excluded goods: In the State VAT scheme, all goods including declared goods (Annex 2.5)
were to be covered and get the benefit of ITC. The few goods to be outside VAT were liquor,
lottery tickets, petrol, diesel, aviation turbine fuel and other motor spirit since their prices
were not market determined. These were to continue to be taxed under the Sales Tax Act or any
other State Act or even by making special provisions in the VAT Act itself and with uniform floor
rates decided by EC.
vii. Zero-rating of exports: It was aimed at increasing competitiveness of the Indian exports. As
per the basic principles of VAT, the State VAT provides that for all exports made out of the
country, tax paid within the State will be refunded in full. Units located in Special Economic Zone
(SEZ) and Export Oriented Units (EOUs) were to be granted either exemption from payment of
input tax or zero-rated.
viii. Registration of dealers: with gross annual turnover above Rs. 5 lakh was made compulsory.
There was a provision for voluntary registration with flexibility given to the States to fix their own
threshold limits. Small dealers with annual gross turnover not exceeding Rs. 50 lakh, who were
otherwise liable to pay VAT, could be given the option for a composition scheme with payment of
tax at a small percentage of gross turnover. The dealers opting for this composition scheme would
not be entitled to ITC.

ix. Tax payers' Identification Number: for better inter-state coordination, it was to consist of 11
digit numerals throughout the country.
x. Provision of self-assessment by dealers: was aimed at reducing harassment in submission of
returns upon setting off the tax credit (see para 8.8).
2.8 Implementation of VAT:

2.8.1 Indirect Taxes subsumed in VAT:
(i) Central VAT: Central Excise Duty,
(ii) State VAT: Sales Tax, Surcharge on Sales Tax, Additional Surcharge, Turnover Tax, Special
Additional Tax, etc.
2.8.2 Indirect Taxes not subsumed in VAT :
(i) CENVAT: does not include additional excise duty, additional customs duty, central surcharges
and cesses. CENVAT applies only at the manufacturing stage, and does not extend down to the
distribution stage till the retail sale of goods.
(ii) State VAT: does not include entry tax, luxury tax, entertainment tax, taxes on lottery,
advertisements, etc.
2.8.3 Goods and Services not included in VAT:
(i) CENVAT: Exemptions under CENVAT and service tax include oil and gas production, mining,
agriculture, wholesale and retail trade, real estate construction, and other services.
(ii) State VAT: Exemptions from State VAT include services, real property, agriculture, oil and
gas production, and mining.
2.8.4 Years of implementation of VAT in the States:
Table 2.5: Implementation of VAT
Date States
April, 2003 Haryana
April, 2005 AP, Arunachal, Assam, Bihar, Himachal, J&K, Karnataka, Kerala, Maharashtra,
Mizoram, Nagaland, Orissa, Punjab, Sikkim, W. Bengal, Delhi, Goa.
July, 2005 Manipur
October, 2005 Tripura, Uttaranchal
April, 2006 Chhattisgarh, Gujarat, Jharkhand, MP, Meghalaya, Rajasthan,
January, 2007 Tamil Nadu
January, 2008 UP
Source: MSE, Dec., 2011.
2.8.5 Benefits of the VAT implemented: While 'true VAT' is a logical beauty, the VAT regime
actually implemented continued with serious shortcomings as discussed in Para 3.1.1. It had
however, the following positive effects:
 State VAT: State VAT addressed several flaws of the indirect tax regime mentioned in para
2.2. It eliminated complexities associated with the application of sales taxes at the first point of
sale (see para 2.2.4a for details). Consensus reached among the States for uniformity in the VAT
rates ended the harmful tax competition among them. It also lessened the cascading of tax.
 CENVAT: Rationalization of CENVAT rates was done by reducing their multiplicity and
replacing many of the specific rates by ad-valorem rates based on the maximum retail price
(MRP) of the products. CENVAT also resulted in fewer classification disputes, reduced tax
cascading, and greater neutrality of tax.
2.8.6 Combined effect of the Central and State indirect taxes: could be seen at Annex 2.4. In
brief, the combined effects are given in Table 2.6 in a specific scenario:
Table 2.6: Summary of Annexure 2.4 (GST 18% (9%+9%), VAT/ST 12.5%, UED 12.5%, CST 2%)
Intrastate Interstate
ST VAT GST ST VAT GST
1 CTC 126.50 105.90 102.66 150.30 125.63 102.66
2 Tax to State 1(M) 1.28 1.28
3 Tax to State 2 (S) 2.93 2.31
4 Tax to State 3 (R) 14.05 11.77 8.70 20.7 17.36 8.70
5 Tax to all States 14.05 11.77 8.70 24.91 20.95 8.70
6 Tax to Centre 7.13 7.13 6.96 7.13 7.13 6.96
7 Total Taxes(5+6) 21.18 18.90 15.66 32.04 28.08 15.66
Note: (i) M = State of manufacture, (ii) S = State of stock, (iii) R = State of Retail sales, (iv) CTC = Cost to
consumer.
2.9 Impact of VAT on the State revenue:
2.9.1 VAT/Sales tax collection: It is evident from Graph 2.1 (data at Annex 2.6) that overall the
VAT/Sales Tax growth trends, both in the pre and post-VAT regime (i.e.2005-06), are almost the
same. No significant growth has been observed due to VAT, as against the expectations. Sharp
increase in VAT happened much after the introduction of VAT i.e. after 2009-10, apparently on the
back of high economic growth and increase in the prices of petroleum products, particularly after
2008-09. Overall the VAT regime appears to be revenue neutral.
250,000
Graph 2.1 : VAT/ST Collection
VAT/ST Collection (Rs. Cr.)
200,000
150,000
HIS
MIS
100,000
LIS
Bihar
50,000
0
04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16
Year

 Similar inference could be made also from VAT: GSDP ratio. As shown in Graph 2.2,
VAT: GSDP ratio increased after 2009-10 i.e. much after the implementation of VAT.
Graph 2.2 : VAT/ST: GSDP Ratio

60.00
50.00
ST/VAT Collection
40.00 HIS
MIS
30.00
LIS
20.00 Bihar
10.00
0.00
2.9.2 Impact of VAT on some poor and rich States: Graph 2.3 shows that VAT revenue in
Maharashtra and TN increased substantially (i.e. after 2004-05). But there was no significant
increase in Bihar, M.P. and Odisha. UP and Gujarat shows marginal increase in VAT revenue.
Overall, VAT seems to have benefited the HIS, not LISs.
Graph 2.3 VAT/Sales Tax collection for some HIS and LIS States in pre vs. post VAT regime.
Gujarat Haryana Maharashtra TN Bihar MP UP Odissa
30,000
Maharashtra
25,000
20,000
TN
15,000
10,000
MP
5,000 Gujarat Haryana
UP
Odissa
0 Bihar
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
PRE VAT VAT POST VAT
 Graph 2.4 shows that VAT/GSDP ratio for Maharashtra and Gujarat has increased marginally
after 2004-05. But, there is no significant increase can be seen in Haryana, TN, MP, Bihar, Odissa
and UP.

Graph 2.4 VAT/Sale Tax: GSDP, for some HIS and LIS States in pre vs. post VAT regime
Odissa Gujarat Haryana Maharashtra TN Bihar UP MP Odissa
0.70%
0.60% Maharashtra
0.50%
0.40% TN
0.30% MP
0.20%
Gujarat
0.10% Haryana
Odissa UP
0.00%
Bihar
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
PRE VAT VAT POST VAT
2.9.3 Analysis by NIPFP:

 To examine whether introduction of VAT by itself led to acceleration in revenues, sales tax
revenues of the states for the period 1991-92 to 2013-13 were regressed by Dr. Govinda Rao of
NIPFP on per capita GSDP, proportion of GSDP from the non-agricultural sector, wholesale price
index of petroleum products and VAT dummy after 2005-06 in a log-linear model. The regression
estimates are summarised in Annex 2.7.
 The analysis shows that in all the states, per capita GSDP was a significant determinant of sales
tax revenues. In 12 out of the 18 States (N.E. States and Goa excluded), the proportion of non-
agricultural income was significant with the correct sign. Similarly in 8 out of 18 States (N.E States
exclude) States, wholesale price index of petroleum products was significant. The VAT dummy
was significant only in Gujarat and Manipur. Thus, while introduction of VAT could have
substantially rationalised the tax system, it would be too optimistic to claim that it led to
significant increases in revenues. The major reasons for the increase in revenues (i.e., much after
implementations of VAT) must be attributed to acceleration in the growth rate of GSDP and sharp
increase in the prices of petroleum products, particularly after 2008-09.
2.10 Sales Tax/VAT effort of the States: May be seen at Annex 2.8 (A) & (B). Annex 2.8(A)
shows that all States have the effort around 100%.

Chapter 3
Goods and Services Tax in India
(Laying the firm foundation for a good and simple tax)
3.1 Problems with the current 'VAT' regime in India: The current 'VAT' regime addressed some
of the flaws of the pre-VAT indirect tax regime as detailed in para 2.2. However, most of these
flaws remain even now in varying degrees as described below:
3.1.1 Prevailing indirect tax regime is a 'partial' VAT: The indirect tax systems at both the
Central and the State levels remain complex. VAT, like its predecessor Sales Taxes, continues to be
characterized by narrow base, plethora of exemptions, multiple rate structure and cascading effect
on account of break in the input-credit chain. While input-credit is available for intra-state
transactions, no such credit is available for inter-state transactions. Their administration leaves a
lot to be desired. They are subject to disputes and court challenges, and the process for resolution
of disputes is slow and expensive. At the same time, the systems suffer from substantial
compliance gaps, except in the highly organized sectors of the economy. The prevailing VAT
regime could, therefore, at best be called a ‘partial’ VAT regime.
3.1.2 Factors contributing to this unsatisfactory situation (the CEA Committee): are broadly
the same as detailed in para 2.2. The key problems are nevertheless described below for
recapitulation:
(a) Classification of goods and the rates of VAT:
 It is clear from Annexure 3.1 that while there is some uniformity in the tax rates which range
from (i) exempted goods (items of basic necessities and goods of local importance), (ii) goods
taxed at 4 percent (other essential items and industrial inputs), (iii) zero-rated goods (for exports),
(iv) goods taxed at one percent (gold, silver & precious stones), and (v) goods taxed at 12.5%
(residual rate for commodities not covered by other schedules), there is considerable variation
among the States as regards the goods included in different categories.
 There are several goods (motor spirit, liquor, etc.) where 20% floor rates are applied and these
rates vary considerably across the States. There is also considerable variation in the list of goods
subject to special rates where credit on taxes paid on goods is allowed or not allowed. Many goods
that may be considered as polluting, inputs and outputs are taxed at different rates in the States.
 Theoretically, one might expect that the lower tax rates would be applied to basic necessities
that are consumed largely by the poor. This is not the case under the State VAT. The lowest rate of
1% applies to precious metals and jewelry, and related products. The middle rate of 4% applies
to selected basic necessities and also a range of industrial inputs and IT products. In fact, basic

necessities fall into three categories – exempted from tax, taxable at 4%, and taxable at the standard
rate of 12.5%. Whatever the political merits of this approach, the classification would appear to be
arbitrary, with no well accepted rational underpinning. Moreover, it does not serve the stated
objectives (see para 6.1) and is not conducive to lower compliance costs.
 Most retailers find it difficult to determine the tax rate applicable to a given item without
referring to the legislative schedules. Consumers are even less aware of the tax applicable to
various items. This gives rise to confusion and leakages.
(b) Taxation at Manufacturing Level [see para 2.2.4(a) for details].
 CENVAT is levied on goods manufactured or produced in India. This gives rise to definitional
issues as to what constitutes manufacturing, and valuation issues for determining the value on
which the tax is to be levied. While these concepts have evolved through judicial rulings
(Annexure 3.2), it is recognized that limiting tax to the point of manufacturing is a severe
impediment to an efficient and neutral application of tax. Manufacturing itself forms a narrow base.
 Moreover, the effective burden of tax becomes dependent on the supply chain, i.e., the taxable
value at the point of manufacturing relative to the value added beyond this point. It is for this
reason that virtually all countries have abandoned this form of taxation and replaced it by VAT
(i.e., multi-point taxation system extending to the retail level).
(c) Distinction between goods & services:
 The traditional distinctions between goods and services (and for items such as land and property,
entertainment, and luxuries) have become archaic. In markets today, goods, services, and other
types of supplies are being packaged as composite bundles and offered for sale to consumers under
a variety of supply-chain arrangements. Under the current division of taxation powers, neither the
Centre nor the States can apply tax to such bundles in a seamless manner. Each can tax only parts
of the bundle, creating the possibility of gaps or overlaps in taxation.
(d) Exclusion of services from the State taxation powers [see para 2.2.4(b) for details]: has
negative impact on the buoyancy of State tax revenues since the States have no powers to levy tax
on incomes or the fastest growing components of the consumer expenditures (i.e. services). The
States have therefore, to rely almost exclusively on compliance improvements or rate increases for
any buoyancy in their own-source revenues, which is becoming ever more difficult.
(e) Tax Cascading:
 Tax cascading remains the most serious flaw of the current VAT system .It increases cost of
production and puts Indian suppliers at a competitive disadvantage in the international markets. It
creates a bias in favor of imports, which do not bear the hidden burden of taxes on production

inputs. It also detracts from a neutral application of tax to the competing products. Even if the
statutory rate is uniform, the effective tax rate (which consists of the statutory rate on finished
products and the implicit or hidden tax on production inputs) can vary from product to product
depending on the magnitude of the hidden tax on inputs used in their production and distribution.
The intended impact of government policy towards sectors or households may be negated by the
indirect or hidden taxation in a cascading system of taxes (Box 3.1).
Box 3.1: The Cascade Tax and Effective Rate

 The simplest sales tax is one that takes a straightforward percentage of all business turnover.
Because tax on tax occurs as a taxed product passes from manufacturer to wholesaler to retailer, this
has become known as a cascade tax. The defects of this type of tax are well known:
- Cumulative and unknowable tax liabilities, different tax liabilities depending on the degree of
industrial vertical integration, difficulty in assessing the amount of cascade tax to be rebated on
exports or imposed on imports, and so on;
 As a rough rule of thumb, it is estimated that the effective rate of a cascade tax to the retail stage
is approximately two and a half times the nominal rate; thus, a turnover tax of 4 percent is equivalent
to a retail sales tax of 10 percent.
Tait, 1988
 Tax cascading occurs under both the Centre and the State taxes. The most significant
contributing factor to tax cascading is the partial coverage under CENVAT/VAT by the Central
and State taxes. Oil & gas production, mining, agriculture, wholesale and retail trade, real estate
construction, and range of services remain outside the ambit of CENVAT and service tax levied by
the Centre. The exempt sectors are not allowed to claim any credit for CENVAT or service tax paid
on their inputs. Similarly, under State VAT, no credits are allowed for the inputs of the exempt
sectors, which include the entire service sector, real property sector, agriculture, oil & gas
production and mining.
 Exemptions and multiple rates, and irrational structure of the levies are the most glaring
in the case of CENVAT and Service Tax. The starting base for the CENVAT is narrow, and is
being further eroded by a variety of area-specific, and conditional and unconditional exemptions. A
few years ago the Government attempted to rationalize CENVAT rates by reducing their
multiplicity but has not adhered to this policy and has reintroduced concessions for several sectors
& products.
 Another major contributing factor to tax cascading is Central Sales Tax (CST) on inter-
state sales, collected by the origin state and for which no credit is allowed by any level of
Government.
 While no recent estimates are available for the extent of tax cascading under the Indian tax
system, it is likely to be significant, judging by the experience of other countries which had a

similar tax structure. For example, under the Canadian manufacturers’ sales tax, which was similar
to CENVAT, the non-creditable tax on business inputs and machinery & equipment accounted for
approximately one-third of total revenues from tax. The extent of cascading under the provincial
RST in Canada, which are similar to the State VAT in India, is estimated to be 35-40% of total
revenue. A priori, one would expect the magnitude of cascading under CENVAT, service tax, and
State VAT to be even higher in India, given the more restricted input credits and wider exemptions
under these taxes. Service Tax falls predominantly on business to business (B2B) services and is
thus highly cascading in nature.
Box 3.2: What exactly is wrong with cascading
 And even more rarely asked - how large might be welfare losses that it implies?
Keen concludes that output losses from cascading or more precisely, the amplification of the production
inefficiencies to which input taxation can lead- may actually be lower the wider the set of inputs that are
taxed; but, probably more to the point, may plausibly be large even at a fairly low nominal tax rate and
with relatively few stages of production. Keen, 2013 (p22)
 Due to cascading, the tax embodied in any given item will depend on the number of production
stages that are subject to tax. In addition to resulting in arbitrary variations in effective tax burdens
across the range of goods sold, cascading also creates an obvious incentive for firms to vertically
integrate their activities in order to eliminate taxable stages, with a consequent distortion in the choice
of firms’ organizational forms that may involve real efficiency losses. Ebrill, 2001(p16)
(f) Lack of Uniformity in Procedures etc.: Present VAT structure across the States lacks
uniformity, which is not restricted only to the rates of tax, but also extends to procedures and
sometimes, to the definitions, computation and exemptions.
(g) Sale of goods or service: Another problem with the State VAT is determining whether a
particular transaction constitutes a sale of goods or service. This problem is most acute in the case
of software products and intangibles such as the right to distribute/exhibit movies or time slots for
broadcasting advertisements.
(h) Fixation of situs –Local Sale vs. inter State Sale: Whether a sale takes place in one State or
another, i.e. to fix the situs of sales transaction, is a major conflict, as its taxability affects the
revenue of the State. Though CST is a tax levied by Central Government, it is collected and
retained by the collecting State. Whether a transaction is a direct inter-State sale from State ‘X’ to
the customer ‘ABC’ located in State ‘Y’; or is a stock transfer from State ‘X’ to branch in State ‘Y’
first and then a local sale to the customer in the State ‘Y’, will have a bearing on the revenues of
the State ‘X’ or State’ Y’. A significant number of litigations pertained to this issue. Ultimately,
Central Government made provisions under the CST Act, 1956 and created a Central Appellate
Authority to resolve such matters.

(i) Complexities in administration: Compounding the structural or design deficiencies of the
taxes is the poor or archaic infrastructure for their administration. Taxpayer services, which are a
lynchpin of a successful self-assessment system, are virtually nonexistent or grossly inadequate
under both the Central and the State administrations. Many of the administrative processes are still
manual, not benefiting from the efficiencies of automation. All this not only increases the costs of
compliance, but also undermines revenue collection.
3.1.3 Problems in the existing indirect tax regime: CEA Committee, 2015 has pointed out in
particular the following problems in the existing indirect tax regime:
(A) Centre:
(i) In relation to goods, the Centre has a very complicated tax structure (Annex 3.3), more
complex than that of most of the States, characterized by:
 a multiplicity of rates, including the most important central excise (central excise has 8
ad-valorem and several specific rates), cesses, countervailing and special additional duties;
 extensive exemptions, about 300 items compared to say 90 for most of the States. These
exemptions for the Centre (on excise duty alone) amount to about Rs.1.8 lakh crore (2014-15),
which is about 1.5% of GDP;
 an incomplete base that stops at the manufacturing stage; and
 an exemptions threshold of 1.5 crore, with exports and exempted goods not counting towards the
threshold.
(ii) In relation to services too, the Centre has a complicated rate structure. Although there is one
statutory rate, in practice, there are 10 other rates because of the so-called “abatement” which
amounts to fixing a rate different from the standard rate and not allowing further ITCs. Abatement
is necessitated in some part because of uncertainty in the base, and specifically being unable to
distinguish “goods” from “services.” The exemptions threshold is Rs. 10 lakh.
(iii) At the Centre, there is incomplete provision of ITC for goods, and incomplete cross-crediting
between goods and services.
(B) States:
(i) In relation to goods, the States have structures characterized by a base that is complete in
extending all the way to the retail stage. However, there is
 a multiplicity of rates, including for VAT.
 Additional taxes on inter-State trade (octroi, entry tax)
 though fewer VAT rates (4 plus) and fewer exemptions (than at the Centre), both rates and
exemptions vary across the States.

(ii) On exemptions, an exemption threshold that varies across the States between Rs.5 lakh and 10
lakh with a provision for “compounding” that also varies across the States in design.
(C) Centre and States:
 A key difference between the Centre and the States, with implications for any future standard
rate is that the States have a much larger portion of the base (more than 65 per cent) taxed at the
lower rate while the comparable number for the Centre is about 40 per cent.
 One reason is that the States typically place intermediate goods in the lower rate category. The
higher standard rate is, therefore, compelled by placing so much of the base at the lower rate.
3.1.4 Key Problems in the current indirect taxes regime: The current indirect tax structure is
thus highly complex, highly leaky(riddled with exemptions in goods that the CEA Committee
estimated to be about 2.7 per cent of GDP for the Centre and the States together), characterized by
significant differences between the Centre and the States, and by a rate structure that does not
conform to what the evidence suggests might be a good policy (illustration in para 6.1). The
current VAT regime is at best a 'partial VAT' regime.
3.1.5 ‘GST’ affords a historic opportunity: In the above backdrop, ‘GST’ affords a historic
opportunity to simplify and rationalize the indirect taxes regime and also eliminate serious
anomalies to make it consistent with rationale policy objectives.
3.2 What is GST: What is proposed as GST in India is known internationally as VAT and it
is an end user consumption tax. It is essentially the VAT system in which both the Centre and the
States levy Value Added Tax on goods as well as services as per the harmonized rate structure and
over a common tax base. See Annex 2.4 for illustration.
3.3 Evolution of VAT/GST in India: VAT/GST in some form or the other has been under
consideration and implementation since 1980s as follows :
(i) 1986 - VAT introduced for Central Excise Duty, first as MODVAT and then as CENVAT.
(ii) 1992 - Chelliah Committee submitted its Report on reforming India's tax system.
(iii) 1993-94 – Union Budget stated "…………our long term aim should be to move to VAT
system…….. NIPFP to prepare the design of a possible VAT system".
(iv) 1994 – Accordingly, Bagchi Committee (NIPFP) prepared a comprehensive Report on Reform
of Domestic Trade Taxes in India (see paras 2.2 to 2.5 for details).
(v) 2003 – Kelkar Task Force on indirect taxes suggested a comprehensive GST based on VAT
principle.
(vi) 2004 – ITC under CENVAT and Service Tax merged

(vii) 2004 – The Task Force on the implementation of FRBM, 2003 while analysing the structure
of the prevailing indirect tax system both at the Central and the State level, recommended
introduction of a destination based VAT type dual GST where tax 'sticks' on final consumption.
(viii) 2004 – Empowered Committee recommendations on VAT led to implementation of 'partial'
VAT by the States (see paras 2.7 and 2.8 for details).
(ix) Union Budget (2006-07): set April 01, 2010 for introducing GST and requested the
Empowered Committee of State Finance Ministers (EC) to prepare a roadmap for GST.
(x) 2008 – EC brought out preliminary views on the design of GST
(xi) Sept., 2009 – JWG of Officers of Central & States Govts. constituted to take the GST related
work further.
(xii) Nov., 2009 – EC presented the First Discussion Paper.
(xiii) Dec., 2009–Task Force Report of the 13th FC prepared a comprehensive Report on GST.
(xiv) June, 2010 – GOI constituted three sub-working Groups i.e., (a) Business Process related
issues, (b) Drafting of Central GST and model State GST legislations, and (c) Basic design of IT
systems required for GST in general and IGST in particular.
(xv) March, 2011 - The Constitution (115th Amendment) Bill introduced in Lok Sabha. The Bill
was referred to the Standing Committee on Finance for examination and report.
(xvi) November, 2012 – Committee on GST Design consisting of Central & State Governments
constituted. Based on its report in Jan., 2013, EC recommended certain changes in the Bill.
(xvii) February, 2013 – EC constituted three Committees (a) Dual Control, Thresholds and
Exemptions in GST regime, (b) RNRs for SGST & CGST and Place of Supply Rules, and (c) IGST
and GST on imports.
(xviii) March, 2013 – GSTN Incorporated as Section 25 Company.
(xix) June, 2013 – EC constituted Committee to draft model GST Law.
(xx) August, 2013 – The Standing Committee on Finance submitted its Report on GST to Lok
Sabha. The Bill suitably revised.
(xxi) Sept., 2013 - Revised draft sent to EC for consideration.
(xxii) April, 2014 – EC constituted Committee to examine business processes under GST.
(xxiii) June, 2014 – The Bill sent to EC after approval of the new Govt.
(xxiv) Dec. 2014 – 122nd Constitutional Amendment Bill, 2014 (CAB, 2014) introduced in Lok
Sabha on approval of the Cabinet.
(xxv) May, 2015 – CAB, 2014 passed by Lok Sabha and then referred to the Select Committee of
Rajya Sabha.
(xxvi) July, 2015 –The Select Committee of Rajya Sabha submitted its Report.

(xxvii) Dec., 2015 –The CEA Committee submitted Report on RNR and structure of the Rates for
GST.
(xxviii) August, 2016 – Rajya Sabha passed CAB, 2014 with amendments (viz. dropping 1%
additional tax on inter-state supplies, etc.), which were endorsed by Lok Sabha.
(xxix) On President giving assent (on Sept. 8, 2016) after endorsement by the requisite number of
States, it became the Constitution (101st) Amendment Act, 2016 (CAA, 2016).
(xxx) July, 2017 – GST implemented w.e.f. 1st July, 2017 with some transitional relaxations.
Box 3.3 : VAT Reforms in China

 In 2008, the Chinese National People’s Congress (NPC) formally approved a five-year plan to allow
reforms to the VAT Act. In that same year, the Chinese Government pledged to ensure the reforms are duly
implemented in line with the country’s overall policy objectives.
 In a 2011 press conference, the Chinese Ministry of Finance (MOF) introduced reform projects that
would require selected regions and sectors of the domestic economy to shift from paying Business Tax (BT)
to paying VAT. Replacing BT with VAT was intended to establish a more reasonable tax system that would
encourage more structural economic changes and help develop a modern services industry.
 On 26 October 2011, Chinese Premier Wen Jiabao disclosed at the State Council Standing Committee
meeting that, effective 1 January 2012, Shanghai would be the first reform city to aggressively implement
the BT-to-VAT conversion.
 Subsequently, VAT reforms have been gradually expanded from reform cities into a nationwide
program:(i) The first round of reform affected certain industries such as transportation and certain modern
services. (ii) Later, the reform was expanded to other sectors of the economy, including postal services.
 Policymakers in Beijing have considered further expanding the scope of the VAT reform in China,
which is expected to cover many more industries in 2016. More businesses are expected to transition from
BT to VAT.
 The Chinese authorities have forecast that its nationwide VAT reform projects will be completed in
2016, with lawmakers expected to pass a formal and comprehensive VAT Act by the end of 2018.
Source: E&Y, 2016
3.4 Broad objectives of GST:
 The problems of pre-VAT regime (para 2.2) were addressed only partially through the
prevailing 'partial 'VAT regime. Most of these problems remain in varying degrees as mentioned in
para 3.1.
 It may be noted that as per the 'object & reasons' of the Constitution Amendment Bill (CAB),
2014, "GST shall replace a number of indirect taxes being levied by the Union and the State
Governments and is intended to (i) remove cascading effect of taxes, and (ii) provide for a
common national market for goods and services. The Central and State GST will be levied on
all transactions involving supply of goods and services, except those which are kept out of the
purview of GST".
 However, the details of the CAB, 2014; the CAA, 2016 and the GST/IGST laws show that the
GST regime is expected to do much more i.e. widen tax base, increase tax compliance, reduce
economic distortions caused by inter- state variations in taxes, remove negative protection for
Indian manufacturing, increase investment and ultimately address the problem of the existing VAT
regime (Para 3.1). The CEA Committee has observed that while these are important, three benefits
stand out in today’s context: governance/institutional reform and “Make in India by Making one
India,” which are two key pillars of the government’s reform efforts.
 Each of the objectives is explained below:
3.4.1 Widen tax base through coverage of multifarious economic activities into its ambit and by
cutting down exemptions - enabling reduction in rates, improved compliance, and revenue
buoyancy. Also reduce corruption and curb black money – if it is extended to alcohol, real
estate, precious metal, etc.
3.4.2 Mitigate cascading and double taxation: i.e., 'tax on tax' through comprehensive ITC. See
para 3.9.8(a) for a different view. Annex 3.12 and Box 3.2 discusses whether cascading is a
serious problem?
3.4.3 Enable better administration and compliance: through simplified tax structure, lowering
of overall tax burden and self-policing. In the process, reduce revenue leakage and rent-seeking.
 A common base and common rates across goods & services and similar rates across the States
and between the Centre and the States will facilitate better tax administration, improve tax
compliance, and ensure adequate tax collection from inter-State sales.
 While RNR may not reduce tax burden right now, improved compliance would provide ample
scope for reduction in the tax incidence in future.
 Self-policing is inherent to a valued added tax. The fractional nature and self-recovering
features of GST mean that in revenue terms it should in some respects be relatively robust to non-
compliance. To claim ITC, each dealer has an incentive to request documentation from the dealer
behind him in the value-added/tax chain. If for some reason a supply to some registered trader
escapes VAT/GST, that missing VAT/GST will be recovered at the next stage in the VAT/GST
charged by that trader on their own sales, since there will, in that case, be no credit to offset against
their liability.
 Provided the chain is not broken through wide ranging exemptions, especially on intermediate
goods, this self-policing feature can work very powerfully.
 Another view is that VAT/GST is not self-enforcing – "ghost" invoices and false refund claims
are common. See paras 3.9.5 and 9.3.
 GST Network: Robust GST network would benefit all the States and the Centre by reducing
leakages through tools such as matching input tax credit, data mining and pattern detection and
providing risk based scrutiny by tax authorities. (See para 8.13.6). Matching of supplier and
purchase invoices will be electronic and instantaneous. This will greatly reduce the scope for fraud
and evasion.
 GST will in effect have a dual monitoring structure—one by the States and one by the Centre.
Hence, there will be a greater probability that evasion will be detected. Even if one set of tax
authorities overlooks and/or fails to detect evasion, the other overseeing authority may not.
 Comprehensive definition of taxation of goods and services: should result in a smaller amount
of the base falling through the cracks between “goods” and “services” as happens currently.
Moreover, elimination of abatements on services will reduce overstatement of ITCs.
3.4.4 Promote competitiveness of the domestic industry: GST would promote it not by
increasing protection but by eliminating the negative protection favoring imports and dis-favouring
domestic manufacturing. Annex -3.4 details, inter alia, (i) distortions resulting from CST, inter-
State taxes and CVD exemption, and (ii) why is GST a better option than CVD/SAD.
3.4.5 Facilitate Common National Market: Common National Market in a large country like
India would promote specialization, scale economics, derisking and experimentation in different
States to create innovative solutions.
 The current tax structure unmakes India by fragmenting Indian markets along the State lines. A
number of inter-State taxes are levied by the States in addition to CST. These include: entry tax not
in lieu of octroi and entry tax in lieu of octroi. This has the collateral consequence of undermining
'Make in India'. By unifying the tax structure across the States, the GST regime would also pave
way for a Common National Market for goods & services and promote 'Making one India'.
 Under GST, all these taxes would be folded into the GST with major savings on transportation,
logistics etc. Example of the costs of logistics due to inter-State 'tax' barriers are given at
Annexure- 3.5. Presently, there are more than 600 check points.
 This increase in inter-state trade will then have another powerful consequence. A common
market will help attain convergence within India because production can be based on comparative
advantage. Implementing GST will accordingly help the natural resource rich lagging regions
catch up with the more advanced regions by making the former more profitable production
destinations. (this assertion is highly questionable - see para 3.9.3).
3.4.6 Increase investment: By making it easier to take advantage of ITCs for capital goods, GST
would increase investment (see Annexure 3.6). It would attract greater FDI by imparting stability
to the tax regime.
 Under the current tax regime, while Union excise duties and State VAT apply to all capital
goods, ITCs are generally limited to manufacturing plant and equipment. For example, no ITCs are

allowed for the Union excise duties on capital equipment acquired for use in transportation,
infrastructure, distribution, or construction sectors because these sectors are outside the scope of
excise duties which are applicable to manufacturing only. Similarly, no credit is allowed for the
State VAT on capital goods acquired by the service sector (e.g., telecommunications,
transportation, finance, insurance, and IT services).
3.5 Scope of the GST regime:

3.5.1 Taxes that ought to be subsumed in GST: TFR, 2009 recommended the following
principles for identifying taxes/levies on goods & services which need to be subsumed in GST:
(a) Taxes/levies should be primarily in the nature of indirect taxes.
(b) Taxes/levies should be part of the transaction chain which commences with importer/
manufacturer of goods or provision of services at one end and the consumption at the other.
(c) Sub-summation should result in free flow of tax credit at the intra and inter State levels.
(d) Any tax/fee/charge in the nature of a user charge, should not be subsumed under GST.
 Accordingly, TFR, 2009 recommended-
(a) (i) Stamp duty, (ii) Taxes on vehicles, (iii) Taxes on Goods & Passengers, and (iv) Taxes/duties
on electricity should also be subsumed, as per the principles mentioned in para 3.5.1.
(b) Amount collected through these taxes on SIN goods should not be subsumed in CGST or
SGST.
(c) Both the Centre and the States should consolidate all taxes (other than the proposed GST) on
SIN goods as a single levy termed as Central and State Excises, respectively.
(d) All Entry and Octroi duties levied by the third-tier of Government should be abolished.
3.5.2 Taxes actually being subsumed in GST: as per the CAA, 2016 :
Box 3.4 : Central Taxes being subsumed State Taxes being subsumed
 Central Excise Duty (CENVAT)  State VAT / Sales Tax
 Additional Excise Duties1  Entertainment Tax (not levied by local bodies)
 Excise Duties levied under MTP Act  Entry Tax (all forms), Octroi.
 Additional Customs Duties (CVD/ACD)2  Advertisements tax
 Special Additional Duty (SAD) 2
 Purchase Tax
 Service Tax  Luxury Tax
 Central Sales Tax (CST)  Taxes on lottery, betting & gambling
 Central Surcharges & Cesses 3
 State Surcharges & Cesses3
Note: 1. On goods of special importance, textiles and textile products.
2. Custom Duties on imports are primarily of 3 types: (a) Basic Custom Duty, (b) ACD/CVD, which is in
lieu of central excise duty, and (c) SAD, which is to counter-balance sales tax, VAT, local taxes or any other
charges leviable on a like article on its sale/purchase/transportation in India.
3. related to supply of goods and services.

3.5.3 Indirect taxes not being subsumed in GST:
Box 3.5 (a) States (b) Centre
 Taxes on potable alcoholic liquors  Basic Custom Duty
 Stamp Duty  Excise duty on tobacco products
 Taxes on Vehicles and Goods & Passengers  Export Duty
 Taxes & duties on electricity  Specific cesses.
 Road Tax, Toll Tax
 Property Tax
 Environment tax
 Entertainment tax levied by Local Bodies
 User Charges
3.5.4 Goods & Services not being subsumed in GST: GST is applicable on supply of all goods
or services with some exclusion as follows:
 GST will not apply to alcoholic liquor for human consumption.
 Initially, GST will not apply to (a) petroleum crude, (b) high speed diesel, (c) motor spirit
(petrol), (d) natural gas, and (e) aviation turbine fuel. The GST Council will decide when will GST
be levied on these products.
 While Tobacco and tobacco products will be subject to GST, the Centre may also impose
excise duty on tobacco and aforesaid petroleum products.
3.6 Levy of Additional Tax in lieu of CST : The CAB, 2014 originally provided that Additional
Tax (in lieu of CST) not exceeding 1% in the course of inter-State trade/commerce would be levied
by GOI for a period of 2 years or such period as the GST Council may recommend, and such tax
would be assigned to the States from where supply originates. However, GOI may in public
interest, exempt such goods from Additional Tax.
 Such provision would evidently impede a key objective of GST of creating a harmonised
national market for goods and services. Apart from the costs on the logistics (see para 3.4.5), a
product made in one State and sold in another would be more expensive than one made and sold
within the same State. Moreover, the 1% additional tax will result in cascading of taxes. This effect
will be magnified if the production and distribution chain passes through several States. The burden
of the cascading tax will be borne ultimately by the final consumer of the product.
 Accordingly, the provision of Additional Tax of 1% has been dropped from the CAA,2016.
3.7 Current vs. proposed vs. ideal GST regime:

3.7.1 Flawless GST: Efficiency of the GST regime would evidently be enhanced with the increase
in the purity of the GST Model. The ten most important elements of a 'pure flawless' GST (out
of the 26 reproduced at Annex 3.7A) as per TFR, 2009 are as follows. The flawless GST would
minimize distortion through seven macro-economic channels (Annex 3.7B).

a. The Tax 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 ITC should be given in respect of capital goods;
f. GST must replace all transaction based taxes on goods & services and factors of production.
g. There should be seamless flow of tax through all stages of production and distribution so as to
stick on “final” consumption;
h. The exports should be zero rated and imports should be fully taxed;
i. There should be a threshold exemption for small dealers;
j. Full computerisation of the compliance and administrative systems should be ensured.
Box 3.6: IMF prescriptions on VAT

In the ideal VAT regime
(i) VAT should utilize the invoice-credit method;
(ii) VAT should extend through the retail stage;
(iii) services should be included in the base of the tax except for well-specified exemptions for education,
health, and financial services;
(iv) introduction of a VAT is facilitated by the establishment of large taxpayer units (LTUs);
(v) VAT should be administered as a national tax;
(vi) in addition to incorporated businesses, individual entrepreneurs and unincorporated businesses should
all be covered by the VAT, subject to a threshold to exclude the smallest businesses;
(vii) a preparation and implementation timetable and project team devoted solely to VAT implementation
should be established before a new VAT is introduced.
(viii) exports be zero-rated,
(ix) VAT charged on capital goods be credited in full immediately,
(x) there be a single positive VAT rate,
(xi) VAT be calculated on an accrual basis (meaning that tax is payable, broadly speaking, when effective
delivery or transfer of ownership occurs).
(xii) provide appropriate VAT staffing and training
(xiii) fix threshold below which businesses need not file for the VAT,
(xiv) certain services, principally health, education, and non-fee financial services, be exempt from the VAT
for policy and practical reasons.
(xv) standard rate of VAT be clustered between 11-19%,
(xvi) agricultural production be exempted,
(xvii) domestic component of the VAT be administered by the internal tax department (that is, administered
with the income tax in a function-based organization). Ebrill, 2001
3.7.2 Comparative picture of the current, expected and model regimes: A comparative picture
of the current indirect tax regime and an ideal GST regime is given at Annexure 3.8. Similarly, a
comparative picture of the current indirect tax regime and the proposed GST is given at Annex 3.9.
It is evident that even the proposed GST regime is 'partial' though it is a radical improvement over
the erstwhile 'partial VAT' regime.
3.7.3 Selection of the appropriate GST model: Para 1.5.9 and Annex 1.9 may be seen for the
alternative GST models and also why concurrent dual GST would be the 'appropriate' model for a
federal democratic polity like India.
 Ideally, GST should be levied by the national govt. (i.e. national GST) comprehensively on all
goods and services at a single rate – along with an objective revenue-sharing arrangement- to
achieve the objectives of simplicity and economic neutrality.
 However, the GST regime proposed is a substantial compromise on the ideal GST regime
because of the concerns about the (i) Possible loss of revenue, (ii) State autonomy, (iii) Distribution
of tax burden (adverse effect on the low income group), (iv) Administrative and conceptual
difficulties in applying the tax to certain sectors (e.g. health care, education, financial services), etc.
3.8 Implication of GST for various Stakeholders: GST would evidently have effect on
distribution, efficiency, savings & investment, foreign trade, public sector size, management of
economy, etc. as discussed below. The dominant policy ideas in any country (about equity and
fairness, efficiency, and growth), as do the dominant economic and social interests (capital, labor,
regional, ethnic, rich, poor), and the key institutions, both political (democracy, decentralization,
budgetary) and economic (protectionism, macroeconomic policy, market structure), interact in the
formulation and implementation of a VAT as they do with respect to tax and budgetary policy in
general.
3.8.1 RBI Report, 2017: (on State Finances) - It is perceived that by anchoring revenue to a more
stable source, i.e., consumption, the government can have a credible plan to strengthen public
finances which, in turn, would boost investor confidence in the economy and sustain growth (Zhou
et al, 2013) especially if the introduction of the GST is supplemented by structural reforms (Bolton
& Dollery, 2005; IMF, 2015b). Although the precise impact is difficult to measure accurately,
average growth increased by about 0.7 percentage point following fiscal (including tax) reforms in
some advanced economies (Danforth et al, 2015). As it promotes competitiveness, efficiency gains
from GST is considered to be higher vis-a-vis other taxes, the benefits of which accrues to growth
over the medium-term (IMF, 2006). In the short term, however, it may result in lower growth
as households adjust their consumption after GST implementation. The evidence also suggests
that implementation of GST may be inflationary under specific circumstances.
 From a fiscal perspective, international evidence suggests that implementation of VAT/GST
have resulted in a higher government revenue-GDP ratio over time. An earlier study concluded that
the tax-GDP ratio increased significantly after VAT implementation in twelve European countries
(Aaron, 1981). Moreover, OECD data on member countries from Europe suggest an increase of 37
per cent in the VAT revenues-GDP ratio between 1975 and 2006 (OECD, 2008).
 A snapshot of implication of GST for the economic agents is given in Box 3.7.
Box 3.7: What GST implies for various economic agents
(i) Business costs would lower the cost of locally
• Easy compliance: a robust and comprehensive IT manufactured goods & services and increase
platform and seamless transfer of ITC from one stage to India’s export competitiveness.
another in the value chain would incentivize tax (ii) Government
compliance. • Improve tax administration: with a robust
 Reducing compliance cost: uniformity in tax rates user- friendly GSTN portal, GST would be
and procedures across the country will economise on simpler and easier to administer.
compliance cost. • Higher revenue: GST is expected to reduce
• Uniformity of rates and structure: GST will ensure the cost of collection and improve revenue
that tax rates and structure are common across the buoyancy.
country, thereby increase certainty and ease of doing (iii) Consumer
business. • Single and transparent tax: only one tax
• Removal of cascading: seamless tax credits from the manufacturer to the consumer would
throughout the value-chain and across States would lead to greater tax transparency.
ensure minimal cascading of taxes, thus reducing • Relief from tax burden: efficiency gains and
hidden costs of doing business. prevention of leakages would reduce overall tax
• Gain to manufacturers and exporters: subsuming burden (around 25-30 per cent).
of major taxes in GST and reduction in transaction RBI, 2017
3.8.2 NCAER Report, 2009: As per the NCAER Report, 2009 commissioned by the 13thFinance
Commission, following benefits are expected for various stakeholders from the GST regime.
(i) Economy: GST in India will lead to efficient allocation of the factors of production thus leading
to gain in GDP and exports. This would translate into enhanced economic welfare and returns to
the factors of production, i.e. 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 per cent. India's GDP would gain
somewhere within a range of 0.9 to 1.7 per cent. The corresponding change in absolute values of
GDP over 2008-09 was expected to be between Rs.42,789 crore and Rs.83,899 crore, respectively.
 Incidentally, the CEA Committee, 2015 assumed an elasticity of investment demand with
respect to price at (-) 0.5 and an incremental capital output ratio of 4 and inferred that GST could
increase investment by 2 per cent which could propel growth by an incremental 0.5 per cent. A
recent study, however, posits a much higher incremental growth impact of 3.1 - 4.2 per cent based
on alternative scenarios of the likely aggregated GST rate due to surge in manufacturing activity
and trade (Leemput and Wiencek, 2017). The implementation of the GST should also boost
domestic business confidence, including among foreign investors by assuring a stable and
transparent tax system, free of cascades and distortions (RBI, 2017).
 Effects of VAT on savings and investment, as per Tait (1988) is given in Box 3.8. In general,
VAT does not distort saving and investment behavior. If it replaces taxes that are distorting,
economic efficiency should be improved.

Box 3.8: Effect of VAT on Savings and investment
 As the VAT is designed to give full credit for capital goods, and to be neutral as regards the choice
between capital and labor or investment and consumption, the substitutions should favor capital over
labor and investment over consumption.
 A broad-based VAT taxes present and future consumption the same and is, therefore, neutral between
consumption and saving. The net effect of a VAT on saving and investment depends on the exact form of
tax replacement discussed. A VAT that simply increased revenue would be potentially deflationary, would
reduce consumption, and probably would reduce the profitability of future investment.
 At the same time, such an increase in revenue could be used to reduce the fiscal deficit, reduce the
public sector borrowing requirement, allow interest rates to fall, and thus stimulate investment.
 The VAT could also lessen the danger of inflation from monetized deficits. This might reduce interest
rates and the real cost of capital. The net outturn depends on numerous behavioral relationships, but it is by
no means clear that VAT harms investment and savings; there are several plausible arguments for the
opposite.
 In general, VAT does not distort saving and investment behavior. If it replaces taxes that are distorting,
economic efficiency should be improved. Tait, 1988
(ii) Foreign trade: Destination based taxation is a fundamental principle of a sound GST i.e.
exports would be tax free by zero rating and imports would be taxed at the local rate within the
jurisdiction of consumption. Both export-oriented industries and import-substituting industries
would thus become internationally more competitive. As a result, while exports can be expected to
register an increase, imports are likely to decrease. Gains in exports are expected to vary between
3.2 and 6.3 per cent.
(iii) Benefits to the poor: Benefits to the poor will flow from two sources (a) increase in income
levels and (b) reduction in prices of goods consumed by them. Another dynamic implication of
the GST would be to generate greater employment as GST helps to increase labour intensive
sectors (Box 3.8 says the opposite). 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. The switchover to the 'flawless' GST
should, therefore, be viewed as pro-poor and not regressive. The switchover infact will
improve vertical equity of the indirect tax system.
(iv) Similarly, to the extent it will impose a higher burden on the informal economy by reducing
cascading effect, the switchover will also improve horizontal equity. Incidentally, Box 3.9 shows
that existence of an informal sector in a comprehensive GST regime would be welfare reducing,
when revenue neutral.

Box 3.9: Existence of an informal sector in a comprehensive GST regime would be welfare
reducing, when revenue neutral.
 The argument rests on the premise that when the choice of a commodity set for VAT increase is
restricted by the existence of a large informal sector, then there are negative welfare effects in
transition to a revenue neutral VAT. If this holds true then there are serious policy implications if
such negative welfare incidence impacts the 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 taxation of domestic goods and
services. When this is taken into account the welfare effects of GST can, in fact, be expected to be
positive. TFR, 2009
(v) Prices of agricultural goods would increase between 0.61 and 1.18 percent, whereas, overall
prices of all manufacturing sector would decline between 1.22 and 2.53 percent. Consequently, the
terms of trade will move in favour of agriculture between 1.9 to 3.8 percent. The increase in
agricultural prices would benefit millions of farmers in India.
(vi) Backward States: Since the changeover to GST will be neutral to vertical and horizontal
integration, GST will encourage industries to be located in the States which enjoy a comparative
advantage. It will serve as an attraction to natural resources based industries to locate in resource-
rich backward States regardless of the fact that the consumer is located elsewhere.
3.8.3 Govt. Revenue

 TFR, 2009: The switchover to GST is designed to be revenue neutral at the existing levels of
compliance. Given the design of 'flawless' GST, producers and distributors will only be pass
through for GST. The GST regime should witness a higher compliance (see para 3.4.3) and an
upsurge in revenue collections. This will also have an indirect positive impact on direct tax
collections. Further, since GST will trigger an increase in GDP, it would also yield higher revenues
even at the existing levels of compliance. Government would also benefit through savings on
account of reduction in the price levels of a large number of goods and services consumed by it.
- However, to the extent Central Government will be required to incentivise the States to adopt
GST; there will be an increase in the budgetary outgo. Given the smallness of the size of
compensation, it is expected that there would be a net gain in tax revenues. This should enable
Central Government to better manage its finances.
 Govt. of MP- Backward States generally have poor fiscal health and are more dependent on
Central Devolution and Grants. The share of taxable services in the “consumption basket” of the
poor is always smaller as compared to the better off sections off the society. Therefore, additional

revenue accruing to the backward States from “final consumption of services” in GST will be
too meagre to compensate the relative loss of tax revenue from taxation of primary
commodities on the 'Destination Principle'. See Table 10.7.
 States will not be able to mobilize additional resources for development as the States (a) cannot
change the rate structure of the most important tax instrument (i.e. ST/VAT) available to them, and
(b) cannot borrow since as their borrowing limit is determined by the Centre and has been fixed at
3% to 3.5% of GSDP.
 Overall : In the initial few years of implementation of GST, because of the inability to achieve
RNR due to (i) subsuming of several State taxes, (ii) removal of the cascading affect, (iii) loss of
CST revenue, (iv) sub-optimal collections from the service sector, (v) provision of additional
setoffs, etc., there may be some State specific losses. The CAA, 2016 therefore, provides for
compensation to such States in the initial 5 years (see para 10.8 for details).
3.8.4 Local Bodies :
 The Select Committee has expected that the State Governments would enact laws on the basis
of Model GST Laws recommended by the GST Council and while making such laws, the States
would abide by the constitutional provisions relating to the Panchayats and the Municipalities. The
Committee appreciated that each tier of the Government draws it powers from the Constitution and
there is a clear demarcation of fields through List I, II and III within which each tier has to
function. Any encroachment by any of them would paralyze the whole system and defeat the very
foundation of our Constitution.
 In their submission before the Select Committee, Department of Revenue (GOI) stated that
‘Entry tax is an impediment to the free flow of goods and services in India. It creates inefficiencies
in the supply chain. Further, in many States, Entry tax is not Vatable, and hence, results in
compounding and cascading of taxes.
 Most often the Local Bodies levy numerous taxes with extremely low rates (such as, 0.25
percent or 1 percent).Many of these local taxes are undesirable in themselves. They frequently list
particular commodities or trades to be taxed; discriminations and distortions abound. It is certainly
undesirable to have yet another tier of VAT or retail sales tax imposed on businesses.
 The obvious solution is to subsume such minor taxes in GST and settle with the local
authorities to share in the GST revenue by a formula or straight percentage. Other tax bases might
be transferred to the Local Bodies (e.g. property, vehicle licenses) to give independent revenue
sources. However, it may be easier, although still very difficult, to get the States to agree on a
common GST with some revenue-sharing formula than it would be to get Local Bodies to do the
same.
 TFR, 2009 has recommended that revenues attributable to 2 percentage point out of the 7
percentage point of SGST should be set apart for devolution to the third-tier of Government
so that the third-tier of Government have a interest in the efficient functioning of the GST and do
not have to impose any cascading taxes like cess, entry tax or octroi.
3.8.5 MSME/SSI and employment:
(i) Govt. of Gujarat in their memorandum to the Select Committee stated that the prevailing
threshold exemption under Central Excise (CENVAT) of Rs. 1.5 crore is primarily to liberate them
from the onerous compliance burden under the CENVAT regime particularly in the context that, in
general, the SSIs are managed by one or two entrepreneurs with the support of a handful of semi-
skilled office staff. The proposed threshold limit of Rs. 10 lakhs under CGST would bring many of
the MSMEs under the GST net (see para 7.6 on this issue). This is likely to adversely affect the
employment generating units under MSME sector. Some of the units may become financially
unviable and lose competitiveness due to additional burden of tax, cost of compliance and dual
control. Around 30,000 MSMEs will be affected in Gujarat alone and this contributes to
employment of 2.18 lakh families.
(ii) However, the CEA Committee on RNR has concluded that under GST, tax incidence on SSIs
would be lower inspite of the withdrawal of exemptions if the standard rate (currently around 25-
26% in goods for the Centre and the States combined) comes down, as envisaged by the Committee
(Details at Annex 3.10). Correspondingly, price of products manufactured by the SSIs would be
lower under the GST regime if the SSIs pass on the benefit of lower tax incidence to the
consumers. Alternatively, their profitability would increase. Therefore, the new GST regime
without SSI exemption will be more beneficial to the SSIs. (This argument seems fallacious since
reduction in the standard rate would benefit the large industries as well).
 Since the CEA Committee has recommended reporting of payment and transaction information
of both CGST and SGST through the combined Form No. GST-I, no additional burden is cast upon
the SSIs for compliance with CGST. Hence, the case for continuing with the existing exemption up
to Rs.1.5 crores of turnover is weak.
 Further, since the SSIs are generally wary of dealing with multiple tax administrations, the CEA
Committee has recommended that scrutiny/audit of the SSIs should be conducted only by the
States. However, the States may seek assistance of the Centre or any other State if operations of the
SSIs transcend the State boundaries. Since CGST and SGST are proposed to be levied on an
identical GST tax base, the outcome of any investigation impacting SGST will also have a
corresponding impact on CGST. Enforcement by the State tax administration would accordingly be
adequate to deal even with CGST evasion.
Box 3.10: SSIs and SGST & CGST
(a) On the State GST (SGST) component, the position will be exactly the same as under the present VAT
regime. There may be three categories of small enterprises in the GST regime:
- Those below the threshold need not register for GST.
- Those between the threshold and composition turnovers might have the option to pay a turnover based
tax or opt to join the GST regime. Given the possibilities of input tax credit, not all small enterprise may
seek the turnover tax option (see paras 7.6.3 and 7.6.5).
- The third category of small enterprises above the turnover threshold will need to be within the GST
framework.
Possible downward changes in the threshold in some States consequent to the introduction of GST may
result in obligations being created for some dealers. In such cases suitable provisions could be made to
provide direct assistance to the affected small enterprises, if considered desirable. (b) In respect of CGST,
the position is slightly more complex. The SSIs manufacturing specified goods are allowed exemption of
excise up to a turnover of Rs. 1.5 crores presently. These units, which may be required to register for
payment of SGST, may see this as an additional cost.
(iii) See para 7.6 for other aspects of the small businesses:
(iv) Conclusion: The contention of a retired Professor of JNU mentioned in para 3.9.7(c) that the
SSIs would be adversely affected, appears quite likely.
3.8.6 Business and Tax Payers :
 Following benefits are likely to accrue to the tax payers who would now focus on business
than taxation:
(i) Conceptual clarity (viz. no dispute regarding goods vs. services).
(ii) Reduced cost and ease of compliance due to (a) simpler tax regime i.e. fewer rates and
exemptions and harmonized Central & State laws, (b) a single registration compliance, and (c)
reduced number of visits to multiple deptts.
(iii) Reduced cost of product due to mitigation of cascading including for inter-State sales.
(iv) Reduced working capital requirement due to seamless flow of ITC and lower overall tax
incidence.
(v) More efficient neutralization of taxes especially for exports.
(vi) Benefits consequential to the development of a common national market viz. easy movement
and sourcing of goods across State boarders, reduced inventory due to fewer stock points.
 However, stock transfer being treated as supply of goods, would entail cash outflow on
account of GST tax before the sale is concluded. Moreover, to become GST-ready, businesses
would be incurring a one-time cost for registering and upgrading their systems at all their locations.
Registrations in each state, where a business operates, will be required to take tax credit for inputs
consumed in those states. Since GST would be replacing the service tax, services would become

costlier given that the current service tax rate is lower i.e. 15%. See service tax rate structure
decided by the GST Council at Table 5.9.
 Sectoral impact of GST as assessed by ICRA is at Annex 3.11.
 Exemption given to the Businesses in Backward or Notified Areas: While such exemptions
from taxes would be withdrawn under the GST regime for the eight north-eastern States and the
three hilly States, incentives (such as tax exemption) given to industries by the States will also be
counted in the calculation of revenue loss for compensation by the Central Govt.
 However, more clarity is required for industries set up in tax-free zones and in other States,
under similar tax exemption schemes of the Central and State Governments.
3.9 A Counterview to the projected benefits of the GST regime:

3.9.1 Projections of NCAER and the 13th FC are over-optimistic: The projections of NCAER
and the assertions of the 13th FC appear to be too optimistic and only the 'missionaries' of GST
would believe these without skepticism. A careful reading would show that their projections are
subject to too many untenable assumptions, uncertain data, and ifs & buts. It reminds of the
observation made by Paul Romer "The field (macro-economics) is dominated by a tight-knit
congregation, unified by deference to authority, not facts. Their revered leaders rely on high-
handed assumptions to make their models work. But they do not admit to these inadequacies,
pretending their naked assumptions are clothed in fine theoretical robes".
3.9.2 Advantages of the GST regime for exports is unclear:
 CEA Committee, 2015: The NCAER (2010) study has suggested that growth would increase
by 0.9-1.7 per cent of GDP, purely based on the elimination of the cascading of taxes on exports.
What is unclear is the quantitative importance of the elimination of the embedded taxes on exports
under the GST relative to the current regime of zero-rating of exports. In other words, how
incomplete is the current zero-rating of exports and how much will the GST improve upon it are
questions that need further investigation.
 Tait, 1988 : Though one of the main advantages of VAT is to ensure that international trade
takes place on a transparent basis (and that is why GATT/WTO accepts the border adjustments for
VAT), no one should claim that the net effects on foreign trade, as such, are likely to be large.
There is the possibility of a minor distortion in foreign trade under VAT to the extent that countries
exempt goods & services, the suppliers are unable to recoup their VAT content. If these goods &
services are used to produce taxable goods & services, then even though those activities can
reclaim the VAT at the point of export, that amount cannot include the earlier VAT paid by the
exempted activity. In this case, there could be differential amounts of hidden and unreclaimable
VAT on different traded goods & services, depending on the exempted sectors in each country. The
same holds true for any small firms that are exempted and export goods or services. In general,
VAT removes distortions that existed in previous systems and the advantages to foreign trade of
adopting VAT are those of getting rid of the previous distortions only.
3.9.3 Evidence does not support the stated advantages to the resource-rich backward States:
It is seen worldwide (including India) that generally the resource-rich countries/regions remain
backward (resource-curse!). Their natural resources are exploited for value addition in the
developed regions and not in the natural resource regions (first mover advantage!).
3.9.4 Elimination of Cascading and RNR for GST are mutually inconsistent: Para 3.9.8(a)
may be seen for details.
3.9.5 Superiority of VAT over RST (Keen, 2007): The superiority claimed for the VAT over the
principal alternative form of indirect taxation i.e. a single-stage Retail Sales Tax (RST), prima facie
rests on the enforcement concerns. Applied at the same rate, a perfectly functioning VAT would
collect the same revenue as a perfectly functioning RST and have precisely the same incidence.
Implementation costs aside, the two are economically equivalent. The only difference is in the
timing of tax payments, some of the VAT revenue being collected at an earlier stage in the chain of
production, with a potential cash flow for the government.
Box 3.11: The strength of intrinsic self-enforcing or self-correcting features of the VAT should
not be over-stated.
 It remains the case that sellers of final goods to private individuals and businesses exempt from the
VAT have the same incentive to sell without tax as they would under an RST (albeit muted to the extent
that they would then also be unable to recover VAT on their own purchases).
 Moreover, while traders have an incentive to ensure that their suppliers provide them with invoices
that the authorities will accept as establishing a right to refund or credit, they have no incentive—unless
specific requirements to this end are imposed—to ensure that tax has actually been paid. For this
reason, the notion that the VAT is self-enforcing is ultimately ‘illusory.”
 Furthermore, the credit and refund mechanism of the VAT creates its own opportunities for fraud,
as discussed in para 9.3.
3.9.6 GST is an old wine (Wikipedia – GST in India): The best VAT/GST systems across the
world use a single VAT/GST, while India has opted for a dual GST model with multiple rates.
Critics claim that CGST, SGST and IGST are nothing but new names for Central Excise/Service
Tax, VAT and CST respectively, and hence GST brings nothing 'new' to the table.
3.9.7 Views of a retired Professor of Economics, JNU: in an article published in the Tribune, he
has pointed out that many critical issues (relating to GST) have not been discussed and resolved.
His article is reproduced below with a view to maintaining its integrity. However, the paras have
been rearranged and also sub-headings given for ease of reading. (It may be noted that many of the
apprehensions have not come to be true).
(a) Concepts of elimination of cascading and RNR are mutually inconsistent :
 GST has three important elements: combining taxes like excise, sales and services. It is said
that 17 taxes will be replaced by one, leading to ease of business; the indirect taxes will be
calculated on value addition and not the value of the good or service. This would remove the
cascading effect of tax on tax and profit on tax. Not only would the cascading effect of each of the
taxes (excise, sales, services and so on) be removed, but even that across these taxes would go.
This would lead to a possible fall in prices, all else remaining the same. It is argued that this would
lead to ease of doing business which could boost growth of the economy.
 Undoubtedly, there would be simplification in the tax regime faced by businesses but not
as much as is being made out. There will be three taxes — CGST collected by the Centre, SGST
collected by the states and an IGST on inter-state movements collected by the Centre. Further,
under pressure from the States, alcohol, tobacco and petro goods are likely to be left out of the
purview of GST. So are electricity and real estate being left out of the GST net and will have
separate taxes resulting in some cascading effect.
 Further, since value addition is only a fraction of the value of a product, if the tax rate
remains the same as earlier, the tax collection would fall. Thus, if the government is to collect
the same amount of tax as in the earlier tax regime, it would have to raise the tax rate under GST.
This is called the revenue neutral rate (RNR) and could be pretty high. Further, tax will have to be
collected at each stage of production and distribution. So, even if the tax rate is a 'common one',
collection of the tax will still be complex.
(b) Concepts of price stability and RNR are mutually inconsistent:
 Services did not have to pay sales tax but will now have to pay SGST to the states so their
prices will rise. Telephone calls, insurance, transportation, restaurants, etc. will therefore, become
dearer (see para 5.5.7).
 A common tax rate will imply that all basic and essential goods prices will rise, and even if
some final goods prices fall, the rate of inflation will go up. If the rate of inflation rises, demand in
the economy would fall and the rate of growth will decline contrary to the arguments by the
proponents of GST. (The apprehension of price rise of essential goods may not prove to be true –
see para 5.5.7).
 To avoid this, the government will have to give up the RNR and fix lower rates of tax. But
then the collection of tax will fall compared to the present and the States will suffer. The deficit of
the Centre and the States will then rise. This is the worry of the States. If the Centre tries to
compensate them for the fall in revenue, as it is promising to do, the Centre’s deficit will rise even

more which will create further problems (e.g. lead to lower transfers on account of lower taxes of
GOI through the UFC mechanism which benefit the low income States more).
(c) GST would have adverse effect on small-scale and unorganized sectors and thereby on
employment:
 Another ignored aspect is the interest of the small-scale and unorganised sectors. The small-
scale sector produces and sells locally, so it would hardly benefit from a unified market, etc. It is
being exempted (actually it would be voluntary and below a threshold of turnover) from the
payment of GST and, therefore, would not be able to claim credit for any purchase from the
organised sector and would be at a disadvantage. If it sells to the organised sector, it would not be
able to provide the benefit of setoff and, therefore, it would have to cut prices or its sales would
decline. A decline in the small and unorganised sector would reduce employment generation since
it is the employment intensive sector.
Box 3.12: Impact of VAT on the small scale & cottage sector
 Take the example of potato chips or envelope-making where the large scale has displaced the cottage
sector. Or, look at any ‘haat’ selling cheaper versions of products sold in the malls or regular shops. They
are visited by the poor, the lower and the middle class who go there to buy products supplied cheap by
the small and cottage sectors. Such products will also get displaced.
 VAT is a difficult tax to implement (e.g. for the SSIs) since it requires keeping account of both the
inputs (so as to claim setoff) and revenue from sales. The small-scale and cottage sectors do not keep
detailed accounts and cannot calculate how much VAT to pay. That is the reason VAT requires
computerisation which the small and cottage sector are not able to afford.
 This is the reason behind exempting SSI below a threshold of turnover and also permitting them to
register voluntarily if they so wish to do (Box 7.12).
 Thus, the real problems with the introduction of GST in India have not been addressed. The
unorganised sector in India employs 93 per cent of the workforce. The small and tiny units
producing and selling locally would lose from a unified market which will benefit large-scale
producers. This will aggravate under-employment, distress in the farm sector and adversely
impact the poorer States. No wonder, GST is being strongly backed by large businesses —
foreign and Indian. Just because VAT exists in more than a hundred nations is no reason that it
would uniformly benefit all in India.
(d) GST would undermine fiscal federalism:
 GST, by introducing a common rate for all States, undermines fiscal federalism. Different
States have different requirements. Needs of Maharashtra are different from those of Assam. The
manufacturing states are worried about loss of revenue due to change of tax from source to
destination and to accommodate them, IGST has been proposed. Even though the States have
arrived at a consensus and given up their powers, undermining federalism will have long-

term effects which will not be visible immediately. The local bodies, the third tier of the
federal structure, are entirely left out of the reckoning.
(e) Conclusion:
 Due to such difficulties, VAT could not be introduced in the 1970s. The Indirect Tax
Reform Committee in 1978 had suggested MANVAT on manufacturing alone. This could not be
implemented because of the existence of a very large unorganised sector in manufacturing. The
long-term fiscal policy in 1986 suggested MODVAT that had to be introduced gradually, till
CENVAT replaced it a decade later. Difficulties are being swept under the carpet. It is these
difficulties that would also undermine the claims that compliance would improve under
VAT/GST and that the black economy would decline.
 Finally, there are contradictions in the argument being made for GST. The tax-GDP ratio
will rise if tax collection rises, but then prices will rise, demand would fall and the economy would
slow down. Contrariwise, if the RNR is given up, the tax-GDP ratio will fall and States’ resource
position will deteriorate. The macroeconomic analysis shows that either way the government’s
argument is contradictory.
3.9.8 Experience of VAT: Incidentally, the benefits expected from the VAT system, almost the
same as being expected from the GST regime, could not be realised (see para 3.1 for details). The
proposed GST regime is far from the desired GST regime (see para 3.7.2 for details) and is likely
to face many of the problems of the current 'partial' VAT regime.

Chapter 4
Interjurisdictional trade and Integrated GST in India

(Indian common market – cooperative or competitive federalism? and the global market)
4.1 Interjurisdictional trade and destination vs. origin principle:

4.1.1 Interjurisdictional trade: It comprises of (i) international trade, and (ii) interstate trade in
federal systems. Interestingly, as per Economic Survey (16-17), the share of international trade in
Indian GDP is 32% and the share of inter-State trade (C+F Form) is 54%.
 Under Sec. 7 of the Indian IGST Act, 2017, supply of goods and services imported into and
exported from the territory of India, till they cross the customs frontiers of India, shall be treated to
be a supply of goods in the course of inter-State trade or commerce. Consequently (i) the
provisions related to interstate trade apply mutatis mutandis to the inter-national trade as
well, and (iii) all subsequent discussions here relating to destination & origin principles apply
to both international and interstate trade.
4.1.2 Destination and origin principles and VAT: In order to be a tax on domestic consumption,
the VAT must be levied by the destination principle. This means that the total tax paid in relation
to a commodity is determined by the rate levied in the jurisdiction of its final sale (as a proxy for
the location of consumption); and, moreover, that all the revenue accrues to the government in the
jurisdiction where that sale occurs.
 The destination principle is generally implemented by zero-rating exports and bringing imports
fully into tax, either at the border, as is typical, or—in an arrangement referred to as “deferred
payment” or “postponed accounting”—at the time of the next periodic VAT return of the importer.
In this way, commodities move between countries free of VAT and in this sense trade remains
undistorted.
 This is in contrast to the “origin principle,” whose meaning is less clear-cut. As applied to the
VAT, we take it to mean that the total tax paid on a commodity reflects the pattern of its origin, in
the sense of being the sum of the tax rate in each jurisdiction (in cases where production is spread
across several jurisdictions) times the value added there. Moreover, the aggregate revenues should
be distributed in that pattern. The term “origin principle” is sometimes used more loosely, simply
to indicate that tax is charged on exports and not on imports (Box 4.2).
4.2 Desirability of the destination principle:

4.2.1 Destination vs. origin principle: Box 4.1 discusses the rationale for 'destination' over 'origin'
principle.

Box 4.1: Destination vs. Origin principle
Destination principle
 Under the “destination principle”—which is the international norm—commodities are taxed by the
jurisdiction in which they are consumed. This is generally implemented under the VAT system by zero-
rating exports and charging VAT on imports (although, there are other ways of implementing the destination
principle). While this implies that exporters will be due refunds, it does not amount to an export subsidy and
is fully WTO-consistent. It is simply a device for removing any domestic VAT from exports. Levying VAT
on imports simply puts them on the same basis as their domestically produced counterparts.
 Generally, exporters have no incentives to under-declare their export values, and importers have no
incentives to overvalue their imports as often seen in the VAT on origin principle. If VAT is properly
applied, all inputs are free of tax burden. Therefore, the destination principle promotes production
efficiency—a destination VAT puts all firms at different jurisdictions on equal footing: they face the same
prices on their input purchase.
Origin principle
 The alternative to destination taxation is the origin principle, by which commodities are taxed at the
point of production. Exports are taxed, but import are not. Origin principle results in global consumption
efficiency as consumers in different countries face the same consumer prices (gross-of-tax prices, adjusted
for differences in transportation costs in domestic distribution and foreign trade), even if the tax rates vary in
different countries. Under origin principle, there is no need for border tax adjustment as the tax is imposed
purely on domestic value added.
 However, the issue of valuation of imports—in order to correctly remove the imports from the tax
base—and of exports—in order to levy the tax—becomes more critical under original principle than under
destination principle. Importers have incentives to overvalue their imports (to claim for more refunds),
while exporters have incentives to undervalue their exports (to remit lower tax on exports).
 Incentive for transfer pricing adds another layer of problem in origin principle: firms within a multi-
national corporation charge artificially high prices on the inputs supplied to firms located in high VAT
jurisdiction, which in turn sell their outputs at artificially low prices to firms located in low VAT
jurisdiction.
 In addition, origin principle tends to induce tax competition among different jurisdictions as importers
pay tax at the rate applied in exporting state but receive credit at the rate applied in importing state.
 Although some countries of the former Soviet Union applied VAT on this (origin) basis for some trade
flows among themselves in the early years of transition, no country now applies such a system.
Le, 2003
4.2.2 Key difference between Destination and Origin principles (Ebrill, 2001) :
 Input Tax Credit: The key difference between the destination and origin principles is in the
crediting of input tax in relation to commodities entering trade. Under the destination principles,
tax levied at all stages of production must be fully credited as a necessary condition for ensuring
that only final consumption is taxed. Under an invoice-credit form of origin taxation, in contrast,
exported goods leave a jurisdiction laden with the tax of that country but receive credit in the other
country for the hypothetical tax that would have been paid on the value added embodied in the
good at the rate of the importing country. In this way the final tax paid on a good is, in principle,
the sum of tax paid, at the local rates, on the various components of value added embedded in the
final good. Box 4.2 illustrates.

Box 4.2: Workings of an Origin-Based VAT
 Suppose that country A exports a good valued at Rs.100 to country B, where it is used to produce a
good that finally sells in B for Rs.350 (both prices being exclusive of tax). The tax rate in A is 5 percent,
in B it is 10 percent.
 Under the origin principle, country A levies tax of Rs.5; country B charges output tax of Rs.35 and
gives credit not for the input tax of Rs.5 actually paid but the Rs.10 that would have been paid at the rate
of country B itself. Total tax paid is thus Rs.5 in country A (5 percent of the value added there) and
Rs.25 in country B (10 percent of the value added there of Rs.350-Rs.100).
 Under the destination principle, country A would levy no tax (zero-rating of export) and country B
levy a tax of Rs.35 (tax on imports at the local rate).
 Production vs exchange efficiencies: The economic difference between destination and origin
principles is that the former places all firms competing in a given jurisdiction on an even footing,
whereas, the latter places consumers in different jurisdictions on an even footing (Box 4.3).
Box 4.3: Production and Exchange Efficiencies

 In a competitive environment, the destination principle implies that all firms receive the same
producer price (that is, the price net of taxes) from selling in any location, irrespective of their country of
residence. They will all charge consumers in any jurisdiction the same price if they are to be competitive,
and, by the destination principle, they will all pay the same tax. This should lead to “production
efficiency” in the sense that producers will all equate their marginal costs to a common producer price,
implying that it would be impossible to produce the same total output at lower cost.
 Under the origin principle, in contrast, consumer prices (that is, the price inclusive of tax), adjusted
for transport costs, would be equated across jurisdictions: if they were not, all consumers could buy more
cheaply from suppliers in one state than another, and the sales of the high price firm would consequently
vanish. This leads to “exchange efficiency”: since all consumers face the same prices, all will place the
same marginal valuation on all commodities, and it would be impossible to make all better off by
reallocating consumption of the various goods and services between them.
 Intuitively, a destination-based tax is a tax on consumption, whereas an origin-based tax is a tax on
production.
Ebrill, 2001
 It is possible (though not necessarily optimal) to achieve both production and exchange
efficiency under either principle. To achieve this, the tax rate within each country should be the
same for all commodities, though that uniform rate may differ across countries. Uniformity means
that, within each country, relative producer prices equal relative consumer prices, so that equating
one set of relative prices across countries—producer prices under the destination principle, for
instance—also equates the other. If, moreover, trade is balanced then this same uniformity
condition implies that there is no real difference between the two principles. Both lead to the same
real allocation of resources. All that is needed to neutralize the real effect of a switch between
destination/origin bases is an appropriate change in the exchange rate (or internal prices).

 Intuitively, a destination-based tax is a tax on consumption, whereas, an origin-based tax
is a tax on production. In present value terms, however, these are the same: the nation’s budget
constraint means that a flat tax on one is thus equivalent to a flat tax on the other. However this
argument relies on strong assumptions (Box 4.4).
Box 4.4: Equivalence relies on strong assumptions.
 First, equivalence immediately fails if taxes on different commodities are not uniform within each
country—and they are not.
 Second, equivalence applies only if the change of principle affects a trade flow that is in balance. While
this may be a reasonable approximation in respect of all trade, at least in an intertemporal sense, in many
practical contexts it will not be, so that a change from taxing imports to exports can have significant
revenue effects.
 Third even if taxes are uniform and trade is balanced in an intertemporal sense, any shift of tax basis
may have intergenerational wealth effects that create a real distinction between the two regimes.
- It is clear that in practice it is not possible to have both production and exchange efficiency, raising the
question of which should be given primacy or whether both should be violated.
Ebrill, 2001
4.2.3 Difficulties in implementing destination taxation:

(i) Zero-Rating: The possibilities for fraud are evident (see para 9.3).
(ii) Cross-Border Movement of Goods: If countries tax final consumption items at different rates,
consumers will have an incentive to arbitrage international price differences. The most striking
instances of this relate to excises on readily transported high value items. The removal of border
frontiers, implies that direct purchases by consumers may be harder to monitor.
(iii) International Services: Services, almost by definition, are intangible. In many cases it is hard
to monitor, or even to define, the place of supply.
(iv) Electronic Commerce : The most troublesome of the e-commerce issues relates to
transactions that cross-jurisdictional boundaries when the essence of the Internet is to reduce the
costs of communication and blur conventional notions of location.
4.2.4 Issues on Destination vs. Origin principle (Ebrill, 2001):
• The presumption in favor of the destination principle, though it would not pass uncontested, is
broadly consistent with the professional consensus.
• The destination principle, as usually implemented, comes at a cost that is often overlooked. The
processing of refunds in relation to exports is one of the most problematic features of the VAT in
developing countries; and it is precisely the usual way of implementing the destination principle
that creates the need for such refunds (see para 9.3).
• Implementing the destination principle is likely to become increasingly difficult as economic
integration proceeds, not least because of the increasing importance of e-commerce. Doing so may
require imaginative thought. Recent proposals (see para 9.7) that dispense with zero-rating of
exports hold out some prospect of progress, though thorny problems remain: including, not least
those from the provision of intangible services by those with no physical presence in the
jurisdiction of consumption. Some form of international coordination may ultimately be required.
4.3 Inter-state trade in India, CST and the problems (TFR, 2009):
4.3.1 Constitutional provision regarding inter-State trade: The Indian Constitution as it
originally stood envisaged taxation of the inter-State 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 Parliament in 1956
authorizing Centre to levy a tax on interstate sales called the Central Sales Tax (CST). But the
power to administer the tax was delegated by the Centre to the States of origin who were also
allowed to retain CST revenue.
4.3.2 CST Rates: Initially, CST was levied at only 1%. But it was raised successively to 4%. In
2006-07, the Central and the State Governments came to an understanding to reduce CST in a
phased manner and completely eliminate it by 1st April, 2010. Accordingly, CST was reduced to
3% in 2007-08 and subsequently to 2% in 2008-09. However, on account of the revenue
implications, CST has been continued 2% until GST is introduced.
4.3.3 Key problems with CST:

(i) CST constitutes a distorting factor in the location of industries and the flow of internal trade,
impeding growth of a truly common market in the country.
(ii) It causes inter-jurisdictional inequity and reduces the international competitiveness of exports
(see Para 2.2.4(e) and Annexure 3.4).
(iii) The administration of and compliance with CST is beset with problems. The State Department
is under pressure to monitor exports to the registered dealers. Similarly, the importers have to incur
considerable transaction cost to procure “C Forms” from the State Department. The exporters also
have the responsibility of obtaining the “C Forms” from the importers on time.
(iv) Treatment of branch transfers/consignment sale under CST provides an easy avenue for
evasion.
Box 4.5: Difficulties in documentation for CST
The rate of CST is 2% if the sale is between two registered dealers across the States and the transaction
is documented through “C Forms”. The latter is issued by the importing state to the importing registered
dealers within the State, and is submitted to the exporting dealer in order that the latter can avail himself
of the concessional rate of tax. If the good is sold to unregistered dealers outside the state and is not a
declared good, the transaction, by law attracts the rate applicable in the exporting state. If the rate
applicable in the exporting state is less than the CST rate, the transaction is not required to be
documented through “C Form”. Since sales tax applies 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.

4.3.4 Interest in continuation of CST: In spite of the adverse economic implications of CST, the
States with substantial CST revenue would naturally want to maintain status-quo in regard to CST
(Annex 4.1 A & B). A summary is given in Table below :
Top 5 States Top 4 States Bottom 5 States Bottom 4 States
11-12 14-15 11-12 14-15 11-12 14-15 11-12 14-15
Population % 25.72 25.72 15.95 15.95 29.28 29.28 25.63 25.63
CST % 55.13 54.01 39.29 39.24 14.98 10.77 11.93 7.81
Per Capita 53.70 53.70 46.71 46.71 10.14 10.14 6.40 6.40
4.4 Inter-State trade and Integrated GST in India:

4.4.1 Why IGST (Ebrill, 2001): In the context of a federal country, the application of the
destination principle (as currently implemented) to a lower-level VAT would imply that
consumption in different States could be taxed at different rates and interstate trade should be zero-
rated. The relative ease of movement between States within a federation, however, may make it
difficult to sustain significant inter State tax rate differentials without inviting large scale cross-
border shopping. Moreover, the administrative demands of implementing zero-rating at the level of
the State are likely large. Consequently, VATs of the kind currently observed may not generally be
suitable for deployment by lower-level governments. While the Central (“federal”) government
may choose to share revenues with the States, conventional wisdom has been that those States
should themselves have no control over the rates or base of the tax in their jurisdiction. VAT is
ideally a tax for Central governments (see para 1.5.9). To solve this problem, India has adopted
Integrated GST (IGST) system for interstate trade as detailed below:
4.4.2 Design of IGST in India:
 IGST is envisaged on destination/consumption principle. Tax revenue accrues to the
destination/importing State based on the Place of Supply Rules (Refer to para 4.5).
 Place of supply Rules are required to determine the place where the supply of goods & services
will take place and to determine whether the supplies are inter or intra State.
 IGST envisages that the Centre will levy tax at a rate approximately equal to CGST+SGST rate
on all inter-State taxable supply of goods & services. It would meet the objective of providing
seamless credit chain to tax-payer across the States.
 IGST obviates the need for refunds to the exporting dealers as well as the need for every State to
settle account with every other State. The exporting State will transfer to the Centre the credit of
SGST used for payment of IGST. The Centre will transfer to the importing State the credit of IGST
used for payment of SGST. Thus Central Government will act as a clearing house and transfer
funds across the States. Annex 4.2 depicts Information and Fund flows at a glance.

 IGST permits cross-utilization of credit of IGST, CGST and SGST in sequence (as shown
below) and for paying IGST unlike intra-State supply where the CGST and SGST credit can be
utilized only for paying CGST and SGST respectively.
Priority in Utilization of ITC
ITC (IGST) (1) IGST, (2) CGST, (3) ISGST
ITC (CGST) (1) CGST, (2) IGST
ITC (SGST) (1) SGST, (2) IGST
 ITC will be given to both the manufacturers and the traders for purchase of inputs /supplies
meant for sales within the state as well as to other States, irrespective of when these will be
utilized/ sold. This also reduces immediate tax liability. Even for stock transfer and consignment
sale of goods out of the State, input tax paid in excess of IGST will be eligible for tax credit.
Box 4.6: Major advantages of the IGST Model
a. Maintenance of uninterrupted ITC chain on inter-State transactions.
b. No upfront payment of tax or substantial blockage of funds for the inter-State seller or buyer.
c. No refund claim in the exporting State, as ITC is used up while paying tax.
d. Self-monitoring model.
e. Level of computerisation is limited to the inter-State dealers and the Central & the State Governments
should be able to computerise their processes expeditiously.
f. As all inter-State dealers will be e-registered and correspondence with them will be by e-mail,
compliance level will improve substantially.
g. Model can take ‘Business to Business’ as well as ‘Business to Consumer’ transactions into account.
4.4.3 Alternative IGST models :

 IGST models: The Empowered Committee of State Finance Ministers on (EC) had set up a
Working Group for designing model for interstate trade which analyzed 9 models: (i) Bank model,
(ii) TDS model, (iii) SGST authority model, (iv) CGST authority model, (v) TINXSYS (Dematted
C –form) model, (vi) TINXSYS with reverse charge model, (vii) Full De-mat model, (viii) Inter-
State Demat model and (ix) IGST model. Out of these, Bank Model and IGST Model were
found more suitable to monitor the interstate transactions as it would simplify tax compliance and
ease administrative burden. Other models entail higher cost of both compliance and administration.
(see paras 3.5 to 3.20 of TFR, 2009 for details).
 Modified Bank Model (MBM): TFR, 2009 recommended a modified version of the Bank
Model. Under MBM, the seller levies GST on the buyer and deposits GST collected to a Nodal
Bank. The Nodal Bank then credits payment to the consuming State. This model was recommended
given that the inter-State transfers under GST should be designed (i) to avoid any distortions or
cascading effects, and so that (ii) tax accrues to the State where the final consumer is located.

Box 4.7: Recommendations of TFR, 2009 on Modified Bank Model (MBM)
 Features of MBM:
(i) all inter-state transactions in goods & services should be effectively zero rated by adopting
MBM.
(ii) consignment sales and branch transfers across States should be treated as if it was a inter-state
transaction in the nature of sale between two independent dealers.
(iii) 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) cost of the scanners should be entirely borne by the Central Government.
(v) all check-posts should be jointly manned by both the States so as to reduce the number of check-
posts and enhance efficiency in the road movement of goods.
 Functional components of MBM as listed by TFR, 2009 are reproduced at Annex 4.3.
4.4.4 Pre-requisites for MBM: Following are the pre-requisites for a successful Bank Model so as
to reduce the complex accounting of ITC and facilitate apportionment between CGST and SGST,
which would reduce both the collection cost and the administrative burden:
a) Uniform e-Registration and Common e-Return for CGST, SGST and IGST
b) e–filing of return every month, with dealer-wise transaction details
c) e- payment of taxes
d) System based validation/consistency checks on ITC availed and tax refunds
e) Effective fund settlement mechanism between the Centre and the States
f) Each dealer to submit one single return consisting information about all his purchases/sales at
invoice level along with the line item.
g) Necessary records/registers to be maintained accordingly.
h) Consolidation of returns to require automation and standard procedure.
i) National portal for access to information by the member States and dealers
j) National agency for overseeing flow of information and taxes
k) Strong IT infrastructure (GST Network) for the above
l) Intra and inter-State rates of tax to be equal in order to avoid evasion and camouflaging intra-
State transactions as inter-state transactions.
4.4.5 Computing and allocating IGST: An illustration of computing and allocating IGST (CGST
+ SGST) is given below:

IGST Mechanism
State State Assumptions: Retailer and

Boundary Boundary Consumer are in the same State
Manufacturer (State 1) Stockist (State 2) Retailer (State 3) Consumer

C2C= Rs.177
SGST
Manufacturing Cost=Rs.100 Stockist Cost Price &Profit=Rs130 Retailer Cost Price & profit=Rs.150
Profit=Rs.10 IGST 2 @18%=Rs.23.4 CGST @9%=Rs.13.5
Total Value=Rs.110 ITC=Rs19.8 SGST @9%= Rs.13.5
IGST1 @18%=Rs.19.8 Tax Payable=Rs.3.6 ITC=Rs.23.4
IGST 1 IGST 2
IGST 1 GSTN/Centre's tax

CGST
State's Tax
(State1+State2+State3=Rs.27
 The calculation sheet is at Annex 4.4.
4.5 Place of Supply/taxation (TFR, 2009) : Destination principle requires clarity on the place of
supply of goods & services for the purposes of levy of tax by the jurisdiction of consumption.
4.5.1 Criteria for determining the place of taxation/supply internationally: While the rules and
approaches vary across countries, the basic criteria for determining the place of supply/taxation is
illustrated as follows:
(i) Goods:
(a) In the international trade in tangible goods, the place of supply/taxation is the place of delivery
or shipment of the goods to the recipient (buyer). In other words, a sale of goods is taxable in a
jurisdiction if the goods are made available or delivered/shipped, in that jurisdiction.
(ii) Services:
(a) For 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) For mobile services (that is, passenger travel, freight transportation, telecommunication, motor
vehicles lease/rentals and e-commerce supplies), there is no fixed place of performance or
use/enjoyment of the service. Therefore special rules need to be framed keeping in mind the basic

destination principle e.g. Section 12(11) - reproduced under para 4.7 - defines place of supply of
telecom services.
(c) For other services and intangible property, the place of supply is determined on the basis of
one or more of the following proxies:
i. Place of performance of service;
ii. Place of use or enjoyment of the service or intangible property;
iii. Place of location/residence of the recipient; and
iv. Place of location/residence of the supplier.
(d) In defining the place of supply of services and intangible property, internationally 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 like advisory or consulting services for which the place of
performance is not important. Therefore, all such services rendered to a non-resident are zero-rated.
- By contrast, many B2C services tend to be tangible or physical in nature, e.g. haircuts, hotel
accommodation, local transportation and entertainment services which are consumed in the place
of their performance. Therefore, the place of supply in the case of B2C transaction is the place
where the supplier is located. In some countries even such services to non-residents is zero-rated.
 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 the legal entities of a corporate group around the world, triangular transactions, supplies
among branches and between branches and head office, and cost reimbursement/allocation
arrangements.
4.5.2 Recommendations on place of supply for inter-state supplies in India:
 Though the place of supply rules indicated above relates to international transactions of goods
and services, these rules should also apply to the inter-State supplies. However, in practice there
are substantial deviations in these rules. The recipient of the services may be located in more than
one State and there is no practice to determine the residency of the recipient unlike in the case of
international transactions. It is, therefore, extremely difficult to identify 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.

Box: 4.8 : Place of Supply of Services in EU (6th Directive of EC)
 A supply of services is the supply of anything that is not a good.
 The general rule for determining the place of supply is the place where the supplier of the
services is established (or "belongs"), such as a fixed establishment where the service is supplied, the
supplier's permanent address, or where the supplier usually resides. VAT is then charged at the rate
applicable in the member state where the place of supply of the services is located and is collected by that
member state.
 This general rule for the place of supply of services (the place where the supplier is established) is
subject to several exceptions. Most of the exceptions switch the place of supply to the place where the
services are received. Such exceptions include the supply of :
- transport services, - legal services,
- cultural services, - banking and financial services,
- artistic services, - telecommunications,
- sporting services, - broadcasting,
- scientific services, - electronically supplied services,
- educational services, - services from engineers and accountants,
- ancillary transport services, - advertising services, and
- services related to transfer pricing services, - intellectual property services.
and many miscellaneous services including
 The place of supply of services related to real estate is where the real estate is located.
 There are special rules for determining the place of supply of services delivered electronically in a
member state.
 The mechanism for collecting VAT when the place of supply is not in the same member state as
the supplier is similar to that used for Intra-Community acquisitions of goods, i.e. zero-rating by the
supplier and reverse charge by the recipient of the services (if a taxable person). But if the recipient of the
services is not a taxable person (i.e. a final consumer), the supplier must generally charge VAT at the rate
applicable in its own member state.
 If the place of supply is outside the EU, no VAT is charged.
 Given that any tax on B2B supplies would generally be fully creditable, too much
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 service. However, if there is no unique place of predominant use,
the place of destination could be the mailing address of the recipient as stated on the invoice, which
would normally be the business address of the contracting party. The risk of misuse of this rule
would be minimal if it is limited to B2B supplies where the tax is fully creditable.
 For B2C services, the place of supply should be the State in which the supplier is located,
which, in turn, could be defined as the place where the 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.
 The place of supply rules discussed above are broadly represented in the diagram below:

Possible place of taxation/destination
Business to Business (B2B) Business to Customer (B2C)
 Supplies of a tangible/physical nature (e.g., haircuts, hotel

 Place of accommodation, local transport, entertainment services) - place of
destination is destination could be the place where the supplier is established or
the place where located, which is generally also the place where the service is performed.
the recipient is  For mobile supplies of an intangible nature (e.g. Telecommunication,
established or e-commerce services, general insurance service) - Place of supply could
located. be the place of residence of the customer, or the place where services are
used or enjoyed.
Special rules for specific supplies can be designed to provide greater certainty and clarity in
situations where the place or location or residence of the supplier or the recipient is not well defined
or easily ascertainable at the time of supply.
4.6 Place of supply and the CAA, 2016 : Relevant provisions are as follows:
 Sec 2(2): Parliament has exclusive power to make law with respect to inter-State trade.
 Sec 9(1): GST on supplies in the course of inter-State trade or commerce shall be levied and
collected by the Central Government and such tax shall be apportioned between the Union and the
States in the manner as may be provided by Parliament by law on the recommendations of the GST
Council. For the purposes of this clause, supply of goods/services, in the course of import into the
territory of India shall be deemed to be supply of goods, or of services, or both in the course of
inter-State trade.
 Sec 9(5): Parliament may, by law, formulate the principles for determining the place of supply,
and when a supply of goods, or of services, or both takes place in the course of inter-State trade or
commerce.
 Sec 10(ii): "(1A) The tax collected by the Union under clause (1) of article 246A shall also be
distributed between the Union and the States in the manner provided in clause (2).
(1B) The tax levied and collected by the Union under clause (2) of article 246A and article 269A,
which has been used for payment of the tax levied by the Union under clause (1) of article 246A,
and the amount apportioned to the Union under clause (1) of article 269A, shall also be distributed
between the Union and the States in the manner provided in clause (2)."
4.7 Place of Supply Rules and the IGST Act, 2017: Some important Sections of the IGST Act,
2017 related to the inter-state supplies are as follows. Relevant goods & services and important
provisions have been highlighted for quick reference. These provisions are in conformity with
para 4.5.2.
(i) Sec. 7(1) to (5): Subject to the provisions of section 10, supply of goods and services, where the
location of the supplier and the place of supply are in two different States or UTs or State and
UT shall be treated as a supply of goods and services in the course of inter-State trade or
commerce. Sec. 7 treats export and import as inter-State trade.
(ii) Sec. 5(1): Subject to the provisions of sub-section (2), there shall be levied a tax called the
integrated goods and services tax (IGST) on all inter-State supplies of goods or services or both,
except on the supply of alcoholic liquor for human consumption, on the value determined under
section 15 of the Central Goods and Services Tax (CGST) Act and at such rates, not exceeding
forty per cent., ………………………………..
(iii) Sec. 5(3): The Government may, ----------specify categories of supply of goods or services or
both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or
services or both ………..
(iv) Sec. 5(5): The Government may……………specify categories of services, the tax on inter-
State supplies of which shall be paid by the electronic commerce operator if such services are
supplied through it, and all the provisions of this Act shall apply to such electronic commerce
operator as if he is the supplier liable for paying the tax in relation to the supply of such services:
(v) Sec. 6(2): Where the Government is satisfied that it is necessary in the public interest so to do,
it may, -----------, exempt from payment of tax any goods or services or both on which tax is
leviable.
(vi) Sec. 10(1)(a): where the supply involves movement of goods, whether by the supplier or the
recipient or by any other person, the place of supply of such goods shall be the location of the goods
at the time at which the movement of goods terminates for delivery to the recipient;
(vii) Sec. 10(1): The place of supply of goods, other than supply of goods imported into, or
exported from India, shall be as under, –– (e.g. 10(1)(d) where the goods are assembled or
installed at site, the place of supply shall be the place of such installation or assembly);
(viii) Sec. 10(2) : Where the place of supply of goods cannot be determined, the place of supply
shall be determined in such manner as may be prescribed.
(ix) Sec. 11(a)&(b): The place of supply of goods, ––
(a) imported into India shall be the location of the importer;
(b) exported from India shall be the location outside India.
(x) Sec. 12(1): The provisions of this section shall apply to determine the place of supply of
services where the location of supplier of services and the location of the recipient of services is in
India.

(xi) Sec. 12(2): The place of supply of services, except the services specified in sub-sections (3)
to (14), ––
(a) made to a registered person shall be the location of such person;
(b) made to any person other than a registered person shall be, ––
(i) the location of the recipient where the address on record exists; and
(ii) the location of the supplier of services in other cases.
Box 4.9: Place of supply of services in relation to an immovable property

(xii) Sec. 12(3)(a) to (d): The place of supply of services, ––
(a) directly in relation to an immovable property, including services provided by architects, interior
decorators, surveyors, engineers and other related experts or estate agents, any service provided by way of
grant of rights to use immovable property or for carrying out or co-ordination of construction work; or
(b) by way of lodging accommodation by a hotel, inn, guest house, home stay, club or campsite, by
whatever name called, and including a house boat or any other vessel; or
(c) by way of accommodation in any immovable property for organizing any marriage or reception or
matters related thereto, official, social, cultural, religious or business function including services provided in
relation to such function at such property; or
(d) any services ancillary to the services referred to in clauses (a), (b) and (c),
shall be the location at which the immovable property or boat or vessel, as the case may be, is located
or intended to be located: Provided that if the location of the immovable property or boat or vessel is
located or intended to be located outside India, the place of supply shall be the location of the recipient.
(xiii) Sec. 12(4): The place of supply of restaurant and catering services, personal grooming,
fitness, beauty treatment, health service including cosmetic and plastic surgery shall be the
location where the services are actually performed.
(xiv) Sec. 12(6) : The place of supply of services provided by way of admission to a cultural,
artistic, sporting, scientific, educational, entertainment event or amusement park or any other place
and services ancillary thereto, shall be the place where the event is actually held or where the park
or such other place is located.
(xv) Sec. 12(8) (a) & (b): The place of supply of services by way of transportation of goods,
including by mail or courier to, ––
(a) a registered person, shall be the location of such person;
(b) a person other than a registered person, shall be the location at which such goods are handed
over for their transportation.
(xvi) Sec.12(9)(a) & (b): The place of supply of passenger transportation service to, —
(b) a person other than a registered person, shall be the place where the passenger embarks on the
conveyance for a continuous journey:

- Provided that where the right to passage is given for future use and the point of embarkation is not
known at the time of issue of right to passage, the place of supply of such service shall be
determined in accordance with the provisions of sub-section (2).
(xvii) Sec. 12(10): The place of supply of services on board a conveyance, including a vessel, an
aircraft, a train or a motor vehicle, shall be the location of the first scheduled point of departure
of that conveyance for the journey.
Box 4.10: Place of supply of telecom services

(xviii) Sec. 12(11): The place of supply of telecommunication services including data transfer,
broadcasting, cable and direct to home television services to any person shall, —
(a) in case of services by way of fixed telecommunication line, leased circuits, internet leased circuit,
cable or dish antenna, be the location where the telecommunication line, leased circuit or cable
connection or dish antenna is installed for receipt of services;
(b) in case of mobile connection for telecommunication and internet services provided on post-paid basis,
be the location of billing address of the recipient of services on the record of the supplier of services;
(c) in cases where mobile connection for telecommunication, internet service and direct to home
television services are provided on pre-payment basis through a voucher or any other means, ––
(i) through a selling agent or a re-seller or a distributor of subscriber identity module card or re-charge
voucher, be the address of the selling agent or re-seller or distributor as per the record of the supplier at
the time of supply; or
(ii) by any person to the final subscriber, be the location where such prepayment is received or such
vouchers are sold;
(d) in other cases, be the address of the recipient as per the records of the supplier of services and where
such address is not available, the place of supply shall be location of the supplier of services:
- Provided that where the address of the recipient as per the records of the supplier of services is not
available, the place of supply shall be location of the supplier of services:
- Provided further that if such pre-paid service is availed or the recharge is made through internet banking
or other electronic mode of payment, the location of the recipient of services on the record of the supplier
of services shall be the place of supply of such services.
(xix) Sec. 12(12): The place of supply of banking and other financial services, including stock
broking services to any person shall be the location of the recipient of services on the records of the
supplier of services: -
- Provided that if the location of recipient of services is not on the records of the supplier, the place
of supply shall be the location of the supplier of services.
(xx) Sec. 12(13): The place of supply of insurance services shall, ––
(a) to a registered person, be the location of such person;
(b) to a person other than a registered person, be the location of the recipient of services on the
records of the supplier of services
(xxi) Sec. 12(14): The place of supply of advertisement services to the Central/State/UT
Government, a statutory body or a local authority ……….. shall be taken as being in each of such
States/UTs and the value of such supplies specific to each State/UT shall be in proportion to the
amount attributable to services provided by way of dissemination in the respective States/UTs as
may be determined in terms of the contract or agreement entered into in this regard or, in the
absence of such contract or agreement, on such other basis as may be prescribed.
(xxii) Sec. 13 (2): The place of supply of services except the services specified in sub-sections (3)
to (13) shall be the location of the recipient of services.
- Provided that where the location of the recipient of services is not available in the ordinary course
of business, the place of supply shall be the location of the supplier of services.
(xxiii) Sec. 13(3): The place of supply of service would be the place where the recipient makes the
goods available for service to the supplier of service. The physical presence of the recipient or
person acting on behalf of recipient with the supplier for the supply of service is required.
(xxiv) Sec. 13(13): In order to prevent double taxation or non-taxation of the supply of a
service, or for the uniform application of rules, the Government shall have the power to notify
any description of services or circumstances in which the place of supply shall be the place of
effective use and enjoyment of a service.
(xxv) Sec. 14(1) : On supply of online information and database access or retrieval services by
any person located in a non-taxable territory and received by a non-taxable online recipient, the
supplier of services located in a non-taxable territory shall be the person liable for paying integrated
tax on such supply of services:
4.8 Zero-rated supply : Under Sec.16. (1) of IGST Act, 2017, “zero rated supply” means any of
the following supplies of goods or services or both, namely:––
(a) export of goods or services or both; or (b) supply of goods or services or both to a Special
Economic Zone developer or a Special Economic Zone unit.
(2) Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax
Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that
such supply may be an exempt supply.
(3) A registered person making zero rated supply shall be eligible to claim refund under either of the
following options, namely:––
(a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such
conditions, safeguards and procedure as may be prescribed (i) without payment of integrated tax
and claim refund of unutilized input tax credit; or (ii) on payment of integrated tax and claim refund
of such tax paid in accordance with the provisions of section 54 of the CGST Act/Rules.

4.9 Apportionment of tax and settlement of funds: Brief of relevant Sec 17 & 18 is as follows :
4.9.1 Sec 17 of IGST: Out of IGST collected by Central Govt. the amount of tax (alongwith
interest, penalty and compounding amount/refund) equivalent to CGST shall be apportioned to the
Central Govt. and the balance to State (and to Centre in case of UT). If (a) place of such supply
made by taxable person cannot be determined or (b) the taxable person is not identified then the said
balance amount shall be apportioned to the State and the Central Govt. in proportion to.
4.9.2 Sec 18 of IGST: The credit of integrated tax availed, in accordance with the provisions made
under CGST Act, SGST Act, UTGST Act shall be reduced from the integrated tax account and
transferred to Central tax account, UT tax account and account of appropriate State Govt. from the
Central Govt.
4.10 Tax wrongfully collected and paid to Central/State Government: Relevant Sections of
CGST Act, 2017 are as follows :
Sec 77(1): A registered person who has paid the Central tax and State tax or, as the case may be, the
Central tax and the Union territory tax on a transaction considered by him to be an intra-State
supply, but which is subsequently held to be an inter-State supply, shall be refunded the amount of
taxes so paid in such manner and subject to such conditions as may be prescribed.
Sec 77(2): A registered person who has paid integrated tax on a transaction considered by him to be
an inter-State supply, but which is subsequently held to be an intra-State supply, shall not be
required to pay any interest on the amount of central tax and State tax or, as the case may be, the
Central tax and the Union territory tax payable.
Sec 54 (8)(d) : Refund of tax in pursuance of section 77.
4.11 IGST paid by tourist: As per Sec. 15, the integrated tax paid by tourist leaving India on any
supply of goods taken out of India by him shall be refunded in such manner and subject to such
conditions and safeguards as may be prescribed.
4.12 E-way bill: E-way bill is an electronic way bill for movement of goods which can be
generated on the GSTN (common portal). E-way bill must be generated when there is a movement
of goods of more than Rs.50,000 in value to or from a Registered Person. Unregistered
persons or his transporter may also choose to generate e-way bill. However, where a supply is
made by an unregistered person to a registered person, the receiver will have to do all the
compliances as if he’s the supplier.
 E-way E-way bills should be generated under the following conditions.(a) Sale,(b) Transfer,(c)
Exchange i.e. e-way bills must be generated on the common portal for all types of movements.

 E-way bill be valid from Date & time at which e-way bill is generated and valid for period
(i) 1 day - < 100 km., (ii) 3 days – 100 km to 300 km., (iii) 5 days – 300 km to 500 km., (iv) 10 days
– 500 km to 1000 km. and (v) 15 days - > 1000 km.
4.13 Application of certain provisions of the GST Act to the IGST Act: Sec 20 of the IGST Act
- Subject to the provisions of this Act and the rules made thereunder, the provisions of CGST Act
relating to, ––
(i) scope of supply; (ii) composite supply and mixed supply; (iii) time and value of supply; (iv)
input tax credit; (v) registration; (vi) tax invoice, credit and debit notes; (vii) accounts and records;
(viii) returns, other than late fee; (ix) payment of tax; (x) tax deduction at source; (xi) collection of
tax at source; (xii) assessment; (xiii) refunds ;(xiv) audit; (xv) inspection, search, seizure and arrest;
(xvi) demands and recovery; (xvii) liability to pay in certain cases; (xviii) advance ruling; (xix)
appeals and revision; (xx) presumption as to documents; (xxi) offences and penalties; (xxii) job
work; (xxiii) electronic commerce; (xxiv) transitional provisions; and (xxv) miscellaneous
provisions including the provisions relating to the imposition of interest and penalty,
- shall, mutatis mutandis, apply, so far as may be, in relation to integrated tax as they apply in
relation to central tax as if they are enacted under this Act:
- Provided that in the case of tax deducted at source, the deductor shall deduct tax at the rate of two
per cent. from the payment made or credited to the supplier.
- Provided further that in the case of tax collected at source, the operator shall collect tax at such
rate not exceeding two per cent, as may be notified on the recommendations of the Council, of the
net value of taxable supplies:

Chapter 5
Revenue Neutral Rate and the Rate structure for GST
(Behind the neutrality and structures lurk the commonly held beliefs and assumptions)
5.1 What is Revenue Neutral Rate (CEA Committee): The term RNR refers to that single rate,
which preserves revenue at desired (current) levels. In practice, there will be a structure of rates, but
for the sake of analytical clarity and precision and also to facilitate comparisons across
methodologies, it is more useful and appropriate to think of RNR as a single rate. It is a given single
rate that gets converted into a whole rate structure, depending on policy choices about exemptions,
what commodities to charge at a lower rate (if at all), and what to charge at a very high rate.
 The RNR should be distinguished from the “standard” rate defined as that rate in a GST regime
(which has more than one rate), which is applied to all goods and services whose taxation is not
explicitly specified. Typically, the majority of the base will be taxed at the standard rate, although
this is not true for the States under the current VAT regime.
5.2 Single vs. Multiple GST Rates:
5.2.1 Tait, 1988: There are contentious issues relating to (a) effective VAT rates, (b) relationship
between VAT and excises, and (c) tax harmonization. However, the most persistent and
important problems all relate to (d) the choice of single or multiple rates and how many
multiple rates. Tait, 1988 has given very convincing rationale against multiple rates. Due to its
length, it is annexed (Annex 5.1A). The basic rule is: use as few tax rates as will satisfy the
preference of politicians.
5.2.2 Le, 2003:
(i) Arguments for multiple VAT rates: Multiple rate structure is inherently complex, but yet,
many argue for it on both (i) efficiency and (ii) equity grounds.
- The efficiency argument hinges on Ramsey rule applied to the consumption taxation. Ramsey
rule states that tax rate on goods should be inversely related to their elasticity of demand to
minimise the deadweight loss (Box 1.1). It implies that the rates should be differentiated across
different groups of goods and services of various demand elasticities.
- Supporters of a multiple rate structure on the equity ground would argue that tax rate
differentiation is needed to mitigate the regressivity of a tax: lower rates must be applied to the
goods and services consumed primarily by the poor.
Box 5.1 : Criticism of Ramsey Rule
 The major criticism of the Ramsey rule is based on the observation that the demand for necessities is
more inelastic than the demand for luxuries. As a result, a tax system that strictly follows the Ramsey rule
might be 'somewhat' regressive in nature, because necessity goods are likely to represent a higher
percentage of household income for poorer households.
 Many have also criticized the rule because the application of this rule will likely result in important
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administrative and compliance costs. 88 | P a g e
(ii) Arguments against multiple rates :
- Multiple rates create scope for misclassification fraud. Moreover, where rate differentials are
sufficiently large they can also give rise to refund entitlements for some traders (those using inputs
taxed at a high rate to produce outputs subject to a low rate of VAT), which, in turn, creates
opportunities for fraudulent abuse. Although a reduced rate of VAT is the most elegant way of
taking account of distributional considerations (see para 6.1 for a contrary view) in the design of a
VAT - since it avoids the production inefficiency associated with the taxation of inputs implied by
exemption - low VAT rate has the disadvantage of extending the scope of the refund problem
beyond exports.
- A multiple rate structure poses a great challenge to the tax compliance and administration.
A VAT with multiple rate structure requires firms to keep separate records for different purchases.
This is, in turn, costly for auditing (more records to be checked; more incentives and opportunities
for firms to misclassify goods) and is cumbersome for application of the self-assessment (complex
for taxpayers to comply; and hard for tax administration to detect fraud). In general, a more
complex VAT would require tax administration to collect exponentially more information to
determine the tax liabilities and refunds (Box 5.2).
Box 5.2: Exponential increase in the requirement of information and the administrative cost with the
increase in number of the tax rates
 The simplest VAT (one positive rate, a zero rate and some exemptions) requires at least 9 pieces of
information from each taxpayer (the value of supplies at the two rates and the value of exempt supplies, the
value of purchases at the two rates, two liabilities to VAT on output, and two liabilities to VAT on inputs).
 At least 17 pieces of information are required if the number of positive rates become three.
 The Irish tax return form, using only two rates, still requires 38 entries. As the number of rates
increases, tax forms become much more complicated and not only the chance of error, on the part of both
taxpayer and tax officials, becomes much greater but the potential for evasion rises rapidly as well.
 Further, Cnossen (1994) estimates that for a broadly “best practiced” VAT in New Zealand (with a
single non- zero rate), the administration cost of the VAT is about $50 per registrant per annum; but the
cost quadruples in the case of the United Kingdom, where the VAT is structured with two positive rates
and multiple zero rating. Source: Tait, 1988
5.2.3 TFR, 2009: The perspectives of a single or a multiple VAT rates could be several -
 Politicians and Public will accept a VAT/GST more easily if the products consumed by low-
income households are taxed at lower rates (see para 6.1.7).
 Administrators who implement the tax know that every additional rate will significantly
increase cost and complexity (Box 5.2). 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 rate).

 Business and industry in general also espouse a single rate since it is simple to comply and
eliminates the problem of classification which arises under the multiple rates regime leading to
protracted legal disputes and taxpayers’ grievances.
 Economists espouse the optimality of tax rates based on elasticity (See para 5.2.2) and whenever
the pattern of consumption contains information about the consumer's underlying – and
unobservable – ability to pay taxes that is not fully exploited by the other policy instruments
assumed to be available (See Annex 5.1B).
5.2.4 Implication of Multiple rates for the standard rate (CEA Committee): Multiple rates also
implies that the standard rate is relatively high. Since taxes result in economic distortion (para
1.1.3) which increases exponentially with the increase in the applied tax rate, a relatively high
standard rate creates much larger economic distortion. It also provides an incentive for
evasion/avoidance and frequent lobbying by trade and industry for favourable modifications in the
tax schedule.
 A large number of rates of taxes exacerbate the problem of 'bracket creep' and classification
disputes. The empirical results confirm that dispersion of rates negatively affect VAT/GST
revenues. The results also confirm the conventional view that VAT/GST generates, other things
being constant, higher revenue in single VAT/GST rate countries than in multiple rates countries. A
rational tax system should, therefore, have very few rates and also low rates.
5.2.5 Ebrill, 2001: The principal conclusions made by him on multiple rates are:
• Support for setting only a single positive rate is based both on experience with the administrative
and compliance difficulties associated with multiple rates and on the realization that the amount of
redistribution that can be achieved through indirect taxation is inherently limited. This position is
matched by an increasing tendency for VATs to be introduced with only a single rate (Table 5.1).
• The extent to which equity gains can be achieved by differential rates of VAT depends on the
range of other instruments available (Annex 5.1B). A few excises on goods in inelastic demand may
be able to reap the main efficiency gains from differentiation, so that the case for multiple rates of
VAT is primarily an equity one.
• The equity case for differential VAT rates will be stronger the more restricted is the set of other
tax-spending instruments available to government. It will be weaker, for instance, when an effective
income tax is in place. But while the benefits from differential VAT rates may consequently be
greater in developing countries, these are also the countries in which the problems of compliance
and administration associated with a multiple rate structure will be greatest.
 The importance of the rate differentiation issue may in any event have been overstated. Even
leaving aside non-VAT instruments, there are design features within the VAT itself other than the
statutory rate structure that can be—and are—rightly or wrongly used to mitigate the distributional
effects of the tax. The widespread use of exemptions, for instance, means that even a VAT that has
only a single statutory rate will have many effective tax rates (Box 3.1), some of which (such as
those associated with the exemption of basic foodstuffs, health, and education services) may have
significant equity effects (para 6.1.4). A high threshold can have similar effects.
5.2.6 Global experience: Table 5.1 shows that the vast majority of countries (72 percent) that have
introduced a VAT over the past ten years (1990 to 2001) have opted for a single positive rate when
doing so. More generally, the number of initial rates at the time of introduction has tended to fall
over time. This presumably reflects, in large part, the perceived success of existing single-rate
VATs.
Table 5.1: VATs introduced with a single vs. multiple rate
Date of introduction Number of countries Single Rate Multiple Rate
Before 1990 48 12 36
1990-94 46 31 15
1995-April 2001 31 25 5
Total 125 68 56
*VAT rates, threshold and revenues for some countries are given at Annexure 5.2.
5.2.7 Should GST rate be capped (CEA Committee): (at 18%!) in the Constitution or the GST
Laws to preempt fixation of high GST rate through executive action?
 While there is a legitimate concern that policy should not be changed easily to suit short term
ends, there are enough checks and balances in the parliamentary system and enough pressures of
democratic accountability to ensure that. Moreover, since tax design is profoundly political and
contingent, it would be unwise to encumber the Constitution with the minutiae of policy that limits
the freedom of the political process in the future: the process must retain the choice on what to
include in/exclude from the GST (for example, alcohol) and what rates to levy.
 The credibility of the macroeconomic system as a whole is undermined by constitutionalizing a
tax rate or a tax exemption. Setting a tax rate or an exemptions policy in stone for all time,
regardless of the circumstances that will arise in future, of the macroeconomic conditions, and of
national priorities may not be credible or effective in the medium term. This is the reason India—
and most credible polities around the world--do not constitutionalize the specifics of tax policy.
The GST should be no different.
 Capping the GST rate even in the GST Law is irrational for the same reason. However, Sec 9
(1) stipulates that subject to the provisions of Section 9(2), there shall be levied a tax called the
central goods and services tax on all intra-State supplies of goods or services or both, except on the
supply of alcoholic liquor for human consumption, on the value determined under section 15 and at
such rates, not exceeding twenty per cent., as may be notified by the Government on the
recommendations of the Council. Similarly, under the State GST Acts, SGST rate would not
exceed twenty per cent.
5.3 Computing tax base and RNR:
5.3.1 Formula for computing RNR and tax base: The essence of calculating RNR lies in the
simple equation: t= R/B, where t is RNR; R is equal to revenues (both the Centre and the States)
generated from existing sales, excise etc. taxes which will be subsumed by GST; B is tax base.
5.3.2 Consumption vs. GVA methods of computing Tax base: Figure below shows that GVA
method is more appropriate.
Consumption method Gross Value Added (GVA) method

Estimating the final consumption in the Estimating GVA by the producers of goods &
country and making appropriate allowance services and making adjustments relating to
for leakages. imports and exports.
Not recommended since Recommended since

VAT regime is characterized by high leakage Comparatively easy to estimate as no need to
while shift to the GST regime is compliance estimate leakages. GVA by the producers can be
enhancing. Hence, estimating the degree of estimated by using either input-output table or
leakage under GST is vexatious. profit & loss account of the producers.
5.3.3 Computing Tax base (TFR, 2009): Various approaches to computing Tax base (details in
Annexures -5.3A,B,C) and the resultant estimates as per TFR, 2009 are as follows:
Table 5.2: Estimates of the tax base (2007-08)
Sl. Approaches Estimates (Rs. Cr)

1 Subtractive – Indirect method 3073037
Consumption method
2 i Task Force Estimate 3743077
ii NCAER Estimate. 3077952
3 Shome Index method 2782809
4 Revenue method 2949748
5 Average of estimates (TFR, 2009) 3125325
5.3.4 Approach of the CEA Committee: Approach of the CEA Committee on Tax base and RNR
is given in para 5.4.
5.3.5 Some projections of RNR: Different RNRs has been proposed based on different
methodologies and assumptions, as follows:
Table 5.3: Some RNRs proposed for GST
TFR, 2009 NCAER Rao & Chakraborty, CEA Report,
Report, 2009 2013 2015
Centre 5% 6.2 % to 9.4% Not Available 15%-15.5%
(combined RNR) (combined RNR)
All States 7% 10.3% (all States average)
 Kelkar Task Force Report, 2002 suggested RNR rate of 20% (12% CGST and 8% SGST).
 Poddar and Bagchi (2007) showed that the prevailing statutory rate was 28.5% (CENVAT 16%
& VAT 12.5%). Such rate would encounter consumer resistance and give rise to pressures for
exemption and/or lower rates for the items of daily consumption. If GST were to be levied on a
comprehensive base, the combined Centre-State RNR need not be more than 12%. This rate would
apply to all goods and services, with the exception of motor fuels which would continue to attract a
supplementary levy to maintain the total revenue yield at their current levels.
 TFR, 2009 took note of the fact that, in 2007-08, the combined statutory incidence of CENVAT
(14%), CST (2%) and State level VAT (12.5%) on goods was in the range of 27% and 30%. This
combined rate is one of the highest in the world and is not conducive to voluntary compliance.
Further, it also underscores the need for multiple rates. Accordingly optimistically low RNR of 12%
(7%+5%) or so was suggested by TFR, 2009, which is based on 'flawless' GST and assuming high
'policy efficiency ratio' and high compliance ratio' (see Para 5.7 for details). Evidently,
'Flawless' GST is possible not even in the advanced economies or in autocratic /unitary polities.
 13th & 14th UFCs and the suggested GST rate: The 13th FC suggested RNR of 12% (5% CGST
+ 7% SGST). The 14th FC could not suggest any RNR.
 A sub-committee (2013) of the States and Central Government officials constituted by EC had
put RNR for GST at a median of 11% by the Centre and 13% by the States. Allowing for
several exemptions, exclusion of alcohol & petrol, and some variations in the rates for merit and
demerit goods, the combined rate of 24% (almost unchanged from the current rates) would be
required to ensure revenue neutrality.
5.3.6 Average VAT/GST Rates across countries :

5.4 RNR and the CEA Committee, 2015 :
5.4.1 ToRs of the CEA Committee: ToRs of the CEA Committee were essentially about RNR and
the rate structure and were as follows:
(a) The Committee may recommend possible tax rates under GST that would be consistent with the
present level of revenue collection of the Centre and the States.
(b) While recommending GST rates, the Committee may develop a dynamic model to assess the
impact of the following parameters on the tax rates, viz. expected levels of growth of economy,
different levels of compliance and broadening of tax base under GST.
(c) Analyze the Sector-wise and State-wise impact of GST on the economy.
5.4.2 Approaches considered by the CEA Committee for computing tax base: The three
approaches presented to and considered by the CEA Committee for computing tax base are: (i) the
macro, (ii) the indirect tax turnover (ITT), and (iii) the direct tax turnover (DTT). These approaches
are the most recent by way of data and methodology (see Annex 5.4 for details).
5.4.3 RNR based on the 3 approaches :
 Table 5.4 highlights the estimated GST base and corresponding RNR of the three approaches
considered by the CEA Committee :
Table 5.4: Comparison of RNR of the CEA Committee with other approaches
Approach GST Base (in lakh cr.) RNR (%) C-Efficiency*
Macro 59.9 11.6 0.70
ITT 39.4 17.7 0.42
DTT 58.2 12.0 0.68
Committee's* (Preferred) 46.2 15.0 0.56
Committee's (Alternative) 44.2 15.5 0.53
ITT= Indirect Tax Turnover DTT= Direct Tax Turnover.
* CEA Committee, 2015. *See para 5.7.
 CEA Committee has compared C-efficiency of these approaches against a number of other
countries and justified its recommendations on RNR (see Annex 5.11).
5.4.4 Critique of the 3 approaches: Each approach has advantages and shortcomings that are
described below. The Empowered Committee of GST (EC) has had the benefit of familiarity only
with the ITT approach (of NIPFP) and the CEA Committee also dwelt to some extent on this
analysis. The CEA Committee underscores that the focus on the ITT approach does not signify that
it is superior to the other two; indeed, focusing on one approach can be limiting and misleading.
(A) Critique of the ITT approach of NIPFP: Following five key features drive the results of the
ITT approach:
a. The assumptions of collections at different rates determine the goods base for States. The
CEA Committee obtained actual data on such collections for16 States (Karnataka, Maharashtra,

Andhra Pradesh, Gujarat, Tamil Nadu, Bihar, Odisha, Chhattisgarh, Delhi, Uttar Pradesh,
Jharkhand, Rajasthan, Madhya Pradesh, West Bengal, Haryana and Puducherry) that together
account for about 78.5 per cent of all States’ VAT base, whereas, NIPFP report is based on
assumptions and not on actual data analysis. This is the reason for variation. These data vary
significantly from the assumptions underlying the ITT approach (of NIPFP).
Table 5.5: VAT rate and base*
VAT Rate 1% 5% 2-6% 12-15% 14-15% Higher Total
CEA (Base) 11.6% - 55.4% 28.5% - 4.7% 100%
NIPFP(Base) 2.0% 56.15% - - 41.85% - 100%
*Weighted averages of VAT rates are thus 7.41% and 8.90% as per CEA and NIPFP data respectively.
Note – Annex 5.6 gives VAT rate structure of Bihar for illustration.
ii. Estimation of the services base by the ITT approach does not make allowance for purchases
from the unorganized sector. Such purchases will lead to an increase in the base—via cascading--
because the final value will reflect the embedded taxes which cannot be set off as ITC.
iii. Estimation of the services base also ignores one potentially important issue. Currently, States tax
most intermediate goods at the lower rate. If these goods were shifted to the normal rate—as States
have indicated they might be willing to do—there would be an effective expansion of the tax base.
It may be noted that taxes on intermediates in a GST system are like withholding—collecting early
on in the value added chain but refunding them later on. So, in principle, this shift of intermediate
goods should not yield any additional taxes.
 But to the extent that the unorganized sector buys intermediates from the organized sector, this
shifting will result in greater taxes because the withheld taxes on intermediates will not be refunded
later in the chain because the buyer is outside the tax chain. The lost base from these two effects—
cascading and withholding—is difficult to estimate. But it cannot be assumed, as the ITT
approach does, that this estimate should be zero. Corporate income tax data allows a guesstimate of
the cascading effect.
iv. A similar withholding type effect would come into play with the elimination of all CVD
exemptions which the ITT approach does not fully take into account.
v. The ITT approach also does not fully incorporate into the base, sugar products and textiles that
are sold directly to the consumer.
(B) Critique of the DTT and Macro approaches: The DTT approach on the other hand is subject
to two uncertainties: whether the output tax base has sufficiently taken account of the exempted
sectors, and whether the estimates of purchases from the unorganized sector—a key input that
drives the final result—are reasonable.

 The macroeconomic approach of the IMF suffers from being too aggregate in nature and the
implied tax base of Rs. 59.9 lakh crore seems to be on the high side. One particular source of worry
is that the tax base seems to increase substantially on account of the exclusion of electricity and
petroleum. This seems unlikely given that in both cases, there is a considerable sale to the final
consumer.
 But these two approaches have two important merits. They help provide a cross-check for the
ITT approach; perhaps more significantly, they highlight the need to validate the estimates
generated by all three approaches.
 All three approaches implicitly assume that there will be no benefits to the base and/or revenues
from improving compliance and/or improved growth consequent upon implementing GST. The
macro approach does not assume current levels of compliance—as the other two approaches do—
but a theoretical one which may or may not correspond to the current reality.
5.5 CEA Committee on RNR and Rate Structure: The CEA Committee recommended that GST
should aim at tax rates that protect revenue, simplify administration, encourage compliance, avoid
adding to inflationary pressure, and keep India in the range of countries with reasonable levels of
indirect taxes (para 5.3.6).
5.5.1 Adjustments made to the ITT approach for estimating RNR: Recommendation of the
CEA Committee is based first on making adjustments to the ITT approach: (i) Rs.3.12 lakh crore
for the data-base revision to the States’ VAT base; (ii) Rs. 30,000 crore for the omission of sugar;
Rs. 45,000 crore for the cascading effect; and (iii) Rs. 95,000 crore for the choice of the statutory
rather than effective excise rate in quantifying the base. Then, an adjustment for compliance
efficiency gains (Rs. 2 lakh crore) is added. See Annex 5.7 for details of these adjustments.
5.5.2 RNR and a few conditional rate structures: Because (i) identifying the exact RNR depends
on a number of assumptions and imponderables; (ii) this task is as much soft judgement as hard
science; and (iii) the prerogative of deciding the precise numbers will be that of the future GST
Council, the CEA Committee has chosen to recommend a range for the RNR rather than a specific
rate. For the same reason, the CEA Committee has decided to recommend not one but a few
conditional rate structures (Table 5.6) that depend on policy choices made on exemptions, and the
taxation of certain commodities such as precious metals.
 Adding up the adjustments mentioned in para 5.5.1 yields a single RNR of 15 per cent.
However, the CEA Committee recognizes that there may be uncertainty about the adjustments it has
made. An alternative scenario is that not all of the adjustments are valid. In this case, the single
RNR would be 15.5 percent (Table 5.6).

Accordingly, the CEA Committee’s view is that the RNR range should be between 15 percent
and 15.5 percent (Centre and States combined) but with a preference for the lower end of that
range based on analysis in its Report. The CEA Committee has noted the risks (para 5.6 below)
both of setting rates that are 'marginally' high and low. On balance, however, it is easier to address
the consequences of erring on the side of marginally low rates.
Table 5.6 : Summary of Recommended Rate Options (in per cent)
RNR Rate on "Low rate" "Standard" rate "High/Demerit" rate or
precious metals (goods) (goods and services Non-GST excise (goods)
6 16.9
Preferred 15 4 12 17.3 40
2 17.7
6 18.0
Alternative 15.5 4 12 18.4 40
2 18.9
Note : All RNR rates are the sum of rates at the Centre and the States (CGST+SGST)
 Since there is the possibility of error in all the approaches (paras 5.3 to 5.5) of computing RNR,
it must be independently validated against other benchmarks. The C-efficiency implied by the three
approaches and the CEA Committee’s recommendations are then compared against C-efficiency in
a number of other countries. It suggests that RNR recommended by the CEA Committee is more
realistic (see Annex 5.11 for details).
5.5.3Allocation of the combined RNR between the Centre and the States :
 How the combined rates of RNR are allocated between the Center and the States will be
determined by the GST Council. This allocation would reflect the revenue requirements of the
Centre and the States so that the revenues are protected. For example, a standard rate of 17% would
lead to rates at the Centre and the States of say 8% and 9% respectively because that is roughly the
ratio of GST revenues that would have to be generated by the Centre and the States assuming that
the 2013-14 data on which these estimates are calculated remain valid. It would be preferable to
keep all other rates identical between the Center and the States to minimize distortions and facilitate
compliance.
Table 5.7: RNR and Standard Rate structure for the Centre and the States (%)*
RNR Lower Rate Standard Rate (a) Higher Rate
Goods
Centre 7 6.0 8.0 20
States 8 6.0 9.0 20
Services
Centre 7 - 8.0 -
State 8 - 9.0 -
* This corresponds to CEA Committee’s preferred scenario with rate on precious metal at 6%.

 As per the CEA Committee Report (page 15), the weighted average statutory rate for goods
is 8.4 per cent and 7.5 per cent for the Centre and the States, respectively. Further the States

have a much larger proportion (>65%) of the base taxed at the lower rate while it is about 40% for
the Centre. Incidentally, in Bihar the lower rate (i.e. 5%) accounts for only 30% of the tax base
(Annex 5.7).
 As per our calculations (based on several assumptions and available data), RNR for the States
would be approx. 9% and for the Centre approx. 8.5% based on 2013-14 data. Details are given
at Annex 10.13 (A&B) for the States and at Annex 5.8 for the Centre.
 The State-specific RNRs according to different approaches are discussed in para 10.8.4.
5.5.4 Suggestions on the rate structure : Theoretically, a simple formula for determining the
structure of rates would be R = αLG + SG + SS + µDG
Where R is the RNR, LG is the lower rate on goods, SG is the standard rate on goods, SS the standard
rate on services; and DG the demerit rate on goods; α, , , and µ are the respective shares of these
four rates in the underlying tax base, and together add up to 1.
If the standard rate for goods and services must be the same to provide a common base and to
obviate the need for defining goods and services separately, SG = SS = (R - αLG - µDG) / ( + ).
(a) In line with the growing international practice (see Table 5.1) and with a view to facilitating
compliance and administration, the CEA Committee has recommended that India should strive
toward a one-rate structure as the medium-term goal (As an illustration, irrationality of the
lower rates for the essential goods is shown in para 6.1).
Meanwhile, the CEA Committee has recommended (Annex 5.5) a three-rate structure (Centre +
State) i.e., (i) lower (12%), (ii) standard (17-18%), and (iii) demerit (40%). In order to ensure that
the standard rate is kept close to RNR, the maximum possible tax base should be taxed at the
standard rate.
 Moreover, the CEA Committee suggested a higher rate for precious metal i.e. 4-6% as against
the current 1% (refer to para 7.7).
(b) Rate for demerit goods: the CEA Committee has recommended that the demerit rate should
be such that the current revenues from that high rate are preserved. Accordingly, this sin/demerit
rate be fixed at about 40 percent (Centre plus States) and apply to luxury cars, aerated
beverages, paan masala, and tobacco and tobacco products (for the States). The Centre can, of
course, levy an additional excise on tobacco and tobacco products over and above this high rate.
These goods are final consumer goods and should be of high value (so that small retail outlets are
not burdened with the complication of having to deal with multiple rates) and clearly identifiable so
that there are no issues related to classification that could complicate tax compliance.
(c) Extract from an article of Finance Minister, Kerala relating to VAT rates is given at Annex
5.9. It argues against (i) reducing the rate for demerit goods from 40% (suggested by the CEA
Committee) to 26%, (ii) increasing the lower rate from 5% to 6%, and (iii) levying top up cess (on
demerit goods) for funding compensation to the revenue loosing States. It also suggests to GOI the
ways to find own resources for the compensation fund i.e. (i) direct taxes of GOI (customs &
income), (ii) sale of assets like spectrum, or (iii) borrowings. It seems that this position has led the
GST Council to (i) increase the demerit goods rate from 26% to 28%, and (ii) reduce the lower rate
from 6% to 5%. However, cess on the demerit goods remains.
(d) Tait, 1988 : GST should be levied on full, unadjusted prices, inclusive of custom & duties,
import fees & charges, and excises, with as wide a base as possible and resist arguments for reduced
rates, special cases and exemption. Moreover (a) use as few tax rates as will satisfy the preference
of politicians, and (b) keep rates low since GST essentially being regressive, a higher rate implies
greater regressivity. Lower rate would also lead to wider acceptability and better compliance.
5.5.5 Band of rates: The CEA Committee sees no sound reasons to provide for an
administration-complicating “band” of rates, for the following reasons:
 First, the argument for fiscal flexibility/autonomy is less compelling. Under the proposed GST,
the States still retain considerable flexibility because alcohol and petroleum—the biggest sources of
revenues for the States i.e. about 29 per cent of overall States’ indirect tax revenue and about 41.8
per cent of the total revenue of States to be subsumed under GST—as well as power, real estate,
health and education remain outside the scope of GST. Even if petroleum, alcohol and tobacco are
subsumed in GST, States will retain the right to levy top-up excises on them.
 Second, if the States exercise this flexibility, there would be varying rates for a given product,
which would create distortions across the States and reduce efficiency and increase compliance
costs, especially for companies planning multi-State activities. These distortions and costs must be
seen against the fact that they will not lead to any meaningful additional fiscal autonomy to the
States.
 Third, rate bands would create another complication for administering CVD. Under World
Trade Organization (WTO) rules, CVD has to be the lowest of the State rates. Supposing one State
charged 8% and another 12%, CVD would have to be based on 8%, which would immediately
disadvantage production in the State charging the higher rate, undermining Make in India
programme.
5.5.6 Assigning products to rates:

 Typically, the assignment of goods to different tax categories (Table 5.8) will be motivated by
the considerations of equity (and revenue protection). Goods that account for a large share of
expenditures of poorer households—for example, food-- will typically be merit goods and will
either be exempt or placed in a lower rate category. A related feature will be that this share will
decline for richer households.
Box 5.3: Justification for a reduced rate on the commodities consumed by the poor.
 Whether a reduced rate of VAT on some commodities that account for a particularly large part of
the spending of the poor—‘food’ is the classic example —can make good sense as a way of addressing
equity concerns?
 Analysts often point out that most of the benefit of reduced indirect tax rates actually accrues to the
better-off, making this a very poorly targeted way of pursuing equity objectives (see para 6.1.4). But
that cannot be the end of the argument. In less advanced economies, it is not obvious that there are any
better ways to protect the poor available to the government.
 So the aim here is to take the argument one step further, by asking: How well targeted do public
spending measures have to be for the poor to be best served not by taxing at a particularly low or zero
rate those commodities that account for an especially large part of their budget, but by taxing them and
using the proceeds to increase that public spending?
 Assessing the distributional case for reduced VAT rates requires understanding the distributional
impact of the public spending that a higher rate could enable—and even poorly targeted spending
may be a better way to support the poor than a reduced rate.
Keen, 2013
 But even if a good is a merit good, in warranting an exemption or lower rate, policy makers will
want to ask how effective that decision will be based on how well targeted the implicit subsidy will
be, where the implicit subsidy is the difference between taxing a good at the standard tax rate and
the lower or zero rate. If the poor account for a large fraction of total expenditure on the merit good,
then the subsidy will be well targeted.
 When a benefit (subsidy rate for the target group) and cost (portion of the total subsidy that
does not go to the target group i.e., leakage) analysis of different commodities is done and
compared against the actual structure of rates, a few broad policy conclusions emerge as captured
in Figure 5.1. (Also see Figure 6.1).
- The vertical axis measures the benefit—the effective subsidy rate, which is the subsidy as a share
of the total expenditure of the target group. The horizontal axis depicts the costs measured as the
share of total subsidy on any given product that leaks to the non-target group.
- Three circles are drawn to highlight desirable evidence-based choices: (a) commodities in the
north- west corner of the graph circled in red are socially worthy of exemption because the benefits
are high and the costs are low. These include cereals, vegetables, pulses, edible oils, and fuel and
light (excluding electricity). (b) Conversely, commodities in the south-east corner of the graph,
circled in blue are less worthy of being treated favorably in tax terms because the benefits are low
and the costs high. These include gold, non-medicine health services, education, and power. (c) In
the middle are commodities, circled in green, that lie somewhere in between that are perhaps
worthy of being included at the lower tax rate. These include milk, poultry products and perhaps
clothing.
Figure 5.1: Benefit Cost Calculus of Exempting Selected Commodities from GST
 A number of commodities are treated fairly under the current system. Thus, merit goods such as
food items, especially cereals, pulses, edible oils, vegetables, and fuel are appropriately taxed at
zero or low rates (in Figure 5.1, these commodities have high benefit-cost ratios and attract low
taxes).
 But there are a number of anomalies. The most glaring is gold, silver and precious metals (taxed
at 1%). They are a strong demerit good. The very rich consume most of it the top 2 deciles account
for roughly 80 percent of total consumption and the poor spend a small fraction of their total
expenditure on it. Moreover, they have become a source of macro-economic instability and less
important as a savings vehicle. Indeed, it is inconsistent for the government to actively promote
schemes (gold bonds and gold monetization) to wean consumers away from gold, on the one hand,
and also give highly concessional tax rates to buy gold, on the other. For all these reasons, these
commodities should in principle be taxed at the standard rate. This anomalous treatment must be
rectified at least by raising current tax levels to 4 or 6 percent. See para 7.7 for details.
 Education, health (excluding medicines), and electricity are also not appropriately treated. They
are all commodities that prima facie seem to be merit goods, warranting zero or low tax burdens.
However, in India, they are mostly consumed by the rich, and many are largely privately provided.
In the case of education, the current tax structure turns out also to be regressive, with the bottom 4
deciles effectively paying greater taxes than the top 6 deciles. They deserve to be taxed more like
standard goods. Yet, most education and health services will be exempted under GST. Electricity is
planned to be excluded from GST. These exemptions and exclusions—which are bad from a tax
policy and administration perspective because they will break down the value added chain--merit
reconsideration.
 Conversely, a number of demerit goods such as alcohol and tobacco are appropriately taxed at
high rates. But the case for alcohol’s inclusion in GST relates to governance and reducing
corruption. A similar argument applies to including real estate in its entirety in GST. 
 Chapters 6 and 7 in regard to the taxation of such major items may also be seen.
5.5.7 GST Council on assigning products to rates:
 Calculation of RNR rate has virtually become redundant now (Annex 5.9) and the focus of the
GST Council is broadly on retaining the existing (effective) tax rate structure around 0, 5, 12, 18 &
28% respectively (Tables 5.8 & 5.9) based on HSN codes. It would (i) achieve revenue neutrality
for both the Centre and the States, (ii) avoid price rise, and (iii) avoid disruptions of economic
activity and macroeconomic stability. Box 5.2 would indicate that the administrative and
compliance costs of such multiple rates are going to be very high and substantially dilute the core
objective of simplication of the GST regime.
 Current taxes on the consumption basket are given in Box 5.4. Only 15% of the CPI is taxed
at the 'normal' rate. Further, low average tax is levied on the most large categories.
Box 5.4 : Current taxes on the consumption basket (CEA Committee-p43)
 Rates approved by the GST Council for goods:

Table 5.8: GST Council Rate Structure for goods
GST Council rate Pre-GST rate Major items
Exempted (0) 0 Essential commodities: unprocessed food, books,
newspaper, judicial papers
Lower Rate (5%) ≥3% to <9% Processed food, coal, biogas, kerosene, pharma
Merit Rate (12%) ≥9% to <15% Packaged food, cutlery tools, frozen meat, computer,
fertilizer
Standard Rate (18%) ≥15% to <21% Ready to eat food, paper pulp products, Bidi patta, electronic
items, steel products
Higher Rate* (28%) ≥21% Personal care products, cement, paint, lubricant, aerated
water, automobiles, motorcycle
*A cess would be levied in addition, for creation of a compensation pool for compensating the revenue
loosing States. See Annex 10.18 for the cess rates.

 Rates approved by the GST Council for services: Table 5.9 gives the rates for major
services. The same rate structure as for goods has been adopted for services also, in keeping with
the spirit of the GST regime.
Table 5.9: Rates approved by the GST Council for services
Council rate Existing rate Major items
0 Exempted (0%) Services by Govt, Healthcare services, Educational services
5% Lower Rate Transportation of goods and passengers by rail, Rented motor cabs,
(15%) Radio taxi, Economy flight travel, Tour operator services, Space in
newspaper for Advertisement
12% Merit Rate Non-economy class flight travel, Construction of building intended to
(15%) sale to buyer wholly or partially, Food/drinks by restaurants not
serving liquor and not having AC or centralized heating
system, Hotels where Room tariff >=Rs1000 & <Rs2500 per room
per day.
18% Standard Food/drinks by restaurant having license to serve liquor or having
Rate(15%) AC/centralized heating, Outdoor catering Renting hotels >Rs 2500
and< Rs 5000 per room per day.
28% Higher Rate Entertainment (Amusement parks, Films), Gambling, Food/drink in
(0% to>100% ) >=5 star rated hotels, Accommodation in hotels where tariff
> RS 5000 per room per day.
 Incidentally, the recommendations of the Bagchi Committee, 1994 for the rate structure were as
given in Box 5.5.
Box 5.5: Commodity Grouping for State VAT Rates (Bagchi Committee Report, 1994)
Exemptions Rate of Tax (4 to5%)
1. Unprocessed cereals including rice, rice Hour, 1. Oilseeds, edible oils and oil cake
wheat, atta, maida, and suji. 2. Processed salt
2. Pulses. 3. Dried fish, vegetables and meat
3. Fresh vegetables and fruits. 4. Pasteurized milk
4. Fresh meat, fish, and livestock excluding race 5. Chillies, turmeric, tamarind, cumin seed, dried
horses. ginger, etc.
5. Unprocessed salt. 6. Kerosene
7. Sugar
6. Fresh milk
High Rate of Tax (Minimum 20%)
7. All types of eggs 1. Diesel, petrol and aviation fuel.
8. Plain water not including mineral water, 2. Opium, ganja, bhang, narcotics, etc.
aerated water, tonic water, distilled water, 3. Liquor
scented water or water sold in sealed 4. Tobacco and tobacco products.
containers/sockets, etc. All Other Commodities
Standard Rate (12 to 14%)
5.6 Risk Analysis of setting RNR Rates little high or low (CEA Committee, 2015) : one cannot
be certain of RNR—it is after all best assessment or best guess—a risk assessment framework poses
the question: should RNR err on the side of an RNR that is a little low or a little high?

5.6.1 Risk of setting lower RNR Rates:
 One risk of setting a low RNR is the re-emergence of a trust deficit between the Centre and the
States as happened in relation to compensation for the lost CST revenues after the global financial
crisis. If revenues fall short, and the fiscal position of the Centre and the States is affected, the
Centre will face a double whammy, with weak revenues for itself and an additional burden of
having to compensate the States. And, if as a result, compensation is delayed or diluted, a trust
deficit could re-emerge.
 The second risk of setting a low RNR Rates is that it could interact with slower growth and/or
weaker buoyancy going forward to magnify the revenue shortfall.
 As per Tait, 1988, for most countries, a VAT is probably not worth introducing at less than
10 percent. At that rate, the administrative costs as a proportion of revenue should fall to 1-2
percent. Also, at that rate (i.e. ≥10%), the deficiencies of the retail sales tax (RST) start to emerge
more strongly, and the VAT, with its fractionated collection at importation and subsequent stages,
begins to look more attractive. Moreover, the lower rate should be high enough ordinarily to
allow complete absorption of the credit originated by tax paid on inputs.
5.6.2 Risk of setting higher RNR Rates:
Box 5.6: Problems with the higher VAT rate

 Several frauds & evasion become more attractive, of course, the higher is the rate of VAT.
 High VAT rates are likely, in particular, to encourage informality. Although they raise the
unrecovered tax that informal operators will bear on their inputs, they also increase the output price they
can charge while still undercutting formal operators, with the latter effect outweighing the former so
long as their own value added is positive.
 Such considerations naturally point to a lower VAT rates than would otherwise be the case.
 At 5%, the incentive to evade tax is probably not worth the penalties of prosecution; at 10%, evasion
is more attractive, and at 15-20%, becomes extremely tempting.
Tait, 1988
 First, some of the risks of setting low RNR/Rates can be overcome. In the event of a revenue
shortfall, the Centre and the States can both raise non-GST taxes (petroleum, tobacco and tobacco
products, and alcohol); they can together raise GST rates; and, as a last resort, the Centre could even
afford to relax its deficit target, based on the fact that it was actually an investment for
implementing unprecedentedly ambitious tax reform with enormous long-run gains. Moreover, a
moderately higher deficit due to a low GST will benefit consumers, especially poorer ones (if the
items of their consumption is low rated or exempted).
 Second, given the unavoidable teething troubles that will afflict GST implementation, it seems
inadvisable to further burden the initial stages of implementation with higher rates that will

increase taxpayer (consumer) displeasure, reduce compliance and increase disaffection.
 On balance, lower rates will facilitate compliance as the evidence in the CEA Committee Report
shows. The econometric analysis suggests that a 1% reduction in the standard rate will lead to an
improvement in administrative efficiency (and compliance) of 1 which in the GST setting would
translate into an efficiency gain of about 15%.
- Lower RNR to lead to 'less loss' in revenue : The CEA Committee has concluded that a lower
RNR will not lead to as much of a loss in revenue as a simple calculation suggests. For example, if
the standard rate were reduced by say 4.1% in weighted terms that should increase C-efficiency by
4.1% (using the conservative regression estimate of 1 rather than 1.22) which amounts to about
9.3% given the current C-efficiency ratio of 0.44. Better compliance could, therefore, fetch
potential additional revenues of nearly Rs 4.3 lakh crore. Details could be seen at Annex 5.10.
 Further, the improvement in compliance will not be restricted to indirect tax collections. The
paper trail of GST will also help direct tax administration and improve compliance in collections of
corporate income taxes.
 Third, the price consequences of GST will be small, especially under a dual rate structure with
essential food items exempted. As analysis by the CEA Committee reveals, an RNR in the 15-
15.5% range with a lower rate of 12% and a standard rate of 18% would have no aggregate inflation
impact. But a higher RNR with a lower rate of 12% and a standard rate of 22% would increase
inflation by between 0.3-0.7%. So that GST does not become the target of popular disaffection on
the grounds that it fed higher inflation, a lower RNR is safer than a higher one, especially
considering that GST is inherently regressive relative to direct (income) taxes.
 Fourth, there is also a perception issue. Today’s GST rate is 14.36 per cent for services(now
nearly 15 per cent with the Swacch Bharat cess). If RNR is greater than 15-15.5 percent, the rate for
services will be in the 20-22% range which will make GST seem like a substantial tax increase
when it strictly speaking is not and should not (after all, the new rate should be revenue neutral).
Optically, GST as a rate hike should be avoided to the greatest extent possible. A lower rate
will be seen as more politically acceptable and will help tax payer compliance.
 Fifth, even if the proposed RNR is on the side of being a little low, all the evidence suggests that
over time, compliance will improve, and GST will become a buoyant source of revenue. This
could happen even in the short run. A marginally lower rate, if it turns out to be that way, will
signal the government’s confidence in the GST as a medium term tax reform. This would re-inforce
the signal that Government has already sent—in a sense under-writing the GST—by committing to
compensation for five years (despite the fact that when the State VATs were implemented,
compensation was not required beyond the second year.)
 Successful GST models adopted by other countries had a very broad base and a relatively
modest tax rate, especially at the time of inception. For example, New Zealand GST was introduced
@ 10%, with a base consisting of virtually all goods and services (with the exception of financial
services). The Singapore GST was introduced at 3%, but the rate has now been raised to 7% as
inefficient excises and customs duties have been progressively eliminated.
 There is virtue in keeping the GST rate in the 10% range, especially at inception. Any revenue
shortfall at this rate could be made up by the use of supplementary excises on select demerit goods
(e.g., tobacco, and alcohol), besides motor fuels. Excises could also be used for select luxury
items which do already attract tax at higher rates. This would help minimize undesirable shifts in
the distribution of tax burden. Clearly, such excises should be limited to a very small list of items
which are discrete and not amenable to tax avoidance and evasion.
 It is worth emphasizing that the GST is intrinsically a regressive tax and the higher the rate
the greater the regressivity. Countries that have well developed social safety nets can better offset
this regressivity but India at a lower level of development is less able to do so and hence needs to be
especially mindful of rates that are out of line with international ones.
5.6.3 Post-facto evaluation of GST:
 Complexity and lags in GST implementation require that any evaluation of GST— and any
consequential decisions—should not be undertaken over short horizons (say months) but over
longer periods say 1–2 years. For example, if six months into implementation, revenues are seen to
be falling a little short, there should not be a hasty decision to raise rates until such time as it
becomes clear that the shortfall is not due to implementation issues. Facilitating easy
implementation and taxpayer compliance at an early stage—via low rates and without adding to
inflationary pressures--will be critical.

Chapter 6
Exemption, Exclusion and Treatment of Merit/Demerit Goods & Services

(When the imputed needs of the poor and the cold self-interests of the elite seemingly converge)
6.1 Incorporating Social and Sectoral Objectives in GST:

6.1.1 GST/VAT is not designed for distributional or sectoral objectives (CEA Committee,
2015): It must be noted that VAT/GST is not a progressive tax but inherently a proportional tax. It
was never designed to meet social (redistributive) or sectoral objectives. However, distributional or
sectoral concerns have been at the heart of the excessive differentiation of the Indian tax system.
The tax system is complicated in terms of rates and structures and has become an “Exemptions
Raj,” rife with opportunities for selectivity and discretion.
- Exemptions are abhorrent to both the logic and the functioning of VAT. Exemptions are
economically inefficient, inequitable, lead to revenue loss, breed rent-seeking behavior, increase
compliance cost and enhance administrative burden. And the cost is a tax base that is narrow
leading to high standard rates and consequently reduced compliance. Moreover, by breaking up the
value added chain, exemptions lead in practice to a multiplicity of rates that is unpredictable,
obscured, and distortionary. The case for tax incentives is further weakened in the existing tax
regime of moderate tax rates. Consequences of exemption are detailed in Annex 6.1.
6.1.2 Targeted instruments better serve such objectives: More targeted instruments should be
found to achieve industrial, regional, and social goals. For example, easing the costs of doing
business, public investment, and direct benefit transfers or better provision of essential services
respectively. Using exemptions as selective industrial policy for example has led to generous un-
selective policy, and proliferating exemptions. The road to exemptions hell is paved with the good
initial intention of restricting exemptions to a few industries.
6.1.3 Inappropriateness of tax policy as an instrument to help the poor (Ebrill, 2001): Tax
policy in the name of the poor often turns out to be poor or ineffective social policy. The more
general point, however, is that few taxes are very well suited to the pursuit of equity objectives.
Expenditure policies can often be far better targeted to these aims, and in that context the first duty
of taxation is to raise revenue with as little distortion of economic activity as possible. It is
important not to overstate this point: many developing countries also face severe limitations on the
effectiveness of their spending policies, and these may properly temper tax policy advice. The key
point, however, is that it is in this wider and more difficult setting that the potential of the VAT to
alleviate poverty and enhance fairness must be assessed.

Box 6.1: Limits to Redistribution Through Indirect Taxation
 Assume that there are only two income groups—“rich” and “poor”—and only two goods. Assume
also that the poor spend all of their income on good 2, while the rich buy both goods. The sole object of
government, for argument’s sake, is to redistribute income to the poor. Clearly the best way to do this is
to tax good 1 (at tax-inclusive rate t) in order to finance a subsidy s on good 2.
 How much redistribution can be achieved? Since the poor spend all of their income on the subsidized
good, the amount they gain is simply the subsidy received. Expressed as a proportion of their income,
this is simply the subsidy rate s. For the government’s budget to balance, it must be that sw2 = tw1,
where wi denotes the proportion of total income (of rich and poor combined) that is spent on good 1.
Thus, s = t(w1/w2); and so, since t cannot exceed unity, the gain to each poor person can be no more than
w1/w2.
 Assume, for example, that 80 percent of all income accrues to the rich, who spend 90 percent of their
income on good 1. Since the rich are the only group who buy good 1, it follows that w1 = 0.72. Then the
poor can gain no more than 250 percent of their income.
 This is a surprisingly small amount, given the propitious circumstances of the example. Even though
the rich spend relatively little of their income on the subsidized good, the volume of that spending on that
good soaks up much of the subsidy that the taxes that they pay finance.
 In less extreme cases, the potential redistributive gain is even less. Change the numbers above, for
instance, to have the rich receive 70 percent of all incomes and spend 50 percent of their income on good
2, and the potential gain to the poor falls to only 54 percent of their incomes.
Ebrill, 2001(p77)
6.1.4 Effective tax burden may not serve social objectives:

 The CEA Committee has presented detailed evidence (Table 6.1) on effective tax burdens on
different commodities and services which highlights that in many cases they are inconsistent with
the social policy objectives of Equity and Effectiveness. It would thus be advisable to bring fully
into the scope of GST commodities and services that are being kept outside.
 Incidentally, the commodities chosen for Table 6.1 and Figure 6.1 are of special interest in the
context of GST: either they are exempt (food, gold-Centre, power, non-medicine health, and
education), or they are taxed at a lower rate (clothing, gold-States, medicines), or they are charged
at very high/demerit rates (petroleum, tobacco and alcohol).
Table 6. 1: Categorizing Commodities according to Equity and Effectiveness Criteria
EQUITY: Expenditure on EFFECTIVENESS: Share of

commodity as share of total total expenditure on commodity
Commodity expenditure on all commodities accounted for by target group
Bottom 4 Top 6 Bottom 4 Top 6
deciles deciles deciles deciles
Food 38.3% 25.9% 24.7% 75.3%
excluding PDS subsidy 36.5% 25.5% 24.2% 75.8%
Cereals 15.7% 7.0% 33.4% 66.6%
Fuel & Light ex. Electricity 9.9% 4.4% 33.5% 66.5%
Clothing 7.1% 5.4% 22.6% 77.4%
Medicines 4.5% 5.0% 16.8% 83.2%
Education 2.2% 6.6% 6.9% 93.1%
Electricity 2.0% 3.0% 13.1% 86.9%
Beverages(non-alcoholic) 1.6% 1.9% 16.3% 83.7%
Tobacco 1.3% 0.9% 25.8% 74.2%
Intoxicants including pan 1.2% 1.0% 21.3% 78.7%
Health (except medicine) 1.0% 2.5% 7.9% 92.1%
Gold 0.2% 1.2% 2.9% 97.1%
Note:
1) The consumption categories are arranged in the decreasing order of benefit (subsidy rate for the target group)-
cost (proportion of subsidy that does not reach the target group) ratio.
2) The category "food" includes cereals, cereal substitutes, pulses and products, egg, fish and meat; vegetables,
fruits, processed food, packaged food, salt and sugar
3) The category "Fuel and light excluding PDS subsidy excludes the consumption of Kerosene (PDS)
4) The category Cereals excluding PDS subsidy excludes consumption of Rice-PDS and Wheat/Atta-PDS
Source: CEA Committee, 2015
 In Figure 6.1, the benefit cost ratio of exempting a good is shown on the Y axis and the
effective tax rate on the X axis. In principle, the higher the benefit cost ratio, the lower should be
the tax. The line of best fit is downward sloping, indicating that tax policy is broadly sensible. A
number of commodities are treated fairly under the current system. Thus, merit goods such as food
items, especially cereals, pulses, edible oils, vegetables, and fuel are appropriately taxed at zero or
low rates. Conversely, a number of demerit goods such as alcohol and tobacco are appropriately
taxed at high rates.
 Figure 6.1 further suggests that some sectors are under-taxed currently. They lie well below and
to the left of the line of the best fit. For example, in respect of the three sectors, (a) food, fuel &
clothing, (b) gold & precious metals and (c) power, health & education; the benefits of exemptions
(even without taking account of any embedded taxes) for the poorer sections is small because these
items constitute a small share of their total expenditure. For the top 6 deciles, these sectors are three
times as important as they are for the bottom 4 deciles. Moreover, the top 6 deciles also consume
such an overwhelming share of these services (probably privately provided) that nearly all the
benefits of the implicit subsidy go to the relatively well off.
 Power, health and education have been excluded or exempt from the scope of GST probably on
the grounds that these are public goods, publicly provided, and of importance to relatively poorer
sections of the population. But what evidence do we have on the underlying assumptions justifying
such a policy? Counter-intuitively in the case of education and health too, the current tax structure
turns out to be regressive, with the bottom 4 deciles effectively paying greater taxes than the top 6
deciles.
 These commodities and services deserve to be taxed more like standard goods. Yet, today, they
face low taxes and they are being excluded from the GST or would be facing low rates. The design
of tax policy evidently needs to more carefully take account of the evidence. Incidentally, the GST

Council has fixed GST rates for these items as follows: (i) 0% - Food, Cereals, Education, Health
(except medicine), Electricity, (ii) 5% - coal, LPG, clothing (below Rs.1000), Medicine, (iii) 12% -
Medicine (some category), clothing (above Rs.1000), (iv) 18% - Beverages (non-aerated), (v) 28% -
Tobacco, Intoxicants including pam masala, (vi) 3% - Gold.
Figure 6.1: Comparing “Desirable” Taxation with Actual Taxation of Selected Commodities
CEA Committee, 2015

 Exemption of food: Contrary to the popular perception, food items are subject to tax at the
State level though at lower rates. The distribution channel for unprocessed food in the rural sector is
either a direct sale by the farmer to the final consumer in village hats or through small retail stores
who would even otherwise remain exempt because of the modest (Rs.20 lac) 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 (rachet) of the lower rate category as is the
international experience. As a compromise, the CEA Committee has recommended that any food
item (and other non-food items also) which is covered under the public distribution system
(PDS) should be exempt regardless of the outlet through which it is sold.
6.1.5 Appropriate way to minimizing tax burden on the poor: TFR, 2009 too took note of the
need to minimize the tax burden on consumption by Low Income Households (LIHs). However it
also did not recommend a low rate of tax, or exemption, for products consumed by LIHs since (a)
the same products also form part of the consumption basket of the middle and high income
households (HIHs), (b) the introduction of a low rate or exemption for products commonly

consumed by LIHs results in increase in the standard rate, (c) LIHs too consume goods liable to tax
at the standard rate, the cumulative burden on the aggregate consumption by LIHs remains
unaffected in spite of the exemption or low rate for the common goods consumed by them.
 TFR, 2009 also recognized that, in general, LIHs purchase their requirement of daily necessities
from the small neighbourhood retail outlets whose turnover is generally low/moderate.
Accordingly, TFR, 2009 recommended a modest threshold exemption limit of Rs.10 lakh for
registration of the dealers. Consequently, the small dealers would remain outside the purview of
GST and, the tax incidence on products sold through such dealers would be relatively lower.
6.1.6 True VAT is not regressive: Para 1.6 shows that true VAT is not inherently regressive.
Further, message from para 6.1 is clear – if one wants to help a particular target group, it is more
efficient to aim transfer expenditure at such group than to erode the VAT base by poorly targeted
exemptions or zero – rating. Counter-intuitively, para 6.5 and Table 6.1 show that eliminating
exemptions even on health and education would make tax policy more consistent with the
social policy objectives.
6.1.7 Are reduced rates/exemption caused by the weaknesses of policy making (Keen, 2013):
 While the formalities have been cast in the maximin terms of protecting the interests of the very
poorest, the harsh truth always arises that, in practice, there will be some that cannot be fully
protected against reforms of the kind considered here: not all entitled to some benefits may actually
receive it, and it will be hard, for instance, to compensate the childless, healthy, and poor aged, for
instance, by increased spending on health care and education. Policy, ultimately, has almost
inevitably to look to some wider good.
 What ultimately stands out, however, is the singular difficulty not of explaining the case for
combined tax-spending reforms of the kind considered above—the essence is often fully understood
by policymakers—but of persuading governments to adopt them. This is presumably because they
believe they cannot carry their support base with them. That, in turn, may reflect a common sense
appreciation that the pain of the increased tax may not always be matched by offsetting gains
on the spending side.
 Or there may be a perception that there are other and even more progressive ways in which to
finance that same increase in public spending—by paying for a reduction in the tax on k by raising
that on some other commodity, for instance. The same issue still arises, however, once maximal
progressivity has been achieved in these other financing instruments.
 Or it may simply be that the richer groups understand precisely how reduced VAT rates
act to their particular advantage.

 It remains unclear whether the failure of policymakers to act on arguments demonstrating that
reduced rates are dominated, in equity terms, by other policies is due to weaknesses of the
policymaking process or to a political naivety of arguments like those above!
6.2 Historic Opportunity for cleaning up the tax system: Multiple-rates, high level of VAT
rates, too many exemptions and zero-rating, low registration threshold, etc. are detrimental to the
efficiency of the whole VAT system (including inducing tax evasion), add unintended distortions
and impose greater burden on the tax administration. This would eventually dry up the funds needed
to support the poor, drive government to make ad hoc tax policy, and create more uncertainty in
the business environment. It is, therefore, crucial not to fall in the 'equity trap'. The equity gains are
more often outweighed by the efficiency costs. GST affords historic opportunity to clean up the
Indian tax system that has effectively become an “exemptions raj” with serious consequences for
revenues but also governance.
6.2.1 Magnitude of exemption: According to the government’s own figures, excise tax
exemptions (and taxing goods at low rates) result in foregone revenues of Rs. 1.8 lakh crore or
nearly 80 per cent of actual collections. Tentative estimates by the Committee suggest that the
comparable figure for the States is about Rs. 1.5 lakh crore. Together, India loses about 2.7 per
cent of GDP because of exemptions. If the GST is to be a success— with an uninterrupted value
chain that facilitates compliance and a buoyant source of revenue— these exemptions must be
plugged.
6.2.2 Indirect and Direct Taxes Reforms are complementary: Tax policy should be designed to
meet broad macro-economic objectives. A rationalization of the indirect tax system under GST will
complement a similar effort for the direct taxes (DTC!), making for a much cleaner overall tax
system.
6.2.3 Rationalization of exemptions is especially salient for the Centre, where exemptions have
proliferated. The States have fewer exemptions—90 products versus 300 for the Centre.
6.2.4 Exclusion of certain items also is unjustified. For example, (a) bringing alcohol and real
estate within the scope of the GST would complement the government’s objectives of improving
governance and reducing black money generation without compromising on the States’ fiscal
autonomy, and (b) bringing electricity and petroleum within the scope of the GST would make
Indian manufacturing more competitive. The States could always levy top up taxes (viz excises)
over these items.
6.3 Exemption and zero-rating: The Australian terms 'GST-free' (instead of 'zero-rating') and
'input taxed' (instead of 'exemption') are in fact more evocative.

6.3.1 What is zero-rating: Section 16(1) of the IGST Act, 2017 says: "zero-rated supply" means a
supply of any goods and/or services on which no tax (i.e. a rate of zero) is payable but credit of the
input tax related to that supply is admissible. Accordingly, such (zero-rated) firms or
goods/services are genuinely exempt from VAT. For example: exports would be treated as zero-
rated supply. In essence, zero-rating does not break the link between the zero-rated stage with others
in the whole production-distribution chain.
6.3.2 What is exemption: Exemption, in contrast, means that no tax is due on output nor is a credit
available for input VAT. Under Sec. 2(47) of the CGST, Act, 2017, exempt means supplies which
attract nil rate of tax or is wholly exempt from tax and includes non-taxable supply. It is a linguistic
quirk of VAT that 'exemption' actually means that the 'exempt' trader has to pay VAT on his inputs
without ITC. Thus VAT ‘sticks’ on business purchases. An exempted firm or goods/services are in
effect outside the VAT system. Thus if farmers are 'exempt' from VAT, they do not deal with the
taxman, but they pay VAT on all their inputs (seed, fertilizers, electricity, farm building and
machinery). In brief, exemptions do not lead to zero taxation because embedded taxes via
inputs cascade into the final product.
6.3.3 Effect of exemption and zero rating: A detailed illustration of the effect of exemption and
zero-rating respectively at various stages of production, distribution and sale is given in Annex –
6.2. The effects of exemption and zero-rating in brief are given in Box 6.2.
Box 6.2 : Effect of Exemption and zero-rating

 Under invoice-based credit method, zero rating of any stage prior to the final one does not affect
the total tax burden borne by the whole chain. The tax revenues will, however, be eliminated if the
last stage is zero-rated. Under subtraction (accounts) method, zero rating of the last stage is
equivalent to exemption: the value added in the last stage is relieved from the tax burden, but tax
revenues are still collected on the value added generated in all preceding stages.
 If any middle stage is exempted and invoice-based credit method is applied, higher tax revenue is
expected due to cascading effect: the exempt stage is eliminated from the chain, and the tax burden
on the value added generated in all stages prior to the exempted one remains and carries on in the
whole production-distribution chain.
 Under invoice-based credit method, exemption is expected to provide some tax relief if it is applied
to the last stage. In this case, the value added generated at the last stage is not taxed.
Le, 2003
6.3.4 Exemption and zero-rating under the GST laws:

 Exemption (CGST Act, 2017):
- Sec 11(1): The Central or a State Government by notification, exempt generally either
absolutely or subject to such conditions as may be specified in the notification, goods and/or
services of any specified description from the whole or any part of the tax leviable thereon………

- Sec 11 (2): The Central or a State Government……… may by special order in each case, exempt
from payment of tax, under circumstances of an exceptional nature to be stated in such order,
any goods and/or services on which tax is leviable.
- See Annex 6.3(a) & (b) for a list of goods & services exempted under Sec 11(1).
 Zero-rating (IGST Act, 2017)
- Sec 16(1): "zero-rated supply" means any of the following taxable supply of goods and/or
services, namely (a) export of goods and/or services; or (b) supply of goods and/or services to a
SEZ developer or an SEZ unit.
- Sec 16(2): Subject to provisions of section 17(5) of the CGST Act, 2017, ITC may be availed for
making zero-rated supplies, notwithstanding that such supply may be an exempt supply.
6.4 Effectiveness of exemption and zero-rating :
6.4.1 Effectiveness of exemption is doubtful:
 Exemption is always a tempting option for the VAT policy design, but as explained in para 6.1
its effectiveness is doubtful and hard to quantify. Exemption tends to (a) erode tax base and reduce
revenue collection without achieving the intended socio-economic objectives, (b) break the VAT
chain and thereby induce cascading problem, and (c) ratchet up: for example, exemption of
unprocessed food ultimately exerts pressure on exempting their inputs (e.g., agricultural inputs).
 It is also worth re-emphasizing that exemptions need not, and often do not, result in low or zero
tax burdens. If a product is exempted, the effective tax burden will depend on all the embedded
taxes on inputs going into that product. If the move to the GST results in lower rates of taxation, it
is possible that eliminating exemptions might actually reduce the effective tax burden. Another
hidden cost of exemptions is that it leads to effective tax burdens that can vary widely across goods,
leading to a multiplicity of effective tax rates (Box 3.1).
 To effectively lower the tax burden on the equity ground through exemption, it is required that
the exemption be allowed exactly at the final stage, where the poor consume the good. Otherwise,
the tax burden is even higher than that in a non-exempt situation due to cascading effect (Annex 6.2
and Box 6.2). The cascading problem may, in turn, induce artificial vertical integration and, in
certain cases, nullifies the advantage of the zero rating granted to exporters. For example,
producers-exporters of agricultural commodities may use VAT-exempt fertilizer; hence, they bear
part of the tax burden, embedded in the inputs purchased by the fertilizer manufacturers and carried
over to the agricultural exports.
 Moreover, exemption may generate another technical problem in compliance and administration,
particularly when a firm produces both exempt and taxable items. In this situation, the advantage of
the invoice-based credit VAT in dealing with multiple rate structure disappears because the firm is
required to apportion its inputs into those used in producing exempt goods and those used in
producing taxable goods.
 In brief, exemption creates numerous efficiency and effectiveness problems; it tends to erode the
integrity and sustainability of the VAT system
6.4.2 Rationale for exemption and reduced rates despite their undesirability: Despite all the
mischief explained in paras 6.4.1 and 6.1.4, exemption is common in practice.
 There always exists rationale for providing tax relief (a) for merit goods (e.g., education and
public health services), or (b) for goods consumed by the poor (e.g., staple or unprocessed food) for
reducing the perceived regressivity of VAT (see para 1.6)
 Moreover, some goods & services are just too hard to tax. From the pure administration
perspective, it would be more cost-effective to exempt hard-to-tax sectors and groups of taxpayers
below certain threshold (Para 7.1), as they pose serious challenge to weak administration in
developing countries. Agriculture, financial service, public institutions supplying goods or services
free of charge or at prices lower than market price, housing, and small traders are some typical
examples.
 Some goods could be justified under all three headings; for instance, farmers are difficult to tax,
the food they produce can be considered meritorious, and exemption of food may improve the
progressivity of a sales tax.
 Exemption of these hard to tax sectors and groups of tax payers are discussed in detail in
Chapter-7.
6.4.3 Choice between Zero- rating and Exemption: The considerations in choosing between zero
rating and exemption should be as follows (see Annex 6.2 also):
A. Zero rating
(i) Advantages: (a) Zero-rating does not break the link between the zero-rated stage with others in
the whole production-distribution chain, and
(b) It genuinely exempts from the levy of VAT.
(ii) Problems (see para 9.3 also) :
a) The administrative burden of the zero-rating procedure can be onerous. Zero-rating implies
build up or payout of refunds, which may entail high administrative costs, requiring verification,
intensified audits and disbursement of refund cheques.
b) 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 correspondingly inflate the value of
taxable inputs purchases, in order to avail themselves of the refund of a larger input tax element.

The resources needed to cross-check such claims can impose additional/ unsustainable demands on
the prevailing systems.
Box 6.3: Arguments against zero-rating (The Sixth Directive of EC)

 The European Community cites five arguments against the zero rate:
First, the zero rates are justified exclusively under Article 28(2) of the Sixth Directive. The crucial point
here is that the zero rates should be used "for the benefit of the final consumer," and the interpretation the
Commission puts upon this is that zero rates cannot be used for intermediate goods.
Second, even where the zero rate can be seen to benefit the final consumer directly, the Commission
argues that the zero rates in one member state will cause consumers in other member states to claim the
same benefit, and this will disrupt the Community tax base.
Third, to the extent that the use of zero-rated goods and services expands, it erodes the tax base, creating
distortions and requiring a higher VAT rate to be used on the taxed sectors to raise the same revenues.
Fourth, the system of refunds that have to be made to taxable persons through the zero-rating system
entail high administrative costs, only to compensate traders and not to raise any revenue; this churning of
money is administratively wasteful and undesirable.
Finally, it is claimed that even the social justification of zero rating might be better achieved by more
appropriately targeted direct transfers than through the blanket provision of indulgent tax treatment.
 For all these reasons, most of which can be generalized to any other part of the world, the
Commission views zero rates as a transitional measure that is tolerated only temporarily.
Tait, 1998(p54)
B. Exemption
(i) Advantages:
a) Exemption is generally less costly than zero rating in both tax administration and revenue loss.
b) Exemption is simpler than the reduced rate and politically, an easier sell to the general public.
c) For having a broader tax base, exempting certain goods is preferable to zero-rating
d) Exemption is a better option than zero rating or reduced rates for the merit (which generate
positive externality) goods and services (viz. basic health service, education) that require some tax
concession.
(ii) Problems:
a) In excluding certain firms from the registration and filing of returns even from the perspective of
firms themselves, there are conflicting considerations. If a firm’s goods are completely exempt, it is
not required to register or file a return, but prices of the goods sold by the exempt firm will include
the tax incurred by the exempt firm on its purchases. This may be particularly objectionable to the
exempt firm’s customers who cannot receive credit for the embedded tax. In this case, exemption
would place the exempt firm at a competitive disadvantage.
b) Since exemptions distort input choices, they are anathema to the logic of the VAT in a way that
zero-rating is not.

C. Conclusion: The choice between exemption and zero-rating would thus depend on the
desirability of freeing users of specific goods or services completely from VAT (as with zero
rating), or only partially (as with exemption).
6.4.4 Items eligible for exemption:
 CEA Committee, 2015: The CEA Committee has recommended that:
(i) The exemptions list be narrow, restricted to a few goods that are merit goods which feature
prominently in the consumption basket of the poor such as food items.
(ii) Exemptions should be confined to final goods because taxes on intermediates are in any case
reclaimable as input credits;
(iii) Exemptions must be common across the Centre and the States;
(iv) Precious metals not be exempted to the extent they are,
(v) Area-based and CVD exemptions be phased out.
 TFR, 2009: TFR, 2009 has recommended that ordinarily, there should not be any exemption
from CGST or SGST. In case it is unavoidable, 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, Defense, Para-military, Police, Intelligence and Government Departments.
- However, public services should not include Railways, Post and Telegraph, other Commercial
Departments, Public Sector Enterprises, Banks and Insurance.
(ii) Any service transactions between an employer and employee either as a service provider,
recipient or vice versa;
(iii) Any unprocessed food article which is covered under the public distribution system regardless
of the outlet through which it is sold; and
(iv) Education services provided by non-Governmental schools and colleges; and
(v) Health services provided by non-Governmental agencies.
6.4.5 Exemption and the CGST Act, 2017: The GST Council has identified items for exemption
under Sec. 11(1) of the CGST Act (see Annex 6.3 a & b).
6.5 Exemption of health and education services :

6.5.1 Exemption of health services (TFR, 2009) : In the case of health services, there are two
approaches.
 The first approach is the full taxation model whereby the health services form part of the
comprehensive GST base. Under this, there is effectively zero tax liability in the case of publicly
funded subsidised health care facilities since ITC will be more than the output tax. As regards health
care availed in other health care facilities covered by insurance, there would be no additional 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, while public may prefer exemption, in reality it imposes a
higher tax burden particularly on the publicly funded health care and for care provided in
facilities covered by insurance.
6.5.2 Exemption of education services (TFR, 2009) : 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. However, given the multitude of schools and colleges in the country and the
disproportionately large administrative burden, TFR, 2009 has recommended that exemption
should be limited to formal education services provided by schools and colleges.
6.5.3 Exemption of health & education services and the CEA Committee, 2015: Earlier Figure
6.1 and Table 6.1 suggests that health, education and power are under-taxed currently. (They lie
well below and to the left of the line of the best fit). The benefits of exemptions (even without
taking account of any embedded taxes) for the poorer sections is small because these items
constitute a small share of their total expenditure. For the top 6 deciles, these sectors are three times
as important as they are for the bottom 4 deciles. Moreover, the top 6 deciles also consume such an
overwhelming large share of these services (probably privately provided) that nearly all the benefits
of the implicit subsidy go to the relatively well off.
 In the case of education, the current tax structure turns out also to be regressive, with the bottom
4 deciles effectively paying greater taxes than the top 6 deciles.
 The burden of health care is higher for the bottom 40 per cent, as bulk of healthcare expenditure
is on medicines (which are taxed at a higher rate than medical services), and particularly so for the
bottom 40 per cent. Education taxes also turn out to be regressive, as the consumption of books and
school supplies is a higher part of education spend for the bottom 40%, and tuition (mostly tax
exempt) is a higher spend for the top 60%.

6.5.4 Health and Education and the GST Law : Health care and education are exempted under
Sec. 11(1) of the CGST Act (See Annex 6.3B).
6.5.5 Conclusion: Logically, Health and Education services deserve to be taxed more like standard
goods even though both have been put under 0% tax bracket.
6.6 Area-based exemptions:

6.6.1 NE & hilly States: Industries set up in the North East, J & K, Sikkim, Uttaranchal and
Himachal Pradesh enjoy exemption from CENVAT. The area based exemptions undermine
neutrality of VAT (which is its major virtue), creates economic distortions, and affect economic
viability of units located in non-exempt (particularly adjacent) areas. Within the exempted States,
Himachal and Uttraranchal have adverse impact on NE region. Further, they are difficult to
administer and prone to misuse (viz. encourage tax evasion). Durability of investment attracted by
such measures beyond the exemption period is also doubtful. The revenue forgone on account of
area-based exemption was Rs.8,073 cr. in 2007-08 alone. It increased to 19,120 cr. in 2015-16 on
account of the Excise Duty alone.
 The area based exemption in respect of CENVAT should, therefore, not be continued under the
GST framework. To provide support to industry for balanced regional development, it would be
more appropriate to provide direct investment-linked cash subsidy and to have a special programme
for roadways and railway development in these States. If their premature withdrawal is not possible
for political and business reasons, at the minimum such incentives should not be extended to
fresh areas and the ones already in force should be extinguished when their applicability ends.
6.6.2 Special Economic Zones (SEZ) : Since GST is designed to ensure that all producers and
distributors are treated as complete pass- through and exports are zero-rated, there is no case for
allowing any form of incentive to the developers of, or units in SEZ.
6.6.3 Area based exemptions and the GST Law : Following are the relevant provisions under the
IGST Act, 2017;
Sec 2 (19) “Special Economic Zone” shall have the same meaning as assigned to it in clause (za) of
section 2 of the Special Economic Zones Act, 2005;
Sec 7 (5) (b) Supply of goods or services or both,–– to or by a Special Economic Zone developer or
a Special Economic Zone unit;
Sec 16 (1) (b) “zero rated supply” means any of the following supplies of goods or services or both,
namely:–– supply of goods or services or both to a Special Economic Zone developer or a Special
Economic Zone unit.

6.6.4 GST Council on area based exemptions: The GST Council has recommended that all
entities exempted from payment of indirect tax under any existing tax incentive scheme would pay
tax in the GST regime. In case any State Government or Central Government decides to continue
any existing exemption/incentive scheme, it will be administered by way of a reimbursement
mechanism.
6.7 Taxation of sin/demerit goods :

6.7.1 Levy of tax on sin/demerit goods: It is international practice to levy sin/demerit rates in the
form of excises outside the scope of VAT/GST on goods and services that create negative
externalities for the economy. As currently envisaged, such demerit rates—other than for alcohol
and petroleum (for the States) and tobacco and petroleum (for the Centre)—will have to be provided
for within the structure of GST. The forgone flexibility for the Centre and the States will be
balanced by the greater scrutiny in the GST Council.
Box 6.4: Advantage of using excises instead of multiple VAT rates

 The advantage of using excises instead of multiple VAT rates is that the mechanisms of tax
collection are kept separate. Typically, excises are collected at the manufacturing stage from a few
large producers. The tax is monitored by both physical and accounting controls. Revenue is secure
and easy to collect.
 Instead of involving VAT and its attendant complicated collection mechanism, it is better to keep
the two taxes separate, VAT with its uniform rate and the clearly recognized excises levied
separately on quite independently justified grounds. However, it is quite possible to use VAT audits
to supplement audits for excises. Tait, 1988
6.7.2 Exclusion of Alcohol (CEA Committee): The CAA, 2016 excludes alcoholic liquor for
human consumption from the purview of GST.
 Political compulsions may require the exclusion of alcohol in the current conjuncture. But this is
at odds with the aim of improving governance and reducing rent-seeking which is pervasive in
relation to alcohol.
 Leaving that aside, there is still little reason to exclude alcohol Constitutionally. Far better was to
leave it in and to allow the Centre and the States at some future date to decide collectively to bring
alcohol within GST net—like foreseen for petroleum products. To leave it out is to rule out even the
possibility of choice for time to come which cannot be a good policy.
 Bringing alcohol within the scope of GST would not curtail States’ fiscal autonomy in this area.
As is envisaged for tobacco, it is perfectly possible—and indeed desirable—for some basic tax to be
levied on alcohol within GST, and allow States to levy top-up sin taxes on alcohol for other revenue
or social reasons.

6.7.3 Tobacco goods and alcohol (TFR, 2009): Like emission fuels, all tobacco goods and alcohol
are also SIN-goods. Therefore, on the same analogy, a dual levy of GST and excise on the entire
range of these goods is recommended (Box 6.4). As a general rule, no ITC should 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. Further, no
ITC in respect of excise should be allowed to any person. Both the Central and the State
Governments may determine the appropriate revenue neutral rate of excise in the case of these
products. However, excessively high rates of tax on tobacco and alcohol may encourage evasion
and become a source for financing of undesirable activities.
6.7.4 Inclusion of Petroleum Products: As per the CAA, 2016, GST will apply to five petroleum
products (i.e., petroleum crude, high speed diesel, petrol, natural gas, and aviation turbine fuel) at a
later date, to be decided by the GST Council.
 Department of Revenue has stated before the Select Committee that petroleum products
constitute a major input in most manufacturing industries and their non-inclusion would mean these
industries would not be able to claim ITC for such inputs resulting in cascading of taxes and
increased cost of production. It is possible that once GST regime is stabilized, the States may want
to include petroleum under GST after two or three years itself.
 TFR, 2009 : The petroleum products can essentially be classified into two categories: (i)
industrial inputs or fuels such as crude oil; (ii) transportation fuels comprising of HSD, MS and
ATF; and (iii) household fuels comprising of kerosene and Liquefied Petroleum Gas (LPG). While
industrial fuels are intermediate inputs, transportation fuels and kerosene (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, the cascading effect of
embedded input taxes is significant.
 As a general rule, no ITC should be allowed in respect of GST on the emission fuels, being
predominantly used in final consumption and having the potential for creating a flourishing market
in trading of invoice and ITC. However, this general rule should be relaxed in the case of
consumption of transportation fuels by Ministry of Railways, State Road Transport Corporations,
Airlines, Truckers, Taxi Operators and a dealer 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.
 TFR has recommended dual levy of GST and excise on the entire range of emission fuels. Both
the Centre and the States should determine the appropriate RNR of excise in the case of emission
fuels.
 However, in the case of truckers and taxi operators, benefit of ITC has the potential of misuse
and therefore credit may be allowed through the abatement mechanism only.
 Further, no ITC in respect of excise should be allowed to any other person.
 Industrial fuels should be subjected only to GST (both the Centre and the State) with the benefit
of ITC like any other intermediate good.
6.7.5 Tax rate on sin/demerit goods : The CEA Committee has recommended that the sin/demerit
rate be fixed at about 40% (for the Centre and the States) and apply to luxury cars, aerated
beverages, paan masala, and tobacco & tobacco products (for the States). The GST Council has,
however, proposed GST @28% on such items, to be topped-up by cess. This cess accrual would go
towards the 'compensation pool' for compensating the revenue- loosing States. This evidently,
would be against the letter and spirit of a GST system and also reneging by GOI on its commitment
to compensate the revenue-loosing states out of its (GOI) own resources. Annex 5.9 may be seen
for details.
6.8 Natural gas (TFR, 2009) : Natural gas, like petroleum products, is derived from the same
source. However, unlike petroleum products, natural gas does not generate negative externalities
(infact generates positive 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 ITC as in the case
of other normal goods.
6.9 Telecom services:
6.9.1 Definition of telecom services: As per Sec 2 (110) of the CGST Act, 2017, Telecom service
means service of any description (including electronic mail, voice mail, data services, audio text
services, video text services, radio paging and cellular mobile telephone services) which is made
available to users by means of any transmission or reception of signs, signals, writing, images and
sounds or intelligence of any nature, by wire, radio, visual or other electro-magnetic means.

Box 6.5: Concern of the Telecom Industry on the Impact of GST
 Registration and place of supply: The Telcos have to get registered in all the states/UT to avoid
any jurisdictional controversies. With service recipient’s address being made basis for determining place
of supply, the TelCos would have to keep their database updated on real-time basis. Moreover, TelCos
operate on the basis of Service Areas/Circles that do not necessarily align with the geographical
boundaries of States/UTs. Hence accounting for State-wise revenues would require a major overhaul of
IT and accounting system.
 Exclusion of petroleum products: Telcos to maintain round the clock uninterrupted supply of
services, which necessitates the use of power generators. Since the applicability of GST on petroleum
products has been deferred, the same would continue to attract central excise duties and states sale taxes
and result in significant cascading impact on the telecom sector.
 ITC on tower: As per the GST Law, telecom towers are not considered as part of machinery hence
infrastructure providers cannot claim for credit against telecom raising towers .
 Exemption status of Distributors: Presently as per notification sr no 29(f) of notification No
25/2012-ST distributors are exempted from service tax but in GST regime distributors will be charged at
18% on the sales value made.
 M-wallets: M wallet is an amalgamation of telecom and financial services. It is not clear if they
should be treated as different service under financial transaction or service under telecom like any other
value added services.
 Telecom as necessity service: Under GST regime the indirect tax increases from 15% to 18%. The
burden of this increase will fall on the end user unless the credit is passed on to the next in business
chain.
 Mandatory audit compliance: until now telecom service providers did not have to comply with
mandatory ‘audit obligation’. But under GST regime, operators may need to engage with two entities,
one for compliance and other for audit.
 Interlinking charges: under the current tax regime interlinking gets covered under services and
Service charges are applicable. But under GST, concerns are regarding place of supply of such services,
state where credit will be applicable, tax on supply of interlinking services of two branches of the same
company.
 Sale of SIM cards: Under current tax regime it is not clear whether sale of SIM cards are to be
treated as service or supply of goods as some State legislature has included SIM cards in the VAT
schedule. Under GST regime it is of concern as what would be the treatment of SIM cards. What would
be the place of supply?
 Self-supplies such as intra-circle termination and intra-circle roaming services for the same operator,
especially in case of multi-state circles, may become taxable under GST. Currently, TelCos do not have
any mechanism to track intra-circle termination and roaming supplies. Thus, this would also increase
complexities for TelCos under the GST regime, including the valuation of such self-supplies.
Source: SKP, 2015, etc.
6.9.2 Some specific provisions relating to telecom in the CGST Act: Frequently Asked Questions
regarding telecom sector concern registration, place of services, input tax credit, outward supplies.
The relevant sections of the CGST Act, 2017 are given below :
Sec.17: Explanation.––For the purposes of this Chapter and Chapter VI, the expression “plant and
machinery” excludes— telecommunication towers.

Sec 12(11) IGST Act : The place of supply of telecommunication services including data
transfer, broadcasting, cable and direct to home television services to any person shall,—
(a) in case of services by way of fixed telecommunication line, leased circuits, internet leased
circuit, cable or dish antenna, be the location where the telecommunication line, leased circuit or
cable connection or dish antenna is installed for receipt of services;
(b) in case of mobile connection for telecommunication and internet services provided on post-paid
basis, be the location of billing address of the recipient of services on the record of the supplier of
services;
(c) in cases where mobile connection for telecommunication, internet service and direct to home
television services are provided on pre-payment basis through a voucher or any other means,––
(i) through a selling agent or a re-seller or a distributor of subscriber identity module card or re-
charge voucher, be the address of the selling agent or re-seller or distributor as per the record of the
supplier at the time of supply; or
(ii) by any person to the final subscriber, be the location where such prepayment is received or such
vouchers are sold;
(d) in other cases, be the address of the recipient as per the records of the supplier of services and
where such address is not available, the place of supply shall be location of the supplier of services.
Sec 24: Notwithstanding anything contained in sub-section (1) of section 22, the following
categories of persons shall be required to be registered under this Act,––
(viii) Input Service Distributor, whether or not separately registered under this Act;
Box 6.6: ITC on Telecom Services

1. Telecommunication services presently attract service tax of 14% along with Swachh Bharat Cess (SBC) of
0.5% and Krishi Kalyan Cess (KKC) of 0.5%. While service tax is a pure value added tax, the above
mentioned cesses are not. This is for the reason that while no ITC (input tax credit) of SBC is available, the
ITC of KKC is allowed to be set off only against KKC. Therefore, both the cesses are turnover tax.
2. As against the above, the telecommunication services will attract GST of 18% in the GST regime, which
is a pure value added tax because full ITC of inputs and input services used in the course or furtherance of
business by the telecommunication service provider would be available.
3. Moreover, presently telecom service providers are neither eligible for credit of VAT paid on goods nor of
special additional duty (SAD) paid on imported goods/equipment. However, under GST, telecom service
providers would avail credit of IGST paid on domestically procured goods as also imported goods. As per
some estimates, this additional input tax credit would be as much as 2% of the turnover of the telecom
industry. Further, ITC of service tax paid on assignment of spectrum by the Government in 2016 is presently
allowed to be availed of by the TelCos over a period of 3 years. In the GST regime, the entire credit can be
taken in the same year. Resultantly, the balance two-thirds credit of the previous year would be admissible in
the current financial year itself. All of these would reduce the telcos liability to pay GST through cash to
about 87% of what they paid in the last fiscal.
4. Thus, the telcos are required to re-work their costing and credits availability and re-jig their prices and
ensure that the increased availability of credits is passed on to the customers by lowering their costs.
Press release by CEBC, 2017
6.9.3 International telecom services :
Box 6.7: Telecommunications, electronically supplied services and e-commerce
 The international telecommunications industry raises special problems in the international context.
Electronic commerce, including electronically supplied services, conducted with the use of
telecommunications and similar networks, raises related problems.
 They all can create competitive inequities, raise difficulties in identifying the place where the sale
occurs, and the place where services, in particular, are consumed.
 In all three areas, tax administration and taxpayer compliance costs narrow the available choices.
Restrictions on a nation’s ability to collect tax from foreign sellers or to identify and collect tax from
local consumers may require simple rules that foster voluntary compliance or rules requiring non-
resident suppliers to register and remit tax on their sales to local nontaxable persons.
Schenk, 2006(p209)
 Position in EU: Under amended Article 9(2)(e) of the Sixth Directive, these services take place
at the customer’s (not the supplier’s) place of business or fixed establishment if the customer is
established in an EU country that is not the telecom supplier’s country. Consumers and unregistered
EU public bodies do not have the opportunity to avoid VAT by purchasing telecom services from
suppliers outside the EU. For these purchasers, telecom services take place where the effective use
and enjoyment of the services occur. The services therefore are taxed and the foreign supplier may
be held jointly and severally liable for the payment of the tax.(Schenk, 2006/p212).
6.10 e-commerce:
6.10.1 Significance of e-commerce: Box 6.8 gives one glimpse of it.
Box 6.8: Excerpts from the Lambert article on electronic commerce.

 [The expansion of e-commerce] . . . is likely to be one of the great economic developments of the
21st century, leading to major structural changes in the economies of developed countries, and hastening
the progress of globalization, encouraging the dismantling of trade barriers, and spurring growth and
employment.
 At the same time, the potential growth of this form of trading causes major headaches for fiscal
authorities, because of the difficulty in establishing audit trails and enforceable compliance requirements
to bring it under adequate control.
 International trade through electronic commerce can be conducted between parties situated anywhere
in the world. The global village shop is truly with us and it is here to stay. Contracting parties may thus
be less constrained by geography or the need for suitable business premises …………. However, does
this mean that the agent can avoid his EU VAT obligations in arranging the holiday package for
his customer?
Schenk, 2006(p216)
6.10.2 e-Commerce - Ebrill, 2001: The most troublesome of the (issues as regards e-commerce)
relate to transactions that cross-jurisdictional boundaries. The essence of the Internet is to reduce the
costs of communication and blur conventional notions of location. A key distinction is that

between (i) commodities that are delivered over the Internet and (ii) those that are ordered
over the Internet but delivered by traditional means.
 Commodities ordered over internet but delivered by the traditional means: established
administrative procedures that are conceptually structured around traditional delivery methods,
whether through the physical checking of imports or, more important, through invoices, continue to
be applicable. Where internal controls are weak, as in most federal systems and the EU, the effect of
Internet commerce is akin to a dramatic reduction in the transactions costs associated with mail
order. In this sense, the Internet does not create qualitatively new problems for the VAT/GST; they
are, however, likely to become much more intense.
- These problems had not been satisfactorily resolved even before the advent of the Internet. Mail
order transactions have been a source of continuing difficulty in the United States and increasingly
problematic in the EU. Policy in the EU is to require distance sellers to charge and forward tax
according to the residence state of the purchaser once their sales to that jurisdiction exceed some
threshold level. Enforcement is by no mean easy, however, and may become more costly with the
Internet and the enhanced possibility of artificial splitting of companies to bring each below the
threshold. Nor is it clear that the tax authorities in one member state have the proper incentive to
ensure that firms in their jurisdiction collect taxes on behalf of another state.
 Delivery of products over the Internet: music and videos being the archetypal example of
such delivery, raises qualitatively more novel issues. Such commodities should in principle be
subject to VAT like any other. In particular, there is no evident reason why digital delivery should
itself be proper object for differential treatment.
- Two difficulties arise, however, with enforcing taxes on this type of commerce. The first is
how to identify that a transaction has occurred. The difficulty of intercepting delivery makes this
especially difficult when the supplier has no formal establishment within the jurisdiction in which
consumption occurs; and the technology makes it easy to do business without one. The second
difficulty is that even a well-intentioned seller may be unable to verify the tax status or physical
location of the purchaser, and may thus be unable to charge the appropriate destination tax. With
traditional delivery, there is at least a billing or delivery address as a guide; this need not be so with
digital delivery.
 Policy response: Faced with the realization that existing solutions for handling international
trade in services, two main policy responses come to mind, neither satisfactory.
- One suggestion is to “level the playing field” for domestic producers by setting low tax rates
in items subject to such competition. In the extreme case, it has been suggested that the EU zero-
rate the supply of any service threatened by competition from the rest of the world. Clearly, this
proposal is tantamount to an admission of defeat. An alternative is to require that firms supplying
into a market register there for VAT purposes even if they do not have, in the traditional sense, a
fixed presence there.
 Thus, the EU has required overseas telecom suppliers to register for VAT in any member states
in which they supply to private consumers, and the EC (European Commission) 1999 proposed
amending the definition of place of supply so as to bring this about more generally. The concern
with this strategy is simply its enforceability. Some degree of information sharing with foreign
countries is likely to be needed; and such agreements have not proved easy to establish in other
areas of tax policy, notably those touched by bank secrecy. Indeed the technology is such that it
may simply not be feasible for the best-intentioned authorities to identify a seller’s true location.
- Further issues arise even if traders do register in countries that they sell into. For example,
the current treatment of services within the EU already poses problems. Viewing the place of supply
as the location of the supplier gives rise to practical problems as businesses are required to claim
refunds from the tax administration of the supplier’s residence; and reverse charging creates
difficulties when the location of the purchaser is flexible or, as will increasingly be the case, readily
concealed. The difficulty of reverse charging may be least for business purchases, and with this in
mind, the EC (1999) and OECD (2001) proposed taxing services delivered over the Internet by
reverse charge for purchases by business. Since reverse charging is impractical for sales to final
consumers, the EC and OECD recommended charging these by location of the buyer; which entails
the difficulties just mentioned. This scheme requires, of course, that sellers be able to distinguish
between registered and unregistered traders in their online dealings, and moreover, that they be able
to identify the location of unregistered purchasers.
6.10.3 e-Commerce and the CGST Act, 2017: Relevant sections of the CGST Act regarding to
e-Commerce are given below :
 Sec. 2(44) : “electronic commerce” means the supply of goods or services or both, including
digital products over digital or electronic network;
 Sec. 2(45) “electronic commerce operator” (hereafter referred to as the operator) means any
person who owns, operates or manages digital or electronic facility or platform for electronic
commerce;
 Sec. 24 : Notwithstanding anything contained in section 22(1), the following categories of
persons shall be required to be registered under this Act,––
(ix) persons who supply goods/services, other than supplies specified under section 9(5), through
such operator who is required to collect tax at source under section 52;
(x) every electronic commerce operator (operator).
(xi) every person supplying online information and database access or retrieval services from a
place outside India to a person in India, other than a registered person;
 Sec. 10(2): The registered person shall be eligible to opt under sub-section (1), if:—
(d) he is not engaged in making any supply of goods through an operator who is required to collect
tax at source under section 52;
 Sec. 52 : (1) Notwithstanding anything to the contrary contained in this Act, every operator, not
being an agent, shall collect an amount calculated at such rate not exceeding one per cent., as may
be notified by the Government on the recommendations of the Council, of the net value of taxable
supplies made through it by other suppliers where the consideration with respect to such supplies is
to be collected by the operator.
(3) The amount collected under sub-section (1) shall be paid to the Government by the operator
within ten days after the end of the month in which such collection is made.
(4) Every operator who collects the amount specified in sub-section (1) shall furnish a statement,
electronically, containing the details of outward supplies of goods/services effected through it,
including the supplies of goods/services returned through it, and the amount collected under sub-
section (1) during a month, within ten days after the end of such month.
(8) The details of supplies furnished by every operator under sub-section (4) shall be matched with
the corresponding details of outward supplies furnished by the concerned supplier registered under
this Act.
(12) Any authority not below the rank of Deputy Commissioner may serve a notice, either before or
during the course of any proceedings under this Act, requiring the operator to furnish such details
relating to—
(a) supplies of goods/services effected through such operator during any period; or
(b) stock of goods held by the suppliers making supplies through such operator in the godowns or
warehouses, by whatever name called, managed by such operator and declared as additional places
of business by such suppliers, as may be specified in the notice.
6.10.4 Impact of GST on e-Commerce : Difficulties of e-Commerce under the GST regime would
be as follows :
 Pan India Registration: Ecommerce companies are providing services across India, and hence
as per GST Law they need to register in all states/UTs where they are providing services. Sec 28(1).
 Threshold Exemption: Irrespective of their annual turnover (no exemption below threshold)
registration is mandatory and operators will have to pay GST. Sec 10(2d).

 TCS Provisions : Every e-commerce operator has to collect 1% tax under CGST Act and 1%
under SGST Act. For interstate transaction, he will collect 2% tax under IGST Act on the net value
of taxable supplies. It means that any dealers/traders who are selling goods online through
e-commerce platforms like Snapdeal, Flipkart, Amazon etc. would get their payment after deduction
of 2% tax by e commerce operators. Sec 52(1).
 Filing of GSTR-8: The ecommerce operator will have to file a special type of return called the
GSTR-8, which will contain details of the tax collected on their suppliers’ sales. They will also have
to file monthly returns (GSTR-1 and GSTR-2) and annual return (GSTR-9). Rule 78.
Box 6.9: Positive Impact of GST on e-Commerce

 Ease of Doing Business: Setting up a business will become easier as entrepreneurs wouldn’t have to
knock on multiple doors in multiple cities and states to get VAT registrations and clearance on entry
taxes. Presently, every state having a different regulation is one of the biggest barriers in starting
up.
 Free inter-state movement of goods: All check-posts on state borders will be done away with and
shipments will freely flow between states, thus reducing delivery windows, and bringing down cost-per-
delivery. The reform will allow even the smaller e-commerce times to cut down the cost of last-mile
deliveries as state-wise entry taxes will cease to exist.
Big push for warehousing: Until now, e-commerce companies had to maintain multiple warehouses
across States and cities to avoid the CST and entry-level tax of each State. This increased cost of
operations that dented their profitability. Now with GST, they can maintain warehouses in strategic
locations as there are no state-wise levies to worry about.
6.11 Credit for VAT on capital goods :

6.11.1 Definition of capital goods: As per Sec. 2(19) of the CGST Act, capital goods means
goods, the value of which is capitalized in the books of account of person claiming ITC and which
are used or intended to be used in course of furtherance of business.
6.11.2 TFR, 2009: In the light of the arguments in support of full and immediate credit for VAT on
capital goods and the revenue implications thereof (Box 6.9), TFR, 2009 has recommended that-
i. 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 which the capital goods
are acquired; and
ii. any kind of transfer of the capital goods at a later stage should also attract GST liability like all
other goods and services.

Box 6.9: The case for allowing full and immediate credit for VAT on capital goods
It rests on the following arguments:
i. Depending on the capital intensity of the production process, VAT on fixed assets enters into the price,
causing uneven effects on consumer prices.
ii. Any kind of restriction on full and immediate credit for VAT on fixed assets deters investment and
hampers technological change, unless it can be fully shifted forward to consumers.
iii. Limiting the credit for VAT on fixed assets in any manner results in increased cost of exports thereby
undermining international competitiveness. Hence, it serves as a disincentive to exports.
iv. Capital goods need to be defined thereby reducing scope for considerable disputes.
v. 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.
vi. 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 assets. Any denial of full and immediate credit for the
VAT on capital goods violates the neutrality of VAT.
TFR, 2009
6.11.3 CEA Committee, 2015 has observed that by making it easier to take advantage of ITC for
capital goods, GST would increase investment.
6.11.4 Capital goods and the CGST Act, 2017 and Rules :
 Sec. 16(3) : Where the registered person has claimed depreciation on the tax component of the
cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961,
ITC on the said tax component shall not be allowed.
 Rule 43 of the CGST Rules: Manner of determination of ITC in respect of capital goods
and reversal thereof in certain cases.- (1) Subject to the provisions of sub-section (3) of section
16, ITC in respect of capital goods, which attract the provisions of sub-sections (1) and (2) of
section 17, being partly used for the purposes of business and partly for other purposes, or partly
used for effecting taxable supplies including zero rated supplies and partly for effecting exempt
supplies, shall be attributed to the purposes of business or for effecting taxable supplies in the
following manner, namely,-
(a) the amount of input tax in respect of capital goods used or intended to be used exclusively for
non-business purposes or used or intended to be used exclusively for effecting exempt supplies shall
be indicated in FORM GSTR-2 and shall not be credited to his electronic credit ledger;
(b) the amount of input tax in respect of capital goods used or intended to be used exclusively for
effecting supplies other than exempted supplies but including zero-rated supplies shall be indicated
in FORM GSTR-2 and shall be credited to the electronic credit ledger;
(c) the amount of input tax in respect of capital goods not covered under clauses (a) and (b), denoted
as ‘A’, shall be credited to the electronic credit ledger and the useful life of such goods shall be
taken as five years from the date of the invoice for such goods.
6.11.5 Conclusion: Recommendations of TFR, 2009 mentioned above seem logical. However, it
may be remembered that it would promote capital intensive production (see Box 3.8).
6.12 Taxes on vehicles and goods & passengers :
Box 6.10: Transport services is used both as intermediate input and final consumption
 Transport services, like most other services, is used both as intermediate input and in final
consumption. Further, the transport equipments are subject to multiple taxation at both the Central and
the 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 rationalize the taxation regime for transport services.
6.12.1 Recommendations of TFR: TFR, 2009 has recommended the following in view of the
position mentioned in Box 6.10.
(i) The tax on vehicles and the tax on goods and passengers levied by the State Governments should
be subsumed in the GST.
(ii) All transport equipments and all forms of services for transportation of goods and services by
railways, air, road and sea must form an integral part of the comprehensive GST base over which
both the Central and State Governments would have concurrent jurisdiction.
(iii) The tax regime for the transport equipments and transport services should be the same as in the
case of any other normal good.
(iv) It is not necessary to levy higher rates of taxes on vehicles as is the existing 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.
6.12.2 Subsidizing public transport (Tait, 1988) : In developing country cities, public transport is
mainly for the benefit of the poor and the better off use private transport. However, it could create
other distortions, such as a probable bias in favor of urban low-income households and against the
rural poor (who, typically, gain little advantage from the subsidized public transport).
6.12.3 Transport and the GST law:
A. IGST Act, 2017:
Sec. 12(8): The place of supply of services by way of transportation of goods, including by mail
or courier to,––
(b) a person other than a registered person, shall be the location at which such goods are handed
over for their transportation.
Sec. 12(9): The place of supply of passenger transportation service to,—
(b) a person other than a registered person, shall be the place where the passenger embarks on the
conveyance for a continuous journey:
- Provided that where the right to passage is given for future use and the point of embarkation is not
known at the time of issue of right to passage, the place of supply of such service shall be
determined in accordance with the provisions of sub-section (2).
Sec. 13 (8)(c): The place of supply of the following services shall be the location of the supplier of
services, namely:–– services consisting of hiring of means of transport, including yachts but
excluding aircrafts and vessels, up to a period of one month.
Sec. 13 (9): The place of supply of services of transportation of goods, other than by way of mail or
courier, shall be the place of destination of such goods.
Sec. 13 (10): The place of supply in respect of passenger transportation services shall be the place
where the passenger embarks on the conveyance for a continuous journey.
Sec. 13 (11): The place of supply of services provided on board a conveyance during the course of a
passenger transport operation, including services intended to be wholly or substantially consumed
while on board, shall be the first scheduled point of departure of that conveyance for the journey.
B. CGST Act, 2017:
Sec. 17 (5)(a): Notwithstanding anything contained in section 16(1) and section 18(1), ITC shall
not be available in respect of motor vehicles and other conveyances except when they are used––
(i) for making the following taxable supplies, namely:—
(A) further supply of such vehicles or conveyances ; or
(B) transportation of passengers; or
(C) imparting training on driving, flying, navigating such vehicles or conveyances;
(ii) for transportation of goods;
6.13 Exclusion of Power/Electricity (TFR, 2009):

6.13.1 TFR, 2009: Power (Electricity) is an important input in production of goods and
services. Hence, it is necessary to rationalize the tax treatment of the power sector so as to ensure
that there is seamless flow of ITC across all the processes/activities in the power sector. At present,
the power sector is subject to multiple taxation.
- At the Central level, power equipments are either exempt from CENVAT or subject to
concessional rates. As a result, either no or partial ITC is available and the input taxes remain
embedded 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 ITC even for
equipments and stores which are subject to CENVAT.
- Similarly, at the State level, there is no benefit of ITC 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 significant
cascading effect of taxes when power is used as an intermediate input. This phenomenon partly
explains the cause for high cost of power generation and distribution. As a result, the international
competitiveness of Indian industry is significantly undermined.
6.13.2 Recommendations on power sector:
 TFR, 2009 has recommended the following:
(i) The electricity duty levied by the States should be subsumed in SGST.
(ii) The power sector must form an integral part of the comprehensive GST base over 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.
 The CEA Committee has concluded that bringing electricity into GST would also improve
competitiveness of Indian Industry.
6.13.3 Power and the GST Law: No provision explicitly mentions power as such. However,
distribution of electricity and electrical energy is exempted under Sec. 11(1) of the CGST Act, 2017
(See Annex 6.3'B').

Chapter 7
Treatment of Hard-to-Tax Sectors

(Hard nuts and elusive kernels)
7.1 Hard-to-tax sectors (Tait, 1988):

Apart from exemptions and zero-ratings justified on the grounds that the transactions are
"meritorious" or that they help equity, there is a miscellaneous group that is considered just too
difficult to tax. For example some economic sectors (financial services, agriculture, real estate/
housing, second hand goods) and groups of taxpayers (e.g., small traders) are practically hard to
tax. They are, therefore, commonly grouped in the hard-to-tax category. Some of these are among
the most important in the economy, for example, financial services, real estate/housing. There are
some reasons for this problem: it is administratively hard or financially costly to estimate the value
added generated by these sectors, or the compliance costs for the taxpayers are prohibitively high.
 The question is, how to treat these sectors—or more specifically, should they be included in the
tax net, and if they should, then how? In theory, all such goods and services should be liable to
VAT; in practice, messy solutions are found.
7.2 Agriculture: The following discussions cover different aspects of agriculture taxation.
7.2.1 Ebrill, 2001:
 In many developing countries, most agricultural producers are outside the formal sector. Even
among farmers who do work within the formal system, it may be only the largest who keep records
sufficient for an accurate measurement of annual turnover. Physical remoteness may further
increase the difficulties of monitoring tax compliance by farmers. Agriculture is also marked by
issues of seasonality and mismatched timing between inputs and outputs that complicate both
measurement and payment procedures. In short, compliance and administration costs for
agricultural producers are likely to be high.
Box 7.1: Taxation of agriculture and small vs. larger farmers

 The agricultural sector often proves hard to tax through the income tax, land, or wealth taxes: taxing
the sector through its inputs may be acceptable as a third-best method of ensuring some equity in the
distribution of the tax burden between this sector and others.
 This improved inter sectoral equity might at first sight seem to imply some reduction in intra sectoral
equity, as larger farmers will be able to recover their input taxes against output tax. But in doing so those
larger farmers will ultimately pay tax not only in relation to their inputs but also on their own value
added, so that smaller farmers will be favored; only in the case—a potentially important one—in which
agricultural outputs are taxed at a sufficiently low rate that registered producers are due refunds (perhaps
because they are exported) will the taxation of agricultural inputs disfavor small farmers.
Ebrill, 2001

7.2.2 Le, 2003
 Agriculture is classified as a hard-to-tax sector for numerous technical, social and political
reasons. First, in developing countries, a large part of the sector is informal. Second, from the
social perspective, agriculture merits certain special tax relief as most of the poor are active in the
sector. Third, the sector hosts most of the political constituents and hence needs to be treated more
favourably in taxation.
 The majority of countries with a VAT therefore, exempt agriculture. But exemption, alone,
does not relieve the sector from tax burden—farmers pay the VAT on their input purchase but
cannot claim for the credit under a pure exemption scheme. The problem entails the need to exempt
agriculture and its main inputs such as farm machinery and tools. Some countries opt to exempt
farmers and zero-rate agricultural inputs.
 But, the “stacked” exemption or the combined exemption and zero-rating requires effective
monitoring—exemption or zero rating must strictly be limited to those inputs used solely by
agriculture. Exempting agriculture tends to ratchet up to exemption of agricultural inputs and dwarf
the benefits of the zero-rating granted to exports of agricultural commodities.
 The chain of exemptions leading up to the agricultural sector would be a nightmare for the
administration: it is always technically hard to distinguish agricultural from non-agricultural inputs.
Many items have both farm and non-farm uses (e.g., tractors, hand tools). In addition, multiple
exemption and zero-rating make the VAT exposed to abuse. This calls for the need to bring back
agriculture to the tax net despite tempting rationales – technical, social & political.
 One feasible approach is to introduce high threshold for registration. The threshold needs to be
the same as the one applied to small traders (see para 7.6). For countries that still exempt
agriculture for any unavoidable reason, it is critical to limit the number of exemptions to critical
and pure for agriculture inputs, such as fertilizer and seeds. Better still is to provide selective
outright fiscal subsidies (to agriculture and its inputs) through public funds.
7.2.3 Tait, 1988:
 As farming becomes more complex and capital intensive, so the value of capital inputs and
bought-in services rises. Modern farmers may purchase the services of specialists (sometimes other
larger farmers) to plough, sow, spray, harvest, and transport their crops.
 In developed economies, the preferred solution is to treat farmers as a business.
 In developing countries, the government policy of encouraging farm production might be served
best by a combination of exemption of farm inputs (or perhaps better, zero rating of farm inputs)
and optional normal rating for large farmers.

7.2.4 Agriculture and the GST Law: As per Sec 23 of the CGST Act, an agriculturist is not liable
for registration to the extent of supply of produce out of cultivation of land.
7.3 Public Sector :

7.3.1 Le, 2003 : Public institutions which provide goods and services on commercial basis, is a
straightforward case. They should be treated in a conventional way, neither exemption nor any
other special provision is allowed. They collect VAT on output and claim for credit of their input
tax. The full taxation treatment would preserve the VAT chain and thereby the VAT efficiency
while maintaining tax neutrality across public and private sectors. Basically, there is neither
economic nor equity rationale for taxing public organizations more lightly than private firms.
Box 7.2: Adverse effect of exempting public sector

Exempting the public sector can have the same adverse effects that are associated with exemption
of private activities. Specifically:
• Insofar as the agency does not anticipate that it will be reimbursed for the input tax that it incurs, the
effect of exemption on the input prices that it faces will distort production decisions just as it does for
profit-maximizing private firms. Public agencies are presumably required, among other things, to
minimize the costs associated with their activities: and it is this cost-minimization, rather than profit
maximization, that generates a production inefficiency when input prices are distorted.
• For public bodies engaged in both commercial and noncommercial activities, the difficulties of partial
exemption arise.
• Self-supply biases also arise: for activities that can be contracted out to the private sector, exemption of
the public sector will mitigate in favor of retaining production in the public sector.
• Classification disputes may arise from, for instance, the requirement that public bodies be taxable on
activities that do, or might, compete with the private sector.
Ebrill, 2001
 However, taxing the public institutions that provide goods or services at subsidized prices
or free of charge (e.g., state-subsidized public transportation, public museums, and basic food)
poses a great challenge. Problems arise in taxing their outputs due to the lack of market prices.
The common practice is exemption (for example, in the EU). However, if they are exempt, they
become, in effect, final consumers in the VAT chain: they do not have to collect taxes on their
outputs but pay tax on their inputs.
 Hence, they usually request for exemption of their input purchase—the chain of exemptions, if
allowed, would effectively be equivalent to zero rating. A long list of subsequent exemptions—or
effectively, zero-rating—would quickly erode the base. On the other hand, if exemption is not
extended to the input purchase by these public institutions, their decision over production will be
distorted—their inputs effectively bear burden of the tax.
 To overcome these opposing problems, Aujean, Jenkins, and Poddar (1999) proposed a full
taxation model. Their proposal treats public institutions as intermediaries, but not as final
consumers (this implies that exemption is ruled out). They recognize the complexity in valuing
the subsidized outputs and propose that VAT include in its base all explicit fees, subsidies, and
grant payments regardless of the funding source. They also suggest that the system be
complemented by reduced rates or zero-rate for merit goods such as health, and education. But this
complex multiple rate structure would obviously lead to all types of problems.
7.3.2 TFR, 2009:
Ordinarily, there should not be any exemption from GST (CGST or SGST). In case it is
unavoidable, the common list of exemption as regards the public sector should be restricted to 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, Defense, Para-military, Police, Intelligence and Government Departments. However,
public services should not include Railways, Post and Telegraph, other Commercial
Departments, Public Sector Enterprises, Banks and Insurance.
Box 7.3: Treatment of Public Sector at par with Private Sector

 Overall, the best position seems to be that adopted by New Zealand. Supplies of goods and services
both made to and by the government and its departments should be taxed on the same basis as all other
taxable supplies and taxable persons may deduct this VAT in the ordinary manner. Supplies made
between departments should also be taxable. The tax should apply only to the operating expenses and not
to the grants and transfers administered.
 Departments should be entitled to deduct tax invoiced to them on purchases of supplies in the same
manner as taxable traders. This treatment of government departments as suppliers of services consumed
by either the public or by other government agencies ensures comparability in the treatment of private
and publicly owned suppliers and facilitates greater accountability of the use of public resources.
 It also means that if future rate changes affect the level of private consumption expenditure in the
economy, a similar effect will occur in the public sector, and the cost differentials will be reflected
appropriately, thereby enabling proper judgments on efficiency and allocation between public and private
sectors.
Tait, 1988 (page 78)
7.3.3 Public utilities (Tait, 1988): Usually, public utilities are provided as a government service.
Because they are publicly provided, it is often argued they should be exempted from VAT as taxing
them would simply be a transfer from one State pocket to the other. This is not wholly true, as
exempting such services from VAT would skew consumer behavior in favor of consuming such
services and would lead to a misallocation of investment in favor of the public enterprises providing
the services and, hence, penalize all producers.
 There are two further considerations that strengthen the argument for taxing utilities. Because
production is usually concentrated in few suppliers, VAT is easy to collect and cheap to administer.
Second, if supplies are by public corporations, such suppliers are often tardy in transferring surplus

revenues (if any) to the exchequer, and the monthly VAT collections are a magnificent tax handle to
transfer speedily a portion of the turnover to the State.
7.3.4 Public sector and the GST Law: As per Sec 7(2) of CGST Act 2017 -
(a) activities or transactions specified in Schedule III; or
(b) such activities or transactions undertaken by the Central Government, a State Government or
any local authority in which they are engaged as public authorities, as may be notified by the
Government on the recommendations of the Council, shall be treated neither as a supply of goods
nor a supply of services.
 Activities in Schedule III include (i) services of any Court/Tribunal, (ii) functions performed by
MPs, MLAs, Members of local bodies, (iii) persons holding Constitutional posts and (iv) Chairman/
Member/Director of a body established by Central & State Govt. or local authority.
 Interestingly, the Model GST Law, 2016 had schedule IV listing activities or transactions in
respect of which Central/State Govt. or any local Authority shall not be regarded as a taxable person
(See Annex 7.1).
7.4 Real-estate & housing: Different perspectives of the real estate and housing in the context of
VAT/GST are given below:
Box 7.4: Rational and feasible treatment under the VAT for construction industry
 The construction industry presents some peculiarities that must be analysed to select a treatment under
the VAT that is as rational and feasible as possible.
First, the construction industry produces goods that, from an economic point of view, can be considered
either for production, such as business premises, or for consumption, such as housing.
Second, construction work usually involves numerous subcontractors, who operate firms of entirely
different sizes and organizational characteristics.
Third, some of the activities of the construction industry, e.g., low-cost housing, are frequently the target
for favourable treatment by governments to accomplish certain social objectives.
Fourth, there are difficulties in defining what is meant by "construction," "alterations," "repairs and
maintenance," and "civil engineering."
 Ideally, a VAT should be neutral. If special treatment is to be given to particular forms of expenditure,
for example, low-cost housing, it is better to accomplish it by subsidies.
 It is best to subject the construction industry to the same treatment as other industries. The
purchase of new business premises should be liable to VAT as any other purchase of capital goods, that is,
should entitle the buyer to claim full credit for tax paid against his current liability. On the other hand,
sales of new properties that are not business premises are sales to final consumers, and this means the
purchaser has to pay the entire tax. Tait, 1988
7.4.1 Ebrill, 2001: Real estate is the durable good par excellence. It yields services over more
than one period, and it is commonly resold. Thus the issues that arise in its VAT treatment are
simply those that apply to all such goods, but writ large.

 The ideal treatment of durable goods would be to tax the flow of services in each period, with a
corresponding credit if the services are used as a business input. This is easy to do when the
services are traded in the marketplace and hence readily valued. Thus the leasing of real estate for
commercial purposes is often subject to VAT, with a credit to the lessee (if not in an exempt
activity). Where it is exempt, so that a risk of cascading arises insofar as the lessee is a taxpayer,
provision is generally made to allow the lessor to opt for registration and payment of the tax (and
recovery of input tax).
 In many cases, however, real estate services are self-supplied, and so have no observable market
value. For services used as business inputs this poses no particular difficulty, as the tax that the
enterprise should charge itself on those services would in any event carry an exactly offsetting
credit. Owner-occupied housing is problematic, however, because this involves final
consumption on which one would like the tax to “stick.” While attempts have been made in the
past to impute value to services enjoyed from owner-occupation for the purposes of income tax, the
experience has not been a success and is now rarely made. Thus services enjoyed from owner
occupation are—with no exception that we know of—exempt from VAT. To avoid distorting the
choice between house ownership and renting, the commercial leasing of residential property is
commonly also exempt.
 There is, however, another way in which services from owner occupation can be taxed. This is
by the “prepayment” method, which simply means levying VAT on owner-occupied properties
at the time of purchase. Since the value of the property capitalizes the value of future services, the
effect of this is to levy tax in advance of the enjoyment of those services. This, implicitly, is the
general method applied to durable goods under the VAT. It is now also the generally recommended
method for taxing residential properties.
 The question that then arises is how to tax resale of property under the prepayment method.
In principle, resales should be fully taxed to the purchaser (to capture the future services to be
enjoyed by the purchaser) and fully refunded to the seller (to give, in effect, a credit in relation to
services taxed at purchase but not enjoyed during their ownership). Net revenue would be zero.
This treatment is generally feasible, and should be adopted, for commercial properties. Given a
possible ownership period of some decades, however, this is unlikely to be practicable for owner
occupation; it is simpler—and apparently universal practice—to exempt resale of owner
occupied housing.
 Construction services and inputs should generally be fully taxed, and creditable only for
those undertaking construction as a business activity. Taxing such inputs acquired by owner-

occupiers is a rough and ready way of taxing the enhanced consumption services to which they
presumably lead.
 Taxing the sale of new residential properties does raise transitional issues at the time the
provision is introduced. Unless also applied to first sales of preexisting properties—which, though
feasible, apparently has never been done—it confers some windfall gain on owners of that initial
stock, who will now be able to sell their properties at prices reflecting the increased VAT-inclusive
price of new properties (though their benefit is mitigated by the increased house prices they will
face if they choose to purchase another residence). This measure will also be seen as disadvantaging
first-time house-buyers, a politically sensitive group in many countries. Thus Australia, for
instance, provided some relief for such buyers at the time of introducing its GST.
- More generally, exemption from VAT for housing services is frequently cited as necessary to
reduce regressivity. It is not clear, however, why housing should be favored over other forms of
“necessary” consumption. Further, and especially in developing countries, the wealthy are
frequently heavy consumers of housing relative to their incomes, as compared to the poor. In
any event, if the impact of the VAT is to increase costs of housing for the poor, it would be far
more efficient to give them direct subsidies.
7.4.2 Le, 2003 :
 The common practice is that residential buildings and rent are exempted, but office buildings are
fully taxed. Exempting residential building and residential rent is commonly practiced on the
basis of both technical and equity grounds. Technically, it is hard to impute rent values for
owner occupation: extensive information and subjective valuation are required. But, if residential
building is VAT-exempt, residential rent also needs to be exempted to eliminate any discrimination
against renting and in favor of owner occupation.
 The treatment of real estate sales is non-uniform across countries with a VAT, even within
the EU. Table 7.1, due to Conrad (1990), shows the practice in selected countries in the European
Community. Generally, resale of residential housing is VAT-exempt. Otherwise, there arises
the need to tax the purchaser and give credit to the seller; as such, the potential net revenue
collection is likely to be minimal, while it is practically complex to apply a VAT credit because the
seller may have lived in the building for many years.
 On the other hand, some may argue that at least, the original purchase of the new housing
should be taxed. However, this would increase the market price of housing: owners of old houses
would get windfall gain, while it would be unfair to the first-time home buyers. Some
countries compensate for the VAT exemption of the real estate sales by imposing various transfer
taxes, which are, in effect, the tax on turnover. The transfer taxes cascade through the sale-resale
processes but do not generate substantial revenues. From the economic efficiency perspective,
these taxes should be removed.
Table 7.1: Value added tax treatment of real estate sales in the European Community*
Country Building land New buildings Old buildings
Belgium Exempt/1 Exempt/1,2 Exempt/1
Denmark Exempt/3 Exempt/3 Exempt
France Taxable Taxable Exempt
Germany Exempt/1 Exempt/1 Exempt/1
Ireland Taxable/2 Taxable/2 Taxable/2
Italy Taxable Taxable Taxable
Luxembourg Exempt/1 Exempt/1 Exempt/1
Netherlands Exempt/1 Taxable Exempt/1
United Kingdom Exempt Zero-rated Exempt
Symbols:
1/ Sales are exempt from value added taxation but are subject to other duties and transfer taxes.
2/ Sales are taxable if certain conditions apply.
3/ Services associated with real estate (such as construction) are taxable.
 Many countries also exempt construction of residential buildings. The rationale is that if the
VAT were imposed only on the housing built through contractors, the contractors would be
disadvantaged: the market price of housing is increased, but people are expected to switch from
hiring contractors to self-building.
 Cnossen (1995) offers some broad guidelines for the treatment of the housing sector. He argues
that the consistent and neutral application of the VAT to real estates (i.e., all building activities,
forms of leasing, and sales are to be taxed at the standard rates) would be superior—on both
efficiency and equity grounds—to widespread exemption or application of preferential rates.
7.4.3 TFR, 2009: has recommended the following for real estate and housing. Details are at
Annex 7.2.
(i) GST should apply to all newly constructed property (both residential and commercial). If it is
self-used by the person who constructed it, GST should be applied on the cost of construction. If it
is sold or transferred, 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.
(ii) 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. ITC should
be allowed only in respect of input tax paid on goods and services used for maintenance. No ITC
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 be liable to GST.

- However, if the property has been constructed after the introduction of GST, GST should be
levied on the resale value and ITC should be allowed in respect of GST paid upon construction or
purchase of the property after making adjustment for inflation. If the property has been acquired by
the seller before the introduction of GST, 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.
(iii) 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.
(iv) The new regime should also be subject to the threshold exemption of Rs.10.00 lakh for
small businesses thereby eliminating the problem of excessively large number of landlords seeking
GST registration.
(v) Immovable property should also include land and, therefore, the new regime will also be
applicable to land transactions. However, where land is used for construction of a property, it
should be treated as an input. In such cases, GST paid in respect of land should be allowed as ITC
in the same manner as other inputs used in construction.
 The State Governments would continue to perform essential asset registry functions, and
enforce 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 erroneous tax policy. Therefore, States
may continue to levy a registration fee at a specific rate not exceeding Rs 1000 per transaction in
immovable property, which is merely a user charge for the IT systems etc. used in property
registration.
7.4.4 CEA Committee, 2015: has also recommended inclusion of real-estate, a major area of rent
seeking, in GST. The arguments in respect of alcohol mentioned in para 6.7.2 apply to the real
estate as well.
7.4.5 Concerns on the impact of GST on real estate:
 Impact of GST on rental real estate: Properties being rent out for residential purposes would
not be taxed under GST. However commercial properties would attract 18%GST if earning through
rent is over Rs.20 lakh annually. Moreover the increased rate and the levy under the reverse
mechanism will eventually make it costlier to take any commercial premises on rent.
 Impact of GST on under construction vs ready to move property: The benefits of investing
in under-construction properties will outweigh the benefits of investing in ready-to-move-in homes
under the GST regime. However, the effective tax on such properties would be 12 per cent as under
the new regime developers will be allowed ITC. The option of getting full ITC that developers
enjoy on under-construction projects would not be applicable on ready-to-move-in flats. This could
effectively mean higher costs for homebuyers of ready-to-move-in flats.
 Impact of GST on property prices : While the basic construction cost may come down a little,
but as the ITC is limited to 12 per cent, it will not be sufficient to bring down the fresh tax liability
to nil because of the taxes paid on other expenditures. As the input tax credit is available on
products utilised for construction, the overall tax incidence should be neutralised.
HSN Description of goods Rate
Chapter 72 Steel 18 %
2523 Cement 28 %
6802 Marble and granite 28 %
2515 Blocks of marble and granite 12 %
Chapter 68 Sand lime bricks and fly ash bricks 12 %
2505 & 2517 Natural sand, pebbles, gravel 5%
8428 Lifts and elevators 28 %
 Impact of GST On affordable housing: A comparison between the current tax regime and the
new tax regime under GST for normal real estate and affordable housing is as below –
Normal Real Estate Affordable Housing

Particulars Pre GST Post GST Pre GST Post GST
Total Tax* 5.15% 12% 0.65% 12%
ITC NA AVL NA AVL
Note: In Pre GST- Total Tax Includes, Service Tax @ 4.50% for Normal real estate and exempted for
affordable housing and VAT @ .65%
It is to be noted that this exemption is only for the ‘beneficiary-led individual house construction/
enhancement’ vertical of the PMAY and not on all affordable housing projects. This exemption
would not be available to residential complexes being built by private developers.
7.4.6 Real estate and the GST Law:

 Schedule II of the CGST Act includes following activities related to real estate to be treated as
supply of goods or services. Hence other sections of the GST laws will apply to these activities also.
- 2. Land and Building
(a) any lease, tenancy, easement, licence to occupy land is a supply of services;
(b) any lease or letting out of the building including a commercial, industrial or residential complex
for business or commerce, either wholly or partly, is a supply of services.
- 5. Supply of services
The following shall be treated as supply of services, namely:—
(a) renting of immovable property;

(b) construction of a complex, building, civil structure or a part thereof, including a complex or
building intended for sale to a buyer, wholly or partly, except where the entire consideration has
been received after issuance of completion certificate, where required, by the competent authority or
after its first occupation, whichever is earlier.
 As per Schedule III of CGST Act, Sale of land and, subject to clause (b) of paragraph 5 of
Schedule II, sale of building shall be treated neither as supply of goods or services. It implies that
second hand sale of land or building wont attract GST.
 Sec 17(3) of the CGST Act: The value of exempt supply under sub-section (2) shall be such as
may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse
charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of
Schedule II, sale of building.
 A person who is registered under GST, who gets supplies of goods or services from a person
who is not registered under GST, will have to pay GST under the reverse charge mechanism. Sec
5(4) of the IGST Act
 Entry no. 19 of the ‘Schedule of GST Rates for Services’ reads as under –
19. Construction of a complex, building, civil structure or a part thereof, 12% With Full ITC but no
intended for sale to a buyer, wholly or partly. [The value of land is refund of overflow of ITC
included in the amount charged from the service recipient]
 Entry no. 66 of the ‘Schedule of GST Rates for Services’ reads as under –
66. Services provided by way of pure labour contracts of construction, erection, commissioning,
installation, completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure
or any other original works pertaining to the Beneficiary-led individual house construction /
enhancement under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana (PMAY);
7.5 Financial Services : Different perspectives in regard to Financial Services are given below :
Items of financial services are listed at Annex 7.3A.
7.5.1 Tait, 1988 :
 Value added in banking and insurance is no less appropriate for inclusion in the VAT base than
any other service or provision of goods. Indeed, to exempt financial services from VAT excludes
from taxation a sector that is often perceived as extraordinarily remunerative, has a high visibility in
terms of its physical assets, and is seen as a bastion of traditional orthodoxy. This is especially so in
developing countries.
 The disadvantages of failure to tax the financial sector are clear: loss of revenue, loss of
information that would be generated by a tax, distortions in the economy, and loss of both real and
perceived equity. As the Central Bank of Ireland pointed out, "banks should be subject to the same
taxation regime—no more and no less favourable—as other non-manufacturing enterprises.

 However, the problems of disentangling the costs of intermediation, the sensitivity of the
financial sector to fine margins, the likelihood of encouraging (untaxed) offshore provision of
financial services (through international arbitrage and "laundering"), and the important role finance
plays in the efficient operation of a modern economy, all argue against experimental sales tax
techniques or rough and ready solutions.
Box 7.5: Quasi-VAT on financial services in Israel.
 Despite these seemingly insurmountable problems, Israel attempted to apply a quasi-VAT on
financial services using addition method: the tax was charged on profits and wages of financial
institutions and was treated as final tax—no credit was allowed; this would avoid the vicious circle
derived from the need to estimate the implicit VAT on the amount borrowed by registered firms.
 Israel used this method to tax the financial sector from 1976 (when the VAT was introduced)
through 1979. Since 1979, the tax on the financial sector has been designated as a separate and distinct
tax and, formally, is no longer part of the VAT. Several considerations led to this change.
First, since the tax cannot be invoiced to users of financial services, it cannot be taken as a credit, and
thus breaks the value added chain.
Second, if financial services were part of the VAT, credit would have to be given for financial services
exported, a difficult and complicated matter that might seriously erode the base; yet if it is not allowed it
could discriminate seriously against the profitable trade of providing financial services overseas.
Third, the calculation of the base—wages and salaries plus profits—differs sufficiently from that for the
VAT itself, that it is, appropriately, considered a separate tax. Profits for purposes of this tax must be
computed on a cash flow basis and not in the way they are defined for income tax; capital goods
purchased are fully expensed, rather than depreciated.
 In the Israeli system, no credit was given for VAT on inputs, but the tax-inclusive cost of inputs was
deductible in computing profits. The rate applicable in the Israeli system is the standard VAT rate.
Tait, 1988(p93)
 Were other countries to adopt a system similar to the Israeli one (Box 7.5), they would have the
advantage of imposing a tax on the financial sector, similar to that imposed on other service sectors,
thus improving equity, reducing distortions, and gaining revenue. The principal disadvantage is that
the tax is not integrated with the regular VAT system and does not give rise to VAT credits for
users of financial services. Cascading is created and the advantages of cross-checking and
integrated administration is lost. Also, presumably, the financial sector may be put at a
competitive disadvantage compared to overseas financial centers offering identical services.
7.5.2 Le, 2003:
 It is conceptually and practically hard to tax the financial sector using the invoice-based
credit method. One example: a bank gets a deposit at 5 percent and loans out at 15 percent.
Under a strict credit VAT, the bank has to divide the total 10 percent value added (i.e., 15%-5%)
into two parts: one is the value added generated during the transaction between the lender and the
bank; and the other is the value added attributed to the transaction between the bank and its
borrower. The apportionment is next to impossible (Box 7.6).
Box 7.6: Why do most countries exempt financial intermediation?
 Suppose, for example, that a bank pays its depositors 5 percent and charges its borrowers 15 percent.
Clearly the value added by the bank is 15 – 5 = 10 percent of deposits (less any material inputs, and
assuming too there is no risk of default). This should be taxed. If all loans were to final consumers, this
would be the end of the matter.
 Assume instead that the borrower is a registered firm. How much of the 15 should be creditable? The
standard conceptual approach on this issue has been to imagine a hypothetical “pure” interest rate at
which the lender could have lent (but without enjoying the ancillary services (clearing, etc.) offered by
the bank) and at which the borrower could have borrowed (had they been able to find suitable lenders
without the help of the intermediary).
 If this pure rate is 12 percent, for instance, then the value added provided to the borrower is 15 – 12
= 3 percent of the loan, and the remaining 12 – 5 = 7 percent is value added provided to the lender. On a
loan of $1,000 and at a VAT rate of 10 percent, the appropriate outcome is thus for the borrower to be
charged VAT of $3 and the lender VAT of $7, the total payable thus being 10 percent of the aggregate
value added on 10 percent of $1,000. These VAT payments would be creditable, in the usual way, if
lender or borrower is registered.
 It is, however, the difficulty of bringing about this outcome, which would appear to require, in
particular, identifying a “pure” interest rate, that has led most countries to exempt financial
intermediation. Ebrill, 2001
 On the other hand, the tax revenue potential in the whole process is expected to be negligible—
only the financial services to final consumers/households are taxed, whereas, the services catered to
firms are treated as intermediate inputs and hence are to be credited. Given the practical problem
and insignificant potential revenues, financial services are generally exempted, except for certain
types of fee-based services such as brokerage and safe-keeping (for example, E.U. countries).
7.5.3 Schenk, 2006:
The following are a list of principles that could be used to develop a system of taxation of financial
intermediation services:
1. VAT should be imposed on the intermediation service component of finance charges on loans,
and of interest payments on deposits, with appropriate value allocated to depositors and borrowers.
2. Subject to modifications justifiable for administrative or compliance reasons, the intermediation
services rendered by financial institutions should be subject to the same tax treatment as other
taxable goods or services, whether these financial services are imported, exported, or rendered for
domestic consumption.
3. Businesses rendering taxable financial intermediation services should receive the same VAT
treatment of their business inputs (input tax credits or deductions) on a transaction-by-transaction
basis as other businesses making taxable sales.
4. Providers and users of financial intermediation services should enjoy the same cash-flow effects
from the VAT that exist for providers and users of other taxable services.

5. The value of financial intermediation services should be taxed only once – the cascading of VAT
should be avoided. Business users of financial services should receive a tax benefit for the actual tax
component in the cost of the intermediation services if they use these services in making taxable
sales of goods or services, but not if they use these services in making exempt sales.
6. If any financial intermediation services are exempt from tax, to the extent that it is
administratively feasible, the provider of the exempt services should be subject to self-supply rules;
that is, it should not have any incentive to vertically integrate its operations in order to reduce the
non-creditable VAT on its purchases.
7. The VAT regime for financial intermediation services should be able to accommodate to changes
in the VAT rate.
7.5.4 Current approach to the financial services in India:
 Financial services in India has followed the approach of bringing virtually all financial services
within the ambit of Service Tax where the consideration for them is in the form of an Expected
Model of GST in India explicit fee. As there are no specific reasons for exempting financial
services, the same approach can be continued under GST.
 The principal reason, as per Poddar-Ahmad Working Paper, is that the charge for the services
(viz. operating and maintaining deposit accounts) provided by financial intermediaries (such as
banks and insurance companies) is generally not an explicit fee but is taken as a margin, that is
hidden in interest, dividends, annuity payments, or such other financial flows from the transactions.
 The implicit fee is the difference between the pure interest rate (i.e., the interest rate which could
otherwise be earned in the market without any banking services) and the interest actually received
by them from the bank on the deposit balance. The fee is the interest foregone. Similarly, the charge
for the services provided by banks to the borrowers is included in the interest charged on the loan. It
is the excess of the interest rate on the loan over the pure rate of interest or cost of funds to the bank
for that loan.
7.5.5 Treatment of financial services - TFR, 2009:
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 because such services as banking, brokerage, property
and casualty insurance and foreign exchange transactions are connected closely with those having
higher income and wealth. The progressive revenue objective thus dictates as wide an application of
VAT to financial services as possible. It also encourage countries to consider compensatory taxes
where an exemption must be provided and even additional ad hoc taxes for revenue purposes.
Therefore, given the progressive nature of taxation of financial services and the distortionary impact
of compensatory and ad hoc taxes, TFR recommend that the consumption of financial services
should be comprehensively taxed under the GST framework.
 TFR recognizes 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 financial services and other business services, the full taxation
method significantly enhances the tax base and also results in equal treatment of all services.
Therefore, TFR recommends that the consumption of financial services should be taxed on the basis
of the full taxation method.
 There are alternative approaches to full taxation of financial services. These are the
addition method, the subtraction method and the cash flow method. TFR recommends that the
choice of the method may be based on administrative and compliance consideration.
7.5.6 Treatment of insurance (Ebrill, 2001): The treatment of pure insurance—insurance with no
savings element—is straightforward under the cash flow VAT (Box 7.7).
Box 7.7: Treatment of pure insurance under a cash flow VAT

 An insurance company receives premiums of $100 and pays $80 (exclusive of VAT) in claims. The
tax rate is 20 percent (this being the tax-exclusive rate; that is, the rate charged on values not including
tax).
 The insurance company is liable to VAT of $20 on its premiums, but allowed a credit of $16 in
respect of the claims it pays. Thus the insurer pays net tax of $4, which is 20 percent of the value added
(in this context, the excess of premiums over claims financed by the insurer) of $20 (= 100–80). The
credit enables the insurer to send the insured a check for $96 should the insured event occur.
 If the insured is a consumer, $96 is just enough to purchase goods to the tax exclusive value of $80:
the credit included in the claim pays the VAT on the replacement goods bought. Total tax collected is
thus exactly 20 percent of value added.
 If registered for VAT, the insured takes a credit of $20 on the premium. When the claim of $96 is
received, output tax of $16 is charged, which is exactly offset by an input tax credit of $16 on the
replacement property. Total tax collected by the government is zero.
 Consistent with the logic of the invoice-credit VAT, the tax thus “sticks” only on final sales to final
consumers. Ebrill, 2001
 Outside the case of pure insurance, however, the cash flow scheme is cumbersome
administratively. Some measures can be taken to alleviate this (for example, by suspending the
payment of tax, and refunds, associated with the initial receipt of loans and deposits). But even
within the EU, where the scheme has been closely considered, there are doubts as to its
practicability. For developing countries, it seems likely to remain overly complex for some time yet.
 It should be emphasized too that it is by no means certain that bringing financial services
fully into tax will generate an increase in VAT revenues. If financial services were fully taxable,
revenue would be collected only on sales to final consumers. When they are exempt, in contrast, tax
is collected on all inputs into the sector. Which will lead to greater revenue is an empirical question.
Subjecting financial services to VAT is unlikely to be the fiscal panacea for cash-strapped
governments that it may appear to be.
7.5.7 Financial services and the GST Law: The GST law does not exempt financial services from
GST. The IGST/CGST Acts provide as follows:
 Sec 12 (12) IGST The place of supply of banking and other financial services, including stock
broking services to any person shall be the location of the recipient of services on the records of the
supplier of services:
- Provided that if the location of recipient of services is not on the records of the supplier, the place
of supply shall be the location of the supplier of services.
 Sec 12(13) IGST The place of supply of insurance services shall,––
(a) to a registered person, be the location of such person;
(b) to a person other than a registered person, be the location of the recipient of services on the
records of the supplier of services.
 Sec 17(4) CGST A banking company or a financial institution including a non-banking financial
company, engaged in supplying services by way of accepting deposits, extending loans or advances
shall have the option to either comply with the provisions of sub-section (2), or avail of, every
month, an amount equal to fifty per cent. of the eligible input tax credit on inputs, capital goods and
input services in that month and the rest shall lapse:
7.6 Treatment of small traders/businesses:

7.6.1 Small traders/businesses encounter problems in seven areas (Tait, 1988) :
(i) Records: Small traders, especially those dealing with cash sales in more or less street market
conditions, without using tills, find it difficult if not impossible to keep records of their gross
takings.
(ii) Multiple Rates: Small traders may find it difficult to keep records of gross takings and even if
they can do so, they may often find it difficult if not impossible to split their sales between the sales
liable to different rates of VAT.
(iii) Stocks: Stocks can play a disproportionately large role in their enterprises.
(iv) Provision of Services: in general, the variety and quality of services is such that the final sales
cannot be associated easily with purchased inputs.
(v) Compliance Cost: compliance costs, as a proportion of tax paid, are much higher for them than
for large businesses.

(vi) Cash Transactions : Again, small family traders frequently pay for their purchases out of the
till. No record is kept of the cash transaction, and at the end of the day it may even appear that their
sales are lower than actually occurred. This distorts the VAT record of both inputs and sales.
(vii) Self-consumption: It is difficult to enforce charging VAT on self-supplies, and the use of
fixed markups, is one way of alleviating this problem.
Box 7.8: Main features of the treatment accorded to small businesses.

Main features under the principal VAT systems are:
(i) exemption below a threshold in turnover - with or without obligation to register,
(ii) special rates system: Use of a multiple rate system to favour selected small businesses,
(iii) Equalization tax scheme - making sales to small exempt firms subject to a higher rate of tax than
the regular rate. All businesses must register for VAT, but small taxpayers are given a special
recognizable number if they qualify (correct business sector, turnover less than a certain amount, and
certain other conditions) and opt to be taxed under the "equalization tax scheme."
(iv) Simplified scheme - It consists of determination of the tax base by the tax administration on the
basis of whatever records the firm has and, if the latter are insufficient or unreliable, external criteria.
(v) Forfait- it implies an arrangement between each trader and the local tax office for determining the
amount of the traders sale by estimating tax from payroll, rent, utility bills etc. Forfait system are usually
done on the basis of trading results for a previous year, adjusted for general factors affecting all
businesses, and any factors that might have relevance only to the particular trader. Tait, 1988
7.6.2 Exempting small businesses:

 Ebrill, 2001 : It is generally agreed that the costs of complying with the VAT are likely to
include a significant fixed component, and so may bear most heavily on smaller traders. There is
again an incidence question: part of this burden may be passed on to consumers in the form of
higher prices.
- Focusing on those traders who sell directly to consumers, the operation of the threshold
conveys a double benefit on the smallest traders who remain below it: not only are they spared the
compliance burden of their competitors above the threshold, but they are also spared the
requirement to charge tax. The distributional impact of the VAT on traders as a group may thus be
rather complex: while small traders just above the threshold may suffer through a disproportionately
high compliance burden, those who are even smaller benefit by acquiring a distinct competitive
edge over taxed traders (paying tax on their inputs, like their competitors, but escaping tax on their
own value added). Thus it is far from obvious that all small traders are harmed by the VAT
(compared to, say, a retail sales tax levied on all traders, or indeed to no indirect tax at all).
- This picture is more complicated, however, in respect of traders who sell primarily to other
traders rather than direct to final consumers. While such traders avoid the requirement to charge
tax by remaining below the threshold, they must also pass on, or bear themselves, the tax that they
have been charged on their own inputs. This latter disadvantage could be avoided by registering
voluntarily for the VAT—but then the compliance costs are again incurred. Small traders wishing to
sell mainly to other registered traders can indeed be placed in a difficult position under a VAT.
- Note that even those below the threshold who sell to final consumers are still liable to pay tax on
their inputs, which is then not recovered. This ability of the VAT to reach enterprises below the
threshold by the taxation of their inputs enables the burden of the VAT to be spread more
widely and, hence, potentially, more fairly than that of other taxes. Those who should register
for the VAT but seek to evade tax by failing to do so, in particular, will be taxed under the VAT to
the extent of their taxed inputs. This quiet taxation of hard-to-tax sectors through VAT on their
inputs can indeed be deployed deliberately to impact on such sectors.
- Quite apart from the potential distortion of real economic activity is the potential scope that the
threshold creates for the avoidance of VAT by organizing production in a series of sufficiently
small enterprises. Legislation typically provides for related firms to be aggregated for the purposes
of applying the threshold, though the detection and identification of common control needed for this
purpose can be problematic. Artificial splitting of enterprises has certainly been a concern in some
countries.
Box 7.9: Poverty trap for small business

 Obviously, as soon as a small business crosses the line and becomes liable to VAT, the tax
liability will reduce profits; to earn the same profits net of VAT as he did before, the trader has to
have a large increase in turnover, which, of course, is unlikely. In the circumstances, small traders
are likely to suppress the sales figures that take them above the limit, and larger traders feel further
penalized.
 An important drawback is that larger firms feel discriminated against, and this may influence
their attitude toward voluntary compliance. (Tait, 1988, p118)
 A few countries have adopted measures to smooth the discontinuity that otherwise arises when
all activities are brought into tax once the threshold is reached: in Japan, for example, entities with
turnover above ¥30m (below which no VAT is payable) but below ¥50m (above which VAT is fully
payable) have their liability reduced proportionately. The Netherlands also provides a tax reduction
to those whose tax liability is between NLGs 2,173 and 4,150, ensuring a gradual rather than discrete
entry into a taxpaying position.(Ebrill, 2001, p115-116)
 Le, 2003: VAT tends to impose high compliance costs on small traders who generally do not
have sufficient resources to keep proper records of their transactions and to comply with accounting
rules. On the other hand, the number of small traders is huge—including them in the tax net would,
therefore, drain the limited resources of revenue administrations—but the revenue potential is
expected to be insignificant because their turnover and value added are generally low. The IMF
estimates that on average, the largest 10 percent of businesses account for at least 90 percent of total
turnover (Ebrill et al., 2001, p. 117); this implies that the administration costs incurred in taxing the
whole group of small businesses may well outweigh the potential benefits (in terms of extra tax
collection). The problem is generally resolved by setting a specific threshold, under which
businesses are exempted from the tax net. Setting threshold is complex however (Box 7.10).
Box 7.10: Registration threshold for exemption

(A) Why higher threshold :
(i) Minimizing the burden on small taxpayers would call for higher thresholds.
(ii) A high threshold also achieves social objectives because poorer households are more likely to buy
from smaller outlets (such as kirana shops).
(iii) The revenue lost by setting a high threshold may be small compared to the saving of administration
costs to the authorities (on account of sharp reduction in the no. of businesses) and compliance costs to
the taxpayer, because the potential tax base is commonly very strongly concentrated in the largest
companies.
(B) Why lower threshold :
(i) A high threshold not only risks foregoing revenues but also undermines the value added chain that is
so critical for the governance benefits of having a VAT.
(ii) Firms not registered for VAT face a non-zero effective rate of tax, because they cannot reclaim the
VAT paid on inputs.
(iii) Potential distortion that any threshold creates in the competition between those above and below it.
This will be eased by the possibility of voluntary registration (Box 7.13), but it is by no means yet
resolved whether the appropriate response to this distortion is to set the threshold lower than would
otherwise be appropriate.
(C) What criteria should be used to decide which enterprises should be exempted (or those to be
given the choice to opt out)? Turnover, value added, capital assets, numbers employed, number of
establishments, number of owners, and profit have all been used to identify the exemption limit.
 Each measure has some justification, but the most usual and the most widely accepted criterion for
exemption is turnover or sales (of course, the definition of "sales" causes some problems).
(D) Why separate lower threshold for services (Tait, 1988-p135): There are two reasons.
 Typically, the purchased VAT-liable inputs of suppliers of services are few, infrequent, and low cost.
 Second, generally, services have a much higher value-added content. The input purchases could be
too infrequent and erratic as a base; the high and maybe variable value added could create inequities in
VAT treatment between traders and over time.
 Even where services can have expensive inputs (for example, computers, restaurant kitchens), these
still tend to be infrequent and value added is still characteristically high.
 A reasonable threshold for small businesses varies across countries, depending on the stage of
development, structure of economy, capacity of tax administration, and tax culture of a particular
country. Many developing countries have weak tax administration but set too low thresholds. The
low thresholds generate unintended compliance and administration problems and ultimately
threaten the sustainability of the whole VAT system. In practice, many countries start a VAT
with a low threshold, but after some “learning by doing” period, they realize the need to adjust the
threshold to a new, and significantly higher level.

7.6.3 Determining exemption threshold (Ebrill, 2001): If it were not for the costs of
administering a VAT (incurred by the authorities) and of complying with it (incurred by taxpayers),
the best threshold would be zero: this would maximize revenue (at any given tax rate) while also
minimizing distortions of competition between firms of different size. Thus the need for some
threshold arises from the willingness to forsake some revenue in order to save on collection costs.
Box 7.11: Determining exemption threshold range

To see what this trade-off might imply for the appropriate level of the threshold, suppose that the
government values an additional $1 of revenue at $δ. Clearly one expects δ > 1, since the only rationale
for raising revenue is the belief that resources are more valuable to society in the hands of the government
than in those of taxpayers. Put differently, since taxation involves costs to the private sector additional to
those of the resource transfer itself—because it distorts economic activity—an additional $1 of revenue
should only be raised if the uses to which it is put are valued by society at more than $1. Indeed δ – 1 can
be thought of as corresponding precisely to the deadweight loss associated with the distortion of economic
behavior.
 Suppose then that such a government considers raising the threshold level of turnover, denoted z, by $1
(taking as given the rate τ at which VAT is levied). For each firm consequently taken out of the tax net,
the government loses revenue of τνz (where ν denotes value added per unit output, so that tax paid at the
threshold level of turnover is τνz) but saves administration costs of, say, A; each firm taken out of tax, on
the other hand, gains after-tax income of τνz and saves compliance costs of C.Weighting the net loss to
the government by δ and equating it to the gain to the private sector gives an optimal threshold of:
𝛿𝐴 + 𝐶
z ∗= +
𝛿− 𝜏
As would be expected, the optimal threshold is higher the more costly is administration or compliance and
the less urgent is the need for funds (the lower, that is, is δ). Clearly too it is higher the lower is the ratio
of value added to sales. All else equal, there is thus indeed a case for setting a lower threshold for more
profitable and/or labor intensive activities. Ebrill, 2001
 More important than the qualitative insights, however, are the illustrative calculations that the
simple rule in Box 7.11 allows. For OECD countries, Cnossen (1994) estimates that a well-
functioning VAT involves administration costs in the order of $100 per registrant and compliance
costs of around $500. Studies for the United States suggest a value for the marginal value of dollar
of tax revenue on the order of $1.20 to $1.50; for illustration, take δ = 1.2. Suppose too that the tax
rate is 15 percent and the ratio of value added to sales is 40 percent, the simple rule thus suggests a
threshold of about $52,000.
 One of the striking features of the rule in Box 7.11 is that it defines the optimal threshold without
reference to the underlying size distribution of firms. This is in apparent contrast to the standard
argument above. This difference reflects the importance the standard argument has attached to the
existing capacity of the tax administration. That is, the threshold is calculated not by reference to an
explicit calculation along the lines above but rather as whatever is needed to restrict the number of
taxpayers to fit some given (usually very limited) administrative capacity. This, however, is simply

the same rule in another guise; the key feature is simply that when capacity is limited the
administrative cost A is implicitly very large.
 More generally of course, it is important to recognize that administrative costs are not
exogenous: the costs of coping with each taxpayer depend on such design choices as the frequency
of audit, the nature of audit, the complexity of the tax structure, and so on.
 IMF recommendation on threshold :
Box 7.12: IMF survey on threshold range

 A recent IMF survey shows that the thresholds range from 0 (i.e., all businesses are required to
register) to $700,000 (in Singapore), and the mean threshold is $90,000 (Ebrill et al. 2001, p.115). Even
across developed countries, thresholds differ dramatically.
 For example, Denmark allows for complete exemption to businesses with annual turnover below
$1,500, whereas the exemption threshold for Japan is over $200,000 (Tait 1991, p.13).
 In addition, many countries apply different thresholds to different types of activities. For example,
producers may face a lower threshold than the one applied to traders. Ghana set the threshold at $20,000
in the first, failed VAT trial in 1995, but sharply raised it to $75,000 in the second, successful
introduction of the VAT in 1999.
 The IMF recommends that for simplicity, efficiency, and transparency of the VAT, a high
threshold be applied and that the threshold be specified uniformly for all types of activities in terms
of turnover (Ebrill et al.,2001,p.122). Countries that just start a VAT may opt to set a relatively
high threshold—in order to quench the initial anxiety among small businesses and to make the
best use of limited capacity of tax administrations—and then can lower the threshold to a level
suitable to the improved administration and to the needs for revenue mobilization. In any case,
through time with unchanged exemption limits, inflation will increase the fraction of firms
having to register.
7.6.4 Voluntary registration for small business: Most countries, but not all, allow those below
the VAT threshold to register voluntarily. Compliance costs aside, this will be in the commercial
interests of those selling to registered traders (since registration will enable them to recover tax on
their inputs, and the tax that must then be charged on output will in any event be recovered by the
purchaser) and of those selling to final consumers at a sufficiently low tax rate (so long as the tax
recovered on inputs exceeds that which has to be charged to those consumers). The zero-rating of
exports, in particular, means that all exporters will find registration beneficial. Voluntary
registration is typically seen as a means of limiting competitive distortions and avoiding inequities.
Restrictions are needed, however, to prevent companies registering to take ITC and then
disappearing before paying any positive net tax. Box 7.13 gives pros & cons of allowing voluntary
registration for small business.

Box 7.13 : Allowing voluntary registration for small businesses
 Some countries recognize that the below-threshold and hence exempted businesses bear the burden
of the tax on their input purchase and thus allow them to register voluntarily. Firms in middle stage
or selling zero-rated goods/services have strong incentives to register in the VAT net in order to be
entitled to claim for their tax credit. As a result, voluntary registration may extend the base to
capture too many small, low-turnover businesses. It may, therefore, nullify the effect of exemption
threshold and jeopardize its very purpose. On the other hand, it would make their transition to VAT
easier on crossing the threshold.
 It is interesting that experience in some countries suggests that small taxpayers seem to see benefits
in registration that outweigh the costs of compliance. Apart from the obvious benefits of receiving
net refunds when large capital purchases are made and getting credit for inputs, there is the
"avoidance of the appearance of commercial insignificance which accompanies nonregistration."
Having a VAT registration number on your invoices looks more organized and important. This is
true particularly for the professions where the absence of a registration number betrays the fact of
low turnover and when the client frequently is registered and wishes to claim a deduction for VAT
paid.
 A country like India, having an improved administration, should allow voluntary registration. In
fact Sec 25(3) of the CGST Act says "A person, though not liable to be registered under section 22
or section 24 may get himself registered voluntarily, and all provisions of this Act, as are applicable
to a registered person, shall apply to such person". Moreover, the following categories of persons
shall be required to register irrespective of this threshold (Sec 24) :
(i) persons making any inter-State taxable supply;
(ii) casual taxable persons making taxable supply;
(iii) persons who are required to pay tax under reverse charge;
(iv) person who are required to pay tax under sub-section (5) of section 9;
(v) non-resident taxable persons making taxable supply;
(vi) persons who are required to deduct tax under section 51, whether or not separately registered
under this Act;
(vii) persons who make taxable supply of goods or services or both on behalf of other taxable
persons whether as an agent or otherwise;
(viii) Input Service Distributor, whether or not separately registered under this Act;
(ix) persons who supply goods or services or both, other than supplies specified under sub-section
(5) of section 9, through such electronic commerce operator who is required to collect tax at source
under section 52;
(x) every electronic commerce operator;
(xi) every person supplying online information and database access or retrieval services from a
place outside India to a person in India, other than a registered person; and

(xii) such other person or class of persons as may be notified by the Government on the
recommendations of the Council.
7.6.5 Threshold for exemption in India: CEA Committee, 2015 has recommended revising the
threshold from 25 lakh to Rs.40 lakh for following reasons :
(i) Corporate income tax data suggests that for turnover in the Rs.25-40 lakh range, there are 3.26
lakh registered entities (0.22 corporate and 3.04 non-corporates), accounting for just over Rs.1.04
lakh crore in total turnover. The benefit cost ratio of minimizing the compliance burden relative to
the revenue foregone may need to be considered. Also, the option should be given to firms to be
part of the GST chain even if they are below the exemption threshold.
(ii) That said, the concern that reducing the threshold will raise the tax burden faced by small scale
industries (SSIs) may need to be reviewed. Under plausible scenarios, the effective burden on SSI
can actually decline, if the standard rate (currently around 25-26% in goods for the Center and the
States combined) comes down (illustrative example at Annex 3.10).
7.6.6 Should the States have different thresholds: A case is made out that the States should be
allowed to adopt different threshold limits keeping in view the size of the revenue base.
Consequently, the States with low revenue potential like the North-eastern States in particular must
be allowed to adopt a lower threshold limit to protect their revenues.
 However, since one of the objectives of providing a threshold exemption is to mitigate the
incidence of tax on the poor who generally make purchases of their goods and services from small
dealers, allowing some States to adopt a lower threshold imply would that the poor in these States
will bear the incidence of tax on their consumption unlike those similarly placed in other States. It
would evidently be inequitable. This will also have the potential to trigger tax-induced migration
from these States.
 Accordingly, the CEA Committee has recommended that the threshold exemption limit should
not only be uniform for both CGST and SGST and but also across the States. However, Sec 22(1)
of the CGST Act contemplates lower threshold (Rs.10 lac against Rs.20 lac) for Special
Category States.
7.6.7 Small traders and Compounding:
 Simplified and lump-sum schemes for small traders. Different countries may treat the below-
threshold exempt firms differently. The majority of developing countries do not apply any sales tax
to these firms. Some may, however, subject them to turnover or sales tax or some type of
presumptive tax. The revenue loss from nonregistered firms can thus be reduced. Such schemes
may also offer both firms (compliance burden) and the authorities (administrative burden)
substantial savings, while reducing both evasion opportunities and competitive distortions.
 The CEA Committee has recommended that small dealers with annual aggregate turnover of
goods and services between Rs.10 lakh to Rs.40 lakh may be allowed to opt for a compounded levy
of one percent, each towards CGST and SGST. However, no input credit should be allowed
against the compounded levy or purchases made from exempt dealers.
 Table 7.2 gives a summary of the current and proposed threshold for exemption and
compounding.
Table 7.2 Thresholds and compounding-Current and Proposed
Current Proposed (both Goods & Services)
Exemption Threshold Compounding
Goods Services Both goods & Exemption Compounding & rates
services Threshold
1.5 crore; 10 lakh Not permissible
(exports and Permissible, (i) not less
exempted 75 lakh* (combined than 1% for manu-
Center goods excluded with no exemp- facture, (ii) 2.5% for
from threshold) tions, and aggrega- making supplies referred
5-10 lakh Not Permissible in ted at the level of to paragraph 6(b) of
States applica- some States for legal entity) Sch.II and (iii) 0.5% in
ble some items and at other cases.
varying rates
*Sec. 10(1) of the CGST Act, has provided exemption threshold at Rs.50.00 lac, but also enables Govt. to
enhance it to upto Rs.100.00 lac. The GST Council has presently fixed it at Rs.75.00 lac.
7.7 Tax rate for Precious Metals:

7.7.1 Precious metal and TFR, 2009: TFR, 2009 recognized that certain high value goods
comprising of (i) gold, silver and platinum ornaments; (ii) precious stones; and (iii) bullions are
prone to smuggling due to high tax incidence thereby generating negative externalities in terms of
social and economic disorder. TFR, 2009 has therefore, recommended that dealers in such high
value items may, subject to the threshold exemption but without the ceiling of Rs. 40 lakh, also be
allowed to opt for the compounded levy of one percent, each towards CGST and SGST.
7.7.2Precious metals and the CEA Committee, 2015 : The top decile accounts for over 63 per
cent of total gold expenditure (Table below).And this is a serious under-estimate because NSS is
very ineffective at capturing the expenditure of the very rich. Cumulatively, the top 2-3 deciles
account for an overwhelming share of total gold consumption and therefore appropriate nearly all
the 'subsidy' given to gold.
 A second reason for favouring gold and precious metals could be to promote savings. At a time
when there were few savings instruments, it may have made sense to incentivize the purchase of
gold via a lower rate in order to promote savings. Gold far from being a desired savings

Table 7.3 :
Source: The CEA Committee, 2015

instrument has become a problem, with large gold purchases and imports becoming a cause of
macro-economic instability. Recognizing this, the government has recently tried to wean consumers
away from gold via the gold monetization and gold bond schemes. It would be perverse and
contradictory to use taxes to incentivize the holding of gold, and undo what the government is
trying to do via these gold schemes. At the very least, tax policy should be neutral on consuming
precious metals.
 The CEA Committee observes that as the grounds of both equity and effectiveness of
targeting, on grounds of consistency of policy, gold should be taxed at the standard rate (bullion can
be exempted from GST). Instead, it is taxed at 1%, dramatically highlighting the incongruity of the
existing policy. Moreover the more rational gold taxation can be, the lower will be the standard rate
which will be critical in creating a buoyant and compliance friendly GST. As shown in Table 5.6
(para 5.5.2), the standard rate could come down to as much as 16.9 per cent if gold is taxed at 12
(6+6) per cent.
 There might be concerns that increasing taxes on gold will lead to increased smuggling and
evasion. This is a legitimate concern. But there is some evidence on how serious the impact of
increased taxes might be. Import duties have been increased several times in the recent past on gold.
These too are tax increases. In Figure 7.1 below, imports of official gold since 2011-12 is plotted
and the timing of import duty increases is highlighted. The Figure clearly shows that there is no
serious deleterious impact on gold imports in response to tariff increases. To some extent, there will
be declines in consumption and imports if taxes increase, but these are modest and manageable. The
notion that there will be rampant evasion and smuggling if the taxation of gold is increased is not
borne out by data. Number for 2015-16 is annualized.

Figure 7.1.: Gold imports in India (in MT)
Import duty
increased Import duty
from 6% to increased from
Import duty Import duty 8% to 10% w.e.f.
8% w.e.f.
1100 increased from increased from 05.06.2013 13.08.2013
2% to 4% w.e.f. 4% to 6% w.e.f.
17.03.2012 21.01.2013
1000
900
800
700
600
500
400
Number for 2015-16 is annualized

7.7.3 GST Council rate for precious metal : However, precious metal have been put under tax
bracket of 3% by the GST Council.
7.8 Leasing of Goods and Agents (Tait, 1988) :

7.8.1 Leasing :
 Leasing or hiring goods, instead of buying them outright, is increasingly popular (often for tax
advantages quite independent of the discussions about VAT). As far as VAT is concerned, the
position is clear: leasing is the provision of a service and as such the entire charge (amortization,
interest, and leasing administration fee) should be liable to VAT. If a registered trader leases an
aircraft, a computer, or an earth-moving equipment, say, then the full rental is liable to VAT
provided the supply and consumption of the service occurs within the territory of the country
concerned.
 Difficulties occur where the lessor and the lessee are in different countries. Many VAT Acts
(including those in the EC) used to focus on where the lessor had his principal fixed establishment.
Thus, in the EC, if an Italian company (VAT at 18 percent) decided to sell and lease back its new
computer to a leasing company elsewhere in the EC, the VAT on the rental could be anything from
12 percent (Luxembourg) to 25 percent (Ireland). This is unreasonable and the EC's Tenth Directive
changed the basis of tax to the lessee's member state. This means the same tax rate applies no matter
where the rental company is established or where the lessee uses the equipment. This seems to be a
practical solution for most VATs.
7.8.2 Agents: Most VAT acts recognize that, in an arrangement using an agency, the supply is
made by or to the principal and not the agent. However, where the agent is registered, he should

be required to charge or account for tax on his commission. This can be no trivial matter,
particularly in developing countries. Sometimes traders have tried to siphon off profits by
interpolating a main agent between a manufacturer and distributors. However, whether or not the
agent is acting in the name of either party, he presumably issues invoices and collects proceeds on
behalf of the agency; if he acts on his own behalf, but on the instructions of and for the account of
his principal, then the agent should be chargeable on the difference between his output and input
tax.
 The agency agreements between the parties may be written or oral or may be implicit in their
general relationship. However, the agent should be required to maintain sufficient records (that is,
tax invoices) to enable the authorities to trace the principal on whose behalf the transaction was
undertaken.
 The essence of any act or regulation should be to ensure that, whatever commercial
arrangements may exist, and whatever legal agreements there may be between manufacturers and
main agent or main distributor, the VAT charge extends to the full selling price by the main
agent or distributor. Also, his commission must be included either in the price invoiced by the
manufacturer (or the main agent acting on his behalf), or must be charged separately as represented
by the difference between output and input tax on the main agent's or main distributor's own VAT
returns. If one party does not wish the other party to know its identity, then the agent can receive
and issue invoices between them as though he were the principal and the agency situation need not
be disturbed (his input tax will equal his output tax).
 Commodities markets (either physical or future) constitute a supply of goods; commodities
brokers' services are chargeable to VAT. If the commodity trade is large and is conducted mainly
on behalf of offshore dealings, then special arrangements can be made to zero rate such
transactions. This is the so-called Black Box arrangement which argues that trades between
registered traders in the London commodity markets are zero rated.
7.8.3 Leasing and Agent and the CGST Law:
 Leasing of land and building : As per schedule II of CGST Act following activities w.r.t lease
and transfer shall be treated as supply of goods or supply of services:
(a) any lease, tenancy, easement, licence to occupy land is a supply of services;
(b) any lease or letting out of the building including a commercial, industrial or residential complex
for business or commerce, either wholly or partly, is a supply of services.
 Agent and the CGST Act : Relevant provisions are

- Sec. 2(5) “agent” means a person, including a factor, broker, commission agent, arhatia, del
credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on
the business of supply or receipt of goods or services or both on behalf of another.
- Provisions of Sec 7(1,a). Sec 18(3) and Sec 85(1) have reference to lease also.
7.9 Second hand goods (Tait, 1988) :

7.9.1 Can used goods be subject to VAT: There is general agreement that used goods sold
privately cannot possibly be made subject to VAT. The position is not so clear regarding registered
business to unregistered person trade in secondhand goods. Excluding these goods from coverage
forces vendors who sell both new and used goods to distinguish between these two categories, and
this may create increased compliance costs. In addition, these vendors will be able to evade tax by
reporting sales of new goods as sales of used goods. On the other hand, making business sales of
secondhand goods taxable introduces discrimination against dealers vis-a-vis direct, unregistered,
person-to-person sales.
7.9.2 Disadvantages of not taxing used goods: It has been reported that this disadvantage has
become particularly severe in some countries for goods such as automobiles, cameras, and
television sets. It would not be difficult for sellers, who see this as discrimination against them, to
evade tax by operating through (untaxed) individuals. One possible solution, recommended by an
EC Commission, would be to tax only the dealers' margins. This is the effect of the British scheme
for secondhand works of art and antiques. "A registered dealer must keep a stock book . . . of all
articles which he buys and intends to sell under the scheme, showing their purchase and selling
prices or details of other methods of disposal. . . . When the sale takes place the amount by which
the selling price exceeds the buying price is treated as a tax-inclusive margin. . . . The tax due must
be entered in the dealer's stock book and record of output tax and included in his tax return to
Customs and Excise."
7.9.3 Procedure for bringing such goods into VAT: Should it happen, peradventure, that the
dealer is obliged to sell the item for less than he paid, there is no VAT liability. The same procedure
could be used for the secondhand sale of other items such as automobiles, scrap, electronic
equipment, and jewelry. However, such transactions are frequently made for cash and no records
are kept. Perhaps simply requiring the dealers to register for VAT pulls them into the monitoring
mechanism and helps reduce evasion.
7.9.4 Second hand goods and the GST Law:
 CGST rule 32(5) Where a taxable supply is provided by a person dealing in buying and selling
of second hand goods i.e., used goods as such or after such minor processing which does not
change the nature of the goods and where no ITC has been availed on the purchase of such goods,
the value of supply shall be the difference between the selling price and the purchase price and
where the value of such supply is negative, it shall be ignored: Provided that the purchase value of
goods repossessed from a defaulting borrower, who is not registered, for the purpose of recovery of
a loan or debt shall be deemed to be the purchase price of such goods by the defaulting borrower
reduced by five percentage points for every quarter or part thereof, between the date of purchase
and the date of disposal by the person making such repossession.
In exercise of the powers conferred by Section 11(1) of the CGST Act, 2017, Notification
No.10/2017-Central Tax (Rate) exempts intra-State supplies of second hand goods received by
a registered person, dealing in buying and selling of second hand goods and who pays the central
tax on the value of outward supply of such second hand goods as determined under rule 32(5) of the
CGST, 2017, from any supplier, who is not registered, from the whole of the central tax leviable
thereon under section 9(4) of the CGST Act.
Box 7.14: Treatment of second hand goods in some countries.

 In Korea and, as a general rule, in Latin America, secondhand goods sold in the course of trade
by registered traders are taxable where such goods would be taxable if new. The treatment is,
however, not the same for all categories of goods.
 In Uruguay, for example, sales of secondhand furniture are chargeable on the full price, while
sales of secondhand automobiles are charged on 10 percent of the selling price. In the case of a
trade-in, VAT is chargeable on the full selling price.
 In Colombia, the only secondhand sales taxed under VAT are those of automobiles and, even
then, only if sold through a dealer; the VAT is levied on the intermediaries' markup.
 New Zealand, in its VAT Act, defines secondhand goods as "goods that have previously been
used, or acquired for use, or held for use, by any other person." This definition includes houses and
buildings. Registered traders account for VAT on their sales in the usual way; however, they can
claim a national input tax credit on the purchase price of the goods (at the rate appropriate to the
goods when sold new). This allowance means that, in effect, only the value added by the dealer
(including the real estate broker) is subject to VAT. Tait, 1988
7.10 Services performed abroad (Tait, 1988) :

7.10.1 Practice in the EC: and most other European countries with a VAT is to zero rate the
following services when they are performed abroad:
• Services relating to land and buildings overseas, • The hire of transport for use overseas, • Services
relating to goods and activities overseas, • Work on temporarily imported goods, • Services for
procuring exports of goods.
7.10.2 Provision in the GST Law: There is no specific provision related to services performed
abroad under the GST laws. However, services performed outside territory of India does not come
under the jurisdiction of Indian Govt., and hence not taxable.

Chapter 8
Constitutional, Legislative and Administrative aspects of GST
(An uncomfortable reality - In developing countries, tax administration frequently is tax policy)
8.1 Pre-requisites for smooth implementation of GST:

8.1.1 Legal, administrative and institutional requirements of the GST regime : Any GST/VAT
regime will require following action:
 Drafting of laws and regulations
 Formulation of procedures and design of the forms
 Reform of administrative systems and organization
 Computerization and modernization of administrative methods
 Training and reorientation of staff
 Taxpayer education
 Creation of institutional infrastructure.
8.1.2 Timeline for implementing VAT/GST: When a country has made the decision to implement
a VAT/GST, significant attention should be paid to the administrative preparations. Based on the
consensus that the VAT/GST is a self-assessed, accounts-based tax, the implementation timetable
typically recommended varies from 18–24 months; this includes approximately 15–20 months for
the preparation of the VAT organization; the design of forms and computer systems supporting self-
assessment procedures; and taxpayer education and staff training programs (Ebrill, 2001). Action
by various stakeholders, and interfaces between stakeholders have to be frozen, and agreed to by all
before implementation can commence. Therefore, the deadline for rolling out GST in India had to
be shifted several times and finally to 1st July, 2017. Even then many relaxations had to be made in
the compliance frame-work.
Box 8.1: Experience of introduction of VAT in Ghana:
It would appear from Annex 8.1 that key factors for the success of the 1998 re-introduction of VAT in
Ghana were:
(i) Strong, clear political commitment from government leaders,
(ii) Good preparation for the tax administration (selecting experienced tax administrators, and allowing
sufficient time to prepare for the VAT registration and collection),
(iii) Reasonably low introductory rate, high registration threshold,
(iv) Well-designed public education campaign, and
(v) Good timing for the VAT introduction (viz. not during inflation) Le, 2003
8.2 Need and objectives of the CAA, 2016 i.e. Constitution (101st) Amendment Act, 2016:
8.2.1 Need for amending the Constitution: Till the 101st Amendment, the Constitution provided
for clear delineation of power to tax between the Centre and the States (para 2.1.1). While the
Centre was empowered to tax services and also goods up to the production stage, the States had the
power to tax sale of goods. The States did not have the powers to levy a tax on supply of
services while the Centre did not have power to levy tax on the sale of goods. The Constitution
did not vest expressed power either in the Centre or the States to levy a tax on the ‘supply of goods
and services’. Moreover, the Constitution did not empower the States to impose tax on imports. It
was therefore, essential to have Constitutional Amendments for empowering the Centre to levy tax
on sale of goods and empowering the States to levy service tax and tax on imports and
consequential issues.
8.2.2 Objects and reasons behind the Constitutional Amendment: The statement of objects and
reasons says "GST shall replace a number of indirect taxes being levied by the Union and the State
Governments and is (i) intended to remove cascading effect of taxes and (ii) provide for a
common national market for goods and services. The proposed Central and State GST will be
levied on all transactions involving supply of goods and services, except those which are kept out of
the purview of the GST."
8.2.3 Salient features of the CAA, 2016: The CAA, 2016 confers simultaneous power upon the
Parliament and the State Legislatures to make laws governing GST. The salient features of the GST
regime as per the statement of objects and reasons are as follows:-
(a) Subsuming Central indirect taxes and levies such as (i) Central Excise Duty, Additional
Excise Duties, Excise Duty levied under the Medicinal and Toilet Preparations (Excise Duties)
Act, 1955, (ii) Service Tax, (iii) Additional Customs Duty commonly known as Countervailing
Duty, Special Additional Duty of Customs, and (iv) Central Surcharges and Cesses so far as they
relate to the supply of goods and services;
(b) subsuming State taxes (i) Value Added Tax/Sales Tax, (ii) Entertainment Tax(other than the
tax levied by the local bodies), (iii) Central Sales Tax (levied by the Centre and collected by the
States), (iv) Octroi and Entry tax, (v) Purchase Tax, (vi) Luxury tax, (vii) Taxes on lottery, betting
and gambling; and (viii) State cesses and surcharges in so far as they relate to supply of goods and
services;
(c) Dispensing with the concept of ‘declared goods of special importance’ under the Constitution;
(d) Levy of Integrated Goods and Services Tax (IGST) on inter-State transactions of goods and
services;
(e) Levy of an additional tax on supply of goods, not exceeding one per cent in the course of inter-
State trade or commerce to be collected by the Government of India for a period of two years, and
assigned to the States from where the supply originates; (removed by Rajya Sabha in July, 2016).
(f) Conferring concurrent power upon Parliament and the State Legislatures to make laws governing
GST;
(g) Coverage of all goods and services, except alcoholic liquor for human consumption, for the levy
of GST.
(h) Petroleum and petroleum products, would not be subject to the levy of GST till a date notified
on the recommendations of the GST Council.
(i) Compensation to the States for loss of revenue arising on account of implementation of GST for
a period which may extend to five years;
(j) Creation of GST Council to examine issues relating to GST and make recommendations to the
Union and the States on parameters like rates, exemption list and threshold limits.
8.3 Legislative steps:

8.3.1 GST Law: GOI circulated in Nov., 2016 modified Model GST (CGST and SGST) Law Box
8.2 gives its chapter headings. The CGST Law has since been enacted as the CGST Act, 2017 by
Parliament, and the SGST Acts by the State Legislatures. Chapter-wise Sections of the CGST
Act, 2017 are given at Annex 8.2. Provisions relating to Levy of and Exemptions from tax, Time
& Value of supply, Tax invoice, Transfer of ITC, Advance Ruling, Transitional provisions etc. are
of particular interest. There is no significant change (Model Law, 2016 vs CGST Act, 2017) in the
context of the sections overall, but there are changes in the chapter plan.
Box 8.2 Chapters under the Model GST Law(Nov., 2016)*
I. Preliminary : XVI. Audit,
II. Administration : XVI. Demands and recovery,
III. Levy of, and exemption from tax XVIII. Inspection, search, seizure and arrest,
IV. Time and value of supply: XIX. Offences and penalties,
V. Input tax credit, XX. Prosecution and compounding of offences,
VI. Registration, XXI. Appeals and revision,
VII. Tax invoice, credit and debit notes, XXII. Advance ruling,
VIII. Returns, XXIII. Presumption as to documents,
IX. Payment of tax, XXIV. Liability to pay in certain cases,
X. Transfer of input tax credit, XXV. Miscellaneous provisions,
XI. Refunds, XXVI. Repeal and saving,
XII. Accounts and records, XXVII. Transitional provisions,
XIII. Job Work XXVIII. Schedule I
XIV. Electronic commerce, XXIX. Schedule II
XV. Assessment, XXX. Schedule V
*Model GST law, 2016 contained both the CGST and SGST models
8.3.2 IGST Law: Similarly, GOI circulated in Nov., 2016 draft IGST Act, which has since been
enacted by Parliament in 2017. The IGST Act, 2017 contains: Preliminary, administration, levy and
collection of tax, determination of nature of supply, place of supply of goods or services or both,
refund of integrated tax to international tourist, zero-rated supply, apportionment of tax and
settlement of funds and miscellaneous.

8.3.3 Power of Central/State Govt. to make Rules: The Central Govt. has notified rules under
Sec. 164 of the CGST Act, 2017 for carrying out the provisions of this Act.
 The power to make rules include the power to give retrospective effect to the rules or any of
them from a date not earlier than the date on which the provisions of this Act come into force. A
contravention thereof shall be liable to a penalty not exceeding ten thousand rupees.
8.3.4 Power to make Regulations: Section 165 of the CGST Act, 2017 gives powers to the Board
(CBEC) to make Regulations consistent with the Act and the Rules made thereunder to carry out the
provisions of the Act.
8.4 CAA, 2016 and the GST Council: Sec 12 of the CAA, 2016 provides for the GST Council.
8.4.1 Composition of the GST Council: The GST Council consists of:
(a) Union Finance Minister (as Chairman),
(b) Union Minister of State in charge of Revenue or Finance as a member, and
(c) Minister-in-charge of Finance or Taxation or any other Minister, nominated by each State
government.
8.4.2 Functions of the GST Council: Sec 12(4) of the CAA, 2016 provides that the GST Council
shall make recommendations to the Union and the States on the following. While doing so, it shall
be guided by the need for a harmonized structure of GST and to the development of a harmonized
national market for goods and services:
(a) the taxes, cesses and surcharges levied by the Union, the States and the local bodies which may
be subsumed in GST;
(b) the goods and services that may be subjected to, or exempted from GST;
(c) Model GST Laws, principles of levy, apportionment of Integrated GST and principles that
govern the place of supply.
(d) the threshold limit of turnover below which goods and services may be exempted from GST;
(e) the rates including floor rates with bands of GST;
(f) any special rate or rates for a specified period, to raise additional resources during any natural
calamity or disaster;
(g) special provision with respect to the Special Category Status States;
(h) any other matter relating to GST, as the Council may decide.
8.4.3 Quorum : The Quorum is one half of the total number of Members of GST Council. All
decisions of the GST Council is to be made by three-fourth majority of the votes cast; the centre
shall have one-third of the votes cast, and the States together shall have two-third of the votes cast.
8.4.4 Major decisions of the GST Council: till June, 2017 are given at Annex 8.3.

Box 8.3 : Dispute Settlement Authority (DSA)
 The CAB, 2014 stipulated that the GST Council would decide about the modalities to resolve
disputes arising out of its recommendations. The 2014 Bill as passed in Lok Sabha accordingly did
not provide for DSA. In fact the Select Committee on GST had observed that "If any DSA is created
separately it will certainly hamper the functioning of the GST Council in general and Legislatures
(Parliament and States) in particular. Empowered Committee (EC) had taken the shape of arbitration
center. Here disputes related to them or between two or many States are raised, deliberated and settled
amicably without any arbitration charges or fees borne by the disputant States. The GST Council may
decide the mechanism for resolving disputes arising out of its recommendations."
 However, the Standing Committee on GST recommended Constitution of a Dispute Settlement
Authority.
 Current status on DSA: Sec. 12(11) of the CAA, 2016 stipulates that the GST Council shall
establish a mechanism to adjudicate any dispute between GOI and the States arising out of the
recommendation of the Council or implementation thereof.
8.5 Taxation jurisdiction of the Central/State Governments for GST:

 TFR, 2009 recommended that the jurisdiction between the Central 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 criteria which is
considered reasonable so that the compliance and administrative burden is minimized.
 Technical Group constituted by EC (2013) recommended turnover for the jurisdiction of the
Centre and the States as follows:
(i) >Rs.1.5 Cr. for GOI (which presently is the threshold for excise duty).
(ii) ≤Rs.1.5 Cr > 25Ɩ – States.
(iii) ≤ 25Ɩ – Exempted.
 GST Council has approved the division of audit and assessment responsibility between the
Central and the State Governments. The State authorities would control 90 per cent of the assessees
with annual turnover of less than Rs.1.5 crore, while the Centre will control the remaining 10 per
cent. Assessees with a turnover above Rs.1.5 crore will be administratively controlled by the Centre
and the States in equal measure.
 IGST Act, 2017: Power to levy and collect IGST (i.e. GST levied on inter-State supply of
goods & services) vests with the Centre to ensure that a single coordinating agency administers it
and the credit chain is not disrupted (see para 4.4.1). By a special provision in the law, however, the
States can be empowered to collect IGST. Power under the IGST Act shall also be cross-
empowered on the same basis under the CGST and SGST Acts with few exceptions.

8.6 Administrative structure (Ebrill, 2001):
8.6.1 Central Govt. level: A critical issue is who should run the GST considering how the structure
of tax administration has evolved and would evolve (Box 8.4).
Box 8.4: How the structure of Tax Administrations has evolved

Tax Focus Function Focus Taxpayer Focus
Registration
Accounting
Functions Sales Corporate Personal Taxpayer Education Large Medium/ Individuals
Tax Tax Income Collection Business Small
Tax Audit Business
Appeals
8.6.2 Should GST/VAT be administered by the Customs Department: The most often cited
example of VAT administration by a customs department is that of UK. Historical accident is the
main reason for this. As explained by Tait (1988), “the UK case is unusual. The customs
administration was assigned responsibility for the operations of the purchase tax that was introduced
during World War II, when the tax administration was overburdened and when the Customs was
less busy than usual. Because of this accident of timing, the Customs gained in experience in
dealing with the purchase tax, and when the time came to introduce the VAT, this experience was a
deciding factor in allocating responsibility for VAT administration.”
- Beyond historical accident, two main factors could justify the allocation of VAT administration to
Customs. The first is the significance of VAT collected on imports for total VAT revenue (which
frequently amounts to between 40 to 60 percent of total VAT collections in developing countries
and transition economies). The second is the experience of customs officials with physical control
of goods and issues such as the classification and valuation of goods.
- However, these factors are of less relevance in a modern tax system. As an economy grows, the
share of VAT associated with the domestic formal economy will typically increase. More important,
the new challenges faced by a VAT administration have little to do with the collection of VAT on
imports (which does not require skills different from those of collecting customs duties). These
challenges include establishing new registration and education systems, controlling the credit
mechanism, processing refunds, and developing new audit programs, all areas in which domestic
tax administrations usually have an advantage.
- In addition, although experience in physical controls may be useful, effective VAT
administration requires a broader range of skills to administer a self assessed, accounts-based tax.
These skills are usually found in the internal tax administration whose staff are trained in auditing

financial transactions and accounting records. Indeed, in countries where the VAT was initially
administered by the customs and excise department, experience has shown that their staff, whose
skills focus on physical control, classification, and valuation of goods, are not best suited to the
requirements of a VAT administration.
- Table 8.1 clearly shows that except a few countries, VAT is administered by the domestic
(income) tax department.
Table 8.1: Examples of organization for the VAT Administration
VAT Administered VAT Administered VAT Administered
by Domestic Tax Dept. by Customs Department by VAT Department
European Union 10 1 2
Other European countries 14 1
1
BRO 15
Latin America 18 1 3
Africa 18 1 5
Asia-Pacific 13
Middle East 1 1 2
North America 1
Total (108 countries) 90 4 14
1
Source: Ebrill, 2001 Baltic states, Russia, and other states of the former Soviet Union.
8.6.3 Should Income Tax Deptt. administer the GST: Administering the VAT in the department
responsible for administering domestic taxes has several advantages:
• Integration of the revenue departments can underpin a more effective tax administration, in which
a function-based organization can be implemented from the top (headquarters) to the bottom (field
offices). Such an organization enhances efficiency and reduces compliance burdens. For example, a
single registration system and a single accounting unit to process all returns and payments for all
taxes will simplify taxpayers’ obligations and reduce tax administration costs. Similarly, an
integrated collection enforcement unit for all outstanding taxes helps improve effectiveness, as the
same accounts are likely to be in arrears for several taxes.
• The self-assessment embodied in a VAT requires close coordination between the VAT, income
tax, and customs administrations, including automatic cross-checking of data (for example, on
turnover, purchases, imports, and exports) and implementation of effective enforcement programs
based on both physical and accounts based controls.
• Integration can also facilitate a major improvement in income tax procedures and systems. For
example, modern collection and enforcement procedures designed for the VAT should also be used
for personal income tax and the corporate tax. In the same way, the registration thresholds under the
VAT can assist the income tax administration by providing a basic approach to classify taxpayers
(for example, simplified income tax systems can be used for taxpayers below the VAT threshold,

while compliance work can be directed primarily toward those above the threshold to maximize
income tax performance).
 Integrating the VAT and income tax administrations can also energize taxpayer education and
income tax enforcement (both in dealing with noncompliance with filing and payment, and in
pursuing underreporting of sales, use of fake invoices, as well as under or overpricing). Clearly,
implementation of effective VAT enforcement and audit programs helps improve income tax
compliance.
8.6.4 Advantages and drawbacks in brief of the different models: The above discussion and Box
8.5 show clear preference for GST to be in the domestic tax administration (Decision of Govt.
of India to entrust GST administration to CBEC hopefully is an interim step).
Box 8.5: Advantages and Drawbacks of the different models for VAT Administration
1. VAT administered by the customs and excise department:
 Advantages: Facilitates exchange of information on imports and exports
 Drawbacks: Customs and excise procedures and systems are not suitable for VAT administration.
Customs staff may not have appropriate skills. Impedes coordination of VAT and income tax
administration.
2. VAT administered by a separate department:
 Advantages: Allows a clean break with existing procedures when the VAT is implemented. Helps focus
on VAT administration.
 Drawbacks: Establishing a new revenue department in a developing country with weak administrative
capacity and scarce skills requires a strong political commitment. Staff of the existing revenue departments
often resist the establishment of a new department. Increases the fragmentation of the tax administration and
impedes coordination of the VAT, income tax, and customs operation. Increases tax administration cost.
3. VAT administered by the domestic tax administration (particularly personal and corporate income
taxes):
 Advantages: Provides for a more modern, effective (function-based), and efficient tax administration.
Facilitates coordination between VAT and income tax administration, and therefore, supports better VAT
and income tax compliance.
 Drawbacks: Risks insufficient focus on the specifics of the VAT administration.
Ebrill, 2001
8.6.5 State Government level: The State Commercial Taxes Deptts. already have full structures
within their jurisdictions. Their personnel would however, need to be trained intensively in both the
knowledge and orientation for a system of self-assessment, facilitation and 'intelligent' enforcement.
8.7 Administrative systems and procedures: The key novelty in adopting a VAT is often less in
the nature of the tax itself than in the methods of its administration and its modernizing influence
more generally.

Box 8.6: Industry' Expectations from GST
(i) Ease of compliance and low compliance cost. (vii) Automation of processes by way of
e-registrations, e-returns, e-payment.
(ii) Simple business processes
(viii) Less requirement of automation initially
(iii) Seamless flow of information between
supplier, buyer and tax administration. (ix) No requirement of verifications during inter-state
movement of goods.
(iv) Minimal ITC refund cases.
(x) Zero-rating of supplies to exporters.
(v) Exemptions instead of exclusions from GST.
(xi) Administrative efficiency in the case of
(vi) Seamless flow of input credit. assessment and adjudication.
ICAI, 2015
8.7.1 Harmonization of Procedures: An efficient administrative system and harmonization of

procedures & processes across the States as well as the Centre can ensure seamless coordination
among all stakeholders and facilitate smooth transition to the GST regime. This includes items such
as the taxpayer registration system, taxpayer identification numbers, data requirement, design of tax
form, tax return, tax reporting periods and procedures, assessment/reassessment and appeal, tax
payments and refunds, invoice requirements, cross-border trade information system, audit
procedures, system of tax rulings and interpretations, etc. GST Rules, 2017 cover this aspect.
Box 8.7: Core elements in implementation of GST

Implementation of VAT involves the same core elements (viz. registration, periodic returns, audit,
enforcement) as does any other self-assessed tax -
(i) identification and registration of those required (or choosing) to pay the tax i.e. purpose of
registration, exemption limit for registration, preparatory work on registration, unit of business for
registration, penalty for nonregistration, keeping the register up to date persons who may elect to
register, VAT registration numbers, application forms for registration for VAT, checking VAT forms by
Local Tax Officers, re-registration and de-registration,
(ii) collection and processing of amounts spontaneously remitted with periodic returns like Invoices, the
retail invoice – Cash Registers and other schemes, payments and refunds, Balance resulting from (a)
export operations, (b) use of multiple rates, (c) Zero-rated goods, (d) Purchasers of equipment (e)
temporary conditions,
(iii) audit to ensure accuracy of returns like Relationship to Income Tax Audit, physical checks,
definition of Audit, type of Audit, Audit Management Activities, Outline procedures for Audit of VAT
at the district level, General approach, The first VAT audit, Subsequent Audits, Number of Audits, Audit
Selection Criteria, and
(iv) enforcement action on delinquent payers like Routine process, Computer selection, Audit manuals.
Tait, 1988
8.7.2 Major features of the proposed registration, return filing and payment procedures are
given at Annex 8.7. GSTN would make the whole thing user friendly, online and seamless (see
para 8.13.1) with minimal human intervention.

8.8 Self-assessment (Ebrill, 2001):
8.8.1 Effective self-assessment system: The VAT can play a pivotal role in developing modern
methods of tax administration, based on effectively monitored voluntary compliance. Under a
system of voluntary compliance (meaning that taxpayers comply with their basic tax obligations
without the intervention of a tax official) taxpayers self-assess, that is, they calculate and pay their
own tax liabilities. They must complete their returns and submit them with their payments to the tax
administration. If they do not, the tax administration detects this failure and takes appropriate
enforcement actions, including applying the penalties specified in the law. Returns are then subject
to the possibility of audit.
- Current thinking based on evidence of the past decade is that, if true self-assessment cannot be
implemented, the country is not ready for the VAT and should defer its plans (Box 8.8).
Box 8.8: Conditions for an Effective Self-Assessment System

The conditions that support a self-assessed tax system include:
• Simple tax laws. Complex laws can significantly increase compliance costs, reducing tax compliance.
A “simple VAT law” would provide for limited exemptions, a single positive rate, a zero rate limited to
exports, and a high threshold.
• Services to taxpayers. The tax administration should assist taxpayers in meeting their obligations.
Taxpayers should receive clear information describing their obligations, the taxes applicable, the dates
when taxes are payable, etc. They also need to be informed of changes to the laws and should have easy
access to information and tax forms.
• Simple registration, filing, payment, and refund procedures. Tax forms should be readily available to
taxpayers and procedures easy to comply with.
• Collection enforcement. Prompt detection of taxpayers who fail to submit tax returns, and/or pay tax
due, is critical to improving tax compliance, especially regarding large taxpayers.
• Audit. Taxpayers need to know that if they fail to comply with the tax laws, they face a reasonable risk
of being detected. The tax administration should have sufficient resources to audit a reasonable
percentage of taxpayers to increase the risk of detection of noncompliance.
• Penalties. Non-compliers need to know that if they are detected, penalties will be strictly applied.
Moreover, tax fraud should be prosecuted through the criminal justice system.
• Access to independent review of decisions. Taxpayers should have access to an appeal process to protect
their rights. When they disagree with the results of an assessment, they should have access to judicial
processes for the resolution of disputes with the tax administration. Ebrill, 2001
8.8.2 Why is self-assessment so important for VAT administration?: One way to appreciate
why self-assessment is important to an effective VAT administration is to consider the impact of not
having self-assessment such as:
 Taxpayers’ costs. Filing and payment procedures without self-assessment typically require
taxpayers to carry out several steps in the tax office and at the bank. While such time-consuming
procedures may sometimes be accepted by enterprises for annual tax liabilities, it is a serious
drawback when tax returns and payments are due monthly, as is usually the case for the VAT.
Moreover, these alternative filing procedures often call for more complicated tax return forms and
supporting documents (such as customs bills of entry, copies of purchases and sales invoices, or
lists of invoices).
 Tax administration’s effectiveness. Burdensome procedures would also have a negative impact
on the tax administration’s effectiveness. Absent self- assessment, tax officers need to deal each
month with substantial paper work—processing returns, issuing payment notices, and reconciling
liabilities and payments for all registered taxpayers. Failure to complete these tasks in time may
jeopardize monthly revenue collections. In an attempt to cope with this paperwork, countries have
typically embarked on ambitious computerization programs to speed up the processing of returns
and issuance of tax notices—this is not an effective use of computer resources.
 Enforcement. With self-assessment, tax officials can concentrate on dealing with the minority of
taxpayers who do not comply with their tax obligations, while, absent self-assessment, most tax
administration resources need to be allocated to paper work. Moreover, when liabilities are assessed
each month by the tax administration, tax officials are often reluctant to apply penalties (levying of
which would imply that the assessment process had not been conducted smoothly and effectively).
In some cases, it would not seem appropriate to discuss an assessment during a field audit when
liabilities have already been agreed to by both the tax administration and the taxpayer during the
monthly assessment.
Box 8.9: Self-assessment and Corruption
 Experience in countries without self-assessment shows that there is usually no difference between the
liabilities reported by large taxpayers on their returns and the liabilities calculated and mentioned in the
payment notices prepared by the tax administration. These amounts may differ somewhat in the case of small
taxpayers, but this appears mainly to reflect the incentive to negotiate the amount of tax due in the absence of
self-assessment procedures. One explanation of both the reluctance to apply penalties and the support of
procedures involving regular discussions between taxpayers and tax officials is the opportunities that result
for collusion, particularly in countries where the salaries of civil servants are low. In some surveyed
countries, concern over corruption was a major reason for the implementation of a self-assessment
system, with modern filing and payment procedures through banks.
8.8.3 Self-assessment and the CGST Act, 2017: Sections 41 to 80 are regarding self-assessment.
Some important Sections are :
Sec 2(11): “assessment” means determination of tax liability under this Act and includes self-
assessment, re-assessment, provisional assessment, summary assessment and best judgment
assessment.
Sec 41(1): Every registered person shall, subject to such conditions and restrictions as may be
prescribed, be entitled to take the credit of eligible input tax, as self-assessed, in his return and such
amount shall be credited on a provisional basis to his electronic credit ledger.

Sec 49(2): The input tax credit as self-assessed in the return of a registered person shall be credited
to his electronic credit ledger, in accordance with section 41, to be maintained in such manner as
may be prescribed.
Sec 59: Every registered person shall self-assess the taxes payable under this Act and furnish a
return for each tax period as specified under section 39.
Sec 60(1): Subject to the provisions of sub-section (2), where the taxable person is unable to
determine the value of goods or services or both or determine the rate of tax applicable thereto, he
may request the proper officer in writing giving reasons for payment of tax on a provisional basis
and the proper officer shall pass an order, within a period not later than ninety days from the date of
receipt of such request, allowing payment of tax on provisional
basis at such rate or on such value as may be specified by him.
Sec 73(11): Notwithstanding anything contained in sub-section (6) or sub-section (8), penalty under
sub-section (9) shall be payable where any amount of self-assessed tax or any amount collected as
tax has not been paid within a period of thirty days from the due date of payment of such tax.
8.9 Transitional Issues (Tait, 1988):

8.9.1 Educating public and traders: Introduction of GST should involve some sensitive initiatives
on the part of the authorities to educate traders and the public about the new tax and to respond with
understanding to the concern of taxpayers. The first problem concerns the public's perception of the
GST particularly impact on prices. Then there are problems about registration, educating traders
about GST, and the precise transitional treatment of inventories, capital goods, contract prices,
installment prices, and various other small but worrying transitional matters.
(i) Documentation and Publicity - Senior officer should be responsible and his activities should
include the following : (i) prepare a short explanatory booklet on GST, (ii) prepare in collaboration
with the technical staff, the staff guide and manual, (iii) arrange for talks on radio and television and
for press, (iv) organize lectures and talks to public and professional groups. The Coordinating
Office would have at least three functions: 'to explain the tax reform; to raise the level of public
understanding; and to coordinate the efforts of the various organisations involved in the GST
education programme.
(ii) Registration - The VAT taxpayers must register before the tax starts. Registration "churns" as
new taxpayers enter the list and firms disappear (see para 8.7.1) and small taxpayers seem to see
benefits in registration that outweigh the costs of compliance (see Box 7.6).
(iii) Educational visits:
 General: In most countries now using VAT, it was found that however extensive the overall

publicity may have been, the general run of traders were puzzled by the implications of VAT and
were in need of direct guidance on how to comply correctly rather than having any intention to be
dishonest. To ensure that traders fully appreciate their obligations and rights under the VAT,
educational visit by officials from the local or district VAT office is necessary.
Box 8.10: Invoices, records and accounts aspects require particular attention
During the educational visits, officials should -
(1) Confirm that the firm has established a proper system of recording particulars of all invoices of
purchases and sales.
(2) Unless the firm already has a satisfactory bookkeeping system in operation, provide a copy of the
official accounts book for VAT if one is issued.
(3) Ensure that whatever system is adopted in relation to VAT it will provide for:
(a) Accounting for tax on all taxable supplies, including taxable self-deliveries.
(b) Proper recording of tax paid on taxable purchases and services and that only inputs that are properly
deductible are claimed.
(c) Correct calculation of apportionment between taxable and exempt elements in the case of partly
exempt activities.
(d) A system under which claims for repayment can be effectively checked by the local tax office.
(e) A VAT account being properly set up and maintained.
(f) Any distinction between current VAT obligations and year-end obligations (reconciliations).
 Premises: The VAT frequently replaces sales taxes that have been incorporated in stocks and
capital. If the tax replaced is, say, a single-stage tax, calculation of the tax content of inventories is
relatively easy. If the tax replaced is a cascade turnover tax, then broad estimates must be made.
8.9.2 Transitional provisions in the CGST Act, 2017: Sections 139 to 142 are about the
transitional issues. The main provisions are as follows:
 Sec 139(1) : Migration of existing taxpayers to GST
 Sec 140(1): Amount of CENVAT credit carried forward in a return to be allowed as input tax
credit
 Sec 140(2): Unavailed cenvat credit on capital goods, not carried forward in a return, to be
allowed in certain situations.
 Sec 140(3): Credit of eligible duties and taxes in respect of inputs held in stock to be allowed in
certain situations.
 Sec 140(5): Credit of eligible duties and taxes in respect of inputs or input services during transit.
 Sec 140(3): Credit of eligible duties and taxes on inputs held in stock to be allowed to a taxable
person switching over from composition scheme.
 Exempted goods returned to the place of business on or after the appointed day
 Sec 141(1): Inputs removed for job work and returned on or after the appointed day.

 Sec 141(2): Semi-finished goods removed for job work and returned on or after the appointed
day.
 Sec 141(3): Finished goods removed for carrying out certain processes and returned on or after
the appointed day.
 Sec 142(2): Issue of supplementary invoices, debit or credit notes where price is revised in
pursuance of a contract.
 Sec 142(3): Pending refund claims to be disposed of under earlier law.
 Sec 142(4): Refund claims filed after the appointed day for goods cleared or services provided
before the appointed day and exported before or after the appointed day to be disposed of under
earlier law.
 Sec 142(6): Finalization of proceedings relating to output duty or tax liability.
8.10 Advance Ruling and the CGST Act, 2017: Provisions of the CGST Act relating to the
Advance Ruling would go a long way in removing many uncertainties and reducing litigation.
8.10.1 Subjects stipulated for advance ruling: As per Sec 97(2), the question on which the
advance ruling is sought shall be in respect of –
(a) classification of any goods and/or services under the Act;
(b) applicability of a notification issued under the Act having a bearing on the rate of tax;
(c) the principles to be adopted for the purposes of determination of value of the goods and/or
services under the Act;
(d) admissibility of input tax credit of tax paid or deemed to have been paid;
(e) determination of the liability to pay tax on any goods and/or services under the Act;
(f) whether applicant is required to be registered under the Act;
(g) whether any particular thing done by the applicant with respect to any goods and/or services
amounts to or results in a supply of goods and/or services, within the meaning of that term.
8.10.2 Situations in which ruling pronounced are binding: As per Sec. 103, the advance ruling
pronounced by the Authority or, the Appellate Authority under this chapter shall be binding only -
(a) on the applicant who had sought it in respect of any matter referred to in section 116(2) of the
application for advance ruling;
(b) on the jurisdictional tax authorities in respect of the applicant.
(2) the advance ruling referred to in sub-section (1) shall be binding as aforesaid unless the law,
facts or circumstances supporting the original advance ruling have changed.
8.11 Preparatory action by the Businesses:
8.11.1 Experience in China: Based on experience in China, E & Y (2016) has suggested that

future VAT/GST payers should consider the following actions:
(i) Conduct a VAT reform impact study to identify areas of the business impacted and needs for
conversion
(ii) Review and revise existing business processes to become “VAT-equipped” suitable to the
specific needs and constraints of the company
(iii) Review and revise business contracts from the VAT perspective
(iv) Carry out pricing analysis with service suppliers and customers
(v) Test and revise accounting systems from a VAT perspective and analyse all Golden Tax
System (GTS) needs
(vi) Review financial forecasts and make necessary adjustments
(vii) Review staff profile and make sure that staff resources are adequate in terms of manpower,
knowledge and experience throughout the VAT reform process and afterward
(viii) Provide necessary training workshops for relevant departments
(ix) Consult with professionals when necessary
8.11.2 Issues for the businesses: ICAI, 2015 has listed the following issues for the businesses:
- Pricing & Costing Margins - Treatment of excluded sectors
- Supply-chain management - Transaction issues
- Change in IT systems - Tax compliance, self-policing
- Treatment of tax incentives
8.11.3 Administrative and Compliance Costs (Ebrill, 2001) : High collection costs are not
necessarily a sign of a bad tax, but may simply reflect inefficient or corrupt administration. Nor are
low administrative costs (even relative to revenue raised) necessarily a sign of a good one, since one
could, for instance, raise substantial revenue under a VAT with low administration costs by
assigning few resources to the payment of refunds. Indeed such is the potential role of the VAT as a
catalyst for organizational and cultural change both within the tax collection agencies
(spearheading, for instance, the modern use of information technology and the development of audit
methods) and among taxpayers (developing a culture of record-keeping) that there is an important
sense in which a successful VAT is in some circumstances bound to involve substantial collection
costs, especially in its early years. A simple structure with a single rate, few exemptions,
reliance on self-assessment, and with a high threshold appears conducive to relatively low
collection costs.

Box 8.11: Cost of compliance
 Most businessmen do not actually compute what it costs them to comply with government
requirements; they just know it costs money and they resent it. This includes the wages and salaries and
fringe benefits of full- or part-time workers involved with the tax, including accounting, clerical, and sales
staff. The overhead costs (office space, depreciation, utilities, and so on) of the employees should also be
costed, as should computer hardware, software, time, other equipment and supplies, and any outside
advice contracted.
 Of course, the real costs of all this is what these people and productive capacity could have earned the
company had they not been dealing with VAT; but usually it is just their market cost that is computed.
 Against these costs, there may be offsetting benefits. Smaller firms may be obliged to keep
better records than they would have kept without VAT. This may improve their management and
decision making. Some businesses may gain a cash-flow benefit. Usually traders collect more VAT
on sales than they pay on purchases. They will, therefore, enjoy a cash-flow benefit that will vary
according to their relative sales and purchases, their commercial credit periods, and the proportion
of annual VAT payments held on average throughout the year.
 This implicit tax may be to some degree passed on to consumers in the form of higher prices,
though insofar as small traders naturally tend to have relatively little market power much of the
burden will remain with them. There is thus the possibility of some regressive impact. Not
surprisingly, small traders are among the most vociferous opponents of the VAT.
8.11.4 Role of the Chartered Accountants :
(i) Restructuring of Business System (vii) Record keeping
(ii) Tax planning (viii) Negotiations with suppliers
(iii) Advisory services (ix) Personal Representation
(iv) Audit of books of account (x) Appellate work
(v) Certification work (xi) Authoring documents on GST.
(vi) Procedural Compliances
8.12 VAT performance measures: The performance of a tax must be gauged by more than the
revenue it raises. It must also be assessed in terms of the efficiency and fairness with which it
raises that revenue, and the costs incurred by government and taxpayer in doing so. Nonetheless,
revenue needs are often a key concern in the introduction of a VAT.
8.12.1 Concepts of tax buoyancy and elasticity: can generally be used to evaluate the
performance of the VAT or any other type of tax or the whole tax system.
8.12.2 Tax Buoyancy vs. Tax elasticity:
 Tax Buoyancy (TB) is defined as the ratio between the real growth rate of tax revenues
[GR(TR)] and the real growth rate of GDP or GNP [GR(GDP)]. The data on revenue collection
used in estimating tax buoyancy incorporates the impact of any discretionary changes in the tax
rate or base or both during the reporting period i.e., TB = GR(TR)/GR(GDP).
 Tax Elasticity (TE) is defined in the same way as tax buoyancy. However, the data on revenue
collection used in estimating elasticity excludes the impact of any discretionary changes during
the reporting period i.e., TE = [(GR(TR) excluding impact of discretionary changes in tax rate or
base or both]/GR(GDP).
 Thus, TB measures the efficiency of both underlying tax structure and discretionary changes,
whereas, TE measures the efficiency of the fundamental tax structure. In general, the VAT/tax
performance is considered to be satisfactory if the buoyancy or elasticity is greater than or equal to
one: in this case, the VAT/tax collection keeps up with the growth of the economy.
8.12.3 Diagnostic tools for measuring in particular the VAT performance (Ebrill, 2001):
include Efficiency ratio (E) and C-efficiency ratio (detailed discussion in para 5.7).
 Efficiency ratio (E) is defined as the share of the VAT in GDP divided by the standard
VAT rate. E of, say, 30 percent, implies that if the standard VAT rate is increased by one
percentage point, the shares of the VAT revenues in GDP is expected to increase by 0.3 percentage
point. In general, the higher the ratio E, the better the performance of the VAT. The IMF survey
shows that small islands and members of EU have the most effective VAT systems: (at 48 and 38
percent respectively), while the worldwide average was 34 percent.
 'E' is an imperfect and, even misleading, statistic. First, there exist problems in measuring
GDP, especially in countries with relatively large informal sector. Second, in general, the GNP-
typed VAT(Table 1.2)—where only intermediate inputs are exempted from the base, and hence
there exists some degree of cascading—tends to improve E. But for economic efficiency, the
consumption-typed VAT(Table 1.2)—which can get rid of the cascading effect if the tax is properly
applied—is actually more desirable.
 C-Efficiency is a more reliable diagnostic tool than 'E". “C-efficiency” ratio, defined as the
ratio of the share of VAT revenues in consumption (rather than GDP) to the standard rate. The
appeal of this is that it is normalized by the benchmark of a uniform tax on all consumption: such a
tax has a C-efficiency ratio of 100 percent. Any other value—higher or lower—indicates deviation
from a single rate tax on all private consumption. Zero-rating of some item of consumption, for
example, would tend to a C-efficiency ratio of below 100 percent; on the other hand, the inclusion
of investment in the VAT base, or a break in the VAT chain resulting in the taxation both of final
consumption and some of the constituent intermediate goods, will tend to result in C-efficiency of
over 100 percent.
- Of course a highly “imperfect ”VAT could happen to score 100 percent: extensive zero-rating of
final consumption might be offset in revenue terms by a failure to pay refunds promptly. Thus a

C-efficiency ratio of 100 percent is a necessary but not sufficient condition for a VAT levied at
a single rate on all consumption.
- The key difference between the efficiency (E) and C-efficiency ratios is that the former is
normalized by reference to an income-type VAT and the latter to a consumption type VAT.
8.12.4 Revenue Performance (TFR, 2009) :
 VRR is affected by both the policy decisions – over the base and the number of rates – and the
compliance levels. 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= 𝑎 𝑎 𝑎 𝑎 * (1−𝐸 ) * (𝐶 𝑎 )
Standard rate
The product of the two terms [W 𝑎 𝑎 𝑎 𝑎 *(1− Exemptions)]
Standard rate
denotes the “Policy efficiency ratio” and the term (𝐶 𝑎 ) denotes the “Compliance
efficiency ratio”.
8.12.5 Policy vs Compliance gap (Keen 2013): Applying a decomposition of VAT revenues (as a
share of GDP) to the universe of VATs across countries over the last twenty years, it emerges that
improvements have been driven much less by changes in standard rates than by changes in ‘C-
efficiency’. Decomposing C-efficiency into a ‘policy gap’ (in turn divided into effects of rate
differentiation and exemption) and a ‘compliance’ gap (reflecting imperfect implementation),
results pieced together for EU members suggest that the former are in almost all cases far
larger than the latter, with rate differentiation and exemptions playing roles that differ quite
widely across countries.
8.12.6 Efficiency and C-efficiency ratios of some countries: The distribution of the E and C-
efficiency ratios by regions is shown in Table 8.2. As one would expect, since consumption is less
than GDP, C-efficiency is on average greater than the efficiency ratio (E) ratio: 58 percent rather
than 35 percent. Indeed, in several cases, C-efficiency exceeds 100 percent. The C-efficiency ratio
also varies more widely and in that sense may prove more informative.
- More important, the two efficiency ratios can convey quite different impressions. Consider, for
instance, the measured efficiency of the VAT in New Zealand, which is often held up as a model
VAT, and that in Brazil, where there was incomplete crediting of tax on investment goods, so
expanding the base relative to a consumption base. The New Zealand VAT has a regular efficiency
ratio (E) of about 65 percent, and so scores well below the 77 of the Brazilian VAT. But New
Zealand has a C-efficiency ratio of 103 percent, close to the benchmark of 100 percent. Brazil, on

the other hand, has a C-efficiency ratio of around 122 percent. Thus a comparison of C-efficiency
ratios signals the relative merits of the two more accurately than does a comparison of the usual
efficiency ratio (E).
Table 8.2: Efficiency Ratios by Region (Percent)
Sub- Asia and Americas EU(Plus Central North Small
Saharan Pacific Norway & Europe Africa & Islands
Africa Switzerland and BRO Middle East
Efficiency ratio 27 35 37 38 36 37 48
C-efficiency 38 58 57 64 62 57 83
ratio
8.12.7 Calculation of VRR by TFR, 2009 for India: is given in Table 8.3.
Table 8.3 : Computation of VAT Revenue Ratio (VRR) under 'Flawless' GST*(2009)
Sl. Description Unit Amount
A Private Final Consumption Expenditure Rs. in crs 2605859
B Government Final Consumption Expenditure Rs. in crs 479099
C Gross Fixed Capital Formation (Household Sector) Rs. in crs 435689
D Gross Fixed Capital Formation (Land) Rs. in crs 429260
E Potential GST Base (A+B+C+D) Rs. in crs 3949907
F Actual Tax Base Rs. in crs 3125325
G VAT Revenue Ratio (F divided by E) Nos. 0.79
H Standard Rate in percent 12.00
I Weighted Average of Statutory rates in percent 12.00
J Weighted average of Statutory rates as a ratio of Nos. 1.00
Standard
K Amount of Exemption** Rs. in crs 206830
L Impact of exemption [K divided by (F+K)] Nos. 0.062
M Policy Efficiency Ratio [I – L] Nos. 0.938
N Compliance Efficiency Ratio [G ÷ M] 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.
8.13 GST Network (GSTN)
8.13.1 What is GSTN: The GSTN is a unique and complex IT System Project which seeks to
establish a uniform interface for the taxpayer and a common and shared IT infrastructure between
the Centre and the States. Integrating the erstwhile 36 disparate systems, which were at different
levels of maturity would have been too complex. Annexure 8.5 gives an idea of varying level of
VAT IT system across a few states i.e. prior to GSTN. GSTN would enable all States to get the
desired IT capability/support, which is crucial to the success of the GST regime.
 Besides, GSTN provides a robust IGST settlement mechanism amongst the States and the
Centre. This is possible only with a strong IT infrastructure and service backbone which enables
capture, processing and exchange of information amongst the stakeholders (including taxpayers,
State and central government, accounting offices, banks and RBI).

 The ambit of GSTN could be appreciated from its 'Mission' statement (Box 8.13).
Box 8.13: Mission of GSTN
1. Provide common and shared IT infrastructure and services to the Central and State Governments, Tax
Payers and other stakeholders for implementation of GST.
2. Provide common Registration, Return and Payment services to the Tax payers.
3. Partner with other agencies for creating an efficient and user-friendly GST Eco-system.
4. Encourage and collaborate with GST Suvidha Providers (GSPs) to roll out GST Applications for providing
simplified services to the stakeholders.
5. Carry out research, study best practises and provide Training and Consultancy to the Tax authorities and
other stakeholders.
6. Provide efficient Backend Services to the Tax Departments of the Central and State Governments on
request.
7. Develop Tax Payer Profiling Utility (TPU) for Central and State Tax Administration.
8. Assist Tax authorities in improving Tax compliance and transparency of Tax Administration system.
9. Deliver any other services of relevance to the Central and State Governments and other stakeholders on
request. Source:-GSTN Website
 Figure 8.1 below captures the key features of GSTN at a glance. Annex 8.6A describes briefly
the GSTN features. Annex 8.6B describes the registration process.
Figure 8.1: GST Network
TAX PAYER CGA Pr CCA/CBEC

nd
Download challan with CPIN Get details from GSTN on 2 day
e-Treasuries e-PAO
GSTN
with
multiple Reconciles the challan
Gateways Updated master data
information to GSTN
Accounting
After completion of
TaxAuthority
payment flow of
Centre Mapping challan with

authority
Inform relative tax authority jurisdictional PAO
about payment of tax
Direct link to payment mode Reports daily consolidated credits
& debits to each Govt &
S1 Accounting Authorities
Internet NEFT/RTGS
OTC
Banking
S2 R
B CAS,RBI
I Luggage file Nagpur
S3 Help desk
Each Bank have one help desk of each state to serve as GST help desk
RBI e-kuber
RBI e-kuber monitors, consolidate luggage file then debit and credit to the account of Centre &
States.

8.13.2 Non-Govt. Company for GSTN:
 In view of the sensitivity of information at the disposal of GSTN, the Empowered Group
recommended that the Government should retains strategic control over GSTN through measures
such as (i) control over the composition of the Board; (ii) mechanisms of special resolution and
shareholders agreement; (iii) induction of Government officers on deputation; and (iv) agreements
between GSTN and Governments. The Government shareholding at 49 per cent (the Centre –
24.5% and the States collectively – 24.5%) would far exceed that of any single private institution.
This Structure brings flexibility of private sector with strategic control of the government.
 The Centre and the States have accordingly jointly registered in March, 2013 GST Network
(GSTN) as a not-for-profit, non-Government Company. A critique of the same is given in Box 8.14.
 After roll out of the GST, the revenue model of GSTN would consist of user charge to be paid
by the stakeholders. It would thus be a self-sustaining and financially viable entity.
Box 8.14: Critique of GSTN as a non-Govt. Company

Significant points raised by Sri Subramanian Swamy in a letter to PM regarding GSTN are :
(i) Private companies which are controlled by foreign shareholders are holding major shares i.e. 51
percent in GSTN. The Centre & the States together 49 percent of shares. GSTN being a “not-for-
profit organisation”, why should private profit making entities have any stake.
(ii) Effort should be made by those who generate data i.e. the Central and the State Government data
processing can be handed to CBEC (Outsourcing confidential assessment & activities to private
sector is not desirable)..
(iii) GSTN never got security clearance, a mandatory requirement, from Home Ministry.
(iv) Heavy remuneration is being given for GSTN employees that any Government officer has never
got in history.
8.13.3 Payment Process: GSTN rolled out the registration module on November 8, 2016 to on
board taxpayers registered under VAT, service tax, central excise and other taxes to be subsumed in
GST. Payment of taxes has started taking place using one challan for all types of taxes which is
prepared on the GST portal. Once challan is created with GSTIN, name of taxpayer, amount under
various tax heads and sub-heads etc., the taxpayer has following two options to pay the tax. He can
use Net-banking facility out of 25 authorised banks or print the challan and take it to an authorised
bank for payment over the counter (OTC). The OTC payment can be up to 10,000 in a month. The
taxpayer can also use NEFT/RTGS from any bank operating in India. The money gets deducted
from the account of the taxpayer and gets transferred to RBI though the bank. No tax money ever
comes to GSTN in any manner.
8.13.4 GSTN to reduce compliance burden: GSTN has crafted a series of services and
technological tools to ensure that paying taxes and filing returns becomes convenient for the last
common denominator. Checking of claim of input tax credit (ITC) is one of the fundamental pillars

of GST, for which data of business-to -business (B2B) invoices have to be uploaded and matched.
The invoice level data can be directly entered on the portal by the taxpayer. In case the number of
B2B invoices is higher, he can use free offline tool developed by GSTN which imports data from
Excel sheet and converts it into a json file which is then uploaded on the GST portal.
 GSTN has already released template of Excel sheet in which taxpayers can keep the business
data at invoice level. The tool can pull 19,000 line items from Excel sheet to generate a 5 Mb file.
The tool can be used multiple times to upload data for creating GSTR-1.
 For those taxpayers who have lakhs of invoices and they want one-stop shop for end-to-end
functionality, GSTN has empaneled GST Suvidha Providers (GSPs). The GSPs are going to provide
accounting services, inventory and reconciliation services and facility of direct upload into GST
system(see para 8.13.5). The common GST portal created and managed by GSTN will do this
matching on the basis of invoice level data filed as part of return by all taxpayers.
 Similar exercise will be done for interstate supplies where goods or services will move from
the state of origin to the state of consumption and so will the taxes. The claim of IGST and its
utilisation will be settled based on returns filed at the common GST portal. GSTN will create and
maintain the information on IGST based on returns of taxpayers. This data will be used for
settlement of funds between Centre and States.
 The common GST portal will be the single interface for all taxpayers from any part of the
country. Only in case where a taxpayer is picked up for scrutiny or audit, he will interface with
the respective tax authority. For all other cases, which is expected to be around 95%, the common
GST portal will be the only interface taxpayer. The way it has been conceived and devised, GST
portal would assist significantly the objectives making India one single, albeit large, market.
8.13.5 GST Suvida Providers (GSPs): GSTN has selected 34 IT, IT enabled services and financial
technology companies, to be called GSPs (list available on GSTN Website). The GSPs (see Figure
8.2) would (i) develop applications for taxpayers interacting with the GSTN, (ii) provide innovative
and convenient methods to taxpayers and other stakeholders in interacting with the GST Systems
from registration of entity to uploading of invoice details to filing of returns. For services provided
by the GSPs, See Box 8.15.
 There will be two sets of interactions, one between the App user and the GSP and the second
between the GSP and the GST System. App provider and GSP could be the same entity. Another
version could be where data required in a format directly goes to GSP-GST Server. Figure 8.2
gives the most generic case of GSPs:.

Box 8.15: GST IT ecosystem
 With respect to the GST IT ecosystem, taxpayers can be divided into three broad categories,
namely:
1) Users with standalone or networked systems that are not connected to the Internet
2) Users with applications with API interfaces such as Tally, SAP, Oracle, Ramco ERP, Microsoft ERP
and many more.
3) Users with applications that are in the cloud and can work in both offline and online mode, have
well-defined API based architecture, and use latest technologies.
 Users in the first category will necessarily need a third party (GSP/ASP) to help them upload invoice
data, file returns, etc., generated from their accounting software. However, many in the other two
categories will prefer to have GST Access in a user-friendly enriched form through the GSP/ASP
network, even though they may be in a position to directly consume APIs in the form provided by
GSTN.
 Specific Services
As for specific services, after receipt of raw data from the taxpayer, GSPs either themselves or with the
help of ASP partners shall provide the taxpayers with the following services:
(i) Compile invoice wise data from the business units.
(ii) Upload invoice wise sales register (supply data) in GSTR-1 within 10 days from the end of the
month. (iii) Download purchase data, i.e., inward supplies (receipts or purchase) in the form of draft
GSTR-2 from the GST Portal. The draft GSTR-2 will be automatically created based on the GSTR-1
filed by corresponding suppliers.
(iv) Cross-match purchases made with those downloaded from the GST portal. After reconciliation with
the books and draft GSTR-2, upload the final GSTR-2. Reconciliation of the purchase register and data
downloaded in the form of GSTR-2 from the GST portal will be carried out by the ASP for the benefit of
taxpayer.
(v) The GST Portal will then generate the GSTR-3, based on the GSTR-1 and GSTR-2.
 Other dealers, including casual dealers and those opting for the composition scheme, will also be
required to file returns. Source : avalara.com
Fig 8.2 : GSP Architecture
Source: GSTN WEBSITE
8.13.6 Developing Software: To support the States, GSTN has prepared (i) necessary software for
front-end modules which would include Registration and Returns, and also (ii) back end processing
modules like assessment, audit, etc. for the States. In case the States want to develop their own
software for the backend modules, they are free to do so.
8.13.7 Tax leakage and GSTN: Robust GST network would benefit the States and the Centre by
reducing leakages through fraud detecting tools such as matching input tax credit, data mining and
pattern detection and also enable risk based scrutiny by tax authorities. Fraud detection would
happen through matching, e-returns and data missing as follows :
(i) Matching : Fraudulent bills, Improper ITC.
(ii) Electronic returns : Fraudulent use of ‘exempt’ rules, False payment proofs.
(iii) Data mining: Unrecorded sales, Misuse of composition method, Wrongful application of lower
tax, Under-invoicing and Non-existent dealers.
 Computation of figures, cross verification, back end checks of input tax credit documents, etc.
will be done on 'real time' basis.
(a) GSTN reconciles the challan details and appends RBI e-scroll number,
(b) Accounting authorities (AAs) of the Centre & the State doubly reconcile the challan received
from RBI & GSTN on the basis of CPIN.
(c) AAs provide CIN wise payment details to respective tax authorities for deptt. reconciliation.
(d) Tax authorities update master data to AAs for mapping challan with jurisdictional PAO.
8.13.8 GSTN and role of stakeholders: The major components of GSTN to be implemented by
various stakeholders is listed in Table 8.3.
Table 8.3 : Action points
Owner Component
Taxpayer - User registration (PAN – based)
- File returns
- Tax payments
GSTN Portal - User registration (PAN – based),
- Acceptance and Consolidation of returns,
- Challan reconciliation
- Matching of Input Tax credit
- Dash board and MIS
- Helpdesk and facilitation Centers
Tax Authorities - Assessment, audit, and enforcement
- Refunds
- Dispute resolution
- Helpdesk and facilitation Centers
Banks and RBI - Tax payment and reconciliation
Accounting Authorities - Reconciliation
Source: ICAI, 2015 and Nilekani Report.

Chapter 9
VAT/GST evasion and fraud
(You 'guard' the branches and I pilfer the 'fruits')
9.1 Causes of tax evasion: Greed or frustration including annoyance with the compliance costs
may tempt one to evade taxes.
 Nobel laureate Gary Becker and others have pointed out that tax evasion is empirically correlated
with five factors: tax rate, detection probability, level of punishment, unemployment rate and
dissatisfaction with the government.
Box 9.1: Nature and causes of VAT evasion
 The frequency of evasion under each heading differs according to each country's enforcement and
according to the particular quirks of VAT legislation. (a) Numerous rates will invite evasion by
misspecification; (b) generous provisions for suspending VAT liability for imported raw materials
may encourage the diversion of goods on to the domestic market. (c) Field audits that are known to be
infrequent will tempt the use of "manufactured" false invoices.
 The proportions in the United Kingdom for 1985/86 offense cases were 73 percent for failure to
furnish returns, 6 percent for failure to pay tax, and 21 percent for other forms of fraudulent evasion.
 The Korean study shows that for the two years 1980 and 1981, the largest penalties were associated
with (i) invoices for VAT liability or credit, and that (ii) delayed submissions of invoices were twice
as costly as non-issuance and non-submission. These results suggest that better collection and
enforcement to trace deliberate fake invoices were important. It is also interesting to note that
nonregistration continued to be a major problem in Korea four years into the VAT.
 Also see Table 9.1 for UK. Tait, 1988
 Public attitudes toward taxation in general and VAT in particular, are important. A U.K.
survey showed that 70 percent of the sample did not consider it "morally wrong" to pay a trader in
cash who volunteered not to charge VAT and 65 percent appeared to consider it acceptable behavior
to take cash for work performed to evade VAT or income tax.
 In another survey of those who tried to evade tax, on a scale of one (never) to ten (always), the
Irish scored 3.35, compared with a European average of 2.64; moreover, the sample indicated that
the younger the person the more likely he is to take a casual view of tax evasion (the index for the
18-24 age group was 4.05, compared with 2.11 for those over 75).
 The IMF's research has shown that tax compliance has been effective in countries that have
followed the troika of third party information, a focus on hard-to-tax segments, and the use of blunt
tools that broaden the tax base.
9.2 VAT is less vulnerable to evasion and fraud:

9.2.1 Fractional nature and self-recovering features of VAT: The question is not whether the
VAT is vulnerable to fraud and evasion—it obviously is—but whether it is more or less vulnerable
than other taxes. The fractional nature and self-recovering features of the VAT mean that in revenue
terms it should in some respects be relatively robust to non-compliance. See Box 1.6 and Annex
1.7 also.
9.2.2 Some distinctive features of VAT make it less vulnerable (Keen, 2003): The key claim
made by advocates of the VAT is that it is a particularly effective way of raising tax revenue.
Cnossen (1990), for example, argues that “purely from a revenue point of view, VAT is probably
the best tax ever invented,” Advocates have also long recognized that VAT, like any other tax, is
vulnerable to evasion and fraud, but stress distinctive features of VAT that may make it less
vulnerable than other forms of taxation. The European Commission (2004), reported that losses
from fraud—most famously, “carousel fraud” (see para 9.4) — have amounted to 10% of net VAT
receipts in some member States. The more pervasive informality in developing countries, and
typically higher levels of corruption, suggest that fraud and evasion are likely to be even
greater problems there.
9.2.3 Frauds distinctive to VAT: are given in Box 9.2 :
Box 9.2: Types of fraud under VAT/GST and RST
A. Frauds common to VAT/GST and RST B. Fraud distinctive to VAT/GST* –
(Retail Sales Tax) : (i) False invoices for credit or refund (including for
(i) Under-reported sales. exports – carousal fraud)
(ii) Unrecorded cash purchases (ii) Bogus traders
(iii) Failure to register. (iii) Credit claimed for
(iv) Abuse of multiple rates – viz. misclassification - VAT on purchases that are not creditable (viz.
of commodities. purchases for private consumption)
(v) Omission of self-deliveries. - invoices from unregistered suppliers.
(vi) Tax collected but not remitted. - taxable supplies used in exempted activities.
(vii) Imported goods not brought into tax. (iv) Credit Notes on purchasers including VAT not
(viii) Barter arrangement shown on returns
(ix) Accounting 'errors' (v) Representation of domestic sales as exports (to
benefit from zero rating)
* These types of fraud can take some time to develop after a VAT is introduced—though there have been fast
learners—and even when they eventually appear, they are no more difficult to deal with than basic corporate
income tax types of fraud such as transfer pricing, fictitious payments to phantom companies, or reporting as
business expenses the purchase of goods or services for private use. However, false export schemes and other
excess credit claims, which give rise to entitlement to actual refunds, have proven to be quite troublesome in
countries with weak tax administration capacity, particularly in the audit area. (Ebrill, 2001)
9.2.4 Description of tax frauds and evasion: is given at Annex 9.1.

9.3 Credit mechanism creates opportunities for fraud characteristic of VAT (Tait, 1988): At
the heart of VAT is the (invoice) credit mechanism with tax charged by a seller available to the
buyer as a credit against their liability on their own sales and, if in excess of the output tax due,
refunded to them. Details are given below:

(i) False claims for credit or refund.
 The universal zero-rating of exports means that fraudulent claims to have exported commodities
are an intrinsic difficulty for VAT. This is the most obvious way to exploit the credit mechanism:
“A VAT invoice…” as Bird (1993) puts it, is “a check written on the government.” And such fraud
can be extensive, for example by presenting forged invoices for non-existent or exaggerated
purchases or genuine commodities that have, in fact, been sold in the local market (“diversion
fraud”).
 For established businesses liable to VAT on their own output there is some limit to this, since
excessive credit claims would imply that the business was operating at an implausibly low margin.
But there is much more scope for new businesses to exaggerate input claims without arousing
suspicion, since large initial purchases of capital goods and other inputs would be expected at start-
up, without being matched immediately by a corresponding level of sales. It poses a challenge that
all tax administrations find trying: between (a) the desire to pay refunds promptly, in order to
avoid converting VAT into an export tax, and (b) the need to protect revenues. See para 9.6.
 Incidentally, a false VAT credit claim for Re.1 costs the government the same as a fraudulent
refund of Re.1. But for the criminally inclined (who would otherwise be outside the tax system),
however, it is only the latter that will be tempting.
(ii) Credit claimed for VAT on purchases that are not creditable. This arises in two main forms.
 First, when traders supply a variety of outputs, some subject to VAT and others exempt, they
have an incentive to allocate inputs to production of the taxed items (in respect of which input tax
credit is available) rather than the exempt (for which it is not). While rules are commonly adopted
for such apportionment, the borderline inevitably proves contentious—and indeed there may well be
no conceptually correct allocation.
 Second, items bought for private consumption may be misrepresented as business inputs,
allowing the VAT to be recovered (and income tax liability reduced).
(iii) Bogus traders. Companies may be set up solely to generate invoices that allow recovery of
VAT. Such “invoice mills” exploit the practical impossibility of cross checking every invoice
against evidence that earlier tax has been paid. What matters, of course, in comparing VAT and its
alternatives is not the number of possibilities for evasion, but their quantitative significance. This is
likely to be affected by the number of taxpayers in a position to exploit particular possibilities for
abuse, the risks of detection and enforcement action that they face—and, not least, the way in which
the taxes are designed.
(iv) Credit claimed for invoices from unregistered suppliers : Credit for VAT paid on inputs can
only be claimed when the purchase is made from a registered supplier. An unregistered supplier
could be an exempt or a small trader, perhaps already enjoying a special treatment for VAT, or it
could simply be a private person. The input purchases may be perfectly valid and it may be that the
purchase does actually involve paying a price inclusive of VAT that is impossible to claim because
the supplier is unregistered. That is just too bad. If the trader who has purchased from the
unregistered supplier pretends that the purchase invoice has a VAT number, or creates an imaginary
VAT number, the authorities are defrauded. The sums involved are unlikely to be great since large
suppliers will be registered; nevertheless, the practice is illegal and as the authorities may have
made special provision earlier in the production chain (for example, under special schemes for
retailers or purchases from farmers) to compensate for such sales, the revenue could lose twice over.
(v) Credit notes on purchases including VAT not shown on returns: This is a minor item, but if
a credit note is issued on a purchase and the credit for VAT is claimed on the full invoice before
credit, the authorities will allow more VAT credit than they ought. The trader's books may all be in
order and all the purchase invoices may be properly kept and available for inspection. The cheating
may show up only through a financial match on checks issued against (sometimes numerous
aggregated) invoices from the same supplier. Sometimes the cross-check can be initiated from the
credit invoices of the supplier.
(vi) Credit claimed for taxable supplies used in exempt activities: If a business is wholly
exempt, no credit can be claimed. The problem arises when a trader is selling both taxable and
exempt goods and services. It may prove quite easy to divert purchased inputs on which VAT credit
is claimed against taxed sales to help produce and sell exempt items. The problem is that some such
decisions can be, in all good faith, extremely uncertain. The VAT content on the capital purchase of
a shop and its equipment should be split between the sales that are exempt (say, unprocessed food)
and the rest that are taxable; in this case, the VAT authorities may simply allow the credit in direct
proportion to the split between taxable and exempt sales. It is much more difficult when the same
raw materials may be inputs to exempt and taxable outputs and some traders may deliberately offset
more credit against VAT than was actually involved. Again, this is unlikely to be a major problem
unless legislation has created numerous exemptions that require traders to make many such
borderline decisions. It is, of course, another argument against creating exemptions.
9.4 Zero-rating of exports and Carousel fraud :

 As discussed above, the frauds most distinctive to the VAT exploit are the crediting of tax paid
on purchased inputs against the tax due on sales. And it is the zero-rating of exports that has proved
the feature most vulnerable to fraud. The difficulty with zero-rating exports is that it not only breaks
the VAT chain but does so “at a particularly vulnerable spot: the interface of domestic and foreign
(including inter-state boarder) tax administrations.” This creates a number of opportunities for
fraud, as outlined above. But the best known form of deliberate attack on the VAT system is the
“Carousel fraud" that has attracted much attention in the EU.
 “Carousel fraud” a special case of what is termed in the United Kingdom “missing trader intra-
community fraud” (MTIC)—exploits the zero-rating of exports combined with the “deferred
payment” mechanism for collecting VAT on imported goods. Under the latter, adopted in the EU
with the removal of fiscal frontier formalities in 1992, VAT on imports from another member state
is collected not at the border but at the time of the next periodic return.
 In the simplest case, Carousel fraud works as follows:
Figure 9.1: Basic Carousel Fraud (Keen, 2013-p13)
Company C in UK (“Buffer”)
United Buys goods from B at VAT inclusive price, and sells to D, charging VAT. C may be wholly
Kingdom unaware of the fraud.(There may be multiple buffer companies between B and D, some or all of
which may be honest).
Company B: The Missing Trader Company D in UK

Purchases goods from Company A in member state 2 Pays VAT on purchase from Company C.
(“France”).Pays no VAT on purchase, because export by Exports goods to company A in France, and
A is zero-rated. Charges VAT on sale to company C in claims a refund for VAT on exported goods.
UK. Disappears without remitting the VAT to the revenue In effect reclaims the VAT notpaid by B.
authorities.
Company A
France Exports goods to company B in another member state (“the UK”). Export
sale is VAT zero-rated. EU abolished fiscal frontier formalities.
 Carousel may be of particular relevance to the federal countries like United States and
India since if a VAT were to be run as—at least in part—a State-level tax, precisely the same
issues would arise in relation to inter-state exports as now arise in the EU, since the absence of
border controls would then create difficulties similar to those associated with deferred payment in
the EU.
9.5 Estimate of the VAT loss in UK: Table 9.1 shows ‘bottom-up’ estimates of VAT revenue
loss in UK (2001–02), under four separate headings. These estimates are based on a range of
information sources, including operational data, audit results, and audit. The methodology is not
fully disclosed, because of concerns about the operational sensitivity of some information sources.
Reflecting their imprecision, the estimates are reported as a range of values.

Table 9.1: Bottom-Up Estimates of VAT Revenue Losses, UK (2001-02)
Type of noncompliance Revenue Revenue Loss (% of full
Loss (£ bn) compliance revenues)
Missing trader (MTIC) fraud 1.77–2.75 2.5–3.9
“Artificial” tax avoidance 2.5–3.0 3.6–4.3
Nonregistration for VAT 0.4–0.5 0.6–0.7
General noncompliance by VAT-registered firms* 2.5–4.0 3.6–5.7
Total 7.17–10.25 10.2–14.6
Source: National Audit Office (2004), page 11.
* i.e.by understating sales or overstating purchases, intentionally or by mistake.
9.6 Timing and methods of VAT refunds (Tait, 1988).
9.6.1 Functioning refund system is essential to the VAT system: A consumption-based VAT
requires that investment costs and intermediate inputs be effectively excluded from the base. As
such, a functioning refund system becomes essential for the VAT administration and it is a crucial
condition for the VAT to be an efficient, pure tax on consumption. Delay in VAT refunds would
add a layer of "hidden costs" to registered firms and thereby discourage investment. The problem is
especially serious for export manufacturers that usually have a huge backlog of refunds but must
compete internationally.
9.6.2 Situation of excess of input tax over output tax: Excess of input tax over output tax (i.e.
balance to be refunded) may arise from (i) export operation, (ii) use of multiple rates, (iii) zero-rated
goods, (iv) purchase of equipments, and (v) temporary conditions, viz. substantial increase of
inventories or seasonally slumping sales.
9.6.3 VAT frauds and speed of refunds: The scope for some VAT frauds is affected by the speed
with which VAT refunds are paid, compared with VAT collections. Frauds that involve false refund
claims by firms which subsequently disappear will be more tempting the more rapidly refunds are
paid, both (i) because this gives the authorities less time to detect the fraud, and (ii) because a
longer time lag in refunds compared with collections means that firms may, for a period, be more
substantial net tax creditors to the tax authorities.
9.6.4 Delay in refunds: Cross-country experience indicates that delay in tax refunds is common
in developing countries. The delay is generally derived from inefficient processing of refund
claims (often for bribes) and strong incentives for meeting revenue targets on the part of the tax
administration, and from the risk of large-scale abuse on the part of taxpayers. In addition, the
treasury is under pressure to postpone the refunds during budget-crunching periods. There is also
legitimate requirement that refund claims be carefully processed, as the refunds normally account
for a significant share of the total VAT collection. It is estimated that in EU countries, the amount

of the VAT refund account for 25-35 percent of the total VAT collection, while the figures
stand at 30-40 percent in most developing countries. (Le, 2003).
Box 9.3: Tackling VAT refund issues in some countries
The refund issue is tackled differently in different countries.
(a) Most cap the amount of refunds of the VAT on intermediate inputs and capital items at the level of
the VAT on output in each tax period and allow for the remaining balance to carry forward over the
following period(s).
(b) In Ghana, for example, the excess tax credit—or the excess of input tax over output tax—is carried
forward for three months, and after that, the refund will finally be made.
(c) Kazakhstan does not allow for VAT refunds, except for the zero-rated supplies; however, all excess
input VAT may be carried forward to offset output VAT in future periods.
(d) New Zealand etc. specify a certain time period for the VAT on capital goods to be fully credited;
this is similar to the specification of fiscal depreciation schedule for corporate income tax purposes.
Major the
(e) In Russia,
9.6.4 principles
firms areand mechanism
entitled to interesttopayments
tackle refund issueof(Source:…………):
on the part refunds unpaid after a specified
period of 14 days.
9.6.5 Hybrid system of refunds: Most developed countries allow for complete refund of all excess
tax credit, while developing countries often embark upon a hybrid system of refunds and carry-
forward arrangement of the excess credit (generally, refund privilege is given to exports, and carry-
forward allowance is applied to sales in domestic markets; the apportionment is usually made
proportional to the ratio of exports in total turnover). In developed countries, refund claims are
made as part of firms’ regular VAT returns, but in others, separate claims for refunds are required.
9.6.6 Special programmes to deal with refunds to exports: To facilitate exports and to prevent
frauds and abuses, special programs to deal with refunds to exports are designed. In general, the
programs are based on certain principles, including:
- Use of history of tax compliance for assessing refund claims.
- Application of pre-approval audits to high-risk claims and post-approval audits to lower-risk
claims.
- Proper reference to the quality of record keeping of historical profiles for all refund claims.
 One proven approach is to establish a “gold-silver” scheme, in which refund claimants are
grouped into “gold,” “silver,” and “others” categories. The criteria for the grouping must be simple
and transparent. They are generally related to the claimant’s history of exports, book keeping, tax
compliance, and audit of records by tax officials. Those classified in “gold” or “silver” categories
are granted with such privileges as fast, and without pre-approval audit refunds. The scheme helps
tax administrations focus on checking and auditing high-risk refund claimants.
 Even so, it is advisable that the target for pre-approval by desk verification and/or field
audits be initially limited to a manageable portion of the total claims. As the profiling system
improves, the target may later be raised.

Box 9.4 : GST compliance rating
Sec 149 of the CGST, 2017 provides as follows :
(1) Every taxable person shall be assigned a GST compliance rating score based on his record of
compliance with the provisions of this Act.
(2) The GST compliance rating score shall be determined on the basis of parameters to be
prescribed in this behalf.
(3) The GST compliance rating score shall be updated at periodic intervals and intimated to the
taxable person and also placed in the public domain in the manner prescribed.
9.7 Options for avoiding VAT fraud:

9.7.1 Keen, 2007: Relative merits of 'administrative solutions' vis a vis 'radical schemes' may be
seen at Annex 9.2.
 There has been a lively debate on the relative merits of radical schemes such as Exporter
Rating, CVAT (Compensating VAT) and VIVAT (Variable Integrated VAT) over administrative
solutions viz. Reverse Charging/Withholding, 'VAT accounts', D-VAT (Definitive VAT), P-VAT
(Prepaid VAT). Any of three radical schemes would offer a more robust defense against trade-
related VAT fraud. But they are, nevertheless, radical, raising sensitive issues of tax sovereignty:
Who, for example, would determine the rate of the CVAT, or of the intermediate rate under the
VIVAT? Who would administer the CVAT? In combating fraud, however, they, in principle, create
scope for all participating countries to gain. More fundamentally, they address the difficulties
created by export zero-rating by pursuing further, not deviating from, the basic logic and inherent
simplicity of the VAT.
9.7.2 Ebrill, 2001: A couple of general points can be made about all three schemes.
- First, all three are much easier to implement if there is a substantial federal presence to facilitate
the proper collection of taxes on trade across internal frontiers. Recent developments have indeed
made it clear that, in the presence of a federal VAT, it should not be too difficult to dispense with
zero-rating of interstate trades for purposes of a lower-level VAT (which Indian GST regime would
have). Doing so in the absence of an overarching federal administration, however, looks
problematic.
- Second, the focus, at least implicitly, has been on the treatment of physical goods, assuming the
ultimate possibility of enforcement through monitoring the movement of commodities. However,
services that are traded across borders are far harder to intercept: and here the Internet will be
especially keenly felt.
 Would the three schemes discussed above permit further progress in this difficult area? Under a
smoothly functioning clearinghouse system (GSTN should be), suppliers could charge tax at the rate

of their location and business purchasers obtain refunds relatively straightforwardly through their
own local tax administration (GSTN in the case of India!).
 Under VIVAT, the supplier could simply charge all business purchasers the intermediate rate,
irrespective of their location. Indeed, the distinction between registered and unregistered traders that
is needed to implement the system advocated by the European Commission and the OECD—and
which the latter suggests is feasible to implement in real time for online transactions—is precisely
the distinction needed to implement VIVAT more generally. Ultimately the most perplexing
difficulty is thus that of bringing operators located outside the 'federation' into the tax net.
Some degree of international coordination may ultimately prove indispensable.
9.7.3 Defensive measures (Ebrill, 2001): These might involve
(a) tighter checks on would-be registrants (for example, with an on-site visit and background
checks), and requiring guarantees in dubious cases.
(b) adopting or strengthening joint and several liability rules by which traders can be held
responsible for fraud elsewhere in the chain that they might reasonably have been expected to be
aware of; and
(c) establishing better and quicker information exchange between the tax authorities (so that the
country/state of import can promptly become aware that exports to it that have been reported in
another member state have not shown up in its own VAT system). GSTN in India should enable it.
9.7.4 Fraud & evasion and the CGST Act, 2017: The following sections are relevant to the
defensive measures against fraud and evasion :
Sec 32(1) : A person who is not a registered person shall not collect in respect of any supply of
goods or services or both any amount by way of tax under this Act.
Sec 33: Notwithstanding anything contained in this Act or any other law for the time being in force,
where any supply is made for a consideration, every person who is liable to pay tax for such supply
shall prominently indicate in all documents relating to assessment, tax invoice and other like
documents, the amount of tax which shall form part of the price at which such supply is made.
Sec 37(1) & Sec 38: Every registered person, other than an Input Service Distributor, a non-resident
taxable person and a person paying tax under the provisions of section 10 or section 51 or section
52, shall -
(a) furnish, electronically, in such form and manner as may be prescribed, the details of outward
supplies of goods or services or both effected during a tax period on or before the tenth day of the
month succeeding the said tax period and such details shall be communicated to the recipient of the
said supplies within such time and in such manner as may be prescribed Sec 37(1).

(b) verify, validate, modify or delete, if required, the details relating to outward supplies and credit
or debit notes communicated under section 37(1) to prepare the details of his inward supplies and
credit or debit notes and may include therein, the details of inward supplies and credit or debit notes
received by him in respect of such supplies that have not been declared by the supplier under
Sec 38.
Sec 42(2): The claim of ITC in respect of invoices or debit notes relating to inward supply that
match with the details of corresponding outward supply or with the IGST tax paid under section 3
of the Customs Tariff Act, 1975 in respect of goods imported by him shall be finally accepted and
such acceptance shall be communicated, to the recipient.
Sec 43(2): The claim for reduction in output tax liability by the supplier that matches with the
corresponding reduction in the claim for ITC by the recipient shall be finally accepted and
communicated, to the supplier.
9.8 Control and incentive system for better compliance (Tait, 1988):
9.8.1 Provision of requisite controls: is crucial to a VAT system. Controls is crucial to a VAT
system. Controls are exercised through a number of means, including taxpayer registration,
deregistration, invoices, refunds, and audit.
 Importance of registration:
Registration brings a person within the control of the tax authorities. Usually this means, the tax
payer is required to make periodic returns of purchases and sales and, at the same time, pay the
VAT. Relevant sections of CGST Act, 2017 have been mentioned below:
 Where a trader operates through two or more places of business, he may find it convenient to
register each unit separately or, alternatively, as one entity. However, safeguards must be provided
to prevent the provision being used for tax evasion by splitting up a business into two or more
separate units to bring each below the limit for registration. Sec 25(4) & (5).
 Failure to register must be treated as a serious tax offense and a significant penalty for non-
registration must be specified and imposed. Sec 122 (1.xi).
 To ensure that the register is up to date, taxable persons should be required to inform the tax
authorities of changes in circumstances affecting registration, including death. The local tax offices
should review periodically against other information in the office (even the humble telephone
book—especially the yellow pages—can be most useful) the lists of registered persons to ensure
that new traders are brought on to the tax rolls, and particularly that those whose sales have risen
beyond the threshold for treatment as small enterprises are brought into the full VAT. Sec 28(1).

 Cancellation of Registration
Sec 29(2): The proper officer may cancel the registration of a person from such date, including
any retrospective date, as he may deem fit, where,––
(a) a registered person has contravened such provisions of the Act or the rules made thereunder as
may be prescribed; or (b) a person paying tax under section 10 has not furnished returns for three
consecutive tax periods; or (c) Any registered person, other than a person specified in clause (b),
has not furnished returns for a continuous period of six months; or (d) Any person who has taken
voluntary registration under sub-section (3) of section 25 has not commenced business within six
months from the date of registration; or (e) Registration has been obtained by means of fraud,
willful misstatement or suppression of facts:
Box 9.5: VAT invoice is a crucial control document

 VAT invoice, forms the primary source of information and is therefore a crucial 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 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 supply being invoiced.
TFR, 2009
9.8.2 Control over Retailers: Revenue from VAT is at greatest risk at the retail sale. Control
in some form or another over retail sales is, therefore, a crucial objective of tax authorities. It has to
be accepted that in many countries, both developed and developing, the standard of bookkeeping
and, occasionally, the standard of tax morality, leave much to be desired.
 Supplemental measures of control are used in such circumstances, entailing the physical
checking of inventories against invoices of purchases and the inspection of merchandise in
warehouses, storerooms, and business premises. Vehicles transporting goods are, in some countries,
required to carry a manifest, corresponding to an invoice and giving particulars of what is being
carried, and the names and addresses of the buyers and the sellers, with the VAT registered
numbers. In fact, in countries where bookkeeping standards are suspect, much reliance is placed on
this form of control though this moves VAT administration away from being an accounts-based
tax back toward excises relying on police, customs, and excise controls.
 In a few countries, the tax authorities provide assistance by initially providing model account
books for VAT, free of charge. Given the importance of simple records in the VAT, the cost to the
government of such free account books is a modest investment to improve taxpayer compliance.

Guidance on keeping the necessary records is considered to be a fundamental feature of the VAT
educational program for traders.
9.8.3 Co-opting tax payer's interest: Some countries have tried to co-opt the taxpayer's own
interests to declare his VAT liability. In Turkey and Bolivia, the trader's VAT liability is allowed as
an offset against a gross income tax. In the Turkish case, the amount allowed to be offset diminishes
as income increases so that the concession can be considered progressive but, nevertheless, is still
expensive in revenue forgone. See Box 9.6 also.
Box 9.6: Incentive system for retail invoices :
 In Korea the authorities recognized that the final retail sale was the weakest link in the chain and
decided to try to oblige retailers to issue invoices. Article 32 of the VAT law required traders to install
cash registers that would issue receipts. The Government would advance 80 percent of the cost of buying
the cash register (repayable without interest over 18 months) and the trader was entitled to deduct from
his VAT bill an amount equivalent to 0.5 percent of his taxable sales; he kept the tally roll in fulfillment
of his obligations under VAT law.
 However, the most valuable benefit was conferred by Article 83 whereby the retail customers could
obtain "compensation" from the Government of 1 percent of the amount of their purchases covered by the
cash register dockets. To further encourage such customers to ask for and keep their "invoices," the
Government ran lotteries based on consecutive numbers on the tally rolls. This elaborate scheme
sacrificed a significant element of the VAT revenue and required increased administration for, perhaps, a
rather uncertain extra yield. However, it is an interesting example of a developing country trying to
ensure that the weakest link in the VAT chain, the retailer, complied with the law.
9.8.4 Mutual assistance by the States : Although prevention of tax evasion within the EC remains
primarily the responsibility of the national authorities (States in the case of Indian GST), the
Community has issued two Council Directives, one for mutual assistance in the exchange of
information and the other for mutual assistance in the recovery of VAT. Increasing rates for VAT
make the tax conspicuous and makes successful evasion all the more valuable to trader and public
alike.
9.9 Audit (Ebrill, 2001) :
9.9.1 Why is an effective audit program critical for VAT operations?
 Like other taxes, VAT can be evaded. The development of effective audit programs is crucial to
increase the risk of being detected and punish those businesses not in compliance with their VAT
obligations. Typically, the most common sources of VAT evasion are similar to those of traditional
sales taxes. However, fraud under a VAT may sometimes be more sophisticated than fraud under
other indirect taxes.
 The most obvious consequences of ineffective audits are the deterioration of VAT compliance
and a loss of credibility of the tax administration. Even if sufficient penalties are provided for in the
law, taxpayers will not be deterred from minimizing their tax liabilities if they believe that there is

little chance of being audited. At some stage, honest businesses will realize that they cannot
compete with those who consistently evade the VAT and may decide, in turn, to underreport
their own tax liabilities.
 A survey indicates that most of the countries lacking an effective audit program are also those
where VAT procedures and systems are more complex. In a number of cases, tax authorities
appear convinced that the lack of effective audits can be offset through increased filing
requirements. CGST Rules, 2017 corroborates this.
 In several countries, requirements to audit 100 percent of the claims prior to refunding VAT
excess credits complicate matters; not only does this policy delay the processing of refunds, it also
implies that most audit resources are assigned to the verification of refund cases. Since not all
refunds can be audited in a timely fashion, a database of all purchase and sales invoices is seen as
facilitating the verification of refund claims. The South Korean experience indicates that massive
cross-checking of invoices is costly to administer, burdensome for taxpayers, and ultimately not
effective in controlling evasion. While information technology has improved spectacularly since
then, the sheer volume of transactions continues to make massive cross-checking a daunting task.
Moreover, it runs the risk of alienating taxpayers.
9.9.2 Basic guidelines for an audit programme: Basic guidelines provided for the development
of an audit program typically address the following key issues:
• Coverage—what percentage of taxpayers should be audited?
• Selection—how should the audit cases be identified?
• Methods—what type of audit should be performed, what should be the duration of an audit, and
what approach should be taken by the auditors?
• Staffing and training—what are the staff resources needed to implement the audit program and
what type of training should be provided?
• Monitoring—what are the management systems needed to monitor the audit program (including
assigning targets, developing time-standards, performing quality review, and ensuring prompt
collection of additional assessments)?
9.9.3 Elements of an effective audit figure: Box 9.7 presents a typical example of an audit
program recommended by IMF.
 Detection of offenses, such as underreporting of turnover, over-reporting of VAT credits, and
use of fake invoices, requires field audits by well-trained officers, rather than desk verifications.
The experience of countries with successful audit programs also shows that a VAT audit plan
should be primarily based on short, issue-oriented audits covering a limited tax period (no more

than one or two return periods). This plan should provide for a broad coverage of taxpayers (taking
into account their classification by size and industries).
Box 9.7: Elements of an Effective Audit Program
In a function-based tax service, the audit program typically includes the following types of audits:
• Desk verifications. Made annually, these verifications are primarily based on
(i) a review of income tax and VAT returns (including a review of basic ratios such as profit margin,
cash flow, cost of personnel, and a comparison with ratios for previous periods and ratios for other
taxpayers in similar industries), and (ii) the cross-checking of information included in the taxpayer
files (particularly income tax, VAT, and customs information).
• Registration checks. These take the form of unannounced visits to a taxpayer’s premises (mainly for
new small and medium-sized taxpayers) during which the tax officer ensures that: (i) the taxpayer has
a basic understanding of his/her obligations; (ii) appropriate records are being kept; and (iii) proper
invoices are being issued.
• VAT refund audits. A pre-refund audit should be undertaken for a first refund claim (particularly by
new enterprises); audits of further claims should be carried out selectively. Refund audits should focus
only on the period covered by the claim.
• Issue-oriented audits. These should be directed at verifying items for which errors have been detected
in the returns. Regarding the VAT, an issue oriented audit should focus on no more than one to two
returns.
• Comprehensive audits. All cases where serious underreporting has been detected during a desk
verification, a registration check, a VAT refund audit, or an issue-oriented audit should be forwarded
to a unit responsible for undertaking comprehensive audits of all tax liabilities (including VAT and
income
tax). These comprehensive audits may be extended to cover several years, up to the limit provided for
in the law.
• Tax fraud investigations. In the most serious fraud cases, criminal investigations may be necessary.
Such investigations may require searches (of business premises and, sometimes, domiciles), seizure of
evidence, testimony from key witnesses, etc. They should be undertaken in accordance with criminal
procedure laws. Ebrill, 2001
 Most tax administration experts agree that, by international standards, an effective VAT audit
program should provide for a 25–30 percent coverage of taxpayers each year.
8.9.4 Effective VAT audit programme improves income tax compliance also: In addition, VAT
audits need to be closely coordinated with audits of other tax liabilities (especially income
tax).When significant underreporting is detected during a VAT audit, the case should be transmitted
to a joint audit division specialized in comprehensive audits. In most countries where VAT and
income tax administrations are integrated (or have been able to develop close cooperation),
the development of an effective VAT audit program significantly helps improve income tax
compliance. Such methods have also proved to be more effective and more compatible with
business requirements (for instance, in limiting the number of visits to taxpayers’ premises and
restricting in-depth audits to cases where significant underreporting is detected).

Box 9.8: Relationship between the Audit for VAT and Income Tax
 Efforts should be made to coordinate VAT audit with the internal and field audits carried out for
the income tax. The relationship and exchange of information between the VAT and the income tax
should be close.
 Audit for VAT is usually undertaken independently of income tax audits because the work is less
comprehensive and can be done, in some instances, by less technically experienced staff. Some
countries, including the Netherlands, consider VAT audit to be as comprehensive as the corporate
income tax audit. In these cases, the size and nature of the firm determines the staff to be responsible
for the audit.
 In any case, recent income tax audit reports should be available for examination by the VAT
auditor beforehand. Equally, VAT audit reports should provide a useful input for income tax audits.
Tait, 1988 (p288)
9.9.5 What are the main reasons for the lack of an effective audit program? First, audit
typically requires higher-level skills than those needed for most other tax administration tasks, and
such skills are sometimes in short supply. Second, the possibility of collusion between taxpayers
and tax officials is significant during an audit. Moreover, auditor errors may damage business
activity. As a result, governments may, sometimes, be reluctant to support comprehensive audit
programs. However, while these general reasons cannot be ignored, the survey data point to more
specific factors that also contribute to the lack of effective audit programs, including:
 Inadequate preparations for VAT implementation. The consequences of a weak audit program
may not be immediately perceptible. While the lack of effective collection enforcement systems,
especially those needed to deal promptly with nonfilers and nonpayers, has an immediate impact on
revenue, the lack of effective audits to detect underreporting of gross receipts and/or over reporting
of credits may affect tax compliance only in the medium term. There have been cases in which
insufficient attention has been paid to the development of an audit function when the VAT was
implemented.
 Weak political commitment :
 Inappropriate legal and judicial environment. A clear legal framework ensures that taxpayers’
rights are protected and that the tax administration has sufficient and clearly defined legal powers to
visit taxpayers’ premises and examine their records. It also ensures that appropriate action will be
taken by the administration, and, as needed, by the judiciary, to collect outstanding taxes and
penalties. Moreover, practice may significantly diverge from the legal and judiciary framework
provided for in the law. For example, in several developing countries there are few, if any,
possibilities for taxpayers to go to court to appeal the decision of the tax authorities. Conversely, in
other countries the appeal process is so complex that taxpayers often take advantage of the system
to delay the payment of their outstanding tax liabilities for a number of years.

 Other technical issues include the following:
- Misallocation of resources. Ill-designed procedures and complex forms result in the allocation of
the majority of staff resources to paperwork.
- Lack of audit selection and monitoring systems. Several tax administrations have yet to develop
basic audit systems. Weaknesses include: (i) the lack of a system for the selection of audit cases; (ii)
absence of audit targets and lax time completion standards for audits; (iii) rudimentary techniques
(such as, in certain countries, checking 100 percent of invoices); and (iv) flawed management
reporting systems. In some countries, there is no appropriate audit organization, with tax auditing
responsibilities being split between different administrations (including tax police forces in several
transition countries).
- Absence of an effective training program.
9.9.6 Strategic approach to refund audit:
 Massive auditing is infeasible and inefficient: Experience indicates that massive auditing is
infeasible and inefficient, given the scarce resources of tax administrations. Some pre-screening
schemes need, therefore, be designed in order to limit the number of refund claims to be audited and
to facilitate refund processing.
 Refund audit should be strategically geared toward:
(i) checking the turnover;
(ii) verifying the proportion of exports in total turnover, and reconciling with customs data (the
export-turnover ratio is often used as basis for pro-rata apportionment of input VAT credit);
(iii) checking VAT credit resulting from purchases. Randomized sampling technique—best, if it is
computer-based—can be applied to select the transactions for auditing.
(iv) Set a value threshold for refund audits—claims of refunds of over the established threshold
deserve vigorous attention. For example, New Zealand assigns an Approved Refund Level (ARL)
to each taxpayer at the time of registration. Taxpayers are entitled to an automatic refund, if the
refund is below the set ARL. The claim is screened for possible audit only when the refund is
above the ARL.
(v) First-time exporters claiming for refunds are carefully audited, preferably on the premises of the
taxpayers—the audit helps gather financial data on the claimant and establish the basis for profiling
and determining an expected level of future refund claims.
9.9.7 Audit and the GST Law:

Sec. 35.(5) Every registered person whose turnover during a financial year exceeds the prescribed
limit shall get his accounts audited by a chartered accountant or a cost accountant (CA) and shall

submit a copy of the audited annual accounts, the reconciliation statement under section 44(2) and
such other documents in such form and manner as may be prescribed.
Sec. 65. (1) The Commissioner or any officer authorized by him, by way of a general or a specific
order, may undertake audit of any registered person for such period, at such frequency and in such
manner as may be prescribed.
Sec. 65.(4) The audit under sub-section (1) shall be completed within a period of three months from
the date of commencement of the audit:
- Provided that where the Commissioner is satisfied that audit in respect of such registered person
cannot be completed within three months, he may, for the reasons to be recorded in writing, extend
the period by a further period not exceeding six months.
Sec. 66. (1) If at any stage of scrutiny, inquiry, investigation or any other proceedings before him,
any officer not below the rank of Assistant Commissioner, having regard to the nature and
complexity of the case and the interest of revenue, is of the opinion that the value has not been
correctly declared or the credit availed is not within the normal limits, he may, with the prior
approval of the Commissioner, direct such registered person by a communication in writing to get
his records including books of account examined and audited by a CA as may be nominated by the
Commissioner.
Sec. 66. (2) The CA so nominated shall, within the period of ninety days, submit a report of such
audit duly signed and certified by him to the said Assistant Commissioner mentioning therein such
other particulars as may be specified.
9.10 Enforcement and penalty :
9.10.1 Administrative vs. legal action: The administration of GST should be based on audited
accounts and not on the basis of any form of physical controls. Most tax administrators will prefer
to rely on regulations and not court proceedings. In the Chilean and some other Latin American
VATs, persistent noncompliance by a trader can lead to the authorities withdrawing his license to
trade and closing his premises for a week or two (or eventually, permanently). The advantage of this
procedure is that it relies on administrative order and not on a laborious legal proceeding. It is a
swift decision that strikes at the heart of the business, and traders will react quickly to get back into
business.
9.10.2 Power of inspection, search and seizure: Sec 67 to 73 of the CGST Act, 2017 may be seen
in this regard (Annex 9.3). Important provisions are mentioned below:
 Officer, not below the rank of Joint Commissioner may authorise any other officer to inspect any
places of business of the taxable person or the persons engaged in the business of transporting
goods or the owner or the operator of warehouse or godown or any other place. [Sec 67 (1)].
 He may authorise in writing any other officer of central tax to search and seize or may himself
search and seize goods, documents or books or things that may be relevant to any proceedings under
this Act. [Sec 67 (2)].
 Power to summon any person whose attendance he considers necessary [Sec 70 (1)].
 Access to place to business of registered person to inspect records and carry out audit. Sec 71(1).
Box 9.9: Penalties as deterrence:

 Like other taxes that are basically self-assessment systems, VAT requires an effective enforcement
system with known and applied penalties culminating in (although rarely used) criminal prosecution.
Deterrents should exist that increase the risk of under reporting commensurate with the degree of
flagrancy and revenue involved. A taxable person who underreports is in effect stealing and misusing
funds that have been paid by his customers and that belong to the government.
 For a penalty to improve tax compliance:
(a) It must reflect the gravity of the offense and not merely increase the risk for underreporting by
more than the cost of borrowing funds (such as interest).
(b) All taxpayers must be seen to be treated equally if all taxpayers are expected to pay their fair
share. If an enforcement program is consistently directed only at a particular group or class of taxpayer,
usually one producing a high yield per audit, that group will eventually lose faith in the fairness of the
system and its levels of compliance will be vitiated. Other classes or groups to which little
investigation has been devoted will tend to comply less since the risk of detection will be seen to be
small.
9.10.3 Offences and penalties: Sec 122 to Sec 138 of the CGST Act are relevant (Annex 9.4). Sec
122(1) and Sec 132(1) in particular describe the offences for which penalty is to be paid.
 Sec 122(1): Offences are listed under this section. Offenders are liable to pay Rs 10 thousand as
penalty or an amount equivalent to the tax evaded whichever is higher.
 Sec 123: person who is required to furnish an information return under section 150 fails to do so
within the period specified in the notice issued under sub-section (3) thereof, the proper officer may
direct that such person shall be liable to pay a penalty of one hundred rupees for each day of the
period during which the failure to furnish such return continues.
 Sec 124: If any person required to furnish any information or return under section 151,— he
shall be punishable with a fine which may extend to ten thousand rupees and in case of a continuing
offence to a further fine which may extend to one hundred rupees for each day after the first day
during which the offence continues subject to a maximum limit of twenty five thousand rupees.
 Sec 127: Where the proper officer is of the view that a person is liable to a penalty and the same
is not covered under any proceedings under section 62 or section 63 or section 64 or section 73 or
section 74 or section 129 or section 130, he may issue an order levying such penalty after giving a
reasonable opportunity of being heard to such person.

 Sec 128: The Government may, by notification, waive in part or full, any penalty referred to in
section 122 or section 123 or section 125 or any late fee referred to in section 47 for such class of
taxpayers and under such mitigating circumstances as may be specified therein on the
recommendations of the Council.
 Sec 133 (2): Any person—(a) who is a Government servant shall not be prosecuted for any
offence under this section except with the previous sanction of the Government;
(b) who is not a Government servant shall not be prosecuted for any offence under this section
except with the previous sanction of the Commissioner.
9.10.4 How much effort should be put into enforcement: One view is that the acceptable
minimum yield from tax enforcement is the real cost of raising the same revenue by general
taxation. The cost is the loss of output and consumers welfare from the (small) increase in taxation
to compensate for the revenue forgone through fraud. Estimates suggest that in the United
Kingdom, this implies that for each pound spent on enforcement about five pounds should be raised
in revenue.
9.10.5 Enforcement and the GSTN : Robust GST network would benefit all the States and the
Centre by reducing leakages through tools such as matching input tax credit, data mining and
pattern detection and providing risk based scrutiny by tax authorities. See para 8.13.6 for details.

Chapter 10
Concerns of the States about GST
10.1 Concerns of the States about GST:

10.1.1 Concerns of the States expressed before the 13th FC (which considered GST
comprehensively) primarily relate to revenue loss, fiscal autonomy, and lack of GST infrastructure
besides various technical, legal and administrative issues as follows:
(i) Determination of the tax base of the States: Some States pointed to the importance of
accurately assessing the tax base that would be available to them under GST. They noted that with
regard to service tax, figures presently available were those pertaining to the point of collection,
rather than to the point of incidence. Also, the rules of supply for services need to be finalized.
(ii) Loss of Revenue : (a) The States which presently have a high tax effort apprehended that the
RNR finally agreed upon would not be favourable to them,(b) Manufacturing states would suffer
additionally due to the abolition of CST. They suggested that the GST rates should, therefore, be
used as a floor rate, (c) On the other hand the low income states (LISs) argued that as their
consumption base was low, and they had increased their tax effort significantly after implementing
VAT, there was little scope for them to increase their revenues under the proposed GST regime.
(iii) Vertical imbalance: It was apprehended that GST would accentuate the vertical imbalance in
favour of the Centre through a proportionally larger CGST rate and access to a larger consumption
base, hitherto unavailable to the Centre.
(iv) Fiscal autonomy of the States: GST requires a commitment to a stable rate structure. This
will compromise fiscal autonomy of the States and deprive them of the only potent lever of macro-
economic policy available to them.
(v) Single rate: A single GST tax rate would be regressive, with the tax levied on items of common
consumption increasing, while providing needless relief to the higher taxed luxury goods.
(vi) Compensation mechanism: The States having a high tax effort requested that an objective
compensation mechanism to support probable losses due to GST be put in place. Compensation for
the loss of CST should also be part of this package.
(vii) Small enterprises: Small enterprises manufacturing specified goods with an annual turnover
of less than Rs. 1.5 crore are presently exempt from excise. GST will bring them into the tax net,
rendering them uncompetitive and enhancing their compliance cost.
(viii) Cesses and surcharges: All cesses and surcharges levied by both the Centre and the states
should be subsumed into GST.

(ix) Taxes to be excluded from GST: Electricity duties; purchase tax; and taxes on crude oil,
motor spirit (MS), high speed diesel (HSD); alcohol and tobacco should be excluded from the
purview of GST.
(x) Compliance mechanism: The GST law should be subject to rigorous compliance and
deviations should not be permitted. Changes should be made only with the consent of the States.
(xi) Selective rollout: Adequate preparation for the changeover, rather than an arbitrary fixed
schedule, should be the sole criterion for deciding the timing for introduction of GST. The States
should be given option to adopt GST at their convenience and the possibility of implementation of
GST in only some States should be incorporated in the design.
(xii) Dispute Resolution: An independent dispute resolution mechanism should be put in place.
(xiii) Implementation modalities: All tax returns, assessment and audit procedures should be
harmonised across the country. A comprehensive IT based infrastructure should be put in place to
track inter-state transactions.
(xiv) CST Act should be abrogated: such that the provision for notifying declared goods is not
available to the Centre.
(xv) Rules of supply for inter-state sales: should be finalized expeditiously, in an objective
manner.
(xvi) The modalities for levying GST on imports, textiles and sugar should be agreed upon.
10.1.2 Observations of the 13th FC: The 13th FC observed that the concerns of the States that the
GST regime will constrict their fiscal autonomy and further tilt the vertical imbalance (in favour of
the Centre) should be viewed in the following perspective:
(i) While the States will normally not be able to deviate from the nationally agreed model for GST,
such constraints will apply to the Centre as well. Further, the States still have fiscal headroom
available. They can impose an additional levy on transmission fuels as well as sumptuary goods and
the authority to levy temporary cesses and surcharges in the case of emergencies (see Sec…….of
GST Law), remains. They can also continue to levy user charges for the services provided to
citizens. Expenditure policy will continue to remain as a powerful fiscal instrument. Further,
strengthening of their fiscal base will improve their access to capital markets, enhancing their
borrowing capacity.
(ii) The tax base of the States will significantly increase with the inclusion in GST of tax on services
and manufacture. The tax base of the Centre, on the other hand, will increase only to the extent of
tax on sales. Thus, it cannot be said that the vertical imbalance will increase in favour of the Centre.

(iii) The States will benefit from the abolition of the cesses and surcharges presently being levied by
the Centre, as size of the divisible pool will rise. Presently this amounts to about 15 per cent of the
divisible pool.
(iv) Tax policy is tax administration, and significant scope exists for improving tax collection
efficiency through implementation of GST.
(v) The GST grant recommended by the 13th FC compensates for the seeming limitation in fiscal
autonomy by enhancing expenditure autonomy through compensation payments and additional
formulaic transfers. An objective compensation mechanism incorporated in the ‘Grand Bargain’
will provide reassurance to both the Centre and the States.
(vi) The GST will be a landmark effort by the States and the Union to further co-operative
federalism with all stakeholders contributing to national welfare by accepting its framework.
10.1.3 Critique of the observations of the 13th FC: It is evident that an attempt has been made by
the 13th FC to address concerns of the States and other problems in a generalized sweep. Perhaps,
the 13th FC did not have adequate time for specifically addressing each concern & problem and
therefore, it also skirted the ToR of 'impact of the proposed GST on the finances of Centre &States
by ‘assuming’ overall Revenue Neutrality of the proposed GST model.
10.1.4 14th FC and GST:
 Views of the State Governments before the 14th FC: States, in their submissions have
generally favoured the implementation of GST and focussed their stand on five critical issues: (i)
revenue compensation, including the issue of pending CST compensation; (ii) goods and services
that should come under the purview of GST; (iii) state-specific issues with regard to
inclusion/exclusion of specific taxes having implication on the GST design; (iv) issues related to
RNR; and (v) capacity building.
 Recommendations of the 14th FC:
i. There are several challenges and many unresolved issues. In the absence of clarity on the design
of GST and the final rate structure, we are unable to estimate revenue implications and quantify the
amount of compensation in case of revenue loss to the States due to the introduction of GST.
ii. The Union may have to initially bear an additional fiscal burden arising due to the GST
compensation. This fiscal burden should be treated as an investment which is certain to yield
substantial gains to the nation in the medium and long run. We also believe that GST compensation
can be accommodated in the overall fiscal space available with the Union Government.

iii. It is suggested that 100 per cent compensation be paid to the States in the first, second and third
years, 75 per cent compensation in the fourth year and 50 per cent compensation in the fifth and
final year.
iv. We recommend creation of an autonomous and independent GST Compensation Fund through
legislative actions in a manner that it gives reasonable comfort to States, while limiting the period of
operation appropriately.
v. We, therefore, recommend that the Constitutional legislative and design aspects of the GST
enable transition towards universal application of GST over the medium to long term, while making
necessary provisions for smooth transition through temporary arrangements.
10.2 Current status in regard to the concerns of the States: expressed before the 13th FC:
(i) Tax base:

- What to speak of the tax base for the States, even the National level tax base calculations by the
Experts and Committees for recommending RNR have essentially been 'speculative' though they
have done their best to use good data sources and methodology (See paras 5.2 to 5.5 for details).
Indirect Tax Turnover option has been chosen for calculating even the National tax base and RNR.
- As regards the State level tax bases, the CEA Committee, 2015 has observed that "Most States
will stand to gain. But pinning down exactly which particular States will gain (from GST) is not
easy because disaggregated State-wise data that would allow reliable computation of the
current and future tax base for States is not available. Moreover, the taxable base of States will
also depend on the rules on supply of goods and services and changing behavior of firms in
response to these rules (for example, headquarters and where supplied). For these reasons, the CEA
Committee has chosen not to provide state-wise RNR calculations. (see para 10.8.4 for some
estimates of the State RNRs)
(ii) Loss of revenue and compensation :
(a) As regards the assertions of the States on their tax efforts, Annex 10…….. shows that –
 Per capita Tax has remained proportional to PCI over the years for all State categories (High,
Middle and Low Income States).
 Tax revenue as ratio to GSDP is tending to equalize over years for all State categories.
 Tax: GSDP weighted by inverse of PCI (more rational measure) is consistently higher for the
Low Income (poorer) States.
(b) Further, para 4.2 together with Box 4.1 clearly shows that retention of CST by the exporting
States is not at all justified.

(c) As regards the concerns of both the LISs and HISs about the revenue loss, the illustrative
exercise by the CEA Committee Report (Annex 10.1) shows that such anxieties may be un-
warranted. It finds that share of the future tax base for the State is very similar to their share in
current GST revenues. For those States that receive a large share of current revenue because they
have a large manufacturing base, their anxieties can be reassured on the grounds that such States are
also likely to have a large base in services too and are far from needing compensation, they would
actually be benefitting from GST. Details may be seen in para 10.8.
- Relative gains/losses of the States are discussed in para 10.5.
(d) As regards the suggestion to use GST rates as floor rates, it would defeat the very purpose of the
GST regime. Arguments in para 5.5.5 apply here as well.
(iii) Vertical imbalance: para 10.5 further shows that vertical imbalance may arise only if
allocation of the combined RNR into CGST & SGST rates is not proper. Prima facie, the States
overall should be gaining.
(iv) Fiscal autonomy of the States:
(a) Fiscal autonomy and floor rates of GST:

 Autonomy in the exercise of taxation powers would mean that both the Centre or the States,-
a. Retain their power to enact tax;
b. Enjoy the risks and rewards of ‘ownership’ of tax (i.e. not be insulated from fluctuations in
revenue collections),
c. Be accountable to their constituents; and
d. Be able to use tax as an instrument of social or economic policy.
 The design of GST based on a common base and a uniform and stable rate structure across the
States without power to the States to make any unilateral changes, is viewed by some States as
undermining fiscal autonomy of the States. It is, therefore, 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.
(b) Pros and cons of fiscal autonomy:
 Tax autonomy to any level of Government may be necessary to enable it to design the base and
set the tax rates according to its revenue needs. However, it is equally important to ensure that the
exercise of these powers do not result in inter-jurisdictional differences in policies and procedures
so as to generate unhealthy tax rate cuts, additional economic distortions, create negative
externalities, or impose higher compliance and enforcement burden.
 Further, if the States are allowed autonomy to increase 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 mechanism. Such increase in rates would mean a greater incentive to evade which, in
turn, would make industries in the competing States uncompetitive. It would also trigger tax-
induced migration. Consequently, decision to increase rate would generate negative externalities
which must necessarily be curbed.
(c) Fiscal Autonomy and the social & economic objectives of the States:
 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 their 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 social and economic objectives by allowing exemptions and incentives. Direct
transfer mechanism (and progressive income tax) is a much better instrument for achieving social
and economic objectives. See para 6.1 for details.
 Under the erstwhile sales tax regime in the States, flexibility to use the tax system as a tool for
achieving 'social and economic objectives' has generated economic distortions and also triggered a
race to the bottom.
(d) Fiscal autonomy vs. Tax autonomy:
 In the context of the federal structure of India, therefore, what is relevant is overall fiscal
autonomy rather than tax autonomy per se. Since the States would continue to have full freedom to
promote social and economic objectives through measures such as direct transfers, effectively, there
would be no significant loss in the fiscal autonomy of the States.
 Moreover, the design of the structure of the GST will be determined through the collective
process of the GST Council comprising the Centre and the States, where the States have 2/3rd of
the votes. The decision to have uniform harmonized rates should, therefore, be viewed as a
collective decision of all the States and the Centre. Thus the existing balance of federal fiscal
powers will accordingly continue to be maintained.
 Further, the proposed GST structure would confer upon the States the power to tax services
which is buoyant and now accounts for about 54% of the GDP. This would significantly improve
the vertical imbalance in the federal fiscal relations in favour of the States (see para 10.5.1). The
States would also have the flexibility to impose surcharges to meet any financial need in an
emergency-like situation under the GST Law.
(e) Fiscal autonomy and increased devolution of funds to the States :

 Nevertheless, with a view to compensating for the perceived erosion in the tax autonomy of
the States, there should be an increase in the formula-based devolution particularly to the low
income States. See para 10.6 for details.

(vi) Single rate: The GST Council, which has majority votes for the States, should address the
apprehension that GST levied on items of common consumption could increase and on the luxury
items, reduce. In fact GST would not have one rate, but multiple rates and address such
apprehension (see para 5.5.7).
(vii) Compensation: This aspect has been discussed comprehensively in para 10.8.
(vii) Small enterprises: Para 3.8.5 would suggest that the apprehension about small enterprises
being adversely affected by the GST regime may not be justified. A contrary view is however,
given in para 3.9.7.
(viii) Cesses & surcharges: All cesses and surcharges are being subsumed in GST except that GOI
proposes to impose cess on demerit goods to create compensation pool for compensating the
revenue loosing States. A critique of the same is given in Annex 5.9.
(ix) Taxes to be excluded:
 Purchase tax is being subsumed in GST (though some States wanted exclusion).
 Although exclusion of Electricity Duty and potable alcohol is not logical, are being excluded on
the suggestions of the States.
 Crude oil, motor spirit, HSD etc. would be covered under GST if the GST Council so decides.
(x) Compliance mechanism: All decisions are to be based on the recommendations of the GST
Council, in which the States have a majority (2/3rd) vote.
(xi) Selective roll out: It would defeat the very purpose of the GST regime.
(xii) Dispute resolution: A Mechanism to adjudicate any dispute among the Centre & the States
arising out of the recommendations of the Council, would be established by the GST Council. See
12(11) of the CAA, 2016.
(xiii) Implementation modalities: Harmonization of procedures across the country and creation of
comprehensive IT infrastructure is being done. See para 8.7.1 and para 8.13 for details.
(xiv) CST/Additional Tax: CST/Additional tax would no longer be levied.

(xv) Rules of supply: The IGST Act, which includes Rule of Supply seems to be logical.
(xvi) Modalities for levying GST on textiles, sugar etc. Earlier under a tax rental agreement, the
Centre levied an additional excise duty (of 4%) in lieu of sales tax on three commodities, viz.
textiles, tobacco and sugar not produced in India. Now it is levied on the first sale in the States and
collected by the State concerned.
(xvii) Modalities for levying GST on imports: The GST regime would adequately address the
issue and would in fact be better than the prevailing tax regime (see para 3.4.4& Annex 3.4).
10.3 Common National Market : One of the core objectives of the CAA, 2016 is to provide for a
common national market for goods and services. But it is pertinent to understand what one
means by a common market, why it is desirable, what aids or hinders forming a common market,
and what is its downside.
10.3.1 Positive effect of a Common Market: Common Market in a large country like India would
promote specialization, scale economics, de-risking and experimentation in different States to create
innovative solutions. But varying State VAT rates and entry tax/octroi in some States are making
the national market uncommon and often causing antagonism. Similarly CST and CENVAT are the
chain breaking taxes i.e. tax credit of the Central taxes could not set off with the State VAT ITC.
The GST regime would address most of these impediments.
10.3.2 Impact on manufacturing: A tentative calculation of impact on manufacturing in terms of

relative prices of goods produced in within a State vs. imported from another State is given at
Annexure-2.4(B). Goods imported from say Maharashtra to Bihar cost much less in the GST
regime than that produced in Bihar in the ST & VAT regimes. For psychological reasons, therefore,
consumer in Bihar may prefer product imported from Maharashtra. A common national market
may, therefore, harm manufacturing in Bihar which already is a miniscule 0.94% of the national
manufacturing. It would also cause revenue loss compared to the VAT/ST regime.
10.4 Negative effect of GST on the State Finances:

10.4.1 Views of Govt. of M.P.: In its submission before the Select Committee, Govt. of MP in
effect stated that the Fiscal health particularly of the Low Income States (LISs) may deteriorate
because of -
(i) Substantial tax revenue loss due to inability to achieve RNR in some States because of the
removal of cascading effect, sub-optimal collections from services sector, etc.
(ii) The share of taxable services in the “consumption basket” of the poor is always smaller as
compared to the better off sections off the society. Therefore, the additional revenue accruing to
LISs from “final consumption of services” in GST will be meagre to compensate the loss of tax
revenue from taxation of primary commodities on the “Destination Principle”.
(iii) The State will not be able to mobilize additional resources for development as the State cannot
change the rate structure of the most important tax instrument (i.e. VAT/Sales Tax) available to
them.
(iv) The State cannot raise additional resources through borrowing as their borrowing limit is
determined by the Centre and has been fixed at 3% to 3.5% of GSDP.

(v) The LISs generally have relatively poor fiscal health and are more dependent on Central
devolution and grants. The divisible pool of the Central taxes is likely to diminish post-GST (Table
10.1)
10.4.2 Losses/gains to the States due to the GST regime have been computed in different
scenarios in para 10.5. More basic issue is the relative losses & gains of the States, discussed
below.
10.5 Relative revenue gains/losses of the States and the Centre: Computations have been made
in the scenario of 2 years: (a) 2013-14, since Actual revenue data for the all the States are available,
and (b) 15-16 (though Actuals are not available), since it would be the base year for computing
compensation to the States. In the pre GST scenario, taxes are based on Actuals, whereas, in the
post GST scenario it has been worked on the assumed GST rates of 18% and 16% respectively. Pre
and post regime scenarios for both the years (13-14 and 15-16) have also been compared.
 Further, though revenue data to the extent available have been taken from (i) RBI for the States
and, (ii) Union Budget for the Centre, - due to non-availability of the required data - several
assumptions and adjustments (often bordering on conjecture) had to be made for
computations viz. (i) exclusion of potable alcohol, petro products, cess for the GST regime, (ii)
elimination of the cascading of CED, (iii) weighted average rate of State VAT/Sales Tax, etc.
10.5.1 Revenue gains/losses of the Centre vs the States: Relative revenue gains/losses of the
Centre vs the States would be determined by the way GST revenue is allocated between the Centre
(CGST) and the States (SGST). Assumptions made here are, (i) GST @ 16%=CGST 8%+SGST
8%, and (ii) GST @ 18%= CGST 9%+SGST 9%.
 Table 10.1 and Annex 10.2 (A) & (B) show the relative gains/losses of the States vs the Centre
in the GST regime in the two scenarios i.e. (i) GST @ 18% for both Goods and Services (9%+9%),
and (ii) GST @ 16% for both Goods and Services (8%+8). It conveys that :
(i) Goods: The Centre, as expected, is gaining in CGST on goods in the GST regime in both 13-14
& 15-16 and also in both the scenarios (i.e. GST @ 16% & 18%), since it would share the entire
goods tax base of the States. Correspondingly, the States are losing on VAT (i.e. SGST) on goods in
the GST regime in both 13-14 & 15-16, since they would share their entire goods base with the
Centre.
(ii) Services: The Centre is losing on Service Tax in the GST regime in both 13-14 & 15-16 and
also in both the scenarios (i.e. GST @ 16% & 18%), since it would now share its entire service tax
base with the States. Correspondingly, the States are gaining in SGST on services in the GST
regime in both 13-14 & 15-16.

(iii) CVD/SAD: The Centre is losing revenue from CVD/SAD in the GST regime, since both are
being subsumed in GST.
(iv) Both Goods and Services:
(a) In the first scenario (GST @ 18% for both goods & services), the States are gaining in 13-14 but
losing in 15-16.
(b) In the second scenario (GST @ 16% for both Goods and Services), the States are losing in both
the years.
(v) Overall, the post-GST scenario seems advantageous for the States (combined) relative to the
Centre, if the assumptions/adjustments made are ‘true’ to life.
Table 10.1: Gains/Losses of the States vs the Centre (Rs. Cr)
Scenario 1 : GST @ 18% on both Goods and Services
Centre States Total
Year (Centre
Goods Services Total Goods Services Total
& States)
13-14 46848 -41934 4914 -93745 111286 17541 22456
15-16 36923 -83459 -46536 -133057 124164 -8893 -55428
Scenario 2 : GST @ 16% on both Goods and Services
13-14 24793 -54472 -29680 -115801 98685 -17116 -46795
15-16 12203 -97676 -85473 -157498 109796 -47702 -133176
Note: See Annex 10.2 (A) & (B) for the supporting computations.
10.5.2 Why Should the Centre have a higher tax accrual: A higher tax accrual to the Centre is an
imperative on both efficiency and equity considerations i.e.-
 The Central Govt. could generally impose & collect revenues more efficiently and hence should
have higher revenue assignments.
 The Central Govt. could use its higher revenue for bridging fiscal capacity deficits of the poorer
States (i.e. “Principle of Equalization”). Incidentally, the State Govt. can generally provide public
goods and services more responsively & efficiently and hence have higher expenditure
responsibilities (“Principle of Subsidiarity”).
10.5.3 Inter-se gains/losses of the States due to the GST regime:
(a) Producing vs consuming States: Ministry of Finance in their post-evidence reply stated before
the Select Committee that there is no scientific data yet available to gauge impact of the proposed
GST on the producing States vis-a-vis the consuming States. However, under GST, the States which
are net importers (i.e. consuming States, generally poor) of goods & services will gain while the
States which are net exporters (i.e. manufacturing States, generally richer) may lose on account of
destination based IGST. However, this is in consonance with the basic philosophy of GST that the
burden of taxes should not be imposed on the non-residents of a State.

 However, subsequently the CEA Committee, 2015 has demonstrated that the manufacturing
States are likely to have a large base in services too and therefore far from needing compensation,
they would actually be benefitting from GST. See Annex 10.1.
(b) Unequal gains to the ‘producing’ States as regards service tax (ICRA, 2016): Currently the
Central Government levies service tax and shares a portion of it (service tax) with the States based
on the UFC recommendations. In the GST regime, the States would have concurrent power (along
with the Centre) to levy tax on services over a common base. As per ICRA's estimates, on an
aggregate basis, revenue related to service tax accruing to the States in the GST regime (i.e.
SGST on services + UFC transfer out of CGST on services) would be twice as high as the share
of service tax devolved to the States in the pre-GST regime (i.e. only UFC transfer of services tax)
See Annex 10.3 for details.
 Further, the tax revenues related to services of nearly all the States are likely to be favorably
impacted after the transition to GST. However the Histogram in Annex 10.3 shows that States like
Gujarat, Karnataka, Maharashtra, Tamil Nadu and West Bengal would get a big hike in service tax
in the GST regime as compared to the current regime whereas, the poor States like Bihar, Assam,
Jharkhand, M.P., Chhattisgarh, Orissa would gain only marginally. Details of computation by
ICRA could be seen at Annex 10.3.
(c) Inter-State gain/losses to the States from services (excluding UFC transfers): Histogram
10.1 shows that all the States are gaining in 15-16 in the GST regime. Haryana (1825), (1820)
Kerala (1834) and Maharashtra (1820) are among the top gainers, whereas, UP (464), Bihar (466)
and Jharkhand (556) are gaining the least among the 18 major States. It evidently corresponds with
the ICRA computation. Overall, gain per capita for HIS (10766) is higher than LIS (3374) in 15-16.
See, Annex 10.4 (B).
Histogram 10.1: Share of the 18 major States in Service tax (excluding UFC
transfers): pre (ET) and post (SGST on Services @ 9%) GST regime for 15-16.
2000
1500
1000
500
0
Har.
Mah.
Guj.
TN
HP
Ker.
Pun.
AP
Kar.
WB
Raj.
Chht.
Odis.
MP
Jhar.
Asm
UP
Bih.
PC Pre GST PC Post GST PC Gain
Note: Supporting data and Computations for 13-14 and 15-16 are given in Annexure 10.4 (A) & (B)
 Moreover, per capita revenue gain for all the States combined in 15-16 (943) is higher as
compared to 13-14 (792). See Annex 10.4 (A) & (B)
(d) Inter-se per capita gains/losses to the States from goods (excluding UFC transfers):
Histogram 10.2 shows that all States are losing in per capita revenue from goods (excluding UFC
transfers) in the GST regime. Haryana (2301), Gujarat (1790) and TN (1566) are losing the most,
whereas, Bihar (206), UP (461) and MP (479) are losing the least.
Histogram 10.2: PC Revenue from goods (excluding UFC transfers) for the 18 major
States in 15-16 in pre (VAT @ 12%) vs post (SGST on Goods @ 9%) GST regime
6500
6000
5500
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
Har.
Mah.
Guj.
TN
HP
Ker.
Pun.
AP
Kar.
WB
Raj.
Chht.
Odis.
MP
Jhar.
Asm
UP
Bih.
-500
-1000
-1500
-2000
-2500
Note: Supporting data and Computations for 13-14 and 15-16 are given in Annexure 10.5 (A) & (B)
 Moreover, per capita loss for all States combined in 15-16 (866) is higher as compared to 13-14
(730). See Annex 10.5 (A) & (B)
(e) Impact of GST on per capita State revenues from both goods & services (excluding UFC
transfers): Histogram 10.3 show per capita revenue (for goods and services combined) of the
States in pre vs post GST regime for 15-16. Majority of the States have higher per capita revenue in
the GST regime. Bihar (582), Maharashtra (633) and Kerala (584) would be among the top gainers,
whereas, Punjab (283), Orissa (105) and Assam (101) would be among the least gainers.

Histogram 10.3: PC Revenue from both goods and services (excluding UFC
transfers) to the 18 major States for 15-16 in pre (VAT @ 12% for goods) vs
post (SGST @ 9%for both goods & services) GST regime.
6500
6000
5500
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
Har.
Mah.
Guj.
TN
HP
Ker.
Pun.
AP
Kar.
WB
Raj.
Chht.
Odis.
MP
Jhar.
Asm
UP
Bih.
-500
-1000
Note: Supporting data and Computations for 13-14 and 15-16 are given in Annexure 10.6 (A) & (B).
 As regards 13-14, majority of the States, except Gujarat (-605) & HP (-108) among HIS, AP (-
460) & Karnataka (-38) among MIS and Chhattisgarh (-182) & Jharkhand (-152) among LIS would
gain (pre vs. post) in per capita revenue in the GST regime. Further, per capita gain for all States in
13-14 (637) is greater than 15-16 (582), See Annexure 10.6 (A) & (B).
10.6 GST and the Union Finance Commission (UFC) transfers:

10.6.1 Fiscal federalism and fiscal transfers: Fiscal federalism consists of the division of
responsibilities in respect of taxation and public expenditure between the Centre and the State
Govts. In a federal setup, fiscal transfers are effected through tax devolutions and grants (Table
10.5), often supplemented by loans from the Centre to the States. The fiscal transfers are guided by
the principle of 'equalization', which neutralizes insufficiency in fiscal capacity (but not revenue
effort) across the States (para 10.5.2). Constitution of India has made several provisions (Articles
268, 269, 270, 275, 282, and 293) for bridging the fiscal gap between the Centre and the States.
Article 280 provides for UFC which determines the share of the States in the Central taxes.
10.6.2 Pre vs. post GST sharing of the UFC transfers (2013-14): Pre & post GST sharing of the
Central taxes & duties for 2013-14 for the major States (i.e. the 13th FC transfer @32%) are given at
Annexure 10.7. Per capita share (post GST) through the UFC transfers for LISs (7334) are higher
as compared to the HIS (5243). Even in terms of pre vs. post GST per capita revenue gain, LIS (94)
are gaining more as compared to HIS (68).

 Further Table 10.2 shows that, the ratio of (UFC % and Population %) is less than 1 for
Haryana, Maharashtra and Gujarat among HIS, whereas, it is greater than 1 for Assam, UP and
Bihar among LIS. It means that in general LISs are getting higher per capita UFC transfers than HIS
in 13-14.
Table 10.2: Share of the States in the UFC transfers (2013-14)
% of % of UFC/ % of % of UFC/
States UFC Pop. Pop. States UFC Pop. Pop.
Haryana 1.0% 2.2% 0.5 WB 7.3% 7.9% 0.9
Maharashtra 5.2% 9.8% 0.5 Rajasthan 5.9% 5.9% 1.0
Gujarat 3.0% 5.2% 0.6 Chhattisgarh 2.5% 2.2% 1.1
TN 5.0% 6.3% 0.8 Odisha 4.8% 3.6% 1.3
HP 0.8% 0.6% 1.3 MP 7.1% 6.3% 1.1
Kerala 2.3% 2.9% 0.8 Jharkhand 2.8% 2.9% 1.0
Punjab 1.4% 2.4% 0.6 Assam 3.6% 2.7% 1.3
AP 6.9% 7.3% 0.9 UP 19.7% 17.3% 1.1
Karnataka 4.3% 5.3% 0.8 Bihar 11% 9% 1.2
Note: % share of the States is based on 13 FC transfers.
10.6.3 Major Losses for the poorer states due to the 14th FC: The 14th FC recommendations have
resulted in major losses for the poorer States as shown in Table 10.3.
Table 10.3: Share of LISs in UFC transfers
UFC GTR of Cesses Tax Share of LIS Share of Bihar
Centre Devo Total PC Total PC
(% of transfer transfer
GTR) (%) (%)
10th 694796 31068 26.33 46.1 12.9
11th 1148007 68203 26.57 51.2 14.5
12th 2663337 301944 25.95 49.3 12498 11.02 4005
13th 5318246 805714 27.22 49.3 23927 10.9 7585
14th 16350470 507100 35.28 46.0 9.6
Note :(a) GTR (Gross Tax Revenue), (b) Devo – Devolution, (c) LIS – Low Income States,
(d) GTR of the 14th FC includes figures for 2015-16, 2016-17 (RE) and 2017-18 (BE).
 Further, Annex 10.8 shows that per capita revenue losses for Orissa (309), Assam (295), MP (291),
Jharkhand (265) and Bihar (257) are higher as compared to Haryana (117), Maharashtra (138), Gujarat
(144), HP (156) and Punjab (156)
10.6.4 Impact of GST on the UFC transfers:
(A) Consequent upon enactment of the CAA, 2016, GST would subsume most of the indirect taxes
levied by the Centre, State and Local Bodies (Box 3.4). The structure of revenues accruing to both
the Centre and the States would change substantially. While the Centre would gain on goods (i.e.
CGST instead of UED on goods), it would loose on services (CGST instead of service tax on
services), See (para 10.5.1). This would in turn impact on the sharable taxes of the Centre.
(B) Impact of GST on UFC transfers (excluding SGST on goods & services) based on 2015-16
data: Histogram 10.4 shows that all States are losing in the sharable Central indirect taxes due to
the decrease in the shareable taxes of the Centre. (Table 10.1). Moreover, in 15-16, LIS such as
Chhattisgarh (340), Orissa (309) and MP (291) are losing the most, whereas, HIS such as Haryana
(117), Maharashtra (138) and AP (142) are losing the least in terms of per capita revenue as shown
in Annex 10.9 (A).
Histogram 10.4: PC Revenue gain of the major States due to the GST regime in the
2500 UFC transfer @ 42%. (15-16)
2000
1500
1000
500
0
Har.
Mah.
Guj.
TN
HP
Ker.
Pun.
AP
Kar.
WB
Raj.
Chht.
Odis.
MP
Jhar.
Asm
UP
Bih.
-500
PC Post GST PC Gain
Note: Supporting data and computations for 13-14 and 15-16 are shown at Annexure 10.9 (A) & (B)
 Further, all States combined are gaining by 1.1% (pre vs. post GST) in 13-14 in per capita
revenue but losing by 13% (pre vs. post GST) in 15-16. See Annex 10.9 (A) & (B).
(B) Impact of GST on State revenues from both Goods and Services (including the UFC
transfers): Histogram 10.5 shows that in 2015-16, Maharashtra (495), Kerala (377), WB (275),
Punjab (127), and Karnataka (23) are gaining. Remaining 13 out of the 18 major States are
losing (5325) in 15-16. All States combined are losing by Rs. 4028 in per capita revenue (pre
vs. post GST) in 15-16. See Annex 10.10 (A).
Histogram 10.5: PC Revenue from goods +Services+UFC transfers to the 18 major States for
15-16 in pre (VAT @ 12%) vs post (SGST @ 9%+ UFC transfers) GST regime.
7500
7000
6500
6000
5500
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
-500
Har.
Mah.
Guj.
TN
HP
Ker.
Pun.
AP
Kar.
WB
Raj.
Chht.
Odis.
MP
Jhar.
Asm
UP
Bih.
-1000
-1500
Note: Supporting data and Computations for 13-14 and 15-16 are shown in Annexure 10.10 (A) & (B)
- As regards 13-14, 11 out of 18 of the States (except Gujarat, HP, AP, Karnataka Chhattisgarh,
Bihar and Jharkhand) gaining in terms of per capita revenue in the GST regime. Overall, the States
are gaining by 0.6% (pre vs. post GST) in 13-14 but losing by 4.5% (pre vs. post GST) in 15-16.
See Annex 10.10 (A) & (B).
10.6.5 UFC transfers to the poorer States would decrease: UFC transfers to the poorer States,
who get greater share than their population (Table 10.2), would decrease (a) on account of the
lower taxes/duties of the Central Govt. (Table 10.1), and (b) if the UFCs continue to reduce share
of the poorer States, as has happened since the 12th FC (Table 10.4).
Table 10.4: Comparison of Tax Devolution (by the 11th to the 14th UFCs)
10.6.6 Structural shift in the Central transfers to the States due to the 14th FC:
 Union Budget 2015-16 has implemented the major recommendations of the 14thFC viz. (i)
increasing the States’ share in tax devolution of the divisible pool (from 32% to 42%), thereby
increasing the flow of unconditional transfers to the States; and simultaneously (ii) modifying
(reducing) the Centre-State funding pattern of some of the centrally sponsored schemes (CSS), in
view of the larger tax devolution to the States.
 The CSS’s have been grouped into three categories viz., (i) fully supported by the Centre, (ii)
with reduced sharing by the Centre, and (iii) schemes which will be delinked from CSS’s. These
changes have resulted in a major shift in Centre-State financing pattern (Table 10.5). Consequential
differential impact on the individual States (of the total Central transfers) are almost impossible to
compute due to non-availability of the relevant data in the public domain. However, the widely
hyped much higher UFC transfers to the States has almost been neutralized through reduction in
other transfers.
Table 10.5: Own revenues and Central transfers to the States (% of GDP)
FC Years Own Revenue Central Transfers Grand
Tax Non-Tax Total Grants- Sharabl Total total
in-Aid e Taxes
13th 10-11 5.9 1.2 7.1 - - 4.9 12.0
FC 11-12 6.4 1.1 7.5 2.1 2.9 5.1 12.6
12-13 6.6 1.2 7.8 1.9 2.9 4.8 12.6
13-14 6.3 1.2 7.5 1.8 2.8 4.7 12.2
14-15 6.3 1.2 7.5 2.7 2.7 5.4 12.8
14th 15-16 (RE) 6.5 1.2 7.7 2.8 3.8 6.6 14.3
FC 16-17 (BE) 6.7 1.3 8.0 3.1 3.9 7.0 15.0
Note: 1. Source: RBI, State Finances, A study of Budget 2016-17.

2. Own revenue includes own tax revenue and own non-tax revenue.
3. Central transfers includes share in central taxes and grants.
10.6.7 Implication of the Special Levies:

 Over the years, there has been a proliferation of special levies – generally used to finance
specific programmes for a finite time period – viz., cess, surcharge and other additional/special
duties that the Central Government has resorted to within the ambit of additional revenue
mobilization (ARM) measures. The Share of special levies in the Central Government’s gross tax
revenue (GTR) has increased rapidly from 8.8 per cent in 2012-13 to 15.2 per cent in 2016-17,
mainly reflecting the impact of the imposition of two new cesses, viz., Swachh Bharat cess and
Krishi/Kalyan/cess in the Union Budget of 2015-16 and 2016-17, respectively.
Table 10.6: Special Levies by the Central Govt. (Rs. Crores)
Item 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
(RE) (BE)
1 2 3 4 5 6 7
1. Cess 72200 76300 83900 132700 183800 190600
2. Surcharge 19500 28000 31900 39100 75400 81600
3. Cess & Surcharge (1+2) 91700 104300 115800 171700 259200 272200
4. GTR of Centre 1036200 1138700 1244900 1455600 1703200 1911600
5. Share of Cess & Surcharge
8.80 9.20 9.30 11.80 15.20 14.20
in GTR (%)
6. Devolution to States 291500 318200 337800 506200 608000 674600
7. States' Share (%) in GTR 28.10 27.90 27.10 34.80 35.70 35.30
Source: RBI 2017.
 GST Council and cesses/surcharges: The GST Council has decided that (a) the existing
cesses/surcharges would be subsumed under GST except the clean energy cess levied on coal, and
that (b) a cess on ultra-luxury goods (viz., high end cars) and demerit goods (viz., tobacco, pan
masala, aerated drinks) would be levied to create ‘Compensation pool’ for compensating the
revenue losing States. Infact luxury and de-merit goods will attract higher GST @ 28% and also a
cess. The GST Council has capped the proposed cess on aerated drinks and luxury automobiles at
15%, pan masala at 135% and cigarettes at 290%. A critique of this is given at Annex 5.9.

 Incidentally, as per Section 8(1) of the Compensation to the States for Loss of Revenue Act,
2017, cesses and surcharges will be collected for a period of 5 years or for such period as may be
prescribed on the recommendations of the GST council.
10.7 Would the poorer States face accentuating fiscal inequity:
10.7.1 Share of 18 major States in Pre vs Post GST regime: Table 10.7 shows the per capita
revenue as the percentage share of total per capita revenue for 18 major States in Pre (VAT @
12%+ ET @ 34%+UFC transfers) vs Post (SGST on both Good & Service @ 9%+UFC
transfers) GST regime (based on 2015-16 data). Evidently, richer States such as Maharashtra,
Kerala, TN and Punjab with high manufacturing & service tax base would continue to have higher
per capita revenue share (pre vs. post) as compared to the poorer States, in the GST regime. Table
10.7 show that, per capita share pre vs. post GST is increasing overall for HIS (from 47% to 49%),
whereas, it is decreasing for LIS (from 26% to 25%) (Table 10.7) thus the fiscal inequity of poorer
States vis-à-vis richer States is likely to increase.
Table 10.7: Share of 18 major States in Pre (VAT@12%+ ET @34%+UFC transfers) vs Post (SGST on
both Good & Service @ 9%+UFC transfers) GST regime in 2015-16.
PC PC % of % of Total
SOTR/ Rev. Rev. Total PC PC Rev.
Sr. States Populn. GSDP PCI SOTR
GSDP (Pre (Post Rev. (Pre (Post
GST) GST) GST) GST)
1 Haryana 2.54 443110 174787 29600 6.68% 7098 6505 7.90% 7.60%
2 Maharas. 11.24 1686695 150096 118960 7.05% 5080 5575 5.60% 6.50%
3 Gujarat 6.04 890152 147279 62070 6.97% 6549 5831 7.30% 6.80%
4 TN 7.21 976703 135377 85770 8.78% 6361 6280 7.10% 7.30%
5 HP 0.69 92529 134792 5700 6.16% 5691 5517 6.30% 6.40%
6 Kerala 3.34 451470 135146 38280 8.48% 6969 7347 7.70% 8.50%
7 Punjab 2.77 349826 126094 28560 8.16% 4801 4928 5.30% 5.70%
HIS Total 33.83 4890485 144549 368940 7.54% 42549 41983 47% 49%
8 AP 8.46 520030 61483 38480 7.40% 5636 4912 6.20% 5.70%
9 Karnataka 6.11 702131 114924 68550 9.76% 5611 5634 6.20% 6.50%
10 WB 9.13 800868 87741 40060 5.00% 3470 3745 3.80% 4.30%
11 Rajasthan 6.85 574549 83816 39790 6.93% 4269 4040 4.70% 4.70%
12 Chhattis. 2.55 210192 82282 18130 8.63% 5506 4614 6.10% 5.40%
MIS Total 33.10 2807769 84815 205010 7.30% 24492 22945 27% 27%
13 Odisha 4.20 310810 74048 19270 6.20% 4186 3982 4.60% 4.60%
14 MP 7.26 508006 69947 39190 7.71% 3878 3671 4.30% 4.30%
15 Jharkhand 3.30 197514 59874 13310 6.74% 4083 3607 4.50% 4.20%
16 Assam 3.12 183798 58899 10750 5.85% 4045 3850 4.50% 4.50%
17 UP 19.98 976297 48861 75970 7.78% 3436 3190 3.80% 3.70%
18 Bihar 10.41 402283 38644 25660 6.38% 3511 2923 3.90% 3.40%
19 LIS Total 48.27 2578708 53422 184150 7.14% 23139 21223 26% 25%
20 18 States 115.21 10276962 89204 758100 7.38% 90180 86151 100.00% 100.00%
21 All India 121.09 11213579 92609 846570 7.55% NA NA NA NA
Note: (i) PC Revenue (pre GST) includes revenue collected from VAT (12%), ET (34%) and shareable UFC

transfer from both Good and Services.
(ii) PC Revenue (post GST) includes SGST on both Goods and Services @ 9%+shareable UFC transfer.
(iii) UFC share of the States are taken as per the 14th FC devolution i.e. Total @42%.
10.7.2 Should the poorer States bear the cost of GST: It would appear that while GST would do
well to the national economy (para 3.8), the moot point is whether the poorest States like Bihar
Jharkhand (from 4.5% to 4.2%), UP (from 3.8% to 3.7%) and Bihar (from 3.9% to 3.4%) with low
tax bases and the lowest PCI (Table 10.7) should bear the cost and face accentuating fiscal inequity,
in a federal polity when the poorer States need to catch up in the larger interest of the national
economy? And if not, what are the ways to address this issue? One option perhaps, is to entrust the
UFC with the issue. But the continuous decline in the share of LIS’s in the UFC devolution since
the 12th UFC (Table 10.4) does not inspire confidence. The confusion of 'cooperative' vs.
'competitive' federalism also raises apprehensions.
10.8 Compensation to the States for the possible loss of revenue due to the GST regime:
10.8.1 Views of the CEA Committee: In the aggregate, the States should not suffer any loss in
revenues because that is intrinsic to the calculation of a RNR. That is, if RNR for the States is set
appropriately, the States as a whole should have the same revenue as before. But there are two
situations why shortfalls may arise.
(i) First, if the aggregate RNR is set low. In this case the GST Council may have to decide to raise
rates. But the interim short falls will have to be compensated.
(ii) A more likely scenario is for shortfalls to be experienced by the individual States even if
the States as whole experience revenue neutrality. The move from status quo to GST will involve
a shift in revenues from the producing States to the consuming States, from manufacturing to
services, and within manufacturing from intermediate and capital goods toward final goods. This
distributional shift is unavoidable because it is intrinsic to the move to GST.
 Prima facie, therefore, the poorer States should be beneficiaries because they consume more, on
average, than they produce; and their economies are more services than manufacturing-based.
 However, the illustrative exercises in the CEA Committee Report (Graph 10.1) shows those
anxieties of some of the major States may be unwarranted. This exercise projects the likely future
tax base of goods consumption using NSS data and likely future tax base of services by estimating
urban incomes. It finds that share of the future tax base for the States is very similar to their share in
the current GST revenues.
 For those States that receive a large share of current revenue because they have a large
manufacturing base, their anxieties can be reassured on the grounds that such States are also likely

to have a large base in services (Histogram 10.1) too and are far from needing compensation, they
would actually be benefitting from GST. See para 10.5.3 for details.
 Graph 10.1 shows that "First, most of the points are below or close to the 45 degree line, and
where they are above the line, they are not very far above it. This suggests that on aggregate there
will not be a huge re-shuffling of taxable revenues.
Second, the largest manufacturing States and the ones that currently get a lion’s share of revenues
either lie below the line, suggesting that far from needing compensation they will actually be
benefitting from the move to the GST; or in the one case, where it is above, it is actually very close
to the line, implying a small compensation requirement."
 The CEA Committee has, however not annexed State-wise data or named the States, even
for illustration in Graph 10.1. (It does not seem to be a transparent approach!). But RNRs for the
States have been computed by various experts as described in para 10.8.4. These State RNRs could
be used for computing the probable revenue losses/gains of the States in the GST regime.
Graph 10.1: Share of revenues to be compensated and share of potential GST base
(Goods & Services bases - 45:55)
Share in future GST

Source: CEA committee, 2015
10.8.2 Views of TFR, 2009: While TFR had estimated RNR for the States to be 6% (wishing
unrealistically GST to be 'flawless'- Annex 3.7 and para 3.5.1), it recommended that the States
should be allowed to impose GST @ 7%. An increase in RNR of the States by 1% implied a
revenue gain of Rs.31,381 crore per annum in the base year 2007-08 i.e. 16.67% increase in
revenues from the 'taxes to be subsumed in GST'
10.8.3 CAA, 2016 and compensation to the revenue loosing states :Since some States
(Histogram 10.7) may suffer substantial revenue loss in the initial years due to their inability to
achieve RNR primarily resulting from (a) sub-summation of several State taxes, (b) removal of
cascading effect, (c) loss of CST revenues, (d) Sub-optimal collections from services sector.(e)
provision of additional set off, etc., the Constitution Amendment Act, 2016 provides for
compensation to the States "for a period which may extend to 5 years". Evidently, this is
conditional upon the ‘Compensation Cess’ pool exceeding the total revenue losses of the
States. Incidentally, earlier in the case of implementation of VAT, compensation was provided for 3
years at a declining rate: (i) 100% in 2005-06, and (ii) 75% and 50% in the following 2 years.
However, compensation was not required beyond the second year in the case of VAT.
10.8.4 State RNRs:
(a) State RNR and the CEA Committee: The CEA Committee has chosen not to provide state-
wise RNR calculations because disaggregated State-wise data that would allow reliable computation
of the current and future tax base for the States is not available. Moreover, the taxable base of the
States will also depend on the rules on supply of goods and services and the changing behavior of
firms in response to these rules (for example, headquarters and where supplied).
(b) State RNRs (2007-08 data) and Kavita Rao & Chakraborty (NIPFP), Jan. 2013:
 NIPFP has provided four alternative estimates of RNR using finance accounts data (FAD) and
the data provided by the Empowered Committee of State Finance Ministers (EC). This is to
compare the rates between FAD and EC data as both the sources have wide differences in number.
This also becomes evident when RNR is estimated using two different sets of data. Each data set
has two estimates of rate, viz. Scenario I and Scenario II.
 In Scenario I, the base of computer and related activities and financial services is excluded. As
per FAD, RNR works out to be lower than the EC data in all scenarios. When FAD is used, in
Scenario I the single rate for all States works out to be 9.7 per cent. In the three rate structure in
scenario I, the general rate works out to be 16.11 per cent.
 The scenario II, estimates the taxable base by assuming that 50 per cent of computer and
related activities would be part of the taxable base adjusted for input tax credit. This scenario also
includes financial services obtained from prowess database. In Scenario II, base is higher than
scenario I
 In the case of RNR without CST, the general rates in all the scenarios hover around 9 to 10% in
three rate GST structure. In a two rate GST structure without CST, the RNR works out to be 8.45%
per cent for Scenario II based on EC data. State RNRs based on this is given at Annex 10.11.
 Para 5.4.4(A) gives a critique of the NIPFP computation by the CEA Committee.
(c) State RNRs for 2013-2014 based on the MSE format: See Annexure 10.12 (A) for the
calculations, basis of which is given at Annex 10.12 (B). As per the MSE approach, 12 out of the 18
major States are gaining due to GST. However, some States are losing as their RNRs are higher
than All India (approx. 8%). viz. HIS (Gujarat and Tamil Nadu), MIS (Andhra Pradesh, Karnataka
& Chhattisgarh) and LIS (Jharkhand).
(d) Alternative approach (2013-14 and 15-16 data): An alternative approach, calculations and
assumptions are given at Annex 10.13 (A) & (B). A summary picture given in Histogram 10.6
shows that RNRs of Gujarat, TN, HP, AP, Karnataka, Chhattisgarh and Jharkhand are higher than
All India (i.e. 8.8%) under both the scenario i.e. GST @ 16% and 18% in 13-14.
Histogram 10.6: RNRs of the major States based on GST @ 16% & 18% for both
Goods and Services (13-14 data)
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Har.
Mah.
Guj.
TN
HP
Ker.
Pun.
AP
Kar.
WB
Raj.
Chht.
Odis.
MP
Jhar.
Asm
UP
Bih.
All India
RNR if GST 16% RNR if GST 18%
 Histogram 10.7 shows that in 15-16, All India RNR is marginally different for GST @ 16%
(8.7%) vis-a-vis @18% (8.9%). Under GST @ 16%, RNRs for Haryana, Gujarat, TN AP,
Rajasthan, Chhattisgarh, and Jharkhand and UP are higher than All India. Even under GST @18%,
RNRs are higher for these States (including Bihar). They would, therefore, loose and need to be
compensated.
Histogram 10.7: RNR of the major States based on GST @ 16% & 18% for both
12.0% Goods and Services (15-16 data)
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Har.
Mah.
Guj.
TN
HP
Ker.
Pun.
AP
Kar.
WB
Raj.
Chht.
Odis.
MP
Jhar.
Asm
UP
Bih.
All India
RNR @ 16% GST RNR @ 18 GST
10.8.5 Estimation of the State-specific loss (SGST+UFC transfers):

 Histogram 10.8 shows the State specific gain or loss (including UFC transfers) per capita in the
scenario of GST @ 18% for both Goods and Services in 13-14 and 15-16. Maharashtra, Kerala
and Bengal are gaining in per capita revenue (post vs. pre GST) in both the years, whereas, Gujarat,
AP, Chhattisgarh, Jharkhand and Bihar are losing. Overall 7 out of 18 States are losing 13-14, and
13 out of 18 States are losing in 15-16. See Annex 10.10 (A) & (B) for details.

Histogram 10.8: State specific gain/loss PC if GST is 18% for both goods and
services (including UFC transfers) in 13-14 and 15-16.
500
0
Har.
Mah.
Guj.
TN
HP
Ker.
Pun.
AP
Kar.
WB
Raj.
Chht.
Odis.
MP
Jhar.
Asm
UP
Bih.
-500
-1000
PC Gain @ 18% PC Gain @ 18%
 Histogram 10.9 shows the scenario of GST @ 16% for both Goods and Services in13-14 and
15-16. Only WB is gaining in per capita revenue (post vs pre GST) in both the years and all other
States (except WB) are losing. Per capita revenue loss for Maharashtra (1186), Gujarat (1231) and
TN (625) Bihar (710) among the highest while the loss is the lowest for MP (386), Assam (388) and
UP (403) in 15-16.
Histogram 10.9: State specific gain/loss PC if GST is 16% for both goods and
services (including UFC transfers) in 13-14 and 15-16*.
500
0
Har.
Mah.
Guj.
TN
HP
Ker.
Pun.
AP
Kar.
WB
Raj.
Chht.
Odis.
MP
Jhar.
Asm
UP
Bih.
-500
-1000
-1500
PC Gain @ 16% GST PC Gain @ 16% GST
*Computation may be seen at Annex 10.10(C).
 Overall, the States are losing by Rs. 27,823 Crore in 13-14 and Rs. 58,159 Crore in 15-16.
10.8.6 Formula for determining Compensation: Fair, transparent and credible compensation will
evidently create conditions for effective implementation of GST by the States and for engendering
trust between the Centre and the States.
(a) Lessons from compensation under the VAT regime (CEA Committee, 2015):
 The formula used for compensation for transition to the State VAT was the following: the three
best annual growth rates of revenue collected in the previous six years was taken, was averaged, and
then used for the calculation of the future revenue to be protected (RP). This method had the virtue

of simplicity and the State Governments knew in advance the actual revenue they could expect to
receive in the coming year and could hence plan accordingly.
 However, there might be one issue in applying the same methodology to GST compensation. In
some of the last five years, revenues witnessed unusually high levels of growth because of the
combination of high real GDP growth and high inflation. The average of the highest three revenue
growth figures for the last three years (11-12, 12-13 & 13-14) for the States as a whole was over
16.8 per cent; and the corresponding average of highest three nominal GDP growth figures was 13.4
per cent.
 This picture could change dramatically both because the real GDP growth has slowed but more
important, because inflation has declined and is expected to remain low. For example, in 2015-16,
nominal GDP growth is expected to be about 9.5 per cent and the forecast for the period ahead is in
the range of 11 per cent and rising slowly on the expectations of a pick-up in real GDP growth.
Now, if the historical buoyancy prevails, this will lead to substantially lower collections which
would be normal and which should not be attributed to GST (and hence would not necessarily need
to be compensated!)
 Hence, the formula for GST compensation would have to take account of two factors: (i) on the
one hand, erring on the side of generous compensation would provide reassurance and certainty to
the States on revenue availability and help them better plan their expenditures; (ii) on the other
hand, the formula should take account of the changed outlook for nominal GDP and hence revenue
growth for both the Centre and the States.
 Incidentally, Graph 10.2 shows that the anticipation/projection mentioned above by the CEA
Committee have not come to be true.
Graph 10.2: Growth rate of Sales Tax/VAT, GDP and Inflation
30
Growth Rate (%)
25
20
15
10
0
01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16
Inflation 5.16 3.2 3.72 3.78 5.57 6.72 5.51 9.7 14.97 9.47 6.49 11.17 9.13 5.86 6.32
Sales Tax/VAT 4.38 11.27 12.88 23.35 20.12 20.54 3.51 14.48 21.10 26.50 23.18 16.97 8.39 14.96 13.89
GDP GR
8.72 7.75 12.03 13.16 14.10 16.60 15.91 15.75 15.18 18.66 20.52 13.91 13.28 10.78 10.20
(current)

(b) The GST (Compensation to the States for Loss of Revenue) Act, 2017:
 Base year and the projected revenue growth of the States: As per Sec 3 and Sec 4 of the
Act, the base year for computing compensation would be 2015-16 and the projected growth rate of
taxes subsumed would be 14%. Illustration : If the base year revenue for 2015-16 for a concerned
State - calculated as per Section 5 - is Rs.100, then the projected revenue for, say, financial year
2018-19 shall be as follows :
𝑃 𝑅 − = +
 Calculation of the Base year revenue and release of compensation:

 Sec 5 details calculation of the Base Year Revenue. Subject to the provision of sub-sections
(2), (3), (4), (5) and (6), the base year revenue for a State shall be the sum of the revenue collected
by the State and the local bodies during the base year, on account of the taxes levied by the
respective State or Union and net of refunds, with respect to the taxes, imposed by the respective
State or Union, which are subsumed into GST.
 Sec 6 and 7 details calculation and release of compensation.
(c) Levy and collection of GST compensation Cess:
 Sec 8 of the GST (Compensation to the States for Loss of Revenue) Act, 2017 provides for
levy and collection of GST 'Compensation Cess' at such rate as may be notified (See Annex 10.14).
(a) on the value determined under Section 15 of the CGST Act, and (b) on such supplies of goods
and services, including imports of goods and services, and (c) those supplies on which tax is
payable on reverse charge basis under Section 7(3) of the CGST Act, 2016, for the purposes of
providing compensation to the States for a period of five years, w.e.f. the date from which the
CGST Act is brought into force. Provided that no such cess shall be leviable under this section on
supplies made by a taxable person permitted to opt for composition levy under Section 8 of the
CGST Act, 2016.
10.8.7 Compensation to the Local Bodies: Para 3.8.4 may be seen in this regard. TFR, 2009 has
recommended that revenues attributable to 2 percentage point out of the 7 percentage point of SGST
should be set apart for devolution to the third-tier of Government so that the third-tier of
Government have an interest in the efficient functioning of the GST and do not have to impose any
cascading taxes like cess, entry tax or Octroi.

Chapter 11
Effect of VAT/GST on Prices
(Price like water seeks its own level!)
11.1 Apprehension regarding the effects of VAT on prices:

11.1.1 Does VAT affect prices: Sales tax reforms are invariably accompanied by intense political
debates about their impact on the price level. Those opposed to reform assert that it would lead to
price increases which would have an adverse impact on the purchasing power of workers in the
unorganized sector and those on fixed incomes. Advocates of reform downplay such fears. Studies
are therefore, conducted to estimate the possible outcomes, and governments, with varying degrees
of commitment, try to protect the public from price increases.
11.1.2 Measuring the effects of VAT on prices: The effects of VAT, like those of most other
taxes, are difficult to assess empirically. It is almost impossible to link, unequivocally, the change in
VAT to the change in prices, efficiency, investment, employment, or whatever. There are usually
too many variables to relate one change uniquely to another (see Box 11.1).
Box 11.1: Estimating the effect of VAT on prices
 The actual ways in which the authorities have tried to estimate the effect on prices range from almost
back of the envelope guesses to sophisticated general equilibrium analyses.
 However, most have used partial equilibrium studies and some, depending on the taxes to be replaced
and the data available, an input-output model for a static general equilibrium price determination.
 The first difficulty is to allocate the taxes replaced, and the VAT (possibly at different rates), to the
available input-output sectors. This inevitably means some substantial judgments, as there are likely to be
fewer input-output sectors than taxed products. Having calculated the industrial-sectoral price changes
these have to be reassigned to the constituent products that make up the household budget in the usual
surveys and in the consumer price index (CPI); this demands another set of heroic assumptions.
 However, the anticipated price changes have matched the actual fairly closely and the apparent
impact on inflation has been much as expected.
Tait, 1988
11.1.3 Response of traders and public: Traders, particularly small businessmen, are uncertain
what effect VAT will have on their liquidity and on the costs of compliance. The public hear bits
and pieces of information, and newspapers sometimes enhance the air of crisis by "scare" stories. In
these circumstances, traders might well attempt to widen margins as a contingency against
uncertainty, and the public may be persuaded to accept higher prices because speculation has
suggested they should expect them.
11.2 Impact of VAT on prices (Bagchi Committee, 1994):
11.2.1 Overall price level: While a revenue neutral replacement of the prevailing taxes by VAT
may or may not have any impact on the overall price level, relative price adjustments are a pre-

condition for the beneficial effects of tax reform to occur. In a market economy, the influence of the
tax system is felt mainly through its impact on the prices of inputs and outputs.
 The nature and magnitude of price changes would depend upon a variety of factors, including the
following:
- aggregate revenue yield of the old and the new systems;
- rate of expansion in money supply;
- statutory tax rates under the old and the new systems;
- degree of competition in the various sectors of the economy, and the pattern of backward and
forward shifting of the tax; and
- mark-up pricing policies of wholesalers and retailers.
 Assuming no change in aggregate revenues and monetary policy stance, the impact of VAT on
the overall CPI should be limited to a one-time adjustment, the magnitude of which could be
influenced by the following two opposing forces:
- First, under a percentage mark-up pricing policy of wholesalers and retailers, a tax at the first
point of sale results in a much larger increase in the final price to consumers than the tax actually
collected by the government (Box 11.2).
- Second, it is possible that a part of the tax that falls on production and distribution of inputs, is
not being shifted forward to consumers, but is being borne by business owners in the form of
reduced profits. Elimination of tax cascading under the new system (VAT) could, in that case,
simply lead to an enhancement of profits, and the tax savings to businesses may not be passed on to
their customers (Box 11.2). The introduction of VAT would, in effect, result in a replacement of the
currently non-rebatable input taxes by the tax on final consumer sales. In the absence of full forward
shifting of the tax savings from the rebating of input taxes, the reform could have the opposite effect
of leading to a one-time increase in CPI.
Box 11.2: Effect of VAT vs pre-VAT system on prices

 To understand how the system of sales taxation (pre-VAT) causes cascading, assume that a product
sold by a manufacturer for Rs 100 gets marked-up by 20 per cent to Rs 120 by the wholesaler, and by 30
per cent to Rs.156 by the retailer. With a first-point tax of 10 per cent on the manufacturer’s selling
price, the retail price of the product would be marked-up to Rs 171.6 (=110x1.2x1.3), or Rs 5.6 (i.e.
15.6-10) more than the amount of tax collected by government from the manufacturer.
 Under a VAT, the retail price increase would be exactly equal to the tax collected by government.
Assuming no change in mark-up percentages, the introduction of VAT could, in such circumstances,
lead to a one-time decrease in retail prices.
Bagchi, 1994(p28)
 Overall, the magnitude of the influences noted above is not expected to be significant. It would
be unrealistic to assume that the percentage mark-ups would remain unchanged under the new
(VAT) system. Wholesalers and retailers could not be expected to accept a reduction in their profits
implied by the constant mark-up assumption. It is likely that they would revise their mark-ups to
achieve the target profit amount. By the same token, competitive forces would prevent producers
and distributors from keeping all of the windfall gain from the elimination of tax cascading.
 In fact, with the liberalization of domestic industrial and international trade policy regime,
domestic producers will be facing increasing competitive pressures (in both domestic and foreign
markets) and would not be able to keep the tax savings from input tax rebates. Foreign suppliers do
not incur Indian taxes on their inputs. Their prices would incorporate only those taxes that apply to
the importation or local sale of finished products.
11.2.2 Relative price changes :The relative price changes occur primarily because of changes in
the effective rates of tax (defined to be the total tax burden on a commodify divided by its pre-tax
retail price) under the old (pre-VAT) and the new (VAT) systems. The effective rates under a
(perfect) VAT extending to the retail level would equal the statutory rates. However, under the
current (pre-VAT) system there is little congruence between the effective and the statutory rates.
The two diverge because of a variety of factors as explained in Box 11.3.
Box 11.3 : Factors behind divergence between effective & statutory rates under pre-VAT system
 First, where the tax is imposed at the first point of sale, the effective rate of tax would be lower than the
statutory rate because of the exclusion from the tax base of the subsequent value-addition by wholesalers and
retailers.
 Second, to the extent the burden of non-rebatable input taxes is shifted forward to consumers, the
effective tax rate on a product would be higher than the statutory rate applicable to the sale of the finished
product alone.
 Third, because of the application of the CST on inter-State sales, the effective rate on products imported
from other States would be higher than the statutory rate applicable to local sales.
 Fourth, given the extent of tax evasion under the current system, the statutory rates may apply to only a
small fraction of total consumption of a given product. The benefit of tax evasion could accrue to the vendor
in the form of higher profit, to the consumer making a particular purchase without paying the tax, to all of the
consumers of a given product, or to both the vendor and the consumers. Where consumers receive at least a
part of the benefit, the effective tax rate would be lower than the statutory rate though the benefit flowing
from such divergence would accrue arbitrarily across producers and consumers.
Source : Bagchi Committee, 1994(p83)
 Further, under the new system (VAT), tax collections from luxury consumer items could go up
relative to other products. Such products are subject to relatively larger non-taxable value-addition
subsequent to the first point of sale. They have also benefited from a substantial drop in the
statutory rates, to the level of basic necessities, because of inter-State competition. The new system
(VAT) would eliminate both of these advantages and cause the relative tax burden on such products
to increase. This would also be the case for products and services that become taxable for the first

time and that do not require a large input of taxable goods (e.g., labour component of works
contracts).
 It may be of interest to note here that with the introduction of the VAT principle in Kerala sales
tax for selected durable consumer goods, retail prices came down while revenue went up even
though the rates of tax were reduced. The fall in prices per unit has been more than the reduction in
the tax incidence.
Box 11.4 : Could VAT be deflationary?

 There has been concern that with the introduction of VAT, a broad-based consumption tax, all businesses
including exempt firms raise their prices—at the rate of the tax—and thereby trigger long-lasting inflation.
Experience of countries adopting VAT shows this concern is unfounded, however.
 Experience indicates that VAT is not inflationary, even though in some countries such as Japan and
Denmark, VAT resulted in once-and-for-all increase in the general price level. If VAT is revenue-
enhancing, it will help the government pursue tight monetary policy, and then VAT may even exert
downward pressure on inflation—in this case, VAT is deflationary rather than inflationary. Graph 11.1
below depicts this situation.
Graph 11.1: Impact of the VAT on general price level
Underlying price
Price level line without VAT
Long-term price
level under VAT
P1
Po
t0 t
 Suppose, without a VAT, the underlying price level is shown by the dotted line.
 Let us assume VAT is introduced in year t0, and there is a once-and-for-all price adjustment: the general
price level goes up from P0 to P1 in year t0. As the government collects more revenues and contracts the
money supply, the rate of growth of the general price level starts to fall. In Graph 11.1, the price line
without a VAT (the dotted line) lies above the long-term price level under VAT (solid line) from year t.
Le, 2003
11.3 Empirical evidence of the impact of VAT on prices from other countries:
11.3.1 Effect on prices due to the introduction of VAT:
 RBI, 2017: As evident from the cross-country experience (Box 11.5), one-off effects on
inflation dissipated after a year of GST/VAT implementation in most countries. In this context, the
short-term effects on inflation depend upon a host of factors including the initial rate at which GST
is implemented, the tax base and the efficiency of tax administration. In the Indian context, the
implementation of GST is likely to have a pass-through impact lasting 12-18 months on the
inflation trajectory (RBI, 2016). This would eventually be moderated by reduction in supply chain
rigidities, transportation and production costs which would accrue from the creation of a unified
goods and services market post-GST.
Box 11.5: Impact of VAT/GST on inflation in some countries

 Singapore witnessed a sharp rise in inflation soon after introduction of the GST, mirroring the
experience of many other countries. Malaysia was able to mitigate this risk as the price rise on account
of GST was moderated by the Ministry of Domestic Trade and Consumer Affairs.
 Australia and New Zealand saw one-off increases in inflation post GST implementation which
normalized within a year. In Australia, GST had a significant but transitory impact on inflation with a
lag of one quarter after its implementation in July 2000. During the quarter, inflation showed an average
increase of 2.6 per cent which was on account of a spike in domestic consumption in the months prior to
VAT/GST implementation as consumers purchased ahead of the new tax coming into effect. Domestic
consumption and economic activity declined after VAT/GST implementation and resulted in the
economy contracting during the first quarter of 2001, but returned to normalcy thereafter (Palil and
Ibrahim, 2011).
 From the British and German experiences, VAT/GST was found to be least disruptive in terms of
inflation if introduced during a period of economic slowdown. In 1979, a wage price inflation spiral
afflicted the British economy after VAT/GST was raised from 11 to 15 per cent as producers increased
prices beyond what was necessary to cover the additional VAT/GST. In contrast, West Germany was
able to minimize the inflationary impact by introducing VAT/GST during recession in 1968. All
subsequent rate increases in Germany have since been successfully effected during periods of economic
slack (Palil and Ibrahim, 2011).
 In the context of 17 Eurozone countries, VAT pass-through to inflation during 1999 to 2013 were
found to be sensitive to the type of VAT change and significantly different between durables and non-
durables due to differences in storability and other features such as the salience of tax changes. For
changes in the standard rate, the final pass through was about 100 per cent, while for reduced rates it was
significantly lower at around 30 per cent (Benedek et al., 2015).
RBI, 2017
 Tait, 1988: Changes in the consumer price indices (CPI), credit, and wages have been examined
in 35 countries for two years on each side of the date VAT was introduced; another 6 examples of
rate changes in existing VAT systems were investigated. The actual outturns were compared to four
hypotheses, first, that VAT could lead to a once and for all shift in the trend of CPI; second, it
might generate an accelerated increase in the rate of growth of CPI (that is, inflation); third, there
could be a shift and acceleration in CPI; and finally, there might be little or no effect. Annex 11.1
summarizes the results. In most countries, the introduction of VAT, or a change in VAT rates, is not
inflationary. The change might lead to a once and for all shift in prices but not to an acceleration of
price changes.
- An interesting outcome was the clear indication of a pronounced shift in eight of the countries
examined. However, only in one case (Norway) was the shift unambiguously combined with an
acceleration in the rate of change of CPI. In another (Bolivia), after looking at other evidence, it was
concluded that the shift was not due to VAT. So in all, there were 7 cases where VAT created a
shift in the trend of the CPI. In 5 countries, there was an acceleration; in 1, a shift and an
acceleration; and in the rest 22 (or 63 percent of the countries), there was little or no effect of the
introduction of VAT on CPI.
11.3.2 Effect on prices due to changes in the rates of existing VAT: Apart from the introduction
of VAT, evidence of the effect of the tax on prices might be judged from changes in the rates of
existing VATs. Examination of six rate changes (see Annex11.1) does not suggest any automatic
link between VAT rate changes and inflation. Only one country (Ireland) suffered accelerated price
changes, one country (Denmark) exhibited a shift, and the other four showed little or no effect.
 While some commentators have associated VAT rate changes with inflation, the weight of
evidence seems to be against it. Indeed, practical common sense suggests the opposite: "Price
increases remove inflationary pressure; they do not add to it. Some light may be shed on the issue
by pursuing the symmetrical argument for lower indirect taxes. If it were possible to excite
inflationary expectations by a switch to indirect taxes, would it not follow that one could subdue
such expectations by switches from indirect taxes to income tax? Or perhaps to more borrowing to
finance some subsidies?" In any case, further assumptions have to be made on an accommodating
monetary policy and on the adjustments in wages and transfers.
11.4 Likely impact of VAT on prices in India (CEA Committee, 2015):

11.4.1 Potential price impact of GST: In principle, the GST should have no aggregate impact
on inflation and the price level because the new rate will be a revenue neutral one. Revenue
neutrality may, however, not be enough to guarantee that there will be no price impact across all
categories of goods and services. This is because the weights of commodities in the consumption
basket (on which the CPI is based) are different from their contribution to indirect tax collections.
The impact on particular goods and services will depend on the current structure of taxation
(including exemptions) and the future structure of the GST both at the Centre and the States. To
estimate the impact on future inflation, we need to begin with understanding the current structure of
taxes.
11.4.2 Current taxes on the consumption basket:
 The average effective tax rate on consumption as measured by the CPI is 10.4%. Excluding items
outside GST coverage, the rate drops to 7%, as the excluded items (e.g. alcohol, petrol and diesel)
have very high tax rates. This relatively low rate reflects a number of key features.
- First, categories like food and beverages, rent and clothing have large weights in CPI basket
(Figure 4). These are categories that are either exempted or taxed at low rates. For example, 75% of

CPI is exempt from excise, and 47% of CPI is exempt from sales tax (Figure 5). Excluding taxed
items that are outside GST (e.g. alcohol, petrol and diesel), 54% of the CPI would be GST exempt.
- Second, most items, where not exempted, are taxed at a lower rate. Thus, in addition to exempted
commodities, a further 32% is taxed at a low rate, and only 15% at a normal rate (Figure 6). The
4% taxed at a high rate are mostly the items excluded from GST (viz. petrol, diesel and alcohol).
- The taxation of some essential commodities in CPI is shown in Figure 7. Most of the categories
with a large CPI weight have traditionally been taxed at low rates to reflect distributional concerns;
that is, these are goods and services which are important for poorer sections of society and hence
are taxed at zero or low rates.
- In some cases, while the headline tax rate is zero, the effective tax rate is higher given the taxes
on inputs. For example, the headline average tax rate on cereals is 2.3%, and vegetables and fruits is
0.5%, but adjusted for the taxes paid on inputs, the effective tax rate on cereals and vegetables rises
to 4.8% and 1.1% respectively. The same holds true for electricity: this is not taxed explicitly, but
the effective tax rate is 8.8%. Even after these adjustments however, these effective rates are low.
Further, to some extent, even these numbers do not truly reflect the net tax burden because of the
subsidies provided by the public distribution system (PDS).

11.4.3 Aggregate impact on inflation to depend on RNR and Standard Rate:
(a) Dual-rate GST with a lower rate of 12 per cent and a standard rate of 18 per cent: This
rate structure would correspond broadly to an RNR of about 15-15.5 per cent. As one can expect,
this has low inflation impact given the small part of CPI that gets taxed at the normal tax rate
(Figure 12 shows the sensitivity). An 18% standard rate would impact CPI by -0.1% if all
producers reacted to headline tax changes and 0% if they reacted after adjusting for input tax
credits as well. Under this dual rate structure, food and beverages would see virtually no price
increase and neither would fuel and light, which would be especially important for protecting
poorer consumers (Figure 13).
Note: (a) Lower rate = 12%, Standard rate = 18%.

(b) Assumed that (i) most food items are exempt except where processing is involved (e.g.
cooked meals, biscuits, sugar, tea, papad, bhujia), (ii) processed food is taxed at the low rate of 12%
(this is 9.6% of the 45.9% of CPI that is food & beverages). (iii) textiles and clothing are taxed at a
low rate (12%). Normal tax rate (18%) would then apply to about 11.2% of CPI. (iv) a change in the
tax rate would drive the supplier to change pricing. In some cases, even if the headline tax rate does
not change (particularly for the exempt categories) if the taxes on inputs go up, the producer may be
motivated to raise prices. For example, if taxes on fertilizers go up, the rice or cotton producer may
take price increases. The reality may fall between the two alternatives: even if GST credits start
flowing in relatively fast, some producers may still price on the headline rate.
(c) Producers’ pricing power in assessing the impact on inflation has not been factored in:
some may not have the pricing power to take price increases (e.g. prices that are determined
globally, say a cotton farmer that sees an increase in input prices), while others, like producers of

personal products, may not cut prices even if they see a reduction in their tax rates.
(ii) These aggregate calculations would depend on a number of details in the design of the
eventual GST, including:
a) Final synchronized exemption lists;
b) The choice of categories to which low-rates are applied;
c) Exemption threshold for enterprises: a low threshold would mean that more producers/sellers
pay GST, and thus re-price their goods/services, whereas, a high threshold would bring that down
(some categories like food could be particularly sensitive to this choice). In many categories the
bulk of the goods/service are accessed through suppliers/outlets that don't pay tax (e.g. if all barbers
& beauticians paid service tax, collections would be Rs 5000-plus crore, but the collections are
about Rs. 100 crore);
d) How many suppliers react just to the headline rate and have the pricing power to either take
price increases or hold on to prices even when they are net beneficiaries of GST implementation;
e) Given the large impact of PDS on food, fuel and light, the impact on the bottom 40% can be
offset by State governments making changes to PDS.
(iii) New GST features: currently excise and VAT cannot be offset, and cascade. In addition, VAT
credits cannot be carried across States. Both these characteristics would change in the GST regime,
and affect the eventual inflation.
11.4.4 Views of NCAER, 2009: Overall price levels may actually go down due to more efficient
allocation of factors of production in the long run.
11.4.5 Views of a Rtd. Professor of JNU: It is given in para 3.9.8(b). It is reproduced below for
ready reference. It argues that the concepts of price stability and RNR are mutually inconsistent:
 Services did not have to pay sales tax but will now have to pay SGST to the States so their
prices will rise. For instance, telephone calls, insurance, transportation, restaurants, etc. will
become dearer (Service tax is to increase from 15% to 18%)..
 A common tax rate will imply that all basic and essential goods prices will rise, and even if
some final goods prices fall, the rate of inflation will go up. If the rate of inflation rises, demand in
the economy would fall and the rate of growth will decline contrary to the argument by proponents
of GST. up (while the problems with the lower rates for basic /essential good are elucidated in para
6.1, the GST Council has fixed zero or low rate of 5% for basic and essential goods).
 To avoid this, the government will have to give up the RNR and fix lower rates of tax. But
then the collection of tax will fall compared to the present and the States will suffer. The deficit of
the Centre and the States will then rise. This is the worry of the States. If the Centre tries to
compensate them for the fall in revenue, as it is promising to do, the Centre’s deficit will rise even
more which will create further problems (e.g. lead to lower transfers from the Centre through the
UFC mechanism which benefit low income States more).
11.4.6 GST Council on the rate structure and prices: Para 5.5.7 shows that the GST Council has
taken care of impact of GST on prices while deciding the rate structure. But due to many
imponderables (see para 11.2), no forecast can be made with accuracy.
11.5 Post-VAT inflation in India: Graph 11.2 shows that inflation increased after 2004-05 i.e. the
year of implementations of VAT. Which of the factors mentioned in para 11.2.1 caused it, is
difficult to ascertain in the absence of good data?
Graph 11.2: CPI Inflation trend

14 13.17
12.11
12
10.22 10.83 10.92
9.30
Inflation Rate
10
8.32
8 8.98 8.87
7.25 5.79
6 6.39
4.84 4.31 4.25 6.37 5.88
4
4.02 3.81 3.77
2 3.77
Inflation
0
2006
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2007
2008
2009
2010
2011
2012
2013
2014
2015
Year
11.6 Effective mechanism to monitor and contain price impact (Tait, 1988):
11.6.1 Action by Govts. to monitor and contain prices: Naturally, it is a bit difficult to know
what influences what. Because the authorities have estimated the price changes that might occur, to
some extent, those are the price changes that will be permitted to happen. Governments undertake
extensive actions to influence prices, from moral suasion to price controls, and these themselves
reflect the judgments already made about expected price changes.
 Another difficulty, especially in complex substitutions, is that in some sectors, prices are
calculated to fall (for example, the U.K. purchase tax and some Korean tax rates), and it is always
easier for government to limit price increases than to require a price reduction. Usually in the
estimates of the effect of the VAT substitution on CPI, it is better to err on the side of caution when
the net effects of price increases are offset by price reductions. Experience shows price reductions
rarely reflect the full tax reduction and some allowance should be made for this.
11.6.2 Mechanism to monitor price increases: However, to ensure that producers do not take
advantage of GST, the government should set up mechanisms to monitor price impact, especially of
sensitive items, as was done by Australia. It could be especially vigilant in identifying anti-
competitive producer behaviour that hurts consumers via excessive price increases.
11.6.3 UK Counter-Inflation Bill, 1973: It contained a clause about retail prices in the period of
transition to VAT, drafted after consultation with the Confederation of British Industry and the
Retail Consortium, on the basis that a special temporary price control could be set in motion by an
individual consumer's complaint about a particular price. The complaint would lead to an
investigation of the facts; if it were found that the price change did not correctly reflect the tax
changes, a notice would be served on the shopkeeper requiring him to correct the price.
Disregarding the notice would be an offense.
 This approach was adopted because public anxiety about the impact of VAT on prices had to
be allayed. It was recognized that, initially, many retailers might be genuinely perplexed and
that not all instances of apparent overcharging could be regarded as profiteering. Some
discretion and flexibility was considered necessary.
Box 11.6: VAT in UK and measures to manage price.

 The success of the U.K. introduction of VAT, despite a most difficult set of relative price changes, is
principally due to the care the authorities took in cooperating with industry and the public to anticipate
and meet their major concerns about VAT.
 The Government published periodic VAT bulletins for traders and tried to pay an educational visit
to each before VAT was introduced.
 The monitoring of price changes by official agencies, consumer watchdogs, and newspapers
undoubtedly provided a coverage that convinced everyone that the Government was serious about
controlling unjustified price increases and ensuring price reductions when traders had been relieved of
tax.
11.7 Action being taken by the Central/State Govts. in India to control prices :
11.7.1 GST Council and GST rates for managing prices : Apparently as a matter of abundant
precaution (given the sensitivity of price rise), the GST Council has (i) adopted multiple rate
structure (5, 12, 18, 28) apart from the exemption of essential items, and (ii) assigned to various
goods the rates proximate to the existing ones. Incidentally, multiplicity of rates would defeat some
key objectives of the GST regime, without significantly benefitting the 'poor' (see para 6.1 etc. for
details). As argued earlier, a reasonable threshold for small traders and direct transfers to the poor
should achieve the objective better.
11.7.2 Anti-profiteering Measure in the CGST Act, 2017:
Sec. 171. (1) Any reduction in rate of tax on any supply of goods or services or the benefit of input
tax credit shall be passed on to the recipient by way of commensurate reduction in prices.
(2) The Central Government may, on recommendations of the Council, by notification, constitute an
Authority, or empower an existing Authority constituted under any law for the time being in force,
to examine whether input tax credits availed by any registered person or the reduction in the tax rate

have actually resulted in a commensurate reduction in the price of the goods or services or both
supplied by him.
(3) The Authority referred to in sub-section (2) shall exercise such powers and discharge such
functions as may be prescribed.
 CGST Rules, 2017 relating to anti profiteering are as follows:
Rule 122: Constitution of the Authority- The Authority shall consist of,- (a) a Chairman who
holds or has held a post equivalent in rank to a Secretary to the Government of India; and (b) four
Technical Members who are or have been Commissioners of State tax or central tax or have held an
equivalent post under the existing law, to be nominated by the Council.
Rule 123: Constitution of the Standing Committee and Screening Committees- (1) The Council
may constitute a Standing Committee on Anti-profiteering which shall consist of such officers of
the State Government and Central Government as may be nominated by it. (2) A State level
Screening Committee shall be constituted in each State by the State Governments which shall
consist of- (a) one officer of the State Government, to be nominated by the Commissioner, and (b)
one officer of the Central Government, to be nominated by the Chief Commissioner.
Rule 127: Duties of the Authority.- It shall be the duty of the Authority- (i) to determine whether
any reduction in the rate of tax on any supply of goods or services or the benefit of input tax credit
has been passed on to the recipient by way of commensurate reduction in prices; (ii) to identify the
registered person who has not passed on the benefit of reduction in the rate of tax on supply of
goods or services or the benefit of input tax credit to the recipient by way of commensurate
reduction in prices; (iii) to order, (a) reduction in prices; (b) return to the recipient, an amount
equivalent to the amount not passed on by way of commensurate reduction in prices along with
interest at the rate of eighteen per cent. from the date of collection of the higher amount till the date
of the return of such amount or recovery of the amount not returned, as the case may be, in case the
eligible person does not claim return of the amount or is not identifiable, and depositing the same in
the Fund referred to in section 57; (c) imposition of penalty as specified in the Act; and (d)
cancellation of registration under the Act.
Rule 137: Tenure of Authority- The Authority shall cease to exist after the expiry of two years
from the date on which the Chairman enters upon his office unless the Council recommends
otherwise.
11.8 Price inclusive or exclusive of VAT (Tait, 1988):
 One possible variation in VAT is whether or not the tax rate is levied on a price inclusive or
exclusive of the tax liability. A 10 percent VAT, on a price exclusive of VAT, is clear to the

consumer. However, it does mean letting the purchaser know both the price before VAT is applied
and the amount of tax that must be paid.
 Alternatively, if the tax is quoted tax inclusive, then a rate of only 9.1 percent would be needed
to generate the same revenue (9.1 percent of 110 yields 10). In theory, it makes no difference which
method is used; in practice, though France originally used it, only Finland and Sweden have
persistently employed the tax-inclusive base.
 On another pricing issue, U.S. commentators often claim incorrectly that the VAT conceals the
tax burden from the consumer. Consumers in Europe can see goods priced with or without VAT; if
without, they are then exposed to the shock of VAT added at the cash register. If anything, this is a
much greater "tax shock" than the usual tobacco, gasoline, or liquor excise common in the United
States.
 Any sales tax can be "concealed" from the taxpayer; this is not a criticism restricted only to
VAT.
11.9 Conclusion : Although VAT generally is non-inflationary or even deflationary, it is critical to

consider the timing in introducing VAT. Practical experience indicates that VAT should not be
introduced when inflation is rising. Otherwise, VAT would be wrongly perceived as inflationary
and become a hard sell to the public. Graph 11.2 shows that 'VAT' in India was introduced in 2004-
05 when inflation was stationary around 4%. Nevertheless, CPI inflation increased post-'VAT'. But
as stated in para 11.6, which of the factors mentioned in para 11.2.1 caused it, is difficult to
ascertain in the absence of good data.

A Reference Guide
On
VAT/GST
in India
Part II (Annexures)
feedback to- anpsinha9999@gmail.com

List of Annexures
Annex Title Para
No.
1.1A Concepts of tax incidence and Tax Progressiveness 1.2
1.1B Partial Equilibrium models of taxation 1.2
1.2 Ability vs Benefit theory of taxation 1.3.1
1.3 Tax Structure by Region 1.3.5
1.4 Tax on consumption vs tax on income(Keen,2007) 1.3.5
1.5 Vertical & Horizontal equity and income vs consumption tax 1.4
1.6 Features of VAT in some countries 1.5.2
1.7 Rationale for VAT 1.5.5
1.8 Comparative methods of computing VAT 1.5.8
1.9 Three prime models of GST 1.5.9
1.10 Direct taxes code, 2013 1.7.3
1.11A Direct and Indirect taxes of the Centre and the States 1.8
1.11B Major Taxes of GOI 1.8
1.12 Tax/GDP Ratio of the major countries. 1.7.1
2.1 SEVENTH SCHEDULE of the Constitution (Art 246)-taxation powers 2.1.1
2.2 Estimation of Tax Bases Under VAT and RNR (Bagchi Committee 1994) 2.4.1
2.3 Service Tax – Negative List. 2.6.1
2.4 Computing ST,VAT & GST(Intrastate and Interstate) 2.8.6
2.5 List of declared goods under VAT 2.7
2.6 VAT/ST Collection of the States 2.9.1
2.7 Impact of VAT Reform in different Indian States 2.9.3
2.8A Sales Tax/VAT Effort of the states 2.10
2.8B Supporting Data for Sales Tax/VAT effort of the States 2.10
3.1 Classification of goods in different states. 3.1.2
3.2 Concept of Manufacture 3.1.2
3.3 India‘s Indirect Taxes 3.1.3
3.4 Distortions resulting from CST and why is GST a better option than CVD/SAD 3.4.4
3.5 Costs of Logistics in inter-state trade in India 3.4.5
3.6 Impact of VAT/Excise Duties on investment 3.4.6
3.7(A) 26 Elements of pure/flawless GST 3.7.1
3.7(B) Seven macro-economic channels for minimizing distortions though GST 3.7.1
3.8 Features and impact of current system vis a vis an ideal GST regime 3.7.2
3.9(A) Present taxation vs expected GST 3.7.2
3.9(B) VAT vs GST Regime 3.7.2
3.10 Possible impact of GST on Small Scale Industries 3.8.5
3.11 Sectoral impact of GST (ICRA, 2016) 3.8.6
3.12 Whether Cascading is a serious problem 3.4.2
4.1(A) CST collection( pre and post VAT regime) 4.3.4
4.1 (B) Top and Bottom States in per capita CST 4.1
4.2 Design of IGST 4.4.2
4.3 Functional components of the MBM 4.4.3
4.4 Computing IGST 4.4.5
5.1 (A) Single vs multiple GST rates. 5.2.1
5.1 (B) Optimal tax perspective on rate differentiation. 5.2.3
5.2 Current VATs: Rates, Threshold and Revenues. 5.2.6
5.3(A) Subtractive Index methods of computing tax base. 5.3.3
5.3(B) Consumption and Shome Index Methods of computing tax base. 5.3.3
5.3(C) Revenue method of computing tax base 5.3.3
5.4 Approaches considered by the CEA Committee for computing tax base 5.4.2
5.5 VAT rate structure of Bihar. 5.5.4
5.6 Adjustments made to the ITT approach for estimating RNR. 5.5.1

5.7 Lower, standard and ―demerit‖ rates 5.4.4
5.8 Computation of RNR for GoI. 5.5.3
5.9 Critique of the proposed VAT rates and cess for the compensation pool 5.5.4
5.10 Estimating association between rates and compliance 5.6.2
5.11 Comparison of C- efficiency of various approaches of computing RNR. 5.7.5
6.1 Consequences of exemption 6.1.1
6.2 Effects on VAT of exemption and zero-rating in credit vs substraction methods 6.3.3
6.3(A) List of goods notified for exemption under sec11(1) of the CGST Act 6.4.5
6.3(B) List of services notified for exemption under sec11(1) of the CGST Act 6.5.4
7.1 SCHEDULE IV: Activities or transactions in respect of which the Central/ State 7.3.4
Government or Local Authority shall not be regarded as a taxable person
7.2 Treatment of immovable properties 7.4.3
7.3(A) What constitutes Financial Sector 7.5
7.3(B) Percent VAT with financial intermediaries excluded from tax base
8.1 VAT in Ghana—failure and success lessons 8.1.2
8.2 Section plan under the CGST Act,2017 8.3.1
8.3 Major decisions of the GST Council 8.4.4
8.4 GSTN Model 3.4.3
8.5(A) Comparison of some State e-gov in Commercial Taxes 8.13.4
8.5 (B) Additional properties of e-gov 8.13.4
8.6(A) GSTN features 8.13.1
8.6 (B) GSTN and Registration procedure. 8.13.1
8.7 Major Features of the Registration, Return Filing and Payment Procedures 8.7.2
9.1 Forms of Evasion 9.2.3
9.2 Relative merit of Reverse charging/withholding, VAT accounts, PVAT,CVAT and VIVAT 9.7.1
9.3 Inspection, Search, Seizure and Arrest(Sec 67-72 of the CGST Act) 9.9.2
9.4 Offences and penalties (Sec 122-138 of the CGST Act) 9.9.4
10.1 Will there be large compensation requirements? 10.2.ii.c
10.2(A) Share of the major States in Manufacturing and Services in GDP 10.5.1
10.2(B) Indirect Tax revenues for All States and Centre in Pre and Post GST regime. 10.5.1
10.3 Impact of GST on the share of the States in Services Tax(ICRA,2016) 10.5.3
10.4 Share of the major States in Service Tax: pre (ET) VS post GST regime. 10.5.3
10.5 Per capita Revenue from goods to the major States in 13-14 & 15-16 in pre vs. GST regime. 10.5.3
10.6 Per capita Revenue from Goods and Services (Excluding UFC transfers) of the 18 major 10.5.3
States in pre vs. post GST regime.
10.7 Shareable indirect central taxes for 18 major States (13-14) as per 13th FC formula 10.6.2
10.8 Shareable indirect central taxes for the 18 major States (15-16) as per 14th FC formula 10.6.3
10.9 Per capita Revenue of the 18 major States due to the GST regime in the UFC transfer. 10.6.4
10.10 Per Capita Revenue of the States form both goods and services (including UFC transfer) 10.6.4
@42% in 15-16
10.11 States RNRs-Kavita Rao, NIPFP(2009) 10.8.4
10.12(A) Computation of RNRs of major States based on 2013-14 data. (MSE Methodology). 10.8.4
10.12(B) Basis assumptions in computation of RNR as per MSE Approach. 10.8.4
10.13(A) State losses or gains for both goods & services (2013-14) 10.8.4
10.13(B) States Losses or gains for both goods & services (2015-16). 10.8.4
11.1 Effects on prices of introduction of VAT in some countries. 11.3.1

Annexure 1.1A
(Para 1.2)
Concepts of Tax Incidence and Tax Progresiveness
A.Tax incidence
 Two main concepts of how a tax is distributed:

 Statutory incidence – who is legally responsible for tax
 Economic incidence – the true change in the distribution of income induced by tax.
 These two concepts differ because of tax shifting.
 Only people can bear taxes
 Business paying their fair share simply shifts the tax burden to different people
 Can study people whose total income consists of different proportions of labor earnings, capital
income, and so on.
 Sometimes appropriate to study incidence of a tax across regions
 Both Sources and Uses of Income should be considered
Tax affects consumers, workers in industry, and owners
Economists often ignore the sources side
 Incidence depends on how prices are determined
Industry structure matters
Short- versus long-run responses
 Incidence depends on disposition of tax revenue
Balanced budget incidence computes the combined effects of levying taxes and government spending
financed by those taxes.
Differential tax incidence compares the incidence of one tax to another, ignoring how the money is
spent.
Often the comparison tax is a lump sum tax – a tax that does not depend on a person‘s behavior.
B.Tax progressiveness
 A tax is often classified as: Progressive, Regressive, Proportional
(Proportional taxes: ratio of taxes to income is constant regardless of income level).
 Can define progressive (and regressive) taxes in a number of ways.
 Can compute in terms of
Average tax rate (ratio of total taxes and total income) or
Marginal tax rate (tax rate on last dollar of income)
 Measuring how progressive a tax system is, presents additional difficulties. Consider two simple
definitions.
 The first one says that the greater the increase in average tax rates as income rises, the more
progressive is the system.
 The second one says a tax system is more progressive if its elasticity of tax revenues with respect to
income is higher.(an elasticity is defined in terms of percent change in one variable with respect to
percent change in another one)
 T1  T0 
% T T1
 TI00
v2  
T0
v1 
I1
% I  I1  I0 
I0 I1  I 0
 These two measures, both of which make intuitive sense, may lead to different answers.
Example: increasing all taxpayer‘s liability by 20%?
Source: Dale Carnegie, Training

Annexure 1.1(B)
(Para 1.2)
Partial Equilibrium Models of Taxation
A. Partial Equilibrium Models

 Partial equilibrium models only examine the market in which the tax is imposed, and ignores
other markets.
 Most appropriate when the taxed commodity is small relative to the economy as a whole
 Unit taxes are levied as a fixed amount per unit of commodity sold
o Excise tax on cigarettes, for example, is 2.37 CZK per piece; sparkling wine 2340.- CZK per 1 hl.
 Assume perfect competition. Then the initial equilibrium is determined as (Q0, P0) in Figure 1.
 Next, impose a per-unit tax of $u in this market.
o Key insight: In the presence of a tax, the price paid by consumers and price received by
producers differ.
o Before, the supply-and-demand system was used to determine a single price; now there is a
separate price for each.
 How does the tax affect the demand schedule?
o Consider point a in Figure 1. Pa is the maximum price consumers would pay for Qa.
o The willingness-to-pay by demanders does NOT change when a tax is imposed on them. Instead,
the demand curve as perceived by producers changes.
o Producers perceive they could receive only (Pa–u) if they supplied Qa. That is, suppliers perceive
that the demand curve shifts down to point b in Figure 1
Figure 1 Figure 2
B. Partial Equilibrium Models: Per-unit taxes

 Performing this thought experiment for all quantities leads to a new, perceived demand curve
shown in Figure 2.
 This new demand curve, Dc‘, is relevant for suppliers because it shows how much they receive for
each unit sold.
 Equilibrium now consists of a new quantity and two prices (one paid by demanders, and the other
received by suppliers).
The supplier‘s price (Pn) is determined by the new demand curve and the old supply curve.
The demander‘s price Pg=Pn+u.
Quantity Q1 is obtained by either D(Pg) or S(Pn).
 Tax revenue is equal to uQ1, or area kfhn in Figure 2.
 The economic incidence of the tax is split between the demanders and suppliers
Price demanders face goes up from P0 to Pg, which (in this case) is less than the statutory tax, u.
Cont…
(ii)
C.Partial Equilibrium Models: Taxes on suppliers vs. demanders
 Incidence of a unit tax is independent of whether it is levied on consumers or producers.
If the tax were levied on producers, the supplier curve as perceived by consumers would shift upward.
 This means that consumers perceive it is more expensive for the firms to provide any given
quantity
This is illustrated in Figure 3.
Figure 3
D. Partial Equilibrium Models: Elasticities

 Incidence of a unit tax depends on the elasticities of supply and demand.
 In general, the more elastic the demand curve, the less of the tax is borne by consumers, ceteris
paribus.
Elasticities provide a measure of an economic agent‘s ability to ―escape‖ the tax.
The more elastic the demand, the easier it is for consumers to turn to other products when the price
goes up. Thus, suppliers must bear more of tax.
 Figures 4 and 5 illustrate two extreme cases.
Figure 4 shows a perfectly inelastic supply curve
Figure 5 shows a perfectly elastic supply curve
 In the first case, the price consumers pay does not change.
 In the second case, the price consumers pay increases by the full amount of the tax.
Figure 4 Figure 5
E. Partial Equilibrium Models: Ad-valorem Tax

• An ad-valorem tax is a tax with a rate given in proportion to the price.
• A good example is the sales tax.
• Graphical analysis is fairly similar to the case we had before.
• Instead of moving the demand curve down by the same absolute amount for each quantity,
move it down by the same proportion.
Contd…..
(iii)
• Figure 6 shows an ad-valorem tax levied on demanders.
• As with the per-unit tax, the demand curve as perceived by suppliers has changed, and the
same analysis is used to find equilibrium quantity and prices.
Figure 6 Figure 7
• The payroll tax, which pays for Social Security and Public Health Care, is an ad-valorem tax on a
factor of production – labor.
• Statutory incidence in the CR is split unevenly with a total of 34% paid by employer and 11%
paid by employee.
• The statutory distinction is irrelevant – the incidence is determined by the underlying elasticities
of supply and demand.
• Figure 7 shows the likely outcome on wages.
Source: Public Economics, dale Carnegie, training

Annexure 1.2
(Para 1.3.1)
Ability vs Benefit theory of Taxation
 In modern public-finance literature, there have been two main issues relating to taxation: who can
pay (Ability principal) and who can benefit (Benefit principle). Correspondingly, influential
theories have been (i) the ability theory presented by Pigou and (ii) the benefit theory developed
by Erik Lindahl. There is a later version of the benefit theory known as the "voluntary exchange"
theory. s
A. Benefit theory
 Under the benefit theory, tax levels are automatically determined, because taxpayers pay
proportionately for the government benefits they receive. In other words, the individuals who benefit
the most from public services pay the most taxes. Here, two models adopting the benefit approach are
discussed: the Lindahl model and the Bowen model.s
(i) Lindahl's model
Lindahl tries to solve three problems:

 Extent of state activity
 Allocation of the total expenditure among various goods and services
 Allocation of tax burden
In the Lindahl model, if SS is the supply curve of state services it is assumed that production of social
goods is linear and homogenous. DDa is the demand curve of taxpayer A, and DDb is the demand
curve of taxpayer B. The vertical summation of the two demand curves results in the community‘s
total demand schedule for state services. A and B pay different proportions of the cost of the services.
When ON is the amount of state services produced, A contributes NE and B contributes NF; the cost
of supply is NG. Since the state is non-profit, it increases its supply to OM. At this level, A
contributes MJ and B contributes MR (the total cost of supply). Equilibrium is reached at point P on a
voluntary-exchange basis.
Bowen's model
Bowen‘s model has more operational significance, since it demonstrates that when social goods are
produced under conditions of increasing costs, the opportunity cost of private goods is foregone. For
example, if there is one social good and two taxpayers (A and B), their demand for social goods is
represented by a and b; therefore, a+b is the total demand for social goods. The supply curve is shown
by a'+b', indicating that goods are produced under conditions of increasing cost. The production cost
of social goods is the value of foregone private goods; this means that a'+b' is also the demand curve
of private goods. The intersection of the cost and demand curves at B determines how a given national
income should (according to taxpayers' desires) be divided between social and private goods; hence,
there should be OE social goods and EX private goods. Simultaneously, the tax shares of A and B are
determined by their individual demand schedules. The total tax requirement is the area (ABEO) out of
which A is willing to pay GCEO and B is willing to pay FDEO.
Contd…..

(ii)
Advantages and limitations

The advantage of the benefit theory is the direct correlation between revenue and expenditure in a
budget. It approximates market behaviour in the allocation procedures of the public sector. Although
simple in its application, the benefit theory has difficulties:
 It limits the scope of government activities
 Government can neither support the poor nor take steps to stabilize the economy
 Applicable only when beneficiaries can be observed directly (impossible for most public
services)
 Taxation in accord with the benefit principle would leave distribution of real incomes unchanged
B. Ability-to-pay approach
The ability-to-pay approach treats government revenue and expenditures separately. Taxes are based
on taxpayers‘ ability to pay; there is no quid pro quo. Taxes paid are seen as a sacrifice by taxpayers,
which raises the issues of what the sacrifice of each taxpayer should be and how it should be
measured:
 Equal sacrifice: The total loss of utility as a result of taxation should be equal for all taxpayers
(the rich will be taxed more heavily than the poor)
 Equal proportional sacrifice: The proportional loss of utility as a result of taxation should be
equal for all taxpayers
 Equal marginal sacrifice: The instantaneous loss of utility (as measured by the derivative of the
utility function) as a result of taxation should be equal for all taxpayers. This therefore will entail the
least aggregate sacrifice (the total sacrifice will be the least).
Mathematically, the conditions are as follows:
 Equal absolute sacrifice=U(Y)-U(Y-T), where y=income and t=tax amount
 Equal proportional sacrifice=(U(Y)-U(Y-T))/U(Y), where U(Y)=total utility from y
 Equal marginal sacrifice=(dU(Y-T))/(d(Y-T))
Source: Wikipedia

Annexure 1.3
(Para 1.3.5)
Table 2.4 Tax Structure by Region(as percentage of total tax revenue),1975-2002

Income Tax Domestic Goods and Services
Social General International

Total Individual Corporate Security Total Consumption Excises Trade
North America
1975-1980 61.0 44.3 15.9 21.4 11.7 6.0 5.1 5.2
1986-1992 57.3 46.2 10.5 26.8 12.4 7.1 4.6 3.1
1996-2002 82.4 65.6 15.7 41.2 14.7 8.7 5.1 1.8
Latin America
1975-1980 25.9 8.8 13.9 21.3 32.0 13.6 15.3 21.2
1986-1992 25.3 7.0 14.4 18.6 38.5 17.0 17.1 17.5
1996-2002 29.2 5.9 17.8 24.9 54.0 32.6 15.5 12.8
Western Europe
1975-1980 27.5 21.4 5.5 30.8 32.6 18.4 10.6 4.3
1986-1992 28.0 21.3 6.0 31.2 34.4 21.6 9.6 2.1
1996-2002 44.4 30.8 12.2 50.1 49.3 29.8 14.1 0.3
Asia
1975-1980 37.2 22.0 19.7 0.1 35.7 13.7 17.6 23.1
1986-1992 37.2 19.7 18.2 0.4 37.4 16.4 15.8 20.1
1996-2002 44.6 23.0 20.3 3.7 38.2 18.6 14.5 12.3
Africa
1975-1980 28.9 13.4 14.5 6.5 26.7 16.6 12.1 34.4
1986-1992 24.7 13.2 10.3 5.9 28.8 16.5 10.7 36.7
1996-2002 29.6 17.1 11.2 6.2 35.0 21.1 10.9 32.0
CEEME
1975-1980
1986-1992 34.9 10.1 23.1 20.9 30.6 23.3 11.3 11.3
1996-2002 29.0 130.9 14.8 40.2 52.1 31.8 14.2 14.2
Note: ‗CEEME‘ (Central and Eastern Europe and the Middle East), although it includes a number of countries
in North Africa and the Middle East, essentially reflects changes in the transitional countries of Central and
Eastern Europe and the countries emerging from the former Soviet Union. To maintain consistency of
measurement and to allow cross-country comparisons of tax structures, the table reflects consolidated
central government revenue for most countries. However, if these data were unavailable, national budget
data, or some combination of national, state, and local revenues, were used. To even out annual fluctuations,
the figures are averaged over 1975–1980, 1986–1992, and 1996–2002.
Source: Calculated (mainly from GFS data) by Bird and Zolt (2005a).

Annexure 1.4
(Para 1.3.5)
Tax on consumption vs tax on income (Keen, 2007)
 The case in pure theory for the use of any kind of general commodity tax is an uneasy one: a
uniform tax on consumption is equivalent, in present value, to a uniform tax on wage income
(and net bequests), and in that sense adds little to what can be achieved by simply taxing wage
income. Atkinson and Stiglitz (1980) show further that if preferences are weakly separable between
consumption and leisure, then differential commodity taxation has no distinctive role to play in the
presence of an optimal nonlinear income tax. Boadway and Pestieau (2003) show, however, that this
result is not robust to various generalizations—such as unobserved differences in needs—and the
empirical evidence is not supportive of such separability (Browning and Meghir, 1991). This implies
that there is in principle some potential gain from differential commodity taxation, but in practice the
information is rarely available to allow such fine-tuning to be made with any great confidence—
beyond, perhaps, that usually achieved by a few key excises. The optimal tax literature thus continues
to suggest, as observed by Kay (1989), that, practical considerations aside, there is little that
commodity taxation can do which cannot be achieved equally well, or better, by an income tax
and a few excises.
 The case for employing a general commodity tax in addition to an income tax must thus largely
turn on administrative practicality and enforceability. As Kay points out, the VAT has typically had
some merit of simplicity in requiring much less judicial interpretation than has been involved in
defining income for the purposes of income taxation. Even more fundamentally, VAT and other
systems of indirect taxation rest on sources of information which are to some degree distinct from
those used in administering income taxes. Spreading enforcement risk across multiple taxes may thus
reduce the overall exposure of the fiscal system to revenue losses from evasion. The point is
developed formally by Boadway, Marchand, and Pestieau (1994), who show (taking an extreme case
for clarity) that when income tax can be evaded but commodity taxes cannot, welfare is improved
by the introduction of a small uniform tax on consumption. Beyond this, moreover, information
obtained in enforcing commodity taxes—on a trader‘s turnover, for example—may be helpful in
enforcing the income tax (and vice versa).
1.5.12 Equivalencies of VAT with other taxes (Ebrill, 2001):

 The effective incidence of the VAT can differ from its formal or legal incidence (see Box 3.1). In
the same vein, a VAT can be economically equivalent to some other combination of taxes, and
understanding those equivalencies can clarify the distinctive features of a VAT. The focus here is on
equivalencies for a consumption-type VAT.
 The first equivalency is obvious: a consumption-type VAT is economically equivalent to a pure
retail sales tax. This emphasizes, in particular, that it is not only the VAT that is conducive to
production efficiency: that is simply a feature of its being a tax on consumption.
 For a VAT levied at a uniform rate on all commodities, more subtle equivalencies arise. In a
closed economy, an instructive example of an equivalency for such a VAT is:
(i) A cash flow business tax and a tax on wage earnings, both levied at the same rate. To see this,
recall that value added (VA) is simply sales (S) less nonfactor current inputs (N) and investment (I).
Adding and subtracting the wage bill W then shows:
VA = (S – N – W – I) + W (2.1) where the first term is exactly the base of a cash flow tax: sales
minus all nonfinancial expenditures. Adding to such a system a personal tax-free allowance, this is
essentially the ―flat tax‖ of Hall and Rabushka (1995).
Contd…..

(ii)
(ii) If, further, the VAT rate is constant over time, then equivalency also holds between a VAT and:
- A tax on pure profits, a capital levy, and a tax on wage earnings, all levied at the same rate. This
equivalence follows directly from the first since, over time, the revenue from a cash flow tax comes
from two sources: pure profits from past and future investments, and the normal return on capital
already in place (with the latter equal, in present value, to the value of the capital itself). This way of
thinking about the VAT emphasizes that—like any tax on consumption—it is in part a retrospective
tax on past savings, a feature, which is of some importance in considering the distributional effects of
a VAT.
 The presence of international trade renders the equivalencies somewhat less transparent, because
of the exclusion of exports from a consumption-type VAT. This means, for instance, that a
destination-based VAT at a uniform rate is equivalent to the sum of a cash flow business tax—with all
sales of domestic firms taxable—a wage tax (as before) and uniform export subsidy/import tax.

Annexure 1.5
(Para1.4)
Vertical & Horizontal equity and income vs consumption tax
i. Horizontal Equity: The Ideal Tax Base

 Robert Haig (1921) and Herbert Simons (1938) proposed a method of thinking about optimal tax
base that relied on three principles:
(1) People ultimately bear the burden of taxation
(2) People sacrifice utility when they bear the burden of taxation
Horizontal equity: Two people with equal utility before tax should have equal utility after tax
Vertical equity: If a person has more utility than another before tax, they should also have more
after tax
(3) The ideal tax base is the best surrogate measure of utility
- Because utility cannot be measured, society must rely on something else, which should be best
surrogate
 Haig–Simons income
- Argues that the best surrogate for utility is the increase in purchasing power during the year
YHS = consumption + change in net worth = C + ∆NW
- Concludes that people with the same YHS should be considered equals and should pay the same tax
because they will sacrifice the same utility
- Once YHS is accepted as ideal tax base it implies that the optimal tax structure is the broadest
possible personal income tax
→ This requirement is never met in practice
- Under the Haig–Simons definition of income, there are a number of distinctions that should not
matter (but usually do)
 Factors that should be treated the same, but usually are not
 Personal income and capital gains  Consumption and saving(saving
(portion of capital gains usually usually excluded)
excluded from tax base).  Various forms of consumption(medical
 Earned and unearned income (receipt care, mortgage interest, payments etc
of transfer payments usually excluded usually excluded)
from tax base)  Form of capital gains(accrued capital
 Different sources of earned gains usually excluded realized usually
income(interest earned on savings and included)
fringe benefits usually excluded)
- These differences usually exist because policymakers often use tax policy to try to promote
social ends which might run counter to the concept of horizontal equity
- Business expenses should be excluded because they subtract from purchasing power out of
income
- Calculation of YHS must be indexed to inflation because increasing prices reduces purchasing
power
- Conclusion: Combined, these facts suggest that the ideal tax base is (YHS - business expenses),
indexed for inflation
 Haig-Simons income and utility
- Is this a good surrogate measure of utility? Almost certainly not!
- Whether income is good measure of utility depends on whether people are identical
- People receive utility from income and leisure
- Income comes from work and leisure comes from not working
Contd…..
(ii)
- If every person has same preference for income and leisure and same opportunities (i.e.same
wage) they will choose same point and have same utility
- In such a case, income would be a good surrogate for utility.
 But people do not have identical tastes and opportunities

- Suppose people earn different wages
- Person with higher wage can receive higher utility with same income by taking more utility (i.e.
can earn same income with fewer hours work)
- Suppose people have different tastes
- Person with stronger preference for consumption works more and earns more income but both
are on second indifference curve which represents same utility
 Consumption as the ideal tax base
- Recognizes that consumption is not a perfect surrogate measure of utility but is likely better than
income
- Consumption most directly generates utility
- Consumption changes over time are more directly tied to utility changes over time than are
income changes over time
- Implication is that to meet the concept of horizontal equity, two people with equal lifetime
consumption before tax should have equal lifetime consumption after tax
- This suggests that tax should be annual tax on consumption rather than annual tax on income
- Two people with same lifetime income might have very different lifetime consumption due to
differences in annual consumption/savings decisions
- Note that it would be possible to design an annual income tax that would be equivalent to an
annual consumption tax.
Would require allowing people to subtract saving from income, which would actually make it a
consumption tax.
 Musgrave‘s view of horizontal equity
- Argues that questioning whether income or consumption tax is better is the wrong question.
- Instead, believes that horizontal equity should only consider whether taxes discriminated against
people in inappropriate ways. Contd……

(iii)
- Either income or consumption tax is appropriate surrogate for utility so long as people are not
treated differently based on gender, race, religion, etc.
- Society should just accept one type of tax and then worry more about the specific tax structure
(i.e. vertical equity)
ii. Vertical Equity
- This is the quest for distributive justice, which generates heated debate without a satisfactory
conclusion
- Key question: Should tax structure be progressive, proportional, or regressive
- Let YhHS and Th be individual h‘s income and tax burdens
- → If Th/ YhHS increases as YhHS increases, tax is progressive
- → If Th/ YhHS is constant as YhHS increases, tax is proportional
- → If Th/ YhHS decreases as YhHS increases, tax is regressive
- Societies tend to have a strong preference for proportional or progressive taxes
Measuring of Consequences of Taxation to Income Distribution I
Lorenz Curve
Measuring of Consequences of Taxation to Income Distribution II

Gini‗s Coefficient
G= (1)
Where : G Gini coefficient,
B Space limited by the curves of Real income division and Curve of absolute
equality,
A Space under the curve of Real income division and horizontal axis (see fig.10)
G is usually 0.2 to 0.5 Consequence of Linear or Progressive Tax: Gini before tax > Gini after tax
Measuring of Consequences of Taxation to Income Distribution III.
Contd…..

(iv)
Figure1.1 Gini coefficients of income inequality in OCED countries, mid2000s
Figure11.2 Influence of in-kind public services and consumption taxes on income inequalities
Source: public economics, dale Carnegie ,training

Annexure 1.6
(Para 1.5.2)
Features of VAT in some countries
New Zealand
GST is a value-added tax that was introduced in New Zealand in 1986, currently levied at 15%. It is
notable for exempting few items from the tax. From July 1989 to September 2010, GST was levied at
12.5%, and prior to that at 10%.
Australia
GST is a value-added tax introduced in Australia in 2000, which is collected by the Australian Tax
Office. The revenue is then redistributed to the states and territories via the Commonwealth Grants
Commission process. In essence, this is Australia's program of horizontal fiscal equalisation. Whilst
the rate is currently set at 10%, there are many domestically consumed items that are effectively zero-
rated (GST-free) such as fresh food, education, and health services, as well as exemptions for
Government charges and fees that are themselves in the nature of taxes.
Bangladesh
VAT in Bangladesh was introduced in 1991 replacing Sales Tax and most of Excise Duties. The
Value Added Tax Act, 1991 was enacted that year and VAT started its passage from 10 July 1991.
The 10 July is observed as National VAT Day in Bangladesh.
Within the passage of 25 years, VAT has become the largest source of Government Revenue. About
56% of total tax revenue is VAT revenue in Bangladesh.
Standard VAT rate is 15%. Export is Zero rated. Besides these rates, there are several reduced rates
locally called Truncated Rate for service sectors that are available. Different rates for different
services are applied. Truncated Rates are 1.5%, 2.25%, 2.5%, 3%, 4%, 4.5%, 5%, 5.5%, 6%, 7.5%,
9% and 10%.
Bangladesh VAT is characterized by many distortions, i.e., value declaration for product and service,
branch registration, tariff value, truncated rates, many restriction on credit system, advance payment
of VAT, excessive exemption etc. For much distortion, VAT-GDP ratio is about 4% here. To increase
productivity of VAT, Government has enacted the Value Added Tax and Supplementary Duty Act of
2012. This law will be in operation from 1 July 2016 with an automated administration.
National Board of Revenue is the apex organization administering the Value Added Tax.
Canada
GST is a value-added tax introduced by the Federal Government in 1991 at a rate of 7%, later reduced
to the current rate of 5%. A Harmonized Sales Tax (HST; combined GST and provincial sales tax) is
collected in New Brunswick (15%), Newfoundland (13%), Nova Scotia (15%), Ontario (13%), Prince
Edward Island (15%), and, for a short time until 2013, British Columbia (12%). (Quebec has a de
facto 14.975% HST: its provincial sales tax follows the same rules as the GST, and both are collected
together by Revenue Québec.) Advertised and posted prices generally exclude taxes, which are
calculated at time of payment; common exceptions are motor fuels, the posted prices for which
include sales and excise taxes, and items in vending machines as well as alcohol in monopoly stores.
Basic groceries, prescription drugs, inward/outbound transportation and medical devices are exempt.
China
VAT was implemented in China in 1984 and is administered by the State Administration of Taxation.
In 2007, the revenue from VAT was 15.47 billion Yuan ($2.2 billion) which made up 33.9 per cent of
China's total tax revenue for the year. The standard rate of VAT in China is 17%. There is a reduced
rate of 13% that applies to products such as books and types of oils
Contd…..

(ii)
European Union
The European Union value added tax (EU VAT) is a value-added tax encompassing member states in
the European Union VAT area. Joining in this is compulsory for member states of the European
Union. As a consumption tax, the EU VAT taxes the consumption of goods and services in the EU
VAT area. The EU VAT's key issue asks where the supply and consumption occurs thereby
determining which member state will collect the VAT and which VAT rate will be charged.
Each Member State's national VAT legislation must comply with the provisions of EU VAT law as set
out in Directive 2006/112/EC. This Directive sets out the basic framework for EU VAT, but does
allow Member States some degree of flexibility in implementation of VAT legislation. For example,
different rates of VAT are allowed in different EU member states. However Directive 2006/112
requires Member States to have a minimum standard rate of VAT of 15% and one or two reduced
rates not to be below 5%. Some Member States have a 0% VAT rate on certain supplies; these
Member States would have agreed this as part of their EU Accession Treaty (for example, newspapers
and certain magazines in Belgium). The highest rate currently in operation in the EU is 27%
(Hungary), though Member States are free to set higher rates. There is, in fact only one Member State
(Denmark) that does not have a reduced rate of VAT.[11]
There are some areas of member state which have lower standard VAT rate than the 15 % limit or
have zero VAT. Such areas are excluded from the EU VAT rules, and sales from them to normal parts
of the EU are considered import for VAT purposes.
VAT that is charged by a business and paid by its customers is known as "output VAT" (that is, VAT
on its output supplies). VAT that is paid by a business to other businesses on the supplies that it
receives is known as "input VAT" (that is, VAT on its input supplies). A business is generally able to
recover input VAT to the extent that the input VAT is attributable to (that is, used to make) its taxable
outputs. Input VAT is recovered by setting it against the output VAT for which the business is
required to account to the government, or, if there is an excess, by claiming a repayment from the
government. Private people are generally allowed to buy goods in any member country and bring it
home and pay only the VAT to the seller.
The VAT Directive (prior to 1 January 2007 referred to as the Sixth VAT Directive) requires certain
goods and services to be exempt from VAT (for example, postal services, medical care, lending,
insurance, betting), and certain other goods and services to be exempt from VAT but subject to the
ability of an EU member state to opt to charge VAT on those supplies
(such as land and certain financial services). Input VAT that is attributable to exempt supplies is not
recoverable; although a business can increase its prices so the customer effectively bears the cost of
the 'sticking' VAT (the effective rate will be lower than the headline rate and depend on the balance
between previously taxed input and labour at the exempt stage).
United States
In the United States, currently, there is no federal value-added tax (VAT) on goods or services.
Instead, a sales and use tax is common in most US states. VATs have been the subject of much
scholarship in the US and is one of the most contentious tax policy topics. (see para 1.5.4)
In 2015, Puerto Rico passed legislation to replace its 6% sales and use tax with a 10.5% VAT
beginning 1 April 2016, although the 1% municipal sales and use tax will remain and, notably,
materials imported for manufacturing will be exempted. In doing so, Puerto Rico will become the first
US jurisdiction to adopt a value-added tax. However, two states have previously enacted a form of
VAT as a form of business tax in lieu of a business income tax, rather than a replacement for a sales
and use tax. Contd….

(iii)
The state of Michigan used a form of VAT known as the "Single Business Tax" (SBT) as its form of
general business taxation. It is the only state in the United States to have used a VAT. When it was
adopted in 1975, it replaced seven business taxes, including a corporate income tax. On 9 August
2006, the Michigan Legislature approved voter-initiated legislation to repeal the Single Business Tax,
which was replaced by the Michigan Business Tax on 1 January 2008.
The state of Hawaii has a 4% General Excise Tax (GET) that is charged on the gross income of any
business entity generating income within the State of Hawaii. The State allows businesses to
optionally pass on their tax burden by charging their customers a quasi sales tax rate of 4.166%. The
total tax burden on each item sold is more than the 4.166% charged at the register since GET was
charged earlier up the sales chain (such as manufacturers and wholesalers), making the GET less
transparent than a retail sales tax.
Malaysia
The goods and services tax (GST) is a value-added tax introduced in Malaysia in 2015, which is
collected by the Royal Malaysian Customs Department. Whilst the rate is currently set at 6%, there
are many domestically consumed items that are effectively zero-rated (GST-free) such as fresh foods,
education, health services and medicines.
Mexico
Value-added tax is a tax applied in Mexico and other countries of Latin America. In September 1966,
the first attempt to apply the VAT took place when revenue experts declared that the VAT should be a
modern equivalent of the sales tax as it occurred in France. At the convention of the Inter-American
Center of Revenue Administrators in April and May 1967, the Mexican representation declared that
the application of a value-added tax would not be possible in Mexico at the time. In November 1967,
other experts declared that although this is one of the most equitable indirect taxes, its application in
Mexico could not take place. In response to these statements, direct sampling of members in the
private sector took place as well as field trips to European countries where this tax was applied or
soon to be applied. In 1969, the first attempt to substitute the mercantile-revenue tax for the value-
added tax took place. On 29 December 1978 the Federal government published the official application
of the tax beginning on 1 January 1980 in the Official Journal of the Federation. As of 2010, the
general VAT rate was 16%. This rate was applied all over Mexico except for bordering regions (i.e.
the United States border, or Belize and Guatemala), where the rate was 11%. The main exemptions are
for books, food, and medicines on a 0% basis. Also some services are exempt like a doctor's medical
attention. In 2014 Mexico Tax Reforms eliminated the favorable tax rate for border regions and
increased the VAT to 16% across the country.
India
VAT was introduced into the Indian taxation system from 1 April 2005. Of the then 28 Indian states,
eight did not introduce VAT at first instance including five states ruled by BJP. There is uniform VAT
rate of 5% and 14.5% all over India. The government of Tamil Nadu introduced an act by the name
Tamil Nadu Value Added Tax Act 2006 which came into effect from the 1 January 2007. It was also
known as the TN-VAT. Under the Narendra Modi government, a new national Goods and Services
Tax was introduced under the One Hundred and First Amendment of the Constitution of India.
Nepal
VAT was implemented in 1998 and is the major source of government revenue. It is administered by
Inland Revenue Department of Nepal. Nepal has been levying two rates of VAT: Normal 13% and
zero rate. In addition, some goods and services are exempt from VAT.

nnexure 1.71.7
Annexure
(Para 1.5.5)
(Para1.5.5)
Rationale for VAT (Le, 2003)
1. VAT replaces other unsatisfactory indirect taxes (e.g., turnover and single-stage taxes)
Many developing countries have introduced the VAT to replace turnover tax or some type of single-
stage sales tax (viz RST). The replaced taxes are inherently troublesome in terms of either revenue
leakage or economic inefficiency or both. To illustrate the relative advantages of the VAT, in what
follows I will briefly review the problems with the turnover and single-stage taxation.
1.1. Turnover taxation
The tax is imposed on every stage of the production-distribution chain. The tax base at any single
stage includes the sales value of the goods plus the tax charged accumulatively in previous stages. A
serious problem with this tax is the ―cascading effect,‖ literally understood as the tax-on-tax effect.
The tax generates a trail of accumulated distortions carried from the first stage of production on to the
last stage of the retail sales distribution. To gauge how bad the cascading effect is, one may simply
imagine a situation, in which a smart entrepreneur ―negotiates‖ with his partners to vertically
integrate, and by colluding, they can avoid a large part of the tax burden.
2.2. Single-stage taxation
The tax can be imposed at any single stage of the production-distribution chain—there may be
manufacturing, wholesale, or retail sales taxation. The tax, at the first glance, is ideal, because its
design is expected to eliminate the cascading effect and does not require huge administration costs
(the base is significantly smaller than the one with the turnover tax). It has many potential problems,
however.
 For example, the tax at manufacturing level needs ―ring fencing‖ the production of capital goods in
order to avoid any bias against capital and escalation of production costs. But it would require
efficient monitoring to detect any potential reselling problem—ring-fenced firms may obtain their tax-
free inputs, resell them to the market, and thereby erode the base.
 Likewise, the tax on wholesales stage is not easy to administer: the problem derives mainly from
the obscure definition of the wholesale stage. For both manufacturing and wholesale stage taxation,
the base is narrow, and hence the rates need to be high to collect sufficient revenues. However, higher
rates provide stronger incentives for evasion and avoidance; taxpayers can easily avoid the taxes by
artificially lowering price at the taxed level (manufacturing or wholesale level respectively) and
raising price at the subsequent, untaxed, level.
 On the other hand, the retail sales tax (RST-which is currently applied, for example, at the state
level in the U.S. etc.) requires, inter alia, massive registration. Mike sell, in his brief on the topic
entitled ―Retail Sales Tax,‖ indicates that to ensure the economic efficiency of a RST regime, two
major principles must be followed. First, the tax must be applied to all sales for final consumption at
a uniform rate. Second, there must be no tax on savings or production consumption. Both conditions
are, however, practically hard to be met. It is not uncommon that tax regimes—applied in practice—
feature multiple rates and exemptions.
 On the other hand, it is costly, administratively, to distinguish consumption (to be taxed) from
production purchases (to be exempted)—there are many items used for both production and final
consumption.
 The administration of the RST is not simple for at least two reasons: (1) the tax requires that all
retailers be registered to collect taxes from their customers; and (2) multiple exemptions and rates, and
Contd…..

(ii)
limited coverage (the tax is typically extended only to goods and very few services) tend to erode the
base and give rise to the need for setting high standard rate for sufficient revenue collection. The high
rate, however, would become an attractive invitation to evasion and avoidance. An interesting vicious
circle can be seen: narrow base—high standard rate—evasion and avoidance—narrower base etc. In
addition, retailers in developing countries are largely small, informal, and mobile (no fixed
business location); these typical taxpayer characteristics combined with the complex tax regime
pose real challenge to tax administration.
 In general, single-stage sales taxation is prone to serious revenue leakage. Especially, the tax
collection is restricted to only one stage of the chain: if some businesses succeed in slipping out of the
tax net (i.e., at the tax point), revenues will immediately drop. The VAT is relatively more
advantageous than the alternatives, be it turnover tax or single-stage tax. First, the VAT is generally
more broad-based (it is extended to cover both goods and services). Second, it is less risky in
terms of revenue leakage (the invoice-based credit mechanism in administering the VAT facilitates
collection and enforcement; even if revenues are missed in one stage, they are still collected in other
stages). The VAT has, therefore, greater revenue potential than its alternatives.
 Opponents to the VAT usually argue that the VAT is more complex to administer than other types
of consumption taxation, and the complexity naturally leads to higher collection costs (defined as the
combined compliance costs from the taxpayer side, and administration costs from the tax authority
side). However, as described, the taxes replaced by the VAT in developing countries are
generally far from being simple in their design and riddled with narrow base, multiple rates,
and numerous exemptions. For example, the VAT, introduced in 1988 in the Philippines, replaced a
web of indirect taxes including manufacturer‘s sales tax, turnover tax, advance sales tax on imports,
miller‘s tax, forest charges, and other sorts of ad valorem taxes on services. McMoran (1995)
indicates that the administration and compliance costs under a single-stage tax and a VAT extended to
the same level in the production-distribution chain do not differ significantly.
2. Invoice-based credit VAT, the most common form of VAT, is, in principle, self-enforcing
and hence a buoyant tax
The VAT is, in principle, described as ―self-enforcing.‖ The description stems from the nature of the
invoice-based credit VAT: a taxable business can claim for the refund of the input VAT only if the
claim is supported by purchase invoices—the mechanism provides strong incentives for firms to keep
invoices of their transactions and is an efficient means for tax authorities to check and cross-check for
enforcement enhancement. In reality, the tax (VAT) is, however, not at all self-enforcing—
―ghost‖ invoices and false refund claims are common.
Despite certain inherent problems in administration, the VAT is empirically found to be a buoyant tax
(Tait1991). Most countries started the VAT with an initial idea of reforming
the existing sales tax system on a revenue-neutral basis but then realized that the VAT is
revenue-enhancing, largely due to the improved compliance. A recent survey by the IMF (Ebrill
et al., 2001) shows that this is true for all regions, except for Central Europe, Russia, and some other
countries of the former Soviet Union. Note another advantage of the VAT: being a buoyant tax, the
VAT may allow for some relief in income taxes; and if the VAT introduction accompanies a reduction
in income taxes, the whole tax system tends to be more politically acceptable and hence more stable.
3. Unlike income taxes, consumption-based VAT does not distort consumption-
savings/investment decision
Being a consumption tax, the VAT does not have discriminating effect on savings/investment because
savings are essentially excluded from the consumption VAT base. The following example helps
illustrate.
Contd…..

(iii)
 In a simplified world, a typical individual lives over two years. He earns income in year 0 and uses
up his income over his two-year lifetime, years 0-1. Suppose his income in year 0 is $100. For
simplicity, assume he could exercise two extreme options: consume all his income in year 0, or save
all income to consume in year 1. Also, assume the discount rate, a measurement of his patience, is 10
percent, the same as the interest rate.
 Case 1: No tax world.
If he saves all his money in year 0, then in year 1, he will consume $110 or $100 in present value (i.e.,
100*(1+10%)/1.1), the same as the amount earned in year 0. There would be no distortion: the
individual would be indifferent between the two options.
Case 2: Income tax of 30% (uniform rate applied to income from different sources).
If he consumes now, he can consume $70 (i.e., 100*(1-30%)). But if he saves the money for the next
year, then he can consume less, at just $68 in present value (i.e., {[100*(1-30%)]*[(1+10%*(1-
30%)]}/1.1). Obviously, he is more likely to consume all his earning income in year 0! Put it
differently, the income tax does discourage savings and investment.
Case 3: Consumption tax of 30%.
He can consume now at $70, net of tax. If he saves all his earned income to consume in the next year,
then in year 1, he expects to earn a present value of the same amount, $70 (or {100*(1+10%)*(1-
30%)}/1.1=$70). The consumption tax does not distort consumption-savings decision—the outcome
is similar to the one in the no-tax world (case 1).
4. A VAT on destination principle may relieve exports from indirect tax burden on inputs if the
tax is properly applied
Under destination principle, conventionally, the VAT zero rates exports. If properly applied, zero
rating removes exports from all VAT burden: exporters do not collect the VAT when exporting but
are still eligible to claim for refunds of all the VAT paid on their input purchase. This is true, however,
only in the case where refunds of the input VAT are made in a timely manner.
 In practice, it is not uncommon that the VAT refunds are delayed by as long as six months in
developing countries. Without any interests earned on the portion of the eligible but delayed refunds,
export-manufacturing firms lose in terms of time value of money. Desai and Hines (2002) argue
further that empirically, the VAT is associated with less trade (fewer exports and imports). They
explain that in addition to the delayed and incomplete refunds, exporters suffer from exchange rate
appreciation, which is likely resulted from the VAT introduction. One may, however, question the
data and methodology applied in their paper.

Annexure- 1.8
(Para 1.5.8)
Comparative methods of computing VAT @ 12.5%
Method Manufacturer Wholesaler Retailer Total cost

1. Addition Method=t(wages+profit)
a. Wages v 300 200 650
b. Rent 50 100 20 170
c. Interest 25 75 20 120
d. Profit 25 25 10 60
Value added
e. [(a)+(b)+(c)+(d)] 250 500 250 1000
f. VAT @ 12.5% 31.25 62.5 31.25 125
2.Addition Method=t(wages)+t(profit)
a. Wages 150 300 200 650
b. Rent 50 100 20 170
c. Interest 25 75 20 120
d. Tax on (a+b+ c) 28.12 59.37 30 117.5
e Profit 25 25 10 60
f Tax on Profit 3.12 3.12 1.25 7.5
g VAT(d+f) 31.24 62.49 31.25 125
3.Subtraction Method=t(output-input)
a. Sales 350 850 1100 2300
b. Purchase 100 350 850 1300
c. Value added [a-b] 250 500 250 1000
d. VAT@12.5% 31.25 62.50 31.25 125
4.Invoice method=t(output)-t(input)
a. Sales 350 850 1100 2300
b. Tax on sales@12.5% 43.75 106.25 137.5 287.5
c. Purchase 100 350 850 1300
d. Tax on purchase@12.5% 12.5 43.75 106.25 162.5
e. VAT [(b)-(d)] 31.25 62.50 31.25 125

Annexure 1.9
(Para 1.5.9)
Three Prime Models of GST
Central GST State GST Dual GST

levied by the Centre levied by the States GST
levied by both *
* (concurrently or non-concurrently)
Canada has GST at Union level extending to all goods and services covering all stages of value
addition. In addition, there is tax at province (State) level in different forms which include VAT,
Retail Sales tax (RST) and so on. European Union (EU) Nations (each one is independent Nation but,
part of a Union and have agreed to adopt common principles for taxation of goods and services) have
adopted ―classic‖ VAT. In the Indian context, Constitution of India specifically reserves the power to
impose tax on specific activities to specific level of Government, e.g., tax on import of goods can be
imposed by Union Government only, whereas, tax on sale of goods involving movement of goods
within the State can be imposed by State Governments only.
3.1 Central GST
Under this option, the two levels of government would combine their levies in the form of a single
National GST, with appropriate revenue sharing arrangements among them. The tax could be
controlled and administered by the Central Government.
Pros:
 If levied on a comprehensive base at a single rate, it would clear the system of virtually all
economic distortions and classification disputes.
 Replacing 36 taxing Statutes (of the Centre and 35 States and Union Territories) with only one
would lead to a substantial reduction in compliance costs and free up resources for other more
productive pursuits.
 It would make common market for India a reality. Goods and services would move freely within
India with no check-posts, internal-tax frontiers or other barriers to trade. Ideal structure from
business perspective – greater stability and facilitation of decision making.
 Businesses will have to deal with only one tax authority and comply with only one tax - A
significant reduction of compliance costs.
 Excellent from consumer perspective as the consumer will know exactly how much is the indirect
tax burden in the goods and service consumed by him.
 Cascading effect can be removed to a large extent as there will not be taxes at two levels leading to
improved competitiveness.
Cons:
 Near impossibility of achieving the structure – It will require drastic modification to the
Constitution of India.
 It might upset the present concept of fiscal federalism, which is the cornerstone of Indian polity.
 Entire infrastructure developed for taxation at both levels will have to undergo huge change.
 States may not agree to give up the power of taxation and depend on the Union for resources.
3.2 State GST

The second model is to have a State GST in which the States alone levy GST and the Centre
withdraws from the field of GST or VAT completely.
Pros:
 Reduction of cascading effect of taxes, as there will not be tax at two levels.
 It enhances the revenue capacity of the States and reduces their dependence on the Centre.
Contd…

(ii)
Cons:
 It would seriously impair the Centre‘s revenues. The reduction in fiscal transfers to the States
would offset this loss, but still the Centre would want to have access to this revenue source for future
needs.
 Major amendments to the Constitution of India will be required.
 The option may not be revenue neutral for individual States. The incremental revenues from the
transfer of the Centre‘s tax collection would benefit the higher-income States, while a reduction in
fiscal transfers would impact disproportionately the lower-income States.
 Businesses will have to comply with tax laws of each State – which will definitely lack uniformity
and harmony. At the same time, decision making will be impacted and may affect business stability.
 A complete withdrawal of the Centre from the taxation of inter-State supplies of goods and
services could undermine the States‘ ability to levy their own taxes on such supplies in a harmonized
manner. In particular, it would be impractical to bring inter-State services within the ambit of the
State GST without a significant coordinating support from the Centre.
 Governments, both States and Union will not find it workable as it will require complete change in
its finances and allocation of resources - entire distribution of taxes will need to undergo changes.
But, that too will not be workable as revenue collection by each State will vary depending on the level
of activities in each State and need for support to States – redistribution of taxes will become an issue.
 There may be unhealthy competition among the States using local tax structure as a tool to attract
industry within the States. This could lead to retaliatory measures by other States.
3.3 Dual GST

3.3.1 Non-Concurrent Dual GST
Under the concurrent dual GSTs, the Centre and State taxes apply concurrently to supplies of
all goods and services. However, it poses two challenges. First, it requires a constitutional
amendment. Second, a framework is needed for defining the place of supply of inter-State services
and for the application of State GST to them.
Therefore, as suggested in the Poddar-Ahmed Working Paper, to circumvent both of these hurdles,
GST on goods can be levied by the States only and on services by the Centre only. The States already
have the power to levy the tax on the sale and purchase of goods (and also on immovable property),
and the Centre for taxation of services. No special effort would be needed for levying a unified Centre
tax on inter-State services.
Under this model, while levying the VAT on services, the Centre would essentially play the
coordinating role needed for the application and monitoring of tax on inter-State services. The Centre
would withdraw from the taxation of goods. Even the revenues collected from the taxation of services
could be transferred back to the States, partially or fully.
Within this framework, cascading could be completely eliminated by the States agreeing to allow an
input credit for the tax on services levied by the Centre. Likewise, the Centre would allow an input
credit for the tax on goods levied by the States.
However, the said model may not be acceptable to the Centre as well as the States. Moreover,
constitutional amendment would still be required in this model since the States are not presently
empowered to levy sales tax on goods where movement of such goods take place in the course of
inter-State trade or commerce.
3.3.2 Concurrent Dual GST

Here the GST will be levied by both tiers of Governments concurrently. There will be Central
GST to be administered by the Centre and the State GST to be administered by the States. Thus, the
GST would comprise a Central GST and State GST: a Central-level GST will subsume central taxes,
such as, excise duty, CVD, SAD and service tax; and a State-level GST will subsume VAT, octroi,
Contd…

(iii)
entry taxes, luxury tax, etc. Therefore, under this model, both goods and services would be subject to
concurrent taxation by the Centre and the States.
Pros:
 This model is achievable in the short term and no significant changes are required in the current
structure of indirect taxation, however, some amendments will be required in the Constitution.
 It removes cascading effect of taxes significantly.
 It strikes a good balance between fiscal autonomy of the Centre and States, and the need for
harmonization.
 It empowers both levels of Government to apply the tax to a comprehensive base of goods and
services, at all points in the supply chain.
 It requires least change in infrastructure of tax departments at the Union and State levels.
 It improves the competitive environment for company working globally, as single taxation system
reduces cost to the consumer.
Cons:
 It is not an ideal model. It can be a temporary or transitional model since tax would continue to be
levied at two levels and compliance costs may not reduce significantly.
 There will always be uncertainty since States might depart from the principles of uniformity.
 To frame a comprehensive model for taxation of inter-State transactions of goods and services and
sharing of its revenue amongst the State will be a challenge.
 Taxation of services at State level, especially services provided nationwide (e.g.
telecommunication service, transportation service), will pose challenge.

Annexure 1.10
(Para 1.7.3)
THE DIRECT TAXES CODE, 2013
ARRANGEMENT OF CLAUSES
CLAUSES
c. Short title, extent and commencement.
ii. Basis of charge
iii. Computation of total income
c. General
ii. Heads of income
Part a – iii. Aggregation of income
Income tax iv. Tax incentives
v. Maintenance of accounts or other related matters
iv. Special provisions relating to the computation of total income of non- profit orgns.
v. Minimum alternate tax
A. Computation of book profit
B. Computation of adjusted total income
C. Miscellaneous
vi. Provisions relating to tax on income received from venture capital company &
venture capital fund
vii. Special provisions relating to conversion of indian branch of foreign bank into a
subsidiary company.
Part b – dividend viii. Special provisions relating to tax on distributed profits of different companies.
distribution tax
Part c – tax on ix. Special provisions relating to tax on distributed income
distributed
income
Part d – branch x. Charge on branch profit tax.
profit tax
Part e – wealth tax xi. Charge of wealth tax.
Part f – prevention xii. Special provisions relating to avoidance of tax.
of abuse of the code. xiii. General anti –avoidance rule.
Part g – tax xiv. Tax administration and procedure
management c. Tax administration
B. Assessment procedure
C. Procedure for assessment in special cases
D. Appeals and revision
E. Special provisions for avoiding repetitive appeals
F. Miscellaneous
xv. Collection and recovery of tax.
A. Deduction of tax at source
B. Collection of tax at source
C. Advance tax
D. Tax relief in respect of arrears or advance receipts
E. Foreign tax credit
F. Payment of wealth-tax
G. Interest payable to the central government
H. Refunds
I. Levy of fee in certain cases
J. Recovery
xvi. Penalties.
xvii. Prosecution.
xviii. Advance rulings and dispute resolution
Part h – general xix. General provisions

Part I –interpretations & xx. Interpretations and constructions
miscellaneous provisions xxi. Miscellaneous

Annexure 1.11 (A)
(Para 1.8)
Direct and Indirect taxes of the Centre and the States (as % of GDP)
Taxes Centre State Centre + States

Year Direct Indirect Total Direct Indirect Total Direct Indirect Total
03-04 4.00 5.61 9.61 0.17 4.87 5.04 4.17 10.48 14.65
04-05 4.44 5.75 10.19 0.17 5.10 5.26 4.61 10.85 15.46
05-06 4.78 5.88 10.66 0.16 5.10 5.26 4.94 10.98 15.92
06-07 5.68 6.11 11.79 0.16 5.33 5.49 5.84 11.44 17.28
07-08 6.65 6.09 12.74 0.14 5.37 5.52 6.79 11.46 18.26
08-09 6.02 5.08 11.10 0.15 5.29 5.45 6.18 10.37 16.55
09-10 6.01 4.01 10.02 0.15 5.19 5.35 6.16 9.20 15.36
10-11 6.04 4.75 10.79 0.17 5.54 5.71 6.21 10.29 16.50
11-12 5.58 4.48 10.06 0.15 5.65 5.80 5.73 10.14 15.87
12-13 5.56 4.76 10.32 0.15 5.85 5.99 5.71 10.61 16.31
13-14 5.52 4.41 9.93 0.14 5.62 5.76 5.66 10.03 15.69
14-15 5.34 4.36 9.70 0.14 5.67 5.81 5.48 10.03 15.51
15-16 5.33 5.23 10.56 0.16 5.92 6.08 5.49 11.15 16.64
Note:-(i) % share of Direct and Indirect Taxes of the Centre based on -

(a)Taxes-Union Budget (b) GDP-CSO.
(ii) % share of Direct and Indirect Taxes of States based on -
(a) Taxes-IPFS,2015-16 (b) GDP-CSO ( available up to 15-16)
Major tax receipt of all the States (Rs. crore)
Year VAT/ST Stamps Vehicles State Goods & Electri- Enter- Indirect Direct Total
& Reg Excise Passengers city tainment Taxes Taxes
03-04 98378 15627 9803 20562 4984 5527 755 155637 4455 160092
04-05 116754 19713 10811 21940 5206 7255 861 182541 4910 187451
05-06 128769 24868 11964 25036 6450 7717 648 205453 5298 210751
06-07 153573 32452 13238 29316 6808 8161 704 244253 6331 250584
07-08 173422 37162 15143 34127 6808 9239 1082 276984 6619 283603
08-09 198327 36066 16446 40990 8541 9530 981 310881 8089 318970
09-10 220644 39576 19140 48375 9857 12226 1112 350930 9400 360330
10-11 278838 52659 24398 59169 11325 17342 1293 445025 12307 457332
11-12 345063 64379 28728 71782 11672 17283 1852 540760 13235 553995
12-13 403849 75589 34003 82625 15306 22181 2037 635591 14655 650246
13-14 453938 77317 35843 81382 19445 22460 2123 692509 16077 708586
14-15 494265 88973 41029 94160 20366 26612 2155 767562 18403 785965
15-16 561701 96740 45620 107331 23535 29676 2466 867070 NA NA
(RE)
16-17 642989 108858 52399 119336 26964 32771 2815 986134 NA NA
(BE)
17-18 NA NA NA NA NA NA NA NA NA NA

Annexure 1.11 (B)
(Para 1.8)
Major Taxes of GOI
Year GDP Direct Tax(D) Indirect Tax(ID) (D+ID)

(Current)
Corporation Personal Total % of % of Custom UED Service Total % of % of Total % of
Tax Income Tax GDP (D+ ID) Duty Tax GDP (D+ ID) GDP
03-04 2625819 63562 41387 104949 4.00 41.61 48629 90774 7891 147294 5.61 58.39 252243 9.61
04-05 2971465 82680 49268 131948 4.44 43.56 57611 99125 14200 170936 5.75 56.44 302884 10.19
05-06 3390503 101277 60757 162034 4.78 44.84 65067 111226 23055 199348 5.88 55.16 361382 10.66
06-07 3953276 144318 80409 224727 5.68 48.20 86327 117613 37598 241538 6.11 51.80 466265 11.79
07-08 4582086 192911 111821 304732 6.65 52.20 104119 123611 51302 279032 6.09 47.80 583764 12.74
08-09 5303566 213395 106075 319470 6.02 54.25 99879 108613 60941 269433 5.08 45.75 588903 11.10
09-10 6108903 244725 122417 367142 6.01 60.00 83324 102991 58422 244737 4.01 40.00 611879 10.02
10-11 7248860 298688 139102 437790 6.04 55.96 135813 137701 71016 344530 4.75 44.04 782320 10.79
11-12 8736039 322816 164525 487341 5.58 55.44 149328 144901 97509 391738 4.48 44.56 879079 10.06
12-13 9951344 356326 196844 553170 5.56 53.86 165346 175845 132601 473792 4.76 46.14 1026962 10.32
13-14 11272764 394678 227714 622392 5.52 55.60 172085 170197 154778 497060 4.41 44.40 1119452 9.93
14-15 12488205 428925 238074 666999 5.34 55.04 188016 188787 167969 544772 4.36 44.96 1211771 9.70
15-16 13576086 453228 270312 723540 5.33 50.48 210338 288073 211414 709825 5.23 49.52 1433365 10.56
16-17(RE) 15039873 493924 326463 820387 5.45 56.07 214933 228056 199672 642662 4.27 43.93 1463049 9.73
17-18(BE) 15039873 538745 412477 951222 6.32 58.12 228548 240466 216534 685549 4.56 41.88 1636771 10.88
Source :-(i) Central Direct and Indirect Taxes -Union Budget.
(ii) States Direct Taxes-IPFS,2014-15
(iii) Indirect Taxes -State Finance, RBI - 2015-16.
(iv) GDP-CSO
(v) Wealth Tax is not included being negligible as compared to Income Taxes.

Annexure 1.12
TAX/GDP Ratio in major countries
(Para 1.7.1)
Country Tax as % Country Tax as % Country Tax as %

of GDP of GDP of GDP
Afghanistan 6.4 Finland 43.6 Pakistan 16.8
Albania 22.9 France 47.9 Panama 10.6
Algeria 7.7 Gambia 18.9 Papua New 24.5
Angola 5.7 Georgia 21.7 Guinea
Argentina 37.2 Germany 40.6 Paraguay 12.0
Armenia 22.0 Ghana 20.8 Peru 18.0
Australia 25.8 Greece 39.0 Philippines 14.4
Austria 43.4 Guyana 31.9 Poland 33.8
Azerbaijan 17.8 Haiti 9.4 Portugal 37.0
Bahamas, The 18.7 Honduras 15.6 Qatar 2.2
Bahrain 4.8 Hong Kong 13.0 Romania 27.7
Bangladesh 8.5 Hungary 39.1 Russia 19.5
Barbados 32.6 Iceland 40.4 Rwanda 14.1
Belarus 24.2 India 17.7 Saint Lucia 23.1
Belgium 47.9 Indonesia 12.0 Saudi Arabia 5.3
Bhutan 10.7 Iran 6.1 Serbia 34.1
Bolivia 27.0 Ireland 30.8 Singapore 14.2
Bosnia and 41.2 Israel 36.8 Slovakia 29.5
Herzegovina Italy 43.5 Slovenia 39.3
Botswana 35.2 Jamaica 27.2 South Africa 26.9
Brazil 34.4 Japan 28.3 Spain 37.3
Bulgaria 27.8 Jordan 21.1 Sri Lanka 11.6
Burkina Faso 11.5 Kazakhstan 26.8 Sudan 6.3
Burma 4.9 Kenya 18.4 Swaziland 39.8
Burundi 17.4 Korea, South 26.8 Sweden 45.8
Cambodia 8.0 Kuwait 1.5 Switzerland 29.4
Cameroon 18.2 Kyrgyzstan 21.4 Syria 10.7
Canada 32.2 Lebanon 14.4 Taiwan 13.0
Chad 4.2 Libya 2.7 Tajikistan 16.5
Chile 21.0 Macau, China 20.1 Tanzania 12.0
China 28.1 Macedonia 29.3 Thailand 17.0
Colombia 16.1 Madagascar 10.7 Togo 15.5
Congo, 13.2 Malaysia 15.5 Trinidad and 28.0
Democratic Maldives 20.5 Tobago
Republic of Mali 15.3 Tunisia 14.9
Congo, 5.9 Mauritania 15.4 Turkey 24.9
Republic of Mauritius 19.0 Turkmenistan 20.2
Costa Rica 21.0 Mexico 19.7 Uganda 12.6
Croatia 36.7 Mongolia 33.8 Ukraine 28.1
Cuba 44.8 Montenegro 28.0 United Arab 1.4
Cyprus 39.2 Morocco 22.3 Emirates
Czech 36.3 Mozambique 13.4 United 34.4
Republic Namibia 28.8 Kingdom
Denmark 50.8 Nepal 10.9 United States 26
Djibouti 20.0 Netherlands 39.8 Uruguay 23.1
Ecuador 13.2 New Zealand 34.5 Uzbekistan 21.0
Egypt 15.8 Niger 11.0 Venezuela 25.0
Ethiopia 11.6 Nigeria 6.1 Vietnam 13.8
European 35.7 Norway 43.6 Yemen 7.1
Union OECD 34.8 Zambia 16.1
Fiji 21.8 Oman 2.0 Zimbabwe 27.2
Source:-Wikipedia
Feedback to-anpsinha9999@gmail.com
Annexure 2.1
(Para 2.1.1)
SEVENTH SCHEDULE of the Constitution (Art 246)

(Extract relating to the taxation powers)
List I—Union List
82. Taxes on income other than agricultural income.
83. Duties of customs including export duties.
84. Duties of excise on tobacco and other goods manufactured or produced in India except—
(a) Alcoholic liquors for human consumption;
(b) Opium, Indian hemp and other narcotic drugs and narcotics, but including medicinal and toilet
preparations containing alcohol or any substance included in sub-paragraph (b) of this entry.
85. Corporation tax.
86. Taxes on the capital value of the assets, exclusive of agricultural land, of individuals and
companies; taxes on the capital of companies.
87. Estate duty in respect of property other than agricultural land.
88. Duties in respect of succession to property other than agricultural land.
89. Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and
freights.
90. Taxes other than stamp duties on transactions in stock exchanges and futures markets.
91. Rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of lading,
letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts.
92. Taxes on the sale or purchase of newspapers and on advertisements published therein.
92A. Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase
takes place in the course of inter-State trade or commerce.
92B. Taxes on the consignments of goods (whether the consignment is to the person making it or to
any other person), where such consignment takes place in the course of inter-State trade or
commerce.
List II – State List

45. Land revenue, including the assessment and collection of revenue, the maintenance of land
records, survey for revenue purposes and records of rights, and alienation of revenues.
46. Taxes on agricultural income.
47. Duties in respect of succession to agricultural land.
48. Estate duty in respect of agricultural land.
49. Taxes on lands and buildings.
50. Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to
internal development.
51. Duties of excise on the following goods manufactured or produced in the State and countervailing
duties at the same or lower rates on similar goods manufactured or produced elsewhere in India:—
(a) Alcoholic liquors for human consumption;
(b) Opium, Indian hemp and other narcotic drugs and narcotics; but not including medicinal and toilet
preparations containing alcohol or any substance included in sub-paragraph (b) of this entry.
52. Taxes on the entry of goods into a local area for consumption, use or sale therein.
53. Taxes on the consumption or sale of electricity.
54. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry
92A of List I.
55. Taxes on advertisements other than advertisements published in the newspapers and
advertisements broadcast by radio or television.
56. Taxes on goods and passengers carried by road or on inland waterways.
Contd…..

(ii)
57. Taxes on vehicles, whether mechanically propelled or not, suitable for use on roads, including
tramcars subject to the provisions of entry 35 of List III.
58. Taxes on animals and boats.
59. Tolls.
60. Taxes on professions, trades, callings and employments.
61. Capitation taxes.
62. Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling.
63. Rates of stamp duty in respect of documents other than those specified in the provisions of List I
with regard to rates of stamp duty.

Annexure 2.2
(Para 2.4.1)
Estimation of Tax Bases Under VAT and RNR (Bagchi Committee 1994)
Revenue Implications of the Proposed State VAT for AP :1992-93

Description/ S1 S2 S3 S4 S5
Scenario (5,14,25) (4,12,20) (4,10,20) (4,9,20) (5,8,20)
A. Tot Revenue for Yr 2184 2184 2184 2184 2184
i. General Sales Tax 1670 1670 1670 1670 1670
ii. Central Sales Tax 286 286 286 286 286
iii. Share in ADEILST 142 142 142 142 142
iv. Tax on diesel, petrol etc * * * * *
v. Purchase tax on sugarcane 86 86 86 86 86
B. Taxable local turnover(LT) 20616 20616 20616 20616 20616
C. Inputs in B(51% of B) 10514 10514 10514 10514 10514
D. I/P tax in B(4% of C) 421 421 421 421 421
E Taxable local turnover net of I/P tax(B-D) 20195 20195 20195 20195 20195
F. Base broadening due to withdrawal of 2020 2020 2020 2020 2020
exemptions ,etc(10% of E)
G. Total taxable local turnover(E+F) 22215 22215 22215 22215 22215
H. Inter-state sales turnover(CST/0.04) 7150 7150 7150 7150 7150
I. Consignment transfers(same as H) 7150 7150 7150 7150 7150
J. I/P tax in H & I(4% of 51/100 times H 292 292 292 292 292
&I)
K. Total turnover(G+H+I-J) 36223 36223 36223 36223 36223
L I/P qualifying for VAT rebate(21/100 6547 6547 6547 6547 6547
times (K-25% of E))
M. Plant & Machinery for VAT 497 497 497 497 497
rebate(100%)
N. Average rate of VAT(%) Turnover based 15.12 12.75 11.11 10.30 9.53
O. Tax on local turnover liable to 3358 2831 2469 2288 2116
VAT(G*N/100)
P. Tax rebate on L&M ((L+M)*N)/100 1065 898 783 725 671
Q. Net Revenue (O-P) 2293 1934 1686 1562 1445
R. VAT on sugar,textiles and tobacco*** 750 628 558 523 494
S. Gain from capturing value added in 247 208 181 168 156
multistage taxation(N times 15% of (1-
51/100) of G)
T. Revenue loss due to raising of the 23 19 17 16 14
threshold limit to Rs 3 lakh p.a.(1%of Q)
U. Total revenue under VAT (Q+R+S-T) 3267 2750 2409 2238 2081
V. Gain in revenue under the proposed State 1083 566 225 54 103
VAT(U-A)
Notes: 1. ADEILST Additional duties of excise in lieu of sales tax.

* Included in A (1)
** Assuming a ratio of 50:50 between interstate sales and consignment transfers.
*** Consumption of sweeteners between sugar and khandsari and gur is taken as 63:35. This is
computed on the basis of per capita consumption of sugar, khandsari and gur. Total
consumption of tobacco products between those subjected to ADEILST and those subjected
to sales tax is taken as 90:10. Total consumption of textiles between these bases is taken as
85:15.Further the tax base under ADEILST is reduced by 5 percent due to VAT threshold of
Rs 3Lakh.
2. Turnover figures are inclusive of turnover to plant and machinery.

Annexure 2.3
(Para 2.6.1)
Service Tax – Negative List
The negative list is mentioned in Finance Act 2012. Relevant extracts of the same are given below
(see also the highlighted portion). However the Finance Act did not mention the date of
implementation of the same, which was notified through Notification No. 19 /2012-Service Tax
dated June 05, 2012.
Extracts from Clause 143- Section 66D
(34) Negative list of services. "Negative list" means the services which are listed in section 66D;
66D. the negative list shall comprise of the following services, namely:-
(a) Services by Government or a local authority excluding the following services to the extent they
are not covered elsewhere-
(i) Services by the Department of Posts by way of speed post, express parcel post, life insurance and
agency services provided to a person other than Government;
(ii) Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;
(iii) Transport of goods or passengers; or
(iv) Support services, other than services covered under clauses (i) to (iii) above, provided to business
entities;
(b) Services by the Reserve Bank of India;
(c) Services by a foreign diplomatic mission located in India;
(d) Services relating to agriculture or agricultural produce by way of-
(i) Agricultural operations directly related to production of any agricultural produce including
cultivation, harvesting, threshing, plant protection or seed testing;
(ii) Supply of farm labour;
(iii) processes carried out at an agricultural farm including tending, pruning, cutting, harvesting,
drying, cleaning, trimming, sun drying, fumigating, curing, sorting, grading, cooling or bulk
packaging and such like operations which do not alter the essential characteristics of agricultural
produce but make it only marketable for the primary market;
(iv) Renting or leasing of agro machinery or vacant land with or without a structure incidental to its
use;
(v) Loading, unloading, packing, storage or warehousing of agricultural produce;
(vi) Agricultural extension services;
(vii) Services by any Agricultural Produce Marketing Committee or Board or services provided by a
commission agent for sale or purchase of agricultural produce;
(e) Trading of goods;
(f) Any process amounting to manufacture or production of goods;
(g) Selling of space or time slots for advertisements other than advertisements broadcast by radio or
television;
(h) Service by way of access to a road or a bridge on payment of toll charges;
(i) Betting, gambling or lottery;
(j) Admission to entertainment events or access to amusement facilities;
(k) Transmission or distribution of electricity by an electricity transmission or distribution utility;
(l) Services by way of-
(i) Pre-school education and education up to higher secondary school or equivalent; (ii) education as a
part of a curriculum for obtaining a qualification recognised by any law for the time being in force;
(iii) Education as a part of an approved vocational education course;
(m) Services by way of renting of residential dwelling for use as residence;
(n) Services by way of- (i) Extending deposits, loans or advances in so far as the consideration is
represented by way of interest or discount;
Contd…
.

(ii)
(ii) Inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign
exchange or amongst banks and such dealers;
(o) Service of transportation of passengers, with or without accompanied belongings, by-
(i) a stage carriage;
(ii) Railways in a class other than-
(A) First class; or
(B) An air conditioned coach;
(iii) Metro, monorail or tramway;
(iv) Inland waterways;
(v) Public transport, other than predominantly for tourism purpose, in a vessel between places located
in India; and
(vi) metered cabs, radio taxis or auto rickshaws;
(p) Services by way of transportation of goods-
(i) By road except the services of-
(A) A goods transportation agency; or
(B) A courier agency;
(ii) By an aircraft or a vessel from a place outside India to the first customs station of landing in
India; or
(ii) By inland waterways;
(q) Funeral, burial, crematorium or mortuary services including transportation of the deceased.
Government of India Ministry of Finance (Department of Revenue)
New Delhi, the 5th June, 2012
Notification No. 19 /2012-Service Tax
G.S.R.___(E).- In exercise of the powers conferred by clauses (C), (F), (G) and (I) of section 143 of
the Finance Act, 2012 (23 of 2012), the Central Government hereby appoints the 1st day of July,
2012 as the date from which the provisions of clauses (C), (F), (G) and (I) of the said section of the
said Act shall come into force.
[F. No. 334 /1 /2012-TRU]
(Rajkumar Digvijay)
Under Secretary to the Government of India

Annexure 2.4
(Para 2.8.6)
(GST 18%=9%+9%)
Computing ST,VAT & GST(Intrastate and Interstate)
Assumptions (in Rs)
1 purchase of input 30 A ST
2 value addition by manufacturer 27 B VAT
3 value addition by stockist 10 C GST
4 value addition by retailer 20
(in %)
5 UED 12.5 CGST 9
6 VAT 12.5 SGST 9 ST 12.5
7 Entry tax 5 IGST 18 CST 2
Intrastate(*) Interstate(**)
8 Manufactuer state 1 state1
9 Stockist state 1 state2
10 Retailer state 1 state3
Intra state Inter state

Taxes ROWS ST VAT GST ST VAT GST
Manufacturer
11 purchase of inputs 1 30 30 30 30 30 30
12 value additions 2 27 27 27 27 27 27
13 total value of manufactured products (11+12) 57 57 57 57 57 57
14 UED(A & B) & CGST (C) (5/100*13) 7.13 7.13 5.13 7.13 7.13 5.13
15 total value inclusive of UED (13+14) 64.1 64.13 64.1 64.1
16 CST (7/100*15)** 1.28 1.28
17 Total including CST (15+16) 65.4 65.4
18 Entry tax (7/100*17)** 3.27 3.27
19 Total including entry tax (17+18) 68.7 68.7
20 ST (A),VAT(B) & SGST (C) (6/100*15)A,B* &(6/100* 8.02 8.02 5.13 8.59 0 5.13
19)A** &(6/100*13)C
21 Total value of manufactured products (15+20)A& B*,(13+14+20) C 72.2 72.15 67.26 77.3 68.7 67.3
including UED/ST( A) UED/VAT(B) &(19+20)A&B**
& CGST/SGST(C)
Stockist
22 value of purchase inclusive of 21(A),21-20(B)*& (21-20)B** 72.2 64.13 57 77.3 68.7 57
UED/ST(A), UED,CST,Entry tax (21-20-14)C
excluding VAT(B) & excluding
CGST/SGST(C)
23 value addition 3 10 10 10 10 10 10
24 total value (22+23) 82.2 74.13 67 87.3 78.7 67
25 CST (A & B) ) (7/100*24)A&B** 1.75 1.57
26 Total including CST (24+25)A & B 89 80.3
27 Entry tax (7/100*26)** 4.45 4.01
28 total including entry tax (26+27) 93.5 84.3
29 CGST( C ) (5/100*24) 6.03 6.03
30 ST(A),O/P VAT(B), O/P SGST(C) (6/100*24)& (6/100*28)A** 10.3 9.27 6.03 11.7 0 6.03
31 value of sales including CST/Entry (24+30) A,B*&(28+30)A,B** & 92.4 83.4 79.06 105 84.3 79.1
tax/ST (A),CST/Entry tax/VAT (B) & (25+29+30)C
CGST/SGST(C )
32 ITC on account of I/O 20* & 18** 8.02 3.27 3.27
Cont..

(ii)
VAT(Intra),Entry tax(Inter)
33 I/P CGST 14 5.13 5.13
34 I/P SGST 20 5.13 5.13
35 net VAT*/Entry tax** payable by (30-32)*& (27-32)** 1.25 1.18 0.74
stockist
36 CGST payable (29-33) 0.9 0.9
37 SGST payable (30-34) 0.9 0.9
Retailer ROWS Intra state Inter state
Taxes ROWS ST VAT GST ST VAT GST
38 value of purchase inclusive of 31 A,(31-30)B,(31-30-29)C 92.4 74.13 67 105 84.3 67
UED,CST,Entry tax, ST but excluding
VAT(B)& CGST/SGST(C)
39 value addition 4 20 20 20 20 20 20
40 total value (38+39) 112 94.13 87 125 104 87
41 CST( A & B) (7/100*40)** 2.09 2.09
42 Total including CST (40+41) 127 106
43 Entry tax(A & B) (7/100*42)** 6.36 5.32
44 total including entry tax & CST (42+43) 134 112
45 net Entry tax payable (43-49) 1.91 1.31
46 CGST (6/100*40) 7.83 7.83
47 ST( A),output VAT(B) & SGST( C) (7/100*40)*&(7/100*44)A&B** 14.1 11.77 7.83 16.7 14 7.83
48 value of sales including ST/entry tax & (47+40)A& B*, (40+46+47)C 126 105.9 102.7 150 126 103
CST(A ), VAT/CST & entry tax (B) & &(44+47)A& B **
CGST/SGST(C)
49 ITC on account of I/P VAT, Entry tax 30* & 27** 9.27 4.45 4.01
50 I/P CGST 29 6.03 6.03
51 I/P SGST 30 6.03 6.03
52 Net VAT payable by retailer (47-49) 2.5 14
53 CGST payable (46-50) 1.8 1.8
54 SGST payable (47-51) 1.8 1.8
55 ST Payable 47 14.1 16.7
56 Total UED(A & B) & CGST(C) 14 A,B &(53+36+14)C 7.13 7.13 7.83 7.13 7.13 7.83
57 Total ST(A),VAT(B) & SGST(C) 55 A,47 B,(55+37+20)C 14.1 11.77 7.83 16.7 14 7.83
58 Total Entry tax (45+35+18)** 6.36 5.32
59 Total CST (41+25+16)** 5.12 3.66
60 Total incidence of tax (56+57) & 21.2 18.9 15.66 35.3 30.1 15.7
(56+57+58+59)A,B**
61 Total value excludingUED/ ST/Entry (48-47-56)A,(48-57-56)B,C & 105 87 87 120 99.2 87
tax/CST(A ), VAT/UED/Entry (48-56-57-58)A,B**
tax/CST(B) & CGST/SGST(C)
62 % incidence of tax burden (60/61*100) 20.1 21.72 18 29.4 30.3 18
63 % incidence of (57/61*100) 13.3 13.53 9 13.9 14.1 9
VAT(A),SGST(B)&ST( C)
64 % incidence of UED(A & B)OR (56/61*100) 6.77 8.2 9 5.94 7.19 9
CGST(C)
65 % incidence of Entry tax( A& B) (58/61*100) 5.3 5.36
66 GOI 56 7.13 7.13 7.83 7.13 7.13 7.83
67 Final state tax(interstate including 57 14.1 11.77 7.83 20.7 17.4 7.83
CST & entry tax in (A & B) & state
3 (C)
68 Price to consumer 48 126 105.9 102.7 150 126 103
69 State 1 ** 16 1.28 1.28
70 State 2 ** (25+35) 2.93 2.31
Cont…
(iii)
71 Total revenue (66+67) 21.2 18.9 15.66 27.8 24.5 15.7
* Notes
a A,B,C indicates sales tax,VAT & GST Regime respectively.
b Formulae of calculations is mentioned under "ROWS" section & numbers indicates row.
c UED,Entry tax & CST are calculated under ST &VAT regime wheras CGST & SGST are calculated in GST regime.
d Under Intrastate coloumn state 1 refers selling & purchasing b/w manufacturing,stockist & retailer of the same state.
e Revenue of State 1 ** includes CST
f Revenue of State 2 ** includes (CST + Entry tax).
g State 3 taxes(interstate) includes VAT,CST & Entry tax(col 67).
Summary of Annexure 2.4 GST 18%(8%+10%)

1 Tax to GOI 7.13 7.13 6.96 7.13 7.13 6.96
2 Taxes to States
a State 1(Manufacturer) 1.28 1.28
b State 2(Stockist) 2.93 2.31
c State 3(Retailer) 14.05 11.77 8.7 20.7 17.36 8.7
d Total &States 14.05 11.77 8.7 24.91 20.95 8.7
3 Taxes to GOI &States 21.18 18.9 15.66 32.04 28.08 15.66
4 CTC 126.47 105.9 102.66 150.78 125.63 102.66
Summary of Annexure 2.4 GST 18%(9%+9%)

1 Tax to GOI 7.13 7.13 7.83 7.13 7.13 7.83
2 Taxes to States
a State 1(Manufacturer) 1.28 1.28
b State 2(Stockist) 2.93 2.31
c State 3(Retailer) 14.05 11.77 7.83 20.7 17.36 7.83
d Total 14.05 11.77 7.83 20.7 17.36 7.83
3 Taxes to GOI &States 21.18 18.9 15.66 32.04 28.08 15.66
4 CTC 126.47 105.9 102.66 150.78 125.63 102.66

Annexure 2.5
(Para 2.7)
List of Declared goods under VAT
Coal, crude oil, petroleum oils and crude oils Aviation turbine fuel sold to a Turbo-Prop
Aircraft.
Cotton, cotton fabrics, cotton yarn Man-made fabrics, woven fabrics of wool covered
Iron and steel, cast iron, iron scrap, cast iron Jute, oilseeds, groundnut , sesamum, cotton seed,
scrap, runner scrap and iron skull scrap, steel soyabean, rapeseed, mustard, toria, rai, jamba-
semis, skelp bars, tin bars, sheet bars, hoe-bars taramira, sarson, yellow and brown, banarsi Rai or
and sleeper bars, steel structural, (angles, joists, True Mustard, linseed, castor, coconut, sunflower,
channels, tees, sheet piling Sections, Z Sections nigar seed, neem, vepa, mahua, Illupai, Ippe,
or any other rolled Sections) sheets, hoops, strips karanja, Pongam, Honga, kusum punna, Undi
and skelp, both black and galvanised, hot and kokum, sal, tung, red palm, safflower, Cereals,
cold rolled, plain and corrugated, in all qualities, Paddy, rice, wheat, jowar, bajra, maize, ragi,
in straight lengths and in coil form, as rolled and kodon, kutki, barley, gram or gulab gram, tur or
in riveted condition, discs, rings, forgings and arhar, moong, masur, urad, moth, lakh
steel castings, tool, alloy and special steels, steel
melting scrap, steel tubes, both welded and
seamless, tin-plates, both hot dipped and
electrolytic and tin-free plates, fish plate bars,
bearing plate bars, crossing sleeper bars, fish
plates, bearing plates, crossing sleepers and
pressed steel sleepers, rails-heavy and light crane
rails wheels, tyres, axles and wheel sets, wire
rods and wires-rolled, drawn, galvanised,
aluminised, tinned or coated such as by copper
defectives, rejects, cuttings or end pieces
Sugar Unmanufactured tobacco and tobacco refuse
covered

Annexure 2.6
(Para 2.9.1)
A.VAT/ST Collection
State 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16
HIS 48,484 55,527 66,794 74,714 87,400 95,780 1,22,313 1,51,001 1,82,430 2,00,507 2,29,588 2,54,480
MIS 28,459 25,890 50,967 47,337 53,693 59,534 75,017 91,425 1,06,661 1,24,697 1,18,644 1,36,346
LIS 19,054 22,283 26,919 29,068 35,449 40,834 50,922 67,753 75,900 84,264 99,614 1,15,303
Bihar 1,829 1,679 2,011 2,491 2,979 2,611 4,528 7,439 8,646 8,418 12,745 15,931
B.VAT/ST:GSDP Ratio
04-
State 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15
05
HIS 41.30 40.51 41.27 39.79 41.15 38.81 41.27 41.44 43.73 42.51 43.97
MIS 41.50 33.65 56.57 44.76 44.10 43.30 45.48 43.32 44.62 45.27 37.98
LIS 29.66 31.59 33.03 30.84 32.18 32.07 33.84 37.51 36.61 36.00 37.92
Bihar 23.52 20.36 19.97 21.91 20.94 16.03 22.24 30.10 30.62 26.55 34.09
Source: VAT/ST figures are taken from RBI, State Finances and GSDP figures from CSO.
Abbreviations:
a. HIS – High Income States (Haryana, Maharashtra, Gujrat, TN, HP, Kerala, Punjab)
b. MIS – Middle Income States (AP, Karnataka, WB, Rajasthan, Chhattisgarh)
c. LIS1 - Orissa, MP, Jharkhand
d. LIS2 – Low Income States (UP, Bihar)
State wise VAT Collection (in Crores)
States AP Assam Bihar Cgarh Gujarat Haryana HP Jkhand Knata Kerala

13-14 48,737 6,848 8,453 7,930 40,976 16,774 3,141 7,305 33,719 24,885
14-15 30,524 7,351 8,607 8,429 44,145 18,993 3,661 8,070 38,286 27,908
15-16 32,840 9,200 10,197 11,625 44,500 25,000 3,937 10,775 40,614 31,193
States MP Maha Odissa Punjab Raj TN UP WB NCR Remarks
13-14 16,650 62,530 10,729 14,847 21,216 53,532 39,645 21,931 17,926
14-15 18,136 67,466 11,817 15,455 24,170 57,191 42,935 24,022 18,289
15-16 20,000 74,617 12,605 17,000 29,250 61,973 49,453 26,664 21,000

Annexure 2.7
(Para2.9.3)
Impact of VAT Reform in Different Indian States

Non-
Log GSDP Petrol VAT Adjusted
State Agricultural Constant
Per capita Price Index Dummy R Square
GDP share
Andhra Pradesh 1.082*** -2.9E-05 0.0105** -0.067** -2.42*** 0.9921
Arunachal Pradesh 3.611* -0.0026 0.054* 0.512 -17.201** 0.7998
Assam 0.75** 0.0012 0.0219*** -0.0208 -2.032** 0.9860
Bihar 1.07** 0.0012 -0.018** -0.098 -0.715 0.8557
Goa 0.91*** -0.0005 -0.01 0.0469 0.109 0.9851
Gujarat 0.485*** 0.003*** 0.0014 0.049* 0.547 0.9927
Haryana 0.605*** 0.0079 0.0187*** 0.0025 -0.957** 0.9925
Himachal Pradesh 1.214*** 0.0005 0.0003 0.05 -2.667*** 0.9948
J&K 1.89*** -0.0021 0.01 -0.034 -5.91*** 0.9772
Karnataka 0.807*** 0.001*** -0.0005 0.007 -0.544* 0.9963
Kerala 0.951*** 0.0013* -0.00007 -0.089*** -1.093*** 0.9927
Madhya Pradesh 0.705*** 0.0024*** 0.0036 -0.0039 -0.696 0.9909
Maharashtra 0.898*** 0.001 0.003 -0.059* -1.28** 0.9896
Manipur 1.216*** 0.0026 -0.017 0.138* -1.92* 0.9638
Meghalaya 1.17*** 0.0015 -0.004 0.0038 -2.55*** 0.9903
Mizoram 2.26*** -0.003 0.038** 0.153 -10.37*** 0.9654
Nagaland 1.067*** 0.002** -0.0019 0.052 -2.4*** 0.9928
Odisha 0.73*** 0.0017** 0.008** -0.019 -1.088** 0.9904
Punjab 1.106*** 0.0001 0.008 -0.063 -2.43** 0.9696
Rajasthan 0.82*** 0.002*** 0.0095*** -0.0039 -1.56*** 0.9975
Sikkim -0.0116 0.0042 0.036*** -0.0019 -0.433 0.9088
Tamil Nadu 0.6*** 0.0022*** 0.0097*** -0.011 -0.495* 0.9967
Tripura 1.015*** 0.0018** 0.016** -0.02 -3.17*** 0.9942
Uttar Pradesh 1.4*** 0.00005 -0.002 -0.047 -2.98*** 0.99
West Bengal 0.636*** 0.0023*** -0.0027 0.027 -0.009 0.9864
Note: Estimated Equation:
 log sales tax per capita = log GSDP per capita Petrol Price index + share of
non-agricultural GDP + VAT dummy.
*Significant at 10 per cent,

**significant at 5 per cent,
*** significant at 1 per cent.
Source: Govinda Rao, NIPFP

Annexure 2.8(A)
(Para 2.10)
Sales Tax/VAT Effort of the States
A. State‘s Sales Tax Effort (Purohit):

There are four rate categories for sales tax, i e, 0, 4, 8 and 12 per cent, but the rate structure of sales
tax for different commodities varies from one state to another. The ideal way could have been to
obtain data on turnover relating to consumption of various types of commodities and also to estimate
the turnover of inputs used in the industries. However, owing to non-availability of required
information from all the states, the equation used is as follows:
Log (STAX) = a + b log (GDSP)
Where, STAX = revenue from total sales tax minus central sales tax
Sales Tax Effort

Sl. States 00-01 05-06 09-10 10-11 13-14 (13-14) Rank
1 Haryana 103 104 101 101 100 11
2 Maharashtra 101 99 99 99 99 14
3 Gujarat 104 101 101 101 102 4
4 TN 104 104 103 102 103 2
5 HP 94 96 98 100 98 15
6 Kerala 107 103 104 104 104 1
7 Punjab 100 101 100 101 102 6
8 AP 103 102 102 102 102 3
9 Karnataka 103 102 102 102 102 5
10 WB 95 95 96 96 96 18
11 Rajasthan 99 100 100 99 99 13
12 Chhattis. 88 101 100 101 100 8
13 Orissa 102 99 99 99 99 12
14 MP 100 99 99 100 98 16
15 Jharkhand 106 100 102 99 100 7
16 Assam 97 102 100 100 100 10
17 UP 98 99 100 100 100 9
18 Bihar 100 93 95 94 97 17
Note:-Supporting data and calculation are given in Annexure 2.8 (B).

Annexure 2.8(B)
(Para 2.10)
Supporting Data for Sales Tax (VAT) effort of the states
2000-01 2005-06 2009-10 2010-11 2013-14 2015-16

SALES SALES SALES SALES SALES SALES GSDP
Sl.NO. STATE GSDP GSDP GSDP GSDP GSDP TAX(RE) (RE)
TAX TAX TAX TAX TAX
Haryana 2574 58183 5,604 108885 9,032 223600 11082 260621 17,400 388917 25000 485184
Maharashtra 12197 252283 19,677 486766 32,676 855751 42483 1049150 63,923 1476233 74617 2038386
Gujarat 5943 111139 10,561 244736 18,200 431262 24893 521519 45,300 765638 44500 994316
HIS
T.N 8197 146796 15,555 257833 25,505 479733 28614 584896 58,690 854238 61973 1212668
HP 302 15661 727 27127 1,487 48189 2101 57452 2,951 82585 3937 119421
Kerala 4345 72659 7,038 136842 12,771 231999 15833 263773 26,664 396282 31193 588337
Punjab 2645 74677 4,627 108637 7,577 197500 10017 226204 16,750 317054 17000 413720
AP 7304 144723 12,542 255941 23,640 476835 29145 583762 52,560 855935 32840 609934
Karnataka 5387 108362 9,870 195904 15,833 337559 20235 410703 32,850 582754 40614 1027068
MIS
WB 3672 143725 6,109 230245 10,510 398880 13276 460959 23,443 706561 26664 907762
Rajasthan 2822 82435 5,594 142236 10,164 265825 12630 338348 21,750 517615 29250 681217
Chhattisgarh 354 25846 2,089 53381 3,712 99364 4841 119420 8,436 185682 11625 260776
Odisha 1584 43351 3,012 85096 5,409 162946 6807 197530 11,095 272980 12605 341887
20000 543975
LIS-1
MP 2767 79203 4,508 124276 7,724 227557 10257 263396 16,500 434730
Jharkhand 1515 32993 2,150 60901 4,200 100621 4503 127281 7,875 172773 10775 241955
Assam 918 36814 2,568 59385 3,535 95975 4319 112688 6,835 159460 9200 224234
LIS-2
UP 6119 181512 11,285 293172 20,825 523394 24837 600286 41,899 862746 49453 1153795
Bihar 1951 57242 1,734 82490 3,839 162923 4557 203555 12,324 343663 10197 413503
State's
70596 1,667,604 125,250 2,953,853 216,639 5,319,913 270430 6,381,543 467,245 9,375,846 511,443 12,258,137
Total

Annexure-2.5
Classification of goods in different states at certain Vat rates
Tamilnadu Andra Pradesh Punjab Maharashtra Delhi
SCH Items/Discription of Goods Tax Rate % SCH Items/Discription Tax Rate % SCH Items/Discription of Tax Rate % SCH Items/Discription Tax Rate % SCH Items/Discription of Tax Rate %
of Goods Goods of Goods Goods
1 Part A:-Bullion ,Gold ,Silver and 1 1 Exempted from exempt A Exempted from exempt A 54 items and exempt 1 Electricity, exempt
Precious Stone State Vat,47items State Vat,65 items electricity energy,rubber,
plastic footwear, plastic
waste
Part B:-150 items 4 2 Elligible for ITC 0 B 149 items(liqor 4 B Bullion ,Gold 1 2 Bullion ,Gold ,Silver 1
included) ,Silver and and Precious Stone
Precious Stone
Part c :- Residual category of 12.5 3 Bullion ,Gold 1 C Bullion ,Gold 1 C 109 items(iron 4 3 84 items (industrial 4
Goods ,Silver and ,Silver and Precious Steel, various cabels and ferrous
Precious Stone metals, lime and metals, paper and news
Stone(Avail Itc) lime stone and print, pipes and plastic
their footwears, plastic
products,paper,plas granules, powder and
tic granules etc..) master
batches,copper,various
other metal , carbon and
insecticides, fungicides
and pesticides of
technical grade and
various industrial inputs
2 No ITC 4 to73 4 90 items 4 D No ITC(Petrol, 20 D county liqour, 20&above 4 Petro products other 20
(Alcohol,Gasoline,Petrol,HS&D Deseil, ATF, MLF, (Molasses, than liquid petroleum
Oil ,Kerosine accept sold through Liquified Petro Gas spirit 20%) ( ATF oil, naptha, ATF, spirit,
PDS,Molasses and Sugarcane and condence and gasoline 27 - gasoline, liquor
natural Gas, 34 % with a including country liquor
Beverages, Tobacco specific and molasses.
and tobacco component added
products amounting to Rs.1
per litre)
3 Hotel ,Resturant and Sweet stalls compounded Rates 5 Residual category 12.5 E Special rates 8.8-27.5 E Residual category 12.5 5 Exempted from State exempt
of Goods ,Diesel , Molasses of Goods VAT
,and Petrol(Tax
vary from 8.8%For
deisel to 27.5%
Petrol)
4 Exempted from State VAT exempt 6 (ITC 21.33 to90 F Residual category 12.5 N. N.G 6 Exempted from State exempt
provided),(liquor, of Goods G VAT
Petrol,AMS,ATF
and diesel oil
Part A:-10 items exempt N.G N.G N.G G Un bodies, N. N.G N.G 7 Non Creditable goods N.G
G (Automobiles, petrol,
deisel, CNG, LPG,
Coal, Beverage, Air
conditioners, tobacco
etc..)
Part B:-81 items exempt N.G N.G N.G H VAT levied on 0 N. N.G N.G N. N.G N.G
taxable turnover G G
(paddy Wheat,
cotton, sugarcane
and milk)
5 Relates to International org.where a 0 N.G N.G N.G N.G 0 N. N.G N.G N. N.G N.G
transit pass is permissible G G
6 Relates to International org.where a 0 N.G N.G N.G N.G N. N.G N.G N. N.G N.G
transit pass is permissible G G

(Para 3.1.2)
Annexure 3.1
*not given (N.G)

Source :- Madras school of economics ,March 2012
Annexure 3.2
(Para 3.1.2)
Concept of Manufacture (MSE, 2012)
a. Concept of Manufacture
The Central Excise Duty, now known as, Central Value Added Tax (CENVAT) is levied on the
manufacture and production of ‗excisable goods in India. Excise duty may be levied and collected on
goods only if (a) the goods are manufactured, and (b) the goods are marketable. The task of determining
what is ‗manufacture‗ has led to various disputes and the Courts have often clarified, from time to time, as
to what should be considered as manufacture for the purpose of central excise duty.
 The Supreme Court of India in the case of Union of India vs. Delhi Cloth & General Mills Co.
Limited, held that the word ‗manufacture‘ is generally understood to mean ―as bringing into existence a
new substance‖ and does not merely mean to produce some change in substance. Later, the Supreme Court
further clarified the meaning of the term ‗manufacture‘ in the case of South Bihar Sugar Mills Ltd vs.
Union of India. The Court held: ―The word manufacture‖ implies a change but every change in the raw
material is not manufacture. There must be such a transformation that a new and different article must
emerge having a distinctive name, character or use.‖
 In a recent judgment, the Supreme Court, in the case of Kores India Ltd., Chennai vs. Commissioner of
Central Excise, defined the concept of manufacturing as follows: - … "Manufacturing is the end result of
one or more processes through which the original commodities are made to pass… There may be several
stages of processing, a different kind of processing at each stage. With each process suffered the original
commodity experiences a change. Whenever a commodity undergoes a change as a result of some
operation performed on it or in regard to it, such operation would amount to processing of the commodity.
But it is only when the change or a series of changes takes the commodity to the point where commercially
it can no longer be regarded as the original commodity but instead is recognized as a new and distinct
article that a manufacture can be said to take place. …" (See Collector of Central Excise, Jaipur vs.
Rajasthan State Chemical Works, Deedwana, Rajasthan (1891 (4) SCC 473).
Thus, for consideration as ‗manufacture‗, the process involved must bring about a transformation and as a
result of such transformation a new and different commercial article must emerge having a distinctive
name, character and use. A mere change of form, shape or size of the same article or substance would not
ordinarily amount to manufacture.
 Definition of manufacture in the Excise Act underwent various Amendments in years 1986, 1999, 2002
and 2003. As a result, ‗manufacture‗ was defined to include any process, which is specified as amounting
to manufacture in relation to any goods in the Section or Chapter Notes specified in the First Schedule to
the Central Excise Tariff Act, 1985 and in respect of goods specified in the Third Schedule to the Excise
Act which involve packing or re-packing of such goods in the unit container or labeling or relabeling of
containers including the declaration or alteration of retail sale price on it or adoption of any other treatment
on the goods to render the product marketable to the consumer. Thus, by a ‗legal fiction‗, certain processes
have been equated with manufacture, even though as a result of such processes no new or different article
merges having a distinctive name, character or use.
b. Concept of Goods and Marketability

 The second main issue is about valuation. Technically, the manufacturing process may be complete but
unless the good enters a market and faces a buyer, there is no value that can be attached to the product.
Excise duty, as provided under Section 3 of the Excise Act, is levied on the manufacture or production of
excisable goods‗. In several judgments, the Supreme Court has held that in order to be goods, an article
must be something which can ordinarily come to the market and is brought for sale and must be known to
the market as such. Therefore, the essentiality of the concept of marketability is that the goods
manufactured are known in the market or are capable of being sold and purchased in the market.
 Several cases judgments have clarified this concept. In the case of Union of India vs. Delhi Cloth &
General Mills Co. Limited, the assesse was manufacturing hydrogenated vegetable oil (vanaspati).
Contd.
(ii)
During the process of manufacture, at an intermediate stage, refined oil came into existence. It was the
contention of the Revenue Authorities that excise duty was leviable on such refined oil. The assesse
contended that the refined oil that came into existence was not refined oil as known to the market since
refined oil as known to the market must have undergone the process of deodorization and that, in their
case, the refined oil had not undergone such process. The Supreme Court held that to become ―goods‖ an
article must be something which can ordinarily come to the market to be bought and sold and that since the
refined oil, in the condition in which it came into existence in the assesse‘s factory, was not refined oil
which could ordinarily come to the market to be bought and sold, that the said refined oil was not ‗goods‘.
c. Classification of Goods
A third problem arises because there is a need to classify the goods so as to determine the appropriate level
of duty in a highly differentiated system of levy. It is often not possible to identify all the goods
individually. Often the goods are identified through groups and sub-groups and then to determine the rate
of duty on each group or subgroups of goods. For the purposes of classifying goods under various heads
and/or subheads, Parliament has passed the Central Excise Tariff Act, 1985. The Tariff Act is based on the
International Convention of Harmonised System of Nomenclature (HSN).
 The First Schedule of the Tariff Act is divided into 20 Sections, which broadly cover separate categories
of goods. For instance, Section I deals with live animals: animal products; Section II deals with vegetable
products; Section XI deals with textile and textile articles; and Section XV deals with base metals and
articles of base metal.
Each Section contains a number of Chapters. The First Schedule comprises 96 Chapters. The Sections and
Chapters contain elaborate sections and/or chapter notes. The Tariff Act also contains Rules for the
Interpretation of the First Schedule. In spite of these provisions being quite elaborate, they are not always
adequate to correctly classify a product. As a result, Courts and Tribunals had to evolve rules over the
years for the classification of the products.
d. Valuation
The next problem is the issue of valuation of goods arises where the rates of duty are ad valorem, i.e.,
expressed as a percentage of the value of goods. For this purpose the assessable value of the goods has to
be determined. There are three main ways for valuation in cases where the duty is ad valorem: (i) a tariff
value that is fixed by the government in respect of certain goods; (ii) transaction value, and (iii) valuation
based on the retail sale price printed on a package of goods.
The Central Government has power to fix tariff values in respect of goods under Section 3 (2) of the Excise
Act. In such a case, the assesse pays the ad valorem duty on the tariff value as fixed. In cases where either
a tariff value has not been fixed by the Central government or the valuation is not based on the retail sale
price, the valuation of goods is required to be carried out under Section of the Excise Act.
 In such cases, valuation is based on the ‗transaction value‘ of the goods. The concept of ‗transaction
value ‗was introduced in the Excise Act with effect from July 1, 2000, subject to the following conditions:
i. The price must be the sole consideration for the sale. In other words, the assesse must not receive any
other sum either by way of money or by way of any other assistance for the manufacture of goods or any
manufacturing assistance from the buyer.
ii. The buyer of the goods must not be related person. The term related person has been defined in sub-
section (3) (b) of Section 4 of the Excise Act.
iii. Goods must be sold by the assesse for delivery at the time and place of removal. The transaction value
includes any amount that is paid or payable by the buyer to or on behalf of the assesse on account of the
sale of goods. However, for determining the transaction value the duty of excise, sales tax and other taxes,
actually paid or payable are not to be included. If any one of the above-mentioned three conditions is not
satisfied then the value of the goods is determined in such manner as may be prescribed. For this purpose,
the Central Government has framed the Central Excise Valuation (Determination of Price of Excisable
Contd.
(iii)
Goods) Rules, 2000‗. These rules provide the manner for determination of value of goods which do not
satisfy the above mentioned conditions. With effect from May 14, 1997 Section 4 A was inserted in the
Excise Act. Under this provision, valuation of products may be made with reference to the retail sale price
of the products.
 However, the conditions precedents for the application of the section are:
i. The excisable goods must be packaged goods on which there is a requirement to specify the retail sale
price under the provisions of the Standards of Weights and Measures Act, 1976 or the rules framed there
under or any other law for the time being in force;
ii. The excisable goods are notified by the Central Government for purposes of the section; and
iii.The goods must be chargeable to duty based on their value.
 On satisfaction of these three conditions, the value for purposes of levy of excise duty shall be the retail
sale price of such goods less such amount of abatement from such retail sale price as the Central
government may notify. The abatement is given as a percentage of the retail sale price. In the CENVAT
system, the provision of CENVAT credit has been put in place since all manufactured goods are not used
by end-users or consumers. The final products manufactured by some manufacturers may be the raw
material/input for other Manufacturers. Similarly capital goods purchased by a manufacturer may be
utilised by him for setting up a plant, machinery or a factory. The inputs/capital goods so purchased by the
manufacturer are duty paid. In order to overcome the cascading effect of tax, under the CENVAT Credit
Scheme, a manufacturer or a service provider may take credit, inter alia, of excise duty or additional duty
of customs (levied under Section 3 (1) of the Customs Tariff Act, 1975) or service tax paid on the inputs or
capital goods or inputs services and adjust such credit for making payment of tax on his final products or
output services.
 The law relating to valuation of excisable goods chargeable to ad valorem rate of duty under Section 4 of
the Central Excises and Salt Act, 1944 has been the subject matter of a large number of disputes for a long
time, beginning from the famous Voltas case where the dispute was as to what constituted wholesale cash
price and when wholesale cash price was available, whether the department could have recourse to retail
price as the basis for assessment. The Supreme Court coined concepts like Manufacturing cost plus the
manufacturing profit, post- manufacturing cost and profit, which were not understood in the true spirit and
were interpreted to the disadvantage of the revenue. In later cases which came up before the Supreme
Court a decision about the interpretation of old Section 4 as well as new Section 4 (which came in force in
October 1975) was rendered. The law on central excise valuation has gradually emerged through ruling of
the Supreme Court in different cases.
e. Exemptions and Multiple Rates

The most significant cause of complexity is, of course, the existence of exemptions and multiple rates, and
the irrational structure of the levies. These deficiencies are the most glaring in the case of the CENVAT
and the Service Tax. The starting base for the CENVAT is narrow, and is being further eroded by a variety
of area-specific, and conditional and unconditional exemptions. A few years ago the government attempted
to rationalize the CENVAT rates by reducing their multiplicity. However, the government has not adhered
to this policy and reintroduced concessionary provisions for several sectors/products. Since CENVAT
relates to an artificial fragmentation of the value added space, it has led to several problems regarding
definition, classification and valuation.

Annexure – 3.3
(Para 3.1.3)
Summary of India‘s Indirect Taxes

Annexure 3.4
(Para 3.4.4)
Distortions resulting from CST and why is GST a better option than CVD/SAD
(CEA Committee, 2015)
 Distortions resulting from CST, inter-state taxes, CVD exemption: Many distortions are caused by
three features of the current system: (i) Central Sales Tax (CST) on inter-state sales of goods; (ii) other
numerous inter-state taxes that will be replaced by (one) GST; and (iii) extensive nature of countervailing
duty (CVD) exemptions.
(a) CST
 The 2 per cent CST on inter- state of goods leads to inefficiencies in supply chain of goods. Goods
produced locally within the jurisdiction of consumption attract lower tax than those produced outside. This
tax encourages geographic fragmentation of production. The tax can be avoided partially through
branch/stock transfers by manufacturers. However, the tax saving from branch transfers get substantially
offset by the incremental cost of logistics and warehousing of goods in multiple locations.
 An example: where intermediate goods produced in Maharashtra go to Andhra Pradesh for production
of a final good which in turn is sold in Tamil Nadu. Effectively, the goods will face an additional tax of 4
per cent, which will reduce the competitiveness of the goods produced in Andhra Pradesh compared with
goods that can be imported directly to say Chennai from South and East Asian sources.
(b) Other interstate taxes: like entry tax which distort interstate trade would get folded into GST.
(c) Do CVD/SAD on imports offset excise duty imposed on domestically produced goods:
 It is insufficiently appreciated that India‘s border tax arrangements undermine Indian manufacturing
and the ―Make in India‖ initiative. Eliminating exemptions in the CVD and SAD levied on imports will
address this problem as shown below :
 It is a well-accepted proposition in tax theory that achieving neutrality of incentives between domestic
production and imports requires that all domestic indirect taxes also be levied on imports. So, if a country
levies a sales tax, VAT, or excise or GST on domestic sales/production, it should also be levied on imports.
In India, this is achieved through CVD/SAD which is levied on imports.
 However, CVD/SAD exemptions act perversely to provide negative protection for Indian
manufacturing. Table-3 below illustrates the impact of CVD/SAD and excise exemptions. When there are
no CVD/SAD and excise exemptions (Scenario 1), neutrality of incentives between domestic goods and
imports is achieved which is desirable. In scenario 2, there is no excise exemption but there is a CVD/SAD
exemption which results in a large penalty on domestic producers (of 12.36 per cent under certain
assumptions about costs).
 But the important and subtle point relates to scenario 3 when both the excise and CVD/SAD are
exempted. This may seem apparently neutral between domestic production and imports but it is not. The
imported good enters the market without CVD/SAD imposed on it; and, because it is zero-rated in the
source country, is not burdened by any embedded input taxes on it. The corresponding domestic good does
not face the excise duty, but since it has been exempted, the ITC cannot be claimed. The domestic good is
thus less competitive vis-à-vis the foreign good because it bears input taxes which the foreign good does
not. In the example, the penalty on domestic producers is over 6 per cent. In effect, a policy designed to
promote domestic manufacturing through excise exemption creates a perverse incentive for the exempt
industry and its eventual decline.
 CVD/SAD is not applied on a whole range of imports. These exemptions can be quantified. The
effective rate of excise on domestically-produced non-oil goods is about 9 per cent. The effective
collection rate of CVDs should theoretically be the same but is in actual fact only about 6 percent. The
difference not only represents the fiscal cost to the government of Rs 40,000 crore, it also represents the
negative protection in favour of foreign produced goods over domestically produced goods.
Contd.

(ii)
Scenario 1 Scenario 2 Scenario 3

No Excise exemption No CVD exemption Excise exemption for
for domestically for imported goods domestically produced
produced goods goods
Domestic Imported Domestic Imported Domestic Imported
cost of raw materials 100 100 100 100 100 100
Input tax 1 12.36 N.A 12.36 N.A 12.36 N.A
Total cost of raw material 2 100 100 100 100 112.36 100
Value added 100 100 100 100 100 100
CVD @ 12.36% N.A 24.72 N.A 0 N.A 0
Excise duty @ 12.36% 24.72 N.A 24.72 N.A 0 N.A
Total cost 224.72 224.72 224.72 200 212.36 200
Protection for domestic
good 0.00% -12.36% -6.16%
1/Excise tax rate=12.36%.Input tax does not apply for imported good because it is zero rated in the
exporting country
2/In scenario 1 and 2 total cost of raw materials for domestic good is unaffected by input tax because
there is no excise exemption and hence credit available for the tax custom duty is assumed to be 0 per
cent.
3/CVD applied on total base of 200,12.36% of 200=24.72
(d) Does CVD exemption on inputs help domestic manufacturer :

 Two defenses of CVD exemptions are typically made. First, that CVD exemption on inputs helps
manufacturers by reducing their input costs. But under the current system and in future when the GST is
implemented, CVD on inputs can always be reclaimed as ITC. So, CVD exemptions do not provide
additional relief. In fact, they help collection efficiency because they are levied at customs.
 The second rationale is that there is no competing domestic production. This argument is faulty
because the absence of competing domestic production may itself be the result of not having the neutrality
of incentives that CVD creates. Domestic producers may have chosen not to enter because the playing field
is not level.
(e) Is GST a better option than CVD/SAD :
 The aforesaid anomaly can be remedied simply by enacting an exemptions-free GST. In one stroke
the penalties on domestic manufacturing would be eliminated because the GST (central and state) would
automatically be levied on imports to ensure neutrality of incentives. In effect, India
 Would be promoting domestic manufacturing without becoming protectionist and without violating
any of its international trade obligations under the WTO or the Free Trade Agreements (FTAs).
 In the meantime, the effect of GST can be partially simulated even now by eliminating the exemptions
applied to CVD/SAD. The default situation should be an exemptions-free regime. If particular sectors seek
relief from CVD/SAD, they should to make their case at the appropriate forums.
 In a sense, India finds itself in a de facto state of negative protection on the one hand, and calls for
higher tariffs on the other. It is win-win to resist these calls that would burnish India‘s openness credentials
and instead eliminate the unnecessary and costly penalty on domestic producers.
Conclusion:
All these three sets of costs—CST, CVD exemptions, and other inter-state taxes—should be viewed as
undermining Make in India because in all cases, they favour foreign production to domestic production.
GST can then be thought of as a trade and productivity shock and one that can be harnessed without
recourse to protectionism: in effect, the GST will be eliminating negative protectionism.

Annexure 3.5
(Para 3.4.5)
Costs of Logistics in inter-state trade in India (CEA Committee, 2015)
 There is ample evidence to suggest that logistical costs within India are high. One study suggests that,
for example, in one day, trucks in India drive just one-third of the distance of trucks in the US (280 kms vs
800 kms). This raises direct costs (wages to drivers, passed on to firms), indirect costs (firms keeping
larger inventory), and location choices (locating closer to suppliers/customers instead of lowest-cost
location in terms of wages, rent, etc.).
 Further, only about 40 per cent of the total travel time is spent driving. Check points and other official
stoppages take up almost one-quarter of total travel time. Eliminating check point delays could keep trucks
moving almost 6 hours more per day, equivalent to additional 164 kms per day – pulling India above
global average and to the level of Brazil. So, logistics costs (broadly defined, and including firms‘
estimates of lost sales) are higher than the wage bill or the cost of power, and 3-4 times the international
benchmarks.
 Another study shows that inter-state trade costs exceed intra-state trade costs by a factor of 7-16,
thus pointing to clear existence of border barriers to inter-state movement of goods. Further, inter-state
trade costs in India exceed inter-state costs in the US by a factor of 6, suggesting that India‘s border effects
are large by international comparison. Bringing India‘s inter-state trade costs down to the US level
increases welfare by 15 per cent; conversely, completely eliminating intra-state trade frictions raises
welfare by 5 per cent.
 All of these barriers to inter-state trade become even more important in India because the share of roads
in freight traffic is high (about 72 per cent) and much higher than in comparable countries and rising over
time because of under-investment in the Railways (Economic Survey, 2015, pp.92-94). The implication is
that it is especially important for India to reduce costs to inter-state trade because of the excessive reliance
on roads for movement of goods.
 Now, all of these costs are not due to taxes. But, the World Bank estimates that about 20-30 per cent are
It is these costs that can be expected to decline with the introduction of GST, providing a boost to inter-
state trade and hence productivity growth within India.

Annexure 3.6
(Para 3.4.6)
Impact of VAT/Excise Duties on investment (CEA Committee, 2015)
(a) How much of current investment suffers from noncredit able excise duties and or VAT
 Estimates vary on how much of current investment in a given year suffers from non-creditable excise
duties and/or VAT. For example, indirect tax collection data for 2014-15 indicate that the total amount of
capital goods purchases for which CENVAT credit was claimed was Rs.1.6 lakh crore, divided between
goods (Rs. 1 lakh crore) and services (Rs. 0.6 lakh crore). National income accounts data suggests that
investment in plant and equipment for the same year by the non-government, non-household sector was
about Rs. 7.4 lakh crore. Apparently, the blocked input taxes could amount to as much as 75 per cent
of the total investment.
(b) What could account for the aforesaid difference and could GST fill this gap?
 If GST could provide for a more seamless and efficient crediting of taxes paid on capital goods, then
capital goods prices would become effectively 12-14 per cent cheaper (because they are taxed at the
standard rate of 12.5 per cent currently by the Centre), increasing the demand for capital goods, raising
investment and hence growth.
 Assuming an elasticity of investment demand with respect to price to be -0.5, GST, by allowing full
ITC for capital goods, could increase investment in capital goods by 6 per cent, resulting in 2 per cent
higher investment (as machinery and equipment account for around one-third of total investment), which in
turn could lead to incremental GDP of 0.5 per cent, assuming an incremental capital output ratio (ICOR) of
4.
 Prior to the introduction of GST in 1991, Canada also had an excise duty regime similar to that in
India. Studies for Canada estimated this beneficial impact of GST to be 0.5 per cent as a result of GST at
the federal level only. The extent of tax cascading in India is much greater because of more stringent rules
in India for claiming tax credits.
(c) In sum, investment is discouraged under the current regime of indirect taxes through the application of
excise duties and VAT to capital goods, for which no set off ITC is provided. This increases the cost of
capital goods and reduces investment.

Annexure – 3.7(A)
(Para 3.7.1)
26 Elements of pure/flawless GST (TFR, 2009)
(References are to the paras of TFR, 2009)
The ‗flawless‘ GST recommended by us (TFR, 2009) 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 2.4)
iii. The Centre and the States should adopt a consumption-type GST, that is, there should be no distinction
between raw materials and capital goods in allowing input tax credit. (Para 2.7)
iv. The tax base should comprehensively extend over all goods and services upto the final consumer point.
(Para 2.7)
v. There should be no classification between goods and services in law so as to ensure that there is no
classification dispute. (Para 2.7)
vi. The GST should be structured on the destination 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 or services 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. (Para
2.16)
viii. The CGST and SGST should be credited to the accounts of the Centre and the States separately. Since
the CGST and SGST 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 which the capital goods are acquired.
Similarly, any kind of transfer of the capital goods at a later stage should also attract GST liability like all
other goods and services. (Para 2.18)
x. Ordinarily, there should not be any exemption from CGST or SGST. However, if for some reason, it is
considered necessary to provide exemption, the Centre and the States should draw up a common exemption
which should be restricted to the following:-;
a. 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, 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 or
vice versa;
c. any unprocessed food article which is covered under the public distribution system should be exempt
regardless of the outlet through which it is sold; and
d. education services provided by non-Governmental schools and colleges; and
e. health services provided by non-Governmental agencies. (Para 2.26)
Contd.

(ii)
xi. The SIN –goods comprising of emission fuels, tobacco products and alcohol should be subject to a dual
levy of GST and excise. No input credit should be allowed for excise. However, 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 independent dealers. (Para
3.20)
xiv. 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. The cost of the
scanners should be entirely borne by the Central Government. 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. (Para 3.20)
xv. 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
Rs.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 inequities. Further, the threshold exemption limit should be uniform for both CGST and SGST
and across States. (Paras 2.61 and 2.62)
xvi. Further, with a view to reduce administrative and compliance burden, small dealers with annual
aggregate turnover of goods and services between Rs.10 lakh to Rs.40 lakh may be allowed to opt for a
compounded levy of one percent, each towards CGST and SGST. However, no input credit should be
allowed against the compounded levy or purchases made from exempt 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 Rs. 40 lakh, also be allowed to opt for the compounded levy of one percent, each towards CGST
and SGST. (Para 2.64)
xviii. The existing exemption upto Rs.1.5 crores of turnover for small-scale industries should not be
continued under the GST framework. However, in order to inspire confidence of the small scale
industry in the new GST framework, the scrutiny/audit of the small scale industry should be conducted
only by the state tax administration. The enforcement by the State tax administration would be adequate to
even deal with 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 the developers of, or units in, the
Special Economic Zones. (Para 2.75)
xxi. The tax regime for power sector, vehicles, goods and passengers, financial services and the real estate
and housing services sector should be reformed and integrated into the GST framework along the lines
summarized in the paragraphs 4 to 7 and explained in detail in Chapter-II.
Contd.

(iii)
xxii. The rate of CGST and SGST on all non-SIN goods and services should be fixed at a single positive
rate of 5 per cent and 7 per cent, respectively. 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 CGST:
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
xxiv. 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:-
a. VAT/Sales Tax (including Central Sales Tax and Purchase tax);
b. Entertainment tax (other than levied by local bodies);
c. Entry taxes not in lieu of Octroi;
d. Other Taxes and Duties (includes Luxury Tax, Taxes on lottery, betting and gambling, and all cesses and
surcharges by States);
Since all taxes on goods and services, levied by the Centre or the States, should be subsumed in the GST,
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. (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 be subsumed under the CGST or SGST. Further, both Centre and the States should take
steps to consolidate all taxes (other than proposed GST) on the SIN goods as a single levy termed as
Central Excises and State Excises, respectively. (Para 2.11)
xxvi. All entry and Octroi duties levied by the third-tier of Government must be abolished. (Para 2.11)

Annexure 3.7(B)
(Para 3.7.1)
Seven macro-economic channels for minimising distortions though the GST regime (TRF, 2009)
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 by removing the many distortionary features of the present indirect
tax system. There are seven important macroeconomic channels through which the ‗flawless‘ GST
minimises the distortions.
First, the failure to tax all goods and services distorts consumption decisions; it weakens the signalling
power of relative prices. GST will reduce these distortions and enable all economic agents to respond
more effectively to price signals. This will improve the allocative efficiency of the tax system.
Second, 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 growth.
The ‗flawless‘ GST envisages full and immediate credit for GST on capital goods (both buildings and
plant and machinery), thereby fully eliminating the incidence of any indirect tax on the capital goods.
This enhances the productivity of capital and hence reduces the incremental capital-output ratio (ICOR).
This is perhaps the most important gain through the introduction of the GST in India.
Fourth, for a given constellation of exchange rates and price levels, violation of the destination principle
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 increase the
cost of doing business. The proposed GST, though dual in nature, envisages a uniform structure, design
and compliance system at all levels of Government and across States. This is a league table in which we
have long languished at the bottom
Negative Grey Area dynamic Effects

Annexure – 3.8
(Para 3.7.2)
Features and impact of current system vis a vis an ideal GST regime
Current regime of indirect taxes An ideal GST structure

Goods and services taxed separately* No differentiation between a good and a service; both
subject to one tax
VAT applies at manufacturing stage (CENVAT i.e. VAT applies at point of consumption. Set-off on the
excise duty) as well as at sales stage (state VAT i.e. inputs gets credit through the production and
sales tax). distribution stages.
Input credit set-off not available across different Input tax credit available across state and central tax
taxes. For example, set off not available for jurisdictions.
CENVAT against state VAT.
Features
Some taxes (CENVAT, service tax) levied at the Follows a destination based principle where tax is
stage of production, while some (state VAT) levied collected on final consumption.
on sale.
Many indirect taxes not included in central and Subsumes all indirect taxes under one tax.
state VAT.**
Different tax rates levied across products and Single tax rate to apply on all goods and services.
across states.
Certain sectors exempt from VAT.*** No goods or services are exempt from GST.
Intra-state transactions get input credit set off but Input credit set off to be available across intra-state
not inter- state transactions. and inter-state transactions.
Cascading of taxes across manufacturing and Eliminates cascading by providing for input credit set
distribution chain increases cost of products off at all stages of production.
making them uncompetitive.
Limited incentive for tax compliance Encourages voluntary compliance. A person in the
supply chain gets credit only when tax is paid by the
previous person.
Distinguishing between goods and services Single tax to apply to both goods and services, hence
complicates the taxation of certain products e.g. distinguishing between the two not necessary.
computer software.
Impact
VAT does not apply uniformly across sectors and No exemptions. All sectors, goods and services
goods. Sectors such as oil and gas production, real subject to GST that broadens tax base.
estate exempt.
States‘ levy of entry tax/octroi when goods pass Facilitates inter-state trade as transactions across state
through states result in bottlenecks at borders, and municipal jurisdictions are free from tax.
raising inventory costs.
Different tax rates across states leads to economic Single national tax rate reduces distortions.
distortions.
Complex tax structure leads to higher Single tax reporting structure as all indirect taxes
administrative costs. subsumed.
Notes: * Service tax cannot be levied by states. It is levied by the centre.
**CENVAT does not include additional excise duty, additional customs duty, central surcharges and cesses. State
VAT does not include luxury tax, entertainment tax, taxes on lottery, advertisements, entry tax etc. CENVAT applies
only at the manufacturing stage, and does not extend down to the distribution stage till the retail sale of goods.
***Exemptions under CENVAT and service tax include: oil and gas production, mining, agriculture, wholesale and
retail trade, real estate construction, and other services. Under state VAT, all services, real property, agriculture, oil
and gas production, and mining are exempt.
Source: PRS Legislative Research

Annexure 3.9(A)
(Para 3.7.2)
PRESENT TAXATION VS Expected GST (ICAI, 2015)
S.N Particulars Present Taxation GST (Expected)
1. Structural  Two separate VAT systems  A dual tax with both Central GST
Difference operate simultaneously at two levels, (CGST) & State GST (SGST) levied
Centre and State, and tax paid (input on the same base. Thus, all goods
tax credit) under one is not available and services, barring a few
as set off against the other exceptions, will be brought into the
 Tax on services is levied under GST base.
separate legislation by Centre  There will be no distinction
 No comprehensive taxation of between goods and services for the
services at the State level; few purpose of tax with a common
services are taxed under separate legislation applicable to both It
enactments allows seamless tax credit amongst
 Imports in India are not subjected Excise Duty, Service Tax & VAT
to State VAT
2. Place of Taxation Taxable at the place of sale of goods  It is consumption (destination)
or rendering of service based tax
3. Excise Duty  Imposed by Centre under separate  To be subsumed in CGST;
Act  Taxable event : Sale; To be taxed
 Taxable event : Manufacture; up to retail level
Taxed up to manufacturing point
4. Basic Customs  Separate Act; - No Change -
Duty  Taxable event: Import
5. CVD/SAD  Imposed by Centre under  To be subsumed in CGST;
separate Act;  Taxable event : Import
 Taxable event: Import
6. Service Tax  Imposed by Centre under separate  To be subsumed in CGST &
Act; SGST;
 Taxable event: Provision of  Taxable event : Provision of
Service Service
7. Central Sales Tax  Imposed by Centre under CST Act; To be phased out
Collection assigned to States;
 Taxable event : Movement of
goods from one State to another
8. State VAT  Imposed by States;  To be subsumed in SGST;
 Taxable event : Sale within State  Taxable event : Sale within State
9. Inter-State  Goods & Services: Imposed by the  To be subsumed in GST &
Transactions Centre (collected by the State). subject to SGST & CGST
10. Tax on  As Excise Duty (CENVAT) : No such powers in GST
Manufacture levied by Centre
11. Tax on Sale of  Inter-State: Centre Concurrent powers to Centre & State
Goods  Local: State
12. Tax on Services  Centre  Concurrent powers to Centre &
State;
13. Tax on Import  Goods: Customs Duties (Basic  Basic Custom Duty on goods : No
Customs Duty, CVD & SAD); Change;
 Services : Under Service Tax  CVD & SAD on import of
services : To be subsumed in GST
14. Tax on Export  Exempt/Zero-rated  No Change -
15. Tax on Transfer of a) Exempt against Form F a) To be taxable
Goods to Branch or b) Generally exempt; Depending b) Might be taxable, unless BIN
Agent. (ii)
upon State procedures of transferor and transferee is
a. Interstate same
b. within States
16. Cross-Levy set-off Excise duty and Service tax : Cross No cross set-off between CGST and
Contd…..
S.N Particulars Present Taxation GST (Expected)
set off allowed SGST
17. Cascading Effect Allows tax credit between Excise Allows seamless tax credit amongst
Duty & Service Tax, but not with Excise Duty, Service Tax & VAT
VAT
18. Non-Creditable Exists Might exist
Goods
19. ITC for Exempted Not allowed Will not be allowed
Activities
20. Exemptions.viz Exists May go in a phased manner
Excise Free Zone
21. Exemption for Exists Might be taxable
transit Inter-State
& High Seas Sale
22. Transactions Exists under the CST Act Forms will be abolished
against Declaration
Forms
23. Taxation on Govt. Partially taxed Might not Change
and Non-Profit
Public Bodies
24. Stamp Duty Presently taxed concurrently by the - No Change -
Centre and State
25. Tax Base Comparatively, Narrow Wider
26. Excise Duty – Rs. 1.5 crores (Turnover of ≥ Rs. 1.5 crores be
Threshold Limit administered by Centre and less by
States)
27. VAT - Threshold Rs. 5 lacs to 10 lacs Rs. 10 lacs to Rs. 20 lacs
Limit
28. Service Tax - Rs. 10 lacs Rs. 10 lacs to Rs. 20 lacs
Threshold Limit
29. Classification of  Excise Duty : HSN; HSN
Commodities  VAT : None
30. VAT/GST Simple TIN (some States : PAN
PAN based BIN
Registration No. based)
31. Procedures for
 CENVAT & Service Tax: Uniform
Collection of Tax Will be uniform
 VAT : Vary from State to State
& Filing of Return
32. Administration Complex due to no. of Taxes Comparatively, simple
33. Use of Computer Done by the States; but very Extensive; It is a necessity for
Network minimum implementation of GST
34. Nature of Present a. Sale vs. Service Will be reduced, provided GST
Litigations b. Classification of goods Legislations are properly drafted
c. Situs issue : between States
d. Interpretation of provisions
e. Sale vs. Works Contract
f. Valuation of Composite
Transactions, etc.

Annexure 3.9(B)
(Para 3.7.2)
VAT vs GST regime
Major Features Present VAT Proposed GST
1. Structure Structure of VAT in different states A dual tax with both Central GST and
differ; VAT rates also differ. state GST will be levied on the same
base. GST to have four rates.
2. Cascading effect CENVAT and VAT have not yet The introduction of GST will not only
been extended to include the chain of include more indirect Central taxes and
value addition and thus the benefits integrate goods and services taxes for
of a comprehensive input tax and set-off relief, but will also capture value
service tax set-off remains out of the addition in distributive trade and a
reach of manufacturers/dealers. continuous chain of set-off from the
original producer's and service
provider's point upto the retailer's level.
3. Coverage Relatively narrow base and separate This would eliminate the burden of all
service tax. cascading effects. Also, major Central
and state taxes will get subsumed into
the GST, reducing the multiplicity of
taxes.
Procedures for It varies from state to state. Wider base and applied on both goods
4. collection of tax and services. GST is a consumption
based tax which will be collected by the
states where the goods or services are
actually consumed.
5. Tax Administration Complex due to number of taxes. Likely to be uniform throughout the
country.
Intention is to make it simple, easy and

tax-payer friendly.
6. Use of Information Not much.
Technology Completely IT-based. Its success to a
great extent will depend on IT for
which the goods and services tax
network (GSTN) – a separate company
has been formed.
Source : http://empcom.gov.in

Annexure 3.10
(Para 3.8.5)
Possible impact of GST on Small Scale Industries(SSIs)-CEA Committee,2015

Existing Under
S.No Description Remarks
Position GST
1 Central Tax Rate
a. Output We assume that the GST rate would be 8
12 8
per cent each for Centre and State
b. Input 12 8
2 State tax rate
a. Output 13.5 8
b. Input 5 8
3 Base value of Inputs: 60 60
4 UED on Inputs 7.2 4.8
5 Value of inputs for State VAT 67.2 60
6 Input VAT 3.36 4.8
7 Value Addition 32.8 32.8 we assume that the value addition is 32.8
8 Base value of In the existing regime the output is exempt
Output(Row3+Row7)* and no input credit is allowed. UED on
inputs become a cost for the taxpayer and
100 92.8
therefore included as a part of value
addition. The output is exempt and therefore
there is no UED on input.
9 UED on Output 0 7.42
10 Output VAT(Row 8*Row 2a) 13.5 7.42
11 Aggregate Value addition
(excluding embedded taxes, if 92.8 92.8
any) (Row 3+ Row 7)
12 Price to consumer(Row 8+Row
113.5 107.65
9+Row 10)
13 Combined Tax Incidence
(Row9-Row10 plus Row 4 if
Row 9 is zero)
14 Rate of tax incidence 22.31% 16.00%
Note: Under GST, the tax incidence on small scale industries would be lower in spite of withdrawal of
exemption .Similarly the price of the products manufactured by SSIs would be lower under the GST regime
if the SSIs pass on the benefit of lower tax incidence to consumers Alternatively, their profitability would
increase. Therefore, the new GST regime without SSI exemption would be more beneficial to SSIs

Annexure 3.11
(Para 3.8.6)
Sectoral impact of GST as assessed by ICRA, 2016

Current GST Regime
A. Transportation
 Service tax under reverse charge  Margin likely dip by up to 450bp if abatement not
mechanism. Tax paid by user of the service extended while 70% abatement may have a 180bp
directly positive impact on margins
 70% tax abatement – Effective service tax  Cost of air borne logistics will increase since the
is 4.5% ATF is outside GST purview and tax paid on it may
 14% Excise duty on Air Turbine Fuel not be available for set off
(ATF). Cenvat credit on ATF can be set off  Increase in vehicle size and utlisation levels to
against service tax improve per km return and profitability for
 Warehouse locations , Warehouse transporters
movements and vehicle utilisations are driven  Compliance cost to increase
by tax considerations
B. Cement :
 Current excise duty of 12.5%and VAT of  At 18% GST and 50% pass through of lower tax
12%-15%  inter-state sales 2% central state incidence ,margins of cement companies can improve
tax (CST) by up to 300bp- 500bp
 Input services taxed at 15%  Warehouse  Savings in handling charges due to a 25% reduction
movement is tax free and but is driven by tax of stock movement can add a further 60bp -80bp to
considerations margins
 18% GST on input services to make services
costlier but can be offset against output tax liability
 Tax outflow on warehouse transfer to impact
working capital negatively but would be offset due to
lower inventory levels.
C. FMCG :
 Excise duty ranging between from 0%-16%  At 18%, tax on input service will increase but can
 VAT of 12 %-14%  Service tax paid on be set off against output tax
sales and promotion can‘t be offset with VAT  Complete set off of the input tax to have a positive
if Excise duty is insufficient or low margin impact of upto 180bp on major FMCG
companies
 Taxing free supplies to impact margins negatively
 Procedural difficulty of identifying place of supply
for services such as media advertisement
 Exemptions given by eight north eastern states and
three hilly states to be considered for calculating
revenue loss for the states.
D. Real Estate :
 Effective service tax rate of 4.5% on sale  No abatement and increase in tax rate to 18% would
consideration after abatement of 70% impact margins negatively
 Lower tax of ~2% under composite scheme  Transfer of land rights under JDA, if considered as
of state VAT supply, and taxed, would result in increased cost of
 Excise Duty on input materials such as steel project and upfront out flow of tax
and cement: 12.5% and VAT is 12%-15%  Lower tax rates of 18% on cement and metal may
 15% Service tax on rented premises lower cost of construction
 Tax credit on input services would also reduce cost
of construction
 Service tax on rented premises to increase but
would be completely available for set off
 Would also benefit lessor to negotiate better rentals
since
(ii) tax burden on lessee is lower.
E. Infrastructure :
Cont….
Current GST Regime
Current: GST Regime:
 Power plants can procure input material at  Keeping electricity outside GST ambit and 18%
2% CST but input services taxed at 15% input tax would lead to higher cost of electricity and
 Input tax absorbed as cost by power increase cost of on-going power projects
producers and passed on to end  18% tax on input services as against 15% and
customers/industries royalty outside GST purview would make mining
 Industries can‘t avail tax credit on activity costlier
electricity duty which adds to cost  Lower cost of input material to impact cost of
 No service tax on works contract for the projects and profitability positively
construction of roads, rails and airports  Compliance cost to come down.
 15% service tax on input services is
absorbed as cost by mining industry
F. Textiles
 Industry has optional route of zero excise  GST of 12% to be negative for cotton value chain
duty subject to not claiming input tax credit  Small and SSI weavers to face margin pressure
 Excise duty on cotton is Nil, so cotton  Margin pressure on branded garment manufacturers
spinners operates under optional route and retailers.
 Man-made fibre and downstream subject to
12.5% excise duty
 2% excise on branded readymades above
INR1000 and abatement of 40%
 VAT of up to 5% (different across states)
 Export duty – Nil and duty drawback of
about 2%-5%
G. Auto Ancillary :
 Excise duty on two wheeler, three wheelers  Standard rate of 18%
and commercial vehicles are at 12.5%.  Margins to improve by upto 600bps across
 Excise duty on Auto ancillary industry segments at 75% pass through of lower tax rates
12.5%  Excise duty on Passenger vehicles  Clarity required on ownership and ITC for tools
12.5% -30% , VAT at 5% - 14.5%  Clarity required on exemptions and subsidies given
 Central Sales Tax at 2% on interstate trade by state and center.
H. Media and Entertainment :

 Print media exempted from service tax;  Standard rate of 18%
digital media pays 15%  Print media margins to be impacted by 370 bp to
 15% Service tax on DTH companies 540bp
 Entertainment tax on DTH services by  DTH industry margins to expand by about 550bp
states is 8%-10% on country wide basis  Entertainment margins to expand by 300bp.
(varies from state to state)
 Entertainment tax on box office collections
is 23%-24% on country wide basis (varies
from state to state)
I. Pharma :
 Inverted duty structure. No refund  Expected Merit rate of 5%
mechanism  Can claim refund if input tax liability higher than
 Input‘s API‘s taxed at around 8% while out- output tax liability
put tax liability is 4.5% to 5%  Inability to increase prices in domestic markets
 CST of 2% and VAT of 5% (different could limit benefits of GST
across states)  Free supplies if taxed would impact margins
 MRP controlled by Drug control mechanism negatively
for domestic formulations  Greater clarity on units set up under central and
state tax exemptions

Annexure 3.12
(Para 3.4.2)
Whether Cascading is a serious problem (Keen,2013)
The term Cascading is, effectively, used by public finance theorists as a term of abuse, its mere
invocation tainting any proposal as inherently suspect. Certainly this has been a prominent concern in
India, a primary argument for movement to a full-fledged VAT being—as it was in the Chelliah Report—
precisely that this VAT would substantially reduce the current extent of cascading. There is indeed
considerable cascading under the present and remarkably complex indirect tax arrangements in India:
Poddar and Ahmad (2009) speculate that more than 35–40 per cent of the revenue from these taxes may
come from cascading elements.
 But what exactly is wrong with cascading? And—even more rarely asked—how large might be the
welfare losses that it implies? These are the questions addressed here. They have importance, it should be
stressed, far beyond the case for a VAT over some form of turnover tax. Even the best designed VATs
embody some degree of cascading in the form of ‗exemptions‘: provisions by which the sale of some
commodity—financial services are a very common example of exemption are not subject to VAT but nor
is any refund given for the tax charged on the inputs used in their production, so that this input tax
‗sticks‘—with tax then levied on top of that tax when the exempted item is used as an input into production.
 So understanding cascading is also critical to understanding the imperfections of real-world

VATs themselves. At its most fundamental, the costliness (or otherwise) of cascading is central to the
public finance mantra of ―broad base, low rate‖: since the broadest base will involve taxing as wide a
range of transactions as possible, even if tax is again levied at a greater stage, this can only be wise as
unqualified advice if cascading is, in fact, not a very great concern.
 Cascading elements include the delay in crediting tax on investment spending under the CENVAT, the
exclusion of major sectors (including agriculture, real estate construction, oil and gas production) from the
CENVAT and the denial to them of credits on state VAT paid, and the non-creditable Central Sales Tax on
inter-state trade.
 Output losses from cascading—or more precisely, the amplification of the production inefficiencies to
which input taxation can lead—may actually be lower the wider the set of inputs that are taxed; but,
probably more to the point, may plausibly be large even at a fairly low nominal tax rate and with
relatively few stages of production.

Annexure 4.1(A)
(Para 4.3.4)
CST collection( Pre and Post VAT regime)Rs crore

Pre VAT Scenario Post VAT Scenario
Category Pop 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 Per 15-16
( RE) Capita ( BE)
HIS (14-15)
Haryana 2.54 867 805 1,062 1,244 1,541 1,357 1,120 1,090 1,264 1,530 1,582 1,761 1,963 773 2,160
Maha 11.24 1,718 2,080 2,417 2,318 2,548 2,385 2,714 2,505 3,548 3,799 4,224 4,769 4,647 413 4,730
Gujarat 6.04 1,157 1,600 1,607 1,915 1,931 1,906 1,667 2,549 4,667 3,943 5,378 5,291 5,289 876 6,034
TN 7.21 929 1,128 1,494 1,861 2,262 1,722 1,646 1,676 2,251 2,831 2,730 3,107 3,464 480 3,845
HP 0.69 44 46 38 80 93 113 139 199 296 245 248 395 292 423 321
Kerala 3.34 356 412 361 486 340 1,016 425 293 310 293 321 331 383 115 474
Punjab 2.77 350 340 479 357 327 328 269 313 374 417 505 525 568 205 569
Total(HIS) 33.8 5,421 6,411 7,458 8,262 9,041 8,827 7,980 8,625 12,710 13,057 14,989 16,179 16,605 3,285 18,133
MIS
AP 8.46 581 975 1,052 1,017 1,244 1,433 1,255 1,362 1,702 1,658 1,932 2,252 999.40 118 1,142
Karnataka 6.11 815 886 1,164 739 1,499 1,262 1,049 937 874 926 1,021 2,805 1,664 272 1,897
WB 9.13 523 617 630 714 1,636 798 821 862 1,059 1,361 1,358 1,469 1,669 183 1,944
Rajasthan 6.85 208 235 297 348 449 405 462 482 728 1,101 1,360 1,381 1,505 220 1,716
Chattisgarh 2.55 334 328 327 415 702 521 664 681 746 1,120 856 928 1,610 631 1,738
Total(MIS) 33.1 2,461 3041 3,469 3,233 5,530 4,419 4,252 4,324 5,109 6,166 6,527 8,836 7,447 1,424 8,437
LIS
Odhisa 4.2 73 182 410 488 722 551 535 494 586 733 755 847 930 221 956
MP 7.26 350 700 471 417 566 557 520 570 683 872 857 943 1,000 138 1,100
Jharkhand 3.3 267 459 528 651 651 739 650 700 725 835 910 1,188 1,508 457 1,737
Assam 3.12 0.34 308 6.79 482 506 449 342 309 366 513 533 559 671 215 806
UP 19.98 707 450 513 883 689 1,385 1,438 1,398 1,968 1,770 1,746 1,793 3,229 162 3,794
Bihar 10.41 50 70 61 54 70 44 37 1,228 30 37 25 35 75 7 94
Total(LIS) 48.3 1,447 2,169 1,989 2,974 3,204 3,725 3,521 4,698 4,357 4,760 4,827 5,366 7,413 1,200 8,486
Grand Tot 115 9,330 11,621 12,917 14,470 17,776 16,971 15,753 17,648 22,176 23,983 26,343 30,381 31,465 5,909 35,057
Source: RBI,State Finances(i) Data of 2003-04 is RE,(ii) 2004-05 BE is taken for UP(iii) RE for Assam for 05-06,06-07,07-08 (iv) RE for 14-15 & BE for 15-16.

Annexure 4.1(B)
(Para 4.1)
Top and Bottom States in per capita CST (2014-15 data)
Top States Bottom States

State Popn CST Per Capita Popn CST Per Capita
Gujarat 6.04 5289 876 Bihar 10.41 75 7
Haryana 2.54 1983 773 Kerala 3.34 383 115
Chhattisgarh 2.55 1610 631 AP 8.46 1000 118
Maharashtra 11.24 4647 413 MP 7.26 1000 138
TN 7.21 3464 480 Odisha 4.2 930 221
All 4 States 18.34 12346 2760 29.47 2458 378
All 5 states 29.58 16993 3173 33.67 3388 599
All states 115 31465 5909 115 31465 5909
4 states as % of all states 15.95 39.24 46.71 25.63 7.81 6.40
5 states as % of all states. 25.72 54.01 53.70 29.28 10.77 10.14
Top and Bottom States in per capita CST (2011-12 data)
Top States Bottom States

State Popn CST Per Capita Popn CST Per Capita
Gujarat 6.04 3943 876 Bihar 10.41 37 7
Haryana 2.54 1530 773 Kerala 3.34 293 115
Chhattisgarh 2.55 1120 631 AP 8.46 1658 118
Maharashtra 11.24 3799 413 MP 7.26 872 138
TN 7.21 2831 480 Odisha 4.2 733 221
All 4 States 18.34 9424 2760 29.47 2860 378
All 5 states 29.58 13223 3173 33.67 3593 599
All states 115 23983 5909 115 23983 5909

Annexure 4.2
(Para 4.4.2)
Design of IGST
Information Flow
Origin State Destination State
Making
Registered payment of
Intra and Inter Registered seller Transaction Buyer output
State SGST
IGST
ITC
Invoice
Against seller BIN Invoice number, date

of invoice, amount of GST for invoice
Fund Flow
Central
Nodal Bank Remits CGST Government
Registered Dealers c/s GST on formula
Transfer of funds (SGST
basis
+CGST) Destination
SGST
State Govt.
Payment via e- IT infrastructure hosted by nodal bank

form GST 1
RBI, SBI or any

authorised

Annexure 4.3
(Para 4.4.3)
Functional components of the MBM as listed by TFR, 2009
3.12 The functional components of the Modified Bank Model would be as under:-
(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.
(ii) The seller shall issue an invoice to the buyer indicating the details of the transaction (including the date
of the 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 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 jointly identify a nodal bank to receive the
collection of CGST and SGST by collecting banks. The nodal bank will also 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-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 collected to all the destination states through a single payment
made along with the electronic furnishing of Form No. 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 approach GST facilitation centre (which will provide Bank
website access and also guide Seller) to submit Form No.GST-I. The Nodal Bank would only serve as the
payment gateway to facilitate payment in any bank in which the dealer has an internet banking account.
(b) Seller will enter his basic details such as his BIN, Name, Phone and email (Financial year will be current
year by default and can be changed, date of deposit will be the current date) on Form No. GST-I.
(c) In case the number of Invoices 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 Seller can enter additional details for Interest,
penalty or other amounts as applicable. The complete total will be calculated automatically and mentioned in
figures and words.
Contd.

(ii)
(e) Seller will have to submit this information for payment by direct debit to his bank account (as per his
selection on the Nodal Bank website) as is the procedure for any e-payment.
(f) Nodal Bank will transmit ONLY the total GST amount information, along with details of the Seller as per
the challan information, to the 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 deposit of GST amount to Government
account.
(i) Nodal Bank, upon receipt of confirmation from bank of the GST payment by Seller, would generate the
Form No. GST-I, which can be printed out by the Seller for his own record purposes.
(j) The Seller would issue an Invoice to the Buyer with details of the Invoice Number and the GST amount
for that Invoice. The Buyer can verify if the GST amount has been credited to the Government by using the
Seller BIN, Invoice number, date of invoice and Invoice Amount 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 a manner which would have the capacity to allocate the amount paid
by any registered dealer between the States on the basis of the business identification number of the buyer.
The amounts so allocated can be automatically credited to the account of the destination States without any
manual intervention. As a result, it would not be necessary to set up any clearing house mechanism whereby
at any given point in time sums would be due to, or from, any other States. Therefore, the destination State
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 claims and identify all
mismatches for follow up action. This will eliminate any possibility of fraudulent claim of input credit and
evasion.
(xvii) The Nodal Bank should be paid on per transaction record basis and the entire cost should be borne by
the Central Government.
(xviii) Further, in case of any default, the administrative responsibility and control over the collection and
recovery of SGST should vest in the origin State.

Annexure 4.4
(Para 4.4.5)
Computing IGST: An illustration of computing IGST (CGST & SGST) is given below:
(GST18%=9%+9%)
Computing GST( Interstate)
Assumptions (in Rs)
1 purchase of input 100 CGST 9.00% Manufacturer State 1 S1
2 Manufacturer`s Profit 10 SGST 9.00% Stockist State 2 S2
3 Stockist`s Profit 20 IGST 18.00% Retailer State 3 S3
4 Retailer`s Profit 20
5 GST
6 A B C
7 Interstate
8 M(State1) S(State 2) R(State 3)
9 Input 1 100 110 130
10 Profit 2 10 20 20
11 Total Value 1+2 110 130 150
12 SGST C11*9% 13.5
13 Input SGST
14 SGST Payable
15 CGST C11*9% 13.5
16 Input CGST
17 CGST Payable
18 Total CGST+SGST C12+C15 27
19
20 IGST 11*18% 19.8 23.4
21 ITC A20(S),B20(R) 19.8 23.4
22 IGST Payable 20-21 3.6 3.6
23 Total IGST A20+B22+C22 27
24 Total Value Addition A10+B10+C10 50
25 Net Tax Payable On 24*18% 9
Value Addition
26 Net Tax On base Price A9*18% 18
27 Total Tax 25+26 27

Annexure 5.1(A)
(Para 5.2.1)
Single vs multiple GST rates (Tait, 1988)
 Apart from administrative and compliance costs, there are numerous doubts about the rationale for using
multiple rates at all.
(1) Multiple rates distort both consumer and producer choices.
(2) Low rates of VAT, as the Irish Commission on Taxation noted, do not "necessarily benefit the final
consumer. In reality, traders [are] faced with recouping a certain amount of VAT from consumers. They
[adjust] their prices in line with what the market would bear regardless of the rate of tax prescribed for
individual items." That is, given multiple rates, traders will juggle their prices to what the market will bear
and items with low VAT rates could end up cross-subsidizing the higher-rated items.
(3) Of course, not just low-income households benefit from the lower tax rate; such differential rates are a
very blunt instrument for favouring particular households. Clearly, income tax adjustments, transfers,
income supplements, or coupon schemes can be better targeted to help the poor.
(4) Many countries subsidize "essential" goods and services such as food, electricity, or fuel. It makes little
sense to levy a special low rate VAT on an already adjusted price rather than the standard VAT rate.
(5) Favourable treatment creates dissatisfied traders and consumers who argue that their products are at the
dividing line of definition; if fresh vegetables are taxed at a low rate, why not frozen vegetables, if frozen,
why not canned, and so on.
(6) A glance at any of the VAT regulations defining differential categories should quickly convince any
sensible person how ill-advised it is to multiply rates and create the attendant problems of definition. It is not
only that VAT staff time is taken up defining the various categories of goods, assessing the borderline cases,
and explaining decisions to traders and public interest groups, but that, typically, these decisions require the
attention of highly qualified, intelligent staff, whose decisions will stand up to debate and argument. Such a
staff can be employed much more fruitfully on administering the VAT. Settling hard-line definitions
therefore becomes an expensive exercise.
(7) Successful arguments for lower VAT rates erode the tax base.
(8) High VAT rates typically (except for automobiles) apply to goods that account for a relatively small
proportion of total consumption. The revenue at issue is small, and the administrative cost is high.
Frequently, consumers avoid sumptuary rates by adjusting their consumption. Given the small segment of
the population involved, the effect on distributive burden cannot be much. Excises and user charges are the
best complements to VAT to levy higher taxes on a few goods (see below).
(9) Whatever multiple rates are chosen and whatever the subsequent changes, they rarely reflect genuine
changes in consumer or government preferences. As Crossen remarked, "At the beginning of 1979, music
and stage performances became taxable at the general rate; admissions to zoos, pleasure fairs, and circuses,
however, continued to be taxed at 4 per cent. Presumably, this change did not signify ashift in the cultural
taste of the Dutch."
(10) Using a general equilibrium model, it has been shown that rate differentiation leads to significant
reductions (about 60 percent for sales tax) in the welfare gains of adopting equalized tax rates.
Contd…..

(ii)
(11) As Roger Douglas, the Minister of Finance of New Zealand, pointed out, "Traders who would be
collecting GST [goods and services tax—the New Zealand VAT] had to be assured they could cope with the
new tax. Simplicity for them was, in fact, one of the key reasons for setting the tax at a single rate and
without exemptions. . . . I believe now this . . .was one of the principal reasons why the tax reform package
was so well accepted when it was finally introduced."
(12) The arguments are overwhelming in favor of using a single rate VAT with a zero rate for exports and
very few exemptions. Should multiple rates be necessary, the fewer the better.
(13) A powerful additional reason against multiple rates (were one needed) is that with "any complication in
rate structure . . . the pattern of uniformity flies apart completely." Even with a simple single rate of 15
percent and a zero rate with some exemptions, Hemming and Kay were able to show that the effective rates
on value added in the United Kingdom ranged from - 2 4 percent (on food) to 37 percent (on leather goods
and furs).
 Of course, these effective rates of VAT, like effective rates of protection from customs tariffs, are not
apparent to the consumer or, usually, to the trader. They occur because traders are unable to claim full credit
for some inputs, yet the VAT is applied to the full value of their sale. Therefore, the actual value added in
that particular trade is taxed effectively at a much higher rate. (For example, a VAT of 10 percent on a
restaurant meal, where inputs represent 40 percent of the final value with no credit because they are exempt,
is transformed into an effective rate of over 16 percent.)
Annexure 5.1 (B)

(Para 5.2.3)
The Optimal Tax Perspective on Rate Differentiation
 The literature on optimal taxation has focused on finding restrictions on the form of consumer
preferences, which imply that it is optimal to tax all commodities at the same rate.
 Central contributions include Besley and Jewitt (1995), who establish a necessary and sufficient
condition for uniform taxation to be optimal in the single consumer case; Deaton and Stern
(1986), who establish conditions for uniform taxation to be optimal in the presence of an
optimal linear income tax; and Atkinson and Stiglitz (1976), who establish that indirect taxation
is unnecessary in the presence of an optimal nonlinear income tax if preferences are weakly
separable between consumption and leisure (that is, take the form U[F(X),L], where X denotes
the vector of consumption and L leisure ). (Edwards, Keen, and Tuomala, (1994) and Marchand,
Nava, and Schroyen, (1996) provide a straightforward intuition for this last result.)
 The general conclusion is that nonuniform taxation has a role to play whenever the pattern of
consumption contains information about the consumer‘s underlying—and unobservable—
ability to pay taxes that is not fully exploited by the other policy instruments assumed to be
available. The preference restrictions under which uniform taxation is optimal thus naturally
become weaker as the range of instruments available widens. Even with fully optimal nonlinear
taxation,however, the restrictions required remain implausible: the empirical evidence is that
preferences are not of the Atkinson-Stiglitz form.
 Moreover, this literature assumes, for the most part, that indirect taxes have no effect on factor
incomes, either taking producer prices to be fixed or assuming profits to be fully taxed. In more
general circumstances, nonuniform taxation might in principle have some role to play through
its effect on factor incomes, although again, of course, the availability of other instruments will
be critical.
 Ebrill, 2001

Annexure 5.2
(Para 5.2.6)
Current VATs: Rates, Thresholds, and Revenues
VAT Rates(%) Threshold($) VAT Revenue

Date VAT Standard Other rates Basic Services Percent of Percent
Introduced Rate tax revenue of GDP
Algeria 1992 17 7 43,000 750 31 3.1
Argentina 1975 21 10.5, 27 51.4 6.2
Australia 2000 10 ... ...
Austria 1973 20 10, 12, 32 8,300 19.1 8.5
Bangladesh 1991 15 32,600 31.6 2.4
Belgium 1971 21 1, 6, 12 6,300 15.1 6.9
Brazil 1967 20 9.89, 12.36
Canada 1991 7 25,000 6.9 2.6
Chad 2000 18 40,000 25.3 1.7
China 1994 17 13 120,800 217,400 27.9 3.9 12
Colombia 1975 15 8, 10, 20,35,45
Congo Republic 1997 18 27.4 5
Czech Republic 1993 22 5 16,000 18.7 7
Denmark 1967 25 1,600 19.2 9.7
Egypt 1991 15 5, 10, 25,45
Finland 1994 22 6, 12, 17 9,900 18.1 8.4
France 1968 20.6 2.1, 5.5 100,000 17 7.8
Germany 1968 16 7 60,000 18.3 6.9
Greece 1987 18 4, 8 5,700 1,900 22.3 7.5
Hungary 1988 25 12 8,000 22 8.1
Iceland 1990 24.5 14 27.9 9.9
Indonesia 1985 10 15,300 30,600 19.3 2.7
Ireland 1972 21 0, 3.6, 10,12.5
Israel 1976 17 6.5 34.9 10.6
Italy 1973 19 4, 10, 16 587,200 211,380 12.5 5.4
Japan 1989 5 4.5 269,000 9.4 2.6
Kenya 1990 18 16 40,200 25.9 5.5
Korea 1977 10 2, 3.5 51,600 19.2 4.6
Mexico 1980 15 10 19.7 3.2
Mongolia 1998 13 18,700 29.9 5.3
Morocco 1986 20 7, 10, 14 200,000 22.7 5.6
Nepal 1997 10 22.5 2.3
Netherlands 1969 17.5 6 16.7 6.9
Nigeria 1994 5 19.7 1.6
Pakistan 1990 15 22,200 17.7 2.4
Poland 1993 22 7, 12 23,000 20.8 7.9
Russia Federation 1992 20 10 36 4.8
South Africa 1991 14 41,300 24 5.9
Spain 1986 16 4,7 341,500 17.6 6.2
Sri Lanka 1998 12.5 33,000 22.5 3.4
Switzerland 1995 7.5 2, 3.5 63,300 11 3.9
Tajikistan 1992
Thailand 1992 10 30800 20.8 2.8
Turkey 1985 16 1,8,25,40 25,000 20.3 6.5
United Kingdom 1973 17.5 0 82,800 18.7 6.8
Source:-Ebrill, 2001

Annexure 5.3(A)
(Para 5.3.3)
Methods of computation of Tax Base
(A)Subtractive –Index method (SI method)
Background Methodology
Value added = wages + profits = output – input
- Input Tax base
GST Base Output Tax base
= Input Tax base
Hen e for tax rate t , taxing an e either of following four: Output Tax base =
Value of purchase of
Additive Net value of supply Capital Goods
(1) Direct (accounts) method : t (wages + profits) of domestically
(2) Indirect method : t (wages) + t (profits) produced goods and (+)
Subtractive services
(3)Direct (accounts) method : t (output – input) Value of purchase of
(4)Indirect (the invoice or credit) method : t (output) – t (input) (+) intermediate goods
and services
Value of Imports
In practice method (4) is applied to arrive at net tax payable (-)
(-)
i.e. the tax rate is applied to a component of value added
Value of purchases
(output and inputs) and the resultant tax liabilities are Value of Exports from unregistered
subtracted to get the final net tax payable. Hence, SI method dealers
based on the profit and loss account of producers.
Further, GST base (Taxable sector) = GST base (All
sectors) – GST base (Exempt sectors)
Output Tax base Input Tax base

Component Actual Proxy Component Actual Proxy
2
Net value of Aggregate of all income GDP Value of Aggregate Value of None
supply of receipts(liable to output tax1) purchase of expenditure on capital
Domestically credited to the Profit and Capital Goods goods debited to
produced goods Loss account of business Profit and Loss
and services entities in India adjusted account of businesses
in India.
Value of Imports From current account None Value of Aggregate of None
purchase of expenditure on
intermediate (A)Purchase of
goods and trading goods and raw
services materials
(B) Special Services
(C) Misc Expenses
Value of Exports From current account None Value of Share of unorganised GDP
purchases sector in GDP (unorgan
from appropriated to firm ized
unregistered level data sector)
dealers
*Notes:
1. Sales /gross receipts from business; (ii) Commission; (iii)Profit on sale of fixed assets; and (iv) ‘Any other Income
2. As per TFR, GDP estimates are underestimated e.g for 2007-08 by around 20%

Annexure 5.3(B)
(Para 5.3.3)
(B) Consumption Method (I)
Methodology
Background GST Base (non-land) + GST Base (land)
GST Base =
 Same as that of SI method.  PFCE (Organised

 Total final consumption is sector)
estimated using Input Flow (+) GST Base=GST
Matrix at factor cost published  GFCE (Goods & Base(non land)+GST
by the National Accounts Services) Base (land)
Division of the CSO. (+) computed by SI
 GFCF (household method.
 Contribution of all
sector excluding
commodities in the primary,
labour)
secondary and tertiary sectors
(+)
of economy to the value
 Intermediate I/P
addition chain is estimated.
from unregistered
 GST base (land) and GST Base dealers
(non-land) is arrived separately to (-)
estimate final GST Base.  Exemptions for
food, health,
education and
some services
(C) Shome Index Method
Background
 Revenue productivity of the VAT: In most Methodology

countries, as a thumb rule, VAT revenue hovers
Estmd.VAT
between (1/3 * ‗X‘) percent and (1/2 * ‗X‘) GST Base +
Base (Shome
percent of GDP. = index)
This revenue achievement is possible if-
Estmd.Base
i. The VAT base is broad with few exemptions;
+
(Financial
ii. The general VAT rate is not impeded by other services)
lower rates;
iii. Tax administration is transparent; and Estmd. Base
(Real EState)
iv. Social norms do not erode tax compliance.
 Hence for countries that have an ‗X‘ % VAT
rate, design should invariably achieve (1/2 *
‗X‘) percent of GDP in revenue .
 Estmd.VAT Base ( Shome index) = 50% of
GDP (factor cost at current prices)

Annexure 5.3(C)
(Para 5.3.3)
(D) Revenue method of computing Tax Base
Background Methodology
 Estimate the implicit GST GST Base= Existing GST Existing GST Additional Base
base in the revenues actually Base (Goods) + Base (Service) +
collected and make such
adjustments as are necessary Output Tax Base – Input Tax
to reflect increase or
decrease in the base on the
basis of the recommended Countervailing ITC CENVAT Separate estimates for:
Service
design and structure of the + tax 1. Financial services
GST. appro- 2. Railway
Public ledger A/C (Paid
priated
to govt) 3. Land
to tax
 The output tax base/ input 4. Trade
rate
tax base are estimated + 5. Petroleum
separately on existing
6. Construction
(goods& services) and Revenue Forgone
etc.
additional (goods& services) +
CENVAT
Appropriated as per tax rate to the appropriate base

Annexure 5.4
(Para 5.4.2)
Approaches considered by the CEA Committee for computing tax base:

 The three approaches presented to and considered by the CEA Committee for computing tax base are: (i)
the macro, (ii) the indirect tax turnover (ITT), and (iii) the direct tax turnover (DTT). These approaches are
the most recent by way of data and methodology.
(a) The macro approach: presented to the CEA Committee by the staff of the International Monetary Fund
(IMF), make use of national income accounts data and supply-use tables to arrive at the base B. It uses the
following formula:
𝐵 = Σ( + − ) − [(1 − 𝑒)Σ( + 𝐼)]
Where B is the potential GST base; Y is domestic output, (M-X) is net imports (imports minus exports);
(N+I) is consumption of intermediate and capital inputs; e is the exempt output ratio (i.e. the tax base
associated with inputs used in the production of exempt final consumption); and the summation is over 140
goods and services and 66 sectors, based on the 2011-12 national accounts. The following assumptions
were made: (1) full compliance, (2) full pass-through of GST into prices, (3) no behavioral response,
(4) GST has a single positive rate, and (5) a zero rate on exports.
 Under a standard scenario exempting health, education, financial intermediation and public
administration, GST‘s potential base is 59 per cent of GDP. Exempting basic food items in addition
(essentially unprocessed foods) reduces the potential base to 55 per cent of GDP. However, exempting
petroleum or electricity increases the potential base to 67 per cent of GDP—given that such items are largely
consumed as inputs rather than final consumption, their exemption increases the base due to cascading.
Assuming that the maximum revenue to be replaced is 6.1 per cent of GDP, these estimates for the GST tax
base, ranging from 55 per cent to 67 per cent of GDP, suggest that the GST RNR rate itself ranges between
9.1 (0.061/0.67)and 11.1 per cent (0.061/.55).
 Losses in the order of 10 to 20 per cent of the potential revenues are common in the OECD countries;
assuming 20 per cent, increases the range of the RNR from 9-11 per cent to 11-14 percent.
 In summary, this (Macro) analysis suggests that the RNR rate ranges between 11 to 14 percent,
depending on the key policy choices regarding exemptions. The scenario that corresponds closest to the
proposed Constitutional Amendment yields an RNR of 11.6 percent after factoring in a compliance rate of
about 80 per cent of the potential GST revenues.
(b) Indirect Tax Turnover (ITT) Approach
This approach, presented by NIPFP, estimates the base in a three step process.
 First, it estimates the goods base at the level of the States. This base is estimated by converting data on
actual collections and statutory rates into a goods base. The effective rate thus becomes the basis for the
estimation of the goods base. In the absence of data for all States, the key assumption is that the States
collect revenues at three rates (1 per cent, 6 per cent, and 14 per cent) in such a proportion so as to yield a
total taxable base of Rs. 30.8 lakh crore.
 In the second stage, the services base is estimated(ii) based on turnover data of 3.25 lakh firms from the
newly available MCA database (this base is estimated at Rs. 40.8 lakh crore).
 In the third stage, adjustments are made to this base to remove IT-related services, because a large part
of them are exported, and to remove most of real estate and financial services from the base because of the
manner in which these items will be treated under the GST regime. These adjusted bases is then subject toCont…
an
input-output analysis to deduct from the base taxable inputs used for service provision and also deduct
services used as inputs into taxable manufacturing. All these adjustments result in an incremental services
base (incremental to whatever has already been incorporated in goods) of Rs. 8.5 lakh crore and a combined
base (goods and services) of Rs.39.4 lakh crore.
Contd…

(ii)
 This base, in turn yields a single RNR of 17.69 per cent under the scenario of having to compensate
States for the 2 per cent CST. The corresponding standard rate under the current structures of taxation is
estimated at 22.76 per cent. It is worth recalling that an earlier analysis based on the same methodology by
NIPFP was presented to the Empowered Committee of GST in February, 2014. That analysis yielded an
estimate of the RNR of 18.86 percent and a standard rate of 25 per cent.
(c) Direct tax turnover (DTT) Approach
 DTT approach, which was described in the 13th Finance Commission (13th FC) Report, is based on using
income tax data which are available for about 94.3 lakh registered entities (including companies,
partnerships, and proprietorships but not charitable organizations). The data are classified into 10 sectors and
75 sub-sectors. These data allow the potential base for GST to be calculated. Unlike the indirect tax turnover
approach but like the macro approach, this approach yields a combined base for goods and services, rather
than separate bases for goods and services.
 The profit and loss accounts provide data on value of supply of goods and services (which is equivalent
to turnover) to which can be added imports of goods and services. This yields the tax base of at about Rs.
222 lakh crore in turnover terms. Deducting the exempt sectors from this base (petroleum, land component
of real estate, interest component of financial sector, electricity, gem and jewellery, education, health, and
agricultural produce) narrows the output tax base down to about Rs. 194 lakh crore.
 Next, purchases are divided into 2 categories, those that reduce the base because of the availability of
input tax credits and those that add to the base either because they are purchase by or from exempt sectors.
The former include intermediate goods and services (Rs. 183 lakh crore) and capital goods (Rs. 6 lakh
crore). The latter include purchases by exempt sectors (Rs.25 lakh crore), purchases of primary goods (Rs.
11 lakh crore) and purchases from unregistered dealers Rs. 24 lakh crore). This yields an input tax base of
Rs. 130 lakh crore.
 Further adjustments are made to take account of the value added of firms that will fall below the
exemptions threshold (removed from the taxable base); of the alcohol sector (removed from the taxable
base); and the rail sector (added to the base because this sector is not part of the ata set in the first place).
 Putting all these together gives a potential tax base of Rs. 58.2 lakh crore, yielding a combined RNR of
11.98 per cent.

Annexure 5.5
(Para 5.5.4)
VAT rate structure of Bihar
Item wise tax collection of VAT (Economic surrey)

A TAXES SUBSUMED IN GST
A1 Central Taxes
Taxes (2012-13) (2013-14) (2014-15)
1 UED 176534.61 170196.94 188787.26
2 Service Tax 132600.94 154778.12 167969.04
3 ACD/CVD/SAD 82242.08 86203.42 93244.56
4 Others
Sub Total
A2 State Taxes(Bihar)
1 BST/VAT (2012-13) (2013-14) (2014-15)
ITEMS(12.5% Std Rate) VAT coll Tax Base VAT coll Tax Base VAT coll Tax Base
1 Cement 800 6400 929 7432 920 7360
2 Unregistered Dealer+ WC 490 3920 659 5272 750 6000
3 Electrical goods 341 2728 546 4368 787 6296
4 FMCG 414 3312 492 3936 523 4184
5 Four wheeler & chasis 515 4120 491 3928 528 4224
6 Coal 282 2256 378 3024 223 1784
7 2 or 3 wheeler 272 2176 336 2688 378 3024
8 WC & TDS 369 2952 334 2672 248 1984
9 Iron & steel 237 1896 281 2248 293 2344
10 Fertilizers & insectisides 198 1584 171 1368 186 1488
11 Consumer durables 124 992 145 1160 173 1384
12 Biscuits 112 896 140 1120 126 1008
13 Fast & cooked food 120 960 139 1112 138 1104
14 Tyres and tubes 114 912 114 912 120 960
15 Paints 61 488 83 664 89 712
16 Beverages 72 576 72 576 129 1032
17 Lubricants 47 376 55 440 56 448
18 Kirana 31 248 50 400 52 416
19 Plastic goods 35 280 49 392 51 408
20 Sanitary fittings & tiles 34 272 46 368 50 400
21 Furnitures 32 256 41 328 42 336
22 Footwear 27 216 37 296 42 336
Sub total 4727 37816 5588 44704 5904 47232
b. ITEMS(5% lower Rate)
24 Drugs & medicine 357 7140 408 8160 459 9180
25 Unregistered dealers 392 7840 344 6880 476 9520
26 Tractors 106 2120 126 2520 125 2500
27 Telephone 100 2000 113 2260 141 2820
28 Battery 73 1460 102 2040 96 1920
29 Ghee & vanaspati 100 2000 99 1980 100 2000

30 Edible oil 66 1320 95 1900 107 2140
31 Autoparts 57 1140 72 1440 74 1480
32 Computers 64 1280 60 1200 68 1360

Cont…
(ii)
Sub total 1315 26300 1419 28380 1646 32920

ITEMS (2012-13) (2013-14) (2014-15)
c ITEMS(1% VAT) VAT coll Tax Base VAT coll Tax Base VAT coll Tax Base
33 Foodgrains 93 9300 174 17400 89 8900
34 Jewellery 15 1500 13 1300 14 1400
35 Sub total 108 10800 187 18700 103 10300
d Other items 417 701 816
Total (a+b+c+d) 6567 7895 8469
2 Entry Tax 3268 4283 4406
3 Entertainment 28 39 46
4 Advt. 1 1 1
5 Hotel, travel 8 10 11
6 CST
B ITEMS NOT SUBSUMED IN GST- VAT Collection

ITEMS Rates in % 2012-13 13-14 14-15
1 Petro products 24.5 2912 3152 3284
2 Crude oil 22 315 817 635
3 IMFL 41 585 747 780
4 Country liqour 34 158 203 266
5 Tobacco 20 151 158 167
6 Pan masala 20 57 91 76
Sub total 4178 5168 5208
C INDIRECT TAXES NOT SUBSUMED IN GST
12-13 13-14 14-15
C1 Central Taxes
1 Basic custom Duty 1283.96
C2 State Taxes
2 State Excise Duty 2430 3168 3217
*Note:
(i) Source : Tax collection (Rs. Cr) from Economic survey of Bihar (2015-16)
(ii) VAT Rates from VAT Rate Schedule (Commercial Tax Dept,Bihar)
(iii) Weighted average of VAT in (12-13),(13-14) and (14-15) are: 8.20% ,7.83% and 8.46%
(iv) Tax Base for goods for calculating SGST is taken the same as for VAT.

Annexure 5.6
Adjustments made to the ITT approach for estimating RNR (Para 5.5.1)
5.12 Our recommendation is based first on making adjustments to the ITT approach. Rs 3.12 lakh crore for
the data based revision to the States VAT base: Rs 30,000crore for the omission of sugar: Rs 45,000 crore
for the cascading effect: and Rs 95000 crore for the choice of the statutory rather than effective excise rate in
quantifying the base. Then, we add an adjustment for the compliance efficiency gains(Rs 2 lakh crore).
5.13 What is the basis for these adjustments?
5.14 Note that ITT approach was based on a pure assumption about the States‘ VAT base which have been
improved upon by collecting the relevant data for 16 States, accounting for 78.5 percent of the entire VAT
base of States.
5.15 The adjustment for sugar is based on the national income estimate for value-added in the sugar sector of
Rs 40,000 crore.We conservatively adjust this down to Rs 30,000 Crore.
5.16 Note that the authors of the ITT approach acknowledge that the withholding, cascading and compliance
effects are important. But they chose to ascribe a value of zero to these effects because of uncertainty about
arriving at a quantitative estimate. But that is clearly biased downwards as the authors of the approach would
themselves acknowledge. The CEA Committee have chosen to address this bias by making some
conservative estimates about the magnitude of these effects.
5.17 For the cascading effect, the ITT approach had earlier estimated an addition to the base of 10% of the
incremental services base. The DTT approach estimates an addition to the base of about 16%.
Conservatively, the CEA Committee estimates that the under-statement of the base would be half that
assumed by the ITT approach which amounts to 45,000 crore
5.18 For the compliance effect, the CEA Committee drew upon cross-country experience. In Box 1 of the
Report, econometric analysis of that experience yields an estimate that a 1 percentage point reduction in the
standard rate would increase the collection efficiency by 1 percent. The GST would lead to about a 4.1
percentage point reduction in the standard rate (in weighted terms) which would translate into a 4.1
percentage point increase in the C-efficiency or 9.3% increase in collection efficiency (based on the current
C-efficiency of 0.44). This is equivalent to an expansion in the tax base of Rs. 4.3 lakh crore. Again, the
CEA Committee assumed, conservatively, and after consulting with the CBEC, that just under half of this
compliance improvement (Rs. 2 lakh crore) would be realized.
5.19 To summarize, the CEA Committee's adjustments to the ITT approach are conservative in the following
ways:
 We do not make any adjustments for the ITT approach understating the contribution of textiles to the tax
base which could be substantial. The magnitude of this omission is suggested by the fact that the gross value
of output and gross value added of textiles and cotton ginning are 5.9 lakh crore and 1.7 lakh crore,
respectively.
 We do not increase the tax base to take account of the withholding effect;
 We Include only half of the NIPFP‘s previous estimates of the cascading effect; and
 We incorporate under half the change of the compliance-enhancing effect suggested by our econometric
analysis;
 We incorporate nothing for the impact of the possible growth-enhancing effect of GST
5.20 Under GST, the compliance gains would be the following:
 At the Centre, the rate structure will be significantly simplified from more than 10 rates (for both goods
and services) and numerous exemptions to 2-3 rates and fewer exemptions;
Contd.

(ii)
 At the Centre and States, Significant improvements in compliance will result because of the IT system
under which matching of supplier and purchase invoices will be electronic and instantaneous, reducing the
scope for fraud and evasion; this will also improve compliance for direct taxes;
 General compliance will improve because of dual monitoring by the Centre and the States;
 Comprehensive definition of taxation of goods and services should result in a smaller amount of the
base falling through the cracks between ―goods‖ and ―services‖ as happens currently. The elimination of
abatements on services will reduce overstatement of ITCs.

5.21 The experience of all countries suggests improvements over time in GST implementation, and in
India‘s case, a number of design features should contribute to such improvements in efficiency. These are
not improvements that will take years to materialize.
5.22 Adding up these adjustments yields a single RNR of 15 Percent. However, we recognize that there
may be uncertainty about the adjustments we have made. An alternative scenario is that not all of the
adjustments are valid. In this case, the single RNR would be 15,5 percent.

Annexure 5.7
(Para 5.4.4)
Lower, standard and ―demerit‖ rates (CEA Committee, 2015)
5.45 Ideally, the GST should aspire to a single rate, which would then also be the standard rate. Since 2000,
about 90 per cent of countries that have adopted a VAT have chosen to have a single rate. The tax
administration benefits of having a single rate are substantial. However, in the years ahead, it may not be
feasible to adopt a single rate GST system for social reasons. A 2-rate structure (or a modified 2-rate
structure) may therefore be adopted. What should be (i) the lower rate and (ii) the standard rate, and (iii) the
demerit rate which would apply to a small group of luxury items?
5.46 Consider the following simple formula for determining the structure of rates:
R = αLG + SG + SS + µDG
Where R is the RNR, LG is the lower rate on goods, SG is the standard rate on goods, SS the standard rate on
services; and DG the demerit rate on goods; α, , , and µ are the respective shares of these four rates in the
underlying tax base, and together add up to 1.
5.47 The first point to note is that the standard rate for goods and services must be the same because that is
the raison d‘etre of the GST—to provide a common base for goods and services, obviating the need for
defining goods and services separately.
Thus: SG = SS = (R - αLG - µDG) / ( + )
5.48 The next point to note is that for any given RNR (that has been estimated), and a given higher rate
(discussed below), the lower is the lower rate, the higher will be the standard rate.
5.49 Ideally, the lower rate should not be far lower than the RNR for two reasons. The lower the rate and the
more the commodities that are taxed at this lower rate, the higher will be the standard rate just as a matter of
arithmetic. In fact, this is the pattern in the States. Lower rates of 4-5 per cent with a large part of the base
taxed at these rates (about 60-70 per cent) results in the necessity of high standard rates of 14-15 per cent.
High standard rates make compliance considerably more difficult.
5.50 The second reason for having lower rates that are close to the RNR relates to political economy. The
temptation to push commodities to the lower rate increases the lower is the low rate. The benefit for any
industry group of seeking to reduce the tax on its output is directly proportional to the tax advantage: moving
a product from 14 per cent to 6 per cent is worth more than moving a product from 14 to 12 per cent. And in
fact the pattern in the States reflects this political economy at work.
5.51 So, if the RNR is close to 15 per cent, the effort should be to keep the low rate at about 12 (6 +6 each
for the Centre and States) per cent.
5.52 As discussed earlier, a lot will depend on the magnitude of exemptions and decisions about what goods
are taxed at the lower rate and at the demerit rate. One of the major items either exempted or taxed at a very
low rate currently is gold, silver, and precious metals. If the Centre moves to the smaller list as
recommended and the States shift more of their tax base, especially intermediate goods, toward the standard
rate also as recommended, the pattern of standard rates will look roughly as follows in Table below.
5.53 Table 7 presents, the consequences for the standard rate (for the given RNR of 15 per cent) of the
treatment of gold and precious metals. As the Table shows, the lower the rate that these commodities are
Cont….
(ii)
taxed, the higher will be the standard rate that is applied to all commodities. For example, if gold is taxed at
4 percent the standard rate will be 17.3 percent. In contrast, if gold is taxed at 6 per cent, the standard rate
can come down to as much as 16.9 per cent (Table-8).
Table 7: RNR and Standard Rate structure for center and states (per cent)
RNR Lower Rate Standard Rate * Higher
Rate
Goods (Total) 15 12 17 40
Center 7 6.0 8.0 20
States 8 6.0 9.0 20
Services (Total) 15 -- 17 --
Center 7 -- 8.0 --
States 8 -- 9.0 --
*: This corresponds to CEA committee’s preferred scenario with rate on precious metal at 6%.
Table 8: Gold rate and it impact on Standard Rate

Rate on "Low" "Standard" "High/Demerit" rate
RNR precious rate rate (goods or Non-GST excise
metals (goods) and services (goods)
Preferred 6 16.9
(State) 15 4 12 17.3 40
2 17.7
Alternative 6 18.0
(Centre) 15.5 4 12 18.4 40
2 18.9
5.54 It is now growing international practice to levy sin/demerit rates—in the form of excises outside the
scope of the GST--on goods and services that create negative externalities for the economy (for example,
carbon taxes, taxes on cars that create environmental pollution, taxes to address health concerns etc.). As
currently envisaged, such demerit rates—other than for alcohol and petroleum (for the states) and tobacco
and petroleum (for the Centre)—will have to be provided for within the structure of the GST. The foregone
flexibility for the center and the states is balanced by the greater scrutiny that will be required because such
taxes have to be done within the GST context and hence subject to discussions in the GST Council.
5.55 The CEA Committee recommended one demerit rate and that rate should be such that the current
revenues from that high rate are preserved. Accordingly, the CEA Committee recommend that this
sin/demerit rate be fixed at about 40 percent (Centre plus States) and apply to luxury cars, aerated
beverages, paan masala, and tobacco and tobacco products (for the states). The Centre can, of course,
levy an additional excise on tobacco and tobacco products over and above this high rate. These goods are
final consumer goods and should be of high value (so that small retail outlets are not burdened with the
complication of having to deal with multiple rates) and clearly identifiable so that there are no issues related
to classification that could complicate tax compliance.

Annex 5.8
(Para 5.5.3)
Computation of RNR for GOI for 13-14 and 15-16 with and without Cesses & Surcharges
13-14 15-16 Note :
(i)Tax Rates and Tax data taken from Union Budget
Tax CGST Tax CGST 2015-16.
Taxes to be subsumed in Tax Rev Tax Rev Tax Rev Tax Rev
S.No Base@12% @9% Base@12% @9% (ii) Tax Base for Post GST(CGST) revenue for goods
GST
has been taken as VAT base for all state.
(Rs. Cr) (Rs. Cr) (Rs. Cr) (Rs. Cr) (Rs. Cr) (Rs. Cr) (Rs. Cr) (iii) Tax base for services is same pre and post GST
1 2 3 4 5 6 7 8 9 10 (iv)Tax Base for AED/SAD are the same as for CED,
1 (a) CED 102963 61778 2205584 198503 163635 98181 2444064 219966 and therefore doesn't provide additional base for the pre
(b) AED on Motor Spirit 4120 17301 and post GST regime
(c ) AED on HSD 15143 52239 (v) Sl. No. (1b to 1f) are the additional taxes on the same
(d) SAD on Motor Spirit 13178 18171 base as for Central Excise Duty.
(e ) NCCD 3365 2019 4050 2430 (vi) Sl. No. 2 (b to c) has the the same base as for
(f) Cesses and Surcharges 31428 18857 32677 19606 Service Tax (a)
(g) Total (CED) 170197 82654 288073 120217 (vii) RNR is computed by dividing total CGST by the
2 (a) Service Tax 150459 150459 1217306 109558 206150 206150 1667881 150109 existing tax base (i.e. 2205583 Cr for 13-14 and 2444064
(b) Ecess 2936 2936 917 917 Cr for 15-16.) with & without Cesses/Surcharges
(c ) HECess 1383 1383 421 421 respectively.
(d) Total (Service Tax) 154778 154778 211414 211414 (viii) Service Tax total includes, Swachh Bharat Cess.
3 (a) CVD 86203 51722 106249 63750 (ix) Revenue from CED, CVD & SAD, cess are
(b) Special C V Duty 25629 15377 30033 18020 excluding POL (40%), since (1)CAG report (2013-14)
says that POL contribute 40% of the total CED
(c) AED on Motor Spirit 20 0
Revenue,(2) Petro is outside GST
(d) AED on HSD 29 2
Abbreviation
(e ) SAD on Motor Spirit 60 0
CED: Central excise duty
(f) NCCD 1285 771 1640 984
NCCD: National calamity contingent duty
(g) ECess 2704 1622 3687 2212
HSD: High speed diesel
(h) HECess 1443 866 1779 1067
SAD: Special additional duty
(g) Total (CVD) 117373 70358 143391 86033
ECess: Education cess
4 (i) With Cesses and Surcharges HECess: Higher Education cess
(a) Total 406433 307790 3422890 308060 642879 413739 4111945 370075 RNR: Revenue neutral rate
(b) RNR (%) 9.0% 10.1% CVD: Countervailing Duty
4 (ii) Without Cesses and Surcharges AED: Additional exise duty
(a) Total 402454 282126 3422890 308060 597831 389515 4111945
(b) RNR (%) 8.2% 9.5%
Explanatory Note: For FY 13-14

GST Tax=TG+TS=(9%*Goods Tax base)+ (9%*Service Tax base)
Goods Tax base=col4row1.a/12%=60%*col3row1.a/12%
Service Tax base= col4row2.a/12.36%
RNR =Total tax rev(excl petro)/Total Tax base=col4row4.a/col5row4.a
Annexure 5.9
(Para 5.5.4)
Critique of the proposed VAT rates and the cess for compensation pool
We have moved away from the rather futile debate on the revenue neutral rate, the estimates of which range
from 12 per cent to 24 per cent. Instead, now the approach is to start from an approximate structure of rates,
say, 6 per cent, 12 per cent, 18 per cent and 26 per cent. All the existing commodities will be distributed to
each of the above rates on the basis of the proximity of the existing combined burden of current Central and
State taxes. This data will enable the estimation of potential tax revenue of the Centre and the state and the
rates may be tweaked to arrive at a structure which would ensure revenue neutral receipts.
 The most controversial is the upper rate of 26 per cent. The commodities included in the higher bracket
currently suffer 14.5 per cent VAT and it makes no sense to reduce the SGST to 13 per cent. Besides, these
commodities suffer Central excise duty of 16 per cent and above; commodities such as SUVs attract excise
rate as high as 34 per cent. There are other taxes currently subsumed under the GST such as octroi, entry tax,
cesses and service tax. Besides, one has also got to account for the cascading impact of tax prevalent in the
existing system.
 The logic of reducing the tax incidence on consumer durables and demerit goods to 26 per cent makes the
GST severely regressive. It may also be noted that around 200 commodities that suffer no Central excise
currently but have only lower VAT rate of 5 per cent are proposed to be included in the lower bracket of 6
per cent. The present rate structure raises tax on necessities and reduces the tax on luxuries. The
distributional impact of the proposed structure is not acceptable to the states.
 The chief economic adviser‘s report had recommended the demerit goods rate of 40 per cent. It should be
reintroduced in the structure and the states should be given flexibility in determining the demerit goods. The
attempt of Kerala to introduce a fat tax on a few branded food products had initiated widespread debate on
the efficacy of the move. It will be a retrogressive step if the fat tax has to be given up with the introduction
of the GST. Besides, the upper rate of 26 per cent must be raised to at least 30 per cent. It should enable us to
reduce the tax rate on necessities so that the GST rate structure is rendered more progressive.
 How will the resources required for compensating the states be mobilised? The current thinking of the
Central government is to impose a cess on tobacco, pan masala and some of the upper rated commodities
such as aerated drinks. Now the secret is out. The upper rate has been pegged at a lower rate so that the
Central government has the option to impose the cess as and when necessary — of course, with the
concurrence of the GST Council. This is not acceptable to the states. They are being deprived of their
legitimate revenue so that compensation can be mobilised by the Centre.
It may be remembered that when the VAT was introduced in 2005, the then Union finance minister, P.
Chidambaram, had proposed an additional cess of 1 per cent on the VAT rate. It was not agreed to by the
states. The Centre was forced to find a compensation amount from its other elastic sources.
 The Centre today still has direct taxes, customs and income from the sale of assets like spectrum or
borrowing from which it can easily draw the required resources. The only cess the states were willing to
concede was the additional tax on tobacco and the clean environment cess on coal which the Centre was
constitutionally entitled to impose. The estimated compensation was only Rs 50,000 crore of which over Rs
43,000 crore would be met by the above two taxes. It was only a matter of Rs 7,000 crore that stood in the
way of a consensus at the GST Council.

Annexure – 5.10
(Para 5.6.2)
Estimating the association between rates and compliance (CEA Committee, 2015)
 Many considerations will go into the determination of RNR,(lower rate will not lead to as much a loss
of revenue as a simple calculation suggest) but one of them will also be the impact of rates on compliance.
Theory suggests that increases in rates will lead to reduced tax compliance. But is there any evidence from
the experience of VAT itself?
 Based on data provided by the IMF, the Committee undertook a simple econometric analysis to test
whether tax rates and compliance were correlated. Data was provided for 86 countries, developed and
developing. Compliance was measured in two ways: collection efficiency (CE) and revenue productivity
(RP). CE is measured as:
C-eff = R/(S*C)
Where R stands for revenue collected, S is the standard rate and C is total final consumption net of VAT
collections. The denominator is a measure of the potential revenues that ought to be collected and the
numerator actual collections. C-efficiency is simply a measure of comparing actual against potential.
Revenue productivity (RP) simply replaces final consumption with GDP in the denominator.
 Simple regressions of the following form were run:

CE (RP) = α + A*S + B*ln(Y) + DUM+μ
Where the left hand side is either collection efficiency or revenue productivity; α is the intercept term; S is
the standard rate; Y is the per capita GDP of a country which controls for other factors—such as quality of
tax administration--that can affect collection efficiency; and DUM is a dummy for country groups arranged
according to income to again control for certain group characteristics that might affect compliance; and μ is
the standard error term.
 The regressions are shown in Tables 1 and 2. There is a very strong association between the standard tax
rate and all measures of compliance even after controlling for per capita GDP and group dummies (Figure
1). For example, for collection efficiency the coefficient (A) is about (-) 1.22. This suggests that a 1
percentage point increase in the standard rate worsens compliance by 1.22 percentage points.
 This has an important implication for the RNR in India. It suggests that a lower RNR will not lead to as
much of a loss in revenue as a simple calculation suggests. For example, if the standard rate were reduced
by say 4.1 percentage points in weighted terms that should increase C-efficiency by 4.1 percentage points
(using the conservative regression estimate of 1 rather than 1.22) which amounts to about 9.3 per cent given
the current C-efficiency ratio of 0.44.
 Better compliance could therefore fetch potential additional revenues of nearly Rs 4.3 lakh crore.
Contd.

(ii)

Annexure 5.11
(Para 5.7.5)
Comparision of C- efficiency of Various approach of Computing
RNR against that of other Country‘s (CEA Committee, 2015)
5.24 Next we validate this recommendation (of RNR of 15 to 15.5%). Since there is the possibility of error
in all the approaches (Macro, ITT, DTT), including our recommendation, we must independently validate
them against other benchmarks. One important benchmark for validation relates to the efficiency of the tax
system. A commonly-used measure of performance of a VAT system is to compute a C-efficiency ratio.
This is measured as:
C-eff=R/(S*C)
where R stands for revenues collected, S is the standard rate and C is total final consumption (net of value-
added taxes). The denominator is a measure of the potential revenues that can be potentially collected and
the numerator actual collections. C-efficiency is simply a measure of comparing actual against potential. The
C-efficiency implied by the three approaches and the Committee‘s recommendations are then compared
against C-efficiency in a number of other countries and this comparison is shown in Figure 1.
Figure 1: Collection-efficiency in Major VAT/GST Economies
1
0.9 India
Average= 0.60 Average= 0.57 Average=0.31
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
High Income Emerging Market Economies Low Income

Source-IMF and Committee’s calculations
5.25 The average C-efficiency is about 0.6 for high income countries and 0.57 for emerging market
countries, and 0.31 for low income countries. The C-efficiency implied by the macro and DTT estimates for
the RNR (of 0.70 and 0.68 respectively) would place India above other emerging market countries. In
contrast, the c-efficiency implied by the ITT approach of 0.40 would put India well below the average of
emerging market countries and only somewhat above that for low-income countries.
5.26 Put differently, if the RNR, and the associated standard rate, of the ITT approach were reasonably
estimated, it would imply that India has either come up with an effective policy base under the GST that is
unusually narrow and/or Indian indirect tax administration is unusually poor relative to comparator
countries. This inference would be puzzling, if not problematic, not least for implying that India‘s tax
efficiency is closer to that of Mali than of Brazil, Chile, Indonesia or Thailand. This cross-country
comparison is important evidence that the RNR estimated by the ITT approach is too high.
Contd….

(ii)
5.27 In contrast, the RNR estimates for the other two approaches would place India at levels comparable to
other countries.19 Our recommendations yield estimates for the RNR that are at or below the average of other
EMEs. In that sense, they are conservative estimates for the RNR because they too imply similar levels of
efficiency of the Indian tax system. 20
5.28 Another consideration can be invoked to support the RNR of 15-15.5 per cent. Suppose this RNR
requires to be operationalized in a two rate GST structure with a lower rate of say 12 per cent and a standard
rate of 17-19 per cent, depending on how goods are allocated between the lower and standard rate.
5.29 Figure-2 shows data on the standard rate of VAT in selected high income and large emerging market
economies. It shows that the average standard rate for comparable EMEs is 14.4 per cent and the highest
standard rate is 19 per cent; and even for the high-spending and therefore high-taxing advanced economies it
is 16.8 per cent. An RNR of anything beyond 15 - 15.5 per cent will likely result in a standard rate of about
19-21 per cent which would make India an outlier amongst comparable emerging economies. For example,
the ITT approach‘s RNR of 17.7 per cent would translate into a standard rate of 22.8 per cent, identifying
India as having the highest GST tax rate amongst emerging market economies. Our recommendations would
still place India at the upper end of the standard rates found across comparable countries. It is worth
emphasizing that the GST is intrinsically a regressive tax and the higher the rate the greater the regressivity.
Countries that have well developed social safety nets can better offset this regressivity but India at a lower
level of development is less able to do so and hence needs to be especially mindful of rates that are out of
line with international ones.
19
It is worth noting that the exclusion of intermediates such as petroleum and power from the GST base tend
to make India‘s C-efficiency better than it actually is. Excluding these inputs essentially lower the standard
rate by more than it lowers the foregone revenues from taxing these inputs: the measured C-efficiency
improves as a result.
20
At the center, there are likely to be large revenue and base-enhancing effects which will increase C-
efficiency. These include: a decrease in the magnitude of exemptions from 300 items to 90 items in line with
the recommendations of the Empowered Committee. Currently about Rs. 1.8 lakh crore are lost in central
excise exemptions of which a substantial proportion can be recovered; expansion of tax base from
manufacturing to retail level; bringing precious metals, gold, etc. into the tax base and taxed at the lower
rate; reduction in the exemptions threshold from Rs. 1.5 crore in the case of goods to Rs. 25 lakh; this will
offset the raising of the exemptions threshold for services from the current level of Rs. 10 lakh. Offsetting
some of these effects will be the fact that cascading could decline because of better administrative efficiency.
Figure 2: Standard rate of VAT in High and Emerging Market Economies
25
Average: 16.8 Average: 14.11
20
15
10
5
COM (P)COM(A)
0
PHILMEXCHIN
MACRO
INDON
UKITA
CHILE
KOR
BRA
RUS
SWE
MAL
NOR
CAN
JPN
DTT
ITT
High income countries EMEs India

Source-IMF, Credit Suisse and Committee’s own calculation

Annexure 6.1
(Para 6.1.1)
Consequences of exemption
A Consequences of Exemption
Exemption has many effects, some of them quite complex.
 Revenues Fall—or Increase
Exemption breaks the VAT chain. Whether this increases or decreases the net revenue raised by
the VAT depends where in the chain of supply the break occurs. If the exemption occurs
immediately prior to final sale, the consequence is a loss of revenue since value added at the
final stage escapes tax. If the exemption occurs at some intermediate stage, on the other hand,
the consequence is actually an increase in net revenues: the cascading of tax on inputs means
that, as the price charged by downstream firms using the exempt item rises in order to cover
their increased costs, so the tax on output downstream increases. Thus value added prior to the
exempt stage is effectively taxed more than once.
Consequences of Exemption
This will be so however many taxable stages occur after the exemption: even if the immediate
purchaser from the exempt sector sells to a registered trader, who is therefore able to reclaim the
increased tax charged by that supplier, the increase in output prices throughout the chain will at
some point be reflected in sales to unregistered persons (including final consumers).
 Distorted Input Choices
The exemption of items used as inputs into production removes the key feature of the VAT, of
preserving undistorted the production choices that firms make. The unrecovered taxation of
some intermediate inputs that is implied by exemption will induce producers to substitute away
from those inputs. The distortionary consequences of the initial exemption, it should be
emphasized, can spread far beyond the sectors most directly affected. Exempting the production
of steel, for example, will not only distort the production decisions of machine tool
manufacturers using steel products as an input; the consequent impact on the price for machine
tool services will distort the prices of tooled products, disadvantaging items and production
methods that make intensive use of such inputs. Exemption may thus render the impact of the
VAT system far more opaque, with effective rates of VAT—in the sense of the difference
between the price at which goods finally sell and the value of the underlying resources used in
their production—potentially differing greatly, and in nontransparent ways, from the statutory
rates of VAT applied to final output.
 Incentive to Self-Supply
By introducing cascading, exemption creates incentives for the avoidance of tax by vertical
integration, commonly referred to by VAT practitioners as ―self-supply.‖ To elaborate, exempt
traders have an incentive to supply taxable items to themselves rather than purchasing them
and incurring irrecoverable VAT. For many exempt items, economies of scale or the
specialized nature of the activity may be such that self-supply is hardly feasible; it is services
produced by relatively unskilled labor and relatively suited to small scale production that seem
most susceptible to self-supply. Banks producing exempt financial services, for example, may
find it worthwhile producing security services in-house rather than purchasing them from
outside companies that must charge VAT, which the bank cannot recover. While such self-
supply mitigates the production efficiency problem associated with exemption, it evidently
does so only at some revenue cost.
 Compromising the Destination Principle
Exemption compromises the destination principle for the taxation of items entering
international trade. While exported items that would otherwise be exempted are in practice
typically zero-rated, it is not possible to remove the consequences of exemption at an earlier
stage in the production chain. By the same token, firms using inputs that are exempt have an
incentive to import those inputs—which will be zero-rated rather than exempted in the country
of export—instead of purchasing tax-laden items from exempt domestic producers.
Cont…
(ii)
 Partially Exempt Traders
Complications arise in respect of traders who sell both taxable and exempt outputs. For
recovery purposes their input tax payments must be allocated between the two kinds of sales.
This is typically in proportion to the values of the two types of sales, which clearly hold the
potential to do rough justice in the presumed allocation of inputs to outputs, and to distort
traders‘ decisions as to the composition of their sales depending on how such treatment differs
from the underlying reality.
 Exemption Creep
One of the key features of exemptions is the way in which they feed on one another, giving
rise to a process of what might be called ―exemption creep.‖ The point here is distinct from the
concern that each exemption provides a general precedent for others. Rather, it is that each
exemption creates direct pressures for further exemptions, both upstream and downstream:
 Avoidance
The distortions that, as just described, can be induced by exemptions are, in a sense, forms of
avoidance. But one response to exemptions may be avoidance. The usage here and below is
loose: gains of this sort would typically be shared between supplier and purchaser. The gain
will be somewhat greater than this, since the exemption of A leads, as a consequence of
unrecovered input tax, to an increase in the price B pays for its inputs, the effects of which are
multiplied by any tax levied on B‘s sales. This consideration also implies that firm B will have
some countervailing incentive to lobby against the granting of exemption to its supplier (so
long as it expects to remain taxable itself) of a more transparent kind. De Wit (1995) gives the
example of characterizing a lease of property (exempt, suppose) as an agreement for storage of
goods (taxable, suppose, and hence preferable for a taxpaying lessee).
B When Zero rating is better than exemptions:
In some cases it may seem impractical to apply the VAT to output; either practicalities or
revenue needs make exemption preferable to the alternative of zero-rating.
(a) A prime instance concerns the treatment of small traders, where administrative and
compliance costs can effectively preclude their inclusion in the VAT system.
(b) A second key instance is that in which output is sold at prices below true market value. The
most prominent examples arise in connection with outputs sold by the public sector in
competition with private enterprises.
(c) There are also sector-specific cases in which difficulties in identifying the appropriate
output to tax have been used to justify exemption as a means of ensuring that taxation is not
avoided altogether.

Annexure – 6.2
(Para 6.3.3)
Effects on VAT of exemption and zero-rating in invoice-based credit vs substraction methods
(Le, 2003)
Let us look at the case of, say, producing bread. At the first stage, a farmer sells wheat to a
miller. In stage 2, the miller makes flour and sells to the baker. At the final stage, the baker makes
bread and sells it to final consumers. For simplicity, let us assume that the value added at the first
stage makes up the total value of the output sold (i.e., wheat).
Let P1, P2, and P3 be the price of wheat, flour, and bread respectively. Likewise, t1, t2, and t3 are
the VAT rates on wheat, flour, and bread respectively.
2.1. No exemption, no zero rating
 Under subtraction method, the VAT in the whole chain would be calculated as follows:
Tax liability = t1*P1+t2*(P2-P1)+t3*(P3-P2) (1)

 Under credit method:
Tax liability = t1*P1+[t2*P2-t1*P1]+[t3*P3-t2*P2] = t3*P3 (2)
In a single rate system, the tax liabilities in (1) and (2) are the same, and the effective tax
revenues are equivalent to the ones received under a retails sales tax system.
2.2. Exemption
We now introduce exemption in the tax structure and analyze its revenue implications.
2.2.1. Exemption of the first stage
 Under subtraction method: Tax liability = t2*P2+t3*(P3-P2) (3)
 Under credit invoice method: Tax liability = t2*P2+[t3*P3-t2*P2] = t3*P3 (4)
Note, under the invoice-based credit method, the tax revenues are the same in both non-exemption
and first-stage exemption cases. On the other hand, under the subtraction method, the revenues may
be lower or higher in the first-stage exemption case than in the non-exemption case, depending on the
relative magnitudes of t1 and t2.
2.2.2. Exemption of the second (middle) stage
 Under invoice-based credit method: Tax liability = t1*P1+t3*P3 (6)
With the middle-stage exemption, the tax revenues under invoice-based credit method are
higher than the ones without exemption. This is the case, because the exemption of the middle stage
effectively eliminates this stage from the whole chain: the second firm (the miller) cannot claim for
refund of its input tax (the tax paid by the firm on its purchase of wheat)—the tax burden hence
carries on. This generates ―cascading effect,‖ which is typical in turnover taxation. The subtraction
method, on the other hand, collects less revenue when the middle stage is removed from the VAT
chain (the value added generated in the second stage is effectively removed from the tax).
2.2.3. Exemption of the third (last) stage
Under both methods, the tax revenues are less than the ones collected in the non-exemption case. As
the last stage is out of the tax net, the value added in this stage escapes the tax.This indicates that the
overall tax burden could be reduced by exempting the last stage.
Contd….

(ii)
Zero rating
2.2.4. Zero rating of the first stage
Zero rating of the first stage does not change the effective tax revenues under invoice-based credit
method. However, the tax revenues would be lower under subtraction method: the value added
generated in the exempt stage (first stage) is not taxed.
2.2.5. Zero rating of the second (middle) stage
 Under subtraction method: Tax liability = t1*P1+0*(P2-P1)+t3*(P3-P2) (11)
 Under credit invoice method:

Tax liability = t1*P1+[0*P2-t1*P1]+[t3*P3-0*P2]=t3*P3 (12)
Under invoice-based credit method, zero rating of the second (middle) stage does not change
the VAT revenues. Under subtraction method, the value added generated in the second stage is free
of tax.
2.2.6. Zero rating of the third (last) stage
 Under subtraction method: Tax liability = t1*P1+t2*(P2-P1)+0*(P3-P2) (13)
 Under credit invoice method: Tax liability = t1*P1+[t2*P2-t1*P1]+[0*P3-t2*P2]=0 (14)
Under invoice-based credit method, the tax revenues for the whole chain become zero if the
last stage is zero rated. This implies that to completely relieve exports from the VAT burden, zero
rating, but not export exemption, must be applied. A destination VAT regime zero-rates exports, but
taxes imports.

Annexure – 6.3(a)
(Para 6.4.5)
List of Goods notified for exemption under sec11 (1) of the CGST Act
Water [other than aerated, mineral, purified, Betel leaves, Jaggery of all types including Cane
distilled, medicinal, ionic, battery, Jaggery (gur) and Palmyra Jaggery
de-mineralized and water sold in sealed Puffed rice
container] Pappad, Bread,
Prasadam, Puja samagri
Live asses, mules and hinnies, bovine animals, Lac and Shellac
swine, sheep and goats, poultry
Other live animal such as Mammals, Birds, Non-alcoholic Toddy,
Insects
Meat of bovine animals, fresh and chilled, frozen Tender coconut water
Meat of swine, fresh, chilled or frozen Aquatic feed, Salt, Dicalcium phosphate
Meat of sheep or goats, fresh, chilled or frozen Electrical energy
Meat of horses, asses, mules or Human Blood, contraceptives
hinnies, fresh, chilled or frozen
Edible offal of bovine animals, swine, Organic manure
sheep, goats, horses, asses, mules or
hinnies, fresh, chilled or frozen
Meat and edible offal Kajal, Plastic bangles, , Glass bangles
Other meat and edible meat offal Municipal waste, sewage sludge
Pig fat, free of lean meat, and poultry fat Firewood, Wood charcoal
Fish seeds, prawn / shrimp seeds Judicial, Non-judicial stamp papers, Postal items
Live fish excluding fish fillets and other fish meat Rupee notes when sold to RBI, Cheques
Crustaceans, Molluscs, Aquatic invertebrates Printed books, Newspapers, journals and
periodicals, Children's picture, drawing, Maps
and hydrographic
Fresh milk and pasteurised milk, Curd; Lassi; Silkworm laying, cocoon, Raw silk, Silk waste,
Butter milk, Chena or paneer. Wool, animal hair,
Birds' eggs, Natural honey, Human hair, All Gandhi Topi, Khadi yarn, Jute fibres, Coconut,
goods i.e. Bones and horn-cores, Hoof meal; horn coir fibre, Indian National Flag, Human hair,
meal; hooves, claws, nails and beaks; antlers Earthen pot, Amber charkha, Handloom
Semen including frozen semen Agricultural implements
Live trees Goods of heading, Hearing aids,
Potatoes, Tomatoes, Onions, shallots, garlic, Muddhas made of sarkanda and phool
leeks, Cabbages, cauliflowers, kohlrabi, kale, bahari jhadoo
Lettuce, Carrots, turnips, salad beetroot, salsify,
celeriac, radishes, Cucumbers, Leguminous
vegetables, Other.
Dried vegetables, leguminous vegetables Spacecraft
Manioc, arrowroot, salep, Jerusalem Slate pencils and chalk sticks
artichokes, sweet potatoes
Coconuts, Brazil nuts, Other nuts, Dates, Handmade musical instruments
Bananas, Citrus fruit, Grapes, Melons, Apples, Passenger baggage
pears, Apricots, cherries, peaches, plums and
sloes, fresh, Other fruit
All goods of seed quality Supply of lottery
Coffee beans, Unprocessed green leaves of tea Soya beans
Seeds of anise, badian, fennel, coriander, Ground-nuts, Linseed, colza seeds, Sunflower
cumin or caraway; juniper berries
Fresh ginger, turmeric, Plants and parts of plants, Locust beans,
Wheat and meslin, Rye, Barley, Oats, Maize, seaweeds and other algae, sugar beet and sugar
Rice, Grain sorghum, Buckwheat, millet and cane, Cereal straw and husks
canary seed, Wheat or meslin flour, Cereal flours,
Cereal groats, Cereal grains hulled, Flour

Annexure – 6.3(b)
(Para 6.5.4)
List of Services notified for exemption under sec11 (1) of the CGST Act
Services by an entity registered under section 12AA of the Income-tax Act.

Services by way of transfer of a going concern.
Pure services provided to the Central Government, State Government or UT or local authority.
Services by Central Government, State Government, UT, local authority.
Services by a governmental authority to a Panchayat under article 243G of the Constitution.
Services provided by the Central Government, State Government, Union territory to
a business entity with an aggregate turnover of up to twenty lakh rupees (ten lakh rupees in case of a
special category state) in the preceding financial year.
Services provided by the Central Government, State Government, Union territory or local authority to
another Central Government, State Government, Union territory or local authority.
Services provided by Central Government, State Government, Union territory or a local authority
where the consideration for such services does not exceed five thousand rupees:
Services received from a provider of service located in a non- taxable territory.
Services provided by way of pure labour contracts of construction, erection, commissioning,
installation, completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure
or any other original works.
Services by way of pure labour contracts of construction, erection, commissioning, or installation of
original works pertaining to a single residential unit otherwise than as a part of a residential complex.
Services by way of renting of residential dwelling for use as residence.
Services provided by the Central Government, State Government, Union territory or local authority by
way of tolerating non-performance of a contract.
Services by a person by way of religious ceremony, renting of precincts of a religious place meant for
general public, owned or managed by an entity registered as a charitable or religious trust under
section 12AA of the Income-tax Act, 1961.
Services by a specified organisation in respect of a religious pilgrimage facilitated by the Ministry of
External Affairs
Services by a hotel, inn, guest house, club or campsite, by whatever name called.
Transport of passengers by air, embarking from or terminating in an airport located in the state of
Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, or Tripura or at
Bagdogra located in West Bengal; non-air-conditioned contract carriage other than radio taxi, for
transportation of passengers, excluding tourism, conducted tour, charter or hire; or stage carriage
other than air-conditioned stage carriage.
Services provided to the Central Government, by way of transport of passengers.
Services by way of transportation of goods
Services by way of transportation of goods by an aircraft from a place outside India up to the customs
station of clearance in India.
Services by way of transportation by rail or a vessel.
Services provided by a goods transport agency.
Services by way of giving on hire.
Service by way of access to a road or a bridge on payment of toll charges.
Services by way of loading, unloading, packing, storage or warehousing of rice.
Services by RBI.
Transmission or distribution of electricity by an electricity transmission or distribution utility
Services by way of extending deposits, loans or advances, inter se sale or purchase of foreign
currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers,
life insurance business under the National Pension System, life insurance business provided or agreed
to be provided by the Army, Naval and Air Force Group Insurance Funds.
Services by the Employees‘ State Insurance Corporation.
Services provided by the Employees Provident Fund Organisation.
Cont…
(ii)
Services provided by the Insurance Regulatory and the Development Authority.
Services provided by the Securities and Exchange Board of India.
Services by an acquiring bank
Services of general insurance business, life insurance business.
Services by way of collection of contribution under the Atal Pension Yojana.
Services by way of collection of contribution under any pension scheme of the State Governments.
Services by the persons in business facilitator or a business correspondent, person as an intermediary
to a business facilitator
Services provided to the Central Government, State Government, Union territory under any insurance
Scheme.
Services received by the RBI, from outside India to management of foreign exchange reserves.
One time upfront amount (called as premium, salami, cost, price, development charges or by any
other name)
Services provided by the Central Government, State Government, Union territory or local authority
by way of allowing a business entity to operate as a telecom service provider or use radio frequency
spectrum
Services of leasing of assets by the Indian Railways Finance Corporation to Indian Railways.
Services provided by an incubatee up to a total turnover of fifty lakh rupees in a financial year subject
to the conditions total turnover had not exceeded fifty lakh rupees and period of three years has not
elapsed from the date of entering into an agreement.
Services provided by arbitral tribunal, partnership firm of advocates or an individual as an advocate
other than a senior advocate, a senior advocate by way of legal services
Services by a veterinary clinic
way of registration required under any law for the time being in force and testing, calibration, safety
check or certification relating to protection or safety of workers, consumers or public at large,
including fire license.
Technology Entrepreneurship Park
Services by way of collecting or providing news by an independent journalist.
Services of public libraries by way of lending of books, publications or any other knowledge-
enhancing content or material.
Services provided by the Goods and Services Tax Network to the Central Government or State
Governments or Union territories for implementation of Goods and Services Tax.
Services provided by a tour operator to a foreign tourist
Services by an organiser to any person in respect of a business exhibition held outside India.
Services by way of sponsorship of sporting events organised by a national sports federation, or its
affiliated federations or by Association of Indian Universities, Inter-University Sports Board, School
Games Federation of India, All India Sports Council for the Deaf, Paralympic Committee of India or
Special Olympics Bharat or by the Central Civil Services Cultural and Sports Board or as part of
national games, by the Indian Olympic Association or under the Panchayat Yuva Kreeda Aur Khel
Abhiyaan Scheme.
Services provided to a recognised sports body by an individual as a player, referee, umpire, coach or
team manager for participation in a sporting event organised by a recognized sports body.
another recognised sports body.
Services by way of slaughtering of animals.
Services provided by the National Centre for Cold Chain Development
Services by way of pre-conditioning, pre-cooling, ripening, waxing, retail packing, labelling of fruits
and vegetables which do not change or alter the essential characteristics of the said fruits or
vegetables
Services by a foreign diplomatic mission located in India.
way of issuance of passport.
Services provided by the Central Government, State Government, Union territory by way of deputing
officers after office hours or on holidays for inspection or container stuffing or such other duties in
relation to import export cargo on payment of Merchant Overtime charges.
feedback to- anpsinha9999@gmail.com Cont…
(iii)
way of assignment of right to use natural resources, except the rearing of horses, for food, fibre, fuel,
raw material or other similar products.
Services provided by an educational institution to its students, faculty and staff.
Services provided by the Indian Institutes of Management, as per the guidelines of the Central
Government,to their students
Service by an unincorporated body or a non- profit entity
Any services provided by NSDC, Directorate General of Training, Deen Dayal Upadhyaya
Grameen Kaushalya Yojana, under any training programme for which total expenditure is borne by
the Central Government, State Government, Union territory administration.
Services by way health care services by a clinical establishment, an authorised medical practitioner or
paramedics, transportation of a patient in an ambulance.
Services provided by the cord blood banks by way of preservation of stem cells or any other service
in relation to such preservation.
Services provided by operators of the common bio-medical waste treatment facility
Services by way of public conveniences such as provision of facilities of bathroom, washrooms,
lavatories,urinal or toilets.
Services by an artist by way of a performance in folk or classical art form of music, dance, theatre.
Exemption shall not apply to service provided by such artist as a brand ambassador.
Services by way of right to admission to circus, dance, or theatrical performance including drama or
ballet; award function, concert, pageant, musical performance or any sporting event other than a
recognised sporting event , where the consideration for admission is not more than Rs 250.
Services by way of admission to a museum, national park, wildlife sanctuary, tiger reserve or zoo.
Services by way of training or coaching in recreational activities arts or culture or sports by charitable
entities
Services provided to the United Nations or a specified international organization, Services provided to
a foreign diplomatic mission or consular post in India
Services by the Central Government or State Government or any local authority by way of any
activity
in relation to a function entrusted to a Panchayat under article 243G of the Constitution is neither a
supply of goods nor a supply of service
Services relating to cultivation of plants and rearing of all life forms of animals, except the rearing of
horses, for food, fibre, fuel, raw material or other similar products or agricultural produce by way
agricultural operations directly related to production of any agricultural produce including cultivation,
harvesting, threshing, plant protection or testing supply of farm labour processes carried out at an
agricultural farm including tending, pruning, cutting, harvesting, drying cleaning, trimming, sun
drying, fumigating, curing, sorting, grading, cooling or bulk packaging and such like operations which
do not alter the essential characteristics of agricultural produce but make it only marketable for the
primary market renting or leasing of agro machinery or vacant land with or without a structure
incidental to its use loading, unloading, packing, storage or warehousing of agricultural produce;
agricultural extension services services by any Agricultural Produce Marketing Committee or Board
or services provided by a commission agent for sale or purchase of agricultural produce.
Services provided by a goods transport agency, by way of transport in a goods carriage of -
agricultural produce, goods, where consideration charged for the transportation of goods on a
consignment transported in a single carriage does not exceed one thousand five hundred rupees;
goods, where consideration charged for transportation of all such goods for a single consignee
does not exceed rupees seven hundred and fifty; milk, salt and food grain including flour, pulses and
rice; organic manure; newspaper or magazines registered with the Registrar of Newspapers;
relief materials meant for victims of natural or man-made disasters, calamities, accidents or mishap;
defence or military equipments.

Annexure 7.1
(Para 7.3.4)
SCHEDULE IV of the Model GST Law, Nov 2016
Activities or transactions in respect of which the Central Government, a State
Government or any Local Authority shall not be regarded as a taxable person
(Indicative List)
1. Services provided by a Government or local authority to another Government or local authority

excluding the following services:
(i) services by the Department of Posts by way of speed post, express parcel post, life insurance and
agency services;
(ii) services in relation to an aircraft or a vessel , inside or outside the precincts of a port or an aircraft; or
(iii) transport of goods or passengers.
2. Services provided by a Government or local authority to individuals in discharge of its statutory powers
or functions such as-
(i) issuance of passport, visa, driving licence, birth certificate or death certificate; and
(ii) assignment of right to use natural resources to an individual farmer for the purpose of agriculture.
3. Services provided by a Government or local authority or a governmental authority by way of:

(i) any activity in relation to any function entrusted to a municipality under article 243 W of the
Constitution;
(ii) any activity in relation to any function entrusted to a Panchayat under article 243 G of the
Constitution;
(iii) health care; and
(iv) education.
4. Services provided by Government towards-
(i) diplomatic or consular activities;
(ii) citizenship, naturalization and aliens;
(iii) admission into , and emigration and expulsion from India;
(iv) currency , coinage and legal tender , foreign exchange;
(v) trade and commerce with foreign countries , import and export across customs frontiers , interstate
trade and commerce; or
(vi) maintenance of public order.
5. Any services provided by a Government or a local authority in the course of discharging any liability
on account of any tax levied by such Government or authority.
6. Services provided by a Government or a local authority by way of -

(i) tolerating non-performance of a contract for which consideration in the form of fines or liquidated
damages is payable to the Government or the local authority under such contract; or
(ii) assignment of right to use any natural resource where such right to use was assigned by the
Government or the local authority before the 1st April, 2016:
Provided that the exemption shall apply only to service tax payable on one time charge payable, in full
upfront or in instalments, for assignment of right to use such natural resource:
Explanation- Periodic payment required to be made not exempt.
7. Services provided by Government by way of deputing officers after office hours or on holidays for
inspection or container stuffing or such other duties in relation to import or export of cargo on payment of
Merchant Overtime Charges (MOT).
8. Services provided by Government or a local authority by way of-

(i) registration required under any law for the time being in force; or
Contd….

(ii)
(ii) testing, calibration, safety check or certification relating to protection or safety of workers, consumers
or public at large, required under any law for the time being in force.
Definitions:
1. Governmental Authority means a board, or an authority or any other body established with 90% or
more participation by way of equity or control by Government and set up by an Act of the Parliament or a
State Legislature to carry out any function entrusted to a municipality under article 243W or a Panchayat
under article 243G of the Constitution.
2. Health care services means any service by way of diagnosis or treatment or care for illness, injury,
deformity, abnormality or pregnancy in any recognised system of medicines in India and includes
services by way of transportation of the patient to and from a clinical establishment, but does not include
hair transplant or cosmetic or plastic surgery, except when undertaken to restore or to reconstruct anatomy
or functions of body affected due to congenital defects, developmental abnormalities, injury or trauma.
3. Education services means services by way of—

i) pre-school education and education up to higher secondary school or equivalent;
ii) education as a part of a curriculum for obtaining a qualification recognised by any law for the time
being in force; or
iii) education as a part of an approved vocational education course.

Annexure – 7.2
(Para7 4.3)
Treatment of immovable properties (Paras 2.42 to 2.48 of TFR, 2009)
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 distorting economic efficiency and incentive for compliance.
2.43 Secondly, expenditure on housing also constitutes a significantly large proportion of total
personal consumption expenditure. Therefore, the exemption of the housing sector from the GST base
would distort the consumption pattern. Further, it would also undermine vertical equity in as much
as consumption of housing services is relatively high in the case of the rich.
2.44 Thirdly, real estate is subject to multiple taxation at both levels 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 such transactions. The cumulative effect
is to incentivise transactions in black money.
2.45 At the State level, the taxes on the real estate sector include ‗sales tax‘ on works contract, state
level VAT on various inputs used in the construction of real estate, stamp duty and registration fee.
Registration and stamp duties exhibit the same distortionary cumulative and cascading effects as
excises. The problem is further compounded by the fact that in most states, the statutory rates of
stamp duty 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 context of a distortionary tax regime governing the real estate industry in India, there is a strong
tendency for this industry to remain outside the organised sector and consequently the regulatory
framework. Therefore, it serves as a breeding ground for tax evasion and criminal activities.
2.46 Fourthly, rationalisation of the tax regime governing the real estate industry could yield
numerous benefits: improve tax compliance in the property tax which is critical for the revenue base
of local government, 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, TFR 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
facilitate input credit and eliminate cascading effect.
ii. 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 elements: - Contd….

(ii)
(a) The GST should apply for all newly constructed property (both residential and commercial). If it is
self-used by the person who constructed it, the GST should be applied on the cost of construction. If it
is sold or transferred, 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. ITC would be
allowed only in respect of input tax paid on goods and services used for maintenance. No ITC should
be allowed in respect of tax paid on construction or acquisition of the property or tax paid on
improvements thereto.
(c) All secondary market transactions in immovable properties (whether constructed before or after
the introduction of GST) should be liable to GST. However, if the property has been constructed after
the introduction of GST, the GST should be levied on the resale value and ITC should be allowed in
respect of the GST paid upon construction or purchase 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 new regime will also be subject to the threshold exemption of Rs.10.00 lakh/- for small
businesses thereby eliminating the problem of excessively large number of landlords seeking GST
registration.
(f) Immovable property will also include land and, therefore, the new regime will also be applicable to
land transactions. However, where land is used for construction of a property, it will be treated as an
input. In such cases, the GST paid in respect of land will be allowed as ITC in the same manner as
other inputs used in construction.
iii. The State Governments would continue to perform essential asset registry functions, and enforce
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 erroneous tax policy. Therefore, States may continue to levy a
registration fee at a specific rate not exceeding Rs 1000 per transaction in immovable property, which
is merely a user charge for the IT systems used in property registration.
2.48 The proposed new regime will lead to more efficient allocation of resources in as much as it will
be comprehensive in its scope for taxation of immovable property transactions and real estate
services. It will be neutral between old and new properties, 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 against the rental charges, if any, in the same year.
Further, under the model, the real estate developer will also be entitled to set off input tax on all inputs
(including land) used for the purposes of construction and development of the real estate. As a result,
the distortionary cascading effect of the existing tax regime for immovable property transaction and
Contd….

(iii)
real estate services will be fully eliminated. This would have significant downward effect on pricing
of real estate. The new regime has 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 estate services forms an integral part of the proposed GST
design.

Annexure 7.3(A)
What Constitutes Financial Sector (Schenk, 2006) (Para 7.5)
A. There is no universally accepted definition of financial services. For purposes of National
accounting, the International Standard Industrial Classification of All Economic Activities (ISIC Rev
3), the financial sector contains:
– 65 Financial Intermediation, except Insurance and Pension Funding (this includes lending, deposit
taking, etc.);
– 66 Insurance and Pension Funding, except compulsory social security; and
– 67 Activities auxiliary to Financial Intermediation (for example, trustees, fund managers).
B. Financial Services include:
i) Banking (making loans and/or offering deposits), investment (including pension and mutual funds),
and insurance.
C. Following transactions involving money and financial products (other than insurance) may be
taxed, zero rated, or granted exemption from tax
1. International financial services
a. financial service component in international transport and export trade
b. financial services rendered to foreigners
2. Domestic financial services
a. services provided by financial institutions and other intermediaries as principals, agents, or
brokers
i. credit card services
ii. underwriting and other issuance of debt or equity securities
iii. loan transactions (including factoring)
iv. savings and checking accounts
v. financial advisory services (estate planning, financial advice, etc.)
vi. letters of credit and other credit guarantees
vii. services of brokers and agents in arranging financial transactions
viii. financial or asset management services for individuals and businesses
ix. interbank services
x. foreign exchange of currency, interest rate swaps, and contracts and options involving currency
xi. issuance of travelers‘ checks, and certified or cashiers‘ checks
xii. data processing services
xiii. safety deposit box rentals
xiv. ―arranging for‖ financial services
b. services provided by merchants as part of their charges for merchandise or services
i. favorable payment terms with no interest charges
ii. gas station or other retailer – prices vary for cash and credit card sales
c. no charge for merchandise provided to customers of financial services
i. toaster given to new depositor who opens an account at the bank
ii. credit card company gives customers credit toward the cost of merchandise charged to the card, and
the credit is linked to the interest they pay on their unpaid credit card balances
d. free services linked to purchases charged to credit cards, such as airline frequent flier
programs.

Annex 7.3 (B)
(Para…)
Percent value added tax with financial intermediaries excluded from the tax base, Schenk 2006
Subtraction method Credit Method
Value Sales Allowed Tax Sales ITC Net
I Added purchases Tax
. Deposits from Mf‘g Sector, Loans to Retailing Sector Financial Intermediaries
4 0 0
. (interest recd = 12, paid = 8)
. Nonfinancial Sectors, Primary Processing (purchases = 0, sales = 150) 150 150 0 15 15 0 15
a
. Manufacturing (purchases = 152 , sales = 352) 200 352 150 20.2 35.2 15 20.2
. Retailing (purchases = 354 a, sales = 474) 120 474 352 12.2 47.4 35.2 12.2
. TOTAL 474 47.4 47.4
. II
. Deposits from Households, Loans to Retailing Sector Financial Intermediaries
4 0 0
. (interest recd = 12, paid = 8)
. Nonfin. Sector Prim.Processing (pur. = 0,sales = 150) 150 150 0 15 15 0 15
. Manufacturing (purchases = 150,sales = 350) 200 350 150 20 35 15 20
b
. Retailing (purchases =352 , sales = 472) 120 472 350 12.2 47.2 35 12.2
. TOTAL 472 47.2 47.2
. III
. Deposits from Households, Loans to Households Financial Intermediaries
. 4 0 0
(interest recd = 12,paid = 8)
. Nonfinancial Sectors Primary Processing (purchases = 0, sales= 150) 150 150 0 15 15 0 15
. Manufacturing (purchases = 150, sales = 350) 200 350 150 20 35 15 20
. Retailing (purchases =350, sales = 470) 120 470 350 12 47 35 12
. TOTAL 474 47 47
. IV
. Dep‘s from Mf‘g Sector,Loans to RetailSector;Fin. Intermed. Pur.Output of
.. 4 0 0
Primary Processing Sector Fin.Intermed int.recd =14; paid = 8;purchases = 2)
.
Nonfinancial Sectors Primary Processing (purchases = 0, sales to mfg = 148,
. 150 150 0 15 15 0 15
sales to fin. Intermed. = 2)
.
Manufacturing (purchases = 151 b, sales = 351) 200 351 148 20.3 35.1 14.8 20.3
. b
Retailing (purchases = 354 , sales = 474) 120 474 351 12.3 47.4 35.1 12.3
.
. TOTAL 474 47.6 47.6
.

Annexure 8.1
(Para 8.1.2)
VAT in Ghana—failure and success lessons
 The VAT, first introduced in Ghana in March 1995, was intended to overcome the problems in
the existing sales tax system—such as narrow base, weak administration, and corruption-prone
physical surveillance. The VAT rate was set at 17.5 percent, significantly higher than the standard
rate of 15 percent applied in the replaced sales tax. A new revenue collection agency, the VAT
Service, was established. A computer system was developed. However, the VAT was short-lived: It
was removed just three and a half months after its introduction. The failure was due to multiple
problems rooted in the tax policy design, timing, and implementation.
 The high introductory VAT rate did not make the VAT politically acceptable. The timing of the
VAT introduction was bad, and it actually fueled the civil unrest: its introduction coincided with
several factors that were beyond the scope of the VAT and put upward pressure on inflation (e.g.,
agricultural prices were sharply increased due to unfavorable rainfall; the excise duty on petroleum
products was also raised). In addition, the lack of preparation made the VAT doomed to fail—the
VAT was actually launched only about three months after the primary VAT legislation was passed in
December 1994. The conflict between the newly established VAT Service, and the Customs, Excise
and Preventive Service (CEPS) was acute and eventually led to significant delays in the appointment
of senior staff to the VAT Service and transfer of staff from the CEPS to the VAT Service. (The
CEPS initially believed it would be responsible for administering the VAT; but in the end, it was
resented that the charge was handed over to the VAT Service.) The threshold was set too low (25
million cedi or $15,000), while the public education failed to reach small traders and consumers.
 The VAT was reintroduced in 1998. This time, the reformers learned well the lessons from the
1995 failed attempt. The legislation was enacted 10 months prior to the adoption of the VAT—this
gave sufficient time to train and recruit capable staff for the VAT Service and to prepare the public for
the tax. The rate was introduced at a substantially lower level (10 percent). In addition, many basic
goods such as unprocessed food, agricultural inputs and machinery, drugs and health services,
utilities, books, and educational materials were exempted to quench the initial public anxiety. The
threshold was raised sharply to 200 million cedi ($80,000)—it should also be emphasized that the
country has recently halved the threshold, to 100 million cedi. The VAT was successful: from the
first year after introduction, the VAT generated 20 percent more revenues than the replaced sales tax.
After less than 2 years, the government raised the rate to 12.5 percent but maintained the reduced rate
of 10 percent for imports subject to VAT. It is currently planning to broaden the base by reducing the
number of exemptions.
 With benefits of the hindsight, we list some key factors for the success of the 1998
reintroduction of VAT:
1.Strong, clear political commitment from government leaders.
2.Good preparation for the tax administration (selecting experienced tax administrators, and allowing
sufficient time to prepare for the VAT registration and collection).
3.Reasonably low introductory rate, high registration threshold.
4.Well-designed public education campaign.
5. Good timing for the VAT introduction (viz. not during inflation).
Le,2003

Annexure 8.2
Sections under the CENTRAL GOODS AND SERVICES TAX ACT,2017 (Para 8.3.1)
CHAPTER – I CHAPTER– VI
PRELIMINARY REGISTRATION
1. Short title, extent and commencement 22. Persons liable for registration.
2. Definitions 23. Persons not liable for registration.
24. Compulsory registration in certain cases
CHAPTER– II 25. Procedure for registration.
ADMINISTRATION 26. Deemed registration.
3. Officers under the Central Goods and 27. Special provisions relating to casual taxable
Services Tax Act person and non-resident taxable person.
4. Appointment of officers under the Central 28. Amendment of registration.
Goods and Services Tax Act 29. Cancellation of registration.
5. Powers of officers under the Central Goods 30. Revocation of cancellation of registration
and Services Tax Act
6. Authorisation of officers of State tax or
Union territory tax as proper officer in certain
circumstances under the Central Goods and CHAPTER – VII
Services Tax Act TAX INVOICE, CREDIT AND DEBIT
NOTES
31. Tax invoice
CHAPTER– III 32. Prohibition of unauthorised collection of
LEVY AND COLLECTION OF TAX tax.
7. Scope of supply 33. Amount of tax to be indicated in tax invoice
8. Tax Liability on composite and mixed and other documents
supplies 34. Credit and debit notes.
9. Levy and collection
10. Composition Levy CHAPTER– VIII
11. Power to grant Exemption from tax. ACCOUNTS AND RECORDS
35 Accounts and other records
CHAPTER- IV 36. Period of retention of accounts.
TIME AND VALUE OF SUPPLY
12. Time of supply of goods
13. Time of supply of services CHAPTER– IX
14. Change in rate of tax in respect of supply of RETURNS
goods or services 37. Furnishing details of outward supplies.
15. Value of taxable supply 38. Furnishing details of inward supplies.
39. Furnishing of returns.
CHAPTER– V 40. First return.
INPUT TAX CREDIT 41. Claim of input tax credit and provisional
16. Eligibility and conditions for taking input acceptance thereof.
tax credit 42. Matching, reversal and reclaim of input tax
17. Apportionment of credit and blocked credits credit.
18. Availability of credit in special 43. Matching, reversal and reclaim of reduction
circumstances in output tax liability.
19. Taking input tax credit in respect of inputs 44. Annual return.
and capital goods sent for job work 45. Final return.
20. Manner of distribution of credit by Input 46. Notice to return defaulters.
Service Distributor 47. Levy of late fee.
21. Manner of recovery of credit distributed in 48. Goods and services tax practitioners.
excess
Contd….

(ii)
CHAPTER– X 77. Tax wrongfully collected and paid to

PAYMENT OF TAX Central Government or State Government
49. Payment of tax, interest, penalty and other 78. Initiation of recovery proceedings.
amounts. 79. Recovery of tax.
50. Interest on delayed payment of tax. 80. Payment of tax and other amount in
51. Tax deduction at source. installments
52. Collection of tax at source. 81. Transfer of property to be void in certain
53. Transfer of input tax credit. cases.
82. Tax to be first charge on property.
CHAPTER-XI 83. Provisional attachment to protect revenue
REFUNDS in certain cases.
54. Refund of tax 84. Continuation and validation of certain
55. Refund in certain cases recovery proceedings.
56. Interest on delayed refunds
57. Consumer Welfare Fund CHAPTER– XVI
58. Utilization of the Fund. LIABILITY TO PAY IN CERTAIN
CASES
CHAPTER– XII 85. Liability in case of transfer of business.
ASSESSMENT 86. Liability of agent and principal.
59. Self-assessment. 87. Liability in case of amalgamation or
60. Provisional assessment. merger of companies
61. Scrutiny of returns. 88. Liability in case of company in
62. Assessment of non-filers of returns. liquidation.
63. Assessment of unregistered persons. 89. Liability of directors of private company.
64. Summary assessment in certain special 90. Liability of partners of firm to pay tax.
cases. 91. Liability of guardians, trustees, etc.
92. Liability of Court of Wards, etc.
CHAPTER– XIII 93. Special provisions regarding liability to
AUDIT pay tax, interest or penalty in certain cases.
65. Audit by tax authorities. 94. Liability in other cases
66. Special audit.
CHAPTER– XVII
CHAPTER– XIV ADVANCE RULING
INSPECTION, SEARCH, SEIZURE AND 95. Definitions.
ARREST 96. Authority for advance ruling.
67. Power of inspection, search and seizure. 97. Application for advance ruling.
68. Inspection of goods in movement. 98. Procedure on receipt of application.
69. Power to arrest. 99. Appellate Authority for Advance Ruling.
70. Power to summon persons to give 100. Appeal to Appellate Authority.
evidence and produce documents. 101. Orders of Appellate Authority.
71. Access to business premises. 102. Rectification of advance ruling.
72. Officers to assist proper officers. 103. Applicability of advance ruling.
CHAPTER– XV 104. Advance ruling to be void in certain
DEMANDS AND RECOVERY circumstances.
73. Determination of tax not paid or short 105. Powers of Authority and Appellate
paid or erroneously refunded or input tax Authority.
credit wrongly availed or utilised for any 106. Procedure of Authority and Appellate
reason other than fraud or any willful Authority.
misstatement or suppression of facts CHAPTER– XVIII
74. Determination of tax not paid or short APPEALS AND REVISION
paid or erroneously refunded or input tax 107. Appeals to Appellate Authority
credit wrongly availed or utilised by reason of 108. Powers of Revisional Authority.
fraud or any willful misstatement or 109. Constitution of Appellate Tribunal and
suppression of facts. Benches thereof.
75. General provisions relating to 110. President and Members of Appellate
determination of tax. Tribunal, their qualification, appointment,
conditions of service, etc.
76. Tax collected but not paid to Government. 111. Procedure before Appellate Tribunal
112. Appeals to Appellate Tribunal. Contd….
(iii)
113. Orders of Appellate Tribunal. 149. Goods and services tax compliance rating.
114. Financial and administrative powers of 150. Obligation to furnish information return.
President. 151. Power to collect statistics.
115. Interest on refund of amount paid for 152. Bar on disclosure of information.
admission of appeal. 153. Taking assistance from an expert.
116. Appearance by authorised representative. 154. Power to take samples.
117. Appeal to High Court. 155. Burden of proof.
118. Appeal to Supreme Court. 156. Persons deemed to be public servants.
119. Sums due to be paid notwithstanding appeal, 157. Protection of action taken under this Act.
etc. 158. Disclosure of information by a public
120. Appeal not to be filed in certain cases. servant.
121. No appealable decisions and orders. 159. Publication of information in respect of
persons in certain cases.
CHAPTER– XIX 160. Assessment proceedings, etc., not to be
OFFENCES AND PENALTIES invalid on certain grounds.
122. Penalty for certain offences. 161. Rectification of errors apparent on the
123. Penalty for failure to furnish information face of record.
return. 162. Bar on jurisdiction of civil courts.
124. Fine for failure to furnish statistics. 163. Levy of fee.
125. General penalty. 164. Power of Government to make rules.
126. General disciplines related to penalty. 165 Power to make regulations.
127. Power to impose penalty in certain cases 166.Laying of rules, regulations and
128. Power to waive penalty or fee or both. notifications.
129. Detention, seizure and release of goods and 167. Delegation of powers.
conveyances in transit. 168. Power to issue instructions or directions.
130. Confiscation of goods or conveyances and 169. Service of notice in certain
levy of penalty. circumstances.
131. Confiscation or penalty not to interfere with 170. Rounding off of tax, etc.
other punishments. 171. Anti-profiteering measure.
132. Punishment for certain offences. 172. Removal of difficulties.
133. Liability of officers and certain other 173. Amendment of Act 32 of 1994.
persons. 174. Repeal and saving.
134. Cognizance of offences.
135. Presumption of culpable mental state.
136. Relevancy of statements under certain
circumstances.
137. Offences by companies. SCHEDULE I
138. Compounding of offences. Activities to be treated as supply even if made
without consideration
CHAPTER– XX SCHEDULE II
TRANSITIONAL PROVISIONS Activities to be treated as supply of goods or
139. Migration of existing taxpayers. supply of services
140. Transitional arrangements for input tax
credit. SCHEDULE III
141. Transitional provisions relating to job work. Activities or transactions which shall be
142. Miscellaneous transitional provisions. treated neither as a supply of goods nor a
CHAPTER–XXI supply of services
MISCELLANEOUS
143. Job work procedure.
144. Presumption as to documents in certain
cases.
145. Admissibility of micro films, facsimile
copies of documents and computer printouts as
documents and as evidence. Source:-CGST Act, 2017
146. Common Portal.
147. Deemed exports.
148. Special procedure for certain processes.
Annexure 8.3
(Para 8.4.4)
Major decisions of the GST Council
Date/Event Major Decisions
Sept. 15, 2016 The President of India constituted the ―GST Council‖ vide F. No. 31011/09/2015-SO
Constitution of(ST) dated 15th September, 2016.
GST Council  GST Council can hold meetings and take decisions on various major issues such
Sept. 16, 2016 as Model law, rate of taxes, exemptions etc.
Enactment of  All sections of Constitution (One Hundred and First Amendment) Act, 2016 came
GST Amend- into force vide Ministry of Finance‘ Notification No. S.O. 2986(E) dated September
ment Act. 16, 2016.
Sept. 22, 2016 • Threshold exemption limit decided at ` 10 Lakhs for North-Eastern States and ` 20
1st Meeting of Lakhs for the rest of India.
GST Council • States will have sole jurisdiction over assesses having a turnover of ` 1.5 crore or
less. The existing service tax assessees will continue to be under jurisdiction of
Centre.
• The Centre will pay quarterly or bi-monthly compensation to States, in case of any
revenue loss.
• Decided 2015-16 as the base year for calculating the compensation.
Sept. 30, 2016 • The GST Council finalised five subordinate legislations relating to payment, returns,
2nd Meeting refunds, invoice and registration.
• Consensus on area-based exemption in accordance with those granted under the
current excise regime.
• Taxes will have to be collected and it can be reimbursed from the annual budgets to
the exempted categories.
• To compensate States for 5 years for loss of revenue due to implementation of GST,
the base year for the revenue of the State would be 2015-16 and a fixed growth rate of
14 per cent will be applied to it.
Oct. 19, 2016 • Proposed a four-tier rate structure comprising a lower rate of 6 per cent, two
3rd Meeting standard rates of 12 per cent and 18 per cent and a higher rate of 26 per cent with an
additional cess for luxury and demerit goods.
• Cess was proposed to be used for payment of compensation to the States. However,
consensus could not be reached.
Nov. 3, 2016 • Decided a four-tier GST rate structure of 5%, 12%, 18% and 28%.
4th Meeting • Essential items including food will be taxed at zero rate.
• The lowest rate of 5 per cent would be for common use items.
• 12 per cent and 18 per cent would be the standard rates.
• The highest rate would apply to luxury and de-merit goods, which will also attract
an additional cess.
• The collection from this cess as well as clean energy cess will be used for
compensating states for any loss of revenue during the first five years of
implementation of GST.
Dec. 2-3, 2016 • Consensus could not be reached on the issue of sharing of administrative powers
5th Meeting between the centre and the states.
Dec. 11, 2016 • The Council discussed on the Model CGST and SGST legislation (Model GST Law)
6th Meeting which was released in the public domain on November 26, 2016.
• Could not reach consensus on issue of dual control of assesses.
Dec 22-23,2017 • Draft CGST and SGST Law were cleared along with compensation law.
7th Meeting • No consensus was reached on issue of dual control.
Jan 3-4,2017 • Issue of dual control remained unresolved.
8th Meeting • States raised a new issue of split in tax revenue in ratio of 60:40 between states and
Centre instead of equally dividing GST between Centre and states.
• States demanded taxation rights for sales made in the high seas within 12 nautical
miles of its coastline.
• States requested to increase the number of items on which this new Cess is to be
levied.
Jan 16, 2017 • A broad consensus was reached for GST to be rolled out from 1st July 2017 instead
Cont..
(ii)
Date/Event Major Decisions

9th Meeting of 1st April 2017.
• The issue of dual control was broadly resolved. States will have powers to assess
and administer 90 per cent of the tax payers under Rs. 1.5 crores annual turnover
while the remaining 10 per cent would be controlled by the Centre.
• Tax payers with turnover more than Rs 1.5 crores will be controlled and
administered in 50:50 ratio both by the states and Centre.
• States can levy GST within 12 nautical miles of its coastline in the high seas.
• Any IGST disputes among states will be resolved by the Centre.
February 18th • Formally approved Compensation law.
10th Meeting. • Some of the issues in three crucial draft CGST/SGT/IGST laws were discussed.
March 4, 2017 • Council cleared the two key draft laws of Central GST (CGST) and Integrated GST
11th Meeting (IGST).
• Hotels with annual turnover of less than ` 50 lakh will pay the lowest tax rate of 5
per cent under the GST regime.
March 16, 2017 • Cleared the remaining two supplementary legislations UTGST (Union Territory
12th Meeting GST Law) and the SGST (State GST Law).
• Approved the bound rate of 15 per cent as peak rate for the proposed cess to be
levied on certain demerit goods.
March 31, 2017 • Approved the Rules relating to Input Tax Credit, Valuation, Composition and
13th Meeting Transition.
• Gave final approval for changes in rules for filing tax returns in the new regime,
registration of entities, payment of GST, invoicing and refunds to make them
compatible with GST laws.

Annexure 8.4
(Para 3.4.3)
RBI e-kuber monitors ,consolidates luggage file then debit account & credit to Centre & States in account of each state
maintained in RBI.

Annexure 8.5 (A)
(Para 8.13.4)
Comparison of some State e-gov in Commercial Taxes
Tamil
S.no Features(NeGP + MoF) Bihar Gujarat Karnataka
Nadu
GSTN
1 Online application for registration
including submission of Query with its    (e-vardan)  
receipt and facility for tracking of status
2 Online filing of returns and periodic

reports by Dealers    (e-varadi)  
3 Online filing of refund Application

including submission of Query with
tracking of status
4 Online filing of complaints including
tracking of status
5 Online payment of commercial taxes  (esugam)
including profession tax. & (e-prerna)  
6 Online dealer verification 

7 Automatic processing of returns/report

filed
8 Online application for the issue of CST
related declaration forms/certificates.  
9 Online issue, filing & processing of

forms including forms used in interstate
 
transactions with its receipt & tracking of
status.
10 Online application for the issue of way

bills.
11 E-payment of tax through at least 5 banks
  
in each of the states/UTs.
12 Online submission of utilization
statements in respect of form and way
bills.
13 Facility to submit and update landline,
mobile phone numbers & e-mail 
addresses
14 online issuance of CST statutory forms
through tax information exchange system. 
15 Display of all acts, rules, notification,

orders, clarifications, etc related to    
commercial taxes on the portal.
16 Online dealers profile.     
17 Information service ,taxpayer education
and guidance: facility to dealer to obtain
various online information system.   
Source: State Commercial Tax Dept. sites

Annexure 8.5(B)
Para (8.13.4)
Additional properties of e-Gov.
Bihar Gujarat KAK Tamil Nadu GSTN
1 e- communication
which user can
send,view sent &   
recive msg from
login Id & pwd
2 Cancelled Dealers    
search
3 SUVIDHA for new
transporters  
registration
4  List of Defaulter &   
suspended dealer
5  TDN registration & 
tracking status of TDN
6  Tatkal registration  
7  Application for URD
for work contract  
incentives
8 statistics of e-return,e-
payment,digitally
 signed C  
form,checkpost form
list period wise.
9 Luxury,ENT Tax
  
registration
10 e-way bill presentation
  
and guidelines
11 List of CTD check
posts,numbers,e-   
mail id,help desk no.
12 know GSC No.(For
VAT/CST Registration
  
GSC NO. is generated
on payment)
13 Dealer(PT/ET/LT)  
  search
14 VAT offices search Circular
 
search
15 e-Grahak(citizen
enabled to lodge a
  informant in case a bill 
is not issued by dealer
in Karnataka.)
16 Validate CST form e-CST form verification 
numbers
17 Transit pass for faster 
 
clearance at check post
18  Register of firms  
19   e-Appeal 
20    Auction
Details
21    Commodity
search
22    
Reconciliation of
challan
Contd….
(ii)
23 Mapping of
challan by AA
   
with jurisdictional
PAO.
24     Fraud detection
25     maintainance of
tax ledger
account
26
    seller's amount
verification
Note:
CTD:Common technical URD:Unregistered TDN:Tax deduction PT:Professio GSC: Gurantee of
document dealers num n tax services to citizen
CST:Central sales tax ENT:Entertaintment AA:Accounting
tax Authority
Note: (i) CTD: Common technical document, (ii) URD: Unregistered dealers, (iii) PT: Profession tax,
(iv) TDN: Tax deduction number (v) CST: Central sales tax, (vi) ENT: Entertainment tax, (vii) AA:
Accounting Authority

Annexure 8.6 (A)
GSTN features (Para 8.13.1)
1 Online registration
a Each taxpayer will be alloted a State wise PAN based GSTIN.
b A unique ID would be given by respective state tax authorities through GST portal.
c In GST multiple registrations within a state for business verticals of taxable person would be allowed.
d Casual dealers can also obtain registration in a state for limited period.
2 e-payment
a Taxpayer can access GSTN for generation of challan through which payment can be made.
b For each mode of payment,the challan will be generated electronically at the GSTN.
c No manual challan will be used under any mode of payment.
d Taxpayer can pay their taxes through three modes of payment i.e. Internet banking, OTC, NEFT/RTGS.
3 e-Return
a There will be common e-return for CGST,SGST,IGST,Add tax.
b Here will be different frequency for filing of return for different class of taxpayes for e.g GSTR1, GSTR2
…..GSTR8
c Tax payer can upload final return form either directly through data entry at the GST common portal or by
uploading the file.
4 e-Refund
a In GST regime issues on which refund arises are kept minimum and laws are clearly defined.
Situations under which refund would arise:
i Excess payment of tax due to mistake or inadvertence
ii Export including deemed export
iii Finalization of provisional assessment
iv Refund of pre-deposit for filing appeal including refund arising in pursuance of an appellate authority order
v Pament of duty/tax during investigation,but no/less liability arises at the time of investigation/adjudication
vi Refund of tax payment on purchase by UN bodies,supplies to CSD,Canteens,para-military forces
canteens,etc
vii Refund from manufacturing/generation/production/creation of tax free supplies or Non -GST supplies
viii Refund of carry forward ITC
ix Refund on account of year-end or volume based incentives provided by the supplier through credit notes
x Tax refund for International tourists
b Administration will verify the correctness of taxpayer's claim within a period as precribed by the GST Law
c There will be automatic carry forward for adjustment against future tax liabilities will be made against a
return and not against any other laibilities.
5 Reconciliation
a GSTN reconciles the challan details and appends RBI e-scroll number.
b Accounting authorities(AA) of centre & state doubly reconciles the challan received from RBI & GSTN on
the basis of CPIN.
c AA provides CIN wise payment details to respective tax authorities for dept reconciliation.
d Tax authorities updates master data to Accounting authorities for mapping challan with jurisdictional PAO.
6 Reduce leakages
a GSTN reduces leakages such as fraudulent bills,improper ITC,fradulent use of exempt rules,false payment
proofs,unrecorded sales,misuse of composition method,wrongful application of lower tax,under
invoicing,Non existent dealers
b Fraud detecting tools: Matching ITC,Data mining,Pattern detection.
7 GSTN maintain tax ledger account
a After tax payer gets receipt of challan tax paid, challan will be credited to the tax ledger account of the
taxpayer.
8 Seller's amount verification
a seller would issue an invoice details and GST amount to the buyer.
b Buyer can use the seller information to verify credited amount
Note: Casual dealers are those who are not registered on regular basis in other State, and desire to conduct
business for a limited period.

Annexure 8.6 (B)
GSTN and Registration procedure (Para 8.13.1)
Enrolment: An existing taxpayer (both VAT and Central Excise) will have to enrol under
GST portal.
Specified month for Taxpayer under State VAT and Central Excise can start enrolling from October
enrolment: 2016. The Taxpayers registered under service tax will be enrolled later.
Fee: There is no fee/charged/ levied for the enrolment of taxpayer.
Common enrolment: The enrolment process is common for all taxpayers registered under
Centre/State/UT tax Acts for both CGST & SGST.
Common There will be common registration, common return and common challan for
Registration: Central and State GST
Information and (i) Provisional ID received from State/Central Authorities
Documents required (ii) Password received from State/Central Authorities
for enrollment: (iii) Valid Email Address
(iv) Valid Mobile Number
(v) Bank Account Number
(vi) Bank IFSC
Documents
a. Proof of Constitution of Business
In case of Partnership firm: Partnership Deed of Partnership Firm (PDF and
JPEG format in maximum size of 1 MB)
First time login For the first time login, user will need to provide username & pwd received
from the State VAT/Centre Tax Department. For subsequent login, need to
provide username and password as created on own with GST portal
Multiple authorized In case of Multiple authorized signatory for single business entity, one
signatory authorized signatory should be designated as primary authorized signatory and e-
mail & mobile number of that person shall be provided.
OTP Separate OTPs are sent on email address and mobile number to validate them,
Thus two separate OTPs are sent. OTP generated will expires after 15 min.
Prefilled information Following are the auto- populated details in the enrolment application:
in the enrolment PAN of the Business,Legal Name of Business, State,Reason of liability to obtain
application registration, Email Address & Mobile num of primary authorized signatory.
Stateand/Center/war Refer VAT Registration certificate to find out State jurisdiction,
d/circle/sector no. ward/circle/sector no./
DSC (Digital DSC is mandatory for enrolment by companies, foreign companies, limited
signature liability partnership and foreign liability partnership. For other taxpayer DSC is
certificate) optional.
ARN(Application ARN will be generated after the successful submission of the enrolment
reference no.) application on GST portal.
Changing Mobile no. One can change mobile no and email id as given at the time of enrolment
and e-mail id application after appointed date onwards through amendment process.
Final Registration FRC will be provided after verification of documents (within 6 months) by
Certificate(FRC) proper officer(s)center/state of concerned jurisdiction(s) after appointed date.

Annexure 8.7
(Para 8.7.2)
Major features of the Registration, Return Filing and Payment procedures:
 Registration Procedure
i. Existing dealers: Existing VAT/Central excise/Service Taxpayers will not have to apply afresh for
registration under GST.
ii. New dealers: Single application to be filed online for registration under GST.
iii. The registration number will be PAN based and will serve the purpose for Centre and State.
iv. Unified application to both tax authorities.
v. Each dealer to be given unique ID GSTIN.
vi. Deemed approval within three days.
vii. Post registration verification in risk based cases only.
 Returns filing procedures:
a. Common return would serve the purpose of both Centre and State Government.
b. There are eight forms provided for in the GST business processes for filing for returns. Most of the
average tax payers would be using only four forms for filing their returns. These are return for supplies,
return for purchases, monthly returns and annual return.
c. Small taxpayers: Small taxpayers who have opted composition scheme shall have to file return on
quarterly basis.
d. Filing of returns shall be completely online. All taxes can also be paid online.
 Payment Procedure:
i. Electronic payment process- no generation of paper at any stage
ii. Single point interface for challan generation- GSTN
iii. Ease of payment – payment can be made through online banking, Credit Card/Debit Card,
NEFT/RTGS and through cheque/cash at the bank
iv. Common challan form with auto-population features
v. Use of single challan and single payment instrument
vi. Common set of authorized banks
vii. Common Accounting Codes

Annexure 9.1
(Para 9.2.3)
Forms of Tax Evasion (Tait 1988)
1. Traders Who Are Liable to VAT but Do Not Register: Traders have an obligation to assess
their trading turnover and if they qualify, they must register for VAT. If traders initially are not
within the VAT limits, most legislation requires traders to notify the authorities either ex post when
sales exceed the limit, and even, in some cases, when there are reasonable grounds to believe that
sales in the coming 12 months will exceed the annual threshold. The problem of evasion is created
when traders who should register do not. On the whole, this is a minor problem because,
principally, only small traders will fail to register and relatively little revenue is at risk. Another,
perhaps larger problem, is those traders who are outside the approved legal structure, such as
bookmakers and operators of sauna parlours. As one government's internal document put it, "These
individuals also could be liable but probably will not register."
2. Exaggerated Refund Claims: One of the simplest ways to evade VAT is to inflate the claims to
deduct VAT paid at earlier stages. The simplest method is to fabricate fake invoices for purchases
never made. Clearly, there is a limit to the scope for this as too many fake invoices would squeeze
the taxable values to the point where the authorities would become suspicious and, in any case,
audit would identify the fraudulent invoice. A more complicated, but more remunerative (and
riskier), device to claim fake refunds is when a new business is started, because then the authorities
could expect VAT deductions to exceed VAT liability since there would be large purchases of
capital equipment and raw materials.
3. Unrecorded Cash Purchases: Small traders (and sometimes large ones) will buy goods from a
primary (unregistered) supplier, such as a farmer, and because the transaction is not recorded, the
purchaser will be able to sell the goods without charging VAT and no record will exist. In general,
this is not a serious problem because most purchasers will want to record the sale to claim the VAT
as credit. But if the production chain is short, which it frequently is in developing countries, then
this can become a major form of evasion. In addition, if income taxes are high, then it will be a
double incentive to avoid both VAT and income taxes, which will increase the value of the
evasion.
4. Credit Claimed for Invoices from Unregistered Suppliers: Credit for VAT paid on inputs can
only be claimed when the purchase is made from a registered supplier. The input purchases may be
perfectly valid and it may be that the purchase does actually involve paying a price inclusive of
VAT that is impossible to claim because the supplier is unregistered. If the trader who has
purchased from the unregistered supplier pretends that the purchase invoice has a VAT number, or
creates an imaginary VAT number, the authorities are defrauded.
5. Credit Notes on Purchases Including VAT Not Shown on Returns: This is a minor item, but if
a credit note is issued on a purchase and the credit for VAT is claimed on the full invoice before
credit, the authorities will allow more VAT credit than they ought. The cheating may show up only
through a financial match on checks issued against (sometimes numerous aggregated) invoices
from the same supplier. Sometimes the cross-check can be initiated from the credit invoices of the
supplier.
6. Credit Claimed for Taxable Supplies Used in Exempt Activities: If a trader is selling both
taxable and exempt goods and services. It may prove quite easy to divert purchased inputs on
which VAT credit is claimed against taxed sales to help produce and sell exempt items. It is much
more difficult when the same raw materials may be inputs to exempt and taxable outputs and some
traders may deliberately offset more credit against VAT than was actually involved. Again, this is
unlikely to be a major problem unless legislation has created numerous exemptions that require
traders to make many such borderline decisions. It is, of course, another argument against creating
exemption.
7. Credit Claimed for Purchases That Are Not Creditable: The best-known example of this type
of fraud is the credit claimed for an automobile for business purposes when, in fact, it is used for
non-business purposes and should be classified as non-deductible. Once discretion is allowed as to
whether the automobile is used fully, partially, or not at all, for business purposes, the door is
opened to misassigned claims for credit. One potential solution is to allow credit for VAT in the
feedback to- anpsinha9999@gmail.com Cont..
(ii)
same proportion as the income tax allows the claim for the capital cost as a business expense.
Another is to disallow automobiles, but then borderline cases arise with jeeps, trucks, and pickups.
8. Imported Goods and Taxed but Unreported Sales: Goods imported illegally, sold with the full
VAT added, reward the trader not only by his illegal sale but by a tax revenue pocketed. It may
seem especially greedy for traders who are already acting illegally by selling smuggled goods to
want to charge VAT on the illicit wares. But it does happen and on a large scale. Gold is the best
example, but for any commodity to be used in this way there has to be a sizable legitimate trade in
the good and fixed retail prices (wine, spirits, and cigarettes are other possible goods).
9. Underreported Sales: Understating sales is the most usual way to evade VAT. The lower the
value of sales, the less the VAT owed. The only dangers are that if an invoice is issued, the
purchaser will claim his VAT deduction and this would not be matched in an audit against the
VAT paid—but this danger depends on the likelihood of audit.
10. Multiple Rates and Incorrect Descriptions: Multiple rates of VAT are the bane of VAT
administration. Tax forms become more complicated as VAT at the appropriate rate has to be
applied to both inputs and outputs; the chances for genuine error are enhanced and the opportunity
for deliberate misclassification is widened. Where traders are buying and selling goods and
services that may be liable to three or more rates of VAT, clearly the compliance costs rise and the
reduction in tax liability by shifting goods from "luxury" to standard rates can be tempting;
equally, the refunds can be inflated by allocating an undue proportion of sales to exempt or low
rate categories. This consideration emphasizes the need to limit the number of tax rates and
exemptions to as few as possible.
11. Omission of Self-Deliveries: Small traders frequently use their own production for their
household consumption. All VAT legislation requires traders to record goods used privately as a
sale liable for VAT. While it is unrealistic to expect all such consumption to be recorded for VAT,
if it rises to a substantial amount (and especially when extended to family and friends), the
amounts can be quite large. Typically, the authorities can spot businesses that are "at risk" and
audit them specifically for this sort of evasion.
12. False Export Claims: Companies that export much of their output are often in continuous
credit to the government. Completely false export sales can be invoiced and the claim for VAT
refund made—very like printing money. This fraud can be caught because export invoices are
usually associated with customs and shipping documents and it is difficult to fabricate all the
paperwork required. More difficult to check would be the export of computerized data (through a
service agency); the use of telecommunications means no documentation need be used and,
therefore no documents may be available for audit. The Dutch claim to have used a system of spot
checks to improve detection of this form of evasion.
13. Bogus Traders: Also difficult to check is the creation of short-lived bogus companies. These
can fabricate fake export invoices and claim VAT rebates on goods that have never been handled.
Alternatively, they may actually sell the goods on the domestic market but claim a VAT rebate on
a bogus export invoice.
14. Barter Arrangement: If there is collusion between seller and purchaser to exchange goods and
services with no payment and no invoice record, then there is no documentary liability to VAT.
Such collusion is difficult to check except through careful analysis of the inventory of goods but,
compared with any single-stage tax, the revenue at risk is limited to the VAT liability at the stage
of production. Such collusion is difficult to arrange, awkward to sustain, and may be difficult to
keep secret.
15. Accounting "Errors: This can be the innocent type of error and generally the penalty will be
the same as the late payment penalty (linked with the period during which the accounting error
delayed the receipt of VAT revenue due). However, "creative accounting" can be extraordinarily
ingenious and tantamount to fraud.

Annexure – 9.2
(Para 9.7.1)
Relative merit of Reverse charging/withholding, VAT accounts, PVAT, CVAT and

VIVAT (Keen, 2007)
(i) Reverse charging: the use of ‗reverse charging‘ for business-to-business (B2B) transactions:
placing VAT liability on the buyer rather than the seller (with the amount thus paid fully creditable
against the purchaser‘s liability on any subsequent sales). Imports, in effect, are conventionally taxed on
this basis, with liability placed on the buyer. Extended throughout the production chain, reverse
charging would frustrate the fraud illustrated in Figure 1, for instance, by passing to firm C the VAT
liability on the sale by the soon-to-be-missing firm B: even if B vanishes without paying any VAT, the
appropriate amount will be collected on C‘s purchases. The United Kingdom has recently adopted
reverse charging for mobile phones, computer chips, and other particular goods that have proved
popular instruments for carousel fraud. More radically still, Austria and Germany have proposed
allowing reverse charging for all B2B transactions above a certain (modest) size.
- There are, however, a number of difficulties with reverse charging. By eliminating part of traders‘
output tax liability, it may increase refund claims, with consequent control difficulties and risk of fraud.
If applied only in respect of particular commodities, it may simply displace current difficulties onto
other items. That dynamic is thus likely to create pressure to extend the scope of reverse charging—
which, in the limit, would, in effect, convert the VAT into an RST, with the attendant difficulties that
creates: in particular, with tax suspended on B2B transactions, if the final seller for some reason fails to
remit the VAT due then no tax is collected. If applied wholesale, reverse charging would mean, to a
large degree, the death of the VAT. For these reasons, the Austro-German proposal has been widely and
strongly resisted.
(ii) Reverse withholding: similar considerations to those motivating reverse charging proposals might
point to considering also the use of ―reverse withholding” in vulnerable sectors. Such schemes—quite
widespread in Latin America and Africa, though not in Europe— have some similarity with reverse
charging, in that the purchaser is again required to remit payment of VAT in respect of its purchases—
but the seller remains liable for output VAT, with a credit given for the amount withheld by the
purchaser (which may be at lower than the normal VAT rate).
- Reverse withholding can protect revenue more firmly than does reverse charging: the effect if firm B
goes missing is the same as under reverse charging, so long as withholding is at the full rate, but not all
revenue is lost if the final seller escapes tax. It does though potentially increase the need to pay refunds,
since sellers in effect take credit not only for input VAT but also the VAT withheld by their customers.
Moreover, the need to ensure that the seller is properly credited (or refunded) for the VAT withheld by
its customers places additional demands on the administration: and to the extent that implementation of
this is imperfect the effect is to transform the VAT, in part, into a tax on production.
-
(iii) VAT Accounts: Adoption of a system of ―VAT accounts”—as proposed for example by Sinn,
Gebauer, and Parsche (2004), and as implemented in Bulgaria—under which traders would be required
to open a distinct bank account into which they would transfer the amount of VAT charged to their
customers. In the event of suspicious refund claims, the authorities could then simply check whether the
amount claimed had in fact been paid. Thus the carousel frauds set out above, for example, would be
stymied by the denial of credit to company C on the grounds that firm B had not paid the corresponding
amount into the required account.
- One evident disadvantage of this approach is that it imposes additional compliance costs on
taxpayers, not only in the requirement to open an additional account but also, and probably more
substantially, in the interest foregone through earlier payment of tax. VAT would become due once the
Contd….
(ii)
sale is complete rather than with the periodic return. (The implied movement of the VAT from an
accrual to a cash basis also raises difficulties in itself.) Moreover, it is not clear why it should be easier
for the authorities to verify payments into a bank account other than their own. Bulgaria, reportedly, is
in the process of removing its VAT accounts system.
(iv) DVAT (Digital VAT): The compulsory use of a third party to guarantee VAT payments, either in
general or for particular sectors, as set out by Ainsworth (2006), who labels this ―D-VAT‖ (for
―digital‖). While this may provide some assurance to the authorities, it is not clear that it solves the
underlying problem. It seems, rather, to simply pass it to the guaranteeing agency—which will
presumably require to be compensated for the risk it bears, whether in the form of charges to
government or to the taxpayers themselves. These schemes, it should be noted, would address not only
fraud related to export zero rating— though this is certainly a key motivation—but also forms of purely
domestic fraud arising from simple failure to remit tax due. The final administrative proposal is directed
specifically to export-zero rating:
(v) P-VAT(Prepaid VAT): under the ―P-VAT” of Poddar and Hutton (2001), goods would simply not
be allowed to clear customs until the authorities had received confirmation (or an appropriate guarantee)
that import VAT has been paid.
- While this to a large degree addresses the problem, it does so by reintroducing or strengthening
restrictions on the movement of goods of precisely the kind that the EU seeks to remove.
Administrative solutions, thus, all have their weaknesses, whether in creating other opportunities for
fraud or/and in increasing the compliance costs of honest traders.
 More radical proposals go to the heart of the problem by fixing the break in the VAT chain as
goods pass between countries (or states within a federation): that is, they eliminate the zero rating of
exports. There are three main proposals of this kind:
(vi) Exporter rating: When the likely difficulties created for the VAT by the opening of borders
within the EU first became apparent, the European Commission suggested a system of ‗exporter-
rating‘: intra-Union exports would bear VAT at the rate of the exporting country, with full credit then
provided to the importer. To ensure the same allocation of revenue as under zero-rating, a
corresponding transfer would be made by the authorities of the exporting country to those of the
importing country. Under the initial proposal, this adjustment would have been on the basis of
individual transactions: a ―clearing house‖ system. The alternative was later raised of allocating
revenues on the basis of aggregate consumption data.
Apart from resistance to the expansion of the Union‘s bureaucracy that the clearing house would seem
to imply, the main weakness of this approach is in the poor incentives it creates for member states to
monitor VAT payments (Lee, Pearson, and Smith, 1988). An importing country, for example, has little
interest in verifying claims for credit on imports from other member states (or helping the exporting
country to do so), since the cost of that credit (and hence of fraudulent refund claims) is simply passed
to the exporting country. And if revenue is simply allocated in proportion to aggregate consumption, a
member state would keep much less than €1 for each additional Euro of VAT that it collects.
(vii) CVAT(Compensating VAT): under the ―CVAT‖—proposed by Varsano (1999) and further
developed by McLure (2000)—exports would be formally zero-rated in the exporting country but then
immediately subjected to a special ‗compensating‘ VAT that would be fully creditable in the importing
country. Thus the net revenue collected by this tax would in principle be zero (leaving aside
complications created by exemptions and sales to final consumers).
Contd…..

(iii)
- This is an elegant scheme, fixing the VAT chain while at the same time preserving the allocation of
revenues associated with zero-rating. Its main drawback is that exports continue to be treated differently
from domestic sales. This runs counter to the objective of creating a unified single market, in the sense
that a trader in Munich, for instance, would still need to treat a sale to Berlin (fully taxable) differently
from one to Paris (zero-rated under the German VAT, but with the CVAT applicable).
(viii) ―VIVAT‖(Variable Integrated VAT)—developed by Keen and Smith (1996, 2000)—instead

charges a single rate—common to all participating countries (or states)—on all B2B sales, whether
domestic or across borders, while leaving the rate applied to final sales to the discretion of each. Under
such a scheme, a trader in Munich would treat customers in Berlin and Paris in exactly the same way: so
long as they are registered for VAT, she would charge the EU-wide B2B rate.
- The VIVAT has been criticized on the grounds that it requires taxpayers to know whether or not
their customer is registered for VAT. But this is already required, for example, for intra-Union exports
of goods (zero-rating being available only for sales to registered taxpayers), and for reverse-charged
supplies of services. Proposals for dealing with e-commerce also commonly envisage a distinction
between B2B and other transactions. A deeper concern again relates to the revenue allocation issue,
since simple application of a common rate on B2B exports will increase revenue for net exporters of
intermediate goods (and reduce revenue for net importers). Thus some form of clearing may again be
needed.

Annexure 9.3
(Para 9.9.2)
INSPECTION, SEARCH, SEIZURE AND ARREST (Sec 67-72 of the CGST Act, 2017)
Sec 67 (1) Where the proper officer, not below the rank of Joint Commissioner, has reasons to believe
that
(a) a taxable person has suppressed any transaction relating to supply of goods or services or
both or the stock of goods in hand, or has claimed input tax credit in excess of his entitlement
under this Act or has indulged in contravention of any of the provisions of this Act or the rules
made thereunder to evade tax under this Act; or
(b) any person engaged in the business of transporting goods or an owner or operator of a
warehouse or a godown or any other place is keeping goods which have escaped payment of tax
or has kept his accounts or goods in such a manner as is likely to cause evasion of tax payable
under this Act,
he may authorise in writing any other officer of central tax to inspect any places of business of the
taxable person or the persons engaged in the business of transporting goods or the owner or the operator
of warehouse or godown or any other place.
(2) Where the proper officer, not below the rank of Joint Commissioner, either pursuant to an
inspection carried out under sub-section (1) or otherwise, has reasons to believe that any goods liable to
confiscation or any documents or books or things, which in his opinion shall be useful for or relevant to
any proceedings under this Act, are secreted in any place, he may authorise in writing any other officer
of central tax to search and seize or may himself search and seize such goods, documents or books or
things: Provided that where it is not practicable to seize any such goods, the proper officer, or any
officer authorised by him, may serve on the owner or the custodian of the goods an order that he shall
not remove, part with, or otherwise deal with the goods except with the previous permission of such
officer: Provided further that the documents or books or things so seized shall be retained by such
officer only for so long as may be necessary for their examination and for any inquiry or proceedings
under this Act.
(3) The documents, books or things referred to in sub-section (2) or any other documents, books or
things produced by a taxable person or any other person, which have not been relied upon for the issue
of notice under this Act or the rules made thereunder, shall be returned to such person within a period
not exceeding thirty days of the issue of the said notice.
(4) The officer authorised under sub-section (2) shall have the power to seal or break open the door of
any premises or to break open any almirah, electronic devices, box, receptacle in which any goods,
accounts, registers or documents of the person are suspected to be concealed, where access to such
premises, almirah, electronic devices, box or receptacle is denied.
(5) The person from whose custody any documents are seized under sub-section (2) shall be entitled to
make copies thereof or take extracts therefrom in the presence of an authorised officer at such place and
time as such officer may indicate in this behalf except where making such copies or taking such extracts
may, in the opinion of the proper officer, prejudicially affect the investigation.
(6) The goods so seized under sub-section (2) shall be released, on a provisional basis, upon execution
of a bond and furnishing of a security, in such manner and of such quantum, respectively, as may be
prescribed or on payment of applicable tax, interest and penalty payable, as the case may be.
(7) Where any goods are seized under sub-section (2) and no notice in respect thereof is given within
six months of the seizure of the goods, the goods shall be returned to the person from whose possession
they were seized: Provided that the period of six months may, on sufficient cause being shown, be
extended by the proper officer for a further period not exceeding six months.
(8) The Government may, having regard to the perishable or hazardous nature of any goods,
depreciation in the value of the goods with the passage of time, constraints of storage space for the
goods or any other relevant considerations, by notification, specify the goods or class of goods which
shall, as soon as may be after its seizure under sub-section (2), be disposed of by the proper officer in
such manner as may be prescribed.
Cont…
(ii)
(9) Where any goods, being goods specified under sub-section (8), have been seized by a proper
officer, or any officer authorised by him under sub-section (2), he shall prepare an inventory of such
goods in such manner as may be prescribed.
(10) The provisions of the Code of Criminal Procedure, 1973, relating to search and seizure, shall, so
far as may be, apply to search and seizure under this section subject to the modification that sub-section
(5) of section 165 of the said Code shall have effect as if for the word ―Magistrate‖, wherever it occurs,
the word ―Commissioner‖ were substituted.
(11) Where the proper officer has reasons to believe that any person has evaded or is attempting to
evade the payment of any tax, he may, for reasons to be recorded in writing, seize the accounts,
registers or documents of such person produced before him and shall grant a receipt for the same, and
shall retain the same for so long as may be necessary in connection with any proceedings under this Act
or the rules made thereunder for prosecution.
(12) The Commissioner or an officer authorised by him may cause purchase of any goods or services or
both by any person authorised by him from the business premises of any taxable person, to check the
issue of tax invoices or bills of supply by such taxable person, and on return of goods so purchased by
such officer, such taxable person or any person in charge of the business premises shall refund the
amount so paid towards the goods after cancelling any tax invoice or bill of supply issued earlier.
Sec 68. (1) The Government may require the person in charge of a conveyance carrying any
consignment of goods of value exceeding such amount as may be specified to carry with him such
documents and such devices as may be prescribed.
(2) The details of documents required to be carried under sub-section (1) shall be validated in such
manner as may be prescribed.
(3) Where any conveyance referred to in sub-section (1) is intercepted by the proper officer at any
place, he may require the person in charge of the said conveyance to produce the documents prescribed
under the said sub-section and devices for verification, and the said person shall be liable to produce the
documents and devices and also allow the inspection of goods.
Sec 69. (1) Where the Commissioner has reasons to believe that a person has committed any offence
specified in clause (a) or clause (b) or clause (c) or clause (d) of sub-section (1) of section 132 which is
punishable under clause (i) or (ii) of
sub-section (1), or sub-section (2) of the said section, he may, by order, authorise any officer of central
tax to arrest such person.
(2) Where a person is arrested under sub-section (1) for an offence specified under subsection (5) of
section 132, the officer authorised to arrest the person shall inform such person of the grounds of arrest
and produce him before a Magistrate within twenty-four hours.
(3) Subject to the provisions of the Code of Criminal Procedure, 1973,––
(a) where a person is arrested under sub-section (1) for any offence specified under sub-section
(4) of section 132, he shall be admitted to bail or in default of bail, forwarded to the custody of
the Magistrate;
(b) in the case of a non-cognizable and bailable offence, the Deputy Commissioner or the
Assistant Commissioner shall, for the purpose of releasing an arrested person on bail or
otherwise, have the same powers and be subject to the same provisions as an officer-in-charge
of a police station.
Sec 70. (1) The proper officer under this Act shall have power to summon any person whose attendance
he considers necessary either to give evidence or to produce a document or any other thing in any
Cont…
(iii)
inquiry in the same manner, as provided in the case of a civil court under the provisions of the Code of
Civil Procedure, 1908.
(2) Every such inquiry referred to in sub-section (1) shall be deemed to be a ―judicial proceedings‖
within the meaning of section 193 and section 228 of the Indian Penal Code.
Sec 71. (1) Any officer under this Act, authorised by the proper officer not below the rank of Joint
Commissioner, shall have access to any place of business of a registered person to inspect books of
account, documents, computers, computer programs, computer software whether installed in a computer
or otherwise and such other things as he may require and which may be available at such place, for the
purposes of carrying out any audit, scrutiny, verification and checks as may be necessary to safeguard
the interest of revenue.
(2) Every person in charge of place referred to in sub-section (1) shall, on demand, make available to
the officer authorised under sub-section (1) or the audit party deputed by the proper officer or a cost
accountant or chartered accountant nominated under section 66—
(i) such records as prepared or maintained by the registered person and declared to the proper
officer in such manner as may be prescribed;
(ii) trial balance or its equivalent;
(iii) statements of annual financial accounts, duly audited, wherever required;
(iv) cost audit report, if any, under section 148 of the Companies Act, 2013;
(v) the income-tax audit report, if any, under section 44AB of the Income-tax Act, 1961; and
(vi) any other relevant record, for the scrutiny by the officer or audit party or the chartered
accountant or cost accountant within a period not exceeding fifteen working days from the day
when such demand is made, or such further period as may be allowed by the said officer or the
audit party or the chartered accountant or cost accountant.
Sec 72. (1) All officers of Police, Railways, Customs, and those officers engaged in the collection of
land revenue, including village officers, officers of State tax and officers of Union territory tax shall
assist the proper officers in the implementation of this Act. (2) The Government may, by notification,
empower and require any other class of officers to assist the proper officers in the implementation of
this Act when called upon to do so by the Commissioner

Annexure 9.4
(Para 9.9.4)
OFFENCES AND PENALTIES (Sec 122 to 138 of the CGST Act)
Sec 122 (1) Where a taxable person who

(i) supplies any goods or services or both without issue of any invoice or issues an incorrect or
false invoice with regard to any such supply;
(ii) issues any invoice or bill without supply of goods or services or both in violation of the
provisions of this Act or the rules made thereunder;
(iii) collects any amount as tax but fails to pay the same to the Government beyond a period of
three months from the date on which such payment becomes due;
(iv) collects any tax in contravention of the provisions of this Act but fails to pay the same to
the Government beyond a period of three months from the date on which such payment
becomes due;
(v) fails to deduct the tax in accordance with the provisions of sub-section (1) of section 51, or
deducts an amount which is less than the amount required to be deducted under the said sub-
section, or where he fails to pay to the Government under sub-section (2) thereof, the amount
deducted as tax; (vi) fails to collect tax in accordance with the provisions of sub-section (1) of
section 52, or collects an amount which is less than the amount required to be collected under
the said sub-section or where he fails to pay to the Government the amount collected as tax
under sub-section (3) of section 52;
(vii) takes or utilises input tax credit without actual receipt of goods or services or both either
fully or partially, in contravention of the provisions of this Act or the rules made thereunder;
(viii) fraudulently obtains refund of tax under this Act;
(ix) takes or distributes input tax credit in contravention of section 20, or the rules made
thereunder; (x) falsifies or substitutes financial records or produces fake accounts or documents
or furnishes any false information or return with an intention to evade payment of tax due under
this Act; Nonappealable decisions and orders. Penalty for certain offences
(xi) is liable to be registered under this Act but fails to obtain registration;
(xii) furnishes any false information with regard to registration particulars, either at the time of
applying for registration, or subsequently;
(xiii) obstructs or prevents any officer in discharge of his duties under this Act;
(xiv) transports any taxable goods without the cover of documents as may be specified in this
behalf; (xv) suppresses his turnover leading to evasion of tax under this Act;
(xvi) fails to keep, maintain or retain books of account and other documents in accordance with
the provisions of this Act or the rules made thereunder;
(xvii) fails to furnish information or documents called for by an officer in accordance with the
provisions of this Act or the rules made thereunder or furnishes false information or documents
during any proceedings under this Act;
(xviii) supplies, transports or stores any goods which he has reasons to believe are liable to
confiscation under this Act;
(xix) issues any invoice or document by using the registration number of another registered
person; (xx) tampers with, or destroys any material evidence or document;
(xxi) disposes off or tampers with any goods that have been detained, seized, or attached under
this Act,
he shall be liable to pay a penalty of ten thousand rupees or an amount equivalent to the tax evaded or
the tax not deducted under section 51 or short deducted or deducted but not paid to the Government or
tax not collected under section 52 or short collected or collected but not paid to the Government or input
tax credit availed of or passed on or distributed irregularly, or the refund claimed fraudulently,
whichever is higher.
Cont…

(ii)
(2) Any registered person who supplies any goods or services or both on which any tax has not been
paid or short-paid or erroneously refunded, or where the input tax credit has been wrongly availed or
utilised
(a) for any reason, other than the reason of fraud or any wilful misstatement or suppression of
facts to evade tax, shall be liable to a penalty of ten thousand rupees or ten per cent. of the tax
due from such person, whichever is higher;
(b) for reason of fraud or any wilful misstatement or suppression of facts to evade tax, shall be
liable to a penalty equal to ten thousand rupees or the tax due from such person, whichever is
higher.
(3) Any person who––
(a) aids or abets any of the offences specified in clauses (i) to (xxi) of sub-section (1);
(b) acquires possession of, or in any way concerns himself in transporting, removing,
depositing, keeping, concealing, supplying, or purchasing or in any other manner deals with any
goods which he knows or has reasons to believe are liable to confiscation under this Act or the
rules made thereunder; (c) receives or is in any way concerned with the supply of, or in any
other manner deals with any supply of services which he knows or has reasons to believe are in
contravention of any provisions of this Act or the rules made thereunder;
(d) fails to appear before the officer of central tax, when issued with a summon for appearance
to give evidence or produce a document in an inquiry;
(e) fails to issue invoice in accordance with the provisions of this Act or the rules made
thereunder or fails to account for an invoice in his books of account,
shall be liable to a penalty which may extend to twenty-five thousand rupees
Sec 123. If a person who is required to furnish an information return under section 150 fails to do so
within the period specified in the notice issued under sub-section (3) thereof, the proper officer may
direct that such person shall be liable to pay a penalty of one hundred rupees for each day of the period
during which the failure to furnish such return continues:
Provided that the penalty imposed under this section shall not exceed five thousand rupees.
Sec 124. If any person required to furnish any information or return under section 151,—
(a) without reasonable cause fails to furnish such information or return as may be required
under that section, or
(b) wilfully furnishes or causes to furnish any information or return which he knows to be
false,
he shall be punishable with a fine which may extend to ten thousand rupees and in case of a continuing
offence to a further fine which may extend to one hundred rupees for each day after the first day during
which the offence continues subject to a maximum limit of twenty five thousand rupees.
Sec 125. Any person, who contravenes any of the provisions of this Act or any rules made thereunder
for which no penalty is separately provided for in this Act, shall be liable to a penalty which may extend
to twenty-five thousand rupees.
Sec 126. (1) No officer under this Act shall impose any penalty for minor breaches of tax regulations or
procedural requirements and in particular, any omission or mistake in documentation which is easily
rectifiable and made without fraudulent intent or gross negligence.
Explanation.––For the purpose of this sub-section,––
(a) a breach shall be considered a ‗minor breach‘ if the amount of tax involved is less than five
thousand rupees;
Cont…
(iii)
(b) an omission or mistake in documentation shall be considered to be easily rectifiable if the

same is an error apparent on the face of record.
(2) The penalty imposed under this Act shall depend on the facts and circumstances of each case and
shall be commensurate with the degree and severity of the breach.
(3) No penalty shall be imposed on any person without giving him an opportunity of being heard.
(4) The officer under this Act shall while imposing penalty in an order for a breach of any law,
regulation or procedural requirement, specify the nature of the breach and the applicable law, regulation
or procedure under which the amount of penalty for the breach has been specified.
(5) When a person voluntarily discloses to an officer under this Act the circumstances of a breach of
the tax law, regulation or procedural requirement prior to the discovery of the breach by the officer
under this Act, the proper officer may consider this fact as a mitigating factor when quantifying a
penalty for that person.
(6) The provisions of this section shall not apply in such cases where the penalty specified under this
Act is either a fixed sum or expressed as a fixed percentage.
Sec 127. Where the proper officer is of the view that a person is liable to a penalty and the same is not
covered under any proceedings under section 62 or section 63 or section 64 or section 73 or section 74
or section 129 or section 130, he may issue an order levying such penalty after giving a reasonable
opportunity of being heard to such person.
Sec 128. The Government may, by notification, waive in part or full, any penalty referred to in section
122 or section 123 or section 125 or any late fee referred to in section 47 for such class of taxpayers and
under such mitigating circumstances as may be specified therein on the recommendations of the
Council.
Sec 129. (1) Notwithstanding anything contained in this Act, where any person transports any goods or
stores any goods while they are in transit in contravention of the provisions of this Act or the rules made
thereunder, all such goods and conveyance used as a means of transport for carrying the said goods and
documents relating to such goods and conveyance shall be liable to detention or seizure and after
detention or seizure, shall be released
(a) on payment of the applicable tax and penalty equal to one hundred per cent. of the tax
payable on such goods and, in case of exempted goods, on payment of an amount equal to two
per cent. of the value of goods or twenty-five thousand rupees, whichever is less, where the
owner of the goods comes forward for payment of such tax and penalty;
(b) on payment of the applicable tax and penalty equal to the fifty per cent. of the value of the
goods reduced by the tax amount paid thereon and, in case of exempted goods, on payment of
an amount equal to five per cent. of the value of goods or twenty-five thousand rupees,
whichever is less, where the owner of the goods does not come forward for payment of such tax
and penalty;
(c) upon furnishing a security equivalent to the amount payable under clause (a) or clause (b)
in such form and manner as may be prescribed:
Provided that no such goods or conveyance shall be detained or seized without serving an order
of detention or seizure on the person transporting the goods
. (2) The provisions of sub-section (6) of section 67 shall, mutatis mutandis, apply for detention and
seizure of goods and conveyances.
Cont…
(iv)
(3) The proper officer detaining or seizing goods or conveyances shall issue a notice specifying the tax
and penalty payable and thereafter, pass an order for payment of tax and penalty under clause (a) or
clause (b) or clause (c).
(4) No tax, interest or penalty shall be determined under sub-section (3) without giving the person
concerned an opportunity of being heard.
(5) On payment of amount referred in sub-section (1), all proceedings in respect of the notice specified
in sub-section (3) shall be deemed to be concluded.
(6) Where the person transporting any goods or the owner of the goods fails to pay the amount of tax
and penalty as provided in sub-section (1) within seven days of such detention or seizure, further
proceedings shall be initiated in accordance with the provisions of section 130:
Provided that where the detained or seized goods are perishable or hazardous in nature or are likely to
depreciate in value with passage of time, the said period of seven days may be reduced by the proper
officer.
Sec 130. (1) Notwithstanding anything contained in this Act, if any person—
(i) supplies or receives any goods in contravention of any of the provisions of this Act or the
rules made thereunder with intent to evade payment of tax; or
(ii) does not account for any goods on which he is liable to pay tax under this Act; or
(iii) supplies any goods liable to tax under this Act without having applied for registration; or
(iv) contravenes any of the provisions of this Act or the rules made thereunder with intent to
evade payment of tax; or
(v) uses any conveyance as a means of transport for carriage of goods in contravention of the
provisions of this Act or the rules made thereunder unless the owner of the conveyance proves
that it was so used without the knowledge or connivance of the owner himself, his agent, if any,
and the person in charge of the conveyance,
then, all such goods or conveyances shall be liable to confiscation and the person shall be liable to
penalty under section 122.
(2) Whenever confiscation of any goods or conveyance is authorised by this Act, the officer adjudging
it shall give to the owner of the goods an option to pay in lieu of confiscation, such fine as the said
officer thinks fit: Provided that such fine leviable shall not exceed the market value of the goods
confiscated, less the tax chargeable thereon: Provided further that the aggregate of such fine and penalty
leviable shall not be less than the amount of penalty leviable under sub-section (1) of section 129:
Provided also that where any such conveyance is used for the carriage of the goods or passengers for
hire, the owner of the conveyance shall be given an option to pay in lieu of the confiscation of the
conveyance a fine equal to the tax payable on the goods being transported thereon.
(3) Where any fine in lieu of confiscation of goods or conveyance is imposed under sub-section (2), the
owner of such goods or conveyance or the person referred to in sub-section (1), shall, in addition, be
liable to any tax, penalty and charges payable in respect of such goods or conveyance.
(4) No order for confiscation of goods or conveyance or for imposition of penalty shall be issued
without giving the person an opportunity of being heard.
(5) Where any goods or conveyance are confiscated under this Act, the title of such goods or
conveyance shall thereupon vest in the Government.
Cont…
(v)
(6) The proper officer adjudging confiscation shall take and hold possession of the things confiscated
and every officer of Police, on the requisition of such proper officer, shall assist him in taking and
holding such possession.
(7) The proper officer may, after satisfying himself that the confiscated goods or conveyance are not
required in any other proceedings under this Act and after giving reasonable time not exceeding three
months to pay fine in lieu of confiscation, dispose of such goods or conveyance and deposit the sale
proceeds thereof with the Government.
Sec 131. Without prejudice to the provisions contained in the Code of Criminal Procedure, 1973, no
confiscation made or penalty imposed under the provisions of this Act or the rules made thereunder
shall prevent the infliction of any other punishment to which the person affected thereby is liable under
the provisions of this Act or under any other law for the time being in force.
Sec 132. (1) Whoever commits any of the following offences, namely
(a) supplies any goods or services or both without issue of any invoice, in violation of the provisions of
this Act or the rules made thereunder, with the intention to evade tax;
(b) issues any invoice or bill without supply of goods or services or both in violation of the provisions
of this Act, or the rules made thereunder leading to wrongful availment or utilisation of input tax credit
or refund of tax;
(c) avails input tax credit using such invoice or bill referred to in clause (b);
(d) collects any amount as tax but fails to pay the same to the Government beyond a period of three
months from the date on which such payment becomes due;
(e) evades tax, fraudulently avails input tax credit or fraudulently obtains refund and where such
offence is not covered under clauses (a) to (d);
(f) falsifies or substitutes financial records or produces fake accounts or documents or furnishes any
false information with an intention to evade payment of tax due under this Act;
(g) obstructs or prevents any officer in the discharge of his duties under this Act;
(h) acquires possession of, or in any way concerns himself in transporting, removing, depositing,
keeping, concealing, supplying, or purchasing or in any other manner deals with, any goods which he
knows or has reasons to believe are liable to confiscation under this Act or the rules made thereunder;
(i) receives or is in any way concerned with the supply of, or in any other manner deals with any supply
of services which he knows or has reasons to believe are in contravention of any provisions of this Act
or the rules made thereunder;
(j) tampers with or destroys any material evidence or documents;
(k) fails to supply any information which he is required to supply under this Act or the rules made
thereunder or (unless with a reasonable belief, the burden of proving which shall be upon him, that the
information supplied by him is true) supplies false information; or
(l) attempts to commit, or abets the commission of any of the offences mentioned in clauses (a) to (k)
of this section, shall be punishable––
(i) in cases where the amount of tax evaded or the amount of input tax credit wrongly availed or utilised
or the amount of refund wrongly taken exceeds five hundred lakh rupees, with imprisonment for a term
which may extend to five years and with fine;
Cont…
(vi)
(ii) in cases where the amount of tax evaded or the amount of input tax credit wrongly availed or
utilised or the amount of refund wrongly taken exceeds two hundred lakh rupees but does not exceed
five hundred lakh rupees, with imprisonment for a term which may extend to three years and with fine;
(iii) in the case of any other offence where the amount of tax evaded or the amount of input tax credit
wrongly availed or utilised or the amount of refund wrongly taken exceeds one hundred lakh rupees but
does not exceed two hundred lakh rupees, with imprisonment for a term which may extend to one year
and with fine;
(iv) in cases where he commits or abets the commission of an offence specified in clause (f) or clause
(g) or clause (j), he shall be punishable with imprisonment for a term which may extend to six months
or with fine or with both.
(2) Where any person convicted of an offence under this section is again convicted of an offence under
this section, then, he shall be punishable for the second and for every subsequent offence with
imprisonment for a term which may extend to five years and with fine.
(3) The imprisonment referred to in clauses (i), (ii) and (iii) of sub-section (1) and sub-section (2) shall,
in the absence of special and adequate reasons to the contrary to be recorded in the judgment of the
Court, be for a term not less than six months.
(4) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, all offences under
this Act, except the offences referred to in sub-section (5) shall be noncognizable and bailable.
(5) The offences specified in clause (a) or clause (b) or clause (c) or clause (d) of sub-section (1) and
punishable under clause (i) of that sub-section shall be cognizable and non-bailable.
(6) A person shall not be prosecuted for any offence under this section except with the previous
sanction of the Commissioner.
Explanation.— For the purposes of this section, the term ―tax‖ shall include the amount of tax evaded
or the amount of input tax credit wrongly availed or utilised or refund wrongly taken under the
provisions of this Act, the State Goods and Services Tax Act, the Integrated Goods and Services Tax
Act or the Union Territory Goods and Services Tax Act and cess levied under the Goods and Services
Tax (Compensation to States) Act.
Sec 133. (1) Where any person engaged in connection with the collection of statistics under section 151
or compilation or computerisation thereof or if any officer of central tax having access to information
specified under sub-section (1) of section 150, or if any person engaged in connection with the
provision of service on the common portal or the agent of common portal, wilfully discloses any
information or the contents of any return furnished under this Act or rules made thereunder otherwise
than in execution of his duties under the said sections or for the purposes of prosecution for an offence
under this Act or under any other Act for the time being in force, he shall be punishable with
imprisonment for a term which may extend to six months or with fine which may extend to twenty-five
thousand rupees, or with both.
(2) Any person
(a) who is a Government servant shall not be prosecuted for any offence under this section
except with the previous sanction of the Government;
(b) who is not a Government servant shall not be prosecuted for any offence under this section
except with the previous sanction of the Commissioner.
Cont…
(vii)
Sec 134. No court shall take cognizance of any offence punishable under this Act or the rules made
thereunder except with the previous sanction of the Commissioner, and no court inferior to that of a
Magistrate of the First Class, shall try any such offence.
Sec 135. In any prosecution for an offence under this Act which requires a culpable mental state on the
part of the accused, the court shall presume the existence of such mental state but it shall be a defence
for the accused to prove the fact that he had no such mental state with respect to the act charged as an
offence in that prosecution.
Explanation.—For the purposes of this section
(i) the expression ―culpable mental state‖ includes intention, motive, knowledge of a fact, and
belief in, or reason to believe, a fact;
(ii) a fact is said to be proved only when the court believes it to exist beyond reasonable doubt
and not merely when its existence is established by a preponderance of probability.
Sec 136. A statement made and signed by a person on appearance in response to any summons issued
under section 70 during the course of any inquiry or proceedings under this Act shall be relevant, for the
purpose of proving, in any prosecution for an offence under this Act, the truth of the facts which it
contains
(a) when the person who made the statement is dead or cannot be found, or is incapable of giving
evidence, or is kept out of the way by the adverse party, or whose presence cannot be obtained without
an amount of delay or expense which, under the circumstances of the case, the court considers
unreasonable; or
(b) when the person who made the statement is examined as a witness in the case before the court and
the court is of the opinion that, having regard to the circumstances of the case, the statement should be
admitted in evidence in the interest of justice.
Sec 137. (1) Where an offence committed by a person under this Act is a company, every person who,
at the time the offence was committed was in charge of, and was responsible to, the company for the
conduct of business of the company, as well as the company, shall be deemed to be guilty of the offence
and shall be liable to be proceeded against and punished accordingly.
(2) Notwithstanding anything contained in sub-section (1), where an offence under this Act has been
committed by a company and it is proved that the offence has been committed with the consent or
connivance of, or is attributable to any negligence on the part of, any director, manager, secretary or
other officer of the company, such director, manager, secretary or other officer shall also be deemed to
be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
(3) Where an offence under this Act has been committed by a taxable person being a partnership firm
or a Limited Liability Partnership or a Hindu Undivided Family or a trust, the partner or karta or
managing trustee shall be deemed to be guilty of that offence and shall be liable to be proceeded against
and punished accordingly and the provisions of sub-section (2) shall, mutatis mutandis, apply to such
persons.
(4) Nothing contained in this section shall render any such person liable to any punishment provided in
this Act, if he proves that the offence was committed without his knowledge or that he had exercised all
due diligence to prevent the commission of such offence.
Explanation.––For the purposes of this section,––
(i) ―company‖ means a body corporate and includes a firm or other association of individuals;
and
Cont…
(viii)
(ii) ―director‖, in relation to a firm, means a partner in the firm.
Sec 138. (1) Any offence under this Act may, either before or after the institution of prosecution, be
compounded by the Commissioner on payment, by the person accused of the offence, to the Central
Government or the State Government, as the case be, of such compounding amount in such manner as
may be prescribed:
Provided that nothing contained in this section shall apply to—
(a) a person who has been allowed to compound once in respect of any of the offences specified
in clauses (a) to (f) of sub-section (1) of section 132 and the offences specified in clause (l)
which are relatable to offences specified in clauses (a) to (f) of the said sub-section;
(b) a person who has been allowed to compound once in respect of any offence, other than
those in clause (a), under this Act or under the provisions of any State Goods and Services Tax
Act or the Union Territory Goods and Services Tax Act or the Integrated Goods and Services
Tax Act in respect of supplies of value exceeding one crore rupees;
(c) a person who has been accused of committing an offence under this Act which is also an
offence under any other law for the time being in force;
(d) a person who has been convicted for an offence under this Act by a court;
(e) a person who has been accused of committing an offence specified in clause (g) or clause
(j) or clause (k) of sub-section (1) of section 132; and
(f) any other class of persons or offences as may be prescribed:
Provided further that any compounding allowed under the provisions of this section shall not
affect the proceedings, if any, instituted under any other law:
Provided also that compounding shall be allowed only after making payment of tax, interest and
penalty involved in such offences.
(2) The amount for compounding of offences under this section shall be such as may be prescribed,
subject to the minimum amount not being less than ten thousand rupees or fifty per cent. of the tax
involved, whichever is higher, and the maximum amount not being less than thirty thousand rupees or
one hundred and fifty per cent. of the tax, whichever is higher.
(3) On payment of such compounding amount as may be determined by the Commissioner, no further
proceedings shall be initiated under this Act against the accused person in respect of the same offence
and any criminal proceedings, if already initiated in respect of the said offence, shall stand abated.

Annexure – 10.1
(Para 10.2.(ii).c)
Will there be Large Compensation Requirements? (CEA Committee, 2015)
 The GST will necessarily entail some shift in revenues from production to consumption and from
manufacturing toward services. This shift is desirable but has raised concern especially from the major
manufacturing producing States that they might suffer some loss in revenues. As noted earlier, it is nearly
impossible to construct reliable tax bases—both new and old—at the level of the States, especially for
consumption of services. Hence, this report has refrained from estimating state-specific RNRs.
 But we can shed some light on this question by looking at proxies for the likely future tax base of States.
This future tax base will be based on consumption rather than production. So, we need to find proxies
for the States’ share in consumption of taxable goods and taxable services. We turn to the NSS—which
measures consumption--to calculate taxable goods consumption. We define each state’s share in taxable
consumption of goods as SGi where G the superscript refers to goods and i the subscript refers to the State.
 Since it is difficult to distinguish taxable from non-taxable services in the NSS, we turn to urban incomes as
a proxy for taxable services. After all, urban incomes will be a key determinant of spending on business-to-
consumer (B2C) services such as financial services, restaurants, advertising, real estate, professions services
etc. all of which are taxable.
 We compiled data on urban populations of the major States and on urban income, the latter by multiplying
urban population by state per capita domestic product. This will under-estimate urban incomes to the extent
that urban per capita incomes are disproportionately greater than rural per capita incomes especially in more
urbanized States. We define, analogously to goods, each state’s share in total consumption of services as
SSi .
Then each state’s share of the total potential GST tax base (goods and services) can be defined as:
STi = α SGi + (1-α) SSi
Where α refers to the share of goods and (1-α) the share of services, respectively in the overall GST base.
 We plot in Figure 1 below, each state’s share in the total GST revenues to be compensated (on the y-axis)
(current tax base) against the state’s share of total potential GST tax base (future tax base) as defined above
(on the x-axis). In this the weights assigned to goods and services are 45 per cent and 55 per cent,
respectively. A 45 degree line is also fitted to the chart which shows points on the line where the current and
future tax base are likely to be the same. All points above the line denote States that will potentially need to
be compensated. The chart has two interesting and potentially significant implications for compensations:
First, most of the points are below or close to the 45 degree line, and where they are above the line, they are
not very far above it. This suggests that on aggregate there will not be a huge re-shuffling of taxable revenues
Second, the largest manufacturing States and the ones that currently get a lion’s share of revenues either lie
below the line, suggesting that far from needing compensation they will actually be benefitting from the
move to the GST; or in the one case, where it is above, it is actually very close to the line, implying a small
compensation requirement.
We do a sensitivity analysis by changing the goods and services base to 50-50 and the results are shown in
Figure 2. In this case, too, the main conclusions described above continue to hold.

 In sum, one cannot be sure that the GST will lead to large shifts in the tax base away from the advanced
manufacturing States but the evidence presented above should provide some reassurance that
these shifts will not be seriously adverse for the country as a whole and also for the large
manufacturing States because they will also be substantial consumers of services.
Figure 2: Share of revenues to be compensated and share of potential GST base

(to check robustness)

Annexure 10.2 (A)
(Para 10.5.1)
Share of the major States in Manufacturing and Services in GDP
% Share in State Share of Base % Share in State Share of Base

States All India 2013-14 13-14 All India 2015-16 15-16
Manu. Services Manu. Services Manu. Services Manu. Services
Haryana 4.48% 3.47% 17533 43508 4.54% 3.66% 22590 52056
Maharashtra 18.28% 15.54% 71540 194844 19.43% 16.39% 96654 233089
Gujarat 13.51% 5.61% 52872 70340 13.83% 5.80% 68777 82451
HIS
TN 10.64% 8.63% 41640 108205 10.33% 9.30% 51390 132216

HP 1.07% 0.60% 4188 7523 1.09% 0.66% 5399 9391
Kerala 1.93% 4.39% 7553 55043 2.01% 4.79% 9978 68081
Punjab 3.50% 2.61% 13698 32725 3.82% 2.63% 18991 37345
AP 3.08% 3.97% 12054 49777 3.32% 4.09% 16499 58079
Karnataka 5.82% 5.92% 22777 74226 6.07% 6.44% 30179 91619
MIS
WB 3.97% 7.07% 15537 88645 4.38% 7.34% 21778 104354

Rajasthan 4.36% 3.84% 17063 48147 4.25% 3.95% 21132 56132
Chhattisgarh 1.70% 1.23% 6653 15422 1.83% 1.29% 9090 18366
Odisha 2.21% 2.47% 8649 30969 2.05% 2.22% 10174 31580
MP 2.82% 3.20% 11036 40122 2.75% 3.23% 13667 45861
Jharkhand 2.00% 1.33% 7827 16676 1.93% 1.44% 9583 20527
LIS
Assam 0.84% 1.46% 3287 18306 0.91% 1.59% 4514 22569

UP 6.62% 7.43% 25908 93159 6.53% 7.57% 32495 107594
Bihar 0.94% 3.38% 3679 42379 0.98% 3.83% 4899 54450
UT Delhi 1.40% 6% 5479 77389 1.43% 6.1% 7112 88940
State Total 87.77% 82.15% 343495 1030016 90.03% 86.22% 447789 1225758
Others 12.23% 17.85% 47863 223808 9.97% 13.78% 49576 195967
Total 100.00% 100.00% 391358 1253824 100.00% 100.00% 497365 1421725
Note: (i) Percentage share of Manu. & services of the States are based on the share of GSDP (2013-14 & 2015-16)
-Manu. & Services in All India GDP (Mfr. and Services) respectively.
(ii) The data for the share of GSDP in Manufacturing and Services are taken from Handbook of Statistics on
Indian States, RBI.

Annexure:10.2 (B)
(Para 10.5.1)
Indirect Tax revenues of All States and the Centre in Pre and Post GST regime (Rs. Crore)
Post-GST @ 18% for both Goods & Post-GST @ 16% for Post-GST @ 18% for both Goods & Post-GST @ 16% for both
(States) Pre-GST Pre-GST
Services both Goods & Services Services Goods & Services
13-14 15-16
Sl. Source of Taxes Tax Base Tax Rev. Tax Gain Tax Rev. Tax Gain Tax Base Tax Rev. Tax Gain Tax Rev. Tax Gain
1 2 3 4 5 6 7 8 9 10 11 12 13 14
1 ST/VAT(11.48%) 253201 280579
1.1 Surcharge on ST 15 0
1.2 Turnover Tax 72 87
1.3 Other Taxes/ Duties 7734 36847
1.4 Total VAT 261022 2205584 198503 -62519 176447 -84575 317512 2444064 219966 -97547 195525 -121987
2.1 CST (2%) 31225 0 0 -31225 0 -31225 35511 0 0 -35511 0 -35511
2.2 Total (Goods) 292247 198503 -93745 176447 -115801 353023 219966 -133057 195525 -157498
3.1 Service Tax 0 1253824 112844 112844 100306 100306 0 1421725 127955 127955 113738 113738
3.2 ET (34%) 2123 6280 565 -1558 502 -63 5155 15163 1365 -3791 1213 -3942
3.3 Total (Services) 2123 1260104 113409 111286 100808 98685 5155 1436888 129320 124164 114951 109796
Total(VAT+CST/IGST+
4 Services) 294371 3465688 311912 17541 277255 -17116 358179 3880952 349286 -8893 310476 -47702
(Centre)
1.1 CED 61778 98181
1.2 Cesses & charges 20288 5611
1.3 Total(CED) 82066 2205584 198503 116437 176447 94381 103792 2472058 222485 118693 197765 93973
2 BCD 46963 391358 46963 46963 0 59684 477470 59684 59684 0

3.1 CVD & SAD 111833 0 -111833 0 -111833 81770 0 -81770 -81770
3.2 Cesses & charges 4148 5466
3.3 Total(CVD&SAD) 69588 0 0 -69588 0 -69588 87236 0 -87236 0 -81770
3.4 Total (Goods) 151654 198503 46848 176447 24793 185562 222485 36923 197765 12203
4.1 Services 150459 1253824 112844 -37615 100305.927 -50153 206150 1421725 127955 -78195 113737.981 -92412
4.2 Cesses & charges 4319 0 -4319 0 -4319 5264 0 -5264 0 -5264
4.3 Total (Services) 154778 1253824 112844 -41934 100306 -54472 211414 1421725 127955 -83459 113738 -97676
4.4 Total(CED+CVD&SAD 306432 3459408 311347 4914 276753 -29680 396976 3893783 350440 -46536 311503 -85473
+Services)
Note: State (Pre vs. GST): Note: Centre (Pre vs.GST):
1. Sales tax/VAT revenue is excluding POL (40%), since CAG report (2013-14) says that POL contribute 1. CED, CVD and SAD reveunue are excluding POL (40%), since CAG report (2013-14) says that POL
40% of the total CED revenue and Petro is outside GST. contribute 40% of the total CED revenue and Petro is outside GST.
2. Base Computed with the corresponding rates and made free from cascading effect of Excise Duty 2. CED Tax base= All States VAT base
(i.e. 12%). Formula-0.1025*(1+0.12)*100=11.48% 3. Service Tax base-Computed @ 14.5%.
3. Entertainment Tax base @ 34% i.e. wtd avg. of States. 4. CVD/SAD base - Same base as for BCD @ 12.5%.
4. Surcharges on Sales Tax and Turover Tax are excluded as their values were negligible. 5. Cess and Charges includes Education Cess and Secondary High Education Cess.
5. Total VAT includes other taxes and duties.
8. Since BCD is not going to subsume under GST its values are not taken for computations feedback to- anpsinha9999@gmail.com
Annexure 10.3
(Para 10.5.3)
Impact of GST on the share of the States in Services Tax (ICRA,2016)
 Assuming that taxable services worth Rs. 100.0 are generated in a particular year, the GoI would collect
service tax worth Rs. 15.0 at the current service tax rate of 15%. Out of this, Rs. 1.0 would be in the form
of cess, which would be retained by the GoI and roughly Rs. 14.0 would be shareable with the states; the
GoI would retain with itself 58% of the latter, equivalent to ~Rs. 8.1, and devolve 42%, equivalent to Rs.
5.9 to the 28 states based on the services inter se formula. As per the current formula, Uttar Pradesh gets
the highest share of (in absolute figure) service tax, followed by Bihar, Madhya Pradesh, West Bengal
and Maharashtra. But per capita share would increase would be for higher for the richer State and much
less for the poorer States.
 Under the proposed GST, assuming that services are taxed at a rate of 18%, which would be split
equally between CGST and SGST, the GoI would collect a CGST of Rs. 9.0 on taxable services worth
Rs. 100.0. It would retain ~58% of the shareable pool of ~Rs. 9.0, or roughly Rs. 5.2 as its share of
services CGST (lower than the Rs. 9.1 of service tax on taxable services worth Rs. 100.0 that it retains
under the current regime). The balance ~42% of the CGST, equivalent to Rs. 3.8, would be distributed to
the 28 states based on the FFC-recommended services inter se distribution, irrespective of the state in
which those services were supplied.
 In addition, SGST @9% would be levied on the same taxable services worth Rs. 100.0, raising tax
revenues of Rs. 9.0 for all the states as a whole. Thereby, the total revenue accruing to all 28 states on
taxable services of Rs. 100 would more- than-double to Rs. 12.8 (Rs. 3.8 plus Rs. 9.0) post-GST, from
Rs. 5.9 in the current regime (refer Table 2 and Chart 2).
 For the 28 states excluding Jammu & Kashmir, we (ICRA) have taken the ratio of tertiary/services
GSVA in each state to the aggregate services GSVA for those 28 states, to be the proxy for the state-wise
supply of services, in order to assess how much of the services SGST of Rs. 9.0 on taxable services worth
Rs. 100.0 would accrue to each state. Each state’s SGST on services estimated in this manner has been
added to the inter se share of ~42% of the CGST, to arrive at the projected division among states of the
total revenue of Rs. 12.8 accruing to all 28 states on taxable services of Rs. 100.
 Such an analysis reveals that the exercise of the concurrent power to levy tax on services by the State
Governments under the proposed GST is likely to favourably impact the tax revenues of nearly all the
states. Moreover, amongst the 28 states, Maharashtra, Tamil Nadu, Karnataka, West Bengal and Gujarat
are likely to gain significantly (refer Chart 3), relative to the devolved share of service tax in the prevailing
regime.(Incidentally, gains for the LISs are much less.)
 The SGST on services would be levied by each state on the supply (sale, transfer and lease made for a
consideration to further a business) of services within the state’s boundary. The inter-state ratio of supply
of services could be quite different from the inter se share recommended by the FFC. The state-wise
proportion of taxable services in the all-India services GVA may provide a proxy for the distribution of
services SGST among the state governments.
 We acknowledge that this is an imperfect proxy, as Gross State Value Added (GSVA) covers value
added on production in a particular state (including export of services), whereas SGST would be levied
on supply of services within the states’ boundaries. Moreover, all services included in the GVA may not
be taxable under either the service tax or the GST, for instance services provided by the government or
local authority and non-air conditioned restaurants would be included in GVA but may not attract tax.

Table 2: Sharing of Service Tax between Centre and States in the existing vs. the
proposed GST regime.
Existing System Proposed GST
1. Service Tax rate 15% 6. GST on Services (assumed) 18%
2. Cess (A) 1% 7. CGST (E) 9%
3. Sharable (B) ~ 14% 8. Centre Share of CGST (F= 58% of E) 5.2%
4. Centre's Share (C=58% of B) 8.1% 9. States' Share of CGST (G= 42% of E) 3.8%
5. States' Share (D= 42% of B) 5.9% 10. SGST (H) 9.0%
11. Total Share of States (E+H) 12.8%
Note: To be distributed among 28 States based on the share of the States in All India Services inter se
distribution of Services.

Annexure: 10.4 (A)
(Para 10.5.3)
Share of major States in Service Tax: pre (ET) vs post (SGST for Services @ 9%) GST regime in 13-14 .
13-14
Sr. States Populn. ET Total Pre PC Pre SGST Total Post Post PC PC Gain PC Gain (%)
1 Haryana 2.54 52 52 21 3931 3931 1551 1530 74
2 Maharashtra 11.24 736 736 65 17683 17683 1574 1508 23
3 Gujarat 6.04 134 134 22 6391 6391 1057 1035 47
4 TN 7.21 47 47 6 9766 9766 1354 1347 208
5 HP 0.69 1 1 0.95 677 677 987 986 1041
6 Kerala 3.34 1 1 0.21 4954 4954 1483 1483 6977
7 Punjab 2.77 27 27 10 2952 2952 1064 1054 108
8 AP 8.46 121 121 14 4512 4512 533 519 36
9 Karnataka 6.11 146 146 24 6724 6724 1101 1077 45
10 WB 9.13 70 70 8 7999 7999 876 869 113
11 Rajasthan 6.85 14 14 2 4337 4337 633 631 311
12 Chhattis garh 2.55 23 23 9 1394 1394 546 537 59
13 Odisha 4.20 12 12 3 2792 2792 665 662 224
14 MP 7.26 54 54 7 3635 3635 501 493 66
15 Jharkhand 3.30 23 23 7 1503 1503 456 449 65
16 Assam 3.12 3 3 1 1648 1648 528 527 626
17 UP 19.98 466 466 23 8504 8504 426 402 17
18 Bihar 10.41 39 39 4 3821 3821 367 363 97
19 Total 115.21 1969 1969 228 93226 93226 15700 15472 10137
Note: See Annexure 10.13 (A) for detailed computation of SGST
Share of the major States in Service tax: pre (ET) and post GST regime (SGST on
Services @ 9% ) for 13-14.
1800
1600
1400
1200
1000
800
600
400
200
(Contd…)

` Annexure: 10.4 (B)
(Para 10.5.3)
Share of major States in Service Tax: pre (ET) vs post (SGST for Services @ 9%) GST regime in 15-16
15-16
Sr. States Populn. ET Total PC Pre SGST Total Post Post PC PC PC Gain (%)
Pre Gain
1 Haryana 2.54 84 84 33 4710 4710 1858 1825 5507%
2 Maharashtra 11.24 658 658 59 21110 21110 1879 1820 3107%
3 Gujarat 6.04 115 115 19 7472 7472 1236 1217 6382%
4 TN 7.21 147 147 20 11988 11988 1662 1641 8049%
5 HP 0.69 1 1 2 845 845 1232 1230 70949%
6 Kerala 3.34 1 1 0.21 6128 6128 1834 1834 862929%
7 Punjab 2.77 48 48 17 3374 3374 1216 1199 6973%
8 AP 8.46 164 164 19 5270 5270 623 604 3115%
9 Karnataka 6.11 216 216 35 8311 8311 1360 1325 3744%
10 WB 9.13 89 89 10 9418 9418 1032 1022 10527%
11 Rajasthan 6.85 88 88 13 5078 5078 741 728 5671%
12 Chhattis garh 2.55 27 27 11 1660 1660 650 639 5939%
13 Odisha 4.20 22 22 5 2850 2850 679 674 13034%
14 MP 7.26 65 65 9 4157 4157 572 563 6295%
15 Jharkhand 3.30 14 14 4 1849 1849 560 556 12818%
16 Assam 3.12 3 3 1 2032 2032 651 650 63402%
17 UP 19.98 542 542 27 9823 9823 492 464 1712%
18 Bihar 10.41 55 55 5 4910 4910 472 466 8828%
19 Total 115.21 2340 2340 20 110985 110985 963 943 4643%
Note: States are gaining higher in terms of PC gain (%), since Pre GST only Centre levied Service Tax whereas,
post GST Centre and States will Share Service tax in equal proportion (say 9%+9). See Annexure 10.13 (B) for
detailed computation of SGST
Comparative PC revenue capita gain/loss from Services (excluding UFC transfers) in
15-16 vs 13-14
2000
1800
1600
1400
1200
1000
800
600
400
200
0
Haryana
Maharashtra
Gujarat
TN
HP
Kerala
Punjab
AP
Karnataka
WB
Rajasthan
Chhattis garh
Odisha
MP
Jharkhand
Assam
UP
Bihar
PC Gain (13-14) PC Gain (14-15)

Annexure: 10.5 (A)
(Para 10.5.3)
PC Revenue from goods to the major States in 13-14 in pre (VAT @ 12%) vs post (SGST on Goods @ 9%) GST regime
13-14
Sr. States Tax on Popul. Total Pre PC Pre SGST on Total Post PC Post PC PC Gain
Goods (Cr.) GST GST Goods GST GST Gain (%)
1 Haryana 10769 2.54 10769 4248 7062 7062 2786 -1462 -34.4%
2 Maharashtra 39426 11.24 39426 3508 27170 27170 2418 -1091 -31.1%
3 Gujarat 26702 6.04 26702 4418 16786 16786 2777 -1641 -37.1%
4 Tamil Nadu 33362 7.21 33362 4624 23719 23719 3288 -1337 -28.9%
5 HP 2043 0.69 2043 2975 1292 1292 1882 -1094 -36.8%
6 Kerala 15064 3.34 15064 4509 11550 11550 3457 -1052 -23.3%
7 Punjab 9118 2.77 9118 3287 6737 6737 2428 -858 -26.1%
8 AP 30143 8.46 30143 3564 21866 21866 2585 -979 -27.5%
9 Karnataka 21354 6.11 21354 3495 14542 14542 2380 -1115 -31.9%
10 WB 13746 9.13 13746 1506 9625 9625 1054 -452 -30.0%
11 Rajasthan 13282 6.85 13282 1938 9330 9330 1361 -576 -29.8%
12 Chhattis garh 5129 2.55 5129 2008 3293 3293 1289 -719 -35.8%
13 Odisha 6776 4.20 6776 1614 4648 4648 1107 -507 -31.4%
14 MP 10367 7.26 10367 1427 7388 7388 1017 -410 -28.7%
15 Jharkhand 4858 3.30 4858 1473 2877 2877 872 -601 -40.8%
16 Assam 4333 3.12 4333 1388 2958 2958 948 -440 -31.7%
17 UP 24505 19.98 24505 1226 17805 17805 891 -335 -27.3%
18 Bihar 7780 10.41 7780 747 6035 6035 580 -168 -22.4%
19 Total 278756 115.21 278756 2420 194682 194682 1690 -730 -30.2%
Note: Tax on Goods includes revenue from Sales Tax/VAT and CST, See Annexure 10.13 (A) for detailed computation of
SGST on Goods.
PC Revenue from goods to the major States in 13-14 in pre (VAT @ 12%) vs post (SGST on
Goods @ 9%) GST regime
5000
4000
3000
2000
1000
0
Haryana
Maharashtra
Gujarat
Tamil Nadu
HP
Kerala
Punjab
AP
Karnataka
WB
Rajasthan
Chhattis garh
Odisha
MP
Jharkhand
Assam
UP
Bihar
-1000
-2000
(Contd…)
Annexure: 10.5 (B)
(Para 10.5.3)
PC Revenue from goods to the major States in 15-16 in pre (VAT @ 12%) vs post (SGST on Goods @ 9%) GST regime
15-16
States Tax on Popul. Total Pre PC Pre SGST on Total Post PC Post PC Gain PC Gain
Sr. Goods (Cr.) GST GST Goods GST GST (%)
1 Haryana 15601 2.54 15601 6154 9767 9767 3853 -2301 -37.4%
2 Maharashtra 44565 11.24 44565 3966 31230 31230 2779 -1187 -29.9%
3 Gujarat 32833 6.04 32833 5432 22011 22011 3642 -1790 -33.0%
4 Tamil Nadu 37123 7.21 37123 5145 25825 25825 3579 -1566 -30.4%
5 HP 2382 0.69 2382 3470 1616 1616 2354 -1117 -32.2%
6 Kerala 17945 3.34 17945 5372 13768 13768 4121 -1250 -23.3%
7 Punjab 9909 2.77 9909 3572 7369 7369 2656 -916 -25.6%
8 AP 38272 8.46 38272 4525 28251 28251 3340 -1185 -26.2%
9 Karnataka 23952 6.11 23952 3920 17316 17316 2834 -1086 -27.7%
10 WB 15931 9.13 15931 1745 11143 11143 1221 -525 -30.1%
11 Rajasthan 17367 6.85 17367 2534 12349 12349 1802 -732 -28.9%
12 Chhattis garh 7416 2.55 7416 2903 4374 4374 1712 -1191 -41.0%
13 Odisha 7595 4.20 7595 1809 5207 5207 1240 -569 -31.4%
14 MP 11899 7.26 11899 1638 8419 8419 1159 -479 -29.2%
15 Jharkhand 6732 3.30 6732 2041 4202 4202 1274 -767 -37.6%
16 Assam 5529 3.12 5529 1772 3815 3815 1222 -549 -31.0%
17 UP 29722 19.98 29722 1487 20505 20505 1026 -461 -31.0%
18 Bihar 9686 10.41 9686 930 7547 7547 725 -206 -22.1%
19 Total 334459 115.21 334459 2903 234712 234712 2037 -866 -29.8%
Note: 1.Source of Indirect Tax Revenue (goods) data: RBI State Fiances , 2.Tax on Goods includes revenue from Sales
Tax/VAT and CST, 3.Sharable tansfers includes UFC tansfers from CED and CVD, See Annex 13.B for understanding
the adjustments made in the base of Goods. 4. See Annexure 10.13 (A) for detailed computation of SGST on Goods.
Comparative PC revenue capita gain/loss from goods (excluding UFC transfers) in 15-16 vs 13-
Comparative PC revenue capita gain/loss from goods (excluding UFC transfers) in 15-16 vs 13-14
14
0
Haryana
Maharashtra
Gujarat
Tamil Nadu
HP
Kerala
Punjab
AP
Karnataka
WB
Rajasthan
Chhattis garh
Odisha
MP
Jharkhand
Assam
UP
-500 Bihar
-1000
-1500
-2000
-2500
PC Gain (13-14) PC Gain (15-16)

Annexure 10.6 (A)
(Para 10.5.3)
PC Revenue from Goods and Services (excluding UFC transfers) to the 18 major States for 13-14 in pre vs. post GST regime.
Goods Services Pre GST SGST Post GST Pre-Post Gain PC
Sr. States Populn. VAT CST (ET) Total Rev. Total PC Rev. SGST_goods SGST_services Total Rev. Total PC Rev. Gain PC (%)
13-14
1 Haryana 2.54 9008 1761 52 10821 4269 7062 3931 10994 4336 68 1.6%
2 Maharashtra 11.24 34656 4769 736 40161 3574 27170 17683 44853 3991 417 11.7%
3 Gujarat 6.04 21411 5291 134 26836 4440 16786 6391 23177 3835 -605 -13.6%
4 TN 7.21 30255 3107 47 33409 4631 23719 9766 33486 4641 11 0.2%
5 HP 0.69 1648 395 1 2043 2976 1292 677 1969 2868 -108 -3.6%
6 Kerala 3.34 14732 331 0 15064 4509 11550 4954 16504 4940 431 9.6%
7 Punjab 2.77 8593 525 27 9145 3296 6737 2952 9689 3492 196 5.9%
8 AP 8.46 27891 2252 121 30264 3578 21866 4512 26378 3119 -460 -12.8%
9 Karnataka 6.11 18549 2805 146 21500 3519 14542 6724 21266 3481 -38 -1.1%
10 WB 9.13 12277 1469 70 13817 1514 9625 7999 17624 1931 417 27.6%
11 Rajasthan 6.85 11901 1381 14 13296 1940 9330 4337 13667 1994 54 2.8%
12 Chhattis garh 2.55 4201 928 23 5152 2017 3293 1394 4687 1835 -182 -9.0%
13 Odisha 4.20 5929 847 12 6788 1617 4648 2792 7440 1773 155 9.6%
14 MP 7.26 9424 943 54 10421 1435 7388 3635 11023 1518 83 5.8%
15 Jharkhand 3.30 3670 1188 23 4881 1480 2877 1503 4380 1328 -152 -10.3%
16 Assam 3.12 3773 559 3 4335 1389 2958 1648 4606 1476 87 6.3%
17 UP 19.98 22711 1793 466 24970 1250 17805 8504 26309 1317 67 5.4%
18 Bihar 10.41 7697 83 39 7819 751 6035 3821 9856 947 196 26.0%
19 Total 115 248327 30428 1968 280724 48185 194682 93226 287907 48822 637 1.3%
Note: See Annexure 10.13 (A) for detailed computations of SGST on both Goods and Services.`
PC Revenue from both goods and services (excluding UFC transfers) to the 18 major States for 13-14 in pre (VAT @
12% for goods) vs post (SGST @ 9%for both goods & services) GST regime.
6000
5000
4000
3000
2000
1000
0
Haryana
Maharashtra
Gujarat
TN
HP
Kerala
Punjab
AP
Karnataka
WB
Rajasthan
Chhattis garh
Odisha
MP
Jharkhand
Assam
UP
Bihar
-1000
Pre PC Post PC Gain PC
(Contd…)
Annexure 10.6 (B)
(Para 10.5.3)
PC Revenue from Goods and Services (excluding UFC transfers) to the 18 major States for 15-16 in pre vs. post GST regime.
Goods Services Pre GST SGST Post GST Pre-Post Gain PC
Sr. States Populn. VAT CST (ET) Total Rev. Total PC Rev. SGST_goods SGST_services Total Rev. Total PC Rev. Gain PC (%)
15-16
1 Haryana 2.54 12459 3142 84 15685 6187 9767 4710 14478 5711 -476 -7.7%
2 Maharashtra 11.24 39836 4730 658 45224 4024 31230 21110 52340 4658 633 15.7%
3 Gujarat 6.04 28076 4756 115 32948 5451 22011 7472 29483 4878 -573 -10.5%
4 TN 7.21 32941 4182 147 37270 5166 25825 11988 37812 5241 75 1.5%
5 HP 0.69 2061 321 1 2383 3472 1616 845 2461 3585 113 3.3%
6 Kerala 3.34 17562 383 1 17946 5372 13768 6128 19895 5956 584 10.9%
7 Punjab 2.77 9399 510 48 9957 3589 7369 3374 10742 3872 283 7.9%
8 AP 8.46 36035 2237 164 38436 4544 28251 5270 33521 3963 -581 -12.8%
9 Karnataka 6.11 22087 1864 216 24168 3956 17316 8311 25627 4195 239 6.0%
10 WB 9.13 14214 1717 89 16020 1755 11143 9418 20562 2253 498 28.4%
11 Rajasthan 6.85 15752 1615 88 17455 2546 12349 5078 17427 2542 -4 -0.2%
12 Chhattis garh 2.55 5579 1837 27 7444 2914 4374 1660 6034 2362 -552 -18.9%
13 Odisha 4.20 6641 954 22 7617 1815 5207 2850 8057 1919 105 5.8%
14 MP 7.26 10739 1159 65 11964 1647 8419 4157 12576 1732 84 5.1%
15 Jharkhand 3.30 5360 1372 14 6746 2045 4202 1849 6051 1834 -211 -10.3%
16 Assam 3.12 4866 663 3 5532 1773 3815 2032 5847 1874 101 5.7%
17 UP 19.98 26155 3567 542 30264 1515 20505 9823 30328 1518 3 0.2%
18 Bihar 10.41 9626 60 55 9741 936 7547 4910 12457 1197 261 27.9%
19
Note: Total of Indirect
1.Source 115 Tax 299389 35070data: RBI
Revenue (goods) 2340State Fiances
336799 , 2.Tax58707 234712
on Goods includes 110985
revenue from 345698 and CST,
Sales Tax/VAT 59289
3.Sharable 582
tansfers 1.0%
includes
UFC tansfers from CED and CVD, See notes (Annex 10.13 B) for understanding the adjustments made in the base of Goods and Services. See Annex 10.13 (B) for detailed
computations of SGST on both Goods and Services
Comparative PC revenue capita gain/loss from goods & Services (excluding UFC transfers) in 15-16 vs 13-14
800
600
400
200
0
Haryana
Maharashtra
Gujarat
TN
HP
Kerala
Punjab
AP
Karnataka
WB
Rajasthan
Chhattis garh
Odisha
MP
Jharkhand
Assam
UP
Bihar
-200
-400
-600
-800

Annexure: 10.7
(Para 10.6.2)
Sharable Indirect Central Taxes for 18 major States (13-14) as per 13th FC formula (i.e. 32%) Rs.Crore
CED CVD &SAD Services Total PC
Pre - Post- Pre - Post- Pre - Post- Pre - Post- Post
States' Share
GST GST GST GST GST GST GST GST GST
32948 82301 35787 0 48147 36110 116882 118411 1027.8
% of CED % of Post- Pre - Post- Pre - Post- Pre - Post- Post Gain Populn. PC
Sl. . States Pre -GST
& CVD Services GST GST GST GST GST GST GST GST post (Crore) gain
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
1 Haryana 1.048 1.064 345 863 375 0 512 384 1233 1247 492 14 2.54 6
2 Maharashtra 5.199 5.281 1713 4279 1861 0 2543 1907 6116 6186 550 70 11.24 6
3 Gujarat 3.041 3.089 1002 2503 1088 0 1487 1115 3577 3618 599 41 6.04 7
4 Tamil Nadu 4.969 5.047 1637 4090 1778 0 2430 1822 5845 5912 819 67 7.21 9
5 HP 0.781 0.793 257 643 279 0 382 286 919 929 1353 10 0.69 15
6 Kerala 2.341 2.378 771 1927 838 0 1145 859 2754 2785 834 31 3.34 9
7 Punjab 1.389 1.411 458 1143 497 0 679 510 1634 1653 596 19 2.77 7
8 AP 6.937 7.047 2286 5709 2483 0 3393 2545 8161 8254 976 93 8.46 11
9 Karnataka 4.328 4.397 1426 3562 1549 0 2117 1588 5092 5150 843 58 6.11 9
10 West Bengal 7.264 7.379 2393 5978 2600 0 3553 2665 8546 8643 947 97 9.13 11
11 Rajasthan 5.853 5.945 1928 4817 2095 0 2862 2147 6885 6964 1016 78 6.85 11
12 Chhattis garh 2.47 2.509 814 2033 884 0 1208 906 2906 2939 1150 33 2.55 13
13 Odisha 4.779 4.855 1575 3933 1710 0 2338 1753 5622 5686 1355 64 4.20 15
14 MP 7.12 7.232 2346 5860 2548 0 3482 2611 8376 8471 1166 95 7.26 13
15 Jharkhand 2.802 2.846 923 2306 1003 0 1370 1028 3296 3334 1011 38 3.30 11
16 Assam 3.628 3.685 1195 2986 1298 0 1774 1331 4268 4317 1383 49 3.12 16
17 Uttar Pradesh 19.677 19.987 6483 16194 7042 0 9623 7217 23148 23412 1172 264 19.98 13
18 Bihar 10.917 11.089 3597 8985 3907 0 5339 4004 12843 12989 1248 146 10.41 14
Total 94.543 96.034 100.0% 31150 77810 33834 0 46237 34678 111222 112488 17510 1266 115
Note: Col 3 & 4, are the % of Shareable Indirect Tax as per 13th UFC i.e @ 32%
Annexure-10.8
(Para 10.6.3)
Shareble Indirect Central Taxes for the 18 major States (15-16 ) as per 14th FC formula (i.e. 42%) Rs.Crore
CED CVD &SAD Services Total
States' Share Pre -GST Post-GST Pre -GSTPost-GST Pre -GSTPost-GSTPre -GSTPost-GST
68727 131560 57239 0 86583 53741 212549 185301
Sl. % of CED % of Pre -GST Post-GST Pre -GSTPost-GST Pre -GSTPost-GSTPre -GSTPost-GST Loss in Populn. PC
States
& CVD Services Post (Crore) Loss
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
1 Haryana 1.084 1.091 745 1426 620 0 945 586 2310 2012 298 2.54 117
2 Maharashtra 5.521 5.674 3794 7263 3160 0 4913 3049 11867 10313 1555 11.24 138
3 Gujarat 3.084 3.172 2120 4057 1765 0 2746 1705 6631 5762 869 6.04 144
4 Tamil Nadu 4.023 4.104 2765 5293 2303 0 3553 2206 8621 7498 1123 7.21 156
5 HP 0.713 0.722 490 938 408 0 625 388 1523 1326 197 0.69 287
6 Kerala 2.5 2.526 1718 3289 1431 0 2187 1357 5336 4646 690 3.34 206
7 Punjab 1.577 1.589 1084 2075 903 0 1376 854 3362 2929 434 2.77 156
8 AP 4.305 4.398 2959 5664 2464 0 3808 2364 9231 8027 1204 8.46 142
9 Karnataka 4.713 4.822 3239 6200 2698 0 4175 2591 10112 8792 1320 6.11 216
10 West Bengal 7.324 7.423 5034 9635 4192 0 6427 3989 15653 13625 2028 9.13 222
11 Rajasthan 5.495 5.647 3777 7229 3145 0 4889 3035 11811 10264 1547 6.85 226
12 Chhattis garh 3.08 3.166 2117 4052 1763 0 2741 1701 6621 5753 867 2.55 340
13 Odisha 4.642 4.744 3190 6107 2657 0 4107 2549 9955 8656 1298 4.20 309
14 MP 7.548 7.727 5188 9930 4320 0 6690 4153 16198 14083 2115 7.26 291
15 Jharkhand 3.139 3.198 2157 4130 1797 0 2769 1719 6723 5848 875 3.30 265
16 Assam 3.311 3.371 2276 4356 1895 0 2919 1812 7089 6168 922 3.12 295
17 Uttar Pradesh 17.959 18.205 12343 23627 10280 0 15762 9784 38385 33410 4974 19.98 249
18 Bihar 9.665 9.787 6642 12715 5532 0 8474 5260 20648 17975 2674 10.41 257
Total 89.683 91.366 61636 117987 51334 0 79107 49101 192078 167088 24990 115.21 217
Note: Shareable UFC under Service is less for the States post GST since Centre will now share Service tax collection with the States thus Centre's
share in Service tax reduced as compared to pre GST regime and hence the shareable UFC.
Annexure: 10.9 (A)
(Para 10.6.4)
PC Revenue of the 18 major States due to the GST regime in UFC transfer (13-14)
@ 32% (13-14)
PRE GST REGIME POST GST REGIME
Sr. UFC Goods UFC Total UFC PC UFC Sharable Sharable Total PC Sharable PC PC Gain
States Popul.
No CED CVD Services tansfer transfer CGST CGST sharable CGST Rev. (%)
1 2 3 4 5 6 7 8 9 10 11 12 13 14
(4+5+6) (7/3) (9+10) (11/3) (12- (14/8)
1 Haryana 2.54 345 375 512 1233 486 863 384 1247 492 6 1.1%
2 Maharashtra 11.24 1713 1861 2543 6116 544 4279 1907 6186 550 6 1.1%
3 Gujarat 6.04 1002 1088 1487 3577 592 2503 1115 3618 599 7 1.1%
4 TN 7.21 1637 1778 2430 5845 810 4090 1822 5912 819 9 1.1%
5 HP 0.69 257 279 382 919 1338 643 286 929 1353 15 1.1%
6 Kerala 3.34 771 838 1145 2754 824 1927 859 2785 834 9 1.1%
7 Punjab 2.77 458 497 679 1634 589 1143 510 1653 596 7 1.1%
8 AP 8.46 2286 2483 3393 8161 965 5709 2545 8254 976 11 1.1%
9 Karnataka 6.11 1426 1549 2117 5092 833 3562 1588 5150 843 9 1.1%
10 WB 9.13 2393 2600 3553 8546 936 5978 2665 8643 947 11 1.1%
11 Rajasthan 6.85 1928 2095 2862 6885 1004 4817 2147 6964 1016 11 1.1%
12 Chhattis garh 2.55 814 884 1208 2906 1137 2033 906 2939 1150 13 1.1%
13 Odisha 4.20 1575 1710 2338 5622 1339 3933 1753 5686 1355 15 1.1%
14 MP 7.26 2346 2548 3482 8376 1153 5860 2611 8471 1166 13 1.1%
15 Jharkhand 3.30 923 1003 1370 3296 999 2306 1028 3334 1011 11 1.1%
16 Assam 3.12 1195 1298 1774 4268 1368 2986 1331 4317 1383 16 1.1%
17 UP 19.98 6483 7042 9623 23148 1158 16194 7217 23412 1172 13 1.1%
18 Bihar 10.41 3597 3907 5339 12843 1234 8985 4004 12989 1248 14 1.1%
19 Total 115 31150 33834 46237 111222 17313 77810 34678 112488 17510 197 1.1%
PC Revenue gain of the major States due to the GST regime in the UFC transfer @ 42%. (13-14)
1500
1000
500
0
Haryana
Maharashtra
Gujarat
TN
HP
Kerala
Punjab
AP
Karnataka
WB
Rajasthan
Chhattis garh
Odisha
MP
Jharkhand
Assam
UP
Bihar
Pre PC Post PC Gain PC
(Contd…)
Annexure: 10.9 (B)
(Para 10.6.4)
PC Revenue of the 18 major States due to the GST regime in UFC transfer (15-16)
@ 42% (15-16)
1 2 3 4 5 6 7 8 9 10 11 12 13
1 Haryana 2.54 745 620 945 2310 911 1426 586 2012 794 -117 -12.9%
2 Maharashtra 11.24 3794 3160 4913 11867 1056 7263 3049 10313 918 -138 -13.1%
3 Gujarat 6.04 2120 1765 2746 6631 1097 4057 1705 5762 953 -144 -13.1%
4 TN 7.21 2765 2303 3553 8621 1195 5293 2206 7498 1039 -156 -13.0%
5 HP 0.69 490 408 625 1523 2219 938 388 1326 1932 -287 -12.9%
6 Kerala 3.34 1718 1431 2187 5336 1597 3289 1357 4646 1391 -206 -12.9%
7 Punjab 2.77 1084 903 1376 3362 1212 2075 854 2929 1056 -156 -12.9%
8 AP 8.46 2959 2464 3808 9231 1091 5664 2364 8027 949 -142 -13.0%
9 Karnataka 6.11 3239 2698 4175 10112 1655 6200 2591 8792 1439 -216 -13.1%
10 WB 9.13 5034 4192 6427 15653 1715 9635 3989 13625 1493 -222 -13.0%
11 Rajasthan 6.85 3777 3145 4889 11811 1723 7229 3035 10264 1497 -226 -13.1%
12 Chhattis garh 2.55 2117 1763 2741 6621 2592 4052 1701 5753 2252 -340 -13.1%
13 Odisha 4.20 3190 2657 4107 9955 2372 6107 2549 8656 2062 -309 -13.0%
14 MP 7.26 5188 4320 6690 16198 2230 9930 4153 14083 1939 -291 -13.1%
15 Jharkhand 3.30 2157 1797 2769 6723 2038 4130 1719 5848 1773 -265 -13.0%
16 Assam 3.12 2276 1895 2919 7089 2272 4356 1812 6168 1976 -295 -13.0%
17 UP 19.98 12343 10280 15762 38385 1921 23627 9784 33410 1672 -249 -13.0%
18 Bihar 10.41 6642 5532 8474 20648 1984 12715 5260 17975 1727 -257 -12.9%
19 Total 115 61636 51334 79107 192078 30880 117987 49101 167088 26862 -4018 -13.0%
Note: Shareable UFC under Service is less for the States post GST since Centre will now share Service tax collection with the
States thus Centre's share in Service tax reduced as compared to pre GST regime and hence the shareable UFC
Comparative PC revenue capita gain/loss from UFC transfers in 15-16 vs 13-14

50
0
Haryana
Maharashtra
Gujarat
TN
HP
Kerala
Punjab
AP
Karnataka
WB
Rajasthan
Chhattis garh
Odisha
MP
Jharkhand
Assam
UP
Bihar
-50
-100
-150
-200
-250
-300
-350
PC Gain (13-14) PC Gain (15-16)

Annexure 10.10 (A)
(Para 10.6.4)
Per Capita Revenue of the States @ GST 18% for both Goods and Services (including UFC transfer @ 42% as per 14th FC) for 15-16
Pre GST Post GST @ 18% for both Goods and Services
Goods UFC Goods Services Goods Services
Total
UFC Total Rev. Shareable Shareable Total Total % Gain
VAT CST CED CVD ET Rev. PC SGST SGST PC Gain
SR. States Services CGST CGST Rev. Rev. PC PC
15-16
1 Har. 12459 3142 745 620 84 945 17995 7098 9767 1426 4710 586 16490 6505 -594 -8.4%
2 Mah. 39836 4730 3794 3160 658 4913 57091 5080 31230 7263 21110 3049 62652 5575 495 9.7%
3 Guj. 28076 4756 2120 1765 115 2746 39579 6549 22011 4057 7472 1705 35245 5831 -717 -10.9%
4 TN 32941 4182 2765 2303 147 3553 45891 6361 25825 5293 11988 2206 45311 6280 -80 -1.3%
5 HP 2061 321 490 408 1 625 3907 5691 1616 938 845 388 3787 5517 -174 -3.1%
6 Ker. 17562 383 1718 1431 1 2187 23282 6969 13768 3289 6128 1357 24542 7347 377 5.4%
7 Pun. 9399 510 1084 903 48 1376 13319 4801 7369 2075 3374 854 13671 4928 127 2.6%
8 AP 36035 2237 2959 2464 164 3808 47667 5636 28251 5664 5270 2364 41548 4912 -723 -12.8%
9 Kar. 22087 1864 3239 2698 216 4175 34280 5611 17316 6200 8311 2591 34418 5634 23 0.4%
10 WB 14214 1717 5034 4192 89 6427 31673 3470 11143 9635 9418 3989 34187 3745 275 7.9%
11 Raj. 15752 1615 3777 3145 88 4889 29266 4269 12349 7229 5078 3035 27691 4040 -230 -5.4%
12 Chht. 5579 1837 2117 1763 27 2741 14065 5506 4374 4052 1660 1701 11787 4614 -891 -16.2%
13 Odis. 6641 954 3190 2657 22 4107 17571 4186 5207 6107 2850 2549 16713 3982 -204 -4.9%
14 MP 10739 1159 5188 4320 65 6690 28162 3878 8419 9930 4157 4153 26659 3671 -207 -5.3%
15 Jhar. 5360 1372 2157 1797 14 2769 13469 4083 4202 4130 1849 1719 11899 3607 -476 -11.7%
16 Asm 4866 663 2276 1895 3 2919 12622 4045 3815 4356 2032 1812 12014 3850 -195 -4.8%
17 UP 26155 3567 12343 10280 542 15762 68649 3436 20505 23627 9823 9784 63738 3190 -246 -7.2%
18 Bih. 9626 60 6642 5532 55 8474 36552 3511 7547 12715 4910 5260 30432 2923 -588 -16.7%
19 Total 299389 35070 61636 51334 2340 79107 535038 90179 234712 117987 110985 49101 512786 86151 -4028 -4.5%
Comparative PC revenue capita gain/loss from goods & Services (including UFC transfers) in 15-16 vs 13-14
600
400
200
0
Har.
Mah.
Guj.
TN
HP
Ker.
Pun.
AP
Kar.
WB
Raj.
Chht.
Odis.
MP
Jhar.
Asm
UP
Bih.
-200
-400
-600
-800
-1000

Annexure 10.10 (B)
(Para 10.6.4)
Per Capita Revenue of the States @ GST 18% for both Goods and Services (including UFC transfer @ 42% as per 14th FC) for 13-14
(13-14)
13-14Haryana 9008 1761 345 375 52 512 12054 4755 7062 863 3931 384 12240 4828 73 1.5%
1 Maharashtra 34656 4769 1713 1861 736 2543 46278 4118 27170 4279 17683 1907 51039 4542 424 10.3%
2 Gujarat 21411 5291 1002 1088 134 1487 30413 5032 16786 2503 6391 1115 26795 4433 -599 -11.9%
3 TN 30255 3107 1637 1778 47 2430 39254 5441 23719 4090 9766 1822 39398 5461 20 0.4%
4 HP 1648 395 257 279 1 382 2962 4315 1292 643 677 286 2898 4222 -93 -2.1%
5 Kerala 14732 331 771 838 0 1145 17818 5334 11550 1927 4954 859 19289 5774 440 8.3%
6 Punjab 8593 525 458 497 27 679 10779 3885 6737 1143 2952 510 11342 4088 203 5.2%
7 AP 27891 2252 2286 2483 121 3393 38425 4543 21866 5709 4512 2545 34632 4095 -449 -9.9%
8 Karnataka 18549 2805 1426 1549 146 2117 26592 4353 14542 3562 6724 1588 26415 4324 -29 -0.7%
9 WB 12277 1469 2393 2600 70 3553 22362 2450 9625 5978 7999 2665 26267 2878 428 17.5%
10 Rajasthan 11901 1381 1928 2095 14 2862 20181 2944 9330 4817 4337 2147 20631 3010 66 2.2%
11 Chhattis garh 4201 928 814 884 23 1208 8058 3154 3293 2033 1394 906 7626 2985 -169 -5.4%
12 Odisha 5929 847 1575 1710 12 2338 12411 2957 4648 3933 2792 1753 13126 3127 171 5.8%
13 MP 9424 943 2346 2548 54 3482 18797 2588 7388 5860 3635 2611 19495 2684 96 3.7%
14 Jharkhand 3670 1188 923 1003 23 1370 8177 2479 2877 2306 1503 1028 7714 2338 -141 -5.7%
15 Assam 3773 559 1195 1298 3 1774 8603 2757 2958 2986 1648 1331 8923 2859 102 3.7%
16 UP 22711 1793 6483 7042 466 9623 48118 2408 17805 16194 8504 7217 49721 2488 80 3.3%
17 Bihar 7697 83 3597 3907 39 5339 24945 2396 6035 8985 3821 4004 22845 2195 -202 -8.4%
18 Total 248327 30428 31150 33834 1968 46237 396228 65909 194682 77810 93226 34678 400395 66331 423 0.6%
Note: See Annex 10.13 (B) for detailed computation of Revenue base for Goods and Services.
PC Revenue from goods, Services and UFC transfers to the 18 major States for 13-14 @ 18% in pre (VAT @ 12%) vs post (SGST @ 9%+ UFC
transfers) GST regime.
7000
6000
5000
4000
3000
2000
1000
0
-1000

Annexure 10.10 (C)
(Para 10.8.5)
Per Capita Revenue of the States @ GST 16% for both Goods and Services (including UFC transfer @ 42% as per 14th FC) for 15-16 and 13-14
Post GST @ 16% for both Goods and Services
Goods Services Goods Services
Shareable Shareable Total Rev. Gain Shareable Shareable Total Rev.
SGST SGST Total Rev. Gain SGST SGST Total Rev. Gain Gain PC
SR. States CGST CGST PC PC CGST CGST PC
15-16 13-14
1 Haryana 8682 1426 4293 586 14988 5912 -3008 -1186 6277 863 3594 384 11119 4386 -935 -369
2 Maharashtra 27760 7263 19240 3049 57313 5100 222 20 24151 4279 16166 1907 46502 4138 225 20
3 Gujarat 19565 4057 6811 1705 32138 5317 -7441 -1231 14921 2503 5842 1115 24381 4034 -6032 -998
4 TN 22955 5293 10926 2206 41379 5735 -4512 -625 21084 4090 8930 1822 35926 4980 -3328 -461
5 HP 1436 938 771 388 3533 5147 -374 -544 1148 643 619 286 2697 3928 -265 -386
6 Kerala 12238 3289 5586 1357 22470 6726 -811 -243 10266 1927 4530 859 17582 5263 -236 -71
7 Punjab 6550 2075 3075 854 12554 4525 -766 -276 5988 1143 2700 510 10340 3727 -439 -158
8 AP 25112 5664 4804 2364 37942 4486 -9725 -1150 19436 5709 4125 2545 31815 3762 -6610 -782
9 Karnataka 15392 6200 7574 2591 31758 5198 -2522 -413 12926 3562 6148 1588 24223 3965 -2369 -388
10 WB 9905 9635 8585 3989 32115 3518 442 48 8555 5978 7314 2665 24512 2686 2150 236
11 Rajasthan 10977 7229 4629 3035 25870 3774 -3397 -495 8293 4817 3966 2147 19223 2804 -958 -140
12 Chhattisgarh 3888 4052 1513 1701 11154 4367 -2910 -1139 2927 2033 1275 906 7141 2795 -917 -359
13 Odisha 4628 6107 2598 2549 15882 3784 -1689 -402 4132 3933 2553 1753 12371 2947 -40 -9
14 MP 7484 9930 3789 4153 25355 3491 -2807 -386 6567 5860 3324 2611 18362 2528 -435 -60
15 Jharkhand 3735 4130 1685 1719 11269 3416 -2200 -667 2558 2306 1374 1028 7265 2202 -912 -276
16 Assam 3391 4356 1852 1812 11411 3657 -1211 -388 2629 2986 1507 1331 8453 2709 -150 -48
17 UP 18227 23627 8951 9784 60588 3032 -8060 -403 15827 16194 7773 7217 47011 2353 -1107 -55
18 Bihar 6708 12715 4476 5260 29159 2801 -7393 -710 5364 8985 3494 4004 21847 2099 -3098 -298
19 Total 208633 117987 101158 49101 476879 4139 -58159 -505 173050 77810 82867 34678 368405 3198 -27823 -242
PC Revenue from goods, Services and UFC transfers to the 18 major States PC Revenue from goods, Services and UFC transfers to the 18
for 15-16 @ 16% in pre (VAT @ 12%) vs post (SGST @ 8%+ UFC transfers) major States for 13-14 @ 16% in pre (VAT @ 12%) vs post
GST regime. (SGST @ 8%+ UFC transfers) GST regime.
8000
8000
7000 7000
6000 6000
5000 5000
4000 4000
3000 3000
2000 2000
1000 1000
0 0
Har.
Mah.
Guj.
TN
HP
Ker.
Pun.
AP
Kar.
WB
Raj.
Chht.
Odis.
MP
Jhar.
Asm
UP
Bih.
Har.
Mah.
Guj.
TN
HP
Ker.
Pun.
AP
Kar.
WB
Raj.
Chht.
Odis.
MP
Jhar.
Asm
UP
Bih.
-1000 -1000
-2000 -2000

Annexure 10.11
(Para 10.8.4)
State RNRs – Kavita Rao, NIPFP (20009)
Revenue Neutral Rate Calculation: With three Rates Structure
(without CST Revenue) (Percent)
Finance Accounts Data Empowered Committee data
Scenario I Scenario II Scenario I Scenario II
States
Single Two Single Two Single Two Single Two
rate rates rate rates rate rates rate rates
Andhra Pradesh 7.81 10.52 7.42 9.39 7.64 10.01 7.15 8.5
Arunachal Pradesh 8.06 11.19 7.36 8.92 8.15 11.45 7.62 9.89
Assam 8.62 12.64 8.26 11.74 8.79 13.28 8.13 11.42
Bihar 10.2 19.21 8.72 14.15 10.02 18.12 8.69 13.83
Chhattisgarh 7.63 10.03 7.29 9.05 7.62 10.02 7.29 9.04
Delhi 7.02 8.05 6.38 5.6 7.33 9.08 6.79 7.27
Goa 9.58 15.4 9 13.96 9.76 16 9.08 14.3
Gujarat 8.02 11.07 7.52 9.6 8.04 11.12 7.56 9.72
Haryana 7.3 9.07 6.83 7.53 7.42 9.41 6.98 8.05
Himachal Pradesh 7.41 9.36 6.93 7.81 7.48 9.57 7.02 8.15
Jharkhand 7.17 8.68 6.69 7.06 7.15 8.63 6.67 6.98
Jammu & Kashmir 8.35 11.96 7.98 10.95 8.37 11.97 8.05 11.15
Kerala 7.67 10.12 7.25 8.85 7.49 9.57 6.98 7.92
Karnataka 7.64 10.05 7.24 8.85 7.71 10.24 7.34 9.15
Madhya Pradesh 9.19 14.32 8.61 12.84 9.25 14.53 8.63 12.91
Maharashtra 7.32 9.09 6.79 7.3 7.34 9.14 6.82 7.38
Manipur 6.67 7.01 6.07 4.62 7.12 8.52 6.63 6.84
Meghalaya 7.58 9.88 7.21 8.81 7.02 8.18 6.48 6.26
Mizoram 6.2 5.15 5.5 1.82 6.51 6.4 5.87 3.68
Nagaland 3.58 -15.55 2.79 -29.31 6.74 7.21 6.13 4.79
Orissa 8.77 13.21 8.16 11.49 8.77 13.19 8.16 11.5
Pondicherry
Punjab 8.36 12.01 7.89 10.69 8.34 12 7.73 10.18
Rajasthan 7.82 10.52 7.35 9.12 7.8 10.47 7.33 9.04
Sikkim 10.58 17.76 10.17 16.92 11.93 21.91 11.2 20.46
Tamil Nadu 7.94 10.85 7.45 9.41 7.76 10.31 7.13 8.23
Tripura 6.89 7.77 6.34 5.73 7.09 8.42 6.58 6.68
Uttar Pradesh 7.9 10.76 7.44 9.39 7.89 10.72 7.42 9.32
Uttarakhand 7.01 8.12 6.45 6.12 7.37 9.28 6.93 7.88
West Bengal 7.18 8.48 6.47 5.76 7.2 8.56 6.5 5.9
Average Rate 7.81 10.5 7.31 8.94 7.78 10.4 7.25 8.74
Note: Scenario I we exclude the base of computer and related activities and financial services. As per the
finance accounts data, the RNR works out to be lower than the Empowered Committee data in all the scenarios.
When we use the finance accounts data, in Scenario I the single rate for all states works out to be 9.7 percent.
In the three rate structure in scenario I, the general rate works out to be 16.11 percent.
Scenario II has a higher base than Scenario I. The Scenario II estimates the taxable base by assuming that 50
percent of the computer and related activities would be a part of the taxable base adjusted for input tax credit.

(This fraction is based on NASSCOM’s estimates of exports as a percentage of total supply of IT related
services). This scenario also includes financial services obtained from the prowess database. This incremental
base has been adjusted for input tax credit. Depending on the nature of the financial services to be brought under
GST would also alter the base. However, it needs to be emphasized that with negative lispt coming in, most of
the services considered in this estimates should be subject to taxation.
In case of Scenario II which has a higher base than Scenario I, we get lower RNR in both single and three rates
structure. As per the Empowered Committee data, the RNR in a three rate structure in Scenario I and II works
out to be 17.10 percent and 15.44 percent respectively.
It is also to be noted that there has been wide variations in rates across states and there are many states whose
RNR falls below the average rate and in many states the RNR lies above the average rate. In case of Bihar there
is a serious data issue that needs to be sorted out. As per the Finance Accounts data of Bihar, Bihar’s CST in
2009-10 was 1227.80 crore. However, as per the EC data the CST was 38 crore. Because of the high CST in
Finance Accounts, we are getting abnormally high RNR for Bihar when we use the Finance Accounts data.
Revenue Neutral Rate Calculation: With Two Rates Structure

(Without CST Revenue)
Finance Accounts Data Empowered Committee data
Scenario I Scenario II Scenario I Scenario II
States
Single Two Single Two Single Two Single Two
rate rates rate rates rate rates rate rates
Andhra Pradesh 7.81 9.94 7.42 8.97 7.64 9.44 7.15 8.32
Arunachal Pradesh 8.06 10 7.36 8.49 8.15 10.45 7.62 9.18
Assam 8.62 11.8 8.26 10.77 8.79 11.54 8.13 9.98
Bihar 10.2 12.8 8.72 10.08 10.02 12.75 8.69 10.2
Chhattisgarh 7.63 9.61 7.29 8.76 7.62 9.61 7.29 8.75
Delhi 7.02 8.03 6.38 6.77 7.33 8.73 6.79 7.57
Goa 9.58 13.4 9 11.82 9.76 13.53 9.08 11.8
Gujarat 8.02 10.2 7.52 9.02 8.04 10.28 7.56 9.12
Haryana 7.3 8.76 6.83 7.71 7.42 9.04 6.98 8.03
Himachal Pradesh 7.41 8.96 6.93 7.88 7.48 9.14 7.02 8.09
Jharkhand 7.17 8.48 6.69 7.42 7.15 8.44 6.67 7.38
Jammu & Kashmir 8.35 11.1 7.98 10.12 8.37 11.26 8.05 10.4
Kerala 7.67 9.59 7.25 8.57 7.49 9.09 6.98 7.95
Karnataka 7.64 9.56 7.24 8.58 7.71 9.74 7.34 8.81
Madhya Pradesh 9.19 12.6 8.61 11.07 9.25 12.58 8.63 11
Maharashtra 7.32 8.74 6.79 7.59 7.34 8.78 6.82 7.63
Manipur 6.67 7.39 6.07 6.25 7.12 8.36 6.63 7.3
Meghalaya 7.58 9.47 7.21 8.57 7.02 8.12 6.48 7
Mizoram 6.2 6.48 5.5 5.31 6.51 7.07 5.87 5.9
Nagaland 3.58 2.91 2.79 2.12 6.74 7.51 6.13 6.35
Orissa 8.77 11.6 8.16 10.1 8.77 11.59 8.16 10.1
Pondicherry
Punjab 8.36 11 7.89 9.77 8.34 10.7 7.73 9.27
Rajasthan 7.82 9.84 7.35 8.73 7.8 9.79 7.33 8.67
Sikkim 10.58 16 10.17 14.72 11.93 18.06 11.2 16
Tamil Nadu 7.94 10.1 7.45 8.9 7.76 9.49 7.13 8.13
Tripura 6.89 7.85 6.34 6.73 7.09 8.28 6.58 7.21
Uttar Pradesh 7.9 10 7.44 8.91 7.89 9.99 7.42 8.86
Uttarakhand 7.01 8.08 6.45 6.94 7.37 8.94 6.93 7.92
West Bengal 7.18 8.28 6.47 6.91 7.2 8.33 6.5 6.97
Average Rate 7.81 9.77 7.31 8.59 7.78 9.67 7.25 8.5

Annexure 10.12 (A)
(Para 10.8.4)
Computation of RNR (%) of Major States based on 2013-14 data. SGST@8% (MSE Methodology)
High Income States Middle Income States Low Income States
Mahara- Chhattis-
Sl. No. Details of Taxes Haryana Gujarat TN HP Kerala Punjab AP Karnataka WB Rajasthan Odisha MP Jharkhand Assam UP Bihar
shtra garh
13-14 13-14 13-14 13-14 13-14 13-14 13-14 13-14 13-14 13-14 13-14 13-14 13-14 13-14 13-14 13-14 13-14 13-14
I Part A of Formula
A VAT and Sales Tax excluding tax on 15014 57761 35685 50425 2746 24554 14322 46485 30914 20462 19835 7001 9882 15706 6117 6289 37852 8418
petroleum products & liquor
B CST (Including ITC adjustments) 1761 4769 5291 3107 395 331 525 2252 2805 1469 1381 928 847 943 1188 559 1793 83
C Entertainment Tax(Unless levied by local bodies) 52 736 134 47 1 0 27 121 146 70 14 23 12 54 23 3 466 39
F Total revenue to be raised under SGST 16827 63279 41110 53579 3142 24886 14874 48858 33866 22002 21229 7953 10741 16704 7328 6851 40111 8550
Tax attributable to Standard rate (0.7):(A*0.7) 10509 40433 24980 35298 1922 17188 10025 32540 21640 14323 13884 4901 6917 10994 4282 4402 26496 5892
Tax attributable to Lower rate (0.3):(A*0.3) 4504 17328 10706 15128 824 7366 4297 13946 9274 6139 5950 2100 2965 4712 1835 1887 11356 2525
II Part-B of Formula
Tax base with respect to Standard rate (A*0.7/0.1425)73751 283737 175296 247704 13491 120615 70352 228348 151859 100514 97434 34393 48543 77154 30047 30891 185940 41350
Tax base with respect to Lower rate 98773 380005 234771 331746 18069 161538 94222 305823 203383 134617 130492 46061 65013 103331 40242 41372 249027 55380
0.08 SGST on Standard Rate (R1)-@8.00% of base 5900 22699 14024 19816 1079 9649 5628 18268 12149 8041 7795 2751 3883 6172 2404 2471 14875 3308
0.06 SGST on Lower Rate (R2)-@ 6.00% of base. 5926 22800 14086 19905 1084 9692 5653 18349 12203 8077 7829 2764 3901 6200 2415 2482 14942 3323
Total SGST Revenue on Goods 11826 45499 28110 39721 2163 19341 11281 36617 24352 16118 15624 5515 7784 12372 4818 4954 29817 6631
III Part C of the formula
Service Tax revenue (All India) 154778 154778 154778 154778 154778 154778 154778 154778 154778 154778 154778 154778 154778 154778 154778 154778 154778 154778
Share of the State in Service as per share of the 5371 24053 8683 13357 929 6795 4040 6145 9163 10943 5943 1904 3823 4953 2059 2260 11500 5232
States GSDP(Service) in All India
GDP(Service).
Service Tax Base(2013-14 @ 12.00%) 44757 200438 72359 111311 7739 56623 33664 51206 76357 91190 49529 15865 31858 41274 17155 18831 95833 43596
0.09 Service Tax revenue -R3 -@9% of base 4028 18039 6512 10018 697 5096 3030 4609 6872 8207 4458 1428 2867 3715 1544 1695 8625 3924
IV Part D of the formula
Special CVD on Import (All India revenue): Z 25629 25629 25629 25629 25629 25629 25629 25629 25629 25629 25629 25629 25629 25629 25629 25629 25629 25629
Z Special CVD base (Z/0.04) 640737 640737 640737 640737 640737 640737 640737 640737 640737 640737 640737 640737 640737 640737 640737 640737 640737 640737
share of the State in Special CVD as per share 28705 117127 86564 68174 6856 12366 22426 19735 37291 25437 27936 10893 14160 18069 12815 5382 42417 6023
of The States GSDP(Mfr.) in All India
share of imports used for final consumption (50%) 14353 58563 43282 34087 3428 6183 11213 9867 18645 12719 13968 5446 7080 9034 6407 2691 21208 3011
Revenue from CVD base.R 4 (SGST @10%) 1435 5856 4328 3409 343 618 1121 987 1865 1272 1397 545 708 903 641 269 2121 301
V Total SGST Revenue (R1+R2+R3+R4) 17290 69395 38950 53148 3203 25056 15433 42212 33088 25597 21479 7488 11360 16990 7003 6918 40563 10856
Loss(L)=( F-V) -463 -6116 2160 431 -61 -170 -559 6646 777 -3596 -249 465 -619 -287 325 -67 -452 -2306
Revenue to be raised from Standard Rate 5437 16583 16183 20247 1018 9479 5069 24914 12926 4446 7545 3217 3265 5886 2729 2404 14424 1002
R=(L)+(R1)
Tax Base on Standard Rate 73751 283737 175296 247704 13491 120615 70352 228348 151859 100514 97434 34393 48543 77154 30047 30891 185940 41350
VI RNR at Standard Rate =R/B*100 7.37 5.84 9.23 8.17 7.55 7.86 7.21 10.91 8.51 4.42 7.74 9.35 6.73 7.63 9.08 7.78 7.76 2.42
VII RNR at (Standard + Lower) Rate 6.59 5.93 7.38 6.93 6.66 6.79 6.52 8.10 7.07 5.33 6.75 7.43 6.31 6.70 7.32 6.76 6.75 4.47
=R/B*100
VIII Combined RNR for 18 States 7.79%
Note:-(i)State wise(except Bihar) data - State Finance,RBI-2015-16.(ii) Data of Bihar based on Eco. Survey-2015-16. (iii)Computation of RNR based on Methodology as adopted by Madras School of Economics - 2012.

Annex 10.12 (B)
(Para 5.8.4)
Basis for computations as per MSE approach:
States RNRs based on the MSE format: See Annexure 10.12 (A) for the calculations, basis of which, is as
follows:
(a) Part A of the Formula (Present Revenue which need to be protected under SGST -
i. Data of Sales/VAT includes VAT, Entry Tax, Luxury Tax etc. and Cesses & Surcharges. Data for the
States taken from RBI State Finance FY 2013-14.
ii. Data of Lottery, Luxury and Purchase Tax are not available separately for States.
(b)Part B of the Formula (SGST Base and SGST revenue from goods):
i. Revenue Collected at standard rate ( @12.5%) and lower rate(@ 5%) are in the ratio of
70(K): 30(1-K) as per assumption of MSE.
ii. Since the Central Excise Duty at 12% cascades in to VAT, a cascading factor is also applied.
iii. The VAT rate including the cascading factor is: (0.125*0.14).
iv. Thus, the overall rate is [0.125*(1+0.14) =0.1425] for goods subjected to VAT rate of 12.5% and
[0.04*(1+0.12) =0.0456] for goods subject to 4% VAT.
v. If the base is B, Tax rate is r and revenue is R, R=r*B or B=R/r
vi. Thus GST Base = VAT rev. [k/0.1425+ (1-k)/0.0456].
vii. MSE has assumed 10% as higher and 6% as lower rate in GST regime for calculation of SGST revenue
(R1 & R2) from the respective base
(C) Part C of the Formula (Potential SGST revenue from Services):

i. Service revenue of All India taken from Union Budget and distributed among states as their share in All
India GDP (service).
ii. Service Tax Base of States computed using the tax rate@ 12.36%
iii. In computation of Service Tax revenue (2008-09), MSE added 20% extra rev. considering the expected
increase, But this would not be valid for 13-14 since all services included (excluding negative list) in
Service
(D)Part D of the Formula:

i. Special Counter Vailing Duty (SCVD) of All India has been taken from Union Budget.
ii. State wise share of SCVD computed on the basis of states share in All India (Manufacturing) and Tax
Base, computed using tax rate@ 4%.
Modification:
i. Consumption of Special CVD @ 10% assumed by the MSE is seemed to be unrealistic, therefore @
50% consumption has been taken in to consideration.
ii. Service tax Rate has been changed (SGST-9%+CGST-9% = 18%) because in the FY-08-09, it was in
revolving stage
iii. Column D-H are not included as most of the cell have zero values.

RNR computation
Post GST(13-14) @ 18% Goods and Services
RNR @ 16% GST RNR @ 18% GST
SGST SGST SGST (Goods & Rev. P C Revenue to be States Revenue to States
(Goods) (Services) Services) Gain gain (Rs.) raised RNR be raised RNR
18 19 20 21 23 24 25 26 27
7062 3931 10994 172 68 10821 8.8% 10821 8.9%

27170 17683 44853 4691 417 40161 8.0% 40161 8.1%
16786 6391 23177 -3659 -605 26836 10.3% 26836 10.4%
23719 9766 33486 77 11 33409 8.9% 33409 9.0%
1292 677 1969 -74 -108 2043 9.2% 2043 9.3%
11550 4954 16504 1440 431 15064 8.1% 15064 8.2%
6737 2952 9689 544 196 9145 8.4% 9145 8.5%
21866 4512 26378 -3887 -460 30264 10.3% 30264 10.3%
14542 6724 21266 -234 -38 21500 9.0% 21500 9.1%
9625 7999 17624 3807 417 13817 7.0% 13817 7.1%
9330 4337 13667 372 54 13296 8.7% 13296 8.8%
3293 1394 4687 -465 -182 5152 9.8% 5152 9.9%
4648 2792 7440 652 155 6788 8.1% 6788 8.2%
7388 3635 11023 602 83 10421 8.4% 10421 8.5%
2877 1503 4380 -501 -152 4881 9.9% 4881 10.0%
2958 1648 4606 271 87 4335 8.4% 4335 8.5%
17805 8504 26309 1339 67 24970 8.5% 24970 8.5%
6035 3821 9856 2036 196 7819 7.1% 7819 7.1%
194682 93226 287907 7183 62 280724 8.8% 280724 8.8%
Annexure 10.13 (B)
(Para 10.8.4)
State's losses or gains (SGST @ 16% & 18%) for both Goods & Services - (2015-16) RE
States Total ST/ VAT Goods Base CST ET ET Base Total Rev. ET Base Service Total Base SGST SGST SGST Total Pouln. PC
ST/VAT (ex.Petrol & @ 11.48% Rev. Rev @34% (G+S) Base Service (Goods) (Services) (Goods & Gain (Crore) Gain
1 Tob.60%) 4 7 10 13 Services)
2 3 5 6 8 11 12 14 15 16 17 18
Haryana 21858 12459 108527 3142 84 280 15685 280 53385 53665 8682 4293 12975 -2710 2.54 -1069
Maharashtra 69887 39836 347000 4730 658 1463 45224 1463 239041 240503 27760 19240 47000 1777 11.24 158
Gujarat 49256 28076 244566 4756 115 576 32948 576 84557 85133 19565 6811 26376 -6572 6.04 -1087
HIS
Tamil Nadu 57791 32941 286942 4182 147 981 37270 981 135592 136573 22955 10926 33881 -3389 7.21 -470
HP 3616 2061 17953 321 1.19 4 2383 4 9630 9634 1436 771 2207 -176 0.69 -257
Kerala 30810 17562 152977 383 0.71 2 17946 2 69820 69822 12238 5586 17824 -122 3.34 -36
Punjab 16490 9399 81875 510 48 140 9957 140 38298 38439 6550 3075 9625 -332 2.77 -120
AP 63220 36035 313897 2237 164 482 38436 482 59562 60044 25112 4804 29915 -8521 8.46 -1007
Karnataka 38750 22087 192400 1864 216 721 24168 721 93959 94679 15392 7574 22966 -1202 6.11 -197
MIS
West Bengal 24937 14214 123816 1717 89 295 16020 295 107018 107314 9905 8585 18490 2470 9.13 271
Rajasthan 27635 15752 137212 1615 88 293 17455 293 57565 57858 10977 4629 15606 -1849 6.85 -270
Chhattis garh 9787 5579 48596 1837 27 81 7444 81 18835 18916 3888 1513 5401 -2043 2.55 -800
Odisha 11651 6641 57851 954 22 87 7617 87 32387 32473 4628 2598 7226 -391 4.20 -93
MP 18841 10739 93547 1159 65 325 11964 325 47032 47357 7484 3789 11272 -691 7.26 -95
Jharkhand 9403 5360 46689 1372 14 13 6746 13 21051 21064 3735 1685 5420 -1326 3.30 -402
LIS
Assam 8537 4866 42386 663 3 9 5532 9 23146 23155 3391 1852 5243 -289 3.12 -93
Uttar Pradesh 45886 26155 227832 3567 542 1549 30264 1549 110341 111891 18227 8951 27178 -3086 19.98 -154
Bihar 16888 9626 83852 60 55 110 9741 110 55840 55950 6708 4476 11184 1443 10.41 139
All India 525243 299389 2607915 35070 2340 7412 336799 7412 1257059 1264470 208633 101158 309791 -27008 115.21 -234
Note:
(i) Col.(2)ST/VAT, Col. (5) CST and Col. (7) Entertainment Tax from RBI, State Finances-RBI . Only Economic Survey of Bihar. for Bihar.
(ii) Col.3-60% of Col.2(excluding POL) .Actual contribution of POL in 13-14 is 40%., as per CAG report (13-14).
(iii) Base of Goods(Col.4) =Rev. in Col.3/11.48*100
(a)10.25% (Wtd.avg.ofST/VAT i.e. 70% at Higher rate of 12.5% & 30% at Lower rate of 5%
(b)Elimination of cascading effect of CED=0.1025*(1+0.12)*100=11.48%
(iv) Base of Entertainment(Col.7)- Tax rate of states is available and for others @34% i.e. weighted average of available tax rate.
(v) Col.9-SGST,.from goods= Col.4*9/100
(vi) State Tax base of Services(Col.12)=Base of ET+Tax base of Services (All India) * share ofthe State in services in GDP @12% -Table-10.2 (A)
(vii)SGST(Services) (Col.(13)=Col.12*9/100
(viii) Total SGST Col.14= Col.9+Col.13

Post GST(15-16) @ 18% Goods and Services RNR computation
SGST (Goods) SGST (Services) SGST Total Populn. PC Revenue to Revenue to States
(Goods Gain (Crore) gain (Rs.) States RNR
be raised be raised RNR
20 & 23 25 25 26 27 28
19 21 22
9767 4830 14597 -1088 2.54 -48 15685 9.7% 15685 9.8%
31230 21645 52875 7652 11.24 942 45224 7.7% 45224 7.8%
22011 7662 29673 -3275 6.04 -169 32948 10.0% 32948 10.1%
25825 12292 38116 846 7.21 473 37270 8.8% 37270 8.9%
1616 867 2483 99 0.69 375 2383 8.6% 2383 8.7%
13768 6284 20052 2106 3.34 1042 17946 8.1% 17946 8.1%
7369 3459 10828 871 2.77 578 9957 8.3% 9957 8.3%
28251 5404 33655 -4782 8.46 -210 38436 10.3% 38436 10.3%
17316 8521 25837 1669 6.11 554 24168 8.4% 24168 8.5%
11143 9658 20802 4782 9.13 633 16020 6.9% 16020 7.0%
12349 5207 17556 101 6.85 196 17455 8.9% 17455 9.0%
4374 1702 6076 -1368 2.55 -362 7444 11.0% 7444 11.1%
5207 2923 8129 513 4.20 243 7617 8.4% 7617 8.5%
8419 4262 12681 718 7.26 213 11964 8.5% 11964 8.6%
4202 1896 6098 -648 3.30 -69 6746 10.0% 6746 10.0%
3815 2084 5899 366 3.12 237 5532 8.4% 5532 8.5%
20505 10070 30575 311 19.98 117 30264 8.9% 30264 9.0%
7547 5036 12582 2841 10.41 341 9741 7.0% 14024 10.1%
234712 113802 348515 11716 115.21 304 336799 8.7% 341082 8.9%

Annexure 10.14
(Para 10.8.6)
Maximum rates notified for GST compensation Cess collection
Source: The Goods and Services Tax (Compensation to States) Act, 2017

Annexure 11.1
(Para 11.3.1)
Effects on prices of introduction of VAT in some countries( )
Immediate Price
Change
Date VAT Taxes Mainly Replaced Designed Effect General Attributed Other Any other Concurrent Price
Introduced on Revenue (%) to VAT % Concurrent Tax Changes Controls
Argentina Jan. 1975 Wholesale sales tax Equal yield 37.2 Minor Changes tax
Provincial Utility rates Yes,but
changes increased;devaluation relaxed
Belgium Jan. 1971 Cascade wholesale tax Equal yield 2.6 Nil Increased Wages Yes
Brazil Jan. 1967 State sales and municipal Equal yield 15.8 Nil No
industrial taxes
Denmark Jan. 1967 Wholesale tax Increase 8 5 Lower Income Increased transfers and No
Tax increased wages
France Jan. 1968 Simpler VAT Equal yield 2.1 1 Tax Exemption Increased wages Yes,after
abolished and IT VAT
adjustements introduced
Germany Jan. 1968 Cascade retail tax Equal yield 1.5 0.6 Monitored
Indonesia Apr. 1985 Production tax Equal yield 3.5 Nil No
Ireland Nov. 1972 Wholesale and retail sales Equal yield 5.5 Nil Some tariff Monitored
tax reduction
Israel Jan. 1967 Various sales taxes Increase 17.9 9 Increased wages and No
tax allowance
Italy Jan. 1973 Central and local Equal yield 6.3 Nil Increased Wages No
government sales tax
Mexico Jan. 1980 Cascade production tax Equal yield or Lower border VAT No
increase
Netherlands Jan. 1969 Cascade wholesale tax Equal yield 5.2 1.5 Lower IT Increased wages Yes
Norway Jan. 1970 Sales taxes on 65% of Loss 7.8 5.8 Reduced IT Increased transfers and Yes
consumption. wages
Note:-IT=Income Tax , (ii)RST= Retail Sales Tax Cont..
(ii)
Spain Jan. 1986 Cascade sales tax Equal yield 2.8 2 Major Administraive Monitoring
changes
Sweden Jan. 1969 Retail sales tax Equal yield 1.6 Nil 1 % Payroll tax No
to offset lost
revenue
Turkey Jan. 1985 Nine production taxes and Equal yield 10 10 Wage earners rebate No
duties and vouchers
UK Apr. 1973 Multirate wholesale tax Loss 4.9 0.7 Selective Monitoring
employement tax
removed

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"Practical considerations influence the form, shape

Bihar State Planning Board

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Indirect Taxes to be subsumed in GST

 Central Excise Duty  VAT/ Sales Tax

Why GST? GST and Rates

Part – I : Main document

1.1 Perspectives of taxation

Box 1.1: Deadweight loss

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Table 1.1: Classification of taxes

State Govt. Central Govt.

 Direct Taxes:  Progressive Taxes:  Direct Taxes (Income):  Direct Taxes:

*See Annex 1.1 (A) & (B) for a theoretical exposition.

1.3 Design and effects of taxation:

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Box 1.2: Tax Evolution and Efficiency

1.3.4 Equivalencies of VAT with other taxes :

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Box 1.3 : Shifting to VAT from income taxes

1.3.6 Desirability of tax on consumption in addition to tax on income: inspite of their

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1.5 VAT and the indirect taxation system:

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1.5.3 Why VAT (see Annex 1.7 also):

B. The opposition to a U.S. VAT is summed up in five points:

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Sub- Central EU (Plus North Africa

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GNP (Gross Product) variant NNP (Income) variant Consumption variant

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Addition method Subtraction method*

1. Direct (Accounts) 2. Indirect (Accounts) 3. Direct (Accounts) 4. Indirect (invoice

VAT = t (wages + VAT = t (wages) + t VAT = t (output VAT = t (output) - t

1.5.9 Alternative models of the VAT system:

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1.6 Is VAT inherently regressive (Le, 2003) :

(ii) The conventional definition of regressivity/progressivity becomes increasingly question-

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1.7 Revenue productivity and Taxation reforms in India:

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4.00 Direct (State)

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500000 Graph 1.3 : Revenue from major taxes of GoI

Source: Union Budget

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120000 Graph 1.6 : Indirect Taxes of All States (excluding VAT/ST)

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2.1 Taxation powers of the Centre and the States: