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Goods & Service Tax



Goods & Service Tax

Executive Summary

1. The taxation of goods and services in India has, hitherto, been characterised as a cascading and distortionary tax on production resulting in mis-allocation of resources and lower productivity and economic growth. It also inhibits voluntary compliance.  Therefore, it is necessary to replace the existing indirect tax system by a new regime which would foster the achievement of the following objectives:
(a) The incidence of tax falls only on domestic consumption;
(b) The efficiency and equity of the system is optimized;
(c) There should be no export of taxes across taxing jurisdictions;
(d) The Indian market should be integrated into a single common market; 
(e) It  enhances the cause of cooperative federalism.       (Para 2.1)

2. A well designed 'value added tax on all goods and services (GST) is the most elegant method of eliminating distortions and taxing consumption.  Under this structure, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax essentially 'sticks' on final consumption within the taxing jurisdiction.  (Para 2.2)

3. The 'flawless' GST recommended by us comprises of the following elements:
     i. It should be a dual levy imposed concurrently by the Centre and the States, but independently to promote cooperative federalism.  (Para 2.4)

     ii. Both the Central Goods and Services Tax (CGST) and the State Goods and Services Tax (SGST) should be levied on a common and identical base. (Para 2.4)

    iii. The Centre and the States should adopt a consumption-type GST1, that is, there should be no distinction between raw materials and capital goods in allowing input tax credit.    (Para 2.7)

1 Reference to GST in this Report includes both CGST and SGST

   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)

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 lakh2 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)

2 The limit of Rs 40 lakh is based on the consideration that dealers with turnover of Rs 40 lakh or more are subject to tax audit under the Income Tax Act, 1961 and therefore they would suffer fromany additional burden in terms of documentation under the GST.

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.
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 CGST3:
                        a. Central Excise Duty (including Additional Excise Duties);
                        b. Service Tax;
                        c. Additional Customs Duty (commonly referred to as 'CVD');
                        d. Surcharges and all cesses

3 This is consistent with the proposal of the EC in their Discussion paper dated 30th April,2008.(Para 2.11)

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:
i.  Stamp duty;
ii. Taxes on Vehicles;
iii. Taxes on Goods and Passengers; and 
iv.Taxes and duties on electricity.     (Para 2.11)

xxv. Any amount collected through these taxes on the SIN goods should not be subsumed either in the CGST or the SGST.  Similarly any amount which is collected as tax/fee/charge/cess which is essentially in the nature of a user charge for supply of goods and services (including environmental goods and services) also should not 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)

4. The power sector must form an integral part of the comprehensive GST base recommended by us over which both the Central and State Governments would have concurrent jurisdiction. The tax regime for the power sector should be the same as in the case of any other normal good. The electricity duty levied by the States should be subsumed
in the SGST.  Article 278 and Article 288 of the Constitution should be amended to enable levy of GST on supply of electricity to Government at all levels like any other normal goods. (Para 2.35)

5. The tax on vehicles and the tax on goods and passengers levied by the State Governments should be subsumed in the GST.  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 recommended by us over which both the Central and State Governments would have concurrent jurisdiction. The tax regime for the transport equipments and transport services should be the same as in the case of any other normal goods. (Para 2.38)

6. The consumption of financial services should be comprehensively taxed under the GST framework on the basis of the full taxation method.(Paras 2.39 to 2.41)

7. The real estate sector should be integrated into the GST framework by subsuming the stamp duty on immovable properties levied by the States to facilitate input credit and eliminate cascading effect. The new GST regime for immovable property transactions and real estate services should be designed on the lines of the comprehensive taxation method. Therefore, the new regime would comprise of the following elements:  -

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

c. The adjustment for inflation may be made on the basis of the same inflation index as provided for the purposes of determination of capital gains under the Income-tax Act, 1961. 

d. The new regime will also be subject to the threshold exemption of Rs.10,00,000/- for small businesses thereby eliminating the problem of excessively large number of landlords seeking GST registration.

e. Immovable property will also include land and, therefore, the new 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 input tax credit in the same manner as other inputs used in construction. 

f. The State Governments would continue to perform essential asset registry functions, and enforces property rights associated with them. These functions are comparable to those of a depository on the markets. The registration fees can be interpreted as user charges for these records keeping functions - which justify small charges. The imposition of large scale indirect taxes through registration and stamp duties constitutes a case of 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.
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. (Paras 2.42 to 2.48)

8. In the context of the GST, it is necessary to resolve the problem relating to the treatment of inter-state sales/transfers in a manner that the incidence of the tax falls on the consumption of commodities without any distortionary cascading effect and the revenue accrues to the State where the final consumer is located.  After analysing the various Models, we recommend a Modified Bank Model, which comprises, inter alia, of the following functional components:-

 (i) In the course of inter-state B2B supply, the seller in the origin State shall collect the SGST leviable on the transaction from the buyer in the destination State as if the sale was within the origin State.    

(ii) The seller would 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 explained in para 3.12.

9. It is now well-recognised that tax administration is tax policy. An inefficient tax administration will not be able to provide the requisite level of deterrence thereby leading to non-compliance and under performance of the tax regime. Therefore, the full potential of the pure tax regime will remain unrealised. Hence, the structure, design and the business process of the tax administration is an important factor in the determination of the revenue performance. The Central Board of Excise & Customs (CBEC) shall be responsible for implementing the CGST and the State Tax administrations will be separately responsible for implementing the SGST. The various tax administrative functions such as assessment, enforcement, scrutiny and audit should be undertaken by the CBEC in respect of the CGST and by the State tax administration in respect of the SGST subject to our recommendation on small-scale industries.  However, from a taxpayer's perspective all compliance and enforcement procedures under CGST and SGST should be uniform. The Central Government shall establish a common IT infrastructure which will serve the needs of both CGST and SGST. (Para 4.8)

10. The jurisdiction between the CBEC and the State Administration may be divided between the two in such manner that the interface of the taxpayer is confined to one tax administration only. The basis for division could be turnover or any other criteria which is considered reasonable so that the compliance and administrative burden is minimized. (Para 4.8)

11. All persons with annual aggregate turnover of goods and services exceeding Rs.10 lakh (excluding CGST and SGST) should be required to register and obtain a GST registration number. Persons with lower turnover may be allowed an option to register. The GST registration number should be a twelve digit alpha numeric number.  The first ten digits should be the alpha-numeric Permanent Account Number (PAN) followed by a space and two more digits indicating the state code.  This number scheme should be publicised widely and should be self-generated after obtaining a PAN.  (Para 4.4)

12. The unit of taxation for the purposes of GST should be persons as defined under the Income Tax Act.  Consequently, for the purposes of CGST, all production units/branches of a person located anywhere in the country will be treated as a single taxable entity eligible for CGST input credit across units/branches.  Similarly, for the purposes of SGST, all production units/branches of a person located anywhere within the State will be treated as a single taxable entity eligible for SGST input credit across units/branches in that State. 

13. The payment of tax and the transaction reporting should be made through a combined payment and transaction reporting statement in Form No. GST-I. This statement should detail all business to business transactions relating to sales. This statement should be common for both CGST and SGST compliance and it should be mandatory to file this statement electronically on a monthly basis while making payment of taxes. The VAT period should be a calendar month. (Para 4.8)

14. The administration of this levy should be based on audited accounts and not on the basis of any form of physical controls. Since the tax base will be common, there should be a common appellate authority.  Similarly, the Authority for Advance Ruling should also be common.  Best international practices should be embedded in the Central-GST, particularly in respect of laws relating to levy of penalties, and circumstances and method of prosecution. No authority should have any power to make preventive detention for the purposes of CGST and SGST. Procedures for collection of both the CGST and SGST should be uniform.(Para 4.8)

15. Another important element of the taxpayer information base is the VAT invoice, which forms the primary source of information and 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 the VAT.  Therefore, it should be mandatory for a supplier making a taxable supply to another taxable person to provide a VAT invoice with that supply or the payment for it. The requirement should be enforceable by some penalty. The VAT invoice should be standardised across all states so as to contain a minimum of information about the supply being invoiced. (Para 4.6)

16. The choice of a single or a multiple VAT rates is extremely critical to the efficiency and performance of the GST. In terms of best international practice, recent experience shows that the preference of the policymakers is for adoption of a single rate as it is more efficient. Therefore, we recommend one positive rate, each for CGST and SGST on all goods and services. In addition, there should be a zero rate applicable to all goods and services exported out of the country. (Para 5.9)

17. One of the crucial issues relates to the determination of the rate of CGST and SGST.  Since the GST is primarily intended as an exercise in reforming the consumption tax in India and not an exercise for additional resource mobilisation through discretionary changes, the CGST and SGST rates should be such rates which would yield the same revenue as collected from the various taxes which will be subsumed in the CGST and SGST , that is, it should be a 'revenue neutral rates' or 'RNR'). (Para 5.17)

18. Using the fiscal year 2007-08 as the base year for calculation of the RNR, we first estimate the GST base under five different methods.
These methods are
(i) Subtraction-Indirect Method;
(ii) Consumption Method-Task Force Estimate;
(iii) Consumption Method-NCAER Estimate;
(iv) Shome Index Method; and
(iv) Revenue Method. The various estimates of the GST Base for 2007-08 are summarized in Table-10. The Task Force estimate of the GST Base using the Consumption method is the highest (Rs.37,43,077 crores) whereas the Shome Index method provides the lowest estimate. All other estimates fall within this range.  Since the five estimates are different, we use their average (Rs 31,25,325 crores) as the size of the comprehensive GST base for 2007-08 for the purposes of estimating the RNR. Since the tax base for both the CGST and the SGST are proposed to be identical, we use the same tax base for calculating the RNR for both levies. (Paras 5.22 to 5.75)

19. Given the estimate of the GST Base and the level of central taxes which are intended to be subsumed in the GST, we estimate the RNR for the CGST at 5.0 percent. Similarly, the RNR in respect of the state level TF-taxes which are proposed to be subsumed in the SGST is estimated to be 6.0 percent. Therefore, the combined RNR is estimated to be 11 percent. Incidentally, this estimate is the same as estimated by Poddar and Bagchi in their pioneering study published in November, 2007. These estimates do not factor in the revenue gains from increased compliance and GDP. To the extent, the flawless GST will reduce cascading effect, there will be significant increase in the corporate profits and hence corporate tax collections. Hence, in actual practice, the RNR of 11 percent will be revenue positive. However, all entry and Octroi taxes by state governments and other sub-national Governments are also proposed to be abolished. Accordingly, it is imperative to provide for an alternate buoyant source of revenue to the third-tier of Government. Hence, we recommend the following:-

i. The rate of CGST and SGST on all non-SIN goods should be fixed at the single rate of 5 percent and 7 percent, respectively;

ii. A formula-based devolution of an amount equivalent to collection of SGST at 2 percentage points should be made to the third-tier of Government after an appropriate Constitutional Amendment;

iii. The formula should be based on the recommendations of the State Finance Commission.

iv. Pending Constitutional Amendment, the collection from 7 percent SGST shall accrue to the State Government and devolution to the third-tier Government should continue to be made on the basis of the recommendations of the State Finance Commission.

v. Both the Central and the State Governments may continue to levy taxes, in addition to the CGST and SGST, on the various non-SIN goods as at present. (Paras 5.76 to 5.79)

20. High import tariffs, excises and turnover tax on domestic goods and services have enormous cascading effects, leading to a distorted structure of production, consumption and exports.  The existing tax system introduces myriad distortions which favour some goods and services at the expense of others.  These distortions yield inefficient resource allocation and consequently, inferior GDP growth. The introduction of the GST will 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. The switchover to a flawless GST will have significant macroeconomic effects. The overall macroeconomic effect of reduction in economic distortions due to GST would be to It would provide an impetus to economic growth. Using CGE Model, the NCAER study commissioned by the Thirteenth Finance Commission estimates the impact of the introduction of a GST which would eliminate all taxes on production and distribution and rest on final consumption only. The study is based on two important assumptions of full employment and that 50 percent of indirect taxes remain embedded and 'stick' on production and distribution. The study concludes that 'implementation of a comprehensive GST in India will lead to efficient allocation of 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 percent.'Further, the study also shows that 'implementation of GST across goods and services is expected, ceteris paribus, to provide gains to India's GDP somewhere within a range of 0.9 to 1.7 per cent. The corresponding change in absolute values of GDP over 2008-09 is expected to be between Rs. 42,789 crore and Rs. 83,899 crore, respectively.     (Paras 7.1 to 7.5)

21. These additional gains in GDP, originating from the GST reform, would be earned during all years in future over and above the growth in GDP which would have been achieved otherwise. The present value of the GST-reform induced gains in GDP may be computed as the present value of additional income stream based on some discount rate.
Assuming the long-term real rate of interest of about 3 per cent as the discount rate, the present value of total gain in GDP is computed as between Rs. 1,469 thousand crores and 2,881 thousand crores. The corresponding dollar values are $325 billion and $637 billion or as much as one-third to one-half of the country's GDP for the year 2009-10.    (Para 7.6)

22. Gains in exports are expected to vary between 3.2 and 6.3 per cent with corresponding absolute value range as Rs. 24,669 crore and Rs. 48,661 crore. Imports are expected to gain somewhere between 2.4 and 4.7 per cent with corresponding absolute values ranging between Rs. 31,173 crore and Rs. 61,501 crore.   (Para 7.11)

23. The benefit to the poor from the implementation of GST will flow from two sources: first through increase in the income levels and second through reduction in prices of goods consumed by them. The proposed switchover to the 'flawless' GST should, therefore, be viewed as pro-poor and not regressive. Hence, the switchover will improve the vertical equity of the indirect tax system. Similarly, to the extent it will impose a higher burden on the informal economy by reducing the cascading effect, the switchover will also improve horizontal equity. (Para 7.22 and Para 7.29)

24. Prices of agricultural commodities and services are expected to rise. Most of the manufactured goods would be available at relatively low prices especially textiles and readymade garments. The prices of agricultural goods would increase between 0.61 and 1.18 percent whereas the overall 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. Similarly, the urban poor will also benefit from new employment opportunities. With regard to the food crops the poor would continue to remain secured through the public distribution system. The prices of many other consumer goods are expected to decline. These include sugar; beverages; cotton textiles; wool, silk and synthetic fibre textiles; and textile products and wearing apparel. (Paras 7.24, 7.27 and 7.28) 

25. The changeover to GST is designed to be revenue neutral at existing levels of compliance. Given the design of the 'flawless' GST, the producers and distributors will only be pass through for the GST. Therefore, this policy initiative should witness a higher compliance and an upsurge in revenue collections. This will also have an indirect positive impact on direct tax collections. Further, given the fact that GST will trigger an increase in the GDP, this in turn would yield higher revenues even at existing levels of compliance. Another important source of gain for the Government would be the savings on account of reduction in the price levels of a large number of goods and services consumed by the Government. However, to the extent, the Central Government will be required to incentivise the states to adopt the GST, there will be an increase in the budgetary outgo. Given the smallness of the size of the compensation, it is expected that there would be a net gain in the tax revenues. This should enable the Central Government to better manage its finances. (Para 7.31 and 7.32) 

26. As regards the State Governments, in the first year of implementation of GST and phasing out of the Stamp duty, the States should expect additional revenues to the extent of Rs 70,000 crores (excluding the incentive amount). However, in the subsequent years this gain would diminish on account of the phasing out of stamp duty but will be more than adequately compensated as compliance starts improving. (Para 7.33)

27. Under the proposed GST, the expansion in the power of the States is significantly larger than the Centre. Therefore, the proposed GST will alter the balance of power in favour of the states thereby reducing the vertical imbalance. (Para 7.36)

28. The GST envisages a mechanism whereby both the Centre and the States will cease to have any independent power to make changes in the design and structure once agreed upon. The existing mechanism for arriving at a collective decision on the structure of the GST should be permanently institutionalised so that changes in the initial design of the GST are collectively agreed and implemented by both the Centre and the States. The Empowered Committee of State Finance Ministers may, upon the introduction of the GST, be transformed into a permanent constitutional body known as the Council of Finance
Ministers.  This Council shall comprise of the Union Finance Minister and all State Finance Ministers.  The Union Finance Minister would be the Chairman of this Council.   (Paras 8.11 and 8.12)

29. The Council should be responsible for any modification in the initial design of the dual GST and regulating the indirect tax system in the country.  The initial design of the dual GST should be approved by the Chairman and three-fourth of the State Finance Ministers.  Thereafter, any change in the structure of the GST (both base and the rates) should be allowed to be carried out only if the Chairman and two-thirds of the State Finance Ministers agree to do so. Consequently, neither the Centre nor any State will have the authority to unilaterally make any change in the agreed design of the GST. However, in the event of a crisis, the Member State or the Centre may take immediate steps to impose a surcharge subject to ex-post facto approval by the Council within one month. Further, such surcharge should not be allowed to remain in force beyond a period of one year.   (Para 8.13)

30. We do not expect any revenue loss to the States on account of the switch-over to GST. However, with a view to incentivising the States and establishing a credible mechanism for deciding on compensation claims, if any, we recommend the following:-

i) A GST Compensation Fund should be created under the administrative control of the Council of Finance Ministers.

ii) The Central Government shall transfer to the GST Compensation Fund a minimum sum of Rs 6000 crores per annum over the next five years (i.e. a total amount of Rs 30,000 crores) if, and only if, the States-
a.  introduce the 'flawless' GST as recommended by us; and 
b. follow the road map, as suggested by us, for its introduction;  

iii) The amounts in the Fund should be used only for the following purposes:-
a. To compensate the states for any revenue loss on account of the adoption of the 'flawless' GST;
b. The balance, if any in the Fund, to be carried forward to the subsequent year;
c. The balance, if any remaining at the end of the fifth year, to be distributed amongst the states on the basis of the same formula used for distributing resources in the divisible pool.

iv) The amount will be transferred in quarterly instalments.

v) The amounts shall be disbursed by the Council on the basis of the recommendations by a three member Compensation Committee comprising of the Secretary, Department of Revenue, Government of India, Secretary to the Council and any fiscal expert appointed by the Central Government for this purpose. 

vi) No contribution to the Fund shall be made by the Central Government in any year in which the States fail to adhere to the roadmap for implementation of the GST.

vii) The methodology to be used for estimating the revenue loss and the compensation shall be decided by the Council.  (Paras 9.3 to 9.6)

31. The States should also be liable to a penalty in case they deviate from the agreed design and structure of the GST. (Para 9.8)

32. Since the design of the GST will also impact the indirect tax system of the Central Government, it is necessary for the Central Government to play a more proactive role in this effort.  Towards this, the leadership of the Union Finance Minister would be vital.  This will provide the necessary impetus to the process of 'grand bargaining' for the GST.   (Para 10.4)

33. On account of lack of adequate preparedness, the implementation of the GST scheduled for 1st April, 2010  should be postponed by six months to 1st October, 2010.  However, the Council should release a timeline of various activities for introduction of GST simultaneously with the announcement for postponement.     (Para 10.6)

34. All taxes on goods and services including cesses and surcharges levied at the State and sub-national level should be subsumed in the SGST.However, if for some political economy reasons it is considered expedient to introduce the GST in a phased way, we recommend the phasing in the following manner:-

a) In the year 2010-11, all elements of the Flawless GST recommended by us whereby 
                        i.  the single CGST rate should be 5 percent and  the corresponding SGST rate should be 7 percent; and
                        ii. Transactions in immoveable property (i.e real estate and housing services) should be brought within the fold of GST; and
                        iii. Stamp duty may not be subsumed but the rate of stamp duty in all states should be calibrated so as not to exceed 4 percent. As a result, transactions in real estate will be subject to a dual levy like in the case of SIN-goods;

b) In the year 2011-12, same as (a) above, with the modification that the rate of stamp duty should be reduced to 2 percent; and

c)  In the year 2012-13, same as (a) above, with the modification that- 
                        i. Stamp duty should be eliminated and replaced by a Registration Fee at a specific rate;
                        ii. the revenues attributable to 2 percentage point out of the 7 percentage point of SGST should be set apart for devolution to the third-tier of Government and the revenues from the balance 5 percentage points will remain with the State 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. (Paras 10.3 to 10.10)