The much-awaited discussion paper on goods and services tax (GST) in India has been released by the empowered committee of state finance ministers.

The proposed GST will have the following key features:

* A dual GST model with two separate components: central GST (CGST) and state GST (SGST).

* Both Centre and state to levy GST concurrently on all goods and services other than a small exempted list.

* Cross-utilisation of input tax credit between CGST and SGST would not be allowed except in case of inter-state transactions (IGST).

* GST to have a two-rate structure: a lower rate for necessary items and standard rate for general goods.

The release of the discussion paper is the first concrete step towards GST and provides guidance on various aspects of GST. These aspects have been extensively reported in the media in recent months. The white paper is the first comprehensive document providing clarity on various aspects of proposed GST.

One significant innovation that has been introduced in the white paper is the concept of IGST. This effectively means that for a supply chain for either goods or services or both that crosses a state boundary, the purchaser would get a credit for taxes paid in the producing state. This is a welcome step to effectively creating a seamless GST that operates on an all-India basis.

However, the white paper has not covered many aspects. For instance, there is no indication on the rate of GST, and the ‘place of supply’ rules for services. Thus, it emerges that these aspects have not been decided and are still being debated by the policy makers.

To elaborate on place of supply rules: this aspect refers to rules that allocate the right to tax services between states. The white paper states that the importing dealer would get a credit for goods and services supplied from another state. What is not clear is which state would have the right to tax different services.

Let us consider the airline industry. A passenger purchasing a ticket from Gurgaon may take a flight from Delhi to travel to Mumbai, involving three states in the transaction. There would have to be detailed rules formulated to govern which state would have the right to tax the revenue from these transactions.

At first glance, this does not seem difficult. The state where the air ticket is purchased can tax the transaction. However, this could lead to tax competition between states resulting in some states lowering the tax rate on air tickets by a partial exemption. This would result in many people buying air tickets in that state even if they live somewhere else.

Source : http://economictimes.indiatimes.com