Transcript Slide 1

K.VAITHEESWARAN
ADVOCATE & TAX CONSULTANT
Mobile: 98400-96876
E-mail : [email protected]
[email protected]
www.vaithilegal.com
Flat No.3, First Floor,
No.9, Thanikachalam Road,
T. Nagar,
Chennai - 600 017, India
Tel.: 044 + 2433 1029 / 4048
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402, Front Wing,
House of Lords,
15/16, St. Marks Road,
Bangalore – 560 001, India
Tel : 080 22244854/ 41120804
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1986 – Comprehensive Modvat Credit
Scheme on inputs at the manufacturer level.
1994 – Modvat Scheme extended to Capital
Goods.
2002 – Limited service tax credit scheme
2003 – Extended service tax credit scheme
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2004 – Cross sector credit through Cenvat
Credit Rules, 2004.
2005 – VAT at the State level.
2016 – GST... ... ...
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Both Government and industry are keen to implement GST.
Governments are looking at increasing the tax base and tax
collections through GST.
State is looking at GST as a window for taxing services.
Centre is looking at GST to go beyond the point of
manufacture.
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Industry wants GST to eliminate the
cascading effect of taxes.
Industry considers GST as a path breaking tax
reform in the field of indirect taxes.
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GST is a tax on both goods and services across the supply
chain.
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It is levied at every stage of supply.
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GST is a levy which commences from the manufacturer /
producer / trader and goes upto the retailer .
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An effective and efficient GST system would provide for
elimination of the cascading effect of taxes.
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The GST on inputs is generally available as a credit for set off
against the GST on the output supply.
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Internationally VAT is a levy on supply of goods and services.
Around 150 countries have implemented GST or a National
level VAT.
Some countries such as Canada and Australia have
implemented GST.
Brazil and Canada have a dual GST.
The credit mechanism is seamless.
Generally all sectors are taxed except for a few exceptions.
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National Sales Tax of 9% was proposed in 1989 to eliminate the tax on
manufacturers.
It was projected that Canada would become more competitive through
GST.
Stiff opposition from the public and liberal party promoted the ruling
party to amend the Constitution to get a majority and the tax was
introduced from 01.01.1991.
The Progressive Conservative Party lost the elections and the Liberal
Party Leader promised to repeal GST.
However GST was modified and continued.
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Implementation of GST in a federal structure
has its own complications.
The Federal, State and even the Municipality
have their own powers and sources of
revenue.
Empowered Committee has suggested a
Dual GST which has been accepted by the
Central Government.
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Excise Duty
Countervailing Duty
Customs Duty
Duty of 4% under Section 3(5) of the Customs Tariff
Service Tax
Primary education cess
Secondary education cess
Products specific cess
Research and Development cess
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VAT
CST by originating State
Entry tax
Octroi by Municipality
Entertainment tax
Luxury tax
Stamp duty and Registration fee
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Excise duty charged by the manufacturer forms
part of the price in the supply chain.
 Since the cenvat credit is linked with manufacture,
the dealer cannot set off the excise duty against any
other tax.
 CST purchases form part of cost as there is no VAT
credit.
 VAT has a cascading effect since sale price includes
excise, customs, CVD.
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Multiple rates
Different valuation mechanisms
Deemed manufacture
Deemed marketability
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Multiple rates
Different rates in different States
Different definitions
Multiple forms
Border controls
Cascading effect due to CST purchases
Deviations
Reversal of ITC on CST Transactions
Issues in refunds
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Origin based tax
No credit on CST purchases leading to
cascading effect
Exempt stock transfer related distortions
Complex law on stock transfer and transit
sales
CST Vs. VAT issues – Check post controls
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Negative List based regime
Mega Exemption Notification
Exclusions from the definition of service
Transactions involving both goods and
services
Dual taxation
Fastest growing collections
States demanding taxation of services
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Classification disputes
Valuation disputes
Cenvat on input services
Construction industry
Manpower
Consideration disputes
Taxes on advances
Exemption Notifications
Reverse charge mechanism
Point of taxation
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Software
Intellectual Property Rights
Restaurants
Works Contract
AMC Contracts
Goods Vs. Services
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Commissioning and Installation
Drawings and designs
Software
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First Discussion Paper released by the Empowered
Committee of State Finance Ministers on 10.11.2009.
 Report of Task Force of 13th Finance Commission released on
15.12.2009.
 Comments of Department of Revenue on the First
Discussion Paper released.
 Hon’ble Finance Minister made some key announcements on
21.07.2010.
 Constitution (115th amendment ) Bill, 2011 introduced.
 Report of Select Committee of the Parliament
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The Empowered Committee has recommended a Dual
GST which is based on the Federal Structure of our
Constitution.
The Department of Revenue in its comments to the
Discussion Paper has also endorsed Dual GST.
A Single GST is ideal but unlikely and the Constitutional
Bill endorses dual GST.
Finance Minister has referred to Dual Rate – Dual GST
for Goods and Dual GST for Services at a single rate
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CGST would be levied by the Centre through a
separate statute on all transactions of goods and
services made for a consideration.
 Consideration ?
 Exceptions would be exempted goods and services,
goods kept out of GST and transactions below
prescribed threshold limits.
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This would subsume the following:
 Central Excise Duty
 Additional Excise Duty
 Additional Excise Duty on medicinal and toilet preparations.
 Countervailing Duty
 Additional Duty under Section 3(5) of the Customs Tariff Act.
 Service Tax
 Cesses
 Surcharges
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CGST would be a tax on all transactions of goods and services
made for consideration.
It would be levied and collected by the Centre.
CGST would be levied across the value chain.
CGST rate
Single or Multiple rates
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Currently effective excise duty is at the rate of 12.36% or
6.18% depending upon the commodity.
Currently services are taxed by the Central Government at
12.36%.
Assuming there are two rates of CGST, the exemptions could
move to a lower rate and lower rates could move to higher
rates
Assuming the CGST rate is 12.77%, the centre would be
collecting 12.77% on goods and services as against the
current rate of 12.36%.
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Many exemptions are likely to be withdrawn.
Will 1.5 crore exemption becomes Rs.10 lakhs
exemption?
Threshold?
Levy on entire supply chain as against only on
manufacture.
Scope of services is likely to widen.
Revenue loss ?
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Withdrawal of exemptions would mean new
assessees.
Scaling down of SSI exemption from Rs.1.5
crores to Rs.10 lakhs would mean new
assessees.
Levy on entire supply chain instead of only on
manufacturers would mean more assessees.
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Paradigm Shift from a levy based on
manufacture to a levy based on supply.
Manufacture is very restricted in scope and
has resulted in distortions.
For the first time supply would be the focus
and hence great care is required in drafting
the key provisions of the statute.
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Impact on small industries.
Current unethical practices.
Administration of new assessees.
Political issues.
To illustrate a manufacturer with a turnover of Rs.1.5
crores would not have paid any excise duty whereas
under CGST the liability would be Rs.15 lakhs assuming
a 10% rate for the goods.
Credit of CGST may not be significant for absorption.
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Excise law has exempted various items for different reasons.
2% concessional rate of duty without cenvat and 6% with
cenvat through notifications.
To illustrate food is not fully taxed under excise law;
Windmills and tractors are exempt from excise duty.
On the other hand VAT is payable on all kinds of goods
except fruits, vegetables, milk, etc.; windmills, tractors.
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Whether all exemptions would be withdrawn ?
Whether excise duty exemption would be reviewed and the
CGST exemption list would be aligned with the SGST
exemption list?
99 items currently exempt under VAT would be exempt from
both CGST and SGST.
Concept of ‘nil’ rate does not exist in VAT.
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Cenvat credit
Stocks in the hands of wholesalers or
distributors who have purchased from
manufacturers.
Rates
Clarity on effective date.
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Appellate mechanism
Audit
Role of range / LTU
Whether small assessees would be
administered by the State on behalf of the
Centre ?
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SGST would be levied by the States through statute
on all transactions of goods and services made for a
consideration.
 Exceptions would be exempted goods and services,
goods kept out of GST and transactions below
prescribed threshold limits.
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Every State will have a SGST Statute.
Basic features of law such as chargeability, taxable
event, measure, valuation, classification would be
uniform across these Statutes as far as practicable.
 State GST would be paid to the accounts of the
respective State.
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SGST would subsume the following:
 VAT / Sales Tax
 Entertainment Tax (could be levied by local bodies)
 Luxury Tax
 Taxes on lottery, betting and gambling
 State cesses and Surcharges relatable to supply of goods
and services
 Octroi (could be levied by local bodies)
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Some States have a concept of industrial inputs.
Pondy taxes industrial inputs at 1%.
No distinction between capital goods and inputs in
Andhra Pradesh.
Kerala taxes gold at 5%.
Many states have increased the revenue neutral rate
Some states have levied additional taxes
Some states have restricted ITC on CST sales
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Andhra Pradesh has increased VAT rate to 13.5%
and increased rates significantly on ATF.
Punjab increased from 4% to 5% on 29th January
2010.
Haryana has increased from 4% to 5%.
Tamil Nadu has increased from 4% to 5% and 12.5%
to 14.5% w.e.f. 12.07.2011.
Turnover taxes.
Complex forms.
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States power to frame law and impose tax cannot
be taken away.
Revenue compulsions.
Political largesse.
Size of the State.
Economic activity in the State.
Past legacy.
Elections.
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Previous FM had requested that States should also
levy SGST on goods at a two tier structure of 6%
and 10% and tax services at 8%.
 State rate at 13.91%?
 SGST on services at 13.91% would increase the
overall levy on services from 12% to 26.68%. (CGST
+ SGST)
 Currently many products attract VAT at 12.5% to
14.5% which would mean a climb down to
13.91%.
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A State like Goa is unhappy with the current VAT
threshold limit of Rs.5 lakhs whereas SGST limit is at
Rs.10 lakhs.
 A State like Tamil Nadu has got the highest
compliance levels and hence assessee base has not
expanded due to VAT.
 Even though services revenue would compensate
States, not all States have fantastic service sector
operations.
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Constitutional amendments are required.
Draft legislation for CGST to be prepared.
Suitable model legislation for SGST to be prepared.
Rules and procedures for CGST and SGST to be
prepared.
 IGST legislation with Rules and procedures to be
drafted.
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A number of amendments are required to
implement a proper framework for GST.
 Centre needs the power to tax beyond manufacture
and State needs the power to tax imports as well as
services.
 Amendments require 3/4th majority of the
Parliament and ratification through resolution by
50% of the States – Article 368(2)(c).
 115th Constitutional Amendment has been
introduced and will have to be modified based on
the recommendations of the Parliament Committee
and the agreement with the States.
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EC wants sales tax and central levy to continue on
petroleum products (crude, motor spirit including
aviation turbine fuel and HSD) and to keep the items
out of GST.
 Task Force makes a distinction between emission
fuels and industrial fuels.
 Constitutional amendment indicates that the
petroleum products would be kept out of GST.
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Alcoholic beverages to be kept out of GST.
States can continue to levy sales tax / VAT
and excise duty on these items.
Tobacco to be kept out of GST.
Impact on companies dealing with tobacco as
well as other products.
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CGST can be set off against CGST
SGST can be set off against SGST
CGST cannot be used for set off against SGST
and vice versa.
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Centre would levy IGST which would be CGST +
SGST.
 IGST would be levied on all inter-State
transactions of taxable goods and services with
appropriate provision for consignment or stock
transfer of goods and services.
 Inter-State dealer will pay IGST after adjusting
available, IGST, CGST and SGST on his purchases.
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The seller in State-A will pay the IGST to the Centre.
While paying IGST the seller will adjust against
available credit of IGST, CGST and SGST.
 State Government-A will have to transfer the credit
of SGST used by the seller for payment of IGST to
the Centre.
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Buyer in State-B can avail credit of the IGST
charged.
 Buyer in State-B can use the IGST to discharge
output tax liability in his own State.
 Centre has to transfer credit of IGST used for
payment of SGST to State Government-B.
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Tamil Nadu seller selling to Karnataka buyer for
Rs.1,00,000/-.
IGST payable assuming an 8% rate is Rs.8,000/-.
Rs.8,000/- can be paid by adjusting
 Inter-State purchases (IGST) Rs.3,000/ Local purchases (CGST) Rs.1,500/ Local purchases (SGST) Rs.1,500/-
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Since dealer has used SGST of Tamil Nadu to the extent of
Rs.1,500/-, Tamil Nadu has to transfer Rs.1,500/- to Centre.
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IGST of Rs.8,000/- is availed as credit by Karnataka buyer.
Karnataka dealer sells the goods at Rs.2,00,000/- attracting
CGST of say Rs.16,000/- and SGST of Rs.16,000/-.
If IGST of Rs.8,000/- is used to pay the SGST then the Centre
has to transfer Rs.8,000/- to Karnataka Government.
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Transfers are only between Centre and State.
No transfer from one State to another State.
Process may be facilitated through a clearing house
mechanism.
Every State would be both selling and purchasing State and
therefore there would be netting of funds through the
clearing house.
In terms of Article 269A as proposed, IGST would be levied
and collected by the Government of India and such tax shall
be apportioned between Union and States in the manner as
may be prescribed by Parliament by law.
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Supply of goods or services or both in the course of import
into the territory of India shall be deemed to be IGST.
Parliament by law may formulate principles for determining
when a supply of goods or of services or both takes place
in the course of inter-State trade or commerce.
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Uninterrupted ITC chain
No refund claim in exporting State as ITC is used up
while paying tax.
Self-monitoring model.
Computerization limited to inter-State dealers and
Governments.
Borders disappear due to seamless credit system.
Tax driven business distortions would disappear.
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Biggest drawback in VAT is the concept of local
purchases linked credit.
 Tax cascade in the current systems resulting in
higher prices – motor car.
 Increase in cost of operating business due to
creation of depots / warehouses / factories all over
the country.
 IGST credit would mean direct sales to dealers
instead of stock transfer route.
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Stock transfers would not disappear and consequently
impact of IGST on transfers to branches / consignment
agents located outside the State.
In stock transfers there is upfront outflow of IGST whereas
the turn around time for sale could be higher.
If customer cannot take credit, IGST is prohibitive.
Assuming hospitals are not in GST, IGST rates charged
would be extremely high.
Government as a buyer will have to pay more compared to
the current rates.
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Inter-unit movement
Job work transactions
History has shown CST Vs. Local Tax in the
receiving State disputes.
IGST Vs. SGST (possibility of State insisting
that SGST is applicable)
Whether CGST or IGST? (rate issue)
Significant challenge in drafting law for
inter-State services.
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Inter-State sale is defined in terms of Section 3 of
the CST Act in respect of goods.
 Sale should occasion the movement of goods from
one State to another.
 Jurisdiction to tax established through Section 4.
 Litigation as to what is a CST Sale despite clear
provisions, tangible items, physical movement and
proof of movement.
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Whether a sale is a CST sale or a local sale in the
other State is still the matter of dispute even after
nearly 55 years of existence.
 Reasons for disputes
 New law would be a challenge since the principles
will have to cover both goods as well as service
tax and also be linked with supply as against sale
of goods / provision of service.
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Goods and services tax would mean any tax on
supply of goods or services or both except taxes on
the supply of petroleum products and alcoholic
liquor.
 No GST on supply of petroleum and liquor.
 Centre to retain power to levy excise duty on
petroleum products and tobacco?
 State to retain power to levy tax on the sale of
alcohol and petroleum products?
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CST law by Parliament and revenues assigned to the
State.
 CST law is a tax on inter-State sale of goods.
 IGST law would be a tax by Parliament on supply of
goods or services or both.
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The rate of IGST for goods can change depending upon
SGST if the SGST rates are different.
To illustrate, if mobile phones attract CGST of 6% and
State-A imposes SGST of 10% and State-B imposes
SGST of 6% then
(a) IGST is based on SGST origin rates then 16% if
goods are sold from State-A to State-Z.
(b) IGST based on SGST origin then 12% if goods are
sold from State-B to State-Z.
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Differing SGST rates can be an issue.
Whether to adopt SGST origin rate or SGST
destination rate needs to be spelt out in the IGST
legislation
 What happens if SGST is exempt in one State but
taxable in another State ?
 Since IGST is levied by the Centre, SGST linked with
SGST destination rates can cause chaos.
 Challenging but relevant solution – SGST rates
should not differ.
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If a supply of service is in the nature of interState supply – IGST will apply.
If supply of service is local then CGST + SGST
will apply.
What is the line of the distinction between
inter-State service and intra-service?
When there is so much of disputes on goods,
services are not going to be easy.
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Both CGST and SGST would be levied on import of
Goods and Services into the country.
 Tax would be based on destination principle.
 Tax revenue in the case of SGST will accrue to the
State where the imported goods and services are
consumed.
 Full set off of GST on imports will be available.
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Taxation of services can be a big challenge in
GST system.
If only select services are taxed then the scope
and ambit and coverage becomes an issue and
the intended objective of revenue and growth in
GDP may not fully materialize.
If all services are taxed it is very difficult for
somebody to understand whether he is
providing service or not for the purpose of
taxation.
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Transportation of goods by road
Non-A/c Rail – Passengers
Taxis, Autos, Public transport
Health care
Doctors
Film Industry
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What would constitute an inter-State service
would be a challenge.
Very difficult to determine inter-State character
when services are involved.
head office in Mumbai executes an agreement with
a client having office in Mumbai for providing
services through out the country.
Which SGST is applicable ?
Assuming client office in Delhi, whether IGST ?
Treatment of reimbursements, incentives.
Professional based in Bangalore providing audit
services for a client in Delhi.
 If IGST is determined based on invoice reference,
acceptability by States has to be ensured.
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If every State seeks to tax services then
compliance would be required in multiple States
even though the operations would be very minor
in that State.
 Unlike a manufacturer the small service provider
does not have a very big finance team or
employees all over the country with expert
knowledge on taxes.
 Compliance issues.
 Increase in cost of compliance.
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Jewellery exempted from duty.
Attempted levy on branded jewellery in 2005.
Branded jewellery completely exempted in
2009.
Another round of attempted levy from
01.03.2011.
VAT on jewellery.
CGST at 13.91% ?
SGST at 12.77?
Special GST rate for Jewellery
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GST Council to make recommendations to the
Union and States
(a) taxes, cesses, surcharges levied by the Centre,
States and local bodies which may be subsumed
in GST.
(b) Goods and Services that may be subjected to tax
or exempted from tax.
(c) Threshold limits
(d) Rates of goods and services tax.
(e) Any other matter relating to GST as the Council
may decide.
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Authority to be created by law of Parliament.
Complaint by a State Government or the GoI arising out of a
deviation from any recommendation of the Council resulting
in loss of revenue to State / Centre or affecting harmonized
structure of GST.
Chairperson – A person who has been a Judge of the
Supreme Court or CJ of High Court to be appointed by
President on the recommendation of Chief Justice of India.
Two other members of Dispute Settlement Authority shall be
persons of proven capacity and expertise in the field of law,
economics or public affairs to be appointed by the President
on the recommendation of the GST Council.
Power to pass suitable orders including interim orders.
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States power to frame law and impose tax cannot
be taken away.
Federal structure has to be respected.
Revenue compulsions.
Size of the State.
Economic activity in the State.
Past legacy.
Elections.
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Petroleum Products
Threshold – States want 10 lakhs whereas
Centre wants 25 lakhs
Rate – Sub-committee has suggested SGST
at 13.91% and CGST at 12.77%
Compensation – Constitution Provisions?
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Computerization
Administration of new assessees
Exemption limits
Rate of tax – balancing concerns
Initial inflation
Consensus
Availability of time
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Awareness
Computerization and accounting records
Availability of time
Long term contracts
Investment decisions
Cost of compliance
K.Vaitheeswaran - All Copyrights Reserved
April 1st, 2016?
Rate of GST
Industry preparedness
Existing business structures and compatibility with
GST.
 Training both for Industry and Government
 Learning and the art of unlearning
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K.Vaitheeswaran - All Copyrights Reserved
K.VAITHEESWARAN
ADVOCATE & TAX CONSULTANT
Mobile: 98400-96876
E-mails : [email protected]
[email protected]
Web: www.vaithilegal.com
Flat No.3, First Floor,
No.9, Thanikachalam Road,
T. Nagar,
Chennai - 600 017, India
Tel.: 044 + 2433 1029 / 4048
402, Front Wing,
House of Lords,
15/16, St. Marks Road,
Bangalore – 560 001, India
Tel : 080 + 2224 4854/ 4112 0804