Tax exemptions likely to be limited under GST

At present there are about 99 items that are exempt from Value Added Tax (VAT) levied by states and around 250 items that do not attract excise duty or central VAT levied by the centre. Under the proposed GST the tax exemption of both states and the centre put together is likely to be limited. The states normally exempt food items like rice, wheat, salt, fruits and vegetables, milk, and milk products etc. from the ambit of VAT. A general consensus seems to be emerging between centre and states to continue the exemption of GST on those items which are exempted by the states at present.

However, this exemption list will be over and above the items already excluded from the GST umbrella. These include petroleum products, alcohol and tobacco products. The taxation of these items will be done separately. There are certain services in the negative list which are not taxed and will continue to be so under GST as well. Even the threshold exemption under service tax is likely to be carried forward into GST.

There are a number of product or sector specific exemptions available in the current tax mechanism. As a very simple example the pharmaceutical goods attract an excise duty of 4.12 per cent. This concessional taxation will result in multiple rates in GST which will not be allowed. Also it is likely to distort the credit flow and create problems in relation to the input tax credit. In the GST it is likely that all goods and services will be taxed at one rate. The best way to accommodate the exemptions would be by providing cash refunds after the tax has been collected in full.

It is quite likely that the end user based tax exemptions will continue under GST as it does not impact the major part of the value chain. However, here also, the process of refund to the end user may be deployed after the tax has been collected in full. The current tax exemptions that fall under this purview include supplies to export oriented units (EOU), supplies to mega power projects, goods used in manufacture of fertilizers, Software technology parks of India (STPI), and special economic zones (SEZ).

The basic customs duty will be continued even under GST. However the import GST will subsume the additional customs duty and special additional duty (SAD). The import of services and goods will require you to pay Central GST or the State GST based on the destination principle. These taxes paid would be available as input tax credit and hence can be termed as revenue neutral. The exports will be zero rated and the exporters will not be required to pay the GST. The input tax credit accrued on the procurement of goods would be refunded to them.

Currently the small scale industries (SSI) are exempt from CENVAT payment up to a turnover of 1.5 crore. However, no such threshold exists for the state level VAT. It is proposed to make SGST payable for the SSI if the turnover exceeds threshold limit which is likely to be 10 lakhs. CGST may become payable at a mutually decided threshold figure.

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