Best Practice Principles for Design and Administration of VAT/GST in a Federal-State System

  • VAT/GST will be a tax on Supply of All Goods and Services above a Threshold, based on Annual Turnover

  • It will be a Destination-based Consumption Tax

  • All Indirect Taxes including those currently levied by the Federal Center and the States will be subsumed in one tax — VAT

  • VAT will facilitate a seamless flow of Input Tax Credit in the Supply-Chain of Goods & Services; Tax paid on Inputs will be available as Credit to the recipient for its utilization in payment of output tax in Supply Chain

  • For Intra-State Trade, VAT will have two parts: Central VAT (C-VAT) and State VAT (S-VAT)

  • For Inter-State Trade, it will be an Integrated VAT (I-VAT), which will be a summation of C-VAT and S-VAT; C-VAT will go to the Federal Center, and the S-VAT component will go to the Destination State; Place of Supply Rules will help determine the Destination in the supply chain, and thus help in its operation.

  • Various Rules will help in implementing the following:

    • Concepts of Supply, Input Tax Credit and Integrated VAT (I-VAT);

    • Business Processes: e.g., Registration, Payment, Filing of Returns, Claims of Refund;

    • Other Activities: e.g., Scrutiny & Audit, Levy & Collection, Demand & Recovery, Enforcement, etc.

    • Transition Provisions

  • Single Standard VAT rate for most of the goods and services, with one higher rate for a limited number of Demerit and Luxury Goods and one lower rate for essential goods and services (general consumption by population)

  •  VAT to be administered jointly by the Federal Center and all the States, with the tax collected to be shared equally between the Center and the States

  • Decisions on Design, Policy and Administration of VAT to be made by a VAT Council comprising Finance Ministers of the States and Chaired by the Federal Finance Minister

  • Robust IT infrastructure, effectively a “VAT Net,” will provide a common portal for taxpayers and tax authorities to interact in administering the tax collection through various business processes

  • The new VAT system will be taxpayer friendly, with deterrence for tax-evaders through effective and extensive use of technology

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