Businesses and traders currently have to file separate returns on state sales tax, central excise and service tax.

The draft recommendations were accepted on Wednesday by the empowered committee of state finance ministers. The recommendations will be submitted to the finance ministry next month.

The agreement - after seven months of consultations between central and state government officials - marks a significant step towards introducing a country-wide harmonised consumption tax system to replace the parallel and multiple systems of indirect tax at the Centre and states.

The GST structure will be finalised by December 2008 and the rates will also be finalised around that time.

Once implemented from April 1, 2010, India will essentially have three major taxes - tax on personal and corporation incomes, GST and property taxes. The recommendations have modelled the new GST administration on the Canadian system.

Under this, there will be a Central GST Authority and a State GST Authority. Taxpayers will have to file the same GST return to both the authorities.

For administrative convenience, the state authority will collect both central and state GST on all goods and pass on the centre's share.

Similarly, the central authority will collect GST on all services (except primary public health and primary public education) and pass on the states' share. Taxpayers will be issued a unique permanent account number (PAN).

GST is essentially a value-added tax that requires producers to pay tax only on the value they add to the goods or service in place of the current system in which central and state imposts cascade on the price of the final product.

For example, a shoe-maker may pay a leather producer Rs 110 for processed leather of which the local tax component is Rs 10.

The finished shoe that now costs, say, Rs 150, has a tax component of Rs 30. The shoe-maker will pay the GST authorities Rs 20 and retain Rs 10, which is the tax (input credit) he paid for the processed leather.

Although all the states except Uttar Pradesh have adopted value added tax (VAT), there is some level of double taxation as VAT was levied on cost plus central excise. Central excise was levied up to production stage and therafter state VAT.

Under the new GST regime input tax credit will be available from both the central and state authorities and there will be no double taxation.

However, the joint working group's recommendations have stated that there will be multiple tax slabs under the proposed GST at central and state levels.

This is because there are certain categories of goods - like medicines and drugs - that need to be charged a lower tax than the standard GST rate.

Likewise, taxes on inter-state sales will be destination-based and entitled to input credit unlike the current regime under which central sales tax are added on to the cost of final goods.

For example, if a taxpayer from Rajasthan buys goods from Gujarat, Gujarat will collect the GST and pass it to Rajasthan through an intermediary bank. The data will be available with the state GST authority so that traders can avail of the input tax credit.

Exports will be zero-rated and will be relieved of all embedded taxes and levies at both the central and state level.

The central taxes to be subsumed under GST are central excise duties, additional excise duty, countervailing duty, central sales tax and service tax.

State taxes to be subsumed under GST are value added tax or sales tax, entertainment tax, luxury tax, octroi, entry tax, taxes on lotteries, betting, gambling and purchase tax.

State entertainment tax will be abolished and it will come under services under GST.

Currently, half-a-dozen states levy purchase tax on buyers instead of sellers, which cannot be reclaimed as input credit. This tax will be abolished within a time frame and the tax will be covered under GST and will be open to input credit.