The article traces how the concept of goods and services tax was first mooted till the time the BJPled NDA government tabled the re-drafted 122nd Constitutional Amendment Bill towards the end of the winter session of Parliament...
In view of India's tax regime being riddled with a plethora of levies, low credit availability and overlap of taxes levied by the Centre and State, the need to introduce an all-subsuming, comprehensive and simpler regime was recognised, also to encourage foreign investments.
The concept of GST was first mooted by the Union Finance Minister in his Budget Speech on 28 February, 2006, when the Minister urged the Empowered Committee of State Finance Ministers (EC) to work along with the Central Government to prepare the road map for introduction of GST in India. The Minister proposed 1 April, 2010 as the date for adoption of GST as an indirect taxation system, in India, to replace the complex Indirect taxes regime.
Goods and Services Tax (GST) is termed as India's most significant tax reform in decades. GST, which, when implemented, is seen to usher in a harmonised national market of goods and services and shall lead to a simplified, assessee-friendly tax administration system.
First discussion paper on GST
Certain elected members of the EC constituted the Joint Working Group (JWG), which then studied various international models of GST and recommended a dual GST that would complement the federal structure of India. Pursuant to discussions between the Central Government and the EC, the First Discussion Paper was released in November 2009. This discussion paper endorsed the need of the day viz. to simplify India's complex indirect taxation system and introduce a comprehensive tax regime that would replace the levies by the Centre and States. Each supply of goods and services will be charged to a dual levy of Central GST (CGST) and State GST (SGST). The CGST would subsume Central indirect taxes and levies such as Central Excise Duty, Additional Excise Duties, Duty levied under the Medicinal and Toilet Preparations (Excise Duty) Act, 1955, Service tax, Additional Customs Duty commonly known as Countervailing Duty, Special Additional Duty of Customs, and Central Surcharges and Cesses so far as they relate to supply of goods and services. On the other hand, the SGST would subsume State Value Added tax/ Sales tax, Entertainment tax, Central Sales tax, Entry tax, Purchase tax, Luxury tax, Taxes on lottery, betting and gambling and State cesses and surcharges in so far as they relate to supply of goods and services.
The First Discussion Paper did not give a rate at which the goods and services would be taxed in the new regime, but, it indicated that the general Revenue Neutral Rate would be greater in the dual structure than in the single levy structure. A key amendment to the Constitution was envisaged, whereby, the Centre and all Indian States would have concurrent powers to tax services besides revising the Seventh Schedule to the Constitution, which Schedule sets out the taxing domains of the Centre and the States.
The task force report
The Thirteenth Finance Commission formed a Task Force consisting of the officers of the Central Government, State Government and Department of Revenue (Ministry of Finance) which released their report1 and recommended a dual model of GST, as well. A dual GST structure empowers the Centre and States to levy taxes separately rather than the Centre alone levying taxes and distributing/ sharing revenues with the States. As per the recommendations, all transactions would attract a central levy administered by the Centre - CGST and a state levy administered by the State - SGST. All inter-State transactions were to attract Integrated GST (IGST) levied by the Centre and the same would be distributed as per the mechanism proposed. The report also suggested that the rate of GST be between the ranges of 6.2% to 9.4%, at each level, in order to ensure revenue neutrality for the States.
Build-up to gst: Tax administration andthe negative list of services
In the Budget Speech on 26 February, 2010, the need to achieve some degree of fiscal consolidation without impairing the tax recovery process in moving forward on the road to GST was acknowledged and so the tax administration (to the extent it concerned the Central Government) underwent some modification and an upgrade to an Information Technology System, known as A.C.E.S, with a view to infusing greater transparency in tax administration, besides improving delivery of tax payer services.
Prior to ushering in GST which has been the subject matter of significant political horseplay - the Central Government adopted measures for reform of Service tax law; GST was envisaged as simplistic and an exemption/ concession-less regime (save for limited subjects), and in this mould, the negative list approach to tax services in the country was brought into force w.e.f. 1st July 2012. This model had concessions at two levels - a negative list at the threshold, and a list dealing with exemptions (this list has since gone up from 39 to 42 items as on date). This negative list approach replaced a nearly 20-year-old law which prescribed in a definitive manner the taxable services and also contained a list of exemptions.
The Constitutional (115th Amendment) Bill, 2011
GST is expected to approximately add 2% to the GDP of the country, besides benefiting the tax payer and hence is regarded by the Government as an important measure to boost the economy and reform the taxation system as well
Given the scheme of the Constitution, a necessary first step was the amendment to certain provisions of the Constitution. The first formal measure was taken by introducing The Constitutional (115th Amendment) Bill, 2011 in the Lok Sabha on 22 March, 2011. This Bill proposed to amend the Seventh Schedule to empower the Centre to tax - 1) manufacture of tobacco and other goods, manufactured or produced in India (except alcoholic liquors for human consumption, opium, Indian hemp and other narcotic drugs and narcotics), and 2) sale of newspapers and on publishing of advertisements and 3) empower States to tax supply of services.
This Bill also provided for setting up a GST Council to act as a recommendatory body in formulating principles, laws and rules governing GST. Separately, the Bill proposed to empower the Parliament to set up a GST Dispute Settlement Authority to adjudicate disputes between the Centre and States and between the States. The scope and extent of GST was proposed to subsume taxes on all goods except taxes on the supply of alcoholic liquor.
When put to vote, many States were not agreeable to the GST model and structure as emanating from the amendments proposed. The States demanded compensation for loss of revenue on account of adopting GST and abolishment of CST, which they hitherto charged and would stand to lose out on owing to introduction of GST. In this context of revenue loss, the Union Budget for FY 2012-13 saw an allocation of '39,000 crore as compensation to the States on account of such loss of revenue. It is significant that till date there has been no payment on this front and on 10 July, 2014, the Union Finance Minister assured an allocation of '11,000 crore as the first tranche towards compensation.
States were wary of the design of the dispute settlement mechanism as they perceived it to be a body with powers overriding the supremacy and independence of the State Legislatures and supplanting their fiscal autonomy. The State Governments saw the proposal of the Council with fear and suspicion - as one designed (by the Union Government) to usurp their constitutionally guaranteed freedom of fiscal federalism. The absence of provisions allowing flexibility to deviate from the recommendations of the Council in situations of economic exigencies and natural calamities became prominent concerns raised by the State Governments qua the Council and its effectiveness.
The 115th Constitutional Amendment Bill was referred to the Parliamentary Standing Committee (PSC), a body formed upon recognising that Parliament does not have the time for detailed examination of bills and seeking public feedback on all bills. Parliament, therefore, delegated this task to the committee which reported back with its recommendations. Members in each house of the Parliament are expected to examine the recommendations, move suitable amendments and following this, the Parliament can vote on these amendments as proposed and finalise the bill. While, the PSC made its recommendations on the Bill after two years, i.e. in 2013, the Bill met a fatal end, with it lapsing with the dissolution of the 15th Lok Sabha in May 2014.
In the GST regime, a GST Network would be required to provide a robust IT-infrastructure and service bone. For this, a GSTN-SPV was incorporated as a non-Government, non-profit, private limited company registered under the Companies Act, 1956. The GST-SPV would render various services like providing common registration, return filing and e-payment services for the tax payers, integration of the common GST portal with the existing tax administration system along with assisting tax authorities in plugging tax evasion.
The Constitutional (122nd Amendment) Bill, 2014
The new Central Government was formed in May of 2014. The Bharatiya Janata Party came to power, which party had as one of its election planks - the reforms of indirect taxes regime and law and adoption of GST. The new government formation infused with greater and fresh vigour, announced April 2016 as the date to roll out GST.
As an immediate first step, a redrafted Bill [The Constitutional (122nd Amendment) Bill, 2014], incorporating the recommendations of the Parliamentary Standing Committee was tabled in the Lok Sabha (lower house of Parliament) towards the end of the winter session in December 2014.
The 122nd Bill displays the drive of the government of the day to win the confidence of the States and the stakeholders and demonstrates that the timeline of April 2016 is not lost on the government. The rate of GST is reported to be 26% (approx) with Central GST at 12% and the State GST at 13% to ensure minimum revenue loss to the State Governments.
Some of the standout aspects of this new Bill are:
The Bill proposes subsuming of Octroi levied by the States within the GST net. The Centre has expressed that charging Octroi for interstate movement separately would cause interruption of free flow of goods inside the country, and would defeat the purpose of making India a common market. The 115th Bill which had left Octroi outside the GST net. This will tend to hamper the fiscal autonomy of the local bodies levying Octroi.
To address the concerns of the States for loss of revenue on account of abolishment of CST, the Centre has proposed a levy of an additional tax @ 1% on all inter-State "supply" of goods (and not services). The additional tax will be levied for a period of two years with the Centre collecting the tax and distributing to the originating State. This may be seen as contrary to the foundation on which GST was mooted.
The States' concerns on revenue loss due to introduction of the comprehensive tax regime have been allayed with the proposal to incorporate a five-year compensation mechanism in the Constitution itself with the modalities of the mechanism and the sun-set clause to be decided by the GST Council. This falls short of the States' expectations.
The Centre has also given into the States' demands by excluding alcoholic liquor from the GST net and these goods will continue to be a State subject and taxed accordingly.
The GST Dispute Settlement Authority, proposed in the 115th Bill as a comprehensive dispute resolution mechanism, was met with opposition from the State Governments. In order to smoothen the introduction of GST in India, the Centre has entrusted the dispute resolution function to the GST Council, in the revised Bill.
Parting thoughts, situs of Sale and Services
With this Bill, the gates have opened for a full steam effort to introduce GST in India. The 122nd Bill will be taken up for debate by both Houses of the Parliament and will have to be passed in each House by a special majority i.e. by a majority of the total membership of that House and by a majority of not less than two-thirds of the members of the House "present and voting". Thereafter, the Bill has to be ratified by Legislatures of not less than one-half of the States before it is presented to the President for assent.
The recent spate of ordinances by the Central Government displays the urgency of the government to adopt all measures of reform, and is indicative that GST is sought to be adopted from April 2016. GST is expected to approximately add 2% to the GDP of the country, besides benefiting the tax payer and hence is regarded by the Government as an important measure to boost the economy and reform the taxation system as well.
However, this Bill will only be the start of the process with the model law, rates, threshold (de minimis limit), list of exempted products, taxation treatment of branch transfers, credit transfers, etc. being key issues to be resolved prior to GST seeing light of day.
The GST regime will also provide for a 'Place of Supply Rules' (POSR) in order to determine the situs of sale or supply of services and thereby the taxing jurisdiction. Special care will have to be accorded to taxation of intangibles, exceptions, multiple office supplies. These rules will form the backbone of the levy of GST and the framers of the provisions have keenly studied the models in Malaysia, European Union, etc.
Industry must evaluate its business and operating structure and blueprint for transition to GST. Harvesting credits, structuring logistics and sourcing, training personnel, will all become important measures for a smooth transition, into GST.
Disclaimer - This article has been authored by Ranjeet Mahtani, who is an Associate Partner and Dhara Trivedi, who is an Associate at Economic Laws Practice (ELP), Advocates & Solicitors. They can be reached at firstname.lastname@example.org and email@example.com for any comment or query. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.