THE CONCEPT OF GST

GST is a tax on goods and services⁶, which can be levied whenever there is a sale or provision of service, provided that at that time, the seller or service provider can claim the input credit of tax which he has paid while purchasing the goods or procuring the service. This comprehensive tax seeks to eliminate the distinction between taxable goods and taxable services. Although the introduction of the CENVAT and State VAT systems has minimized the cascading effects of the old Central Sales Tax structure to a large extent, the said system is incomplete at certain levels. There are many goods and services which are exempt at both Centre and State levels, like oil and gas production, mining, agriculture etc., wherein no credit is allowed for the tax paid on their inputs. This causes cascading of taxes. An extract from a working paper commissioned by the Ministry of Finance observes:⁷ “Tax cascading remains the most serious flaw of the current system. It increases the cost of production and puts Indian suppliers at a competitive disadvantage in the international markets. It creates a bias in favor of imports, which do not bear the hidden burden of taxes on production inputs. It also detracts from a neutral application of tax to competing products. Even if the statutory rate is uniform, the effective tax rate (which consists of the statutory rate on finished products and the implicit or hidden tax on production inputs) can vary from product to product depending on the magnitude of the hidden tax on inputs used in their production and distribution. The intended impact of government policy towards sectors or households may be negated by the indirect or hidden taxation in a cascading system of taxes.” Moreover, the CENVAT provides set-off for taxes paid on inputs and services up to the stage of production and the State VAT provides set-off for taxes paid on inputs and also on previous purchases. The main weakness of the CENVAT system is that it has kept the benefits of this mechanism of ‘set-off’ away from the hands of the manufacturers and dealers. Similarly, the State VAT system is incomplete inasmuch as it fails to undo the cascading effect of the CENVAT load on goods. The State VAT system has also failed to subsume taxes such as luxury tax, entertainment tax, etc.

As India is a federation, where the responsibility of taxation is shared by the Union and the States, the proposed model envisions a dual system of GST. Therefore, in keeping with the constitutional mandate of fiscal federalism, both levels have distinct responsibilities to perform. Thus, a Central GST, which replaces the current CENVAT and a State GST, which replaces the current State VAT, will come within the ambit of the GST. Although this proposal has diluted what was said to be the greatest plus point of GST, i.e., to have a uniform tax slab for the State and the Centre⁹, this system is certainly more pragmatic as it will help to phase out the multiplicity of indirect taxes in India in a slow and steady fashion.

GST includes within its ambit the system of Input Tax Credit (‘ITC’), wherein a manufacturer is allowed to deduct the tax that he has already paid on an input from the tax on final product, as done in the VAT system. Therefore, he would have an available ‘credit’ while calculating GST. The credits obtained through the Central and State GSTs will operate in parallel and cross-utilization of credits will not be allowed. Also, unutilized accumulated ITC has to be refunded.

Due to the multiplicity of taxes in the present system, basic phrases such as ‘taxable event’, ‘supply of goods’ and ‘rendition of services’ have not been uniformly defined. Moreover, different legislations in India define the terms ‘goods’ and ‘services’ differently. Also, in the modern world, the distinction between goods and services has become increasingly blurred due to the bundling of goods and services as well as e-commerce transactions. The current system does not prevent the same transaction from being taxed under both service tax and VAT or CST. This acts as a deterrent to economic growth. Moreover, the attempts of the Government to levy service tax and/or VAT on transactions related to immovable property have posed significant challenges to the real estate sector in the country.

In order to curb these complexities, inconsistencies and unnecessary litigation, there is an urgent need to standardize the system, principles and procedures. The proposed GST system seeks to fill these gaps in the present system. The GST system also seeks to nullify the present system of Central Sales Tax being imposed at source on Inter-State transactions. This will lead to a new Inter State Goods and Service Tax (‘IGST’) which covers such transactions, including stock transfers and consignments. This system brings out a revolutionary new principle in India, by which, inter-state transactions will be taxed at the destination and not at the source level. Similarly, services will be taxed at the state of consumption. This means that the originating State will have to pay no taxes in respect of the transaction. Specific provisions for this purpose have not been drafted as of now. The proposal envisages a system where inter-state sellers will pay IGST on value addition after adjusting available credit of IGST, CGST and SGST on their purchases.

IMPLEMENTATION OF GST- NEED FOR 115th CONSTITUTIONAL AMENDMENT

The proposed dual system of GST charts out a system wherein both the Centre and the States will have concurrent powers for indirect taxation. The power to levy tax on goods and services are vested with both Central Government and State Government under Art. 246 read with List-I and List-II of Schedule VII of the Constitution. Accordingly, neither the Central Government nor the State Government can usurp the taxing powers of the other without constitutional amendments to such effect. As has been noted earlier, the current system of taxation under the Constitution is inefficient in the present scenario. For the purpose of designing a comprehensive and neutral goods and service tax consonant with standards set by developed nations, it stands as insufficient. Therefore, the following provisions of the Constitution need to be amended

• Specific entries in List-I and List-II of Schedule VII of the Constitution

• Art. 246, which categories the subjects on which the Union and the States can legislative respectively.

• Art. 269, which relates to taxed levied and collected by the Union, but assigned to the States.

• Art. 270, which provides for taxes which are levied and shared by the Union and the States.

• Art. 286, which imposes restrictions on the levy of tax on the sale or purchase of goods.

• Certain restrictive definitions given in Art. 366.

For these purposes the Constitution (One Hundred and Fifteenth Amendment) Bill, 2011 (hereinafter the “Amendment Bill‟) has been introduced in the Parliament in March 2011. The Amendment Bill seeks, interalia, to subsume various central and state indirect taxes into GST and empowers the Union and the State Governments to levy it on the supply of goods or of services or both. In the proposed GST regime, there will be State GST (SGST) and Central GST (CGST) on the local transactions and Integrated GST (IGST) on interstate transactions and on imports. It is also decided to exclude certain categories of goods from the GST net.

At present the Union Parliament is competent to make laws upon any subjects other than those enumerated in List II and this power is exclusive and with overriding effect. The Amendment Bill proposes to insert Article 246A as a special article dealing exclusively with goods and service tax. The general principles of legislation under Articles 246 and 254 will not be applicable to this article. It grants power to Parliament and the legislature of every State, to make laws to levy GST with a condition that only the Parliament shall be competent to levy GST on the transfer of goods and/or services in the course of inter-State trade or commerce. The Amendment Bill seeks to modify Art. 248 whereby exercising the residuary power of legislation after the amendment shall be subject to Art. 246A. It means that consequent to the amendment, the exclusive power of the Union Parliament to legislate upon the subjects not enumerated in Lists II and III will not be applicable to the GST.

Chapter I of Part XII of the Constitution provides for the distribution of the tax revenue of the Union government between the Union and the States. Under Article 268, the stamp duties on ten instruments⁸ and duties of excise on medicinal and toilet preparations shall be levied by the Union but shall be collected and appropriated by the States. The Amendment Bill proposes to remove „duties of excise on medicinal and toilet preparations‟ from the purview of this Article. Consequent to the amendment, duties of excise on medicinal and toilet preparations will form part of the GST and only those stamp duties which are mentioned in the Union List will be levied by the Union but collected and appropriated by the States.

The Constitution (Eighty-eighth Amendment) Act, 2003 inserted Art. 268A which provided for the levy and collection of service tax by the Union and appropriation of it by the Union and the States. The Amendment Bill proposes to delete Art. 268A because a specific article empowering the Union government alone to levy service tax is against the principles of GST proposed under Art. 246A. Article 269 deals with the taxes, which are levied and collected by the Union but assigned to the States. There are only two types of taxes under this category; the Central Sales Tax and the Consignment Tax. Central enactments were imperative to levy these taxes. As the Union Parliament has enacted only the law to levy tax on the sale or purchase of goods in the course of interstate trade or commerce¹⁰, the Central Sales Tax is the only impost available under this Article. In the absence of a central legislation on tax on the consignment of goods‟ it could not be levied or collected. The amendment proposed in Art. 269 is only to specify that the taxes levied and collected by the Union but assigned to the States will not include the taxes specified under Art. 269A. Art. 269A is a new Article proposed to be inserted in the Constitution which provides for the levy and collection of IGST on supplies of goods and services in the course of interstate trade or commerce. It specifies that such taxes shall be levied and collected by the Union and shall be apportioned between the Union and the State in the manner as may be prescribed by Parliament by law. It also stipulates that the supply of goods and/or services in the course of import into the territory of India shall be deemed to be supply of goods and services in the course of interstate trade or commerce. In view of the proposed definition of goods and services tax‟ under clause (12A) of Art. 366 the levy of tax on the interstate sale of goods shall be limited to the goods which are excluded from the ambit of GST.

Article 286 prevents the States from imposing tax on a sale or purchase of goods that takes place outside that state or in the course of export out of or import into the territory of India. Restriction are imposed upon the taxing powers of the states on the sale or purchase of declared goods¹¹, and on the sale or purchase of goods defined under sub-clauses (b), (c) and (d) of clause (29A) of Art. 366. These transactions are subject to the restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify¹². The proposed amendments in Art. 286 maintain the prevention upon the states to tax the transactions outside the state and in the course of export or import. But the transactions which are prevented – the sale or purchase of goods‟ – will be substituted with the supply of goods or of services or both‟.

CONCLUSION:

After years of deliberation and discussion, GST is finally at India’s doorstep and India needs to prepare itself for this revolutionary reform in Indirect Taxation. GST aims to consolidate and increase the efficiency of the indirect tax system in India, which presently harbors multiple taxes in a complex, indecipherable system. It will eliminate the cascading effects of taxation, facilitate and promote increase in revenue for both the Centre and the States and will result in provision of goods and services to consumers at much lower rates. Nevertheless, the efficacy of this system depends on its implementation. For the purpose of designing a comprehensive and neutral goods and service tax consonant with standards set by developed nations, For these purposes the Constitution (One Hundred and Fifteenth Amendment) Bill, 2011 (hereinafter the Amendment Bill‟) has been introduced in the Parliament in March 2011. The Amendment Bill seeks, interalia, to subsume various central and state indirect taxes into GST and empowers the Union and the State Governments to levy it on the supply of goods or of services or both. The 115th Constitutional Amendment Bill marks the beginning of the legislative process required for the implementation of GST in India. It is noteworthy that the Bill has been introduced without any consensus of states especially on the issue of division of powers stipulated in the draft Bill. This Bill is in line with the First Discussion Paper which was released by the Empowered Committee of the State Finance Ministers in November, 2009. The Bill read with the Statement of Object and Reasons emphasizes the concept of a harmonious structure of taxation of goods and services reflecting its intention to make the Indian market more competitive and stable. Considering that States are continuing to oppose the Bill, it would be interesting to note how the Union Government moves ahead with the draft Bill and to what extent would it be successful in its endeavour to implement GST in its proposed form in India. The framework of GST is ready and it is safe and secure as it is India needs harmonization of tax collection, whereby the Centre and States will both stand to earn revenue and the system will work in a smooth manner Therefore, if properly and efficiently implemented, imposition of GST could be the greatest reform in the field of indirect taxation in India. It will bring about efficiency and transparency in the indirect tax mechanism in India and will no doubt be a big leap forward for the Indian economy.

REFERENCE:

1. Articles 246A, 269A, 279A and 279B.

2. Articles 248, 249, 250, 268, 269, 270, 271, 286, 366 and 368.

3. Article 268A.

4. Inserting a new clause (e) in Sub- paragraph (3) of Paragraph 8

5. Modifying Entry 84 and Omitting Entries 92 and 92C of List I and modifying Entries 52, 54 and 62 and omitting Entry 55 of List II

6. ‘GST’ has been defined under article 366 clause 12 under proposed 115 constitutional amendment bill to mean any tax on the supply of goods or services or both excluding supply of petroleum crude, high speed diesel, motor spirit, natural gas, aviation turbine fuel and alcoholic liquor for human consumption.

7. Satya Poddar, Ehtisham Ahmed, Department of Economic Affairs, Ministry of Finance, Government of India, GST Reforms and Intergovernmental Considerations in India (Working Paper No.1/ 2009-DEA, March, 2009) at http://finmin.nic.in/WorkingPaper/GST%20Reforms%20and%20Intergovernmental%20Considerations%20in%20India.pdf

8. Ruma Dubey, GST – India’s most ambitious Indirect Tax Reform, June 22, 2010, available at http://www.premiuminvestments.in/cover-feature/45364p106/45318.html

9. Bills of exchange, cheques, promissory notes, bills of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies, and receipts. See Entry 91 of List I .

10. Central Sales Tax Act, 1956 (Act 74 of 1956).

11. Goods declared as having special importance in the interstate trade or commerce. The list of such goods are given under section 14 of the Central Sales Tax. Act, 1956

12. Restrictions upon the tax on the sale or purchase of declared goods are given in Sec. 15 of the Central Sales Tax Act, 1956 and Parliament has not made any law imposing restrictions upon the tax on the transactions mentioned in Sub-clauses (b), (c) and (d) of Art. 366.

BIBLIOGRAPHY

STATUTES

(1) THE CONSTITUTION OF INDIA, 1950.

(2) THE CONSTITUTION 115^th AMENDMENT BILL, 2011.

WEBSITES VISITED

(1) http://plbs.in/pdf/PLBS%20Report%20on%20the%20GST%20Bill%20-%2023-5-11.pdf

(2) http://www.thehindubusinessline.com/2010/10/23/stories/2010102350331100.htm

(3) http://economictimes.indiatimes.com/personal-finance/tax-savers/Decoding-the-goods-and-services-tax/articleshow/6230329.cms.

(4) www.referencer.in/gst/files/gst_discussion_paper.pdf

(5) http://www.premiuminvestments.in/cover-feature/45364p106/45318.html

(6) http://finmin.nic.in/WorkingPaper/GST%20Reforms%20and%20Intergovernmental%20Considerations%20in%20India.pdf

Received on 01.02.2013

Modified on 20.02.2013

Accepted on 25.02.2013

Research J. Humanities and Social Sciences. 4(1): January-March, 2013, 56-59