GST: New Dimensions in Indian Tax System
An attempt has been made under this paper to examine the meaning, scope, advantages and disadvantages of the concept of ‘Goods and Services Tax’ (GST). The need of tax reform in Indian tax system had risen from time to time. Various taxes have been imposed on goods starting from manufacturing till it reaches to consumer (especially indirect tax). To curve this multi-tax system the new concept of GST has brought by the Government. This paper also studies the reforms made on Articles of the Constitution of India.
Tax reforms are an integral part of the development process of any country. Over the years, a number of tax reforms, especially in the Indirect Tax system, have been initiated by the government to make India more tax-friendly as well as make the tax system less complicated. To fight with black money the present government shown his commitment through the tax reforms and by demonetization of Rs. 500 and 1000 from 8 November, 2016 throughout India. As far as tax reforms in the field of Indirect Taxes are concerned, the historical tax reform being undertaken by the present Government as a challenge is the Goods and Services Tax (GST).
However, it is not the first time in tax history that tax reform has been made. In the year of 2005, VAT (Value Added Tax) was imposed in place of the Sales Tax, at present a number of other indirect taxes are levied in addition to the VAT. The major tax reforms had been made in 1991. This leads to the problem of cascading effect of taxes, whereby an item is taxed several times from the production to the final retail sales stage. The GST is to put an end to the complex web of multifarious indirect taxes that exist at present and replace them with one indirect tax: The GST. It is similar to a VAT and hence, is expected to reduce the problem of cascading effect of taxes.
Before India, 165 countries have also ratified the GST system. Among these countries the GST rates are: Newzealand-15%; Australia- 10%; France-19.6%; Germany-19%; Sweden-25%; Denmark-25%; Pakistan-18% and Canada etc.
Genesis of Tax Reform in India:
The path in the tax reform in India is not new. Since independence India’s decision to be a federation with a unitary bias was coloured by its own experiences. Many who were involved in the proceedings of the Constituent Assembly as well as independent observers have often opined that the Assembly was possibly obsessively focused on the need for ensuring the unity and integrity of the new nation. In fact, in one lengthy debate, Syamanadan Sahaya, MP from Bihar argued “in the matter of financial adjustments between Provinces and the Centre, I think that the Provinces have not been treated as well as they should be. In fact, I have a feeling that in this matter, the Provinces are worse off that in the days of the 1935 Act. The responsibilities of the Provinces their commitments and their sphere for introducing ameliorative measures for the people are greater than even those of the Centre and as such, they should have been given sufficient scope in the field of taxation”.
Indeed, Pt. Hridayanath Kunzru, MP from the United Provinces placed the unitary debate in focus in the same debate arguing: “the financial and administrative stability of the Provinces depends to no small extent on the position of the Centre. It would be short sighted of the Provinces to demand a large share from the Centre, regardless of the effect that their claims would have on the position of the Central Government”.
In the early years, with most states run by Congress Ministries in sync with the Union Government led by Pandit Jawaharlal Nehru never sought to question this arrangement. From the 1960’s when alternate Governments emerged in States, there have been challenges which sought greater powers for the federal units.
In 2005, VAT (Value Added Tax) was introduced in the tax system in which sale tax has been subsumed into VAT. But it imposes lengthy process of tax into good’s starts from manufacturing to production and ended when it reaches upto consumer.
The Goods and Services Tax (GST) is not a new concept. France was the first country to implement GST in 1954, followed by Germany in 1968 and the United Kingdom in 1973. In Canada, the GST was introduced in 1991. Similarly, in India the implementation of GST was started sixteen years back during Atal Bihari Vajpayee’s Government. Again, in 2007, P. Chidambaram was also suggested to implement GST till 2010, but was not imposed due to political conundrum. Finally, during BJP’s Government the Constitution (122nd Amendment) Bill was first passed by the Lok Sabha in May 2015, then taken up again by the Lower House to approve the changes made in it by the Rajya Sabha. Finally, Rajya Sabha has passed it by 203/203 member present and voting in favour of GST on 3 August, 2016 and in Lok Sabha on 8 August, 2016. The Government had moved six official amendments, including scrapping of 1% additional tax, to the bill which was approved by the Upper House. The GST is expected to be a legislative measure that will help transform the economy ushering in transparency and most of all, bring the concept of “one country one tax” into fruition. The tax rate under the GST regime will be kept at “minimum workable rate” so that no State Government ends up annoying its people with a higher tax rate. The final rate is to be decided by the GST Council. The Bill will now have to be ratified by at least 16 of the 29 State Assemblies and 2 Union Territories. Fortunately, all the States have ratified the Bill with majority. Assam was the first State who ratify the GST in Legislative Assembly and Bihar was the second State. Himachal Pradesh was the 5th State to ratify GST on 22nd August.
As far as, GST rates are concerned, the rates have been finalized with a four-tier structure of 5, 12, 18 and 28 percent while basic consumption items, such as foodgrains, will be taxed at zero percent. The main objectives of the GST rates are to maintain revenue and to minimize the inflationary impact. The lowest rate of 5 percent will be for items of mass consumption, there would be two standard rates of 12 and 18 percent. The highest tax slab of 28 percent will be applicable to items such as white goods (electrical goods used domestically such as refrigerators and washing machines which are currently taxed at 30-31% including excise duty and state levies).
If the Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 has been assented by the President then it would be needed to amend the Constitution. In Constitution not only one Article would amend but a bundle of Articles to be amended. The following Articles would amend after The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 become Act:
1. After Article 246 of the Constitution, the following Article shall be inserted, namely:—
"246A. (1) Notwithstanding anything contained in Articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.
(2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.
Explanation.—The provisions of this Article, shall, in respect of goods and services tax referred to in clause (5), of Article 279A, take effect from the date recommended by the Goods and Services Tax Council.’’.
2. In Article 248 of the Constitution, in clause (1), for the word "Parliament", the words, figures and letter "Subject to Article 246A, Parliament" shall be substituted.
3. In Article 249 of the Constitution, in clause (1), after the words "with respect to", the words, figures and letter "goods and services tax provided under Article 246A or" shall be inserted.
4. In Article 250 of the Constitution, in clause (1), after the words "with respect to", the words, figures and letter "goods and services tax provided under Article 246A or" shall be inserted.
5. In Article 268 of the Constitution, in clause (1), the words "and such duties of excise on medicinal and toilet preparations" shall be omitted.
6. Article 268A of the Constitution, as inserted by Section 2 of the Constitution (Eighty-eighth Amendment) Act, 2003 shall be omitted.
7. In Article 269 of the Constitution, in clause (1), after the words "consignment of goods", the words, figures and letter "except as provided in Article 269A" shall be inserted.
8. After Article 269 of the Constitution, the following article shall be inserted, namely:—
‘‘269A. (1) Goods and Services tax on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council.
Explanation.—For the purposes of this clause, supply of goods, or of services, or both in the course of import into the territory of India shall be deemed to be supply of goods, or of services, or both in the course of inter-State trade or commerce.
(2) Parliament may, by law, formulate the principles for determining the place of supply, and when a supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.’’
9. In Article 270 of the Constitution,—
(i) in clause (1), for the words, figures and letter "Articles 268, 268A and Article 269", the words, figures and letter "Articles 268, 269 and Article 269A" shall be substituted;
(ii) after clause (1), the following clause shall be inserted, namely:—
‘‘(1A) The goods and services tax levied and collected by the Government of India, except the tax apportioned with the States under clause (1) of Article 269A, shall also be distributed between the Union and the States in the manner provided in clause (2).’’
10. In Article 271 of the Constitution, after the words ‘‘in those Articles’’, the words, figures and letter ‘‘except the goods and services tax under Article 246A,’’ shall be inserted.
11. After Article 279 of the Constitution, the following Article shall be inserted, namely:—
‘‘279A. (1) The President shall, within sixty days from the date of commencement of the Constitution (One Hundred and Twenty-Second Amendment) Act, 2014, by order, constitute a Council to be called the Goods and Services Tax Council.
(2) The Goods and Services Tax Council shall consist of the following members, namely:—
(a) the Union Finance Minister........................ Chairperson;
(b) the Union Minister of State in charge of Revenue or Finance................. Member;
(c) the Minister in charge of Finance or Taxation or any other Minister nominated by each State Government....................Members.
(3) The Members of the Goods and Services Tax Council referred to in sub-clause (c) of clause (2) shall, as soon as may be, choose one amongst themselves to be the Vice-Chairperson of the Council for such period as they may decide.
(4) The Goods and Services Tax Council shall make recommendations to the Union and the States on—
(a) the taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed in the goods and services tax;
(b) the goods and services that may be subjected to, or exempted from the goods and services tax;
(c) model Goods and Services Tax Laws, principles of levy, apportionment of Integrated Goods and Services Tax and the principles that govern the place of supply;
(d) the threshold limit of turnover below which goods and services may be exempted from goods and services tax;
(e) the rates including floor rates with bands of goods and services tax;
(f) any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster;
(g) special provision with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and
(h) any other matter relating to the goods and services tax, as the Council may decide.
(5) The Goods and Services Tax Council shall recommend the date on which the goods and services tax be levied on petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel.
(6) While discharging the functions conferred by this Article, the Goods and Services Tax Council shall be guided by the need for a harmonised structure of goods and services tax and for the development of a harmonised national market for goods and services.
(7) One half of the total number of Members of the Goods and Services Tax Council shall constitute the quorum at its meetings.
(8) The Goods and Services Tax Council shall determine the procedure in the performance of its functions.
(9) Every decision of the Goods and Services Tax Council shall be taken at a meeting, by a majority of not less than three-fourths of the weighted votes of the members present and voting, in accordance with the following principles, namely:—
(a) the vote of the Central Government shall have a weightage of one-third of the total votes cast, and
(b) the votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast, in that meeting.
(10) No act or proceedings of the Goods and Services Tax Council shall be invalid merely by reason of—
(a) any vacancy in, or any defect in, the constitution of the Council; or
(b) any defect in the appointment of a person as a member of the Council; or
(c) any procedural irregularity of the Council not affecting the merits of the case.
(11) The Goods and Services Tax Council may decide about the modalities to resolve disputes arising out of its recommendation.”
(i) in clause (1),—
(A) for the words "the sale or purchase of goods where such sale or purchase takes place", the words "the supply of goods or of services or both, where such supply takes place" shall be substituted;
(B) in sub-clause (b), for the word “goods”, at both the places where it occurs the words “goods or services or both” shall be substituted;
(ii) in clause (2), for the words "sale or purchase of goods takes place", the words "supply of goods or of services or both" shall be substituted;
(iii) clause (3) shall be omitted.
13. In Article 366 of the Constitution,—
(i) after clause (12), the following clause shall be inserted, namely:—
‘(12A) “goods and services tax” means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption;’;
(ii) after clause (26), the following clauses shall be inserted, namely:—
‘(26A) “Services” means anything other than goods;
(26B) “State” with reference to Articles 246A, 268, 269, 269A and Article 279A includes a Union territory with Legislature’.
14. In Article 368 of the Constitution, in clause (2), in the proviso, in clause (a), for the words and figures “Article 162 or Article 241”, the words, figures and letter “Article 162, Article 241 or Article 279A” shall be substituted.
15. In the Sixth Schedule to the Constitution, in paragraph 8, in sub-paragraph (3),—
(i) in clause (c), the word "and" occurring at the end shall be omitted;
(ii) in clause (d), the word "and" shall be inserted at the end;
(iii) after clause (d), the following clause shall be inserted, namely:—
"(e) taxes on entertainment and amusements."
16. In the Seventh Schedule to the Constitution,—
(a) in List I — Union List,—
(i) for entry 84, the following entry shall be substituted, namely:—
"84. Duties of excise on the following goods manufactured or produced in India, namely:—
(a) petroleum crude;
(b) high speed diesel;
(c) motor spirit (commonly known as petrol);
(d) natural gas;
(e) aviation turbine fuel; and
(f) tobacco and tobacco products.";
(ii) entries 92 and 92C shall be omitted;
(b) in List II — State List,—
(i) entry 52 shall be omitted;
(ii) for entry 54, the following entry shall be substituted, namely:—
"54. Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-State trade or commerce or sale in the course of international trade or commerce of such goods.";
(iii) entry 55 shall be omitted;
(iv) for entry 62, the following entry shall be substituted, namely:—
"62. Taxes on entertainments and amusements to the extent levied and collected by a Panchayat or a Municipality or a Regional Council or a District Council."
Meaning of GST:
GST is a simplified tax structure applied on both goods and services. It is a value-added tax levied at all points in the supply chain with credit allowed for any tax paid on input acquired for use in making the supply. It would be applicable on supply of goods or services as against the prevailing system of tax on the manufacture of goods or on sale of goods or on provision of services. It would be a destination based tax as against the existing system of origin based tax.
GST is levied on indirect taxes only and not on direct taxes. Direct Taxes are levied on Incomes, Property and Wealth whereas indirect taxes include Customs Duties, Excise Duties, Service Tax, and Sales Tax/ Value Added Tax (VAT).
In order to maintain the federal structure, the nation is going to have dual GST, Central GST (CGST) and the State GST (SGST). This means that there will be common tax base for both the Centre and the States. There will also be Integrated GST (IGST). It would be levied on inter-State supply of goods or services. This would be collected by the Centre so that the credit chain is not disrupted. Import of goods or services would be treated as inter-State supplies and would be subject to IGST in addition to the applicable customs duties.
GST and Justification:
Presently, the Central Government levies tax on manufacture (Central Excise Duty), provision of services (Service Tax), interstate sale of goods (levied by the Centre but collected and appropriated by the States) and states levy tax on retail sales (VAT), entry of goods in the State (Entry Tax), Luxury Tax, Purchase Tax, etc. It is clearly discernible that this fractured mandate of taxation between the Central and State Governments leaves a lot of gaps in the supply chain. There is cascading of taxes as taxes levied by Central Government are not available to set off against the taxes being levied by the State Governments. Further, the variety of VAT tax laws in the country with disparate tax rates and dissimilar tax practices divides the country into separate economic spheres. Creation of tariff and non-tariff barriers such as Octroi, Entry Tax, Check Posts etc. hinder the free flow of trade throughout the country. Besides that, the large number of taxes created high compliance cost for the taxpayers in the form of number of returns, payments etc. In fact, it is said that our tax laws have created a situation where business decisions are based on tax considerations rather than logical economical factors. All these issues created a need for one tax that will be able to mitigate number of these problems to a large extent. Therefore, all the taxes are proposed to be subsumed in single tax called the Goods and Services Tax (GST) which will be levied on supply of goods or services or both at each stage of supply chain starting from manufacture or import and till the last retail level.
Merits and Demerits of GST:
Merits of GST:
The benefit of GST is not in one field rather it is benefited to Government, Industry and Individual etc. The various advantages of GST are:
1. Advantage to the Government:
i) GST will help to create a unified common national market for India, giving a boost to foreign investment and “Make in India” campaign.
ii) It will prevent cascading of taxes as Input Tax Credit will be available across goods and services at every stage of supply.
iii) It will harmonize the laws, procedures and rates of tax.
iv) It will improve environment of compliance as all returns to be filed online, input credits to be verified online, encouraging more paper trail of transactions.
v) Common procedures for registration of taxpayers, refund of taxes, uniform formats of tax return, common tax base, common system of classification of goods and services will lend greater certainty to the taxation system.
vi) Greater use of IT will reduce human interface between the taxpayer and the tax administration, which will go a long way in reducing corruption.
vii) It will boost export and manufacturing activity, generate more employment and thus increase GDP with gainful employment leading to substantive economic growth.
viii) It will help in poverty eradication by generating more employment and more financial resources.
2. Advantages to Business and Industry:
i) A robust and comprehensive IT system would be the foundation of the GST regime in India. Therefore, all tax payer services such as registrations, returns, payments, etc. would be available to the taxpayers online, which would make compliance easy and transparent.
ii) GST will ensure that Indirect Tax rates and structures are common across the country, thereby increasing certainty and ease of doing business. In other words, GST would make doing business in the country tax neutral, irrespective of the choice of place of doing business.
iii) A system of seamless tax-credits throughout the value-chain, and across boundaries of States, would ensure that there is minimal cascading of taxes. This would reduce hidden costs of doing business.
iv) Reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry.
3. Advantages to Common Man:
i) At present the Consumer pay service tax and VAT both on eating. Under GST regime, it would be a single tax and eating could be cheaper.
ii) Television could get cheaper, as part of the “Make in India” initiative, the GST is expected to be lower.
iii) Buying bags, shoes, electronics goods online will be getting more expensive as the e-commerce industry comes into a tax net and will have to pay tax deducted at source for every purchase from its sellers. So e-commerce companies which will see shrinking of profit margins and increase tax compliance net could slash discounts and freebies that they offer.
Demerits of GST:
No dought there are lots of benefits by introducing GST, but there are also some demerits of GST. Firstly, the Service Tax in India is now 15% but the proposed GST is about 18-20%. All the services will be Costlier and this is one of the Disadvantages of GST Bill on Common Person.
Secondly, some Economist says that CGST (Central GST), SGST (State GST) are nothing but new names for Central Excise/Service Tax, VAT and CST.
Thirdly, some Economist says that GST in India would impact negatively on the real estate market. It would add up to 8 percent to the cost of new homes and reduce demand by about 12 percent.
Fourthly, the amount of compensation for States under GST will not be fixed which cause a hue and cry among the States.
Lastly, the GST will be non-applicable to the tax on petroleum products, electricity, alcoholic liquors, and stamp duty on immovable property. Thus, the concerned State can impose taxes on these items to fulfill their revenue deficit caused due to GST.
The praxis of policy should be designed after understanding the need of the economy, in the context of socio-economic environment and public needs. Indian manufacturing sector is primarily resource-driven than technology-driven and therefore, the input cost and subsequent taxes on it make the sector more challenging. The implementation of GST would go a long way in promoting “Make in India” and will give much relief to the manufacturing sector and country by getting rid of cascading effects of Sales Taxes, VAT etc.
It can be concluded that the real success of GST lies on the impact on government, Business and industry and common man. The essence of GST is that all goods and services be taxed at moderate rate. “One Nation, One Tax” proves to be a game changer in a positive way and proves to be beneficial not only to the common man, but to the country as a whole. As and when a new law is imposed, it surely leaves its impact especially on the common man.
The Goods and Services Tax may have one unique consequence that turning India’s Constitution from being described as “Federal with a Unitary Bias” to a “Constitution for the Union with a Federal Bias”.
*Ph. D scholar, Himachal Pradesh University, Shimla.
# T N Ashok, “Tax Reforms: Past, Present and Future”, Yojana, 7 (November 2016)
# Malini Chakravarty “India’s Tax System: Increasing Progressivity”, Yojana, 14 (November 2016)
# Jayanta Roy Chowdhury, “GST and the Constitutional Conundrum”, Yojana, 41 (November 2016).
# Id. at 42
# http://gst.customs.gov.my/en/gst/pages/gst_ci.aspx (visited on November 24, 2016).
# Supra n 4.
# Supra n 1 at 8.
# The Tribune, Nov. 4, 2016, p 1.
# Shishir Sinha, “GST: One Nation, One Tax”, Yojana, 52 (November 2016).
# Octroi is a local tax collected on various articles brought into a district for consumption.
# Najib Shah, “Indirect Tax Reforms: Facilitative Tax Regime”, Yojana, 19 (November 2016).
# The Hindu, Dec. 17, 2014 at 9.
# Supra n 15.
# Yojana, 62 (November 2016).
# Ranjeet Mehta, “GST: Game Changer for Indian Economy?”, Yojana, 39 (November 2016).
# www.businessbatao.com/2016/08/gst-bill-advantages-and-disadvantages.html (visited on November 29, 2016).
# https://www.quora.com/Whats-the-importance-of-GST-bill-in-India (visited on November 29, 2016).
# Amiya Kumar Mohapatra, “GST: Rejuvenating the Manufacturing Sector”, Yojana, 60 (November 2016).
# Supra n 5.