This article is written by Rini Mathew, from School of Law, SASTRA University, and Prachi Bhatia, from ILS Law College, Pune. 

Introduction

Goods and Service Tax Bill is the 122^nd Constitutional Amendment Bill initiated by the Upper House, Rajya Sabha, is a game changing historical reform in the tax regime of the country. It creates a harmonized system of taxation by subsuming all indirect taxes under one tax which includes Central taxes like Central Excise duty, Additional Excise duty, Service tax, Additional Custom duty, Special additional duty and State level taxes like, VAT or sales tax, Central Sales tax, Entertainment tax, Entry tax, Purchase tax, Luxury tax, etc. This uniform tax regime was introduced earlier in 2000 by Prime Minister Vajpayee, but few hurdles were created by the Indian National Congress backed by the left parties. The rates of GST are decided on the principle of revenue-neutral-states (RNR). This reforms Indian Economy by developing a common Indian market and reducing the cascading effects of tax on the cost of goods and services. This will impact the tax structure, tax computation, tax structure, tax payment, compliance, credit utilization leading to a complete revamp of the current indirect tax system.

Constitutional Scheme of Indirect Tax before GST

Article 265 provides that no tax can be collected or levied except by authority of law.  Article 246 lists down the subject matters on which state and centre can legislate. The list I of the seventh schedule also known as Union List (UL) gives Parliament exclusive power to legislate on the given matters. List II is a State list (SL) giving exclusive powers to state legislatures. List III is a Concurrent List laying down subject matters on which both can legislate. 

Before the advent of GST, the source of revenue for the central government were customs duty (entry 83 of UL), central excise duty (entry 84 of UL), and service tax (entry 97 of UL). Central Sales Tax (CST) was levied by the central government but collected by the government of the state of origin.

State governments filled their pockets from excise duty on alcoholic liquors, opium and narcotics (entry 51 of SL), octroi and entry tax (entry 52 of SL), electricity tax (entry 53 of SL), tax on sale and purchase (entry 54 of SL), taxes on entertainment, luxuries, amusements, betting and gambling (entry 62 of SL). CST was also a major source of revenue.

Constitutional Amendment for GST

Constitution (101ST Amendment) Act, 2016 was passed to give GST constitutional backing.   

Following provisions were introduced through this amendment-

Insertion of Article 246A empowered Parliament and state to make laws relating to respective GST imposed on them. The laws with respect to inter-state supplies were reserved for Parliament. 

Art. 269A provides for the manner of distribution of revenue between the centre and the state collected from inter-state supplies.

Under Art. 279A President is given the power to constitute GST Council, a joint forum of the Center and the States.  It also elaborates on the composition of the council.

Art.366 added important definitions. Clause 12A defines ‘goods and service tax’, clause 26A defines ‘services’, and clause 26B defines ‘state’ with reference to art. 246A, 268, 268A, and 279A.

Why was GST introduced?

The reasons for the implementation of GST are as follows-

Web of taxes- The taxpayer was entangled in the web of various indirect taxes imposed on him. The tax was levied at the center, state and as well as at municipal level. The burden of this three-tier tax structure troubled taxpayers for the longest time.

Double Taxation- A single transaction was exposed to multiple taxes imposed by different authorities. Example: to watch a movie in the theatre, entertainment as well as service tax was payable. Service tax was collected by the central government and entertainment tax by the state.

The complexity of compliances- The process of compliance was cumbersome.  In the previous tax regime, taxpayers had to pay different authorities at different durations. 

A number of taxable events- Tax was levied at different stages. Excise duty was levied by the central government at the manufacturing stage. Entry tax was collected by the State on the entry of goods. State VAT was applicable to the sale of goods within the state. Octroi was then collected by municipal authorities. There was a tax at each stage of goods movement.

Remove the Cascading Effect- Cascading effect is also known as the tax on tax. The tax was charged on cost inclusive of tax. Tax paid as excise wasn’t allowed as a credit to set off against the taxes payable at the state level and vice versa.

Taxes introduced by GST

1. Central Goods and Services Tax (CGST) 
2. State Goods and Services Tax (SGST)
3. Integrated Goods and Services Tax (ITGST)
4. Union Territory Goods and Services Tax (UTGST)

Taxes Subsumed By GST

7 central taxes and 8 state taxes saw dusk with the dawn of GST. 

Central Taxes	State Taxes
Central Excise Duty entry	State VAT
Duties of Excise (medicinal and toilet preparations)	Central Sales Tax  Purchase Tax
Additional Duties of Excise (Goods of special importance)	Entry Tax  Luxury Tax
Additional Duties of Excise (Textiles and Textile products)	Entertainment Tax (except those levied by the local bodies)
Additional Duties of Customs (CVD)	Taxes on lotteries, betting and gambling
Special Additional Duty of Customs (SAD)	Taxes on advertisements
Service Tax

Salient features of GST

Equal distribution of powers to Union and State Legislature

Our constitution has provided the autonomy to States to impose taxes to meet their financial needs. Centre cannot amend their power which falls in State List until states want to do so GST provisions have also adhered to the same. Union Government will be vested with the power to make laws in respect of supplies in the course of inter-state trade or commerce. Similarly, State Government shall levy intra-state transactions including services.

Creation of GST Council

Within 60 days after the enactment of the bill, GST Council shall be formed. It shall consist of representatives from Centre as well as State. It will make recommendations to the Union and the States on model Goods and Service Tax laws. The model bill is put in public domain. This facilitates online registration, tax payment and return filing. State will also frame their respective legislations to enable them to implement GST, which will be in line with the Central GST legislation. Administration of GST will be responsibility of the GST Council, which will be the apex policy making body of GST.The GST Council, will consist of the Union Finance Minister, Union Minister of State for Revenue, and state Finance Ministers.

Compensation to States for loss of revenue

Parliament may, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years. Parliament may, by law, provide compensation to States for any loss of revenue from the introduction of GST, up to a five year period.

Additional tax

The Centre to impose an additional tax of up to 1% on the inter-state supply of goods for two years or more. This tax will accrue to states from where the supply originates. The additional 1% tax levied on goods that are transported across states dilutes the objective of creating a harmonized national market for goods and services.  Inter-state trade of a good would be more expensive than intra-state trade, with the burden being borne by retail consumers.  Further, cascading of taxes will continue.

Other Features

• Centre will levy IGST on inter-State supply of goods and services. Import of goods will be subject to basic customs duty and IGST.
• GST shall be levied on any tax on supply of goods and services but it is silent about alcohol for consumption.
• Upon notification by the GST Council, Petroleum and petroleum products such as crude, high speed diesel, motor spirit, aviation turbine fuel and natural gas shall be subject to the GST.
• Removal of imposition of entry tax/ Octroi across India.
• Taxes levied by State on movies, theatre etc. as Entertainment tax will be subsumed in GST, but levy of the same at panchayat, municipality or district level will continue.
• Government’s access to substantial incremental revenues by levying GST on the sale of newspapers and advertisements.
• No amendments were made to stamp duties, imposed on legal agreements by the state.

Comparison of 2014 and 2016 bill

Additional tax up to 1% on inter-State trade

An additional tax of up to 1% on the supply of goods will be levied by Centre in the course of inter-State trade or commerce. The tax will be directly assigned to the States from where the supply originates. This will be for two years or more, as recommended by GST Council, whereas the 2016 proposed amendment has deleted the provision itself.

Compensation to States

Parliament has prescribed a shorter time period for the compensation incurred by the States because of low revenue collected by the new regime.

Dispute resolution

2014 bill was not clear with the nature of the dispute, whereas the 2016 bill establishes a mechanism to adjudicate any dispute arising out of its recommendations.

Disputes can be between:

(a) The Centre vs. one or more States;

(b) The Centre and States vs. one or more States;

(c) State vs. State. This implies there will be a standing mechanism to resolve disputes.

Replacement of the term IGST

Under the 2014 bill, the GST Council had made recommendations on the apportionment of the Integrated Goods and Services Tax (IGST). However, the term IGST was not defined. The 2016 amendments replace this term with ‘goods and services tax levied on supplies in the course of inter-State trade or commerce’.

Inclusion of CGST and IGST in tax devolution to States

The amendments state that the CGST and the Centre’s share of IGST will be distributed between the Centre and States. This is just a restatement of the provisions in the 2014 Bill in clearer terms.

Analysis of laws replaced by GST

• Central Excise Act, 1944 (CEA) and Central Excise Tariff Act,1985 (CETA)

Excise Duty was an indirect tax payable at the manufacturing stage. It is paid by the manufacturer as soon as the goods are manufactured. Excise duty has been subsumed under GST barring few items such as alcohol and petroleum. The CEA provided definitions related to excise whereas CETA provided for goods on which excise duty was charged and tariffs on them. Additional excise duty is levied on goods of special importance and special excise duty on special goods mentioned in the second schedule to the CETA.

Under GST, excise duty was bid adieu. The tax was levied on the supply of goods or services whether by manufacturer or any other person. CGST has taken place of excise and all the revenue from it goes to the central government. The rate of excise duty was 12.36% varied as per the kind of product whereas rates in GST is 5%, 12%, 18%, and 28% depending on the product. There was no composition scheme and reverse charge mechanism for manufacturers prior to GST. In earlier tax regime credit had to be availed on capital goods within two years but it has been removed in GST. 

• Customs Act, 1962 and Customs Tariff Act, 1975

Custom Duty was applicable to the goods imported in the country and a few exported goods. It is collected by the central government and regulated by the Central Board of Excise and Customs (CBEC).  GST subsumed countervailing duty (CVD) and Special Additional Duty (SAD). Basic Customs Duty (BCD) was kept within the purview of GST. BCD is applicable to the imported goods under sec 12 of the Customs Act. IGST is levied on a supply made in the course of inter-state trade and commerce. Inter-state trade and commerce include import/export made in India and inter-state supplies. The imported goods are levied IGST along with BCD and other surcharges. BCD varies from 5% to 40%. GST law borrowed the concept of transactional valuation for charging GST. 

• Service Tax Act, Chapter V of Finance Act, 1994

Service tax was exclusively applicable by the central government on services. Whereas, GST is applicable on both goods and services which is collected by both central as well as state government. The definition of “services” provided in sec 2(102) of CGST Act is wider and includes anything other than goods, money and securities. Service tax was levied on the provision of services while GST is charged on supply of services. 

• Value Addition Tax, 2005

It was introduced on 1st July 2005 and replaces Sales tax. It was a state-level tax but is still applicable to key products like alcohol for human consumption, petrol and diesel. The VAT rates for goods and services were different in different states. The calculation of tax was done on value addition done in the process of production to consumption. The credit on tax was available under VAT. This was adopted in GST. VAT did bring uniformity in the taxation but still had some deficiencies. The GST took into consideration all the deficiencies like different tax rate, compliances burden, cascading effect etc and provided a better system.

• Central Sale Tax Act, 1956 (CST)

Central Sale Tax was levied by the central government on inter-state sales. It was collected and retained by the state in which the goods are sold and the movement commences. It was an origin tax and stood in contrast with the VAT which was a destination tax. CST is now replaced with IGST. IGST collected for inter-state supplies by the central government is apportioned between the state and central governments. The revenue is apportioned to the Centre at CGST rate and the remaining amount goes to the consuming state.

Pre GST	Post GST
Central excise Levied on- manufacturer Taxable event- as soon as goods are manufactured Collected by – Central government (Including state VAT in which it is sold)	CGST Levied on- manufacturer Taxable event- when manufactured goods are supplies Collected by – Central government (Including GST if intra-state supply)
Customs Act Levied on- importer/exporter Taxable event- when goods are imported in India and some exported goods Collected by – Central government	IGST and BCD Levied on- importer Taxable event- when goods are imported in India Collected by – Central government
Service Tax Act Levied on- services Taxable event- provision of services Collected by – Central government	CGST, SGST/UTGST or IGST Levied on- services Taxable event- supply of services Collected by – Central and state government( intra-state supply) Central Government (inter-state supply)
VAT Levied on- goods and services Taxable event- purchase and sale of goods and services Collected by – State government	SGST/UTGST Levied on- goods and services Taxable event- supply of goods and services Collected by – State government/union government
CST Levied on- inter-state sale Taxable event- when goods are sold to a different state Collected by – State government	IGST Levied on- inter-state supply Taxable event- when goods or services are supplied to a different state Collected by – Central government (revenue apportioned with state government)

How GST transformed indirect taxation?

The changes that GST brought in are as follows-

• Easy Compliance

All GST filings and compliances are computerized. The taxpayer can easily log in to https://www.gst.gov.in/ to pay the dues. It has removed all the unnecessary impediments like filing for different VAT in different states, different date of filing etc.

• Reduced Taxes

Before GST, there was a long list of taxes that a person had to pay. Post its introduction the list got shorter and with many of the taxes erased, the cost of goods has considerably come down. The benefit of reduced taxes is a welcome change for consumers.

• Regulation of the unorganized sector

GST introduced the concept of reverse charge mechanism. This puts liability on the registered suppliers to pay GST in case they purchase goods from unregistered suppliers. This has promoted registration of suppliers and regulation of the widespread unorganized sector.

• Composition Scheme

Previous tax regime lacked the incentive to promote small businessmen. GST introduced a composition scheme in which lower tax was applicable on the turnover. Lower tax boosted the morale of the businessmen and manufacturers.

• Reduced Corruption

GST is a technologically friendly law. The whole procedure of filing of taxes online introduced much-required transparency in the system. The clog was put on offline transactions which were a gateway for corruption. The unaccounted receipts were tackled by necessitating GST identification number (GSTIN) on receipt.

Exemptions under GST

The Bill excludes alcoholic liquor for human consumption from the purview of GST.  Further, GST will apply to five petroleum products i.e. (a) petroleum crude, (b) high speed diesel, (c) motor spirit (petrol), (d) natural gas, and (e) aviation turbine fuel at a later date, to be decided by the GST Council. Petroleum products are inputs for several other goods and exempting them from the purview of GST could lead to cascading of taxes.  This is because the input tax credit would no longer be available on such products.  This disruption in the tax credit chain would distort the GST structure and could also lead to leakages of revenues.[1] The 13th Finance Commission and the Department of Revenue had recommended that all petroleum products and alcohol be brought under GST.[2] The Commission had suggested that states could impose an additional levy on petroleum products and alcohol, in addition to GST.[3]

Advantages

Three major benefits from the GST. Firstly, it will increase the resources available for poverty alleviation and development. This will be the result as the tax base becomes more buoyant and as the overall resources of the Central and State Governments would increase. There will be a uniform distribution of resources irrespective of the state and its location. Secondly, this would facilitate ‘Make in India’, by making one India. The current tax structure unmakes India by fragmenting markets of the country along borders of states. These economic distortions are caused by the existing hurdles of the tax regime: Central Sales tax on inter-states sale of good, numerous intra-state taxes, giving abundant powers in the hands of the states to impose tax on various services, goods etc. All these hurdles shall be rectified by GST. Thirdly, dual monitoring structure of the GST, one by the States and one by the Centre.

For Central and State Governments

Simple and Easy Administration: GST replaces multiple indirect taxes at the Central and State levels. Backed with a robust end-to-end IT system, GST would be enable simpler and easier administration.

Better tax compliance: GST will result in better tax compliance due to a robust IT infrastructure. There is an in-built mechanism in the design of GST that would incentivize tax compliance by traders due to the seamless transfer of input tax credit from one stage to another in the chain of value addition,

Higher revenue efficiency: Lead to higher revenue efficiency as GST is expected to decrease the cost of collection of tax revenues of the Government, and will therefore

For business and industry

Ease of doing business: In the indirect tax system, taxes were levied at multiple points and locations. The type of tax means higher prices for everyone in the chain. There were also differential state taxes. The GST avoids such anomalies and creates a single market and a single price which makes it easier to do business.

Uniformity of tax rates and structures: The introduction of the concept of one India, one market will decisively alter the economy for the better. 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.

Easy compliance: A robust and ample IT system would be the foundation of the GST regime in India. Therefore, all services such as registrations, returns, payments, etc. would be available to the taxpayers online, which would make compliance easy and transparent.

Removal of cascading: 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.

Improved competitiveness: Improves competitiveness for the trade and industry by reducing transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry.

Gain to manufacturers and exporters: The subsuming of major taxes both in Central and State in GST would reduce the cost of locally manufactured goods and services. This will boost the Indian exports by increasing the competitiveness of Indian goods and services in the international market. The uniformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost.

For the consumer

Single and transparent tax proportionate to the value of goods and services: Under GST, there would be only one tax from the manufacturer to the consumer, leading to transparency of taxes paid to the final consumer.

Relief in overall tax burden: The overall tax burden on most commodities will come down, which will benefit consumers because of efficiency gains and prevention of leakages

Miscellaneous

As a boost of GDP of India: Implementation of laws should be for the public interest and the proposed GST, will enable in gain of additional GSP growth of 1% to 1.5% because balanced growth in production as well as consumption could lead to sustainable growth.Sustainable growth cannot achieved by the country without increasing the consumption power of majority of the population.

Less Corruption: With high transparency in the tax regime and levy of tax will result in less corruption.

Disadvantages

GST fails to deal with tax on alcohol, petrol, petroleum products etc.

Woes of manufacturing states: For States with manufacturing industries, creation of uniform tax regime will mean an outflow of tax revenue along with goods and services produced there. GST provides no incentive for manufacturing States. Initially, the worries of the manufacturing States were not been addressed properly by the Union Government but now the compensation shall be given for the loss of revenue up to 5 years. GST further distorts the basic structures of fiscal federalism.

Conclusion

Sometimes, we are insufficiently appreciative of how much the country has achieved in coming to this point with the GST. As the Prime Minister suggested, credit should go to all stakeholders at the Centre and the States for having worked towards the GST. The time is ripe to collectively seize this historic opportunity; not just because the GST will decisively alter the Indian economy for the better but also because the GST symbolizes Indian politics and democracy at its cooperative, consensual best.

References

[1]Report of the 14th Finance Commission, Chapter 13, „Goods and Services Tax‟, February 24, 2015.

[2] Comments of the Department of Revenue on the First Discussion Paper on GST, January 2010.

[3] Report of the 13th Finance Commission, Chapter 5, „Goods and Services Tax‟, Ministry of Finance, December 2009.

• GST, concept and status by CBIC
• Introduction to Indirect Taxation, ICSI
• Constitution (101 Amendment) Act, 2016
• https://www.gst.gov.in/

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