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Essential Features of GST

August 26, 2016

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

Table of Contents

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

Central Goods and Services Tax (CGST)
State Goods and Services Tax (SGST)
Integrated Goods and Services Tax (ITGST)
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;

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