In this blog post, Rini Mathew, a 4th year student of School of Law, SASTRA University, discusses in details the salient features of GST, draws a comparison between the GST 2014 and GST 2016 bills and further goes on to elaborate on the advantages and disadvantages that the Central Government, State Government as well as the consumers will have with of the introduction of GST.
Goods and Service Tax Bill is the 122nd 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.
GST as a Constitutional Bill
GST bill “also” proposes to alter the relationship between the state and the Centre and also the method in which they collect taxes. Hence, it is a Constitutional Bill and not an ordinary or Money Bill and Rajya Sabha’s consent is a must. If the Constitution clause is removed, it becomes a money bill but forthwith will it lose it its essence as GST. Hence it is not to the whims and fancies of the Union Government to present it as a money bill.
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.
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.
- 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.
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.
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. The 13th Finance Commission and the Department of Revenue had recommended that all petroleum products and alcohol be brought under GST. The Commission had suggested that states could impose an additional levy on petroleum products and alcohol, in addition to GST.
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
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.
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.
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.
Report of the 14th Finance Commission, Chapter 13, „Goods and Services Tax‟, February 24, 2015.
 Comments of the Department of Revenue on the First Discussion Paper on GST, January 2010.
 Report of the 13th Finance Commission, Chapter 5, „Goods and Services Tax‟, Ministry of Finance, December 2009.