By Ananya Banerjee, WBNUJS, Kolkata.
Indirect Taxes & GST
The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 (the “Bill”) seeks to amend the Constitution to change the indirect tax structure of the country to facilitate the introduction of Goods and Services Tax (“GST”). Following the footsteps of most of the developed countries, the Centre is trying to implement a centralized structure with respect to goods and services. GST is meant to be a single, comprehensive tax that will subsume all the other smaller indirect taxes applicable on consumption.
Why GST?
The present indirect tax structure is highly complicated, resulting in multiplicity of taxes. The Indian Constitution has given the power to the Centre to levy excise duty on manufacturing, Service Tax for provision of taxable services, Central Sales Tax (“CST”) etc. Whereas, the States have the power to levy Value Added Tax (“VAT”), Entertainment and Luxury Taxes, Octroi and Entry Taxes etc. The complex indirect tax structure of the country, the different tax rates, the ‘tax on tax’ structure and the lack of credit facility among different levels hinder the industry. Moreover, this structure also causes unnecessary and unwanted inflation of prices of goods and services.
Salient Features
The distribution of financial powers, as provided in the Constitution, shall be amended to facilitate GST. The GST structure proposes taxation of the supply of goods and services simultaneously by the Centre and the States. Therefore, both the Centre and the States will be empowered to levy GST across the value chain from the stage of manufacture to consumption.
Basic Provisions: Both the Centre and the States shall have power to legislate on GST. Instead of levying taxes for purchase or sale, GST would be levied for supply of goods and services. GST would subsume several indirect taxes and levies including VAT, sales tax, CST, several forms of excise duties, central surcharges and cess (so far as they relate to supply of goods and services), entertainment tax, luxury tax, purchase tax, octroi and entry tax, lottery tax, taxes on betting and gambling etc. The Bill also proposes to do away with the concept of ‘declared goods of special importance’, as existing under the Constitution. The Centre and the States shall form a company for providing the necessary infrastructure.
Dual GST System: As per the provisions, both the Centre and the States shall simultaneously levy GST on supply of goods and services. The Centre would levy and collect Central Goods and Services Tax (“CGST”), while the State would levy and collect the State Goods and Services Tax (“SGST”) for each transaction carried on within that State. The Centre would also levy and collect Integrated Goods and Services Tax (“IGST”) on all inter-State transactions of similar nature from an inter-State seller.
Tax Rates: The floor rate of GST shall be uniform throughout the country. The States would have a tax band over and above the floor rate. In addition to IGST levied, the Centre shall also impose an additional tax at the rate of 1% (or less), for a period of two years or more, to be decided by the Goods and Services Tax Council (“GSTC”), which would be used for compensating the manufacturing States. A four tier rate structure is proposed with the standard rate fixed at 17-18%. The widest possible range of goods and services is proposed to be taxed at this rate. The proposed rate for different goods are as follows: (i) precious metal – 2-6%, (ii) food products and few other products – 12%, (iii) tobacco, tobacco products, aerated drinks, paan masala and luxury cars – 40%. All other products are recommended to be taxed at the standard rate.
Shift of Structure & Transferable Credit: GST would be destination-based instead of being origin-based, i.e., the SGST collected shall ordinarily accrue to the State of residence of the consumer, instead of the producer or supplier State. Due to this shift, there’s a possibility that some large manufacturing States might face a considerable amount of revenue drop during the initial years of implementation of GST. The Bill also aims to ensure seamless flow of input tax credit from one entity to another and the traders would be entitled to claim and use their tax credits conveniently for the payment of IGST, CGST and SGST.
Special Treatment: All goods and services would fall under the purview of GST, with the exception of liquor, petroleum and petroleum products (until notified to be taxed under GST as goods). The taxes currently applicable on tobacco and tobacco products (levied by the Centre) would continue to be applicable over and above GST. Liquors for human consumption would continue to be taxed as per the existing tax structure.
GST Council: The GSTC shall be established as a joint forum of the Centre and the States having the Union Finance Minister as the Chairman and members from all the States and Union Territories (having legislature). The GSTC will make recommendations to the Centre and the States on important issues like tax rates, exemption list, threshold limits, compensation procedure etc. At least one-half of the total number of members would be required to form a valid quorum of its meeting, whereby, every decision would require three fourth of the votes of the members, present and voting, with the Centre’s vote having one-third weightage and the States having two-third weightage or the total votes cast.
Conclusion
The Bill was introduced on December 19, 2014 and was passed by the Lok Sabha on May 06, 2015. However, it has been held up in the Rajya Sabha owing to the objections raised by the opposition parties regarding several issues. The Congress has demanded to scrap the additional levy above and over the IGST, to cap the rate of GST at 18%, and, to change the composition of GSTC as well as to reduce the weightage of the vote of the Centre. The large manufacturing States have also opposed the Bill as this system is expected to throw those States in front of a critical economic challenge.
The proposed structure would end the multiplicity of indirect taxes, eliminate the concept of ‘tax on tax’, simplify the multifaceted indirect tax structure of India, reduce the production cost and help the industrial sector, which might put a check on inflation. It would also ensure uniformity, better compliance and seamless transfer of input tax credit. However, this structure significantly deviates from the existing Constitutional provisions. Although the system is adopted by many developed countries, there’s no certainty that India is ready to accept it as yet. Moreover, the drastic change of the origin-based tax structure to the destination-based tax structure is expected to harm the economic autonomy of several large manufacturing States. The power sharing between the Centre and the States might also result in a chaotic situation. Due to this reason, there’s a difference of opinion among the experts with regards to the possible effects of this system. Notwithstanding the foregoing, if the Bill is passed, utmost care and co-operation of the Centre and the States would be required to attain the desirable results sought to be achieved by the framers of this Bill.