Business NewsNews

Historic tax reform, the Goods and Service Tax (GST), has resulted in formalization of economy and consequently information flow would eventually augment not only the Indirect Tax collections but also Direct Tax collections. In the past, the Centre had little data on small manufacturers and consumption because the excise was imposed only at the manufacturing stage while the States had little data on the activities of local firms outside their borders. Under the GST, there will be now seamless flow of availability of common set of data to both the Centre and the States making Direct and Indirect Tax collections more effective.

There are early signs of tax base expansion. Between June and July 2017, 6.6 lakh new agents, previously outside the tax net, sought GST registration. This is expected to rise consistently as the incentives for formalization increase. Entire Textile chain is now brought under tax net. Further, a segment of land and real estate transactions has also been brought into tax net “works contracts”, referring to housing that is being built. This in turn would allow for greater transparency and formalization of cement, steel and other sales which earlier tended to be outside the tax net. The formalization will occur because builder will need documentation of these input purchases to claim tax credit.

The introduction of GST, a common Indirect Tax for both the States as well as the Central Government with its end to end digitization of all processes, is the biggest reform measure which is already creating more jobs in formal sector and eliminating transactions which are not recorded earlier in the books of accounts and thus, were outside the tax net so far. GST is designed to bring about better tax compliance and transparency in tax system. It is putting a premium on honesty. It would make increasingly difficult for those (who are liable to pay tax) to remain outside the tax net.

A number of procedural changes have also been made since the roll-out of GST on 1st July, 2017 in order to simplify the processes. An extensive exercise was undertaken for tax payers education and facilitation by way of knowledge sharing, dissemination of information and replies to FAQs among others. Further, steps are also being undertaken for further simplification in order to facilitate the tax payers and to extend benefit to the customers.

Ministry of Finance

Legislation UpdatesRules & Regulations

G.S.R. 524(E).—In exercise of the powers conferred by Section 53 read with Section 17 of the Central Goods and Services Tax Act, 2017 (12 of 2017), Sections 17 and 18 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017) and Section 21 of the Union Territory Goods and Services Tax Act, 2017 (14 of 2017), the Central Government hereby makes the following further amendments in the Goods and Services Tax Settlement of Funds Rules, 2017, namely:

1. (1) These rules may be called the Goods and Services Tax Settlement of Funds (Second Amendment) Rules, 2018.

(2) They shall come into force on the date of their publication in the Official Gazette.

2. In the Goods and Services Tax Settlement of Funds Rules, 2017, in rule 11, for sub-rule (3), the following shall be substituted, namely:

“(3) At any point of time in any particular financial year, the Central Government may, on the recommendations of the Council, provisionally settle any sum of integrated goods and services tax collected in that particular financial year which has not been settled so far which will be adjusted in the subsequent month(s)/year(s), based on the returns filed by the taxpayers”.

[F. No. 31013/16/2017-ST-I-DoR]

Note: The principal rules were published in Gazette of India, Extraordinary, Part- II, Section 3, Sub-Section (i), vide number G.S.R. 964(E), dated the 27th July, 2017 and first amendment published in the Gazette of India, Extraordinary, Part- II, Section 3, Sub-Section (i), vide Notification No. G.S.R. 145(E) dated the 6th February, 2018.

Ministry of Finance

 

Hot Off The PressNews

The GST council in its 27th meeting, held on 04-05-2018, has approved the principles for filing of new return design based on the recommendations of the Group of Ministers on IT simplification.

 

The key elements of the new return design are as follows

  • One monthly Return: All taxpayers excluding a few exceptions like composition dealer shall file one monthly return. Return filing dates shall be staggered based on the turnover of the registered person to manage load on the IT system. Composition dealers and dealers having nil transaction shall have facility to file quarterly return.
  • Unidirectional Flow of invoices: There shall be unidirectional flow of invoices uploaded by the seller on anytime basis during the month which would be the valid document to avail input tax credit by the buyer. Buyer would also be able to continuously see the uploaded invoices during the month. There shall not be any need to upload the purchase invoices also. Invoices for B2B transaction shall need to use HSN at four digit level or more to achieve uniformity in the reporting system.
  • Simple Return design and easy IT interface: The B2B dealers will have to fill invoice-wise details of the outward supply made by them, based on which the system will automatically calculate his tax liability. The input tax credit will be calculated automatically by the system based on invoices uploaded by his sellers. Taxpayer shall be also given user friendly IT interface and offline IT tool to upload the invoices.
  • No automatic reversal of credit: There shall not be any automatic reversal of input tax credit from buyer on non-payment of tax by the seller. In case of default in payment of tax by the seller, recovery shall be made from the seller however reversal of credit from buyer shall also be an option available with the revenue authorities to address exceptional situations like missing dealer, closure of business by supplier or supplier not having adequate assets etc.
  • Due process for recovery and reversal: Recovery of tax or reversal of input tax credit shall be through a due process of issuing notice and order. The process would be online and automated to reduce the human interface.
  • Supplier side control: Uploading of invoices by the seller to pass input tax credit who has defaulted in payment of tax above a threshold amount shall be blocked to control misuse of input tax credit facility. Similar safeguards would be built with regard to newly registered dealers also. Analytical tools would be used to identify such transactions at the earliest and prevent loss of revenue.
  • Transition: There will be a three stage transition to the new system. Stage I shall be the present system of filing of return GSTR 3B and GSTR 1. GSTR 2 and GSTR 3 shall continue to remain suspended. Stage I will continue for a period not exceeding 6 months by which time new return software would be ready. In stage  2, the new return will have facility for invoice-wise data upload and also facility for claiming input tax credit on self declaration basis, as in case of GSTR 3B now. During this stage 2, the dealer will be constantly fed with information about gap between credit available to them as per invoices uploaded by their sellers and the provisional credit being claimed by them. After 6 months of this phase 2, the facility of provisional credit will get withdrawn and input tax credit will only be limited to the invoices uploaded by the sellers from whom the dealer has purchased goods.
  • Content of the return and implementation: Return shall be simplified also by reducing the content/information required to be filled in the return. The details of the design of the return form, business process and legal changes would be worked out by the law committee based on these principles. Government is keen to introduce the simplified return design at the earliest to reduce the compliance burden on the trade in keeping with the philosophy of ease of doing business.

[Press Release no. 1531331, dt. 04-05-2018]

Ministry of Finance

Business NewsNews

Electronic bill exchanges are the latest match-making venues for lenders seeking new clients and small entities desperate for capital. The fledgling exchanges, opened under the Trade Receivables Discounting System (TReDS), have attracted a host of lenders otherwise shy of financing companies with low credit ratings, since the new system allows them to find creditworthy clients and build new relationships. System gives small firms access to cash, helps banks find new creditworthy customers.

Typically, micro, small and medium enterprises (MSMEs) that supply products or services to larger companies raise their bills (or trade receivables) but have to wait long to be paid, resulting in a shortage of working capital. Under TReDS, the MSME uploads the same bill on a TReDS bill discounting exchange, where lenders bid to buy the bill, depending on the creditworthiness of the bigger company. The selected lender which offers the lowest discount or margin pays the MSME, and later receives the payment from the larger company. It’s a win-win situation for both the MSME (which gets immediate cash) and the lender (which find new creditworthy customers, though with less risk due to the payment due from the larger company). Joining TReDS has helped new MSME clients get access to priority sector lending-compliant loans and build stronger portfolios.

The benefit of such collaborations is that the exposure is on a stronger entity and banks get opportunity to build a relationship with both the large companies as well as MSMEs. Also, availability of more authentic data due to GST will enable banks to do better due-diligence and help give more credit to MSME. The state-owned lender has tied up with all three TReDS exchanges licensed by the Reserve Bank of India in November 2015. According to bankers, goods and service tax (GST) has brought many companies under the tax umbrella, making banks confident of lending to them. MSMEs are usually capital-starved because of limited access to bank credit. One of the key reasons is lack of documentation and skills to predict future cash flows, weak account maintenance, and non-compliance with taxation rules. Additionally, demonetization had impacted their finances, which were already stretched because of delays in payments by large companies at least by over a quarter. Apart from TReDS, other announcements too are likely to boost credit demand to the sector. Separately, RBI on 7 February, 2018, gave additional time for loan repayment to certain MSMEs affected by GST, without getting their accounts classified as non-performing. This facility is available only to those firms whose aggregate loans are less than Rs 25 crore. These steps may prompt more lenders to register themselves on these platforms.

[Source: Livemint]

Business NewsNews

The GST will not be charged on the cost of food served to patients by hospitals as advised by doctors. As per GST law, healthcare services have been defined to include any service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognised system of medicine in India. However, patients not admitted will have to pay tax on the total value of food served by the hospital. The Revenue Department also clarified that no Goods and Services Tax (GST) would be levied on services provided by senior doctors/consultants/ technicians hired by the hospitals as these are covered under healthcare services. The food supplied to in-patients are not separately taxable as they form part of composite supply of healthcare, which is exempt under the GST. The entire amount charged by them (hospitals) from the patients, including the retention money and the fee/payments made to the doctors etc, is towards the healthcare services provided by the hospitals to the patients and is exempt (from GST).

[Source: The Financial Express]

Business NewsNews

With a view to remove any doubt or uncertainty in the matter and bring uniformity in the rate of GST applicable to supply of food and drinks made available in trains, platforms or stations, it has been clarified with the approval of the competent authority that the GST rate on supply of food and drinks by the Indian Railways or Indian Railways Catering and Tourism Corporation Ltd., or their licensees, whether in trains or at platforms (static units), will be 5% without input tax credit [vide letter F.No. 354/03/2018-TRU dt. 31-03-2018 (Order No. 2/2018 – GST) issued to the Railway Board (available at www.cbec.gov.in)].

[Press Release no. 1528079]

Ministry of Finance

Business NewsNews

As per decision of the GST Council, E-Way Bill system became mandatory from 01-04-2018 for all inter-State movement of goods. Both the businesses as well as the transporters moving goods worth Rs 50,000 from one state to another will have to carry an electronic or E-way bill from 01-04-2018, except for Karnataka having notified the E-way bill for both inter-state as well as the intra-state movement of goods. The E-way bill is being touted as an anti-evasion measure that would help boost tax collections by clamping down on the trade that currently happens on the cash basis. It was first introduced on 01-02-2018 but the implementation was put on hold after the system developed glitches in generating permits. With several states also starting to generate intra-state E-way bills on the portal, the system developed a snag. The Karnataka state government officials, however, said that the state has been running the E-way bill system for both inter-state and intra-state movement of goods since September, 2017.

To ensure a fool proof system, the GSTN has activated only that facility on its portal where E-way bill can be generated when goods are transported from one state to another by either road, railways, airways or vessels, and has further stated that it will block any attempt to generate E-way bill for intra-state movement of goods. The GST Council, has decided on a staggered rollout of the E-way bill starting with inter-state from 01-04-2018 and intra-state from 15-04-2018.

Furthermore, in addition to the above exceptions (i.e. only inter-State E-way bills are permitted for now, with Karnataka being the only exception to generate both inter- and intra-State E-way bills), the Central Government has, vide G.S.R. 315 (E), dt. 31-03-2018, on recommendations of the Council, notified that irrespective of the value of the consignment, no E-way bill shall be required to be generated where the movement of goods commences and terminates within the Union Territory of Andaman and Nicobar Islands.

The implementation of the nationwide E-Way Bill mechanism under GST regime is being done by GSTN in association with the National Informatics Centre (NIC) and is being run on portal namely https://ewaybillgst.gov.in. To answer queries of taxpayers and transporters, the Central helpdesk of GST has made special arrangements with 100 agents exclusively dedicated to answer queries related to E-way bills. Separately, state tax authorities have started helpdesk in local language, details of which are available on the GST portal. Central as well as State Tax Authorities have declared Nodal Officers for E-way bills. Detailed FAQs are kept on the portal for the guidance of the users.

E-way Bill can be generated through various modes like Web (Online), Android App, SMS, using Bulk Upload Tool and API based site to site integration etc. Consolidated e-way Bill can be generated by transporters for vehicle carrying multiple consignments. Transporters can create multiple Sub-Users and allocate roles to them. This way large transporters can declare their various offices as sub-users. There is a provision for cancellation of e-way Bill within 24 hours by the person who has generated the e-way Bill. The recipient can also reject the E-way Bill within validity period of E-way bill or 72 hours of generation of the E-way bill by the consignor whichever is earlier.

[Press Release no. 1527153, dt. 01-04-2018]

Ministry of Finance

Business NewsNews

The changes in the GST rate structure and policy have been recommended by the GST Council keeping in view the representations received from trade and industry and the interests of consumers including the GST rates on eateries and small traders and the same are expected to benefit the overall economy and consumers.

Some of the decisions which have been implemented by the issuance of requisite notifications/circulars are detailed below —

Rationalization of GST policy measures:

  • Increase in the aggregate annual turnover threshold for eligibility under the composition scheme from Rs 75 lakh to Rs 1 crore for 27 States (including J&K and Uttarakhand).
  • Increase in the aggregate annual turnover threshold for eligibility under the Composition scheme from Rs 50 lakh to Rs 75 lakh for Special Category States (as specified in sub-clause (g) of clause (4) of Article 279A of the Constitution) other than J&K and Uttarakhand.
  • Taxpayers having annual turnover of up to Rs 1.5 crore in the previous year provided with an option to file quarterly Returns.
  • Registered persons making supply of goods to make payment of tax on issuance of invoice and not at the time when advances are received.
  • Suspension of the application of reverse charge mechanism under Section 9(4) of the CGST/SGST Acts, 2017 and Section 5(4) of the IGST Act, 2017 till 31-03-2018 for all categories of registered persons.
  • Uniform rate of tax @1% under Composition scheme for manufacturers and traders. The turnover of taxable goods to be considered for eligibility for the Composition scheme for traders.
  • Supply of exempted services by Composition taxpayer will be allowed and the same will not be taken into account while computing the aggregate turnover.
  • Amount of late fee payable for delayed filing of return in Form GSTR-3B by a taxpayer whose tax liability for the month was ‘Nil’ reduced to Rs 20 per day (Rs 10 per day each under CGST & SGST Acts) subject to maximum Rs 5000 under each Act from October, 2017.
  • The amount of late fee payable for delayed filing of return in Form GSTR-3B by other taxpayers reduced to Rs 50 per day (Rs 25 per day each under CGST & SGST Acts) subject to maximum Rs 5000 under each Act from October, 2017.
  • The filing of returns by the taxpayers has been simplified by continuing the GSTR-3B return up to March, 2018. The filing of FORM GSTR-2 and GSTR-3 has been kept in abeyance till further notice.

Rationalization of GST rates of goods and services:

The GST rates on goods and services were fitted into 5 slabs i.e. Nil, 5%, 12%, 18% and 28%, largely based on the pre- GST cumulative indirect tax incidence both of Central and State taxes, including the embedded taxes, which are subsumed in GST, so as to ensure revenue neutrality. These rates were recommended by the GST Council in its 14th and 15th meeting held on 18-05-2017 and 03-06-2017 respectively.

Subsequent to notification of these rates a number of representations were received from the trade and industry regarding GST rates on goods and services. Based on these representations the GST Council reviewed the rates on goods and services in its subsequent meetings including GST rates on eateries which has been reduced from 18% with ITC to 5% without ITC, including a restaurant located in the premises of a hotel having unit of accommodation with declared tariff below Rs 7500.

The revenue loss on account of the rationalization/reduction in GST rates, at the same levels of economic activity, is roughly expected to be of the order about Rs 29,000 Crore in a full year. This is expected to be off-set by increased economic activity, amalgamation of GST rates, easing of procedural complications and less litigation, leading to greater revenue collection.

[Press Release no. 1524881, dt. 16-03-2018]

Ministry of Finance

Business NewsNews

The Ministry of Finance has explained the applicability of Goods and Services Tax (GST) on Skill Development, Start-Ups, and Tourism etc. All kinds of representations received from the trade and industry (including start-ups) regarding GST rates on services have been deliberated in the Fitment Committee.
The government has exempted various kinds of services in relation to skill development. Decision pertaining to rates of GST and exemption on skill development, start-ups, and tourism is taken after due deliberation in GST Council. There are several services which have been exempt from GST. The details are as given below.
Exemptions in relation to Skill development and start-ups
  • Services provided by an incubatee up to a total turnover of fifty lakh rupees in a financial year subject to the following conditions, namely:
    • the total turnover had not exceeded fifty lakh rupees during the preceding financial year;
    • and a period of three years has not elapsed from the date of entering into an agreement as an incubatee.

Taxable services, provided or to be provided, by a Technology Business Incubator or a Science and Technology Entrepreneurship Park recognised by the National Science and Technology Entrepreneurship Development Board of the Department of Science and Technology, Government of India or bio-incubators recognised by the Biotechnology Industry Research Assistance Council, under the Department of Biotechnology, Government of India.

Any services provided by, (a) the National Skill Development Corporation set up by the Government of India; (b) a Sector Skill Council approved by the National Skill Development Corporation; (c) an assessment agency approved by the Sector Skill Council or the National Skill Development Corporation; (d) a training partner approved by the National Skill Development Corporation or the Sector Skill Council, in relation to-

  • the National Skill Development Programme implemented by the National Skill Development Corporation; or a vocational skill development course under the National Skill Certification and Monetary Reward Scheme; or
  • any other Scheme implemented by the National Skill Development Corporation.

Services of assessing bodies empaneled centrally by the Directorate General of Training, Ministry of Skill Development and Entrepreneurship by way of assessments under the Skill Development Initiative Scheme is exempt from GST. Services provided by training providers (Project implementation agencies) under Deen Dayal Upadhyaya Grameen Kaushalya Yojana implemented by the Ministry of Rural Development, Government of India by way of offering the skill or vocational training courses certified by the National Council for Vocational Training are exempt from GST.

Services provided to the Central Government, State Government, Union territory administration under any training programme for which total expenditure is borne by the Central Government, State Government, Union territory administration.

Exemptions in relation to Tourism

Services by a specified organization in respect of a religious pilgrimage facilitated by the Government of India, under the bilateral arrangement is exempt. Further, the supply of tour operators services attracts the concessional rate of GST @ 5%, subject to fulfillment of specified conditions.

Minister of Finance

Business NewsNews

The government has decided to speed up the input tax refund to exporters. As per Rule 91 of CGST Rules, 2017, 90 % of the refund amount claimed shall be granted on a provisional basis within a period not exceeding 7 days from the date of acknowledgement of the refund claim. Further, as per Section 54(7) of the CGST Act, 2017, the final order for granting refund shall be issued within 60 days from the date of receipt of the complete application. Out of total taxpayers under GST, 64% who were already registered under the previous tax regime have transitioned to GST as on 02-03-2018. However, no specific study has been undertaken on the impact of the said transition. The Minister of State for Finance further has stated that, the processing of the refund claim is being done after the claimant has filed the GST return and the grant of the refund shall be within 60 days from the date of receipt of the complete application.

[Source: Press Information Bureau]

MINISTRY OF FINANCE

Business NewsNews

GST Council: Sending a strong positive signal to the exporting community, the GST Council in its 26th meeting held on 10-03-2018, decided to extend the current tax exemptions on imported goods for a further period of 6 months, i.e., beyond 31-03-2018. Thus, exporters presently availing various export promotion schemes can now continue to avail such exemptions on their imports upto 01-10-2018, by which time an e-Wallet scheme [to be credited with notional/virtual currency by DGFT, for use by exporters to make payments of GST/IGST on goods imported/procured so that their funds are not blocked] is expected to be introduced w.e.f. 01-04-2018 to continue the benefits in future.

In a related development which would benefit the exporters, the Council directed GSTN to expeditiously forward the balance refund claims to the Customs/CGST/SGST authorities, for their immediate sanction and disbursal, with a further direction to all the State tax authorities to proactively clear refund claims. CBEC has taken the initiative to observe a special drive refund sanction fortnight from 15-03-2018 to 29-03-2018 on an all India scale, with special refund cells manned by experienced staff being put in place throughout the country.

In the meeting held on 06-10-2017, the Council had noted difficulties of cash blockage experienced by exporters on account of upfront payment of GST/IGST on inputs, raw materials or finished goods imported/procured for exports and thus had suggested an interim solution by re-introducing pre-GST tax exemptions on such imports, and for merchant exporters a special scheme of payment of GST @ 0.1% on their procured goods was also introduced. Also, domestic procurement made under Advance Authorization, EPCG and EOU schemes were recognized as ‘deemed exports’ with flexibility for either suppliers or exporters being able to claim refund of GST/IGST. All of these avenues were made available upto 31-03-2018.

On 16-12-2017, a Working Group with representatives of Central and State Governments to operationalize the e-Wallet scheme was constituted by the Finance Secretary. The Council being unanimous that there should be no disruption in any manner to affect the exports accordingly agreed to defer the implementation of the e-Wallet scheme by 6 months, i.e., upto 01-10-2018 and extended the present dispensation in terms of exemptions, for a further period of 6 months i.e., upto 01-10-2018.

[Source: Press Information Bureau]

MINISTRY OF FINANCE

Appointments & TransfersNews

In an immediate follow up action of last week’s Cabinet approval for creation of the posts of Chairman and Technical Members of the National Anti-profiteering Authority under GST, the Government issued orders appointing senior IAS officer Shri B.N. Sharma, as the first Chairman of this apex Authority in the rank of Secretary to Government of India.

Shri B.N. Sharma, an IAS officer of 1985 batch belonging to Rajasthan cadre, is currently posted as Additional Secretary in the Department of Revenue, Ministry of Finance. Shri B.N. Sharma has been closely associated with the formulation of GST and its implementation. He has also worked as Additional Secretary in the Ministry of Power and prior to that, in the Commercial Taxes Department in the State of Rajasthan. As its first Chairman, Shri B.N. Sharma is expected to give a direction to the Authority in boosting the confidence of consumers that GST is a ”Good and Simple Tax” in the overall national interest.

Shri B.N. Sharma would be assisted by four senior officials of the rank of Joint Secretary and above, who have been appointed as Technical Members in the Authority. These officials are Shri J.C. Chauhan, Chairman Tax Tribunal, Himachal Pradesh; Shri Bijay Kumar, Principal Commissioner GST, Kolkata; Shri C.L. Mahar, Principal Commissioner GST, Meerut; and Ms. R. Bhagyadevi, ADG, Systems, Chennai.

The appointment orders of Shri B.N. Sharma as Chairman and of the other officials as Technical Members of the Authority were issued on the recommendation of a high level Selection Committee headed by Shri P.K. Sinha, Cabinet Secretary. Revenue Secretary, Chairman, CBEC and Chief Secretaries of States of Maharashtra and Tamilnadu were the other members of the Selection Committee.

The Authority has been set up for a two-year period, which would begin from the date Shri B.N. Sharma assumes charge as Chairman. The Authority is mandated to ensure that the benefits of input credit and the reduction in GST rates on specified goods or services are passed on to the consumers by way of a commensurate reduction in prices. With the Chairman and Technical Members now having been appointed, the Authority becomes functional thereby reassuring consumers of Governments’ commitment that GST would result in lower prices of goods and services.

It may be recalled that in almost every meeting, the GST Council has been engaged in rationalizing and reducing the GST rates on a wide spectrum of goods and services. The last and indeed the most significant reduction took place from midnight of 14 November, 2017 when the GST rate were slashed from 28% to 18% on goods falling under 178 headings. This now leaves only 50 items which attract the highest GST rate of 28%. Likewise, a large number of items witnessed a reduction in GST rates from 18% to 12% and so on with some goods being completely exempt from GST.

In addition to the Authority, the institutional mechanism for effective implementation of the “anti-profiteering” measures enshrined in the GST rules consists of a Standing Committee, State level Screening Committees and the Directorate General of Safeguards in the Central Board of Excise & Customs (CBEC).

Consumers who are aggrieved that there has been no commensurate reduction in prices may apply for relief to the Screening Committee in the State. After forming a prima facie view on the substance of the application, the matter would be referred to a Standing Committee at the Centre. The Standing Committee shall, in turn, ask the Director General of Safeguards, CBEC to carry out detailed investigation. The Director General of Safeguards shall report its findings to the Authority. The Screening Committee is expected to look into complaints of local nature while the Standing Committee would ordinarily enquire into cases of mass impact with All India ramification.

Once the Authority confirms there is justification to apply anti-profiteering measures, it has the authority to order the business concerned to reduce its prices or return the undue benefit availed along with interest @18% to the consumers of the goods or services. If the undue benefit cannot be passed on to the consumers, it can be ordered to be deposited in the Consumer Welfare Fund. The Authority also has the power to impose penalty on the defaulting business or even order the cancellation of its registration under GST.

The Authority shall function from the Jeevan Bharti Building, Connaught Place, New Delhi. The secretariat for the Authority shall be as follows:

Directorate General of Safeguards,

2nd Floor, Bhai Veer Singh Sahitya Sadan,

Bhai Veer Singh Marg, Gole Market,

New Delhi: 110001.

Email: anti-profiteering@gov.in

Tel.: 011-23741537

Ministry of Finance

Case BriefsHigh Courts

Delhi High Court: Taking note of the fact that the legal practitioners are under a genuine doubt whether they require to get themselves registered under the Central Goods and Service Tax Act 2017 (CGST Act), the Delhi Goods and Service Tax Act 2017 (DGST Act) and the Integrated Goods and Services Tax Act, 2017 (IGST Act), the Court directed that that no coercive action be taken against any lawyer or law firms for non-compliance with any legal requirement under the CGST Act, the IGST Act or the DGST Act till a clarification is issued by the Central Government and the Govt. of NCT of Delhi (GNCTD) and till further orders.

The matter was brought before the Court by Mr. J.K. Mittal, advocate, who contended that he provides legal services including consultancy, opinion, drafting, appearances before Courts etc. and although he has an office only in Delhi, he represents his clients throughout the country before various High Courts and Tribunals outside Delhi. The petitioner had challenged the validity of the Notifications issues by the Central Government and the GNCDT for being violative of the Central Goods and Service Tax Act 2017 (CGST Act), the Delhi Goods and Service Tax Act 2017 (DGST Act) read with Article 279 A of the Constitution of India. He has also challenged the constitutional validity of Section 9 (4) of CGST Act, Section 5(4) of The Integrated Goods and Services Tax Act, 2017 (IGST Act) and Section 9 (4) of DGST Act.

The division bench of S. Muralidhar and Pratibha M. Singh, JJ noticed that as of date there is no clarity on whether all legal services (not restricted to representational services) provided by legal practitioners and firms would be governed by the reverse charge mechanism and if all legal services are to be governed by the reverse charge mechanism than there would be no purpose in requiring legal practitioners and law firms to compulsorily get registered under the CGST Act, IGST Act and/or DGST Act. Those seeking voluntary registration would anyway avail of the facility under Section 25 (3) of the CGST Act (and the corresponding provision of the other two statutes).

The Court further clarified that any lawyer or law firm that has been registered under the CGST Act, or the IGST Act or the DGST Act from 1″ July, 2017 onwards will not be denied the benefit of such clarification as and when it is issued. Listing the matter to be taken up on 18.07.2017, the Court said that if the Central Government and GNCDT fail to give an appropriate clarification by the next date, the Court will proceed to consider passing appropriate interim directions. [JK Mittal & Company v. Union of India, 2017 SCC OnLine Del 9087, order dated 12.07.2017]

Legislation UpdatesStatutes/Bills/Ordinances

The Government affirms determination to introduce Goods and Services Tax (GST) in the coming year to replace existing multiple taxes. A milestone is accomplished as the Empowered Committee of State Finance Ministers have in principle approved model GST law. The current political consensus appears to be favourable in Rajya Sabha leading to passage of Constitution Amendment Bill facilitating introduction of GST.

Certain business processes like registration, tax payment, refund and filing of return were already released earlier. The Ministry of Finance has now released the Model GST Law, the salient features of which are set out below:

  • GST shall comprise of Central GST (CGST), State GST (SGST) and Integrated GST (IGST) levied on the same taxable value. Taxable event under GST is ‘supply of goods and services’ instead of the existing multiple taxable events like manufacture, rendering of service and sales of goods. ‘Supply’ includes all forms of supply such as sale, transfer, barter, exchange, license, rental, lease or disposal of goods and services, import of service as well as specified deemed supplies such as works contract.
  • GST law retains the distinction between goods and services. Supply of intangible goods will be considered as supply of service eliminating scope of litigation. The law provides separate principles for determination of time and place of supply of goods and services.
  •  All persons supplying goods and services having aggregate turnover exceeding INR One million (in case of North-East states- INR Five hundred thousand) would be liable to pay GST. Aggregate turnover would be computed on an all India basis and shall include all supplies including exempted and non-taxable supplies. Import and inter-state supplies shall be taxable without any threshold limit. Small suppliers with turnover upto INR Five million can opt for composition scheme at lower rate. Only agriculturists have been kept out of GST net. Rate schedule is aligned with HSN code.
  • GST law permits seamless tax credit. However, cross-utilisation of credit between CGST and SGST is not permitted.
  • GST law provides special provisions concerning e-commerce. E-commerce operator is required to pay amount at specified rate from the collection directly to the Government. This will capture all e-commerce transactions bringing them into GST net. Aggregator providing goods and services under their brand would be liable to pay GST. GST law also provides for collection of tax at source.
  • Further, the law also provides for appointment of SGST officers as CGST officers to simplify administration. Three classes of officers, viz., (i) CGST officers (ii) SGST officers and (iii) IGST officers shall administer the respective GST law. Suppliers are liable to be registered in each State from where supply of goods and/ or services is made.
  • It also provides for demand of tax within five years in cases involving suppression, etc. and in other cases within three years.
  • GST law contains transition provision for registration, carry forward of tax credit (CENVAT & VAT), claim of tax credit on stocks by new tax payers, etc.

Comment

Introduction of GST will be the biggest tax reform in the history of independent India. GST is expected to simplify tax administration, ensure ‘Ease of Doing Business’ and promote ‘Make in India’. This is the time when businesses ought to try and align their business model/structure with the proposed tax structure to plug potential tax losses and improve profitability.

Note by Khaitan & Co, Advocates since 1911. For more information contact editors@khaitanco.com

OP. ED.

Introduction

Indian taxation system at present is very complicated and involves multiple taxes on the same commodity which results in inflated prices. Attempts at simplifying the taxation system have been made time and again and the proposed goods and services tax (hereinafter “GST”) model is one such attempt at simplifying and unifying the tax structure in the country. The Kelkar Task Force Report which first conceived the idea of a unified value added tax for the whole country in the shape of goods and services tax was received with much enthusiasm because of its claim at simplifying the tax system and curing it of its ills, such as, tax cascading effect and making the taxation structure suited to the federal structure of the country.

The Constitution (One Hundred Fifteenth Amendment) Bill, 2011 was the first bill relating to implementation of GST which was introduced in Parliament on 11-3-2011. The Standing Committee on Finance was also constituted to study the Bill which submitted its report in August 2013. However, the pending Bill lapsed with the dissolution of the 15th Lok Sabha. Thereafter the Constitution (One Hundred Twenty-Second Amendment) Bill, 2014 (hereinafter “the Bill”) was introduced in the Lok Sabha on 19-12-2014 for implementation of GST and for conferring concurrent powers on the Centre and the States to facilitate such implementation.[1] The Bill has been passed by the Lok Sabha and ultimate introduction of the GST model would depend on its passage through the Rajya Sabha and subsequent ratification by one-half of the States in accordance with the procedure provided by Article 368 of the Constitution.

Prime Minister Narendra Modi’s Government aims at rolling out the GST by April 2016 and for that purpose has set up a GST cell to act as a Secretariat to the Empowered Committee of State Finance Ministers who have been allotted the task of looking into the Bill and ensuring its smooth passage through Parliament and thereafter, monitoring its progress through the State Legislatures. Work to set up an IT infrastructure to support the computerised tax collection which GST envisages is also in progress.[2]

However, the Government has till date failed to reach a wide consensus with all the stakeholders with respect to the requirement of GST in India leave alone the finer details of the model. While debate continues about the need for GST and the model which is best suited to the unique conditions in India, the Government needs to engage with and respond to the criticisms which are emerging from different quarters. Only after it has put to rest the apprehensions of the States regarding encroachment upon their autonomy and loss of revenue and has taken care of the anticipation of increased tax burden on consumers and small traders, can it proceed with the programme which it hails as the ultimate milestone in the process of indirect tax reforms in India.

This article looks at the need for GST in India and the benefits which the Government and the policy-makers believe would accrue from the successful implementation of GST. The Bill pending in Parliament as well as the report of the Empowered Committee has been analysed to infer the salient features of the GST scheme and the exact manner in which it will be implemented. Finally, the concerns arising from different quarters especially those which have been raised by the States have been dealt with in an attempt to analyse whether the prospective benefits accruing out of the introduction of the GST outweigh the apprehended drawbacks. An attempt has been made to provide clarity about the proposed GST model and look at the federal implications of such an initiative.

Objectives behind introduction of GST in India and its prospective benefits

GST is recognised internationally as a destination based consumption tax. The Constitution (One Hundred Twenty-Second Amendment) Bill, 2014 defines the goods and services tax as “any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption”.[3]

The first mention of the GST System in Indian policy making was in the Central Budget of 2007-2008 when the then Finance Minister envisioned introduction of the system in the country by 1-4-2010 and instructed the Empowered Committee of State Finance Ministers to lay down a road map for the same. This Committee in its first discussion paper on GST saw the GST Scheme as the next logical step in the indirect tax reforms which had been initiated by the substitution of the central excise duty at the national level and the services tax at the State level by the central valued added tax (hereinafter Cenvat). Cenvat was introduced in India to address the issues of multiple taxation and “tax on tax” as under the traditional regime at the first level the input was taxed and at the output level the output was taxed along with the input tax load. VAT introduced a set-off system where deduction was made from the overall tax burden for the input tax.[4] This step in indirect tax reforms received positive responses from the industries and benefitted trade and resulted in tax revenue growth.[5]

Despite the success of VAT, there were certain shortcomings which GST aims to improvise upon. Certain central taxes, such as, additional customs duty, surcharges, etc. have not been included in the Cenvat and the value added chain in the distribution trade below the manufacturing level has not been captured by the VAT system. Indirect taxes such as, luxury tax and entertainment tax have not been included in the State level VAT. The State VAT is taxed on the value of goods including the Cenvat and this further contributes to the cascading effect as the tax is being charged not on the actual value of the goods but the value of the goods which includes the Central VAT. The Empowered Committee while analysing the existing VAT system was of the view that there should be integration of the VAT on goods and services as the final product is produced on the basis of the harmonious integration of physical inputs as well as services in appropriate amounts.

The system of GST uses set-off mechanism from the original producer’s point to the retailer’s level to remove cascading effect of both the taxes on goods and services and thus, takes care of the value addition in that part of the chain below the manufacturing level which had been ignored by VAT.[6] Cenvat is confined to the “manufacturing” stage and does not extend to the distribution chain beyond that.[7] The following table explains the set-off mechanism used by GST as well as the manner in which “tax on tax” is avoided by it.

Table

Stage of supply chain Purchase value of Input Value addition Value at which supply of goods and services made to next stage Rate of GST GST on output Input Tax credit Net GST=GST on output – Input tax credit
Manufacturer 100 30 130 10% 13 10 13-10 = 3
Whole seller 130 20 150 10% 15 13 15-13 = 2
Retailer 150 10 160 10% 16 15 16-15 = 1

Fig 1: Working of GST at the different levels of manufacture and distribution of goods.[8]

The argument of covering that part of the chain which had been missed by VAT and prevention of cascading effect was used to justify the need for introduction of a new system and not just changing the existing system of VAT by adding service tax to it. Moreover, GST would remove the burden of central sales tax (hereinafter “CST”) and the overall tax burden on goods would fall. Although CST has been lowered from 4% to 2% yet the burden has not been fully phased out. CST is an origin based tax which is charged by the Centre and collected by the States and it cannot be set-off against VAT in many situations. As far as revenue of States and the Centre is concerned, the widening of tax base and possible improvement in tax compliance may result in revenue gains. The inclusion of almost all indirect taxes into the GST would result in decreased compliance costs.[9]

Out of all the objectives behind introduction of the GST system and the benefits which would arise from such a system, the one which concerns the consumer the most is the actual impact of the tax on the cost of final products. It has been speculated that introduction of GST would result in lowering of the price of the final product. This is because the present systems of Cenvat and State VAT have been unsuccessful in completely removing the cascading effect of taxes which results in increased prices. Also, at present there are many Central and State taxes at the stages of production and distribution where no set-off mechanism in the form of input tax credit is available. GST by removing the cascading effects of all taxes and providing an input tax credit mechanism and subsuming all the major Central and State taxes would ensure that the prices of goods are controlled and under the proposed system the prices of final products would be lower than what they are at present.

A complete transparent chain of set-offs and better tax compliance resulting in lower tax burden on manufacturers would bring relief to industry, trade and agriculture. The decrease in the price of goods manufactured in India under GST would make Indian goods more competitive in foreign markets and improve export business.

The proposed GST system has two components, the Central and the State GST which is a reflection of the federal structure of the Indian State. The Empowered Committee while dealing with the question of dual GST gave constitutional requirement of fiscal federalism as the only reason for introduction of a separate State GST.[10] The Constitution has given both the Centre and the States the power to levy taxes.[11] The power to levy taxes which have not been mentioned in either of the three lists rests with Parliament.[12] Thus, the taxation powers of the Centre and the State have been very well demarcated in the Constitution and dual GST is an attempt to maintain this demarcation and to ensure that the taxation powers of the States are not encroached upon by the Centre.

The present GST system provides for PAN based registration of all dealers and makes provision for filing of returns on a common portal and a more efficient information sharing mechanism between Centre and the States. These provisions would greatly help in prevention of tax evasion and boost revenue from taxes by ensuring efficient tax administration and tax compliance. Under the existing system, reliefs had been granted in tax payment to create an environment conducive for investment but it is expected that under the GST model such exemptions would be controlled if not completely eliminated.

GST also promises greater transparency because of the inbuilt tax credit system in the model. It proposes to make the intra and inter-State rates of taxes the same and eliminate the problem of rate arbitrage. This might prove to be an incentive for tax compliance. The tax rates and grounds for tax exemptions in States are quite arbitrary and large variations are observed between tax schemes of different States. The flexibility offered to the States allows them to compete with each other to attract investments. They do so by reducing tax rates arbitrarily which ultimately leads to tax wars between the States. The States which face the brunt of such tax wars at present have no recourse but the GST model proposes to set up a GST Council which will recommend tax rates to the Centre and States. The GST Scheme envisions the establishment of the GST Dispute Settlement Authority which would act as the appropriate forum for handling complaints of deviant action of States that results in loss of revenue for another State.[13]

The Standing Committee of Finance which analysed the Constitution (One Hundred Fifteenth Amendment) Bill, 2011 recognised the ability of the GST Scheme to expand the extent to which economic activities could be covered by taxes and consequentially increase the tax base. It was optimistic that introduction of the tax system in India would improve the competitiveness of the indigenous industries and contribute to the development of a common national market for goods and services.[14]

The GST scheme envisages high goals and projects great benefits to justify its introduction. However, actual delivery upon the promises which have been made would encounter several practical difficulties. The study of prospective obstacles in the implementation of GST as well as an analysis of its shortcomings requires us to understand the salient features of the GST model.

Salient features of the Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014

The Indian Constitution provides for fiscal federalism in the form of elaborate division of taxation powers between Centre and States with specific entries being present in the Union and State List to this effect. It can be said that sales tax is the only mass-based tax assigned to the States and constitutes the backbone of their fiscal autonomy. Collection of sales tax is done by the States because it involves dealing with dealers spread across the length and breadth of the State. The Centre has limited powers to tax commodities extending only to duties of excise. It has thus, been argued that it was never the intention of the Constitution-makers to give extensive powers to the Centre to levy domestic trade taxes and allowing the same now through the proposed GST model substantially effects the federal nature of the Constitution.[15]

The Bill introduces a new article in the Constitution, Article 246-A which provides concurrent powers to Centre and the States for making laws relating to goods and services tax. The proposed Article 246-A reads as follows:

“246-A. Special provision with respect to goods and services tax.—(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 279-A, take effect from the date recommended by the Goods and Services Tax Council.”[16]

The residuary powers of Parliament are also sought to be amended by the Bill by making the provisions of Article 248 subject to the provisions of Article 246-A. The Bill also makes provision for introduction of Article 269?A which deals with apportionment of GST collected by the Centre on inter-State trade or commerce. The article provides for apportionment between the Union and the States to be done in a manner provided by Parliament by law based on the recommendations of the Goods and Services Tax Council.[17] The revenue from the proposed GST shall be divided between the Centre and the States like all the other duties and taxes mentioned in the Union List, that is, based on the recommendations of the Finance Commission or as prescribed by the President by order.[18]

The Bill also proposes to establish a Goods and Services Tax Council which would consist of the Union Finance Minister as the Chairperson, the Union Minister of State in charge of Revenue or Finance and the Minister in charge of Finance or Taxation or any other Minister nominated by each State Government as members. The functions of the Council laid down in the Bill include recommendations to the Union and the States on the taxes levied by the Union, States and local bodies which may be subsumed in the GST. The Council may also make recommendations about tax exemptions, model GST tax laws, principles of levy, apportionment of integrated goods and services tax (hereinafter “IGST”), threshold limit of turnover for tax exemptions, the rates including floor rates, special rates for specified periods, special provisions for the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand. The Council has also been given the power to make recommendations on any other matter related to GST as it may decide from time to time. The Bill directs the Council to be guided in its actions by the need for a harmonised structure of GST and the development of a harmonised market for goods and services. The Council may provide for a dispute resolution mechanism to deal with the disputes arising out of its recommendations.[19]

The proposed GST Scheme also includes an additional tax on supply of goods, not exceeding one per cent in the course of inter-State trade and commerce to be levied by the Centre for a period of two years or such other period as the GST Council may recommend. The proceeds out of this additional tax except where the proceeds accrue from Union Territories shall be assigned to the States from where the supply originates and Parliament may make laws for determining the place of origin from where supply of goods take place in the course of inter-State trade or commerce.[20]

The Council may also make recommendations to Parliament to frame laws to pay compensation to the States for loss of revenue arising on account of implementation of GST for the period specified in the law, provided such period may not exceed five years.[21] The Bill aims at removing any difficulties which may arise in giving effect to the GST Scheme as outlined in the Bill or difficulties arising out of the transition from the previous taxation system to the new one. It empowers the President to pass an order making such provisions or modifications to existing provisions, as may appear necessary to him for the purpose of implementation of GST. Such an order must be made within three years of the Bill receiving Presidential assent. The order made by the President shall be laid before each House of Parliament for their approval.[22]

The model proposed at present involves three types of taxes Central GST (hereinafter “CGST”), State GST (hereinafter “SGST”) and Inter-State GST (“IGST”). The CGST and SGST would be levied simultaneously on all transactions where the seller as well as the purchaser are located in the same State. In case of inter-State transaction, SGST is not levied instead IGST is levied. CGST as well as SGST are levied on the basic value of the product unlike the present system in which State VAT is levied on the price inclusive of Cenvat. The taxes are charged by the seller from the buyer at the respective rates and deposited with the Centre or the State as the case may be.[23]

Illustration: A is a dealer of goods in Karnataka which have not been exempted from taxes under the GST list. The rate of CGST is 12% and the rate of SGST is 8% and the goods are being sold to B who also resides in Karnataka. The value of the goods being sold is Rs 100 hence, A collects Rs 12 as CGST and Rs 8 as SGST. He is required to pay Rs 12 to the CGST account and Rs 8 to the SGST account though he need not actually pay the amount in cash, he can set it off against the CGST and SGST that he has paid on his purchase of some other goods, say inputs. However, the credit for one type of GST cannot be used to set off the other type of GST.

Under the proposed model, the Centre would levy IGST which would be the cumulative cost of CGST and SGST on all inter-State transactions. The IGST model helps in maintenance of an uninterrupted input tax credit chain on inter-State transactions and ensures creation of a self-monitoring system. The idea is that all inter-State dealers would be registered online and hence, compliance level will improve substantially.[24]

GST would affect the powers of both the Centre and the States and their relations as well as the Lists in Seventh Schedule and hence, introduction of the model requires an amendment to the Constitution and the Bill would have to be passed by Parliament and ratified by one-half of the States in accordance with the procedure provided under Article 368.[25]

Criticism of GST and challenges in its implementation

In spite of the noble objectives behind introduction of the GST Scheme, there are shortcomings in the scheme itself not to mention the practical difficulties in implementation of the scheme which makes the success of such a scheme questionable. The Thirteenth Finance Commission which dealt with the topic of goods and services tax outlined the issues that most State Governments had with GST. The States which had higher tax rates were apprehensive that they might be at a loss when a common tax rate is introduced for the whole country. States would also suffer losses due to abolition of CST as the taxes which they received from the manufacturing sector would be substantially reduced. The low income States with small consumer bases were fearful that they might end up being extremely dependent on the Centre and the appropriation of tax revenues might not be in their favour. It was also argued that the proposed scheme would result in a vertical imbalance in favour of the Centre which would have at its disposal a tax base which had hitherto been unavailable to it.[26]

The Empowered Committee has expressed optimism about GST increasing the revenue for the Centre and States. Most of the existing taxes will be subsumed by the GST and multiple taxation would thus be avoided but the loss arising out of this will have to be compensated by the widening of the tax base.[27] The tax rate under the proposed GST would come down but the number of assessees are expected to increase by five to six times. Hence, the overall revenue would be benefited by introduction of GST. The task force which had been constituted by the Thirteenth Finance Commission estimated that India will gain $15 billion a year by implementing GST as it would promote exports, raise employment and boost growth. The GST in Canada is similar to that proposed to be introduced in India and its introduction in Canada resulted in a 1.4 per cent increase in the GDP of Canada. This is suggestive of the potential benefits of GST for the Indian economy.

The States have also voiced their concerns about loss of their autonomy due to imposition of a common tax rate for the entire country. They fear that they would lose their tax leverage.[28] The demarcation of powers between the Centre and the States gives the States power to independently impose taxes in their own domain. States take into account factors such as, socio-economic and political scenario in the State as well as the revenue requirements of the State while deciding tax rates and tax base. They would lose this flexibility under the proposed GST model.[29]

States with high tax rates oppose the scheme because they foresee huge revenue losses arising due to implementation of a common low tax rate and demand adequate compensation for the same. States have also demanded that implementation of GST by States be made optional and they be allowed to adopt GST at their own convenience. The States want harmonisation of all tax returns, assessment and audit procedures using a comprehensive technology based infrastructure which would keep a record of all inter-State transactions.[30]

A robust IT infrastructure would form the cornerstone on which the entire GST structure is proposed to be built. It would play a special role in implementation and management of IGST. The registration of dealers online based on their PAN numbers as well as keeping track of all inter-State transactions is a major practical obstacle in the implementation of GST. The transaction details need to be maintained on a common portal as IGST is collected by the Centre and later apportioned to the States based on the point of sale. In case of VAT the Centre had a broad IT infrastructure in place for Cenvat but adequate IT infrastructure is a troubling issue for the States even in VAT system. Collection of CGST can be taken care of for the time being by the Centre’s online tax payment system called Automation of Central Excise and Service Tax (ACES) by making required changes to it. However, computerisation and building adequate IT infrastructure for the States where such infrastructure is not present is a big challenge. The infrastructure facilities of the Centre and the States need to be tied up and the existing Tax Information Exchange System (Tinxsys) should be put to this use and upgraded to serve the needs of GST till a new independent structure is created.[31]

The GST model works on the destination principle, that is, goods and services are taxed in the States where they are sold or rendered respectively. This makes the States fearful of losing revenue as they would not be able to charge taxes on manufacturing. States have pressed the demand for exclusion of purchase tax from GST which provides considerable revenue to foodgrain producing States and mineral rich states. Purchase tax is the same as sales tax except it is deposited with the State Government by the purchaser instead of the seller. The goods, mainly foodgrains, on which purchase tax is levied are exported to other States. So the burden of the tax is borne by the purchaser belonging to the other State and this transfers the tax burden from the population of the manufacturing State to the population of another State. Thus, the States are opposed to inclusion of purchase tax in GST.[32] The Central Government has assured the States that in case purchase tax is included in GST, adequate and continuing compensation would be provided to the affected States and at present the matter is being discussed by the Central Government.[33]

A single tax rate would make taxation extremely simple, however, the Empowered Committee in India has recommended adoption of a two-rate structure, a lower rate for the necessary items and a standard rate for goods in general. There will also be a special rate for precious metals and certain goods would be exempted from GST. There existed an exempted list and list of goods of local importance under VAT and the Central Government at present is considering whether or not the same should be retained in the exempted list under SGST and whether a similar approach should be followed for CGST.[34]

The tax rate at which the GST model would produce the same revenue as the present taxation structure is called revenue neutral rate (hereinafter “RNR”). If the GST rate is above RNR, it will result in increase in overall prices and the consumers would be burdened by the inflated costs whereas, if the GST rates are below RNR then, it would create a strain on the economy as the Central and State Governments would not have enough revenue to be spent on the development projects. The RNR is unique for each State hence, no one rate of GST can be decided which would ensure equilibrium and strain on either the consumer or the economy would be created in most of the States. Some States have suggested that this situation can be avoided by providing a band of GST rates, similar to the practice followed in the European Union. However, this disparity in rates can create undesirable consequences by creating an opportunity for tax arbitrage and incentivising clandestine inter-State trade.[35]

GST is based on an input tax credit system which is very difficult to implement especially for inter-State transactions. It has been proposed that the following taxes would be kept out of the ambit of GST:

  1. Levies on petroleum products.
  2. Levies on alcoholic products.
  3. Taxes on lottery and betting.
  4. Basic custom duty and safeguard duties on import of goods into India.
  5. Entry taxes levied by municipalities or panchayats.
  6. Entertainment and luxury taxes.
  7. Electricity duties/taxes.
  8. Stamp duties on immovable properties.
  9. Taxes on vehicles.

Consequently, the taxation on the above products would continue as is currently prevalent. This means that these products would continue to suffer from the negative impact of tax cascading and their prices would continue to be inflated. It would also come in the way of ensuring the competitiveness of these products in foreign markets.[36]

Another concern which the States have voiced is that of the common threshold limit of exemption being too low and the possibility of inclusion of several small entrepreneurs in the tax base. Tax regimes generally have a threshold limit of annual turnover below which all businesses are exempted from paying taxes. The reason for introduction of threshold limit is to protect the interests of small traders and also because of the practical difficulty in administering taxes at such a small scale. The compliance and administration costs of such taxes are higher than the revenue generated out of their collection. At present, States specify their own threshold limits under the State VAT Acts. The Empowered Committee in its report recommended a common threshold limit for the sake of harmonisation of the tax structure. It recommended Rs 10 lakhs as the threshold limit for SGST for both goods and services with compensation to those States which lose out on revenue because of the threshold limit becoming higher. Rs 1.5 crore was recommended as the threshold limit for CGST for goods and while no specific limit was given for services it was recommended that the limit for services also be kept sufficiently high to protect the business interests of small traders.[37]

Conclusion

The Central Government has addressed most of the concerns of the States and other stakeholders but there still remain obstacles in the passage of the Bill and practical difficulties in its implementation. While the Government and the Empowered Committee are trying to reassure the States about protection of their revenue and promise them compensation for the lost revenue, the real problem it seems is not the GST model but the political dynamics at the Centre and State. At present, the Bill which has been passed by parliament is facing severe opposition from the opposition parties including Congress which during its tenure had introduced the first GST Bill and based on whose demands the Bill has been sent to a Select Committee. The Standing Committee created for the 2011 Bill also looked into the matter in great detail and there is not much difference between the model proposed to be introduced by the 2011 and 2014 Bills. Hence, such a demand seems to be frivolous and politically motivated. Sending the Bill to a Select Committee has elongated the process of passage of the Bill and foiled BJP’s plans of getting the Bill passed by Parliament in the budget session itself. The Bill being a Constitutional Amendment Bill and not a simple Money Bill for imposition of tax, the legislative procedure appears to be a long drawn one.

The Bill itself provides for only a skeletal outline of the proposed scheme with many of the major decisions being left to the GST Council proposed to be set up under the Bill. The real challenge in ensuring that GST achieves the objectives that it has set out to achieve is to ensure that the almost perfect model which has been outlined is actually put into practice. With an incomplete IT infrastructure and uncertainty about the common tax rate to be imposed, the extent and manner of compensation to the States, the Rules governing implementation of GST, the viability of an input tax credit system and the nodalities of the dispute resolution mechanism, the Bill leaves a lot to be decided by the GST Council which makes the success of the model quite uncertain.

The Bill contrary to what the States believe does not go against the principles of fiscal federalism as it provides the Centre and the States with concurrent powers to make laws in relation to GST and a say in the decisions of GST Council. Even if the argument of the States about the Bill being opposed to fiscal federalism is accepted, what cannot be denied is that the move is not aimed towards filling the cofers of the Centre but to improve the country’s economy and the condition of consumers. Under such circumstances, it is the duty of the States to place the well-being of the residents of their territory above their own autonomy and cooperate with the Centre even if it involves compromising on their federal powers.

The future of GST in India and its success is thus, to a large extent dependent on the GST Council’s decisions. If the GST Council with its State Government representatives, succeeds in reconciling the differences between the States and reaches a consensus on the issues it is required to deliberate upon then, it would undoubtedly unfold one of the greatest reforms in the field of indirect taxes in India with the repercussions being felt by the economy, trade and consumers alike. The task of balancing the interests of the States and the Centre and at the same time ensuring that the powers conferred and the decisions taken do not in any way encroach upon the autonomy of States or compromise the federal structure of the Indian Constitution is a difficult one. However, this task if performed successfully holds great promise for the future of the country’s economy.

*IInd year student, National Law School of India University (NLSIU), Bangalore.

[1]  Goods and Services Tax: Comparison of the 2014 Bill with the 2011 Bill, available at <http://www.prsindia.org/uploads/media/Constitution%20122nd/GST-%20Table-%202014% 20v.%202011.pdf>

[2]  Subhomoy Bhattacharjee, Modi Fixes April 2016 Deadline for GST Launch, The Indian Express (16-9-2014), available at <http://indianexpress.com/article/business/business-others/modi-fixes-april-2016-deadline-for-gst-launch/>  (last visited on 6-5-2015).

[3]  Cl. 14, Constitution (One Hundred Twenty-Second Amendment) Bill, 2014 (introduced in Lok Sabha on 19-12-2014).

 [4]  Empowered Committee of State Finance Ministers, First Discussion Paper on Goods and Services Tax in India, 1-5 (2009).

  [5]  Empowered Committee of State Finance Ministers, First Discussion Paper on Goods and Services Tax in India, 1-5 (2009), at 8.

  [6]  Empowered Committee of State Finance Ministers, First Discussion Paper on Goods and Services Tax in India, 1-5 (2009), at 9.

  [7]  Standing Committee on Finance, Lok Sabha, The Constitution (One Hundred Fifteenth Amendment) Bill, 2011, 9 (2013).

  [8]  Standing Committee on Finance, Lok Sabha, The Constitution (One Hundred Fifteenth Amendment) Bill, 2011, 9 (2013), at 33.

   [9]  Standing Committee on Finance, Lok Sabha, The Constitution (One Hundred Fifteenth Amendment) Bill, 2011, 9 (2013), at 9.

  [10]  Standing Committee on Finance, Lok Sabha, The Constitution (One Hundred Fifteenth Amendment) Bill, 2011, 9 (2013), at 34-39.

  [11]  Art. 246, The Constitution of India.

  [12]  Art. 248, The Constitution of India.

  [13]  Standing Committee on Finance, Lok Sabha, The Constitution (One Hundred Fifteenth Amendment) Bill, 2011, 9 (2013), at 12-13.

  [14]  Standing Committee on Finance, Lok Sabha, The Constitution (One Hundred Fifteenth Amendment) Bill, 2011, 9 (2013), at 8.

  [15]  Short-Circuiting Indirect Tax Reform, 39(31) Economic and Political Weekly 3419, (2004).

  [16]  Cl. 2, Constitution (One Hundred Twenty Second Amendment Bill), 2014.

  [17]  Cl. 9, Constitution (One Hundred Twenty-Second Amendment Bill), 2014.

  [18]  Cl. 10, Constitution (One Hundred Twenty-Second Amendment Bill), 2014; Art. 267, Constitution of India.

  [19]  Cl. 12, Constitution (One Hundred Twenty-Second Amendment Bill), 2014.

  [20]  Cl. 18, Constitution (One Hundred Twenty-Second Amendment Bill), 2014.

  [21]  Cl. 19, Constitution (One Hundred Twenty-Second Amendment Bill), 2014.

  [22]  Cl. 21, Constitution (One Hundred Twenty-Second Amendment Bill), 2014.

  [23]  Empowered Committee of State Finance Ministers, First Discussion Paper on Goods and Services Tax in India, 1-5 (2009), at 41.

  [24]  Empowered Committee of State Finance Ministers, First Discussion Paper on Goods and Services Tax in India, 1-5 (2009), at 50.

  [25]  Art. 368, Constitution of India.

  [26]  13th Report of Finance Commission, Vol. 1 (2009), at 64.

  [27]  Jose Sebastian and Anitha Kumary, L, Revenue and Equity Implications of Goods and Services Tax: A Preliminary Analysis, Gulati Institute of Finance and Taxation, at 2.

  [28]  13th Report of Finance Commission, Vol. 1 (2009), at 65.

  [29]  Supriya Kamna et al, Goods and Service Tax — Panacea for Indirect Tax System in India, 2(10) Tactful Management Research Journal 1, 5 (2014).

  [30]  13th Report of Finance Commission, Vol. 1 (2009), at 65.

  [31]  Supriya Kamna et al, Goods and Service Tax — Panacea for Indirect Tax System in India, 2(10) Tactful Management Research Journal 1, 5 (2014), at 5.

  [32]  Supriya Kamna et al, Goods and Service Tax — Panacea for Indirect Tax System in India, 2(10) Tactful Management Research Journal 1, 5 (2014), at 5.

  [33]  <http://www.empcom.gov.in/content/20_1_FAQ.aspx> (last visited on 8-5-2015).

  [34]  Empowered Committee of State Finance Ministers, First Discussion Paper on Goods and Services Tax in India, 1-5 (2009), at 46.

  [35]  Supriya Kamna et al, Goods and Service Tax — Panacea for Indirect Tax System in India, 2(10) Tactful Management Research Journal 1, 5 (2014), at 5-6.

  [36]  Supriya Kamna et al, Goods and Service Tax — Panacea for Indirect Tax System in India, 2(10) Tactful Management Research Journal 1, 5 (2014), at 6.

  [37]  Empowered Committee of State Finance Ministers, First Discussion Paper on Goods and Services Tax in India, 1-5 (2009), at 48.