Introduction

On December 19 2014 the finance minister, Arun Jaitley, tabled the Constitutional (122nd Amendment) Bill 2014 in the lower house of the Indian Parliament (the Lok Sabha). The minister described the bill as the "single most important tax reform since 1947". The proposed bill will amend the Constitution to give union territories and states the power to introduce a goods and services tax (GST) and to confer the respective legislatures (Parliament and the state legislatures) with the power to levy GST on transactions of "supply of goods or services or both". The idea of the GST was first mooted by then Finance Minister Palaniappan Chidambaram in the 2006-2007 Budget. However, the GST was not introduced due to irreconcilable differences between central government and the states over the framework, taxing powers, issues of revenue loss and compensation.

The election of the National Democratic Alliance (NDA) government appears to augur well for the revival of the GST. The introduction of the amendment bill is unarguably the first major economic policy from the NDA government and reflects the government's commitment to push through its much-promised economic reforms. These include the GST which when implemented, will usher in a harmonised national market of goods and services and lead to a simplified, non-adversarial and tax-friendly administrative system in the country.

Key features of bill

The amendment bill not only seeks to give central government and state governments concurrent tax jurisdiction over the "transaction of supply of goods or services or both", but also provides a prima facie broad framework as to what the GST would be in terms of its coverage, its operating mechanism, implementation and dispute resolution.

Taxation under GST

The GST would have two components to reflect the country's federal structure. The first would be levied by central government and referred to as central GST and the other would be levied by the federal states and be referred to as state GST. Further, central government would have the power to tax the inter-state supply of goods and services by levying an integrated goods and service tax. This tax would be apportioned between central government and the states in the manner provided by Parliament on the recommendation of the GST council. It has been proposed that Parliament should formulate the principles for determining the place of supply and when a supply of goods or supply of services or both takes places in the course of inter-state trade or commerce.

Taxes to be incorporated

Various central indirect taxes and levies would be incorporated into the GST, such as:

  • central excise duty;
  • additional excise duty;
  • excise duty levied under the Medicinal Toilet Preparations Act;
  • service tax;
  • central sales tax;
  • additional customs duty;
  • special additional duty of customs; and
  • central surcharges and cesses so far as they relate to the supply of goods and services.

Various state taxes would also be incorporated into the GST:

  • VAT/sales tax;
  • entertainment tax (other than that levied by local bodies);
  • octroi and entry tax;
  • purchase tax;
  • luxury tax;
  • taxes on lottery;
  • betting and gambling taxes; and
  • state cesses and surcharges so far as they relate to the supply of goods and services.

However, Entry 62 of List II (State List) would be substituted to allow local bodies the right to levy and collect taxes "on Entertainment and Amusements".

Goods and services tax 

The 'GST' has been defined to mean any tax on the supply of goods or services or both excluding "taxes on the supply of alcohol for human consumption". Under the GST states would retain their power to charge excise duty and sales tax/VAT on alcohol.

Significantly, petroleum and petroleum products such as high speed diesel, motor spirit, natural gas and aviation fuel have been incorporated in the GST. However, petroleum products would not be subject to the GST levy until a future date, following the recommendation of the GST council. The present taxes levied by the states and central government on petroleum and petroleum products (ie, sales tax/VAT, central sales taxes and excise duty only) will continue to be levied in the interim period. The earlier bill sought to exclude petroleum and petroleum products, as well as alcohol, from the purview of the GST.

Goods and Services Tax Council

The GST council is envisaged as a recommendatory body comprised of the union finance minster as chairperson, the minister of finance or taxation or any other minster nominated by each state government as members and the union minster of state in charge of revenue. The members will choose a vice chairperson from among themselves.

Recommendatory power

The GST council will be crucial for the smooth implementation of the GST as it has been empowered to make recommendations on issues of significance such as taxes to be incorporated, rate structures, an exemption list of goods and services and threshold limits. Further, the present amendment bill (unlike the earlier bill) extends the recommendatory role of the GST council to include model GST laws, principles of levy, the distribution of integrated goods and services tax and the principles that govern the place of supply.

The GST council has also been vested with the power to recommend special schemes with respect to the states of:

  • Arunachal Pradesh;
  • Assam;
  • Jammu and Kashmir;
  • Manipur;
  • Meghalaya;
  • Mizoram;
  • Nagaland;
  • Sikkim;
  • Tripura;
  • Himachal Pradesh; and
  • Uttarakhand – a focus area of the NDA government.

The GST council has been empowered to recommend the date on which the GST can be levied on crude oil, high speed diesel, petrol, natural gas and aviation fuel – which will continue to be taxed temporarily by the states. The GST council will aim to create a harmonised structure and a harmonised national market for the GST.

Decision making mechanism

The amendment bill seeks to increase the quorum for GST council meetings from one-third (in the earlier bill) to half the total number of GST council members. Instead of a consensus based decision-making process, the amendment bill introduces a weighted voting system. Every GST council decision would be made at a meeting by a majority of no less than three-quarters of the "weighted votes of the members present and voting", wherein the central government would have one-third of votes cast and state governments would have two-thirds of votes cast. A formula for calculating the number of votes is prescribed in the statement of objects and reasons.

Dispute resolution mechanism

The amendment bill empowers the GST council to resolve disputes that arise from its recommendations. This is a departure from the previous proposal of having a separate GST dispute settlement authority, whose decisions would have been amenable only to the Supreme Court. State governments strongly opposed the idea of a GST dispute settlement authority and it was also opposed in the 73rd Report of the Parliamentary Standing Committee on Finance (2013).

Treatment of goods of special importance 

The amendment bill looks to dispense with the concept of declared goods of special importance by omitting Clause 3 of Article 286 of the Constitution. The omitted clause empowered Parliament to restrict and provide conditions regarding any state laws which sought to levy tax on the sale and purchase of goods which Parliament declared to be of special importance in inter-state trade or commerce and/or a tax on sales or purchases concerning transactions of work contracts, hire-purchase and transfer of rights to use any goods as specified in sub-clauses (b), (c) and (d) of Clause (29A), Article 366 of the Constitution.

Resolution of GST compensation to states

The amendment bill looks to resolve the contentious issue of GST compensation to states by constitutionally guaranteeing compensation through additional taxes on the supply of goods in the course of inter-state trade and commerce. This would see the imposition of a tax rate not exceeding 1% for a period of two years or any other period as recommended by the GST council. The proceeds of such a tax would go to the state government from where the supply originates.

Compensation to states for loss of revenue due to GST

By law and on the recommendation of the GST council, Parliament will compensate states for loss of revenue arising from the GST's implementation for a period which may extend to five years. The GST council will decide on the type of compensation and also the sunset clause. However, compensation payments will not extend beyond five years. The amendment bill suggests that the NDA government has been more receptive to appeals from state governments and (unlike the previous United Progressive Alliance government) has made an extra effort to ensure consensus with the states on various contentious issues, especially tax structures, the coverage of goods, compensation for revenue loss and the flexibility of the GST council, which were major impediments to the GST's implementation in the past.

Next steps

The introduction of the amendment bill in Parliament is a welcome step towards achieving a fully fledged and harmonised GST system. However, the government needs to ensure that the amendment bill's introduction does not suffer the same fate as the previous bill. For the new bill to come into force, it would need to be ratified by at least a two-thirds majority in both houses of Parliament and then undergo subsequent ratification by at least half of the state legislatures. While passage of the bill is expected to be smooth in the Lok Sabha, its passage in the Rajya Sabha (upper house ) remains doubtful, given that the government has fewer seats and is facing an acrimonious and united opposition. Due to recent arguments between the government and the opposition and the rarity of unity among opposition political parties, achieving a consensus is going to be difficult. Even if the government is able to get the bill passed in the coming budget session, it will be hard to secure its ratification from half of the state legislatures, not to mention drafting the numerous regulations and laws which will govern the GST framework. The road ahead is arduous.

Comment

The April 2016 deadline for the introduction of the GST will be difficult to meet. However, politics has always been the "art of the possible, the attainable – the art of the next best" and it will be interesting to watch what the government does in the coming months. Given the government's resoluteness and its intent to introduce the GST by April 2016, it will be risky not to prepare for the same. It is time to start looking at business models while keeping the potentially inhibiting GST in mind.

Kumar Visalaksh

Dhruv Bhattacharya

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