Introduction

In 1950 the framers of the Constitution envisaged India developing into a common economic market. Article 301 of the Constitution – which stipulates that trade and commerce may be freely conducted throughout India, subject to reasonable restrictions which Parliament or state governments can impose – was enacted to further this goal. Article 19(1)(g) of the Constitution guarantees all citizens the right to practise any profession or carry out any occupation, trade or business, subject to certain reasonable restrictions. The Apex Court has recognised that this constitutional protection extends beyond both tax and non-tax barriers.

However, the reality in the last 60-odd years – since the birth of the Indian republic and the introduction of the Constitution – has been different. Owing to the federal nature of the Indian government and economic pressures, several tax laws have been introduced which have fragmented the national market into smaller markets. The complex and multi-layered indirect tax structure has further fragmented the market by imposing tax barriers, which in turn has hindered the development of a common economic market. There is an urgent need to address this issue from an economic perspective and to simplify procedures for doing business in India.

Amendment bill

The common theme in the 122nd Constitution Amendment Bill 2014 – introduced in the Lok Sabha on December 19 2014 in order to facilitate the introduction of goods and services tax (GST) – is the need to stop the cascading effect of taxes and create a common national market for goods and services.

The amendment bill seeks to amend the Constitution in order to:

grant concurrent power to Parliament and the state legislatures to establish laws governing GST;

subsume various central taxes into a central-level GST and state taxes into a state-level GST;

levy an integrated goods and services tax on interstate transactions of goods and services;

levy an additional tax not exceeding 1% on interstate transactions for a two-year period (which will be collected centrally, but assigned to the originating state);

cover all goods and services under GST, except alcoholic liquor for human consumption. Petroleum and petroleum products, although not excluded from the GST regime, will not be subject to or covered under GST until the GST Council makes a recommendation to do so;

establish a GST Council, which will examine and make recommendations to the country and the states on issues such as rates, exemption lists and threshold limits under GST; and

provide compensation to states for loss of revenue arising from the implementation of GST for a period of up to five years.

The introduction of GST will be a game changer for the industry and is expected remedy right various inefficiencies and defects in the current indirect tax regime, such as the following:

The subsuming of various indirect tax levies at the central and state level into central GST or state GST will prevent multiple taxes from being levied across various stages of the supply chain.

Full availability of tax credits across the supply chain will help to stop the cascading effect of taxes. Under the proposed GST system, there will be no separate excise duty or value-added tax; therefore, there will be a uniform levy across goods and services with an uninterrupted credit flow.

The subsuming of taxes (eg, entry tax) within GST will remove the need for the Rajauli checkpoint, which restricted the free movement of goods from one state to another. It is estimated that truckers in India waste 60% of their travel time waiting at checkpoints, which not only causes delays, but also increases logistics costs.

Simplification of the tax regime will reduce compliance costs and time spent on tax compliance and facilitate better planning and the creation of more efficient supply chain systems.

Comment

The introduction of GST, along with other government initiatives such as the 'made in India' scheme, have the potential to:

reduce costs drastically;

facilitate economies of scale;

redefine and reshape the logistics of the Indian market;

place India, once again, on a high-growth trajectory; and

realise the vision of India becoming a single common economic market.

Parliament and both houses have yet to pass the bill, but it is expected to be considered in the budget session starting on February 23 2015.

For further information on this topic please contact Rohan Shah or Karthik Sundaram at Economic Laws Practice by telephone (+91 22 6636 7000), fax (+91 22 6636 7172) or email (rohanshah@elp-in.com or karthiksundaram@elp-in.com).

Rohan Shah and Karthik Sundaram.

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