November,26,2015: The Goods and Service Tax Bill or GST Bill, officially known as The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014, proposes a national Value added Tax to be implemented in India from April 2016.
"Goods and Services Tax" would be a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India, to replace taxes levied by the Central and State governments. GST would be levied and collected at each stage of sale or purchase of goods or services based on the input tax credit method. This method allows GST-registered businesses to claim tax credit to the value of GST they paid on purchase of goods or services as part of their normal commercial activity.
Taxable goods and services are not distinguished from one another and are taxed at a single rate in a supply chain till the goods or services reach the consumer. Administrative responsibility would generally rest with a single authority to levy tax on goods and services. Exports would be zero-rated and imports would be levied the same taxes as domestic goods and services adhering to the destination principle. .
The introduction of Goods and Services Tax (GST) would be a significant step in the reform of indirect taxation in India. Amalgamating several Central and State taxes into a single tax would mitigate cascading or double taxation, facilitating a common national market. The simplicity of the tax should lead to easier administration and enforcement.From the consumer point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods, which is currently estimated at 25%-30%
As India is a federal republic GST would be implemented concurrently by the central government and by state governments.
The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014, seeks to amend the Constitution of India to facilitate the introduction of Goods and Services Tax (GST) in the country. The proposed amendments in the Constitution will confer powers both to the Parliament and the State legislatures to make laws for levying GST on the supply of goods and services on the same transaction.
2. Rationale behind moving towards GST:
2.1 Presently, the Constitution empowers the Central Government to levy excise duty on manufacturing and service tax on the supply of services. Further, it empowers the State Governments to levy sales tax or value added tax (VAT) on the sale of goods. This exclusive division of fiscal powers has led to a multiplicity of indirect taxes in the country. In addition, central sales tax (CST) is levied on inter-State sale of goods by the Central Government, but collected and retained by the exporting States. Further, many States levy an entry tax on the entry of goods in local areas.
2.2 This multiplicity of taxes at the State and Central levels has resulted in a complex indirect tax structure in the country that is ridden with hidden costs for the trade and industry. Firstly, there is no uniformity of tax rates and structure across States. Secondly, there is cascading of taxes due to ‘tax on tax’. No credit of excise duty and service tax paid at the stage of manufacture is available to the traders while paying the State level sales tax or VAT, and vice-versa. Further, no credit of State taxes paid in one State can be availed in other States. Hence, the prices of goods and services get artificially inflated to the extent of this ‘tax on tax’.
2.3 The introduction of GST would mark a clear departure from the scheme of distribution of fiscal powers envisaged in the Constitution. The proposed dual GST envisages taxation of the same taxable event, i.e., supply of goods and services, simultaneously by both the Centre and the States. Therefore, both Centre and States will be empowered to levy GST across the value chain from the stage of manufacture to consumption. The credit of GST paid on inputs at every stage of value addition would be available for the discharge of GST liability on the output, thereby ensuring GST is charged only on the component of value addition at each stage. This would ensure that there is no ‘tax on tax’ in the country.
2.4 GST will simplify and harmonise the indirect tax regime in the country. It is expected to reduce cost of production and inflation in the economy, thereby making the Indian trade and industry more competitive, domestically as well as internationally. It is also expected that introduction of GST will foster a common or seamless Indian market and contribute significantly to the growth of the economy.
2.5 Further, GST will broaden the tax base, and result in better tax compliance due to a robust IT infrastructure. Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an in-built mechanism in the design of GST that would incentivize tax compliance by traders.
3. Salient features of proposed GST:
3.1 Dual GST: Both Centre and States will simultaneously levy GST across the value chain. Tax will be levied on every supply of goods and services. Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State. The input tax credit of CGST would be available for discharging the CGST liability on the output at each stage. Similarly, the credit of SGST paid on inputs would be allowed for paying the SGST on output. No cross utilization of credit would be permitted.
3.2 Inter-State Transactions and the IGST Mechanism: The Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supply of goods and services. The IGST mechanism has been designed to ensure seamless flow of input tax credit from one State to another. The inter-State seller would pay IGST on the sale of his goods to the Central Government after adjusting credit of IGST, CGST and SGST on his purchases (in that order). The exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The importing dealer will claim credit of IGST while discharging his output tax liability (both CGST and SGST) in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST.
3.3 Destination-Based Consumption Tax: GST will be a destination-based tax. This implies that all SGST collected will ordinarily accrue to the State where the consumer of the goods or services sold resides.
3.4 Central Taxes to be subsumed:
- i. Central Excise Duty
- ii. Additional Excise Duty
- iii. The Excise Duty levied under the Medicinal and Toiletries Preparation Act
- iv. Service Tax
- v. Additional Customs Duty, commonly known as Countervailing Duty (CVD)
- vi. Special Additional Duty of Customs-4% (SAD)
- vii. Cesses and surcharges in so far as they relate to supply of goods and services.
3.5 State Taxes to be subsumed:
- i. VAT/Sales Tax
- ii. Central Sales Tax (levied by the Centre and collected by the States)
- iii. Entertainment Tax
- iv. Octroi and Entry Tax (all forms)
- v. Purchase Tax
- vi. Luxury Tax
- vii. Taxes on lottery, betting and gambling
- viii. State cesses and surcharges in so far as they relate to supply of goods and services.
3.6 All goods and services, except alcoholic liquor for human consumption, will be brought under the purview of GST.
- i. Petroleum and petroleum products have been constitutionally included as ‘goods’ under GST. However, it has also been provided that petroleum and petroleum products shall not be subject to the levy of GST till notified at a future date on the recommendation of the GST Council. The present taxes levied by the States and the Centre on petroleum and petroleum products, viz. Sales Tax/VAT and CST by the States, and excise duty the Centre, will continue to be levied in the interim period.
- ii. Taxes on tobacco and tobacco products imposed by the Centre shall continue to be levied over and above GST.
- iii. In case of alcoholic liquor for human consumption, States would continue to levy the taxes presently being levied, i.e., State Excise Duty and Sales Tax/VAT.
3.7 GST Council: In the GST regime, a Goods and Services Tax Council is being created under the Constitution. The GST Council will be a joint forum of the Centre and the States. This Council would function under the Chairmanship of the Union Finance Minister and will have Minister in charge of Finance/Taxation or Minister nominated by each of the States & UTs with Legislatures, as members. The Council will make recommendations to the Union and the States on important issues like tax rates, exemption list, threshold limits, etc. The recommendations made by this Council will act as benchmark or guidance to Union as well as State Governments. One-half of the total number of Members of the Council will constitute the quorum of GST council. Every decision of the Council shall be taken by a majority of not less than three-fourths of the weighted votes of the members present and voting in accordance with the following principles:-
- i. The vote of the Central Government shall have a weightage of one-third of the total votes cast, and
- ii. The votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast in that meeting..
This is to protect the interests of each State and the Centre when the Council takes a decision and is in the spirit of co-operative federalism.
3.8 Floor rates of GST with band: GST rates will be uniform across the country. However, to give fiscal autonomy to the States and the Centre, there will a provision of a tax band over and above the rate of the floor rates of CGST, SGST and IGST. Initially, the rates of CGST, SGST and IGST are expected to be closely aligned to the Revenue Neutral Rates (RNR) of the Centre and the States.
3.9 Goods and Services Tax Network (GSTN): A not-for-profit, Non-Government Company called Goods and Services Tax Network (GSTN), jointly set up by the Central and State Governments will provide shared IT infrastructure and services to the Central and State Governments, tax payers and other stakeholders.
3.10 GST Compensation: Due to a shift from origin based to destination based indirect tax structure, some States might face drop in revenue in the initial years. To help the States in this transition phase, the Centre has committed to compensate all their losses for a period of 5 years. Accordingly, clause 19 has been inserted in the Constitution (122nd) Amendment Bill, 2014 to provide for compensation to States by law, on the recommendation of the Goods and Services Tax Council, for loss of revenue arising on account of implementation of the goods and services tax for a period of five years.
4. Salient features of the Constitution (122nd) Amendment Bill, 2014: The salient features of the GST Bill as introduced in the Lok Sabha are as follows:-
- i. subsuming of various Central indirect taxes and levies such as Central Excise Duty, Additional Excise Duties, Excise Duty levied under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, Special Additional Duty of Customs, and Central Surcharges and Cesses so far as they relate to the supply of goods and services;
- ii. subsuming of State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States), Octroi and Entry tax, Purchase Tax, Luxury tax, Taxes on lottery, betting and gambling; and State cesses and surcharges in so far as they relate to supply of goods and services;
- iii. dispensing with the concept of ‘declared goods of special importance’ under the Constitution;
- iv. levy of Integrated Goods and Services Tax on inter-State transactions of goods and services;
- v. levy of an additional tax on supply of goods, not exceeding one per cent. in the course of inter-State trade or commerce to be collected by the Government of India for a period of two years, and assigned to the States from where the supply originates;
- vi. conferring simultaneous power upon Parliament and the State Legislatures to make laws governing goods and services tax;
- vii. coverage of all goods and services, except alcoholic liquor for human consumption, for the levy of goods and services tax. In case of petroleum and petroleum products, it has been provided that these goods shall not be subject to the levy of Goods and Services Tax till a date notified on the recommendation of the Goods and Services Tax Council.
- viii. compensation to the States for loss of revenue arising on account of implementation of the Goods and Services Tax for a period which may extend to five years;
- ix. creation of Goods and Services Tax Council to examine issues relating to goods and services tax and make recommendations to the Union and the States on parameters like rates, exemption list and threshold limits. The Council shall function under the Chairmanship of the Union Finance Minister and will have the Union Minister of State in charge of Revenue or Finance as member, along with the Minister in-charge of Finance or Taxation or any other Minister nominated by each State Government. It is further provided that every decision of the Council shall be taken by a majority of not less than three-fourths of the weighted votes of the members present and voting in accordance with the following principles:—
- a. the vote of the Central Government shall have a weightage of one-third of the total votes cast, and
- b. the votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast in that meeting.
- x. levy of an additional non-vatable tax on supply of goods of not more than 1% in the course of inter-State trade or commerce, for a period not exceeding 2 years, or such other period as the GST Council may recommend, to protect the interests of the producing/manufacturing States. This additional tax on supply of goods will be levied and collected by the Government of India, over and above the IGST levied under the proposed Article 269A (1). This tax shall be assigned to the States from where such supplies originate.
Differential treatment for alcohol, tobacco and petroleum products
(i) Alcoholic liquor for human consumption has been excluded from the purview of GST. The definition of goods and services tax in the proposed clause (12A) to be inserted in Article 366 of the Constitution is “tax on the supply of goods or services or both (except tax on the supply of alcoholic liquor for human consumption).” The manufacture and sale of the product will continue to be taxed by states.
(ii) Tobacco and tobacco products will be subject to central excise duty in addition to GST. While not excluded from GST, it is retained in entry 84 of List I (union list) also.
(iii) Petroleum products are excluded from GST for the present, and will continue to be taxed in the present mode – central excise duty on manufacture and VAT / CST on sale. However, the proposed Constitutional amendment requires the GST Council to fix the date by which these products will be brought into the purview of GST. This is in clause (5) of the proposed Article 279A.
Additional 1% for originating state on interstate supply of goods – non-VATable In addition to GST, an amount of 1% on inter-state supply of goods will be charged by the centre and assigned to the originating state, as per section 18 of the Constitution amendment bill. What is the originating state will be determined in terms of the rules for place of supply, which will be framed by Parliament in terms of the same section.
This tax of 1% on inter-state supply of goods will not be available as input tax credit. The tax will be levied for an initial period of two years and may be extended on the recommendation of the GST Council.
Legilative History of GST Bill-
The Constitution (One Hundred and Twenty-second Amendment) Bill, 2014 was introduced in the Lok Sabha by Finance Minister Arun Jaitley on 19 December 2014. The Bill was passed by the House on 6 May 2015, receiving 352 votes for and 37 against. All 37 no votes came from members of the AIADMK.
The Indian National Congress party opposed the Bill and boycotted the vote, its members leaving the House before voting began. Although the BJD and the CPI(M) had previously opposed the Bill, they cast votes in favour.
The Government attempted to move the Bill for consideration in the Rajya Sabha on 11 May 2015, however, members of the Opposition repeatedly stalled the proceedings of the House. In order to appease the Opposition's demand for further scrutiny of the Bill, Jaitely moved a motion to refer the Bill to a Select Committee.
FAQs on GST-
What is GST?
Goods and Services Tax – GST – is a comprehensive tax levied on manufacture, sale and consumption of goods and services at a national level. Through a tax credit mechanism, this tax is collected on value-added goods and services at each stage of sale or purchase in the supply chain. The system allows the set-off of GST paid on the procurement of goods and services against the GST which is payable on the supply of goods or services. However, the end consumer bears this tax as he is the last person in the supply chain. Experts say that GST is likely to improve tax collections and boost India’s economic development by breaking tax barriers between States and integrating India through a uniform tax rate.
What are the benefits of GST?
Under GST, the taxation burden will be divided equitably between manufacturing and services, through a lower tax rate by increasing the tax base and minimizing exemptions. It is expected to help build a transparent and corruption-free tax administration. GST will be levied only at the destination point, and not at various points (from manufacturing to retail outlets).Currently, a manufacturer needs to pay tax when a finished product moves out from a factory, and it is again taxed at the retail outlet when sold.
How will it benefit the Centre and the States ?
It is estimated that India will gain $15 billion a year by implementing the Goods and Services Tax as it would promote exports, raise employment and boost growth. It will divide the tax burden equitably between manufacturing and services.
What are the benefits of GST for individuals and companies?
In the GST system, both Central and State taxes will be collected at the point of sale. Bothcomponents (the Central and State GST) will be charged on the manufacturing cost. This will benefit individuals as prices are likely to come down. Lower prices will lead to more consumption, thereby helping companies.
What type of GST is proposed for India?
India is planning to implement a dual GST system. Under dual GST, a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of a transaction. All goods and services, barring a few exceptions, will be brought into the GST base. There will be no distinction between goods and services.
What are the flaws in present GST bill?
The government should remove flaws in the Constitutional Amendment Bill and build a consensus with the states on a flawless GST. The Bill, to give the Centre and states concurrent powers to tax goods and services, is a right step. What is not correct is a 1% extra levy proposed to be charged when goods move from one state to another. If Rajasthan imports goods from Maharashtra, it will pay 1% tax to Maharashtra, but the levy will not be charged if the goods are imported from outside India. Also, the 1% tax would apply multiple times, every time goods move from one state to another, and could cumulate to as much as 5% in a typical supply chain. This will add to the cascade of taxes that products bear and raise the cost of raw materials, capital and finished goods.
As there will be no set-offs on the extra levy —to be in force for two years or such other period as the GST Council may recommend. However, producing states want the levy on the grounds that they will lose out when the central sales tax is scrapped. There is no logic as the Centre has already guaranteed compensation to states while transiting to GST. The extra levy will scuttle the Make in India plan. It goes against the grain of GST and renders our exports uncompetitive. The extra levy should be scrapped.
Keeping real estate out of GST is a bad idea as credit will not be available for taxes paid on inputs used in construction such as cement and steel. Construction capital expenditure is 40% of total capital investment in a year, and that’s not small change. Bringing real estate under GST will raise investment and push growth.
Ten things to know about the GST Bill-
The Goods and Services Tax is one of the main items on the finance agenda of the BJP government. Finance Minister Arun Jaitley has said that it can raise India’s GDP by one to two per cent. As the Lok Sabha takes up the GST Bill, here is your cheat sheet to the debate:
Officially, the Constitution (One Hundred and Twenty-Second Amendment) Bill 2014.
|2|| It was introduced in the Lok Sabha on December 19, 2014 by Finance Minister Arun Jaitley.|
|3|| The Bill seeks to amend the Constitution to introduce a goods and services tax (GST) which will subsumes various Central indirect taxes, including the Central Excise Duty, Countervailing Duty, Service Tax, etc. It also subsumes State value added tax (VAT), octroi and entry tax, luxury tax, etc.|
|4|| The Bill inserts a new Article in the Constitution make legislation on the taxation of goods and services a concurrent power of the Centre and the States.|
|5|| The Bill seeks to shift the restriction on States for taxing the sale or purchase of goods to the supply of goods or services.|
|6|| The Bill seeks to establish a GST Council tasked with optimising tax collection for goods and services by the State and Centre. The Council will consist of the Union Finance Minister (as Chairman), the Union Minister of State in charge of revenue or Finance, and the Minister in charge of Finance or Taxation or any other, nominated by each State government.|
|7|| The GST Council will be the body that decides which taxes levied by the Centre, States and local bodies will go into the GST; which goods and services will be subjected to GST; and the basis and the rates at which GST will be applied.|
|8|| Under the Bill, alcoholic liquor for human consumption is exempted from GST. Also, it will be up to the GST Council to decide when GST would be levied on various categories of fuel, including crude oil and petrol.|
|9|| The Centre will levy an additional one per cent tax on the supply of goods in the course of inter-State trade, which will go to the States for two years or till when the GST Council decides.|
|10||Parliament can decide on compensating States for up to a five-year period if States incur losses by implementation of GST.|
GST – a political and economic challenge
If the GST Bill doesn’t get passed in the Winter Session, the government will miss the 1 April roll-out date.
For the outside world, where Modi has hard-sold the India story, the passage of key reform Bills in the Winter Session is all that matters. Particularly so, since the Land Bill is almost off the table for now with the power to decide on land acquisition now resting with the state governments.
If the Modi government can make GST happen, it will be seen as a big victory of this government by the investor community and the biggest reform India has witnessed in a decade. The GST will subsume several different taxes into one and will significantly improve the tax revenues over a period of time.
Economists estimate up to 2 percent addition to the country’s GDP when GST improves tax revenues.
Its passage can silence Modi’s critics who have cited absence of major reforms, except a few incremental steps and FDI liberalisation. This will also give ample time to the NDA government to work on rest of the reform agenda, such as Land and labour reforms.
Read Full Text of the GST Bill here-