Taxation

ANALYSIS OF GST IN INDIA: CONSTITUTIONAL CHALLENGES

Submitted To:-

Ms.Nilima Panda,

Faculty, Taxation

Submitted By:-

Sindhura Cheruku

Roll No. : - 201233

8th Semester, 4th Year

DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

VISAKHAPATNAM

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Table of Contents
Abstract ......................................................................................................................................................... 3
Introduction .................................................................................................................................................. 4
What is GST? ............................................................................................................................................. 4
Roadmap to GST ........................................................................................................................................... 5
Why is GST?................................................................................................................................................... 5
Benefits of GST: ............................................................................................................................................. 6
Indirect Taxes subsumed under GST:............................................................................................................ 7
The GST model in India: ................................................................................................................................ 8
Dual GST .................................................................................................................................................... 8
Issues involved in implementation of GST: Constitution Perspective .......................................................... 8
Salient Features of the Constitution (122nd Amendment) Bill, 2014 .......................................................... 9
Functions of the GST Council: To examine issues relating to GST and make recommendations to the
Union and the States, on the following .................................................................................................... 9
Compensation to states: ..................................................................................................................... 10
Parliament may, by law, provide for compensation to states for revenue losses arising out of the
implementation of the GST, on the GST Councils recommendations. This would be up to a five
year period. ......................................................................................................................................... 10
Resolution of disputes: ....................................................................................................................... 10
No Surcharge on GST :Amendment to Article 271: ................................................................................ 11
COMMENTS/OBSERVATIONS ...................................................................................................................... 11
IMPACT OF GST Constitution (122nd Amendment) Bill, 2014.................................................................... 12
NEXT STEPS REQUIRED FOR IMPLEMENTATION: ........................................................................................ 13
CONCLUSION............................................................................................................................................... 14
Bibliography: ............................................................................................................................................... 15

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Abstract

This paper focuses on the process of introducing the Goods and Services Tax (GST), bringing
out the perspectives of different stakeholders and the contentious issues. The GST was expected
to subsume a variety of taxes and simplify the indirect tax regime. The Empowered Committee
(EC) was mandated in 2007, to bring about consensus among the States to move towards GST.
The important stakeholders in the process were the Government of India (GoI), individual States,
industry and the committees commissioned by the GoI or EC. However, the EC faced challenges
since there were issues of control between the Centre and States, perceived loss of revenue by
some States, extent of uniformity across various commodities and their tax rates, input credit
mechanism and dispute settlement. The deadline for the introduction of GST kept getting
postponed due to the slow resolution of the challenging issues. Finally, it was tabled in the
Parliament as the 122nd Constitutional Amendment Bill (CAB) in December 2014.

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Introduction

What is GST?

Goods and Services Tax (GST) is a part of the proposed tax reforms that center round evolving
an efficient and harmonized consumption tax system in the country. Presently, there are parallel
systems of indirect taxation at the central and state levels. Each of the systems needs to be
reformed to eventually harmonize them.1

In the Union Budget for the year 2006-2007, Finance Minister proposed that India should move
towards national level Goods and Services Tax that should be shared between the Centre and the
States. He proposed to set April 1, 2010 as the date for introducing GST. World over, goods and
services attract the same rate of tax. That is the foundation of a GST. The first step towards
introducing GST is to progressively converge the service tax rate and the CENVAT rate.2

The goods and service tax (GST) is proposed to be a comprehensive indirect tax levy on
manufacture, sale and consumption of goods as well as services at a national level. Integration of
goods and services taxation would give India a world class tax system and improve tax
collections. It would end the long standing distortions of differential treatments of manufacturing
and service sector. The introduction of goods and services tax will lead to the abolition of taxes
such as octroi, Central sales tax, State level sales tax, entry tax, stamp duty, telecom license fees,
turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods and
services, and eliminate the cascading effects of multiple layers of taxation. GST will facilitate
seamless credit across the entire supply chain and across all states under a common tax base.3

1
Mona Prasad, Introduction of Value Added Tax in Indian States: How has the revenue performance
been?Harward Business Review, Vol25, isuue 6, March 2015.
2
Bharat Singh, Ravi Kumar .V, Vat in India- Issues and Concerns, The Chartered Accountant Journal, Vol4, issue
3, June 2014.
3
Abhishek A. Rastogi & Aditya Kumar, Goods and Service Tax: New face of Indirect Taxes in India, Taxmann
Publications (P) Ltd., New Delhi, 2014.

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Roadmap to GST

As we have parallel systems of indirect taxation at the central and state levels, each of the
systems needs to be reformed to eventually harmonise them. The central excise duty should be
converted into a full fledged manufacturing stage VAT on goods and services and the states sales
tax systems should be transformed into a retail stage destination based VAT, before the two are
integrated. At the central level, beginning has been made by converging widely varying tax rates
and extending input tax credit to convert excise duties into a CENVAT.4

The reformed indirect tax system GST-Goods and service tax is proposed to implement on 1st
April 2010 in India. Several countries implemented this tax mechanism followed by France, the
first country introduced GST. Goods and service tax is a new version of VAT which gives a
comprehensive setoff for input tax credit and subsuming many indirect taxes from state and
national level. The GST Implementation is not yet declared by government and the drafting of
GST law is still under process and a clear picture will be available only after announcement of
Implementation. As the name denotes the goods and service tax is integrated in GST for setoff
benefit of Input tax credit.

Why is GST?

1. Avoid cascading effect of taxation:

One of the main reasons of the introduction of GST is to avoid cascading effect of taxes
in India. For example manufacturing of a product attract CENVAT. The manufacturer
pays CENVAT on goods produced. So the CENVAT element is loaded on the product.
According VAT rules, the sales tax is payable on the aggregate selling price which
include CENVAT. Here there is no set off benefits available. Likewise there are many
situations in the nature of cascading effect for instance, State VAT on CST, Entry tax on
VAT etc. Now Government has decided to abolish tax on tax effect by implementing
GST.5

4
Ibid
5
V.S. Datey, Service Tax & VAT, Taxmanns Publications (P) Ltd., New Delhi, 2013

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 2. Shortfall of existing VAT
Indirect taxes like luxury tax, entertainment tax, are yet to be included in the VAT. These
taxes are still existing and payable.6

3. Shortfall of existing CENVAT

Several taxes like additional customs duty, surcharges not included under CENVAT.
Input tax and service tax set off is out of reach to the manufacturer and dealers.

Benefits of GST:7

1. GST provide comprehensive and wider coverage of input credit setoff, you can use service tax
credit for the payment of tax on sale of goods etc.

2. CST will be removed and need not pay. At present there is no input tax credit available for
CST.

3. Many indirect taxes in state and central level subsumed by GST, You need to pay a single
GST instead of all.

4. Uniformity of tax rates across the states

5. Ensure better compliance due to aggregate tax rate reduces.

6. By reducing the tax burden the competitiveness of Indian products in international market is
expected to increase and there by development of the nation.

7. Prices of goods are expected to reduce in the long run as the benefits of less tax burden would
be passed on to the consumer. 8. Overall tax compliance cost will reduce for government and can
concentrate on GST.

6
ibid
7
Abhishek A. Rastogi, Guide to Goods and Services Tax, Taxmanns Publications (P) Ltd.,New Delhi 2010.

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Indirect Taxes subsumed under GST:8

The following indirect taxes from state and central level is going to integrated with GST

State level:

1. VAT/Sales tax

2. Entertainment Tax ( unless it is levied by local bodies)

3. Luxury tax

4. Taxes on lottery, betting and gambling.

5. State cesses and surcharges in so far as they relate to supply of goods and services.

6. Entry tax not on in lieu of octroi.

7. Purchase tax

Central level:

1. Central Excise Duty.

2. Additional Excise Duty.

3. The Excise Duty levied under the medical and Toiletries Preparation Act

4. Service Tax.

5. Additional Customs Duty, commonly known as countervailing Duty ( CVD)

6. Special Additional duty of custums-4% ( SAD)

7. Surcharges

8
Working Paper No. 103, Moving towards Goods and Services Tax in India: Impact on Indias Growth and
International Trade, National Council of Applied Economic Research, Report submitted to Thirteenth Finance
Commission, Govt. of India, December 2015.

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8. Cessess

The GST model in India:

The above taxes dissolve under GST; instead only CGST & SGST exists. Many countries are
following single GST. But it is proposed that dual CST is suitable for federal country like India.
The end user, i.e. consumer cannot recover taxes but a business can recover by claiming input
tax setoff.9

Dual GST

Dual GST means, the proposed model will have two component called CGST Central goods
and service tax for levied by central Govt. SGST State goods and service tax levied by state
Govt. There would have multiple statute one CGST statute and SGST statute for every state.

Issues involved in implementation of GST: Constitution Perspective

The first issue is with respect to the amendments required to be made in the existing
Constitutional provisions. It is quite evident that some of the Constitutional provisions would be
redundant after introduction of GST. For example, Article 268 A which provides for service tax
levied by Union and collected and appropriated by the Union and the states. Also, Constitutional
provisions like Article 285,286, 287,288, and 289 which would require suitable amendments.
The second issue relates to the amendment of entries in List I and List II as many entries would
be subsumed in GST.10 The third issue is the need for setting up of constitutional machinery for
(a) sanctioning any changes in the rate or exemptions under CGST and SGST in future; (b) for

9
M. Govinda Rao, Goods and Services Tax: Some Progress towards Clarity, Economic & Political Weekly, , vol xliv,
no. 51, December 19, 2014
10
ibid

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resolving disputes between the Centre and the states and among the states.11 The fourth issue is
with respect to distribution of GST revenue between the Centre and the states. 12

Salient Features of the Constitution (122nd Amendment) Bill, 2014

Concurrent powers for GST: The Bill inserts Article 246 A in the Constitution to give the central
and state governments the concurrent power to make laws on the taxation of goods and
services.13Effectively, every supply of goods and services would be subjected to a Central GST
(CGST) and State GST (SGST) on such intra-state supply by the jurisdictional State.

Integrated GST (IGST): However, Article 269 A provides that only the Centre may levy and
collect GST on supplies in the course of inter-state trade or commerce.14The tax collected would
be divided between the Centre and the states in a manner to be provided by Parliament, by law,
on the recommendations of the GST Council.

GST Council: Article 279 A provides that the President must constitute a Goods and Services
Tax Council within sixty days of this Act coming into force. 15 The GST Council aim to develop
a harmonized national market of goods and services.

Functions of the GST Council: To examine issues relating to GST and make
recommendations to the Union and the States, on the following16

Taxes, cesses and surcharges levied by the Union, States and local bodies, which may be
subsumed in GST
Goods and services to be subjected to or exempted from GST

11
Narendra Motwani, India Budget and fiscal policy, available at http://indiabudget.nic.in/es1985-
86/6%20Fiscal%20Policy%20and%20Government%20Budget.pdf, accessed on February 16, 2016
12
Report of Task Force on Goods & Services Tax, accessed on April 1, 2016 time: 16:47
13
Article 246A of The Constitution (One Hundred and Twenty-Second Amendment) BILL, 2014
14
Article 269A of The Constitution (One Hundred and Twenty-Second Amendment) BILL, 2014
15
Article 279A of The Constitution (One Hundred and Twenty-Second Amendment) BILL, 2014
16
Arvind Battacharya, finance Ministry sets up Technical advisory group available at
http://www.thehindu.com/news/national/finance-ministry-sets-up-technology-advisory-group/article449063.ece,
accesed on: 1-04-2016 time: 15:45

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 Model GST laws, principles of levy, apportionment of Integrated GST and principles
governing place of supply.
Threshold limit of turnover below which goods and services may be exempted from GST
Rates including floor rates with bands of GST
Special rate or rates for a specified period, to raise additional resources during any natural
calamity or disaster
Special provisions with respect to States of Arunachal Pradesh, Assam, Jammu and
Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh
and Uttarakhand.
Date on which GST is to be levied on petroleum crude, high speed diesel, motor spirit
(commonly known as petrol), natural gas and aviation turbine fuel
Any other matter relating to GST as the Council may decide.

Additional Tax on supply of goods: An additional tax (not to exceed 1%) on the supply of goods
in the course of inter-state trade or commerce would be levied and collected by the Centre. 17
Such additional tax shall be assigned to the states for two years, or as recommended by the GST
Council.

Compensation to states:

Parliament may, by law, provide for compensation to states for revenue losses arising out of the
implementation of the GST, on the GST Councils recommendations.18 This would be up to a
five year period.
Goods exempt: Alcoholic liquor for human consumption is exempted from the purview of the
GST.19Further, the GST Council is to decide when GST would be levied on: (I) petroleum crude,
(ii) high speed diesel, (iii) motor spirit (petrol), (iv) natural gas, and (v) aviation turbine fuel.

Resolution of disputes:

The GST Council may decide upon the modalities for the resolution of disputes arising out of its
recommendations.20

17
The Constitution (One Hundred and Twenty-Second Amendment) BILL, 2014 (Point 18)
18
The Constitution (One Hundred and Twenty-Second Amendment) BILL, 2014 (Point 19)
19
Article 366(12A) of The Constitution (One Hundred and Twenty-Second Amendment) BILL, 2014

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No Surcharge on GST :Amendment to Article 271:

Article 271 empowers the Union to increase any of the duties or taxes referred to in Articles 269
and 270 by a surcharge and whole proceeds of any such surcharge shall form part of Consolidate
Fund of India. Article 271 is proposed to be amended to restrict the powers of the Parliament to
impose any surcharge on the GST.21

Treatment of goods of Special Importance: The Amendment Bill seeks to dispense with
theconcept of declared goods of special importance by omitting Clause (3) of Article 286 of the
Constitution.

COMMENTS/OBSERVATIONS

This Bill have managed to cover petroleum products within its ambit, albeit in a phased manner.
This is a welcome development since petroleum products are key industrial inputs, and therefore
should be within the ambit of GST in the long term.22

The concept of introducing such non-creditable additional tax is not in line with the proposal of
making GST a destination based consumption tax.

The 122nd Amendment Bill hosts the definition of the terms services and goods and services
tax for the first time in the Constitution. Article 366(26A) is proposed to be inserted to define
services as services means anything other than goods.23 Article 366(12A) is also proposed
to be inserted to define goods and services tax as goods and services tax means any tax on
supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human

20
PRS Legislative Research, Bill Summary of The Constitution (One Hundred and Twenty-Second Amendment) Bill,
2014 (GST) available at http://www.prsindia.org/billtrack/the-constitution-122nd-amendment-gst-bill-2014-3505/,
accessed on 1-04-2016 time: 7:37
21
Amendment of Article 271 of The Constitution (One Hundred and Twenty-Second Amendment) BILL, 2014
22
BMR Advisors, The Central Government Introduces the Constitutional Amendment Bill on Goods and Services
Tax, 10 BMR Edge (December 20,2014).Available at
http://www.moneycontrol.com/news_html_files/news_attachment/2014/GST%20Constitutional%20Amendment%
20Bill%202014.pdf, accessed on 1-04-2016 time: 17:27
23
Article 366(26A) of The Constitution (One Hundred and Twenty-Second Amendment) BILL, 2014

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consumption.24 In my opinion, the proposed definition of services to mean anything other than
goods, reflects a wide interpretation as to what would constitute as a service and suggests the
intention to extend the scope of goods and services tax to cover other items such transactions in
money and actionable claims that are currently not regarded as services under section 65B (44)
of the Finance Act, 1994. A conjoint reading of the definition of goods and proposed definition
of services would indicate a scope of ambiguity within the Constitution, leaving out for the
Union and the States to decide upon the characterization of certain transactions such as
intangibles, immovable property and composite supplies such as works contract.25

The Bill provides that compensation to States on revenue loss on account of introduction of GST
would be based on the recommendations of the GST Council. Therefore, the GST Council, and
not the Centre, would be decision making authority on the computation of compensation to
States for any revenue loss, and therefore determination of compensation will be done by a body
with democratic representation by all States. This is a welcome step as it will address the
concerns of the states as the states will have a say in determination of compensation. "No state
will loose a rupee. It will be a winwin situation for all," the Finance Minister Arun Jaitley said
while announcing the compensation of 11,000 crores for states.26

IMPACT OF GST Constitution (122nd Amendment) Bill, 2014

The introduction of GST will be a game-changer for industry, and, the introduction of GST can
be expected to set right various inefficiencies/defects in the present Indirect tax regime in India.
For instance:

24
Article 366(12A) of The Constitution (One Hundred and Twenty-Second Amendment) BILL, 2014
25
CA Kewal Satra, Key Features of the CONSTITUTION (122ND AMENDMENT) BILL, 2014.Available at
http://www.cvocaassociation.com/resource/image/Key_Features_of_Constitution_Bill_2014_.pdf, accessed on 1-
04-2016, time: 14:55
26
Shishir Sinha, Constitutional Amendment Bill for GST introduced in Lok Sabha .Available at
http://www.thehindubusinessline.com/economy/policy/constitutional-amendment-bill-for-gst-introduced-in-
loksabha/article6708210.ece, accessed on 1-04-2016. Time: 13:30

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The subsuming of various indirect tax levies at a Central or State level into a Central GST or
State GST will address the issue of multiple taxes levied across various stages of the supply
chain.27

Full availability of tax credits across the supply chain will result in avoiding the cascading effect
of taxes.28 Under the proposed GST system, there would be no separate excise duty, VAT etc.,
and, there would be a uniform levy across goods and services with an uninterrupted credit flow;

The subsuming of taxes like entry tax into the fold of GST, will remove the need for the check-
post raj which in itself 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 check points and this
not only causes time delays but also increases logistics costs.29

The simplification of the tax regime will result in reduction in compliance costs/time spent on
tax compliance, and, facilitate better planning and creation of more efficient supply chain
systems.

NEXT STEPS REQUIRED FOR IMPLEMENTATION:

Amendment of the Constitution is being initiated by the introduction of a Bill in both the Houses
of Parliament. For its passage, it will require not less than two thirds majority of the members
present and voting in the Lok Sabha and Rajya Sabha30

The Bill is also required to be ratified by the Legislatures of not less than one-half of the States.
It shall be thereafter presented to the President who shall give his assent to the Bill and thereupon
the Constitution shall stand amended.

27
ELP, Constitution and Scheme of GST, GST Insight Bulletin 1 (February18,2015). Available at
http://www.manupatrafast.in/NewsletterArchives%5Clisting%5CGST%20ELP%5C2015%5CFeb/ELP%20GST%20Insig
ht%20- %20Bulletin%201.pdf, accessed on 1-04-2016, time: 12:35
28
Ibid
29
Ibid
30
Ashok Reddy, Analysis of the Constitution Amendment Bill for introduction of Goods and Service Tax, EY GST
News Alert (20 December 2014).Available at
http://www.ey.com/Publication/vwLUAssets/GST__News_Alert_Constitution_Amendment/$FILE/GST_%20News_A
lert_Constitution_A mendment.pdf, accessed on 1-04-2016, time: 18:54

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While passage of the Bill is expected to be smooth in the Lok Sabha, its passage in the Rajya
Sabha remains doubtful, given that the Government is less in number and is facing an
acrimonious and a united opposition.31Even if the Government is able to get the Bill passed in
the coming Budget Session, it will be an uphill task to secure its ratification from half of the
State Legislatures, not to mention the drafting of the numerous regulations/laws which shall
govern the entire framework of GST.

CONCLUSION

With this initiative of the Finance Minister, the Union Government has moved a step closer
towards the suggested implementation of GST by April 2016. The Bill clearly reflects the fact
that Union Government has addressed all key concerns of States, and is also willing to indemnify
for loss of revenue post GST introduction.

31
Navthan Sangi ELP GST Insight (December 2014).Available at
http://www.manupatrafast.in/NewsletterArchives%5Clisting%5CGST%20ELP%5C2014%5CDec/ELP%20GST%20Insi
ght%20- %20December%202014.pdf, accessed on 1-04-2016, time: 15:25

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Sury, M Taxation in India 1925 to 2007: History, Policy, Trends and Outlook, Indian Tax
foundation, New Delhi, (ed) (2006).

Reports

Empowered Committee of State Finance Ministers (2009). First Discussion Paper on

GST, Government of India, New Delhi
Report of Task Force on Implementation of FRBM Act, Government of India, New Delhi
Thirteenth Finance Commission (2009). Report of Task Force on Goods & Service Tax

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