Goods and Services Tax (GST)

Objectives:

The objective of Goods and Services Tax is to replace indirect tax regime in India by a single tax known as GST. The unified taxation regime known as GST will be a single tax rate that will be levied at the point of supply and not at the point of consumption as was being done so far.

• Convert Union of India into a Common Market: This taxation regime will convert Union of India into a common unified market thereby enabling uninterrupted flow of goods and services across the length and breadth of the country which in the erstwhile indirect taxation regime was being hindered because of imposition of octroi and freight charges at State borders.
• GST to subsume all indirect taxes: Secondly, as all the indirect taxes will be subsumed under GST, the cascading effect of different taxes will be avoided, which in turn will lower the tax burden on the end consumer making the goods and services cheaper.
• Indian States will have a level playing field: Once whole of India is converted into a common market, States will have a level playing field in context of attracting industrial enterprises to set shop in their State. The different States of India would be able to showcase the benefits of their logistical infrastructure, uninterrupted electric supply, water, man-power to lure industrial houses and will no longer be able to differentiate on grounds on tax imposition which used to benefit advanced States because of their better financial position.
• Boost GDP: As GST will subsume all indirect taxes as one rate, compliance with the indirect taxation regime by manufacturers and service providers will become easier. This in turn will lower tax administration and collection costs borne by the government as well as lower tax compliance cost borne by the tax payer. The lowered costs will induce greater efficiency in tax collection system and thus the government as well as the tax payer will benefit. Tax payer will have to pay a lesser tax rate and will thus have more money in his pockets to spend. The government will benefit in terms of voluntary compliance by tax payer due to a simplified tax regime. GST will disincentivize the need to indulge in black marketing as costs will be reduced on account of imposition of a single tax rate. As black marketing activities reduce, money laundering will cease and in turn promote monetization of the economic sectors which shall add to nation’s GDP.

How will GST lower taxes and affect common man:

In order to understand this, we need to understand the different levels of the supply chain as follows:

• First level (Manufacturing): An industrialist buys leather worth Rs 100 from leather tannery and uses it to manufacture a pair of shoes worth Rs 150. He has to pay a GST of 10%. Therefore, the tax payable by him is Rs. 15/- at his location since GST is levied at the place of supply.
• Second level (Wholesaler): The pair of shoes is bought by the wholesaler who adds his profit margin of Rs 20 and decides to sell the shoe pair for Rs. 170/-. GST tax at the rate of 10% comes to be Rs. 17/-. Since, manufacturer had already paid a tax of Rs. 15/-, the balance Rs.2/- will be paid by the wholesaler at his location.

Therefore the total GST levied at two different levels comes out to be Rs 17/- which is collected at the respective points of supply unlike in the earlier taxation regime where complete tax was collected at point of consumption.

Benefit of collecting tax at ‘Point of Supply’:

The supply points are always spread across different states and thus each state would benefit as per its ability to promote entrepreneurship in different stages of supply chain. In the earlier regime, the State with higher demand benefitted as tax was collected at point of consumption thus neglecting the intermediate States which formed part of preceding stages of supply chain.

This methodology of tax collection at point of supply rather than point of consumption will encourage different States of India to promote entrepreneurship irrespective of their population base and thus help eradicate the developmental divide that exists between Indian states.

122nd Constitutional Amendment Bill:

The 122nd Constitutional Amendment Bill was introduced in Parliament in 2014 to amend the constitutional provisions so as to provide the grounds for legislating the Goods and Services Tax laws.

GST Bill has to be passed by both the houses of the parliament individually by special majority and later ratified by atleast half of the State legislatures.

Constitutional provisions amended by the 122nd Constitutional Amendment Bill are as follows:

• Insertion of new article 246A. It deals with special provision with respect to goods and services tax.

• Amendment of article 248.
• Amendment of article 249.
• Amendment of article 250.
• Amendment of article 268.
• Omission of article 268A.
• Amendment of article 269.
• Insertion of new article 269A –

269A(1) - Goods and services tax on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council.

Explanation.—For the purposes of this clause, supply of goods, or of services, or both in the course of import into the territory of India shall be deemed to be supply of goods, or of services, or both in the course of inter-State trade or commerce.

269A(2) Parliament may, by law, formulate the principles for determining the place of supply, and when a supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.

• Insertion of new article 279A - Goods and Services Tax Council.

279A(1): Formulation of Goods and Services Tax Council: The President shall, within sixty days from the date of commencement of the Constitution (One Hundred and Twenty-second Amendment) Act, 2014, by order, constitute a Council to be called the Goods and Services Tax Council.

279A(2): The Goods and Services Tax Council shall be headed by Union Finance Minister

279A(3): GST Council members will choose from amongst themselves a Vice Chairman.

279A(4): The GST Council shall make recommendations to the Union and the States on—

(a) The taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed in the goods and services tax.
(b) The goods and services that may be subjected to, or exempted from the goods and services tax.
(c) Model Goods and Services Tax Laws, principles of levy, apportionment of Integrated Goods and Services Tax and the principles that govern the place of           supply.
(d) The threshold limit of turnover below which goods and services may be exempted from goods and services tax.
(e) The rates including floor rates with bands of goods and services tax.
(f) Any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster.
(g) Special provision with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim,                   Tripura, Himachal Pradesh and Uttarakhand.
(h) Any other matter relating to the goods and services tax, as the Council may decide.

279A(5) The Goods and Services Tax Council shall recommend the date on which the goods and services tax be levied on petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel.

279A(6) While discharging the functions conferred by this article, the Goods and Services Tax Council shall be guided by the need for a harmonised structure of goods and services tax and for the development of a harmonised national market for goods and services.

279A(7) One half of the total number of Members of the Goods and Services Tax Council shall constitute the quorum at its meetings.

279A(8) The Goods and Services Tax Council shall determine the procedure in the performance of its functions.

279A(9) Every decision of the Goods and Services Tax Council shall be taken at a meeting, 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, namely:—

(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.

279A(10) No act or proceedings of the Goods and Services Tax Council shall be invalid merely by reason of—

(a) any vacancy in, or any defect in, the constitution of the Council; or
(b) any defect in the appointment of a person as a member of the Council; or
(c) any procedural irregularity of the Council not affecting the merits of the case.

279A(11) The Goods and Services Tax Council may decide about the modalities to resolve disputes arising out of its recommendation.”.

Taxes subsumed under GST are:

• 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.
• Subsuming of State indirect taxes such as: 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.

The other features of the 122nd Constitutional Amendment bill are:

• Dispensing with the concept of ‘declared goods of special importance’ under the Constitution;.
• Levy of Integrated Goods and Services Tax on inter-State transactions of goods and services.
• Conferring concurrent power upon Parliament and the State Legislatures to make laws governing goods and services tax.
• 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.
• 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.

By: Abhinav