OCTOBER 01, 2013

By Sumit Dutt Majumder

THE Parliamentary Standing Committee on Finance chaired by Mr Yashwant Sinha recently released the Report of the Standing Committee on the 115 th Constitutional Amendment Bill regarding introduction of GST in India. In its report, the Committee made an unequivocal endorsement of the Dual GST structure. While making recommendations on various provisions of the Bill, the Committee also allayed the fears of some of the States about loss of fiscal autonomy. Simply said, the Report displayed a balanced consideration of the economic and political issues concerning GST, and showed a proper understanding of how the ideals of fiscal federalism could be achieved while simultaneously respecting the needs of all the stakeholders. The Report is particularly important because it is an all-party endorsement of the Dual GST model. Besides the issues relating to the Bill, the Committee also made observations and recommendations on certain issues related to GST in general like Administration and IT Mechanism, Compensation Mechanism and GST Monitoring Cell.

On consideration of the recommendations and observations of the Committee, the Centre prepared a revised version of the Bill, and gave it to the Empowered Committee of State Finance Ministers (EC) during its meeting on 19/9/13 for its comments. The final version of the Bill will be prepared after receipt of the comments of the States. This is an encouraging development, and if everything goes well, the final version of the Bill can be expected to be passed by the Parliament in the winter session itself, since after all, the Revised Bill has taken care of most of the concerns raised in the all-party Report.

Now let us have a look at the major changes brought out in the Revised Bill. The format of the empowering provision for levying GST i.e. Art 246A has been changed by bringing in two clauses in place of one clause with a proviso. These two clauses i.e. 246A(1) & (2) make it clear that while both Parliament and the State Legislatures will have concurrent jurisdiction in levying GST for intra-State supply of goods and services, the Parliament will have exclusive power of levy where the transactions are inter-state.

The term ‘Goods & Service Tax' was proposed to be so defined at Clause (12A) of the Art. 366 in the Bill that certain goods like petroleum & its products, natural gas, alcohol etc were to be excluded from the ambit of GST. The Committee however had recommended that the above - mentioned exclusion provision may be omitted from the Bill. This was because when in future it is decided to bring Petroleum products, Alcohol etc within the ambit of GST, it will be so much easier without having to go through the Constitution Amendment route. In deference to the Committee's recommendation, the aforesaid exclusion provision has been omitted from the Revised Bill.

The Committee, while endorsing the proposal to set up a GST Council under Art. 279A had expressed reservation about the stipulation regarding consensus before every decision of the Council, and recommended for voting instead, since otherwise no decision could be taken even if one State differed. Agreeing with this recommendation, the Centre has proposed the following at Clause 8 of Art. 279A in the Revised Bill:

"8. 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". (Emphasis supplied)

The total number of members of GST Council that will constitute the quorum at its meetings has also been changed to one-half in place of one-third.

The Bill at Clause (4) of the proposed Article 279A had listed certain matters on which the GST Council would make recommendations. One such matter was rates of GST, where the Committee had felt that the States should have some elbow-room for varying the tax rate depending on exigencies. Accepting the recommendation, the Centre has in the Revised Bill expanded the sub-clause (d) as

"(d) the rates including floor rates with bands of goods and service tax."

Further, agreeing with the Committee's recommendations on providing both Centre and the States the requisite flexibility to raise additional resources during the period of natural calamities and disasters, the Revised Bill has proposed an additional sub clause (e) as follows:

"(e) any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster;"

The Committee had also recommended to provide for special schemes for North-Eastern States, the State of J&K etc . Accordingly, an additional sub-clause (f) has been proposed in the Revised Bill as follows:

"(f) special provisions with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura;"

Another important aspect of the Revised Bill is that the Centre, in agreement with the Committee, has dropped the provisions regarding establishment of a GST Dispute Settlement Authority , and instead empowered the GST Council to deal with the resolution of disputes arising out of deviation from the norms laid down by the Council. For this purpose, a new clause (10) has been added to the proposed Article 279A which is as follows:

"(10) For the purposes of resolving any issue or dispute relating to the goods and services tax raised by a State Government or the Government of India, the Goods and Services Tax Council may constitute Advisory Committees consisting of Members concerned from the Council and such experts as it deems fit, to exercise such powers and functions as may be assigned to them."(Emphasis supplied)

On the issue of ‘Declared Goods' , the Committee had recommended suitable amendment of Clause (3) of Article 286 in order to ensure that there was no unilateral decision by the Centre regarding taxation of ‘declared goods' kept outside the purview of GST, ‘and also to uphold the spirit of cooperative federalism, which is crucial for the structure of dual GST.' The Centre has in its Revised Bill given due importance to the need for recommendation of the GST Council, and modified the Clause (3) of Art. 286 as follows:

"(3) Any law of a State shall, in so far as it imposes, or authorises the imposition of a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce be subject to such restrictions and conditions as Parliament may, on the recommendations of the Goods and Services Tax Council constituted under Article 279 A, by law specify."(Emphasis supplied)

As for Entry Tax, the Bill had proposed that Entry 52 in the State List be substituted as follows:

"52. Taxes on the entry of goods into a local area for consumption, use or sale therein to the extent levied and collected by a Panchayat or a Municipality."

The Committee however observed that it would not be desirable to go back to the earlier system of levy and collection of Octroi by local bodies, which would hinder free flow of trade and increase compliance burden. The Committee thus desired that ‘entry tax' in general should be subsumed in GST. It has therefore been proposed in the Revised Bill to omit Entry 52 altogether. The abolition of Octroi, through this amendment will be great relief for trade and industry, particularly in Maharashtra.

Some other short but significant amendments in the Revised Bill are also worth mentioning. The term ‘services' has been defined at Clause 26A of Art. 366 as ‘anything other than goods'. This is particularly important because, in the light of this definition, any activity other than ‘supply of goods' would be treated as ‘supply of service'. This would necessitate a careful listing out of ‘Negative List' of Services so as to avoid confusion.

The other important amendment in the Revised Bill is with regard to sharing of taxes other than those related to inter-state trade. It has been made clear at clause 1(A) of Art. 270 that GST, except the taxes referred to in Article 269A , i.e. those related to inter-state trade, levied and collected by the Centre shall also be distributed between the Union and the States in the manner provided in clause (2) of Art. 270.

Thus, the Centre has in the Revised Bill gone by most of the recommendations of the Committee on substantive issues. This discussion would however be incomplete if the Committee's recommendations/observations that the Centre could not accept, possibly for goods reasons, are not listed out. First, the Centre could not accept the Committee's recommendation for making it optional for the States to adopt GST. That would complicate the structure of GST, particularly in respect of inter-state transactions where it may involve one State opting for GST and the other opting out. Unlike introduction of VAT, which is administered basically by individual States, the GST would be a joint venture between Centre and the States, and so it has to be launched simultaneously by Centre and all the States.

Secondly, the Centre could not agree to the recommendation for having a Constitutional provision in Art. 279A for compensating the States in case of revenue loss after introduction of GST. All throughout the negotiations, Centre has been consistently opposing the specific inclusion of compensation mechanism in the Constitution, basically on the ground that the already existing provision of Finance Commission could take care of this issue. There are certain other observations/recommendations which have not found place in the Revised Bill. But possibly these will be taken care of in due course through administrative instructions and circulars. For example, the recommendation regarding further amplification of the term ‘harmonised structure' could be considered later through administrative instructions. Setting up a GST Monitoring Cell could also be an administrative decision. Similar will be the suggestion for reconsideration of Modified Banks Model for finalisation of the model for collection of GST in inter-state trade.

Thus, as mentioned, the Revised Bill, after getting the nod of the EC, should be able to sail through in both the Houses of the Parliament, given that the recommendations of the all-party Committee have been taken care of substantively. Having said that, it must also be pointed out that implementation of the operative portion of the Bill, after it becomes an Act, will require good amount of preparatory work. Most of the issues being technical ones, it is hoped that feedback of the field-formations who would administer GST has been duly obtained through the nodal point i.e. the Central Board of Excise & Customs before finalising the Revised version. This is very important for effective implementation of this joint venture. For example, it would have to be seriously considered as to how to deal with varying tax-rates amongst different States, particularly in the context of inter-State trade. Also, in the context of Revenue Neutral Rate, what would be the revenue-impact for such an arrangement, and whether the GST Net, the IT infrastructure is adequately equipped to take care of this exigency. Similarly, careful listing out of ‘Negative List' would be a critical issue in the context of the definition of ‘Services' provided in the Revised Bill. Further, the experience of Central Excise field formations in administering ‘special schemes' for certain States/Areas like the notifications for Uttarakhand, Jammu & Kashmir and Kutch Region etc would help in formulating the special schemes for GST. Be that as it may, on an optimistic note one can say that the wheels of GST have resumed moving, and post-2014 general elections, the country may seriously expect introduction of GST within one year of formation of the new government, irrespective of which party gets the mandate. Here also lies the importance of the all-party Report.

[The author is Indirect Tax Ombudsman, Delhi and former Chairman, Central Board of Excise & Customs; Views are personal ]