JANUARY 09, 2015

By Sumit Dutt Majumder

THE deal is done. Centre stretched the hand further. The States relented, and shook the hands finally. The 122nd Constitution Amendment Bill proposing empowerment of both Centre and the States to levy and collect Goods and Services Tax (GST) has been tabled in the Parliament in the Winter Session. Arun Jaitley, the Union Finance Minister made the masterstroke when he praised the United Progressive Alliance(UPA) Government led by the Congress as well as Ashim Das Gupta, the then Chairman of the Empowered committee and Finance Minister of West Bengal in the CPM regime for steering the initial process of introduction of GST since 2006.Can the UPA or the Left front say 'no' to GST now? I think not. A feeble demand for referring the Bill to the Standing Committee of Finance has rightly been rejected. After all, the previous Bill on the subject i.e. 115 th Amendment Bill in the previous Lok Sabha was critically examined by the Standing Committee of Finance, and its detailed recommendations and observations were taken into consideration for drafting the present 122nd Amendment Bill.

Therefore, one can now expect smooth sailing of the Bill in the Budget Session. Once the Bill is through, the Constitution would provide the necessary empowerment for Centre and the States to introduce the GST. Kudos to Arun Jaitley. He kept his words that he spoke in his First Budget Speech in July 2014. Now, let's have a critical look at the main features of the Bill, and the challenges ahead in introduction of GST on the 1 st of April, 2016, a target set by none other than Narendra Modi, the Prime Minister. Let's not forget, he is the only Prime Minister who called for a detailed presentation from the Finance Ministry on the introduction of GST in India before setting this target.

Recapitulation of the Disputes

For the sake of recapitulation, the States had the following basic objections with respect to the previous Amendment Bill placed in the previous Parliament in 2011. First, they did not want Petroleum, Petroleum Products and Alcohol to be brought within the ambit of GST. Secondly, they did not want 'Entry Tax including Octroi' to be subsumed in the GST. The apprehension in all these cases was about the loss of revenue if these were included in the GST. Reportedly, the States at present collect more than 50% of the State VAT from Petroleum and Petroleum Products alone. Thirdly , the States demanded more fiscal autonomy by way of power to vary the State GST rates. It may be recalled that the GST would have two components – Central GST (CGST) and State GST (SGST), to be levied and collected concurrently by Centre and the States respectively. Further, being a destination based tax, the State share of GST (SGST) would accrue to the destination State in respect of interstate movement of goods and services. That's the reason why the predominantly manufacturing States fear loss of revenue to the consuming States. Fourthly, there had been a trust deficit between Centre and the States with respect compensation for loss of revenue. The States claim that the Centre did not pay the due compensation promised to the States when the States brought down the Central Sale Tax (CST) from 4% to 2% incrementally at the behest of the Centre. Therefore, when Centre promised this time that any shortfall in revenue after the introduction of GST would be compensated by Centre, the States demanded that the said promise be inscripted through a Constitutional provision.

Stalemate Broken through the Amendment Bill

The negotiations on these issues had been going on without consensus since November 2009, after the First Discussion Paper on GST was released by the EC. That's the major reason why GST has been delayed so much, although the announcement regarding the intention to introduce GST in April 2010 was made in the Budget Speech of the Union finance Minister in February 2006. Arun Jaitley and his team seem to have succeeded in breaking the stalemate through the present 122nd Amendment Bill. Let us see, how.

Examination of Provisions of the Bill

Empowerment to levy GST – Article 246A

The new Article 246A proposed to be included in the Constitution through amendment would deal with empowerment of Parliament (read Centre) and the States Legislatures (read the States) to levy and collect GST. The Parliament would however have exclusive jurisdiction with respect to taxation in interstate transactions. The proposed Article 246 A reads as follows:

"246A (I) Notwithstanding anything contained in Articles 246 and 254, Parliament, and subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.

(2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.

Explanation – The provisions of this article shall, in respect of goods and services tax referred to in clause (5) of Article 279A, take effect from the date recommended by the Goods and Services Tax Council ".

[Emphasis supplied]

The discussion on the aforesaid 'Explanation' would be taken up soon in an appropriate context.

IGST for Inter State Transactions – Article 269 A

As for interstate movement of goods and services, the Bill proposes levy and collection of Integrated Goods and Services Tax (IGST) by the Centre and apportionment of such tax between Centre and the States. In this regard, the proposed Article 269A reads as follows:

"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.

(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".

[Emphasis supplied]

Taxes to be subsumed – Statement of Objects & Reasons

An extract from the Statement of Objects and Reasons for proposing the amendment with respect to empowerment to levy GST, the taxes to be subsumed, the goods to be kept outside the purview of GST etc. is quoted below:

"The Constitution is proposed to be amended to introduce the goods and services tax for conferring concurrent taxing powers on the Union as well as the States including Union territory with Legislature to make laws for levying goods and services tax on every transaction of supply of goods or services or both. The goods and services tax shall replace a number of indirect taxes being levied by the Union and the State Governments and is intended to remove cascading effect of taxes and provide for a common national market for goods and services. The proposed Central and State goods and services tax will be levied on all transactions involving supply of goods and services, except those which are kept out of the purview of the goods and services tax.

2. The proposed Bill, which seeks further to amend the Constitution, inter alia, provides for –

(a) 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;

(b) 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 surcharge in so far as they relate to supply of goods and services.

(c) dispensing with the concept of declared goods of special importance' under the Constitution;

(d) levy of Integrated Goods and Services Tax on inter-State transactions of goods and services

[Emphasis Supplied]

GST Council – its Constitution & Functioning:

The proposed Bill also provides for creation of a GST Council to examine issues relating to GST and make recommendations to the Union and the States on various parameters. In terms of the proposed Article 279A, the President shall within sixty days from the date of commencement of the said 122nd Constitution Amendment Act constitute the GST Council. In terms of Para 2 (i) of the Statement of objects and Reasons (read with the clauses (2) and (4) of the proposed Article 279A), "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-fourth 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".

[Emphasis supplied]

Thus, the States will have two-third vote in the GST council, while the remaining one-third will be with the Centre. Further, any decision with regard to levy of GST would need approval of 75 percent of the Council vote. Therefore, neither the Centre alone nor all the States put together alone would be able to push through any decision relating to the GST.

In terms of Clause (3) of Article 279A, the Members of the GST Council would choose one amongst themselves to be the vice –chairperson of the Council.

In terms of Clause (4) of Article 279A, the GST Council will make recommendations to the Union and the States on the following:

"(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; and

(h) any other matter relating to the goods and services tax, as the Council may decide".

Other Provisions on Functioning of GST Council

On the functioning of the GST Council, Clause (6) of the proposed Article 279A states as follows:

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

[Emphasis Supplied]

Clauses (7) and (8) of Article 279A are also important and reproduced below.

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

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

[Emphasis Supplied]

Disputes Attempted to be Resolved in the Bill

Petroleum & Alcohol

Coming back to the points of dispute between Centre and the States on exclusion of Petroleum and Petroleum Products and Alcohol from the ambit of GST, while the Centre has relented on the States' demand on Alcohol by keeping it outside the ambit of GST, the issue relating to Petroleum and Petroleum Products seems to have been resolved in a smart way.

In Article 366 of the Constitution, the following clause is proposed to be inserted after Clause (12),

"(12A) "goods and service tax" means any tax on supply of goods or services or both except taxes on the supply of the alcoholic liquor for human consumption;"

[Emphasis supplied]

It may be noted that this clause defines GST, and it excludes Alcohol from the ambit of GST. However, Petroleum and Petroleum Products have not been excluded from the ambit of GST, unlike Alcoholic liquor. But at the same time, by virtue of Clause (5) of the proposed Article 279A, the levy of GST on these items has been postponed to a later date to be decided by the GST Council . The aforesaid clause reads as follows;

"279 A (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".

The position has been reiterated at the Explanation to the proposed Article 246 A as follows;

"Explanation - The provision of this article, shall, in respect of goods and services tax referred to in clause (5) of Article 279A , take effect from the date recommended by the Goods and Services Tax Council "

[Emphasis supplied]

Amendment of Entry 84 and Entry 54

In light of the foregoing proposed amendments. It has also been necessary to propose amendment to the Entry 84 in the Union List and Entry 54 in the State List as follows:

Entry 84

"84 Duties of Excise on the following goods manufactured or produced in India , namely:-

(a) Petroleum crude;

(b) High speed diesel;

(c) Motor spirit (commonly known as petrol);

(d) Natural gas;

(e) Aviation turbine fuel; and

(f) Tobacco and tobacco products"

The entries 92 and 92C in the Union List shall stand omitted.

Entry 54

"54 Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, but not including sale in the course of inter-State trade or commerce or sale in the course of international trade or commerce of such goods."

Thus , a conjointed reading of the provisions of the proposed Articles 366 (12A) and 279A (5), Explanation to the Article 246 A and the Revised Entries 84 and 52 would lead one to infer that while Petroleum and Petroleum Products have been proposed to be kept within the ambit of GST, there will be no GST rate of duty on these items, and that the States and the Centre would be at liberty to levy State VAT and Central Excise Duty respectively on these items till such time as the GST council decides to levy the GST rate on these items.

Implications of the Compromise on Petroleum and Alcohol

This is a compromise formula. This arrangement will have following implications. The Central Excise duty and State VAT that would be levied on Petroleum and Petroleum Products would remain outside the GST credit chain. It would have to be clarified as to what scheme of input tax credit would be applicable to these items, the inputs for which would move in and out of the ambit of GST in the supply chain.If there is no credit scheme for these items, then it would be a case of cascading of taxes i.e. taxing the taxes- not a desirable situation in modern progressive taxation schemes.

The positive side of this compromise is that having come within the ambit of GST, albeit without the GST rate of duty on Petroleum and Petroleum Products, it won't require another Constitutional amendment to start levying the GST rate on these items at a later date; only the GST Council's nod would be good enough.

As mentioned, with respect to Alcohol, a demerit goods under the States List of the Constitution, the Centre has accepted the demand of the States to keep it outside the ambit of GST. Therefore State Excise and State VAT would continue to be levied on Alcohol. As a corollary, the Central Sales Tax (CST) administration will also continue in its place to take care of interstate movement of Alcohol. Thus, the inputs for manufacture of Alcohol which have suffered GST will be deprived of credit, and this will lead to cascading of taxes. It is noteworthy here that Tobacco & Cigarettes, the other demerit goods under the Central List of the Constitution have been kept within the ambit of GST with GST rate of duty. However, the Centre will levy and collect a separate Central Excise duty on Tobacco & Cigarette, since the GST rate would be too low for demerit goods. It would have been so much better if Alcohol was also given a treatment similar to Cigarettes in the GST regime.

Entry Tax

As for the 'Entry Tax including Octroi', the Centre has stood its ground and it would be subsumed in the GST. On the reluctance of some States, the Finance Minister explained that since Service Tax, hitherto in the Center's exclusive domain, would be shared with the States , it would more than take care of Octoroi absorption into the GST.

Narrow Band for State GST Rate

On the States' demand for more fiscal autonomy, the Centre has gone by the recommendation of the Standing of Committee on Finance in the previous Parliament and decided to provide the elbow room to the States by allowing them to vary the State GST rate within a narrow band of a ceiling rate and a floor rate.

On this matter, the Clause (4) of the proposed Article 279 A at sub-Clause (e) specifies that the GST Council shall make recommendations to the Union and the States on " the rates including floor rates with bands of good and service tax". This again is a compromise and it runs contrary to the requirement of same rate of GST across the States so as to achieve the goal of common economic market where tax-rate will not be a consideration to decide on investment at particular State. Besides, it is likely to throw a challenge to the administering of the GST Net. A point also to be noted here is that the aforesaid Sub-Clause (e) does not preclude the Centre also to have a band of CGST rate.

Additional Levy of one Percent for inter-state supply.

Further, in order to ease the transition to the GST regime and to please the manufacturing or origin States, they would be allowed to levy an additional one percent over and above the IGST on supply of goods in the course of interstate trade for a period of two years. That additional tax would be origin based, and not destination based. In this context, the Constitutional provision in the Clause 18 of the Bill is proposed as follows:

"18 (1) An additional tax on supply of goods, not exceeding one per cent, in the course of inter-State trade or commerce shall, notwithstanding anything contained in clause (1) of article 269A, be levied and collected by the Government of India for a period of two years or such other period as the Goods and Services Tax Council may recommend, and such tax shall be assigned to the States in the manner provided in clause (2).

(2) The net proceeds of additional tax on supply of goods in any financial year, except the proceeds attributable to the Union territories, shall not form part of the Consolidated Fund of India and be deemed to have been assigned to the States from where the supply originates.

(3) The Government of India may , where it considers necessary in the public interest, exempt such goods from the levy of tax under clause (1).

(4) Parliament may, by law, formulate the principles for determining the place of origin from where supply of goods takes place in the course of inter-State trade or commerce.

[Emphasis supplied]

This proposition seems to suffer from an intrinsic conflict. The additional levy is meant for the manufacturing or origin State in the case of interstate movement, whereas GST is essentially a destination based consumption tax . Further this tax won't be available for credit. It thus seems that this tax, which would be levied for a short period of two years, would be distortionary . Even administratively it is difficult to fathom as to how this tax will be factored into the integrated GST (IGST) scheme. If CST mechanism is retained in GST regime for administering this additional origin based tax, it will undo most of the good aspects of GST. Therefore, the proposal to levy this tax, albeit for a short period, would need a closer look.

Compensation after introduction of GST

On the last issue of the States demanding a Constitutional provision for compensation by Centre in the case of loss of revenue on the introduction of GST, the Centre has finally given in. The Clause 19 of the bill provides for five year compensation by the Centre to the States for any possible revenue loss after introduction of GST. It has been separately clarified that the compensation would be 100% for the first three years and it would then be tapered down to 75% for the fourth year and 50 % for the fifth year. A purist view is that the promise for compensation is not a good idea, because the States may no longer have the incentive to put in place an efficient tax collection system, having been assured of the compensation. But this apprehension does not seem to be correct. As reiterated on many occasions, GST is a joint venture between Centre and the States, and both of them will have to work in tandem in every sphere of administering GST in order to make it a win-win situation for both Centre and the States. Besides, the experience of the introduction of VAT in the States where the revenue increased substantially after the introduction of VAT supports the view that the revenue of both Centre and the States would increase significantly after introduction of the GST, and this would dilute the need for compensation.

Definition of Services

While there is no specified definition of 'Service' in the present Service Tax provisions, it is proposed in Clause (26A) of Article 366 to define ' Services' as follows:

"(26 A) " Services" means anything other than goods."

This provision is quite significant. It would imply that any business activity which is not supply of goods would be considered as ' supply of services'. This necessitates creation of a Negative List of Services, so that certain services which are not intended to be taxed can be put in that Negative List. The Negative List would have to be drawn thoughtfully after consulting all the stake holders.

Resolution of Disputes

As for resolution of disputes between Centre and the States and amongst the States, it was initially proposed by Centre to setup a Dispute Settlement Authority (DSA) to be chaired by a Judge of the Supreme Court / High Court. However, the States objected to it on the ground of autonomy and stated that this responsibility can be bestowed on the GST Council. The Centre relented and placed the Clause (11) of the proposed Article 279A as follows:

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

[Emphasis supplied]

Other Miscellaneous Provisions of the Bill

(a) The Clause 20 of the Bill provides for transitional provisions as follows:

"20. Notwithstanding anything in this Act, any provision of any law relating to tax on goods or services or on both in force in any State immediately before the commencement of this Act, which is inconsistent with the provisions of the Constitution as amended by this Act s hall continue to be inforce until amended or repealed by a competent Legislature or other competent authority or until expiration of one year from such commencement, whichever is earlier".

[Emphasis supplied]

(b) The Clause 21 (1) of the Bill bestows power on the President to remove difficulties in giving effect to the provisions of the Constitution within a period of three years as follows:

"21.(1) If any difficulty arises in giving effect to the provisions of the Constitution as amended by this Act (including any difficulty in relation to the transition from the provisions of the Constitution as they stood immediately before the date of assent of the President to this Act to the provisions of the Constitution as amended by this Act), the President may, by order, make such provisions, including any adaptation or modification of any provision of the Constitution as amended by this Act or law, as appear to the President to be necessary or expedient for the purpose of removing the difficulty.

Provided that no such order shall be made after the expiry of three years from the date of such assent".

[Emphasis supplied]

Summing Up

Summing up, the GST Bill displays Centre's determination and urgency to introduce the GST even at the cost of compromising certain standard norms of GST, so as to bring the States on board.

The empowerment of both Centre and the States to levy and collect GST on supply of goods and services has been proposed through Article 246A.

Parliament (read Centre) will however have exclusive jurisdiction with respect to taxation of inter – State trade i.e. IGST. This has been proposed through Article 269A.

As for subsuming of taxes and levies in the GST, following has been proposed at the Central level:

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;

At the State level, subsuming of following taxes and levies have been proposed:

State VAT / 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 surcharge in so far as they relate to supply of goods and services.

Creation of GST Council with Minister of State for Finance at Centre and Finance Ministers of the States as Members, and chaired by the Union Finance Minister has been proposed under Article 279A. The GST council will make recommendations to Centre and the States on important issues like tax rates, exemptions, threshold, model GST laws etc. The Council will also resolve the disputes arising out of its recommendations.

The voting pattern of the GST Council has been so designed that neither Centre alone nor all the States put together alone would be able to push through any decision in relation to the GST.

It is evident that the GST Council has been given enormous power with respect to all critical issues relating to GST. But it is hoped that no question would be raised in future as to whether or not the power of Parliament and Assemblies would be transgressed, since after all the decision of the Council would be recommendatory in nature.

GST has been defined by the Clause (12A) of Article 366 as "any tax on supply of goods or services or both except taxes on the supply of the alcoholic liquor for human consumption". While acceding to the States' demand for exclusion of Alcohol, the Centre has smartly dealt with the other demand of the States for exclusion of Petroleum and certain Petroleum products. While these items have not been excluded from the ambit of GST in the constitution, the levy of GST on these items has been postponed to a later date to be decided by the GST council. Effectively, therefore, Petroleum and certain Petroleum Products will continue to be out of GST, and subjected to Central Excise Duty and State VAT. It thus appears that there will be no input tax credit for these items, the inputs for which would move in and out of the ambit of GST in the supply chain. The only consolation is that another Constitution amendment will not be required to b ring these items within GST in future; a nod from the GST Council will do. It is hoped that the nod is given sooner than later.

Inputs for Alcohol would also suffer similar cascading of taxes. Therefore, Alcohol also would have to be brought within the ambit of GST soon after introduction of GST through a Constitutional Amendment.

The States' demand for a narrow band with floor rate has been acceded to. Even the Centre can have a narrow band. This has been proposed at Clause (4) of Article 279A.

The demand of the States for excluding Entry Tax has not been agreed to. This will provide great relief to the Trade and Industry.

Further, the levy of an additional one percent over and above the IGST rate in respect of inter-State trade by the manufacturing or origin States will complicate the structure of GST. It would throw a big challenge to the GST Net in designing it.

'Services' have been defined by Clause (26A) of the Article 366 as "anything other than goods" Therefore, all business activities other than supply of goods will come under the purview of 'supply of services' unless a particular service gets covered by the Negative List of services. The Negative List will need to be drawn carefully in consultation with all stakeholders.

The disputed issue of Compensation has been resolved by Centre agreeing to put the promise of compensation in case of loss of revenue after introduction of GST in the Constitution itself. The period for compensation has been restricted to five years with provision for tapering it after three years.

Thus the Bill does show Centre's flexibility in dealing with the States' demand. This has led to certain compromises which were unavoidable. The idea was to go ahead. After all, Arun Jaitley clarified on quite a few occasions that India is aiming for a good GST and not necessarily the best one. In light of the circumstances arising out of the demands of the States, as explained in foregoing paras, there was no other way but to concede a few points. Let us now hope that all the political parties across the Parliament join hands in clearing the Bill in both the Houses. Let us also hope that all the States follow suit. Indeed, the Bill bares it all, and there is no 'fine print' or for that matter 'devil in the details '.

(The author is former Chairman, Central Board of Excise and Customs. He is also the author of the book titled "GST in India-its travails, tribulations and challenges ahead".)