FEBRUARY 13, 2019

By Vijay Kumar

These are the days of confusion and cacophony: many views, many interpretations, and many jurisprudential mumblings.

THE lure of lucre and the power of purse are too seductive to be resisted - be it for an individual, or an institution, or even a nation. Internationally, the rhetoric of freedom, fraternity, comity, and human rights apart, the nations are guided by naked economic compulsions. The latter part of the last century dedicated itself to dismantling walls around the nations; this century has begun, it seems, determined to raise a few. At the national level, this clamor for economic hegemony is felt acutely, at least, institutionally.

Granted, federalism is the pinnacle of a democracy's political maturity; sharing the power signifies its wisdom. But there, too, fiscal discipline demands a watertight division. Our Constitution has, as a case in point, kept the fiscal legislative powers in water-tight divisions -either in List I or in List II. None in List III. In a federal polity, good legislative fences make good political neighbors. A vigilant policeman always guards a thief's virtue, anywhere; as the constitution prevents federal fiscal turf wars.

To be explicit, constitutionally, fiscal powers between the Centre and the States stand demarcated. The legislative scheme admits of almost no overlap between the respective domains. The Centre has the powers to levy a tax on the manufacture of goods (except alcoholic liquor for human consumption, opium, narcotics, and so on); the States, on the other hand, have the powers to levy a tax on the sale of goods. With inter-state sales, the Centre has the powers to levy a tax (the Central Sales Tax). But the tax is collected and retained entirely by the originating States. As for services, it is the Centre alone that is empowered to levy Service Tax.

Since the States had the legislative competence to impose a sales tax, under Entry 54, List II, indiscriminate tax rates were applied by the respective States resulting in tax wars, tax holidays, deferrals, incentives, and concessions. Each State started to offer attractive schemes to invite investments into its States. When the Central levies such as the Customs Duty and the Excise Duties remained the same throughout the Country, Sales Tax rates varied among States.

To avoid a lopsided or imbalanced growth, the Union Government took steps, beginning with constituting Empowered Committees, to usher in further tax reforms. Besides that, then the Sales Tax, in its original form, was invariably a single tax levy, imposed at the first stage of the sale. The subsequent resale and its value addition were not captured to tax. This and other shortcomings made the Sales Tax give way to the Value Added Tax; the sale at every stage till the point of consumption got taxed, and the taxes paid in the previous stages were subsumed as Input Tax Credit.

Earlier, the taxing powers of the Union and the States had been well-demarcated. Recently, with the 101st Constitutional Amendment, the Goods and Services Tax regime has been ushered in. The Constitutional Amendment Act (the "CA Act") has led to a federal fiscal experiment by engendering a host of enactments: the Central Goods and Services Tax Act, 2017; the Integrated Goods and Services Tax Act, 2017; the Union Territory Goods and Services Tax Act, 2017; the Goods and Services Tax (Compensation to States) Act, 2017; The "X" State Goods and Services Act, 2017 (State specific).

For the first time, in the taxation sphere, both the Union and the States have come to enjoy simultaneous powers, thus putting paid to the repugnancy doctrine, at least, in particular areas of taxation. With the insertion, amendment, and deletion of a few constitutional provisions-particularly with the insertion of Article 246A of the Constitution and deletion of Entry 52 of List II in Seventh Schedule - there has been a realignment of legislative powers of the Union and the States.

In a federal constitutional set up, coordination rather than subordination as the guiding spirit, the States and the Union as the constituents have demarcated spheres of legislation and governance. With clearly delineated legislative fields, neither can trespass upon the other's legislative territory - the residuary powers lying with the Union, though. The division of powers is zealously guarded in no other sphere than fiscal. Taxation as the backbone of a welfare nation, which India is; the legislative fields are as distinct, yet interconnected, as the spinal segments do.

That said, 101st Constitutional Amendment is the epoch-making federal feat unparalleled in constitutional democracies- almost. It is, I may say, a constitutional coup de grace delivered against the fiscal confusion compounded by conflicting taxation regimes. This amendment, perhaps, marks the crest of cooperative federalism. It has created even a constitutional institution - GST Council.

As constitutional democracies have gained experience, Utopian vision of justice has given way to utilitarian view. Material comfort or upliftment has become the hallmark of good governance. So economic analysis of law substitutes the notion of simple justice with that of economic efficiency and wealth maximization. True, nations like France successfully embraced GST regimes in the 1950s. Even federal polities like Canada replaced MST (Manufacturer's Sales Tax) with GST (Goods and Services Tax) in the 1980s. India joined the fiscal reform bandwagon a little late. Tentative it was to begin with, but determined it is in this new federal fiscal path.

To put the concept in perspective, GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the later stage of value addition. This process makes GST a tax on value addition at each stage. The consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.

In other words, the focus was shifted from taxable event to destination-based taxation. It avoids the evil of cascading taxation or tax on tax trouble. So goes the motto: One Nation-One Market-One Tax.

A nascent enactment in a nebulous field of taxation will have many teething troubles. GST is no exception. In its path to perfection, GST has much dust to settle-legislatively and judicially. These are the days of confusion and cacophony: many views, many interpretations, and many jurisprudential mumblings.

Before its advent as a revolutionary indirect tax regime, Goods and Services Tax (GST) had been on the parliamentary anvil for more than a decade. Its need as a harmonized indirect tax, encompassing all goods and services was documented as early as in 2004. That year the Task Force on Implementation of the Fiscal Responsibility and Budget Management in its Report stressed the need. The first official announcement for a transition to GST, though, was made by the Government of India in 2006-07 (the Budget Speech). The Government's commitment stood reiterated in the Budget Speech of 2008-09, too. But the Government of India took the first step towards the transition to GST when it announced certain policy changes in the 2009-10 budget.

The GST Council, constituted in September 2016, is a constitutional institution comprising as its members the Finance Ministers of the Union and the States, including Union Territories with Legislatures. It has the authority "to recommend to the Union and the States on various facets of GST, including Model GST laws, principles to determine the place of supply, levy of the tax, design of GST, dispute settlement, special provisions for a special category of States, and so forth."

Adopting the recommendation of the GST Council, Parliament has enacted these pieces of legislation:

(1) The Central Goods and Services Tax Act, 2017: it levies a tax on intra-State supplies of goods and services in all supplies within a State;

(2) the Integrated Goods and Goods and Services Tax Act, 2017: it levies a tax on inter-State supplies of goods and services;

(3) the Union Territory Goods and Services Tax Act, 2017: it levies a tax on intrastate supplies of goods and service.

Salient features of GST:

The salient features of GST are these:

(i) GST applies on 'supply' of goods or services as against the present concept on the manufacture of goods, or on the sale of goods, or on the provision of services.

(ii) GST is based on the principle of destination-based consumption taxation as against the present principle of origin-based taxation.

(iii) It is a dual GST with the Centre and the States simultaneously levying a tax on a common base. GST to be levied by the Centre is called Central GST(CGST) and that to be levied by the States called State GST (SGST).

(iv) An Integrated GST (IGST) is levied on inter-state supply (including stock transfers) of goods or services. This 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 recommendation of the GST Council.

(v) Import of goods or services is treated as inter-state supplies and is subject to IGST, besides the applicable customs duties.

(vi) CGST, SGST & IGST are levied at rates to be mutually agreed upon by the Centre and the States. The rates would be notified on the recommendation of the GST Council.

(vii) GST will apply to all goods and services except Alcohol for human consumption.

(viii) GST on five specified petroleum products (Crude, Petrol, Diesel, ATF & Natural Gas) will be applicable from a date to be recommended by the GSTC.

(ix) Tobacco and tobacco products would be subject to GST. Besides, the Centre will have the power to levy Central Excise duty on these products.

(x) A common threshold exemption would apply to both CGST and SGST. Taxpayers with an annual turnover not exceeding Rs.20 lakh (Rs.10 Lakh for special category States) would be exempted from GST. For small taxpayers with an aggregate turnover in a financial year up to 50 lakhs, a composition scheme is available. Under the scheme, a taxpayer shall pay tax as a percentage of his turnover in a State during the year without the benefit of Input Tax Credit. This scheme will be optional.

(xi) The list of exempted goods and services would be kept to a minimum, and it would be harmonized for the Centre and the States and across States as far as possible.

(xii) Exports would be zero-rated supplies. Thus, goods or services that are exported would not suffer input taxes or taxes on finished products.

(xiii) The credit of CGST paid on inputs may be used only for paying CGST on the output, and the credit of SGST paid on inputs may be used only for paying SGST. Input Tax Credit (ITC) of CGST cannot be used for payment of SGST and vice versa. In other words, the two streams of Input Tax Credit (ITC) cannot be cross-utilised, except in specified circumstances of inter-state supplies for payment of IGST.

(xiv) Accounts would be settled periodically between the Centre and the States to ensure that the credit of SGST used for payment of IGST is transferred by the Exporting State to the Centre. Similarly, IGST used for payment of SGST would be transferred by the Centre to the Importing State. Further, the SGST portion of IGST collected on B2C supplies would also be transferred by the Centre to the destination State. The transfer of funds would be carried out based on information contained in the returns filed by the taxpayers.

(xv) The laws, regulations, and procedures for levy and collection of CGST and SGST would be harmonized to the extent possible.

GST replaces these taxes currently levied and collected by the Centre: (a) Central Excise Duty, (b) Duties of Excise (Medicinal and Toilet Preparations), (c) Additional Duties of Excise (Goods of Special Importance), (d) Additional Duties of Excise (Textiles and Textile Products), (e) Additional Duties of Customs (commonly known as CVD), (f) Special Additional Duty of Customs(SAD), (g) Service Tax, (h) Cesses and surcharges, in so far as they relate to the supply of goods and services.

State taxes that get subsumed within the GST are: (a) State VAT, (b) Central Sales Tax, (c) Purchase Tax, (d) Luxury Tax, (e) Entry Tax (AII forms), (f) Entertainment Tax and Amusement Tax (except those levied by the local bodies), (g) Tax on advertisements, (h) Tax on lotteries, betting and gambling, (i) State cesses and surcharges in so far as they relate to the supply of goods and services.

The CA Act inserts, repeals, and amends certain parts of the Constitution. Inserted are the Articles 246A, 269A, and 279A; repealed is the Article 268A; amended are Articles 248, 249, 250, 268, 269, 270, 271, 286, 366, and 279A. Besides that, the Sixth and the Seventh Schedules, too, have been amended.

Article 246A, inserted through Section 2 of the Amendment Act, is a marvel of the federal fiscal mechanism. By this Article, the State Legislatures now have the power to make laws regarding GST tax imposed by the Union or by that State and to implement them in intra-state trade. The Centre, of course, continues to have exclusive power to make GST laws regarding inter-state trade. Both the Union and States in India now have simultaneous powers to make law on the goods and services.

Article 269A, inserted through Section 9 of the Act, deals with levy and collection of goods and services tax in the course of inter-State trade or commerce. That is, in case of inter-state trade, the amount collected by the Centre is to be apportioned between the Centre and the States as per the GST Council's recommendations. Under the GST, if the Centre collects the tax, it assigns State's share to the State concerned; on the other hand, if the State collects the tax, it assigns the Centre's share to the Centre. Those proceeds will not form a part of the Consolidated Fund of India, so it avoids having an Appropriation Bill passed every time a deposit is made.

Article 279A provides for the constitution of a GST Council, besides prescribing its powers and positions. Earlier, Article 268A dealt with the service tax levied by Union and collected and appropriated by the Union and States. Now, this Article stands repealed. As to the amended constitutional provisions, Article 248 confers residuary legislative powers on Parliament. Now this provision is subject to Article 246A of the Constitution. Article 249, amended through Section 4 of the Act, now stands changed so that if Rajya Sabha approves the resolution with 2/3rd majority, Parliament will have powers to make necessary laws regarding GST, in the national interest. So has Article 250 been amended; Parliament will have powers to make laws on GST during the emergency period.

At a different plane are the other amendments. Article 268 has been amended so that excise duty on medicinal and toilet preparation are omitted from the State List and are subsumed in GST. And Article 269 would empower the Parliament to make GST related laws for inter-state trade or commerce. Article 270 now provides for collection and distribution of tax to be done according to Article 246A. Then, under Article 271, GST has been exempted from being part of the Consolidated Fund of India. The amended Article 286 includes the supply of goods and services under its ambit, rather than just sale or purchase of goods; Article 366 now includes the definitions of Goods and Service Tax, Services and State. And finally, Article 279 A has also been brought under the ambit of Article 368.

To be explicit, in Article 366 of the Constitution, after clause (12), clause (12A) was inserted; "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 consumption. After clause (26), clauses (26A) and (26B) were inserted; "Services" means anything other than goods; "State" with reference to Articles 246A, 268, 269, 269A and Article 279A includes a Union territory with Legislature.

Section 18 of the Amendment Act provides for compensation to States for loss of revenue because of the introduction of goods and services tax. Parliament shall, by law, on the recommendation of the GST Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for five years.

Until next week