The Constitution Amendment Bill for Goods and Services Tax (GST) has been approved by The President of India post its passage in the Parliament (Rajya Sabha on 3 August 2016 and Lok Sabha on 8 August 2016) and ratification by more than 50 percent of state legislatures. The Government of India is committed to replace all the indirect taxes levied on goods and services by the Center and States and implement GST by April 2017.
With GST, it is anticipated that the tax base will be comprehensive, as virtually all goods and services will be taxable, with minimum exemptions.
GST will be a game changing reform for the Indian economy by creating a common Indian market and reducing the cascading effect of tax on the cost of goods and services. It will impact the tax structure, tax incidence, tax computation, tax payment, compliance, credit utilization and reporting, leading to a complete overhaul of the current indirect tax system.
GST will have a far-reaching impact on almost all the aspects of the business operations in the country, for instance, pricing of products and services, supply chain optimization, IT, accounting, and tax compliance systems.
Historical Background of GST:
- Amaresh Baghchi Report, 1994 suggests that the introduction of “ Value Added Tax (VAT) ‘ will act as root for implementation of Goods and Services Tax in India
- Ashim Dasgupta, 2000 empowered committee, which introduces VAT System in 2005, which has replaced old age taxation system in India.
- Vijay Kelkar Task Force 2004, it strongly recommended that the integration of indirect taxes into the form of GST in India.
- Announcement of GST to be implemented by 1st April, 2010 after successfully implementation of VAT system in India and suggestion of various committees and task forces on GST, the Union Government first time in Union Budget 2006-07 announced that the GST would be applicable from 1st April, 2010.
- The government has formed various Joint Working Groups of state finance ministers to study the impact of GST on the revenue of various States.
- The empowered committees of State Finance Ministers after various meetings reached on amicable formula for implementation of GST in India.
- Task force of Finance Ministers has submitted their report in December, 2009 on structure of GST in India.
- Government of India has issued first discussion paper in November, 2009.
- Constitution (115th Amendment) Bill introduced on 22nd March, 2011 and same was referred to Parliamentary Standing Committee on Finance for discussion.
- Finance Minister in his speech announced that the GST will be rolled out by April, 2011.
- Constitution (122nd Amendment) Bill introduced in the Parliament in December, 2014; since 115th Amendment Bill has been lapsed due completion of parliamentary terms. The Government of India has introduced Constitution (122nd Amendment) Bill on 19th December, 2014 the Lok Sabha has passed the bill on 6th May, 2015 but Bill is pending in Rajya Sabha.
- GST Bill Passed in Rajya Sabha on 3rd August 2016 (03-08-2016)
- When GST is Applicable – Modi Government Want to applicable GST Bill From 1st July 2017, Due to Some Legal Problems GST Bill is not applicable before 1st July 2017.
How is India’s tax system structured today?
The constitution divides taxation powers between centre and states. Both levels of government have some exclusive areas where they can levy tax. Income tax, which includes tax on company profits, is the exclusive domain of central government. These taxes are referred to as direct taxes.
Indirect taxes are taxes levied on manufacture of goods, provision of services and consumption. In India, generally speaking, indirect taxes levied on manufacture of goods or provision of services are the exclusive domain of central government. Taxes on consumption are the exclusive domain of state governments.
What is the problem with this arrangement?
There are two important problems with the current arrangement.
First, keep in mind that some good such as a shirt has to first be manufactured before it is consumed. The central government, therefore, levies its indirect tax called central excise at the factory gate. Subsequently, a shirt reaches a retail outlet and is bought by a consumer. The state government, at this stage, levies a tax on consumption dubbed value added tax (VAT). So, we have a tax at the factory gate which adds to the cost of the shirt and another tax on the final price.
Since states have their exclusive domain on consumption tax within their borders, they treat goods coming from other states as “imports.” For example, if a shirt maker in Uttar Pradesh buys dye in Bihar, he would have paid central excise and Bihar’s state taxes on the product. On this cost, Uttar Pradesh government would levy its tax if the shirt is sold in the state. If the shirt is sent across Uttar Pradesh’s border and sold in Delhi, an “export” tax called central sales tax is collected by UP.
As the example suggests, India is politically one country, but economically it is fragmented. There are multiple taxes when there is commerce across state borders. Consequently, it increases costs for everyone and makes economic activity within India for Indians complicated.
How will GST help?
Goods and Services Tax (GST) is an indirect tax reform which aims to remove tax barriers between states and create a single market. For that to happen the constitution first needs to be amended to remove different layers of governments’ exclusive powers to levy taxes. Once this step is taken, the tax barriers between states, and centre and states will disappear.
How will it help consumers?
Today consumers have no idea about the extent of taxes they pay on goods. If you get a bill after buying merchandise which gives the extent of VAT you have paid, it is an understatement of the actual tax you have paid. Remember, well before merchandise reached the retail outlet, the central government has collected excise duty. The extent of excise duty is not mentioned in the bill.
Therefore, today it is reasonable to assume we pay well over 20% tax for most merchandise we buy.
In GST, consumers should benefit in two ways.
First, all taxes will be collected at the point of consumption. It means that if a shirt is taxed at 18%, it will include both central government’s taxes and state government’s taxes. Transparency in taxation should deter governments from indiscriminately increasing taxes as there is bound to be public backlash.
Second, once barriers between states are removed, we as consumers will not end up paying “tax on tax” which is what happens when goods move across state borders.
If this is the case why will GST not kick in the moment both houses of parliament clear the constitution amendment bill?
The constitution amendment bill only changes the overarching principle of indirect taxation in India in order to create a common market. Details of GST have yet to be worked out. It is only after details have been worked out can the final GST rates be fixed. Therefore, after the constitution is amended, the centre and states have to pass a separate legislation which fleshes out the details of GST. Eventually, this will be followed by subordinate legislation which details procedures.
In short, the constitution amendment is just the beginning of the legislative journey.