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GST: Steps Towards Tax Reform In India

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[mks_dropcap style=”letter” size=”52″ bg_color=”#ffffff” txt_color=”#8224e3″]N[/mks_dropcap]o system of federation can be successful unless both Union and the states have at their disposal adequate financial resources to enable them to discharge their respective responsibilities under the Constitution. It is very necessary that both Union and States are autonomously funded so that neither feels any burden on them with regards to tax monitoring. With the quasi federal system followed by the country, both the center and the states participate in the collection of taxes.

The taxation system in India is one of the most complicated tax systems in the world. The distribution of sources of revenue between Union and the States are based on the three lists provided in the Seventh Schedule of the constitution wherein the subjects are divided into three lists: Union, State and the Concurrent lists. Union and the states make laws on to their allotted subjects as per the list.

However, due to a large number of direct and indirect taxes levied by the Central and State governments, often carrying out a business becomes very difficult. Right from starting a business to its functioning, a businessman is required to pay different types of taxes which have to be maintained on two different records. Such a situation often causes the businessmen to evade the taxes so as to save his hard earned income and escape the agony of filing taxes.

To overcome the hardship caused to the taxpayers due to a plethora of taxes, Government has proposed to bring into effecr the Goods and Services Tax which is a value tax and is being used widely in more than 150 countries. The idea of GST was first mooted by the, then Union Finance Minister Shri P. Chindambaram in his union budget of 2006-2007.

The Goods and Services tax is a very significant step in the taxation laws of the country since it seeks to replace all indirect taxes levied on the goods and services by the Indian central and state government. If implemented, GST will amalgamate a number of Central and State taxes into a single tax and hence the concept of indirect tax will be pulled up from the Indian taxation system.

For the implementation of GST, the Constitution (122nd Amendment) Bill, 2014 was introduced for the first time in Lok Sabha on December 19, 2014 by the Finance Minister Mr. Arun Jaitley. Powers between the Centre and the States are clearly demarcated in the Constitution and so there is almost no overlap between them. Hence, changes in the bill will have to be in relation to the well-established rules of constitutional interpretations such as doctrine of repugnancy, jurisprudence on deemed sale, and rule of harmonious construction of legislative entries.

Also, introduction of the GST would require amendment in the Constitution so as to concurrently empower the Centre and the States to levy and collect GST. The assignment of concurrent jurisdiction to Centre and the States for the levy of GST would require a unique institutional mechanism. For it to be effective, such a mechanism will also need to have Constitutional force.

The Amendment Bill contains 21 clauses which gives the idea about the implementation of GST in the country. Cl.2 states that both the Parliament and the State Legislature shall be enabled to frame laws with respect to the GST. The taxes levied by the center or the states will be replaced by the GST. All the taxes will be merged into a single one with a tax-rate which is uniform in all over India. The main reason behind the uniformity is that these taxes act as a barrier, which is proved to be unfair.

In addition to these, there shall be “Dual GST” which is one for the Central and one for the State. Central GST will be stated as CGST and State GST called SGST. These will lead to the exclusion of several central taxes, custom duties, and State taxes.

Under Clause 10 of the Bill, it is stated that taxes on the goods and services on imports and the businesses between the states in the territory of India (including union territories) shall be collected by the Central Government. The taxes shall be distributed between the Center and States which shall be determined on the advice of the GST council by Parliament.

Clause 17 (a) of the Bill, states that certain products will be exempted from the purview of GST. These goods are: petroleum goods, including:- (a) petroleum crude; (b) high speed diesel; (c) motor spirit; (d) natural gas; (e) aviation turbine fuel; and (f) tobacco and its products; Also Central Government is empowered to impose excise duties on these products. The alcohol products are also being exempted from GST as the government didn’t like to allow free trade on this property. However, in case of petroleum products the GST council will later give its recommendations.

Clause 18 describes that the Central Government shall impose an additional tax on supply of goods which will not exceed 1% during the trade between states which will be collected by the Central Government for a period of two years or any recommendations made by the GST council and taxes shall be assign to the states.

The important thing placed in the Bill is the GST Council described in Cl. 12 which will be inserted as Article 279-A, constituted by the President within sixty days. The council will be constituted by the members namely:-

  1. Union Finance Minister – Chairperson;
  2. Union Minister of State in charge of Revenue or Finance – Member;
  3. Minister in charge of Finance or Taxation or any other Minister nominated by each State Government – Members.

Members will choose one among them as Vice-Chairperson of the Council for a period whichis to be decided by them. Hence, the council will be a constitutional body headed by the Union minister of Finance. The council will give recommendations about the:-

  1. Taxes, cesses and surcharges levied by the Union, States and the local bodies;
  2. The goods and services that may be exempted from the goods and services tax;
  3. Threshold limit of turnover on which goods and services may be exempted from GST;
  4. Other matters relating to the goods and services tax, as the Council may decide.

The GST council shall also resolve any disputes arising out of their recommendations.

The bill also states that special provisions shall be framed for special status states on the recommendations made by the Council.

Clause 17 describes that the State legislatures shall have power to levy certain taxes to an extent, collected by local bodies which include entertainment and amusement taxes.

Clause 19 of the bill provides Centre Compensation mechanism by which states are entitled for the compensation of any loss of revenues by the implementation of GST. The loss will be compensated by the Central Government on the recommendations made by the GST Council for period which may extend to 5 years.

The main purpose behind the implementation of the GST is to replace the many indirect taxes which are acting as an impediment to the start of a business. The implementation of GST will provide a common national platform for the taxation of all goods and services. It will subsume various central and state indirect taxes. Also, the entire share of the revenue shall be divided between Centre and the State. Due to the convenient system of filing taxes, tax-evasion will also go down. Apart from these, Goods and Services tax will also simplify and harmonize the tax system in India which will consequently boost the national economy as a result of the increase in tax- revenues.

However, the bill has received stiff opposition from the manufacturing states since the tax collections are based on the sale of the goods. This will cause the manufacturing states to bear a huge revenue loss as the sale of the goods will depend on the consuming states. The inclusion of the petrol products in the purview of GST is also likely to incur huge revenue loss to the states. The threshold limit has also to be strictly checked so as not to keep it too high or too low. Many states have claimed that the compensation provided to them according to this bill is not sufficient.

On many pertinent issues, the bill is silent. No method has been described in the bill to provide assistance to the states for the collection of the revenues. Also, the Union government has been empowered to interfere directly which can undermine the sovereignty of the states. The provisions for states possessing special status are not being fully described in the whole act. The acts provides the members of the council to work in the consensus however the term consensus is not defined anywhere in the bill.

The GST bill is contrast with idea of federalism and the basic structure of the Constitution as it is against the spirit of the lists described in the Constitution. In such a case, both Parliament and State legislatures have equal power to frame laws regarding the tax matters. In the previous GST bill, there was GST Dispute Settlement Authority which adjudicated disputes between the Center and states, however in this bill, GST council will settle disputes.

The GST Bill will be tabled in the Parliament in the next session. The Petrol products are also included under the purview of GST and the recommendations are being approved by the Cabinet. The GST bill is regarded as the biggest tax reform after the independence. Owing to the advantages of the GST the Central Government should not give up on the bill and should take the states into confidence that the bill will not affect the relations between union and the states and the idea of federalism will remain intact. A mutual understanding between union and the states is the call of the hour so as to provide the maximum benefits to the people.

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