About GST

GST is supposed to be biggest tax reform in the history of Independent India. It merges majority of indirect taxes prevalent in India into one tax ie GST. GST is going to change the way transactions are done in India and will ultimately result into a business reform which has the capacity to increase India’s GDP in the long run. For understanding GST, it is important to first understand history of tax in India.


1) History of Taxation

What is Tax?
The word tax is derived from the Latin word 'taxare' meaning to estimate. “A tax is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is any contribution imposed by government whether under the name of toll, tribute, impost, duty, custom, excise, subsidy, aid, supply, or other name.” The first known system of taxation was in Ancient Egypt around 3000 BC - 2800 BC in the first dynasty of the Old Kingdom. Records from that time show that the pharaoh would conduct a biennial tour of the kingdom, collecting tax revenues from the people. Other records are granary receipts on limestone flakes and papyrus. Early taxation is also described in the Bible. In Genesis, it states "But when the crop comes in, gives a fifth of it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for yourselves and your households and your children." Joseph was telling the people of Egypt how to divide their crop, providing a portion to the Pharaoh. A share of the crop was the tax. In India, the tradition of taxation has been in force from ancient times. It finds its references in many ancient books like 'Manu Smriti' and 'Arthasastra'. The Islamic rulers imposed jizya. It was later abolished by Akbar. However, Aurangzeb, the last prominent Mughal Emperor, levied jizya on his mostly Hindu subjects in 1679. Reasons for this are cited to be financial stringency and personal inclination on the part of the emperor, and a petition by the ulema. The period of British rule in India witnessed some remarkable change in the whole taxation system of India. Although, it was highly in favor of the British government and its exchequer but it incorporated modern and scientific method of taxation tools and systems. In 1922, the country witnessed a paradigm shift in the overall Indian taxation system. Setting up of administrative system and taxation system was first done by the Britishers. Broadly, there are two types of Taxes viz. Direct and Indirect taxes. Taxes in India are levied by the Central Government and the State Governments. Some minor taxes are also levied by the local authorities such as Municipality or Local Council. The authority to levy tax is derived from the Constitution of India which allocates the power to levy various taxes between Centre and State.

2) Tax Structure in India

Taxes in India are levied by the Central Government and the State Governments. Some minor taxes are also levied by the local authorities such as Municipality or Local Council. The authority to levy tax is derived from the Constitution of India which allocates the power to levy various taxes between Centre and State.
Some of the important Central taxes
  • Customs Duty
  • Service Tax
  • CST
  • Excise Duty
Some of the important State taxes
  • State Sales Tax
  • Works Contract Act
  • Entry tax
  • Other local levies

3) Limitations of Existing Indian Taxes

Originally, the taxes on the sale of goods were levied in terms of the respective Sales Tax/Trade Tax enactments and the 'entry of goods' was subject to tax under the respective State Entry Tax enactments and this scenario prevailed till the reform process set in whereupon these levies were replaced by VAT. The levy of tax on provisioning of services was introduced for the first time in 1994 and has been subjected to persistent vigorous legal challenges. Still lot of services remained uncovered. The need for transition from the Sales Tax /trade structure for taxing commodities to a value added (VAT). However the shift to VAT did not put to an end to cascading realities. This because Parliament has maintained its own VAT model and the State Legislatures their own, there was no linkage between the two and thus the credit of duties paid on manufacture are not available towards adjustment on duties payable on sale of goods. Input set-off available to the manufacturers. Thus it is evident that the transition to VAT did not remedy the issue of non-creditable duties and the consequent cascading effect requiring further reform in the area and consequently GST arose. Service tax was introduced in 1994. Current service tax rate is 14% plus Cesses. The scope of service tax has since been expanded continuously by subsequent Finance Acts and now under the negative list all most all are covered. But there are many service sectors which are out of purview of Central Government which can generate more revenue to Government. Despite of existence of multiple taxes like Excise, Customs, Education Cess, Surcharge, VAT, Service Tax etc. GDP of India is much lower than GDP of countries like USA, China and Japan. Therefore, the Indirect Taxes are therefore urgently required to be rationalized and unified. If the G.S.T. is introduced it would certainly increase the volume of tax collection. The implementation of GST would ensure that India provides a tax regime that is almost similar to the rest of the world. It will also improve the international cost competitiveness of native goods and services.

4) Need for GST Model in India

"Liberal in assessment and ruthless in collection."
The proposed GST seems to be based on the above principle. Following are the supporting reasons to adopt GST:
  • Present system allows for multiplicity of taxes, the introduction of GST is likely to rationalize it.
  • Many areas of Services which are untaxed. After the introduction of GST, they will also get covered.
  • GST will help to avoid distortions caused by present complex tax structure and will help in development of a common nat ional market.
  • Existing taxes i.e. Excise, VAT, CST, Entry Tax have the cascading effects of taxes. Therefore, we end up in paying tax on tax. GST will replace existing taxes.
  • GST will lead to credit availability on interstate purchases and reduction in compliance requirements.
  • Introducing GST will do more than simply re-distribute the tax burden from one sector or Group in the economy to another.
  • Will achieve uniformity of taxes across the territory, regardless of place of manufacture or distribution.
  • Will provide greater certainty and transparency of taxes.
  • Ensure tax compliance across the country
  • GST will avoid double taxation to some extent
  • GST will provide unbiased tax structure that is neutral to business processes and geographical locations.
  • If the Goods and Service Tax is implemented in the true spirit, it will have many positives for the stakeholders and will lead to a better tax environment.

5) Introduction to GST

  • GST is not going to be an additional new tax but will replace other taxes.
  • GST is a simple, transparent, and efficient system of indirect taxation.
  • The system facilitates taxation of goods and services in an integrated manner.
  • It is a comprehensive value added tax on the supply and consumption of goods and services in an economy.
  • GST is levied at every stage of supply-distribution chain with available set-offs.
  • GST is basically a tax on final consumption.
  • In simple terms, GST may be defined as a tax on goods and services, which is leviable at each point of sale or provision of service, in which at the time of sale of goods or providing services the seller or service provider may claim input credit of tax which he has paid while purchasing the goods or procuring the services.
  • It will help in eliminating tax induced economic distortions and gives boost to the economy.
  • The administrative cost will be much lower.
  • On indirect tax front, India is all set to usher into the era of all new tax called 'Goods and Service Tax' which will bring in India at par with over 140 developed Nations of the world. It is going to be the biggest tax reform ever introduced in Independent India.

6) Background of Goods and Service Tax in India

GST, was first mooted by the Vajpayee government in the year 2000 by setting up the empowered committee for GST. The Kelkar Task  Force on  implementation  of  FRBM   Act,  2003  had  pointed  out  that although the indirect tax policy in India has been steadily progressive in the direction of VAT Principle since 1986, the existing system of taxation of goods and services still suffers from many Problems. The tax base is fragmented between Centre and States. Keeping significance of GST in view, an announcement was made by then our Finance Minister Mr. Arun Jaitley for rollover of GST in April 2017.  

7) GST Models Suggested by Indian Experts initially

On this basis as experts are univocal on three options namely –
  • First, The Centre will have complete power to levy and collect tax and will distribute it to States according to a pre-defined formula.
  • Second, a dual levy, one at the Central and another at the state with a common base;
  • Third, dividing the right to tax goods between the Centre and the States.
Various models have been designed and a few of them advocated by various experts as follows.
The Kelkar – Shah Model suggested implementation of GST in four stages - The Kelkar – Shah Model
  1. Establishing Information Technology systems
  2. Building the Central GST
  3. Political effort of agreeing on "Grand bargain;
  4. Interaction with the States.
  5. The Bagchi – Podda Model –
    It also visualizes a combination of Central Excise, Service tax and VAT to make it a common base of GST to be levied both by the centre and the states separately and collection by both the centre and the states.

8) Salient features of proposed GST model

AMBIT OF GST
  1. It is applied to all taxable goods and services except the exempted goods and services and on transactions below the threshold limit for a person not required to register for GST.
  2. Exempted goods and services include alcohol for human consumption, electricity, custom duty, real estate (to a limited extent).
  3. Petroleum products [crude oil, HSD (high speed diesel), motor spirit (petrol), natural gas, ATF (aviation turbine fuel)] are initially exempted from GST till the GST Council announces date of their inclusion.
  4. Tobacco products are included in GST along with central excise tax.
IMPOSITION AND COLLECTION OF GST
  1. The power of making law on taxation of goods and services lies with both union and state legislative assemblies. A law made by union on GST will not overrule a state GST law.
  2. GST has two components CGST and SGST as discussed above. CGST will be collected by central government whereas states governments will collect SGST.
  3. IGST is levied on supplies in the course of interstate trade including imports which is collected by central government exclusively and distributed to consuming states based on destination based tax concept. The proportion of distribution between center and states is decided on recommendation of GST Council.
GST COUNCIL
  1. It is set up under Article 279A and chaired by Union Finance Minister.
  2. It constitutes Union Minister of State in charge of Revenue or Finance or Taxation or of any other field nominated by state governments. The 2/3rd representatives in council are from states and 1/3rd from union.
  3. The decision of council is made by 3/4th majority of the votes cast and quorum of council is 50%.
  4. It will make recommendations on
    • Taxes, surcharge, cess of central and states which will be integrated in GST.
    • Goods and services which may be exempted from GST
    • Interstate commerce – IGST- proportion of distribution between state and center
    • Registration threshold limit for GST
    • GST floor rates
    • Special rates during calamities
    • Provision with respect to special category states especially north east states
  5. It may also work as Dispute Settlement Authority for GST.
COMPENSATION TO STATES
  1. For maximum of 5 years union will compensate states for the revenue losses arising out of GST implementation.
  2. This compensation will be made on the recommendation of GST Council.

9) Preparation for GST

In 2000, an empowered committee was set up by NDA government under the chairmanship of Asim Das Gupta to design GST model. With UPA in power union finance minister, Mr. P.Chidambaram, proclaimed the implementation of GST from April2010 in budget of 2007and set up an empowered committee of state Finance ministers to work with center. Therefore, on 10 May 2007 Joint Working Group was set up by empowered committee of state finance ministers which submitted the report in Nov 2007.First detailed discussion paper on structure of GST was introduced by empowered committee in Nov 2009 with the objective of generating a debate and getting the inputs from all stakeholders. It suggested a dual GST Module along with a GST council and finally in March 2011, constitution 115th amendment bill was introduced to draw up laws for implementing GST. It includes the followings:
  • Setting up of GST COUNCIL by the president within 60 days of passage of bill. The council will chaired by union finance minister and its members includes MoS for revenue and finance ministers of states. It will work on GST rates, exemption limits etc.
  • Setting up of a GST Dispute Settlement Authority having three members to resolve dispute arising among states and act against states.
  • GST Amendment Bill was referred to parliamentary committee on finance for evaluation.
In Aug 2013 the standing committee submitted the report and recommended that proposed Dispute Settlement Authority should be removed and its mechanism should be given to GST Council itself. It also recommended that GST Council should take decision by voting rather than consensus. The representation in the GST Council should be 1/3 from central and rest 2/3 from states. The decision in the council should be passed with more than ¾ vote representatives present. The quorum of council is raised from proposed 1/3 to half by standing committee. But the proposed 115 amendment bill was lapsed with dissolution of 15th Lok Sabha. On 19 Dec 2014 after making slight changes in GST Bill, NDA government redefined it in 16th Lok Sabha as 122nd amendment of constitution. On 6 may 2015 it passed in lower house of government. Finally the GST Bill was passed in Rajya Sabha on 3rd August 2016. President’s assent to the Constitutional Amendment was received on 8th September 2016. Immediately within one week time, the GST Council was created. GST Council has already met 9 times during this period from September 2016 to January 2017 and has converged on many important decisions with respect to the structure and other modalities of GST.