Roadmap for GST

Not a super highway, but a typical Indian road

 V S Datey

1. Introduction

In view of federal structure of governance in India, there is multiplicity of taxes on goods and services. Excise duty on manufacture, customs duty on imports/exports and service tax on services are levied by Central Government, while sales tax (State Vat), Entry tax/octroi and duty on liquor are levied by State Government.

Besides these, there are plethora of taxes like cesses, surcharge, stamp duty, entertainment tax, road tax and what not.

Such multiplicity of taxes distort the tax structure and brings in complexities. Reforms in taxes is of course a continuous process. Cenvat (that time it was termed as ‘Modvat’) was introduced in 1986 in Central Excise to avoid cascading effect of excise duties. Introduction of State Vat started in 2005 and now most of the States have implemented State Vat.

GST is a logical consequence of State Vat.

Idea of national GST was first mooted by Kelkar Task Force in 2004.

A task force was formed under Chairmanship of Shri Vijay Kelkar on Implementation of Fiscal Responsibility and Budget Management Act. The Kelkar Committee submitted its report in July 2004. The Committee strongly recommended fully integrated ‘Goods and Service Tax’ (GST) on national basis.

Full integration of goods and service tax will obviously take considerable time, as it can be achieved only after political consensus is achieved. However, a beginning was made by proposing to make credit of service tax and excise duty inter-chargeable. The then Finance Minister Shri P Chidambaram, in para 148 of his budget speech on 8-7-2004, stated as follows, ‘I propose to take a major step towards integrating the tax on goods and services. Accordingly, I propose to extend credit of service tax and excise duty on goods and services. Accordingly, I propose to extend credit of service tax and excise duty across goods and services’.

To give effect to this proposal, Cenvat Credit Rules, 2004 were issued and made effective from 10-9-2004.

Empowered Committee for GST - The task of designing and implementing GST was taken up Empowered Committee of State Finance Ministers which had also designed the State Vat. The Empowered Committee had appointed various working groups and also had various meetings to discuss issues relating to proposed national GST.

Basic idea of GST considerably diluted - When it was initially proposed as a national GST in 2004, it was projected as a solution to all ills of taxation. It was envisaged that there will be a simple single point GST. All Central and State taxes will be merged in national GST. In short, it was projected as a six lane super highway of taxation.

Over the years, basic idea of ‘one single tax’ has been considerably diluted and various compromises have been made. The ‘Empowered Committee of State Finance Ministers’ was holding numerous meetings and trying to sort out various issues. Outside public and taxpayers only had some vague idea how GST is proposed to be implemented, through unauthenticated press reports, some study reports etc.

Release of first discussion paper - It appears that some basic ideas about way to implement GST have crystalised. First discussion paper has been released by Empowered Committee of State Finance Ministers on 10-11-2009.

It is true that many aspects of GST are yet not clear in the first discussion paper released, but now basic direction of GST is known through discussion paper. The discussion paper gives broad outline of policy of proposed GST. Thus, the basic direction in which GST is heading is clear though many issues are yet to be sorted. The discussion paper at least provides the industry and business a glimpse of shape of things to come.

Of course, it is still a long way to go.

Compromised GST  - The GST system as proposed to be introduced is result of deliberations of committee of representatives from 29 States. Each State has its own views and peculiarities (and whims and fancies). Hence, having uniform nationwide GST is very difficult and some compromises/adjustments are inevitable. This had happened while introducing State VAT also.

It is rightly said that ‘A camel is a horse designed by Committee’. As the story goes, a committee was formed to design a horse. As usual, each committee member had his own ideas, whims and fancies, due to which some adjustments and compromise were inevitable. The result was that finally, the design that came out was of a camel!

Not super highway – typical Indian road – It is clear that the GST as proposed will not be a six lane superhighway, but a typical narrow Indian road with potholes, diversions and encroachments. However, the road seems to be motorable.

1.1 Background of ‘Empowered Committee of State Finance Ministers’

Tax on sale within the State is a State subject. Over the period, many distortions had come in taxation due to unhealthy competition among States by giving sales tax incentives and ‘tax rate war’ started to attract more revenue to State. Many steps were taken to remove the distortions and rationalise tax structure since 1999. It was decided to introduce uniform State Level VAT.

Introduction of VAT was difficult in India as sales tax is a State Subject and sales tax on sale within the State can be levied only by respective State Governments. Even in respect of Central Sales Tax (CST), though the tax is levied under Central Act, the CST is collected in the State from which goods are sold, i.e. originating State and CST so collected is retained by that State only. The CST amount never goes to Union Government.

After lot of persuasion by Central Government, all States ultimately agreed to introduce State Level sales tax VAT at the conference of Chief Ministers all States at Delhi in November, 1999. A high power committee termed as ‘Empowered Committee of State Finance Ministers’ consisting of Finance Ministers of all 29 States was constituted under Chairmanship of Dr. Asim Dasgupta, Finance Minister, West Bengal. It was decided to introduce Sales tax VAT w.e.f. 1-4-2002. It could not be done and introduction of VAT was delayed on several occasions. Finally, state Vat has been introduced in most of the States.

The Empowered Committee is registered as a Society with administrative office at New Delhi.

Though the committee is termed as ‘empowered committee’, it is actually a misnomer, as actually, it has no powers. The decision of empowered committee are arrived through persuasion. Efforts are made to arrive at a consensus, due to which various compromises become inevitable. The discussion paper issued by empowered committee or the white paper which may be released later, have no statutory force.

Decisions of empowered committee are not ‘law’ and not binding – Decisions of empowered committee have only persuasive value. These are not statutory provisions and their recommendations cannot govern State legislature – Federation of All Ida Tea Traders Associations v. Government of AP (2007) 5 VST 21 (AP HC DB).

1.2 State-wise position of VAT 

Some 21 States have introduced State VAT (though in diluted form) w.e.f. 1-4-2005.

Haryana was the only State to introduce VAT w.e.f. 1-4-2003. 20 States have introduced VAT w.e.f. 1-4-2005. These include Assam, Andhra Pradesh, Bihar, Delhi, Goa, Karnataka, Kerala, Maharashtra, Punjab and West Bengal.

States like Gujarat, Chhatisgarh, Jharkhand, Madhya Pradesh and Rajasthan (which were that time ruled by BJP) introduced Vat w.e.f. 1-4-2006.

Tamilnadu introduced Vat on 1-1-2007. Uttar Pradesh introduced Vat w.e.f. 1-1-2008.

Uttarakhand has not introduced VAT so far. J&K is out of picture of Vat due to constitutional limitations.

1.3 Progress so far towards GST

Various steps have been taken for moving towards GST -

Practically, Vat has been introduced both at Central level upto manufacturing stage and at State level at trading stage. Purpose of GST is to merge and synthesize these two taxes.

After introduction of GST, central excise duty, service tax and Central Sales Tax (CST) will be abolished. State Vat will also go. Octroi and Entry tax (which is in lieu of octroi) will continue. Stamp duty, entertainment tax etc. will also continue.

1.4 Announcement in Parliament about GST

Shri Pranab Mukherji, Finance Minister of Government of India, in para 85 of his budget speech on 6-7-2009 (made while presenting budget for 2009-10) has stated as follows -

‘I have been informed that the Empowered Committee of State Finance Ministers has made considerable progress in preparing the roadmap and the design of the GST. Officials from the Central Government have also been associated in this exercise. I am glad to inform the House that, through their collaborative efforts, they have reached an agreement on the basic structure in keeping with the principles of fiscal federalism enshrined in the Constitution. I compliment the Empowered Committee of State Finance Ministers for their untiring efforts.  The broad contour of the GST Model is that it will be a dual GST comprising of a Central GST and a State GST.  The Centre and the States will each legislate, levy and administer the Central GST and State GST, respectively. I will reinforce the Central Government’s catalytic role to facilitate the introduction of GST by 1st April, 2010 after due consultations with all stakeholders’.

While commitment of Government to GST is welcome, there is no assurance that GST will be introduced w.e.f. 1-4-2010. It seems Centre is keen to keep the scheduled date.

Shri Pranab Mukherji, in an interview after presentation of budget on 6-7-2009, has stated that Centre will introduce GST even if some of the States do not agree to bring in State GST.

One Central GST and 29 State GSTs - The most disturbing part of the announcement made by Finance Minister is that each State will legislate, levy and administer its own State GST. Thus, there will be one Central GST law and 29 State GST laws. The State GST Laws are unlikely to be uniform, all over India.

It was expected that there will be uniformity in GST law all over India. This hope has gone in smoke. Initially, it was envisaged that there will be one GST out of which some part will go to Centre and balance to States. There will be single assessment and all other taxes will be abolished. This is not going to happen.

Difficulties of dealers having multi-state operations - The difficulties presently faced by dealers having operations in more than one States will continue as at present.

2. Overview of proposed GST

The overview of proposed GST is summarised as follows –

3. A primer on Vat

GST is based on principle of Vat. Hence, it is appropriate to see basics of Vat.

Generally, any tax is related to selling price of product. In modern production technology, raw material passes through various stages and processes till it reaches the ultimate stage e.g., steel ingots are made in a steel mill. These are rolled into plates by a re-rolling unit, while third manufacturer makes furniture from these plates. Thus, output of the first manufacturer becomes input for second manufacturer, who carries out further processing and supply it to third manufacturer. This process continues till a final product emerges. This product then goes to distributor/wholesaler, who sells it to retailer and then it reaches the ultimate consumer.

If a tax is based on selling price of a product, the tax burden goes on increasing as raw material and final product passes from one stage to other. For example, let us assume that tax on a product is 10% of selling price. Manufacturer ‘A’ supplies his output to ‘B’ at Rs. 100. Thus, ‘B’ gets the material at Rs. 110, inclusive of tax @ 10%. He carries out further processing and sells his output to ‘C’ at Rs. 150. While calculating his cost, ‘B’ has considered his purchase cost of materials as Rs. 110 and added Rs. 40 as his conversion charges. While selling product to C, B will charge tax again @ 10%. Thus C will get the item at Rs. 165 (150+10% tax). As stages of production and/or sales continue, each subsequent purchaser has to pay tax again and again on the material which has already suffered tax. This is called cascading effect.

Cascading effect of conventional system of taxes - A tax purely based on selling price of a product has cascading effect, which has the following disadvantages - (a) Computation of exact tax content difficult (b) Varying Tax Burden as tax burden depends on number of stages through which a product passes (c) Discourages Ancillarisation (d) Increases cost of production (e) Concessions on basis of use is not possible  (f) Exports cannot be made tax free.

VAT to avoid the cascading effect – VAT was developed to avoid cascading effect of taxes. In the aforesaid example, ‘value added’ by B is only Rs. 40 (150–110), tax on which would have been only Rs. 4, while the tax paid was Rs. 15. In VAT, the idea is that B will pay tax on only Rs 40 i.e. value added by him. Then, it makes no difference whether a product passes through 5 or 10 stages or even 100 stages, as every person will pay tax only on ‘value added’ by him to the product and not on total selling price.

Tax credit system - VAT removes these defects by tax credit system. Under this system, credit is given at each stage of tax paid at earlier stage.

3.1 Illustration of tax credit system

In the example we saw above, ‘B’ will purchase goods from ‘A’ @ Rs. 110, which is inclusive of duty of Rs. 10. Since ‘B’ is going to get credit of duty of Rs. 10, he will not consider this amount for his costing. He will charge conversion charges of Rs. 40.00 and sell his goods at Rs. 140. He will charge 10% tax and raise invoice of Rs. 154.00 to ‘C’. (140 plus tax @ 10%). In the Invoice prepared by ‘B’, the duty shown will be Rs. 14. However, ‘B’ will get credit of Rs. 10 paid on the raw material purchased by him from ‘A’. Thus, effective duty paid by ‘B’ will be only Rs. 4. ‘C’ will get the goods at Rs. 154 and not at Rs. 165 which he would have got in absence of Cenvat. Thus, in effect, ‘B’ has to pay duty only on Rs 40, which is the value added by him.

Following example will illustrate the tax credit method of Cenvat.

Note - 'B' is purchasing goods from 'A'. In second case, his purchase price is Rs 100/- as he is entitled to Cenvat credit of Rs 10/- i.e. tax paid on purchases. His invoice shows tax paid as Rs 14. However, since he has got credit of Rs 10/-, effectively he is paying only Rs 4/- as tax, which is 10% of Rs 40/-, i.e. 10% of 'value added' by him.

Tax Revenue of Government – The Government gets revenue of Rs 14, which is 10% of selling price of B, out of which Rs 10 are paid by A and Rs 4 by B. In the first case (i.e. without VAT), Government would have got revenue of Rs 25 (Rs 10 from A and Rs 15 from B). However, to avoid double taxation, most of the States had provided for tax at first sale and all subsequent sales (termed as re-sale) were exempt. Hence, Government would have got revenue of Rs 10, if the tax on only at the first point. If, prior to VAT, sales tax rate was 10%, under VAT, Government can get the same quantum of revenue if VAT rate is 7.143%. Note that 7.143% of Rs 140 is Rs 10.

Advantages of tax credit system - The ‘Tax Credit Method’ has following advantages - (a) Audit control is much better, which helps in controlling tax evasion. It acts as a self-policing mechanism (b) Flexibility in applying varying tax rates to different commodities (c) Useful in giving tax benefits on exports or other preferred end-uses like uses by common man etc. Most of the countries have adopted ‘tax credit’ method for implementation of VAT.

Meaning of ‘Value added’ – In the above illustration, the ‘value’ of inputs is Rs 110, while ‘value’ of output is Rs 150. Thus, the manufacturer has made ‘value addition’ of Rs 40 to the product. Simply put, ‘value added’ is the difference between selling price and the purchase price.

3.2 Advantages of VAT

Advantages of VAT are as follows : (a) Exports can be freed from domestic trade taxes (b) It provides an instrument of taxing consumption of goods and services (c) Interference in market forces is minimal (d) Aids tax enforcement by providing audit trail through different stages of production and trade. Thus, it acts as a self-policing mechanism (e) Neutrality i.e. with minimum distortion in tax structure - as there are few variations in tax rates and exemptions from taxation are very few.

The disadvantage is that paper work required increases considerably and it is not as simple as a single point sales tax.

3.3 Highlights of Vat

The basic principles are as follows –

4. Inter State GST is a very good and novel idea

IGST on inter-state transactions is a very novel and practical idea. At present, dealer having inter-state transactions is in a difficult position. CST payable is only 2% (in some cases Nil, if it is tock transfer). He is required to file refund claim if his credit of State Vat (later it will be State GST) is high.

It is experience that refunds lead to corruption (politely termed as ‘rent seeking’) and harassment. Huge funds of dealer are blocked, seriously affecting his working and cash flow. It also increases litigation, as refund claims are often rejected on flimsy grounds (due to fear of ‘audit objections’). Further, most of States are financially broke and often refunds are delayed due to shortage of funds with State Governments.

IGST will considerably reduce this difficulty.

4.1 Credit of IGST used for SGST to importing State

It is envisaged that Inter-state GST (IGST) will be imposed on inter-state transactions. It will be equal to SGST plus CGST. The IGST will be entirely collected by Centre. The dealer in importing State (i.e. where goods are received for sale, use or consumption) will be entitled to avail tax credit of entire IGST. If the dealer in importing State utilises that input tax credit for payment of SGST, the amount will be reimbursed to the importing State by Centre.

IGST has to be paid electronically.

The amount to be credited to importing State will be calculated on basis of e-returns submitted by registered dealer in importing State, on monthly basis.

It is envisaged that dealer in importing State will utilise input tax credit of IGST in sequence of IGST, CGST and SGAT. Thus, input tax credit (ITC) of IGST will be utilised first for payment of IGST on sale of goods and services and then for payment of CGST. Only balance, if any, will be utilised for payment of SGST.

4.2 Debit of SGST used for payment of IGST to exporting State

Registered Dealer in importing State can take ITC (Input Tax credit) of IGST paid by dealer in exporting State. The credit will be matched with e-returns filed by registered dealers of importing State and exporting State.

If the dealer in exporting State utilises input tax credit of SGST for payment of IGST, Centre will debit that amount to the exporting State (i.e. State from which goods are sent to another State). Thus, Centre will act as ‘clearing house’ among different States.

The amount to be debited will be calculated by Centre on basis of e-returns submitted by registered dealer in exporting State, on monthly basis.

It is envisaged that the dealer in exporting State will utilise his input tax credit in sequence of IGST, CGST and SGST for payment of IGST on his sales/services. Thus, first he will utilise his input tax credit (ITC) of IGST and CGST for payment of IGST on his sale of goods and services. If that credit is insufficient, then only he can utilise credit of SGST for payment of IGST.

4.3 B2C transactions

In case of B2B transaction, the buyer is importing State will be registered and hence there will be debit and credit as explained above. In case of B2C transactions, the buyer in importing State will not be registered. In such case, the credit of SGST portion of IGST will be entirely credited to importing State, with some exceptions.

If the SGST rate in both exporting State and importing State are same, there will be no difference if goods are purchased in the State or procured from outside the State. However, if SGST rate in exporting State is lower compared to SGST rate within the State, it will be cheaper to import goods from outside the State. This might start ‘rate war’ among States!

4.3 Control through TIN

Each dealer having inter-state transaction will be registered with Central authority and will have Tax Identity Number (Tax Identification Number) which will be Income Tax Pan based 13/15 digit number. The e-return filed by selling dealer will contain TIN number of purchasing dealer and amount of IGST paid. This will be matched with e-return filed by purchasing dealer and then only credit will be allowed.

4.4 What happens if selling dealer of exporting State does not pay the IGST or takes bogus credit

The purchasing dealer can take input tax credit on basis of invoice issued by selling dealer.

However, it seems that if the selling dealer does not pay tax within prescribed period, the credit will be disallowed. Similarly, if it is found that selling dealer has taken bogus credit, it may be recovered from purchasing dealer.

 The control will be through mechanism of e-return and audit.

Really, such provision, if made, will be highly unjust. Why purchasing dealer should suffer for fault of selling dealer?

If selling dealer has utilised some input tax credit which is disallowed by tax authorities, its burden will ultimately fall on purchasing dealer and he cannot even file appeal ansd even notice of such proposed disallowance will not be served on him!

4.5 Advantages of IGST

IGST will considerably reduce refund claims by dealers and consequent delays, harassment and corruption.

IGST will eliminate need of check posts at State borders, as check will be maintained electronically through credits and debits of exporting and importing dealer.

4.5 Illustrations

Compute the invoice value to be charged and amount of tax payable under GST by a dealer who had purchased goods for Rs. 1,20,000 and after adding for expenses of Rs. 10,000 and of profit Rs. 15,000 had sold out the same. The rate of SGST and CGST on purchases and sales is 8%.

Ans – Effectively, tax is payable on Rs 25,000 @ 8% each i.e. Rs 2, 000 of SGST and Rs 2,000 of CGST.

Compute the GST amount payable by Mr. A who purchases goods from a manufacturer on payment of Rs. 2,32,000 (including GST) and earn 10% profit of net purchase price, on sale to retailer? SGST and CGST rate on purchase and sale is 8% each.

Ans – Net purchase price of Mr.  A is Rs 2,00,000 (check that by adding 16%, the amount comes to Rs 2,32,000). His profit is 10% of net purchase price. Thus, his net sale price is Rs 2,20,000. He is liable to pay SGST of Rs 17,600 and CGST of Rs 17,600. He will get input tax credit (ITC) of Rs 16,000 of SGST and Rs 16,000 of CGST. Thus, he is liable to pay SGST of Rs 1,600 and CGST of Rs 1,600.

A dealer purchased 11,000 Kgs of inputs on which SGST and CGST paid @ 4% was Rs 4,000 each. He manufactured 10,000 Kgs of finished products from the inputs. 1,000 Kgs was the process loss. The final product was sold at uniform price of Rs 10 per Kg, as follows – Goods sold within State – 4,000 Kgs. Finished product sold in inter-state sale – 2,500 Kgs. Goods sent on stock transfer to consignment agents outside the State – 2,000 Kgs. Goods sold to Government departments outside the State – 1,500 Kgs. There was no opening or closing stock of inputs, WIP or finished product. The SGST and CGST rate on the finished product of dealer is 8% each. Calculate liability of SGST and CGST. Find Input tax credit available to dealer and tax required to be paid in cash.

The tax payable would be as follows –

Tax paid on inputs – SGST - Rs 4,000, CGST – Rs 4,000. This credit should first be utilised for payment of CGST and SGST respectively and balance is to be used for payment of IGST. Thus, balance available for payment of IGST is Rs 800 of CGST and Rs 800 of SGST.

Thus, tax payable is as follows –

(A) IGST – Rs 8,000 (Rs 9,600 – Rs 1,600)

(B) CGST – Nil

(C) SGST – Nil

Since credit of SGST of Rs 800 has been utilised for payment of IGST, the State Government will get debit of Rs 800 from Central Government.

In aforesaid example, if 2,000 Kgs were exported (and not stock transferred), what would be the tax liability and credit available.

If finished product is exported. There is no tax liability. Hence, IGST will be Rs 6,400.

Further, the entire credit of tax paid on raw material is available. Hence, tax payable is as follows –

(A) IGST – Rs 4,800 (Rs 6,400 – Rs 1,600)

(B) CGST – Nil

(C) SGST – Nil

Since credit of SGST of Rs 800 has been utilised for payment of IGST, the State Government will get debit of Rs 800 from Central Government.

In the previous example, if the raw material was purchased inter-state (and not locally), on which IGST of Rs 8,000 was paid, what will be net tax liability of the dealer?

The IGST paid should first be utilised for payment of IGST. Hence, he should utilise entire Rs 8,000 for payment of IGST.

Thus, tax payable is as follows –

(A) IGST – Rs 1,600 (9,600-8000)

 (B) CGST – Rs 3,200

(C) SGST – Rs 3,200

Calculate the GST liability for the period Jan. 1, 2011 to Jan. 31, 2011 from the following particulars: Inputs worth Rs. 1,00,000 were purchased within the State. Rs. 2,00,000 worth of finished goods were sold within the State and Rs. 1,00,000 worth of goods were sold in the course of inter-State trade. CGST and SGST paid on procurement of capital goods worth Rs. 1,00,000 during the month was at 8,000 each. If the input and output tax rate in the State are 8% of SGST and CGST,  find the total tax liability.

Ans – Tax payable on sale within State – CGST –Rs 16,000 and SGST Rs 16,000.

Tax payable on inter-state sale – IGST – Rs 16,000.

ITC on capital goods – CGST – Rs 4,000 and SGST Rs 4,000 (Note – It is assumed that 50% credit of capital goods is available in current year and balance in subsequent year, on the basis of similar provision under Cenvat. However, exact credit available will depend on SGST and CGST provisions when enacted)

ITC on inputs – SGST Rs 8,000 and CGST Rs 8,000.

Total Credit – CGST – Rs 12,000 and SGST – Rs 12,000.

This credit can be utilised for payment of SGST and CGST respectively. Hence, net tax payable is as follows -

(A) IGST – Rs 16,000 (No credit available)

 (B) CGST – Rs 4,000 (16,000 – 12,000)

(C) SGST – Rs 4,000 (16,000 – 12,000)

Since no credit of SGST has been utilised for payment of IGST, there will be no debit to State Government.

5. Constitutional provisions

Article 246(1) of Constitution of India states that Parliament has exclusive powers to make laws with respect to any of matters enumerated in List I in the Seventh Schedule to Constitution. (Called ‘Union List’). As per Article 246(3), State Government has exclusive powers to make laws for State with respect to any matter enumerated in List II of Seventh Schedule to Constitution.

Seventh Schedule to Constitution (referred to in Article 246) indicates bifurcation of powers to make laws, between Union Government and State Governments. Parliament has exclusive powers to make laws in respect of matters given in list I of the Seventh Schedule of the Constitution (called ‘Union List’’). List II (State List) contains entries under jurisdiction of States. List III (concurrent list) contains entries where both Union and State Governments can exercise power. [In case of Union Territories, Union Government can make laws in respect of all the entries in all three lists].

5.1 Union List relevant to taxation

List I, called “Union List”, contains entries like Defence of India, Foreign affairs, War and Peace, Banking etc. Entries in this list relevant to taxation provisions are as follows :

Entry No. 82 - Tax on income other than agricultural income.

Entry No. 83 - Duties of customs including export duties.

Entry No. 84 - Duties of excise on tobacco and other goods manufactured or produced in India except alcoholic liquors for human consumption, opium, narcotic drugs, but including medicinal and toilet preparations containing alcoholic liquor, opium or narcotics.

Entry No. 85 - Corporation Tax.

Entry No. 92A - Taxes on the Sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of Interstate trade or commerce.

Entry No. 92B - Taxes on consignment of goods where such consignment takes place during Interstate trade or commerce.

Entry No. 92C – Tax on services [Amendment passed by Parliament on 15-1-2004, but not yet made effective].

Entry No. 97 - Any other matter not included in List II, List III and any tax not mentioned in list II or list III. (These are called ‘Residual Powers’.)

5.2 State list pertaining to taxation

State Government has exclusive powers to make laws in respect of matters in List II of Seventh Schedule to our Constitution. These entries include Police, Public Health, Agriculture, Land etc. Entries in this list relevant to taxation provisions are as follows:

Entry No. 46 - Taxes on agricultural income.

Entry No. 51 - Excise duty on alcoholic liquors, opium and narcotics.

Entry No. 52 - Tax on entry of goods into a local area for consumption, use or sale therein (usually called Octroi).

Entry No. 54 - Tax on sale or purchase of goods other than newspapers except tax on interstate sale or purchase.

5.3 Concurrent list

List III of Seventh Schedule, called “concurrent list”, includes matters where both Central Government and State Government can make laws. This list includes entries like Criminal Law and Procedure, Trust and Trustees, Civil procedures, economic and social planning, trade unions, charitable institutions, price control, factories, etc. In case of entries included in concurrent list, in case of conflict, law made by Union Government prevails. The only exception is that if law made by State contains any provision repugnant to earlier law made by Parliament, law made by State Government prevails, if it has received assent of President. Even in such cases, Parliament can make fresh law and amend, repeal or vary law made by State. [Article 254 of Constitution].

5.4 Amendments to Constitution made in 2004 not yet made effective

 88th Amendment to Constitution has been passed by Parliament on 15-1-2004, but not yet made effective. Newly inserted Article 268A(1) provides that tax on services will be collected and appropriated by Union as well as States. Article 268A(2) provides that the proceeds of service tax so levied by Union and States shall be

(a) collected by Government of India and States in accordance with such principles of collection and appropriation as may be formulated by Parliament by law and

 (b) appropriated by Government of India and the States in accordance with such principles of collection and appropriation as may be formulated by Parliament by law. Entry 92C to List I – Union List (as newly inserted), reads ‘Tax on Services’.

Thus, in effect, the amendments provide that ‘Tax on Service’ is a Union subject, but tax will be collected and appropriated by Union and State Governments as per law passed by Parliament. Article 270 is also amended to provide that distribution of tax collected by Union will be appropriated between Union and States as per principles decided by Finance Commission.

It seems this amendment has been passed by more than 50% States but has not yet been brought into force.

5.5 Amendments needed to Constitution

As can be seen from aforesaid provisions in Constitution of India, presently, Centre cannot impose GST on traders for sale within the State, since that entry is included presently in List II of Seventh Schedule to Constitution of India (State List). Similarly, State cannot imposed service tax concurrently with Central Government.

Constitution will have to be amended to provide for following – (a) Power to Centre to impose GST on traders (b) Power to States to legislate regarding imposition of tax on services.

Deemed sale of goods - Provisions relating to ‘deemed sale of goods’ [as contained in Article 366(29A)] will have to be amended (rather the Article will have to be deleted) if GST is to be imposed.

5.6 Amendments have to be passed by at least 15 States, besides Parliament

The constitutional amendments will have to be passed by Parliament and at least 15 State legislatures. Then Central and State GST Acts will have to be passed, rules framed and notified.

It is a big challenge to complete all this procedure by 31-3-2010.

It seems if some States do not fall in line, partial GST may have to be introduced to begin with.

5.7 Debit to State will require approval of State legislature

The tax paid is part of Consolidated Fund of the State. Any debit to that fund requires approval of State legislature as per Article 283(2) of Constitution of India. 

Thus, unless the State passes suitable law, debit by Centre to State will not be possible. 

6. Composition scheme for Small manufacturers and service providers

Small manufacturers with turnover less than Rs 1.50 crores, small traders with turnover upto Rs 50 lakhs and small service providers (limit not specified but my hunch is that it may be about 30-40 lakhs) may be liable to pay only SGST. A composition scheme i.e. paying SGST at flat rate of turnover will be provided to them. Optionally, they can pay IGST and come under entire value chain.

The exact nature of exemption is not clear from the discussion paper. 

7. Issues which need attention/clarifications

The basic direction of GST is now clear in the discussion paper. However, there are various issues which need attention and clarification.

7.1 Valuation of stock transfer in case of IGST

Often goods are sent outside State under stock transfer or for incorporation in works contract. Goods may also be sent on sale or return basis. In such cases, clear and unambiguous provisions are required for valuation of goods for purpose of payment of ISGT.

7.2 Textile sector

Presently, textile sector is virtually outside excise net and in many cases, even Vat net. The policy about tax on textile sector is not clear. It seems the sector is so unorganised and so divergent that the sector may be kept out of GST net at least in initial stages.

7.3 Job work and repairs on Inter State basis

GST will apply to job work and repairs. That is not a problem. Issue is how to send goods inter-state for job work or repairs. There are many issues presently in the documentation and issue of F form. These need to be sorted out. It seems IGST will not be payable when goods are sent inter-state for job work or repairs, since goods will be coming back after job work or repairs.

Simplified paper work should be prescribed for this purpose.

7.4 Centralised registration and assessment

At present, dealers having multi-state operations face considerable difficulties as they have to face assessments in various States which is very costly and time consuming. There should be provision for centralised registration and assessment in such cases.

7.5 Casual dealer

In some cases, a dealer usually does not have business in other States but may get occasional business of transaction in other State. In such cases, getting regular registration and completing all formalities is a costly and difficult proposition. In such cases, there should be provision of a ‘casual dealer’.

7.6 Uniformity in law and procedures

It would have been much better if the law and procedures are uniform all over India and only implementation was given to States (like CST Act). At present, each State has its own procedures, rules and forms. This makes life miserable for registered dealers having multi-state operations.

7.7 Taxes and products outside GST

It appears that tax on alcoholic liquor taxes, entertainment tax, property tax will continue. Petroleum products, tobacco products, lottery ticket and alcoholic liquor will be outside the GST chain.

7.8 Dual assessments

From the first discussion paper, it seems clear that there will be dual assessment i.e. both by Centre and State though some coordination mechanism may be developed to reduce transaction costs of small and medium size taxpayers.

It seems that in case of small service providers and small traders, there will be only single assessment by State Government authorities, as they will be liable to pay only SGST.

7.9 Rate of SGST and CGST on basis of RNR

It should be noted that purpose of GST is simplification and avoiding cascading effect. The purpose is neither to increase tax revenue nor to increase/reduce prices.

The GST rate at which the tax revenue which was collected earlier will continue to be same termed as ‘Revenue Neutral Rate’ (RNR). It is the GST rate at which tax revenue remains unchanged, compared to earlier tax revenue.

It is difficult to exactly calculate RNR.

Rate of SGST and CGST has not been specified in the discussion paper released on 10-11-2009. As per press reports, both the rates may be around 8% each. This may be changed later based on the experience of actual tax collections.

7.10 Unutilised transitional credit

While switching over to GST, there will be Input tax credit (ITC) of Cenvat (in case of manufacturers) and State Vat (in case of traders). Provision should be there to transfer this credit under GST.

7.11 Exemptions and incentives to new industries already granted in some States

All State Governments were offering sales tax incentives to new industries set up in the State. The incentives were broadly of three types - (a) Exemption - Don’t charge tax and don’t pay (b) Deferral - Charge sales tax in invoice but pay after long period of (say) 12 to 18 years (c) Remission - Charge in the invoice but retain and do not pay to Government.

State Governments have stopped giving incentives to new industries. However, there are commitments in respect of industries set up earlier. State Governments will have to continue with the incentives which were already granted   [Some States have allowed industries under exemption scheme to convert to deferral scheme so that such industries can pass on benefit of VAT to their buyers].

Central Government has given area based exemption from excise duty to various States. The areas are as follows – (a) North Eastern Region and Sikkim - Notification No. 20/2007-CE dated 25-4-2007 (Earlier No. 32/1999-CE(NT) dated 8-7-1999, No. 33/1999-CE dated 8-7-1999, 56/2003-CE dated 25-6-2003 and 71/2003-CE dated 9-7-2004) (b) Kutch district of Gujarat – No. 39/2001-CE dated 31-1-2001 (c) State of Jammu and Kashmir – 56/2002-CE and 57/2002-CE both dated 14-11-2002 (d) Himachal Pradesh – 49/2003-CE dated 10-6-2003 (e) Uttarakhand (earlier Uttaranchal) – 50/2003-CE dated 10-6-2003.

The incentive period/exemption period has not expired. The commitments already made will have to be honoured till the incentive/exemption period is over.

7.12 Tie between state autonomy and simplification in tax structure

It is true that States should have sufficient  autonomy in a federal structure of government. However, there has to be a fair balance between such autonomy and need of a simple tax structure.

It seems the balance has been lost in the dual GST as proposed.

7.13 Penal provisions should not apply for first two years

There are bound to be ambiguities and different interpretations in initial stages. Hence, it should be specifically provided that penal provisions shall not apply for first two year. Only tax with interest should be payable, if at any time, tax is found to be payable.

8. Conclusion

The GST as envisaged may not be ideal mode but seems to be workable and seems to be the ideal design, considering the constitutional and political constraints. The GST system will certainly be better that the present multi-layer tax system and will definitely be better than the present hybrid system.

Cost efficient distribution channels - The business will have to restructure their operations to take maximum advantage of GST.  Distribution channels based on hub and spoke model can be developed which will be very cost effective since credit of IGST will be available across all States.

Inter State Trading Houses - Just like ‘merchant exporters’ specialising in physical exports, there could be ‘inter state trading houses’ specialising in inter-state transactions. Thus, small and medium enterprises, instead of entering into inter-state transactions themselves can route their transactions through such ‘inter state trading houses’, which will be quite cost effective.