After an arduous journey from the year 2006, the introduction of Goods and Service Tax (GST) in India is becoming a reality with the passing of the 122nd Constitution Amendment Bill (‘the GST Constitution Amendment Bill’) in the Lok Sabha. The earlier Constitution (115th Amendment) Bill, was referred to the ‘Standing Committee on Finance’ and the Committee presented its report containing various observations/recommendations to the Lok Sabha, some of which find place in the present GST Constitution Amendment Bill.
Since the opposition insisted on further legislative scrutiny of the proposed legislation in the Rajya Sabha prior to passing of the same, the Bill has now been referred to a Select Committee of the Rajya Sabha.
The 21-member panel of the Select Committee will give its report by the last day of the first week of the monsoon session, post which the Bill will be reconsidered in the Rajya Sabha. The Bill, thereafter, requires to be ratified by the Legislature of not less than one-half of the States, before the same is presented to the President for his assent.
Consensus in this regard appears to have been built by the Government, most of the States having in-principle agreed to support the introduction of GST except for certain dissenters like the Government of Tamil Nadu.
The amendment to the Constitution has been necessitated by the fact that India is a federal structure wherein the exclusive powers to legislate by the Centre and the State is clearly defined. At present, the Union is levying excise duty, service tax, custom duty etc whereas the States are levying and collecting VAT, CST, entry tax, entertainment duty etc.
GST proposes concurrent powers to both Centre and the States to levy tax on goods and services hence the Constitution requires to be amended.
In this context, the present GST Constitution Amendmen Bill, inter-alia proposes the following:
• Concurrent powers to the Central and the State government to make laws on the taxation of goods and services;
• Exclusive powers to the Centre to levy and collect tax on the interstate supply of goods and services;
• Subsume various prescribed Central level taxes into a Central level GST and State level taxes into a State level GST;
• Levy of origin based tax not exceeding 1% on the supply of goods in the course of interstate trade or commerce, initially for a period of two years;
• Constitution of the ‘GST Council’ which will be a joint forum of the Centre and the States. The objective of the council is to develop a harmonised national market for goods and services. The GST Council is set up to make recommendations on inter alia the modalities of levy of taxes under GST, develop place of supply rules, and other identified matters etc;
• Provide compensation to the states for revenue loss arising out of implementation of GST up to a period of 5 years. The compensation will be in a phased out manner i.e., 100 per cent for first three years, 75 per cent in the fourth year and 50 per cent in the fifth year; and
• Alcoholic liquor for human consumption is kept outside the ambit of GST.
The key differences between the 2011 Bill and the 2014 Bill is:
• Introduction of origin based tax not exceeding 1% on the supply of goods in the course of inter-state trade or commerce which would be levied and collected by the Centre;
• Introduction of petrol and petroleum products within the ambit of GST. However, the date from which GST on petrol and petroleum products will be levied will be notified later based on the recommendations of the GST Council;
• Introduction of rate band between which the states can levy the taxes instead of a single rate of tax. Post passing of the Bill in the Rajya Sabha, model legislations will have to be drafted and circulated for public comments, laws have to be formulated both by the Centre and the State and IT changes have to be made before GST can be introduced in India.
The introduction of GST along with other government initiatives like the ‘Make in India’ programme have the potential to drastically bring down costs, facilitate economies of scale, re-define and re-shape the logistics landscape of India, place India once again on a high growth trajectory, and, realise the vision of India in becoming a single ‘common economic market’.
The success of GST will not only depend upon the formulation of the laws but will also depend upon its effective implementation. Since GST is expected to change the face of the indirect tax structure in India, it is imperative that the entire framework of GST including the fine print be made available in public domain prior to implementation of the same, so as to afford sufficient time to the industry to gear up to the proposed new tax regime. Furthermore, the determination of the Revenue Neutral Rate (‘RNR’) for GST will be important for industry as it will directly impact the profit/business of the industry.
Industry must also review their current tax practices in terms of identifying tax optimization strategies, ensuring that unutilized credits are availed under the present taxation system, ensuring that all un- availed credits are captured etc, to prepare themselves for GST. Though the Government is keen on introducing GST from 1st April, 2016, given the fact that the GST Constitution Amendment Bill has been referred to the Standing Committee, the time line for the introduction of GST may require some deferment.