1. The Constitution (One Hundred and Fifteenth Amendment) Bill, 2011, which has been referred to the Standing Committee on Finance of Parliament for detailed examination and Report seeks to bring fundamental systemic reforms in the indirect taxes dispensation prevailing in the country by integrating and harmonizing the tax structure across the country in the form of Goods and Services Tax (GST). The proposed amendments in the Constitution are targeted to achieve the objective of conferring simultaneous power on Parliament and State legislatures to make laws for levying GST simultaneously on every transaction of supply and goods & services. In addition, the proposed amendments would allow subsuming of a number of indirect taxes presently being levied by Central & State Governments into GST and thus will remove cascading of taxes and provide a common national market for goods and services. Before discussing at length the various issues emanating from the provisions of the Constitution (One Hundred and Fifteenth Amendment) Bill, 2011, it would be useful to have a brief overview of the proposed amendment Bill.
I. GST Design
2. GST is recognized internationally as a destination based consumption tax which is least distortionary. The broad objectives of introducing the Goods and Services Tax (GST) in India are to expand the tax base through wider coverage of economic activities and reduction in exemptions; mitigate cascading and double taxation and enable better compliance through the lowering of overall tax burden on goods and services. By removing hidden or embedded taxes, it would improve the competitiveness of domestic industry vis-à-vis imports and in international markets. By harmonizing the tax structure across States, this reform would also lead to the development of a common national market for goods and services.
b) CENVAT is itself made up of several components in the nature of cesses and surcharges such as the National Calamity Contingency Duty (NCCD), education and secondary and higher education cess, additional duty of excise on tobacco and tobacco products etc. This multiplicity of duties complicates the tax structure and often obstructs the smooth flow of tax credit.
c) While input tax credit of CENVAT or additional duty of customs paid on goods is available to service providers paying Service Tax, they are unable to neutralize the State VAT or other State taxes paid on their purchase of goods.
d) State VAT is payable on the value of goods inclusive of CENVAT paid at the manufacturing stage so that the VAT liability of a dealer gets inflated by this component without compensatory set-off.
e) Inter-State sale of goods attracts the Central Sales Tax (CST) levied by the Centre and collected by the States. This is an origin-based tax and cannot be set-off against VAT in many situations.
f) State VAT and CST do not directly apply to the import of goods on which special additional duties of customs are levied at a uniform rate of 4% by the Centre. Input tax credit of these duties is available only to those manufacturing excisable goods. Other importers have to claim refund of this duty as and when they pay VAT on subsequent sales.
g) VAT dealers are unable to set-off any Service Tax that they may have paid on their procurement of taxable input services.
h) State Governments also levy and collect a variety of other indirect taxes such as luxury tax, entertainment tax, entry tax etc. for which no set-off is available.
5. Introduction of GST is a logical culmination of the tax reform process involving the switch over to CENVAT; levy of service tax and the transition from sales tax to state VAT. By replacing a large number of taxes levied both by the Centre and the States, GST would integrate the tax base and allow seamless flow of input tax credit across the value chain of goods and services. This would eliminate multiplicity of taxes, cascading of taxes and overall simplification of indirect taxation regime. Seamless input tax credit chain will lead to reduced cost of goods and services. As the credit chain will function only if all the transactions are recorded, GST environment would lead to improved disclosure of economic transactions which may have a positive impact on direct tax collections also.
10. The benefits of GST can be summarized as under :
For business and industry
- Easy compliance
- Removal of cascading
- Improved competitiveness
For Central and State Governments
- Simple and easy to administer
- Better controls on leakage
- Consolidation of tax base
- Higher revenue efficiency
For the consumer
- Single and Transparent tax proportionate to the value of goods and services
- Reduction of prices
11. GST, by its design, encourages the system to be transparent. There is an inbuilt system of Input Tax Credit i.e. the tax paid at earlier stage of the production distribution chain will be set off at the final stage of sale of goods and services. Also the rate arbitrage between the inter-state and intra-state supplies will get eliminated. This is because it is proposed to equalize the total rate of tax applicable to intra- and inter-state supplies unlike the present regime where the CST rate is 2% while the normal VAT rate is either 5% or 12.5%. Thus it is expected that tax evasion would be largely reduced. The Centre and States today fix rate of tax and grant exemptions many times not in sync with each other. States also try to compete with each other to attract investment etc. and offer reduced rate of tax on select goods, which leads to tax rate war between States and ultimately hurts them. The affected State today has no forum to go to get its grievance redressed. The Bill proposes to set up GST council which after discussion will recommend rate of tax etc. to Centre as well as States. Centre and States will be expected to follow the recommendations of the GST Council and State and Centre will have a forum in the form of GST Dispute Settlement Authority for seeking redressal of grievances related to loss of revenue because of such deviating action of the other State which may have affected their revenue. This will bring transparency, accountability and efficiency in the tax administration and reduce the arbitrage opportunities available to tax avoidance and evasion.
