As understood traditionally in Economics, a good taxation system should meet five basic conditions: fairness, adequacy, simplicity, transparency, and administrative ease . To achieve these, the legal framework of a taxation system should be oriented towards the same. The legality of any tax is established largely by some key aspects like the power to levy tax, the incidence of tax, the liability of being taxed exemptions from being taxed and if there are any special provisions made in consonance with the socioeconomic milieu of the country in which the tax is being introduced. These are largely covered under Chapter III of the Model GST Act. This write up would explicate these aspects thus attempting to give the reader an understanding of the legal foundations of the new taxation system.
THE POWER TO LEVY TAX :
2. The power to levy tax is drawn from the Indian Constitution as it is the fundamental law and source of all laws therein. Since G.S.T. requires different kind of taxation powers than provided for in the present Constitution thus certain Constitutional Amendments have been necessitated in this context.
3. The 122nd Constitutional Amendment Bill is introducing Article 246A which would confer simultaneous powers on both the Parliament and State Legislatures to make laws with respect to goods and services tax imposed by the Union or by such State. The Article is as follows:
Article 246A :
(1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of eve”, State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.
(2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.
Explanation.—The provisions of this article, shall, in respect of goods and services tax referred to in clause (5) of article 279A, take effect from the date recommended by the Goods and Services Tax Council.”
4. In pursuance of the same Section 7 of the Model GST Act levies CGST /SGST and Section 4 of the Model IGST Act levies IGST. These are further elucidated upon in the description of the incidence of tax.
THE INCIDENCE OF TAX :
5. The incidence of tax is perhaps the foundation stone of any taxation system. It determines the point at which tax would be levied , i.e. the taxable event. Presently different taxes in India have differing taxable events e.g. : V.A.T. is levied on sale and purchase of goods and follows the destination – based principle of taxation ; Excise tax is levied on the manufacture of goods and follows the origin-based principle of taxation. Similarly the taxable event for GST would be supply of goods and services and would follow the destination – based principle of taxation. The incidence of tax for CGST , SGST and IGST according to the Model Acts is explained as follows .
THE INCIDENCE OF CGST AND SGST :
6. Section 7(1) of the CGST /SGST Act levies the tax on all intra-State supplies of goods and/or services.Section 7(3)levies CGST/SGST on specific categories of supply of goods and/or services on which tax is payable on reverse charge basis. These will be notified by the Central/State government (on the recommendation of the GST Council) [ Note : Reverse charge means the liability to pay tax by the person receiving goods and / or services instead of the person supplying the goods and / or services (Section 2(85)]. The Section is cited as follows :
(1)There shall be levied a tax called the Central/State Goods and Services Tax (CGST/SGST) on all intra-State supplies of goods and/or services at the rate specified in the Schedule . . . to this Act and collected in such manner as may be prescribed.
(2) The CGST/SGST shall be paid by every taxable person in accordance with the provisions of this Act.
(3) Notwithstanding anything contained in sub-section (2), the Central or a State Government may, on the recommendation of the Council, by notification, specify categories of supply of goods and/or services the tax on which is payable on reverse charge basis and the tax thereon shall be paid by the person receiving such goods and/or services and all the provisions of this Act shall apply to such person as if he is the person liable for paying the tax in relation to such goods and/or services.
THE INCIDENCE OF IGST :
7. Section 4(1) levies IGST on all supplies of goods and/or services made in the course of inter-State trade or commerce. Section 4(3) levies IGST on specific categories of supply of goods and/or services the tax on which is payable on reverse charge basis. These are to be notified by the Central/State government ( on the recommendation of the GST Council) Section 4 of IGST Act is cited as follows :
Section 4 :
(1) There shall be levied a tax called the Integrated Goods and Services Tax on all supplies of goods and/or services made in the course of inter-State trade or commerce at the rate specified in the Schedule to this Act and collected in such manner as may be prescribed.
(2) The Integrated Goods and Services Tax shall be paid by every taxable person in accordance with the provisions of this Act.
(3) Notwithstanding anything contained in sub-section (2), the Central Government may, on recommendation of the Council, by notification, specify categories of supply of goods and/or services the tax on which is payable on reverse charge basis and the tax thereon shall be paid by the person receiving such goods and/or services and all the provisions of this Act shall apply to such person as if he is the person liable for paying the tax in relation to such goods and/or services.
(4) Notwithstanding anything contained in sub-section (1) but subject to such conditions as may be notified in this behalf, no tax under this Act shall be payable by any taxable person in respect of such supplies of goods and/or services as are specified in Schedule . . . to the Act
8. Thus it has been well established that at what point tax is to be levied in the new taxation regime. Now the question arises that the tax is to be levied on whom. The next section of the write-up dwells on this very aspect of who is liable to be taxed.
THE LIABILITY OF BEING TAXED :
9. This is a critical aspect to understand especially from the perspective of those who have to pay tax and also for tax administrators. The legal definitions in this regard are the foundation stones of the entire taxation ecosystem .
THE LIABILITY OF BEING TAXED FOR CGST/SGST :
10. This has been duly laid out in the Act . In the Chapter on definitions, Section 2(96) defines a taxable person which is further elaborated upon in Section 9 and Section 7(2) binds every taxable person to pay CGST/ SGST. Section 9 refers to Schedule III which explains that who is liable to be registered under the Act. Section 9 also lays down the threshold limit ( of the gross annual turnover , which would include exempt supplies and exports) which would mark the advent of anyone into the fold of being called a taxable person. It has been set as Rupees ten lakh. This limit has been set as Rupees 5 lakh in the case of North -eastern states (including Sikkim). Section 9(3) lays down that who shall not be considered as taxable persons under the Act. The relevant Sections are cited as follows :
Section 2 (96):
taxable person shall have the meaning as assigned to it in section 9 of this Act;
(1) Taxable Person means a person who carries on any business at any place in India /State of and who is registered or required to be registered under Schedule III of this Act:
Provided that an agriculturist shall not be considered as a taxable person.
Provided further that a person who is required to be registered under paragraph 1 of Schedule HI of this Act shall not be considered as a taxable person until his aggregate turnover in a financial year exceeds [Rs ten lakh]
Provided further that a person who is required to be registered under paragraph 1 of Schedule HI of this Act shall not be considered as a taxable person until his aggregate turnover in a financial year exceeds [Rs five lakh]
[This threshold of 5 lacs will apply only if a taxable person conducts his business in any of the NE States including Sikkim.]
(2) The Central Government, a State Government or any local authority shall be regarded as a taxable person in respect of activities or transactions in which they are engaged as public authorities other than the activities or transactions as specified in Schedule IV to this Act.
(3) The following persons shall not be considered as taxable persons for the purposes of this Act ‑
(a) any person who provides services as an employee to his employer in the course of, or in relation to his employment, or by any other legal ties creating the relationship of employer and employee as regards working conditions, remunerations and employer’s liability;
(b) any person engaged in the business of exclusively supplying goods and/or services that are not liable to tax under this Act;
(c) any person, liable to pay tax under sub-section (3) of section 7, receiving services of value not exceeding rupees in a year for personal use, other than for use in the course or furtherance of his business.
Section 7(2) :
Every Taxable person shall pay CGST / SGST in accordance with the provisions of this Act
11. The Proviso to Section 9(1) provides that an Agriculturist will not be included in a taxable person. In this context the Chapter on definition defines an agriculturist and agriculture as follows :
Agriculturist means a person who cultivates land personally, for the purpose of agriculture .
Agriculture with all its grammatical variations and cognate expressions, includes floriculture, horticulture, sericulture, the raising of crops, grass or garden produce and also grazing, but does not include dairy farming, poultry farming, stock breeding, the mere cutting of wood or grass, gathering of fruit, raising of manmade forest or rearing of seedlings or plants;
Explanation.- For the purpose of this clause, the expression ‘forest’ means the forest to which the Indian Forest Act 1927 applies.
12. Further Section 9(2) brings government bodies within the ambit of a taxable person but making an exception at the same time that they would be excluded if they are engaged in the sort of activities listed in Schedule IV. In this context Schedule IV has been cited as follows :
Activities or transactions in respect of which the Central Government, a State Government or any Local Authority shall not be regarded as a taxable person
1. Services provided by a Government or local authority to another Government or local authority excluding the following services:
(i) services by the Department of Posts by way of speed post, express parcel post, life insurance and agency services;
(ii) services in relation to an aircraft or a vessel , inside or outside the precincts of a port or an aircraft; or
(iii) transport of goods or passengers.
2. Services provided by a Government or local authority to individuals in discharge of its statutory powers or functions such as‑
(i) issuance of passport, visa, driving licence, birth certificate or death certificate; and
(ii) assignment of right to use natural resources to an individual farmer for the purpose of agriculture.
3. Services provided by a Government or local authority or a governmental authority by way of:
(i) any activity in relation to any function entrusted to a municipality under article 243 W of the Constitution;
(ii) any activity in relation to any function entrusted to a Panchayat under article 243 G of the Constitution;
(iii) health care; and
4. Services provided by Government towards‑
(i) diplomatic or consular activities;
(ii) citizenship, naturalization and aliens;
(iii) admission into , and emigration and expulsion from India;
(iv) currency, coinage and legal tender, foreign exchange;
(v) trade and commerce with foreign countries , import and export across customs frontiers , interstate trade and commerce; or
(vi) maintenance of public order.
5. Any services provided by a Government or a local authority in the course of discharging any liability on account of any tax levied by such Government or authority.
6. Services provided by a Government or a local authority by way of –
(i) tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to the Government or the local authority under such contract; or
(ii) assignment of right to use any natural resource where such right to use was assigned by the Government or the local authority before the 1st April, 2016:
Provided that the exemption shall apply only to service tax payable on one time charge payable, in full upfront or in instalments, for assignment of right to use such natural resource:
Explanation.- Periodic payment required to be made not exempt.
7. Services provided by Government by way of deputing officers after office hours or on holidays for inspection or container stuffing or such other duties in relation to import or export of cargo on payment of Merchant Overtime Charges (MOT).
8. Services provided by Government or a local authority by way of‑
(i) registration required under any law for the time being in force; or
(ii) testing, calibration, safety check or certification relating to protection or safety of workers, consumers or public at large, required under any law for the time being in force.
1. Governmental Authority means a board, or an authority or any other body established with 90% or more participation by way of equity or control by Government and set up by an Act of the Parliament or a State Legislature to carry out any function entrusted to a municipality under article 243W or a Panchayat under article 243G of the Constitution.
2. Health care services means any service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognised system of medicines in India and includes services by way of transportation of the patient to and from a clinical establishment, but does not include hair transplant or cosmetic or plastic surgery, except when undertaken to restore or to reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities, injury or trauma. 3. Education services means services by way of‑
i) pre-school education and education up to higher secondary school or equivalent;
ii) education as a part of a curriculum for obtaining a qualification recognised by any law for the time being in force; or
iii) education as a part of an approved vocational education course.
THE LIABILITY OF BEING TAXED FOR IGST :
The liability to be taxed for IGST has not been laid out separately. Rather Section 2(2) provides that all those terms which have not been defined in this Act will have the same meaning as in the CGST Act. Thus a taxable person as defined in the Model CGST Act will be applicable for the IGST Act as well. In this context Section 2(2) of the IGST Act has been cited as follows :
Words and expressions not defined in this Act shall have the meaning assigned to them in the Central Goods and Service Tax Act, 2016.
Further Schedule III of the CGST Act provides that persons making any inter-State taxable supply would be required to be registered irrespective of the threshold specified. Thus the CGST Act itself determines the liability to be taxed under IGST .
Thus it has been established that who will levy tax on whom. But as mentioned in the Introduction itself there are certain special provisions to be made in consonance with the socio-economic milieu of a country. Such a provision has been made in the form of a Composition levy. It will be explored further in the next section.
It is a special provision for taxable persons with aggregate turnover below fifty lakh rupees. They would not be part of the credit chain and would not be able to pass on the tax to consumers. The tax levied on them would be a certain percentage (not less than one percent) of the turnover during the year. The proper officer of the Central or a State Government may permit a registered taxable person to avail this special facility. The provisions in detail in this respect have been laid out in Section 8 of the Model CGST/SGST Act. There is a caveat in this that this would not be available for those effecting inter-state supply. Section 8 has been cited as below.
(1) Notwithstanding anything to the contrary contained in the Act but subject to sub-section (3) of section 7, on the recommendation of the Council, the proper officer of the Central or a State Government may, subject to such conditions and restrictions as may be prescribed, permit a registered taxable person, whose aggregate turnover in a financial year does not exceed [fifty lakh of rupees], to pay, in lieu of the tax payable by him, an amount calculated at such rate as may be prescribed, but not less than one percent of the turnover during the year:
Provided that no such permission shall be granted to a taxable person who effects any inter-State supplies of goods and/or services.
Provided further that no such permission shall be granted to a taxable person unless all the registered taxable persons, having the same PAN as held by the said taxable person, also opt to pay tax under the provisions of this sub-section.
(2) A taxable person to whom the provisions of sub-section (1) apply shall not collect any tax from the recipient on supplies made by him nor shall he be entitled to any credit of input tax.
(3) If the proper officer has reasons to believe that a taxable person was not eligible to pay tax under sub-section (1), such person shall, in addition to any tax that may be payable by him under other provisions of this Act, be liable to a penalty equivalent to the amount of tax payable as aforesaid:
Provided that no penalty shall be imposed without giving a notice to show cause and without affording a reasonable opportunity of being heard to the person proceeded against.
Besides these special provisions exemptions can also be made for certain category of taxable persons or even goods or services from being taxed. The provisions in relation to these are explained in the next section.
EXEMPTIONS FROM BEING TAXED :
As discussed in the previous section , exemptions from tax are sometimes needed to be made . These are often the need of the hour or sometimes made to protect certain products or taxable persons. The Powers to make such exemptions have been conferred in Section 10 of the Act. The relevant Section is cited as follows :
Section 10 :
(1) If the Central or a State Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendation of the Council, by notification, exempt generally either absolutely or subject to such conditions as may be specified in the notification, goods and/or services of any specified description from the whole or any part of the tax leviable thereon.
Explanation.- Where an exemption under sub-section (1) in respect of any goods and/or services from the whole of the tax leviable thereon has been granted absolutely, the taxable person providing such goods and/or services shall not pay the tax on such goods and/or services.
(2) If the Central or a State Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendation of the Council, by special order in each case, exempt from payment of tax, under circumstances of an exceptional nature to be stated in such order, any goods and/or services on which tax is leviable.
(3) The Central or a State Government may, if it considers necessary or expedient so to do for the purpose of clarifying the scope or applicability of any notification issued under sub-section (1) or order issued under sub-section (2), insert an explanation in such notification or order, as the case may be, by notification at any time within one year of issue of the notification under sub-section (1) or order under sub-section (2), and every such explanation shall have effect as if it had always been the part of the first such notification or order, as the case may be.
(4) Every notification issued under sub-section (1) or sub-section (3)and every order issued under sub-section (2) shall
(a) unless otherwise provided, come into force on the date of its issue by the Central or a State Government for publication in the Official Gazette; and
(b) be made available on the official website of the department of the Central or a State Government
In a similar vein , certain other exceptions can also be made while levying tax . There can be remission of tax on supplies found to be deficient in quantity. It has been described in the next section.
REMISSION OF TAX ON SUPPLIES FOUND DEFICIENT IN QUANTITY :
This is an exception which can be made in the case of supplies which are found to be deficient in quantity due to any natural causes. The Rules to be made would also fix the limit of percentage beyond which no remission can be allowed. These powers have been conferred upon the Central and State government by Section 11 of the Act. The relevant Section is cited as below.
Section 11 :
(1) The Central or a State Government may, by rules made under this sub-section, provide for remission of tax on such supplies which are found to be deficient in quantity due to any natural causes.
(2) Any rules made under sub-section (1) may, having regard to the nature of the supply, fix the limit or limits of percentage beyond which no such remission shall be allowed.
The legal and conceptual foundations of the Goods and Services Tax have thus been laid out. The power to levy GST is drawn from Article 246A proposed in the Constitutional Amendment Act. In pursuance of the same Section 7 of the CGST / SGST Act and Section 4 of the IGST Act levy the respective taxes also determining the incidence of the respective taxes therein. Subsequently Section 7 along with Section 9 and Schedule III also lay down the liability to be taxed. Section 8 explicates the special case of Composition Levy and Section 10 has imbibed within it the special nature of the Indian State conferring special powers on the government for making exemptions from tax. Thus the legality of the tax has been established and the path has been paved for understanding the procedural intricacies of the proposed taxation regime.
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