Genesis
The inclusion of several indirect taxes at various levels of the supply chain hampered the Indian tax system. This resulted in a complicated and fragmented tax framework that included excise duty, service tax, value-added tax (VAT), central sales tax (CST), and other taxes.
These led to tax cascading (tax on tax), raising the entire tax burden on goods and services.
The primary goal of GST is to simplify the tax system by substituting a single indirect tax for several indirect levies. It tries to eliminate tax cascading by establishing a uniform tax structure.
The discussion on indirect tax reforms began during the tenure of Prime Minister Rajiv Gandhi in 1986. A proposal for introducing a Modified Value Added Tax was initiated by the then Finance Minister Vishwanath Pratap Singh, aiming to streamline the indirect tax system.
Manmohan Singh, finance minister in PV Narasimha Rao-led government set up the Tax Reforms Committee under the chairmanship of Raja J. Chelliah in 1991. Foundations were laid for rolling out a nationwide value-added taxation (VAT) regime in the country, which subsequently lead to a GST structure.
A meeting between PM AB Vajpayee and his economic advisory panel in 2000, which included three former RBI governors, namely IG Patel, Bimal Jalan, and C Rangarajan, proposed a single common Goods and Services Tax.
The idea of a nationwide GST in India was first proposed by the Kelkar Task Force on Indirect taxes in 2000. Vijay Kelkar was also the Chairman of the Finance Commission until January 2010.
He was earlier Advisor to the Ministry of Finance (2002–2004) when Shri Jaswant Singh was the FM, and is known for his role in economic reforms in India.
Prior to this, he remained Finance Secretary, Govt. of India, 1998–1999, when Yashwant Sinha was the finance minister. and in 1999.
The Kelkar Task Force on indirect tax reforms, chaired by Vijay Kelkar, suggested the introduction of a national-level GST in 2004.
The Empowered Committee of State Finance Ministers (EC) was formed in 2006, with Asim Dasgupta, the FM of West Bengal to design the GST model.
The proposed national-level GST by April 2011 was announced during the budget speech in 2010 by the Manmohan Singh government's FM P. Chidambaram.
The Constitution (115th Amendment) Bill was introduced in Parliament in 2011 to amend the Constitution for the implementation of GST. However, it faced resistance and could not be passed.
The Standing Committee headed by the BJP's former Finance Minister Yashwant Sinha presented its report on GST in 2013.
The Central Government and the States reached a broad consensus in 2015 on key aspects of GST under Finance Minister Arun Jaitley in the new government led by Prime Minister Narendra Modi.
The objective was to replace the prevailing complex and fragmented tax structure with a unified system that would simplify compliance, reduce tax cascading, and promote economic integration.
The Empowered Committee of State Finance Ministers prepared a design and roadmap, releasing the First Discussion Paper in 2009.
The Constitution Amendment Bill was introduced in 2011 by Shri Pranab Mukherjee in the Shri Manmohan Singh led UPA Government.
After years of deliberation and negotiations between the Central and State Governments, the Constitution (122nd Amendment) Bill, 2014, was introduced in Parliament. The Bill aimed to amend the Constitution to enable the implementation of GST.
The Constitution Amendment Bill was passed by the Lok Sabha in May, 2015. The Bill with certain amendments was finally passed in the Rajya Sabha and thereafter by the Lok Sabha in August, 2016.
Further, the Bill has been ratified by the required number of States and has since received the assent of the President on 8th September, 2016 and has been enacted as the 101st Constitution Amendment Act, 2016.
The GST Council was notified w.e.f. 15th September, 2016. For assisting the GST Council, the office of the GST Council Secretariat was also established.
The GST Council, consisting of the Union Finance Minister and representatives from all States and Union Territories, was established to make decisions on various aspects of GST, including tax rates, exemptions, and administrative procedures. It played a crucial role in shaping the GST framework in India.
On 1st July, 2017, GST laws were implemented, replacing a complex web of Central and State taxes. Under the Indian GST, goods and services are categorized into different tax slabs, including 5%, 12%, 18%, and 28%.
Some essential commodities are exempted from GST, Gold and job work for diamond attract low rate of taxation. Compensation cess is being levied on demerit goods and certain luxury items.
To prepare for the implementation of GST, extensive efforts were made to build the necessary technological infrastructure and train tax officials and businesses. GST Network (GSTN), a not-for-profit company, was created to provide the IT backbone for the GST system, including taxpayer registration, return filing, and tax payments.
Since its implementation, the Indian GST has undergone various amendments and refinements based on feedback from businesses and the evolving economic scenario. While the GST implementation initially posed challenges for businesses in terms of understanding the new compliance requirements and adapting to the changes, it has gradually settled into the Indian tax landscape.
It can be said that the history of GST in India showcases a monumental shift in the country's tax structure, aiming to create a more unified, efficient, and transparent indirect tax regime for the benefit of businesses and the economy as a whole.
GST and Centre-State Financial Relations
The implementation of GST has brought about a fundamental shift in the financial relations between the Central Government and the State Governments in India. GST is a unified tax system that replaced multiple indirect taxes levied by both the Central and State Governments.
Under GST, both the Central and State Governments share the authority to levy and collect taxes on goods and services. This has led to greater harmonization and uniformity in the tax structure across States, promoting economic integration.
The GST system follows a dual structure, comprising Central GST (CGST) and State GST (SGST), levied concurrently by the Central and State governments, respectively. Additionally, an Integrated GST (IGST) is levied on interstate supplies and imports, which is collected by the Central Government but apportioned to the destination state.
In terms of revenue distribution, the GST Council plays a crucial role. It is a joint forum consisting of the Union Finance Minister and representatives from all States and Union Territories.
The Council makes decisions on various aspects of GST, including tax rates, exemptions, and revenue sharing between the Central and State Governments.
Except for one decision, all decisions of the Council were taken by consensus. Only the GST on lottery was decided on voting. This is not to say the decisions have been unanimous.
To ensure a smooth transition to the GST regime and address any revenue losses incurred by the States, a compensation mechanism was established.
A GST compensation fund is created from which the state would be paid the shortfall every two months by the Centre. This corpus is funded through a compensation cess that is levied on so-called 'demerit' goods. The GST compensation collected by the central government is done through the GST compensation cess, which is levied on certain luxury and demerit goods, such as cigarettes, aerated drinks, and SUVs.
The Central Government was committed to providing compensation to the States for any revenue shortfall during the initial years of GST implementation. This compensation was meant to bridge the gap between the expected revenue growth and the actual revenue collected by the States.
It has the potential to reduced tax barriers and streamlined the tax system, leading to improved efficiency and competitiveness in the Indian economy. The successful implementation of GST relies on a cooperative and consensus-based approach between the Central and State Governments. It can transform financial relations, ensuring greater coordination and efficiency in the Indian tax system.
Salient Features of GST
Goods and Services Tax (GST) is a comprehensive indirect tax levied on the supply of goods and services in India. Here are some of the salient features of GST:
One Nation, One Tax: GST replaced multiple indirect taxes levied by the Central and State Governments, such as excise duty, service tax, value-added tax (VAT), and others. It brought uniformity in the tax structure across India, eliminating the cascading effect of taxes.
Dual Structure: GST operates under a dual structure, comprising the Central GST (CGST) levied by the Central Government and the State GST (SGST) levied by the State Governments. In the case of Inter-state transactions, Integrated GST (IGST) is applicable, which is collected by the Central Government and apportioned to the respective State. Import of goods or services would be treated as inter-state supplies and would be subject to IGST in addition to the applicable customs duties.
Destination-based Tax: GST is a destination-based tax, levied at each stage of the supply chain, from the manufacturer to the consumer. It is applied to the value addition at each stage, allowing for the seamless flow of credits and reducing the tax burden on the end consumer.
Input Tax Credit (ITC): GST allows for the utilization of input tax credit, wherein businesses can claim credit for the tax paid on inputs used in the production or provision of goods and services. This helps avoid double taxation and reduces the overall tax liability.
GST would apply on all goods and services except Alcohol for human consumption. GST on five specified petroleum products (Crude, Petrol, Diesel, ATF & Natural Gas) would by applicable from a date to be recommended by the GSTC. Tobacco and tobacco products would be subject to GST. In addition, the Centre would have the power to levy Central Excise duty on these products. Exports are zero-rated supplies. Thus, goods or services that are exported would not suffer input taxes or taxes on finished products.
Threshold Exemption: Small businesses with a turnover below a specified threshold (currently, the threshold is ₹ 20 lakhs for supplier of services/both goods & services and ₹ 40 lakhs for supplier of goods (Intra–Sate) in India) are exempt from GST. For some special category states, the threshold varies between ₹ 10-20 lakhs for suppliers of goods and/or services except for Jammu & Kashmir, Himachal Pradesh and Assam where the threshold is ₹ 20 lakhs for supplier of services/both goods & services and ₹ 40 lakhs for supplier of goods (Intra–Sate). This threshold helps in reducing the compliance burden on small-scale businesses.
Composition Scheme: The composition scheme is available for small taxpayers with a turnover below a prescribed limit (currently ₹ 1.5 crores and ₹ 75 lakhs for special category state). Under this scheme, businesses are required to pay a fixed percentage of their turnover as GST and have simplified compliance requirements.
Online Compliance: GST introduced an online portal, the Goods and Services Tax Network (GSTN), for registration, filing of returns, payment of taxes, and other compliance-related activities. It streamlined the process and made it easier for taxpayers to fulfill their obligations.
Anti-Profiteering Measures: To ensure that the benefits of GST are passed on to the consumers, the government established the National Anti-Profiteering Authority (NAA). The NAA monitored and ensured that businesses do not engage in unfair pricing practices and profiteering due to the implementation of GST. All GST anti-profiteering complaints are now dealt by the Competition Commission of India (CCI) from 1st December, 2022.
Increased Compliance and Transparency: GST aims to enhance tax compliance by bringing more businesses into the formal economy. The transparent nature of the tax system, with the digitization of processes and electronic records, helps in curbing tax evasion and increasing transparency.
Sector-specific Exemptions: Certain sectors, such as healthcare, education, and basic necessities like food grains, are given either exempted from GST or have reduced tax rates to ensure affordability and accessibility.
Accounts would be settled periodically between the Centre and the States to ensure that the credit of SGST used for payment of IGST is transferand by the Exporting State to the Centre. Similarly, IGST used for payment of SGST would be transferred by the Centre to the Importing State. Further, the SGST portion of IGST collected on B2C supplies would also be transferred by the Centre to the destination State. The transfer of funds would be carried out on the basis of information contained in the returns filed by the taxpayers.
It's important to note that the GST framework is subject to changes and amendments are passed based on the evolving needs of the economy and the Government's policy decisions.
In order to implement GST, Constitutional (122nd Amendment) Bill (CAB for short) was introduced in the Parliament and passed by Rajya Sabha on 03rd August, 2016 and Lok Sabha on 08th August, 2016. The CAB was passed by more than 15 states and thereafter Hon’ble President gave assent to “The Constitution (One Hundred and First Amendment) Act, 2016” on 8th of September, 2016. Since then, the GST council and been notified bringing into existence the Constitutional body to decide issues relating to GST.
On September 16, 2016, Government of India issued notifications bringing into effect all the sections of CAB setting firmly into motion the rolling out of GST. This notification sets out an outer limit of time of one year, that is till 15-9-2017 for bringing into effect GST.
GST COUNCIL
As per Article 279A (1) of the amended Constitution, the GST Council has to be constituted by
(1) the President within 60 days of the commencement of Article 279A. The notification for bringing into force Article 279A with effect from 12th September, 2016 was issued on 10th September, 2016.
(2) As per Article 279A of the amended Constitution, the GST Council which will be a joint forum of the Centre and the States, shall consist of the following members: -
a) Union Finance Minister - Chairperson
b) The Union Minister of State, in-charge of Revenue of finance - Member
c) The Minister In-charge of finance or taxation or any other Minister nominated by each State Government - Members
As per Article 279A (4), the Council will make recommendations to the Union and the States on important issues related to GST, like the goods and services that may be subjected or exempted from GST, model GST Laws, principles that govern Place of Supply, threshold limits, GST rates including the floor rates with bands, special rates for raising additional resources during natural calamities/disasters, special provisions for certain States, etc.
(3) The Members of the Goods and Services Tax Council referred to in sub-clause (c) of clause (2) shall, as soon as may be, choose one amongst themselves to be the Vice-Chairperson of the Council for such period as they may decide.
(4) The Goods and Services Tax Council shall make recommendations to the Union and the States on- (a) the taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed in the goods and services tax; (b) the goods and services that may be subjected to, or exempted from, the goods and services tax; (c) model Goods and Services Tax Laws, principles of levy, apportionment of Goods and Services Tax levied on supplies in the course of inter-State trade or commerce under article 2094 and the principles that govern the place of supply. (d) the threshold limit of turnover below which goods and services may be exempted from goods and services tax; (e) the rates including floor rates with bands of goods and services tax; (f) any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster: (g) special provision with respect to the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and (h) any other matter relating to the goods and services tax, as the Council may decide.
(5) The Goods and Services Tax Council shall recommend the date on which the goods and services tax be levied on petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel.
(6) While discharging the functions conferred by this article, the Goods and Services Tax Council shall be guided by the need for a harmonised structure of goods and services tax and for the development of a harmonised national market for goods and services.
(7) One-half of the total number of Members of the Goods and Services Tax Council shall constitute the quorum at its meetings.
(8) The Goods and Services Tax Council shall determine the procedure in the performance of its functions.
(9) Every decision of the Goods and Services Tax Council shall be taken at a meeting, by a majority of not less than three fourths of the weighted vores of the members present and voting, in accordance with the following principles, namely:
(a) Go the vote of the Central Government shall have a weightage of one third of the toral votes cast, and (b) the votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast,
in that meeting.
(10) No act or proceedings of the Goods and Services Tax Council shall be invalid merely by reason of-
(a) any vacancy in, or any defect in, the constitution of the Council; or (b) any defect in the appointment of a person as a Member of the Council; or (c) any procedural irregularity of the Council not affecting the merits of the case.
(11) The Goods and Services Tax Council shall establish a mechanism to adjudicate any dispute-
(a) between the Government of India and one or more States; or (b) between the Government of India and any State or States on one side and one or more other States on the other side; or (c) between two or more States, arising out of the recommendations of the Council or implementation thereof.
GST Council Meetings
The GST Council is a constitutional body responsible for making recommendations on issues related to the implementation of the Goods and Services Tax (GST) in India. The first meeting of the GST Council was held on September 22-23, 2016, and since then, the Council meets periodically to deliberate and decide on various issues related to GST.
The Council has been instrumental in deciding key issues related to the GST such as tax rates, exemptions, thresholds, and administrative procedures.
During its meetings, the GST Council ideally takes decisions through a consensus-based approach. However, every decision of the GST Council is taken by a majority of not less than three-fourths of the weighted votes of the members present and voting with a weightage of one-third of the total votes cast to the Centre and a weightage of two-thirds of the total votes cast to the States, promoting the spirit of the co-operative federalism.
The Council has so far held 49 meetings to date, and its decisions have had a significant impact on the GST implementation in India. Some important decisions taken in the GST Council meeting are:-
For encouraging the self-reporting businesses, the GST Council in its 24th Meeting introduced new e-way bill mechanism.
The GST Council in its 35th Meeting approved the roll out of e-invoicing system in GST, a digital mechanism for generating and reporting invoices in a standardized format under the GST regime in India. The e-invoicing threshold has been further reduced and it is made mandatory for small firms with annual turnover of ₹5 crore or more to issue e-invoices for business-to-business supplies from August 1, 2023.
Under the special scheme introduced for real estate Sector, the Council in its 33rd and 34th meetings, the Council reduced the effective rate from 12% to 5% on non-affordable and from 8% to 1% on affordable housing scheme applicable under construction properties.
For promoting green energy initiatives, the GST Council in its 36th Meeting reduced the GST rates on all the electric vehicles from 12% to 5% and Electric buses having occupancy capacity of more than 12 people exempted from GST.
The GST Council in its 42nd Meeting approved the Enhancement in the features of Return filing process and QRMP scheme was rolled out for small scale business.
As a relief measure during COVID-19 pandemic, the Council in its 43rd and 44th Meeting approved the rationalization of duty on specified COVID related goods.
The GST Council in its 47th Meeting approved certain trade facilitation measures by way of amendment in CGST Rules like change in formula for calculation of refund in inverted duty cases, further waiver of late fees for delay in filing of GSTR-4, additional modes for payment of tax, etc.
The Council in its 49th meeting has approved the creation of National Bench of the Goods and Services Tax Appellate Tribunal (GSTAT) in principle. The National Bench of the Appellate Tribunal shall be situated at New Delhi. GSTAT shall be presided over by its President and shall consist of one Technical Member (Centre) and one Technical Member (State).
All GST anti-profiteering complaints are now dealt by the Competition Commission of India (CCI) from December 1, 2022. Prior, the National Anti-profiteering Authority (NAA) was set up in November, 2017 to check unfair profiteering activities by registered suppliers and ensure that commensurate benefits of reduction in GST rates on goods and services and of the input tax credit are passed on to consumers by way of reduction in prices. Initially, it was set up for two years till 2019, but was later extended further.
Simplification and auto-population of GST Returns, making compliance easier for taxpayers.
Integrating e-invoices with the e-way bill system and GST returns, promoting ease of doing business.
Introduction of the dynamic QR code on invoices to facilitate digital payment.
Rate Rationalization: 226 Items under 28% GST slab reduced to 37 items till now.
Relations between the Union and the States are often tested in the GST Council Meetings.
The authority to levy a tax is derived from the Constitution of India which allocates the power to levy various taxes between the Union Government and the State Governments.
An important restriction on this power is Article 265 of the Constitution which states that "No tax shall be levied or collected except by the authority of law"
In recent years, the fiscal capacity, and discretion of the Union government in collecting and disbursing promised tax revenue to states has remained highly volatile. Union Government has exclusive powers to impose taxes which are not specifically mentioned in the state or concurrent lists. Some taxes imposed using these powers include Gift tax, wealth tax and expenditure tax.
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