The tabling of the Constitution Amendment Bill in the Lok Sabha on Friday is indeed a welcome step, and signals the Government’s serious intention of implementing this much-awaited Goods and Services Tax (GST) in April 2016. As the Finance Minister commented, this is one of the most important tax reforms since India’s independence. It enables the Centre and states to concurrently tax supplies of goods and services across the supply chain with a seamless credit mechanism.
The perusal of the Constitution Amendment Bill suggests that the Centre has more than met the states’ demands towards fostering the spirit of cooperative federalism. The Bill, adhering to the demands of states, excludes alcohol for human consumption. Petroleum goods, though included, will attract GST from a date notified based on the recommendation of the GST Council. The sense is that petroleum goods would be zero rated to begin with under the GST, with the provision to levy additional duties and taxes. Compensation to the states for any loss of revenues due to the implementation of GST for a period of five years is another feature of the Bill.
While these were known facts, what came as a surprise was the Centre conceding to an additional 1% origin-based tax on supply of goods in the course of interstate trade or commerce of goods, to be collected by the Government of India for a period of two years and assigned to the states. This major concession of an origin-based tax in a GST scenario, which is fundamentally destination based, could have been avoided.
This concession of additional tax is primarily to assuage the producing states, and will result in them collecting these taxes over and above the GST revenues. This will unnecessarily complicate the tax system and create an element of cascading, as it appears that this tax would be outside the GST credit chain. With the Centre agreeing to compensate the states for any loss due to GST, there was no need to create this origin-based exception. Hopefully, sense will prevail among the states to remove this additional tax of 1% as the Parliament debates the Bill.
While all these compromises will result in a less than ideal GST structure, it at least paves the way for its potential implementation in April 2016. The Bill brings some clarity on all the taxes and duties that will be listed within GST both at the Centre and the state level, including entry tax and the levy of integrated GST on goods and services on inter- state transactions. The concept of declared goods has also been dispensed with under the GST structure.
Another important aspect of the Bill is the structure and functioning of the GST Council. It is imperative to understand this body, as it has the power to make recommendations on a range of issues such as base, threshold limits, taxes to be included, exemptions, model law, principles of levy, place of supply rules, floor rates with bands and special provisions for specified states.
Fundamentally, the GST design and structure and its evolution will depend on the collective wisdom of this Council. The fact that this Council will be guided by the principles of creating a harmonised GST structure for a national common market provides some degree of comfort.
This article was published in Hindu Business line on 21 December 2014.