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GST: ADDING A NEW HORIZON TO REGIME

Vibhuti Nakta1 & Kanupriya Grewal2

ABSTRACT

GST, one of the most awaited dream projects for the unification of taxation policy of the government has now become a reality as the Act has been passed. Earlier there were different forms of prevalent in the Indian society. being a democratic country has to look into the welfare of the people at large and her wings has to devise the policies in such a way that equal representation in economic sphere should be the key to success; but due to the existing taxing policies the citizens were not being equally represented in terms of paying taxes and also in terms of exemptions. So, a need to develop such a mechanism which can curb this menace of inequality in taxation and can bring the utmost economic reforms. Goods and Services Tax (GST) may be defined as a tax on goods and services, levied at every point of sale or provision of goods and services. The tax reforms which this proposed legislation is going to bring can make our economic structure more vibrant. The article is an attempt to give an overview of the upcoming model of India’s most awaited tax regime.

Keywords: Taxation, GST, VAT, JWG, CENVAT, Credible and non-credible taxes, direct and , revenue- expenditure

1 Research Scholar, Punjab University 2 Research Scholar, Punjab University

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INTRODUCTION

The taxation was born and conditioned with civilization. Its structure and intricateness has further been developed with the advancement of the society. The sovereign authority of the Government to extract is the life of taxation, Governments’ need for resources is its bargaining power and human instinct of reluctance to sacrifice money is the reason for its mandatory imposition.3

Speaking in layman’s term tax is a fee charged by a Government on a product, income or activity. It is when levied directly on personal or corporate income and indirect when charged upon price of goods or services. The aim of taxation is to finance public goods and utility services which can be further summarized into four main purposes i.e. Revenue, Redistribution, Re-pricing, and Representation.

The main purpose of tax is generation of revenue or to raise funds to be spent on utilities such as roads, schools and hospitals etc. which shall also include market regulation and legal system. The second purpose is redistribution, which means transferring wealth from the richer sections of society to poorer sections. A third purpose of taxation is re-pricing of certain commodities to increase or decrease their consumption. A fourth effect of taxation is representation or accountability by the people on account of their payment of taxes.

The word tax is derived from the Latin word ‘taxare’ which means ‘to estimate’. “A tax is not a voluntary payment or donation, but an enforced contribution, exactly pursuant to legislative authority" and is any contribution imposed by Government whether under the name of toll, tribute, impost, , custom, , subsidy, aid, supply, or other name.” (Black’s Law Dictionary)

HISTORY In India, the history of taxation dates back to ancient times and has reference in the Manu Smriti and Arthsastra. Records suggest that India always had a composite taxpaying population. Whether

3 C.S. Basavaraj , Demands of Globalization and Reforms in Direct and Indirect Taxes- A Study in Indian Context, UGC SPONSORED MAJOR RESEARCH PROJECT, Gulbarga University, Gulbarga 1 (2014).

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it was during Muslim regime wherein tax was imposed in form of , from non-Muslims, thus symbolizing their complete subjugation towards state and its laws. The Britishers brought in major change in the Indian taxation system. Though the entire system was built to suit their needs, but they contributed significantly in modernizing and bringing in scientific techniques and tools in taxation. Setting upon a broad tax regime was first done by Britishers.

Broadly taxation can be classified into: a) Direct Tax – It is the tax paid to the government directly by the assessee. The , and are classical examples of direct taxes in India. b) Indirect tax - When the taxes are paid indirectly, it comes under the purview of indirect taxes. It is the tax that is levied on goods or services rather than on persons or organizations. The excise duty; duty, and are examples of indirect taxes.

In India taxes are imposed by the Central Government and the State Governments. Some minor taxes are also levied by the local authorities such the Municipality. It is the from which these Centre, State and Local authorities derive the power to levy taxes, also the allocation of taxes between the Centre and the State is derived from Constitution. A significant restriction on this power is Article 265 which states. “No tax shall be levied or collected except by the authority of law”. Hence, each tax levied or collected has to be accompanied by a law, passed either by the Parliament or the State Legislature.

Article 246 of the Indian Constitution, relegates legislative powers which includes taxation, between the Parliament and the State Legislature.

“Article 246. - Subject-matter of laws made by Parliament and by the Legislatures of States. - (1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the ""). (2) Notwithstanding anything in clause (3), Parliament, and, subject to clause (1), the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the "").

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(3) Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the ""). (4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included in a State; notwithstanding that such matter is a matter enumerated in the State List.” Schedule VII enumerates these subject matters with the use of three lists – List - I entailing the areas on which only the parliament is competent to make laws List - II entailing the areas on which only the state legislature can make laws, and List - III listing the areas on which both the Parliament and the State Legislature can make laws upon concurrently.

It is also essential to enumerate certain Constitutional provisions dealing with imposition of taxes, these are:

Article 268–Duties levied by the Union which includes stamp and excise duties on medicinal and toilet preparations, shall be collected and appropriated by the States or in case of Union territories by the . Sub clause (2) of the article essentiates that proceeds of such taxes collected by States shall be assigned to the States itself. Article 269 entails list of certain duties and taxes levied and collected by the Union but assigned to the States these shall include duties on succession to property other than agricultural land, taxes on railway fares and freights, taxes on sale and purchase of newspapers etc. Article 270 Taxes levied and collected by the Union and distributed between the Union and the States I.e. Taxes on income other than agricultural income shall be levied and collected by the Government of India and distributed between the Union and the States in the manner provided in clause (2). Article 271 gives power to the Parliament to increase surcharge on certain duties and taxes for the union and in doing so, shall not be prevented by articles 269 and 270 and such proceeds shall form part of Consolidated Fund of India. Article 2724 taxes which are levied and collected by the Union and may be distributed between the Union and the States now stands repealed by the Eightieth Constitution Amendment Act.

4 INDIA CONST. (Eightieth Amendment Act, 2000), section 4 (w.e.f. 9th June, 2000).

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With regard to the distribution of taxes between the centre and the states, major amendments were made in the year 2000 and 2003 by introducing the 80th and 88th Amendment Acts which brought several central taxes and duties like corporation tax and custom duties at par with income tax except the agricultural income in respect of sharing with the states. The 88th amendment Act has inserted a new Article-268A which provides the levying of service tax by the centre.

DIFFERENT TYPES OF TAXES Important Central taxes are: · Customs duty – Tax on imports · Central Value Added Tax (CENVAT) – tax on manufacture · Service Tax – tax on specified services

Important State taxes are: · Central Sales Tax (CST) –tax on inter-State sale of goods · State Value Added Tax/State Sales Tax -tax on intra-State sale of goods · Works Contract Tax -tax on contracts involving sale of goods and services · Entry Tax -tax on entry of goods into a State · Other local levies

The present Sales tax structure has proved to be a burden due to the problem of of commodities and multiplicity of taxes. For instance, in this structure, before a commodity is produced, inputs are first taxed, and then after the commodity is produced with input tax load, output is taxed again. This causes an unjust double taxation with cascading effects. Hence, the Value Added Tax (VAT) had been introduced to replace such Sales tax structure which now is to be followed by a more harmonized regime of taxation i.e. the Goods and Services Tax commonly known as GST and also known as Harmonized VAT.

GOODS AND SERVICES TAX (GST)

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The GST is a Value added Tax (VAT) proposed to be comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at the national level. It will replace all indirect taxes levied on goods as well as services by the Indian Central and State governments. It is aimed at being comprehensive for most goods and services.5 “The success of GST depends on proper administration. Much will depend on its simplicity and efficient implementation, which are even more difficult in a disparate federal setup”.6

Origin of GST Goods and Services Tax also known as the Value Added Tax (VAT) or Harmonized Sales Tax (HST) was first contrived by a German economist during the 18th century. He envisioned a sales tax on goods that did not affect the cost of manufacture or distribution but was collected on the final price charged to the consumer.

Back drop of GST The structure of taxation in better refined since the introduction of VAT. Agreeing with Bagchi Report which says that the tax regime in India was “archaic, irrational, and complex – according to knowledgeable experts, the most complex in the world.”7

The Indian indirect tax regime is characterized by various tolls, such as excise duty, customs duty, VAT, central sales tax, service tax, which also includes local levies, such as octroi and entry tax. Historically, none of these taxes were creditable against one another, except a part of the Customs duty and excise; over the last few years, service tax has also been brought into the creditable basket. The excise duties, Customs duties and service tax belong to creditable taxes, while VAT, Central sales tax and octroi, belongs to non-creditable taxes.

It was clear and unambiguous that the Central and the state Government shall levy taxes independently and individually. Owing to which, over the past six decades both the Centre and

5GST JOURNEY SO FAR, KNOW GST HISTORY- GST INDIA; (Jun 15, 2017, 10:10 AM) www.gstseva.com/gst/history/. 6 Sukumar Mukhopadhyay -Former Member, Central Board of Excise & Customs, BUSINESS ENVIRONMENT, CHARTERED FINANCIAL ANALYSTS, April 2008, 16. 7 Amaresh Bagchi, “Reform of Domestic Taxes in India: Issues and Options”, NATIONAL INSTITUTE OF PUBLIC FINANCE AND POLICY, New Delhi, 1994.

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State Governments have industriously worked towards amplifying their respective tax regimes, and still remained like two corners of the ocean, that would never ever meet. In reality until the introduction of VAT till recent, even a single regime such as service or sales tax frequently entailed multiple taxes and this was more than often prominent in sales tax, since sales tax imposed across different states was non-creditable.

On implementation of Fiscal Responsibility and Budget Management (FRBM) Act, 2003 the Kelkar Task Force had pointed out that although the indirect in India continues to progress in the course of VAT principles since the year 1986, still the existing system of goods and services suffer many challenges and lacunas. It reported that due to fragmentation of the tax base between the centre and the state, a lot of services contributing towards half the GDP are yet to be taxed appropriately which has led to low GDP ratio while causing distortions in the economy. The Task Force had suggested GST based on VAT system. VAT is modern and evolved system of sales tax. It is charged and collected by dealers on price paid by consumers. This was uniform basis agreed upon by the States to avoid unnecessary competition. Thus, the VAT replaced sales tax on 4th January, 2005.

The Empowered Committee constituted by the GOI provided rudimentary structure for uniform VAT laws, but the states had freedom to set their own valuation within their territory. It was in the year 2006-2007, the then finance minister P. Chidambram opined presence of consensus towards the introduction of the new tax regime at a national level in the form of GST. August 1st, 2010 was proposed as the date of introducing GST. It was evident that after GST came into force, it would replace the CENVAT and the Service Tax levied by the Centre and the VAT levied by the states, which are multi-stage value-added taxes. The Empowered Committee along with the Central Government prepared a roadmap for introducing national level GST from 1st of April, 2010. Owing to which in May 2007 the Empowered Committee and Central Government constituted Joint Working Group (JWG) to recommend GST model, which presented its report to Empowered Committee of State Finance Ministers in November, 2007. The Committee accepted and further sent the recommendations made by JWG to Government, which led to the outlining of the proposed GST design.

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All these developments point toward the government’s endeavor for successful implementation of GST.

On 10th November, 2009 the first discussion on GST by Empowered Committee of State Finance Ministers was released. In the year 2011 a proposed bill on GST was introduced by the then Finance Minister Mr. Pranab Mukherjee. The bill further went to Parliamentary Committee on finance led by Mr. Yashwant Sinha, who suggested changes in the bill.8 Even though the changes suggested were approved by Mr. Chidambram, who r returned Finance Ministry, still the bill could not make a passage through. Until recently, till 2015, the bill remained in hibernation, which now is stirred and after much efforts the bill was passed by Lok Sabha in 20159. Due to government’s lack of numbers in Upper House led long stand-off with opposition in 2016 and after several negotiations with state governments, and with passage of key bills a passage has been paved for launch of GST on July 1, 2017.10

CONSTITUTION 101ST AMENDMENT ACT: A STEP AHEAD To make financial relation between the Centre and the State more comprehensive, also to bring historical reforms in such relations, a change was required in the constitutional provisions resulting into the amendment of the Constitution. Through this amendment various articles were inserted. The Articles inserted are as follows:

Article 246 A: under clause (1) of the provision the state has been given the power to legislate on goods and services tax imposed by the Union or such state. Clause (2) gives the exclusive domain to the parliament with regard to supply of such goods and services tax that takes place in the course of interstate trade and commerce.

8 Shaji Vikraman, LOOKING BACK AT GST’S JOURNEY: HOW AN IDEA IS NOW NEAR REALITY, 31st March 2017, (Jun 15, 2017, 9:00 AM), www.indianexpress.com. 9 It was introduced as One Hundred and Twenty Second Amendment Act, 2017, constitutional amendment. The GST is governed by GST Council which is headed by the Union Finance Minister. 10 Ibid.

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Article 269 A: it provides the manner of distribution of taxes between the Union and the State that has been levied during inter-state trade and commerce. This amended provision further provides that the proceeds collected by levying the above-mentioned taxes will remain outside the purview of the consolidated funds.

Article 279 A: This article necessitates the formulation of GST council pursuant to approval of the . The amendment also brought changes in three lists provided in seventh schedule. Further it provides that Parliament shall, by law, on recommendation of GST Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years. This has resulted into Compensation Cess Bill.11

NEED FOR GST The famous Arthshastra by Kautilya reads out, ‘best taxation regime is the one which is liberal in assessment and ruthless in collection’. The proposed GST seems to be based on this very principle:

 Helps removing the cascading effect of taxes across all supply chain by bringing down the cost of doing business and thereby making economy competitive.  Eradicates multiplicity of taxes, rates, tolls etc.  Helps in removal of dual taxation on same transaction (e.g. VAT & Service tax on EPC (engineering, procurement and construction) contracts.  Considerable cost reduction.  Aims at uniformity of taxes across the territory, regardless of place of manufacture or distribution.  Greater certainty and transparency of taxes, ensuring tax compliance.  Will result in widening tax base henceforth leading towards increased revenue to the Centre and State.

11CONSTITUTION 101ST AMENDMENT ACT, 2016, (Jun 18, 2017, 9:30 AM), www.gktoday.in/blog/constitution- 101st-amendment-act-2016/.

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Pursuant to implementation of GST, India would obtain full efficacy of a single national VAT, while retaining a federal structure. This would be an answer to all the efforts that have been made towards its implementation. Among the several benefits of GST, uniformity of laws, greater transparency and neutrality of tax rates on various products and reduction of compliance formalities are being seen at the forefront. If GST is implemented as it is, it will have many benefits for the stakeholders and will lead to a better and healthy tax environment. The introduction of the GST shall reduce the overall incidence of indirect taxation and thereby the overall tax burden by removing the many deformities of the present tax system.

GST- THE PREFERRED TAX STRUCTURE The implementation of GST would ensure that India tax regime would match to the rest of the world and improve the international cost competitiveness of native goods and services. It will also foster a non-prejudiced tax structure that is neutral to business processes and geographical locations. Not only will it help get rid -off current regime of indirect taxes but shall also improve tax compliances.

Owing to its ability to uplift revenue in most neutral and impartial manner, more than 150 countries have adopted GST and with increase of international trade, GST has become a preferred global standard. Implementation of GST will remove impediment in the existing taxation system in India. It will remove multiple taxes and will streamline the administration and collection of indirect taxes.

GST- PROPOSED FRAMEWORK The design and implementation of GST across the country will be in the nature of dual GST, which shall be levied simultaneously by the Centre and the States. The unified tax will consist of Centre GST and State GST, which will be ordained, imposed and administered by respective governments at Centre and State level. The taxable base shall be same to both GST’s. The centre and state shall have separate legislations and both will have power to administer the taxes. The proposed tax system will be a more comprehensive regime and will subsume taxes in the nature of Central Excise Duty, Service Tax and VAT. In order to deal with complex issues relating to inter-state transactions, an innovative integrated GST is also under consideration.

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GST- LACUNAS There is no inbuilt mechanism in GST to provide or share the copies of statements recorded during the course of any investigation of tax and therefore it lacks transparency. Furthermore while adjudicating such cases provisions regarding written statement, show cause notice, filling of appeals etc. have to be made available online so as to make it more economically viable and time saving but no such provision has hitherto been inserted in the legislation.

GST- A VIABLE SOLUTION GST is an economically effective solution wherein a unified will be paid by the companies. It has been taken care, while framing the constitution of the GST Council, adequate representation has been given to the States so that they can have a say in the implementation of the tax laws with regard to their territories. GST can boost the economic growth by as much as two percentage points according to finance minister Arun Jaitley. Greater tax compliance has a potential to boost revenues for the government, helping narrow Asia’s widest deficit and allowing more funds to be allocated to schools and highways.12 Certain suggestions to improve functioning of its implementation are, firstly, to make it more effective and workable, the provisions of the proposed legislation should be made more transparent. Secondly, with implementation of GST the State governments will incur revenue losses which will enhance financial dependency of the States on the centre, in order to meet such exigencies, in the proposed GST model a path should be devised that help States overcome financial dependencies.

CONCLUSION Indian system of taxation of goods and services is characterized by distortionary tax on production of goods and services which leads to misallocation of resources hampering productivity and

12 WHAT IS GST AND HOW WILL YOU BENEFIT FROM IT? (Jun 18, 2017, 6:40 PM), www.timesnow.tv/business-economy/article/all-you-need-to-know-gst/56785.

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economic growth.13 To remove the barriers of the complex tax structure prevalent in the Indian society, a pure and simple tax like GST (unified taxation system) would help in making our economy more progressive. The Government while introducing GST has long term prospects in mind which will enhance our economy and also help India meet International standards.

13 GOODS AND SERVICES TAX (GST) INDIA- A SUMMARY, (Jun 19, 2017, 9:22 PM), http://googleweblight.com/i?u=http:// www.gstindia.com/goods-and-service-tax-gst-india-a-summary.

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