GST & Constitutional Amendment

GST & Constitutional Amendment S M Sinha Addl.Commissioner, Commercial Tax (Retd.) Lucknow, UP The proposed 122 nd Constitutional Amendment to the Constitution has paved the way for introduction of GST in India the most awaited indirect tax reform. It has also settled down the controversy that the issue of GST design is not the top priority as desired by many States. Constitutional amendment is a bigger priority for the Centre rather than settling down issues of rate of tax, exemption and threshold etc. While tabling this amendment in the Lok Sabha, the Finance Minister Mr. Arun Jaitley has said that this is single biggest tax reform since independence. This amendment proposes conferring concurrent taxing powers to Union as well States including Union Territories to make laws for levy and collection of goods and service tax on every transaction of goods or services or both except those which are going to be exempt under GST. There are certain indirect taxes such as Central Excise Duty, Additional Excise Duty, Countervailing Duty, Service Tax etc. Which are going to be subsumed under CGST while indirect taxes of State like VAT, Luxury Tax, Entertainment Tax, Entry Tax not in lieu of octroi, Purchase Tax etc are going to be subsumed under State GST. It is also expected that implementation of GST will help in building a common national market for goods and services as GST design and procedures are expected to be common throughout the country. Before we discuss the recently proposed constitutional amendment regarding GST, it is desirable to understand the earlier provisions regarding indirect taxation under the Constitution of India : In the Seventh schedule to the Constitution, in List I that is Union List, the entry 92 A speaks: (a) Taxes on the sale or purchase of goods where such sale or purchase takes place in the course of inter state trade or commerce. (b) entry 92 C : Taxes on Services. In the Seventh Schedule in List II that is State List, the entry 54 speaks : Taxes on sale or purchase of goods other than newspaper subject to the provision of entry 92A of List I. The above provisions make it abundantly clear that State Government was to tax goods on the sale or purchase where such sale or purchase takes place inside the state while Centre to tax such sale or purchase which takes place from one state to another. The Constitution has very clearly defined the taxing powers of states as well as Centre. In the light of this federal nature of division of powers between Centre and States regarding indirect tax, the present amendment to the Constitution, that is 122 nd amendment, is to be seen. Constitutional Amendments (122 nd ) Article 246A : This newly inserted Article read as under: 1

(1) Notwithstanding anything contained in article 246 and 254, Parliament, and, subject to clause 2, the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or such State (2) Parliament has exclusive power to make laws with respect to goods and services tax where supply of goods, or of services, or both takes place in the course of inter state trade or commerce. The above amendment suggests that Centre has retained its exclusive power to tax interstate transaction of goods but exclusive domain of states to tax intra state transactions of goods have been shared between Union and States along with Union Territories. Article 246A (1) does not demarcate the boundaries of Union and States regarding taxing of intra state transaction of goods. Moreover, vesting of same type of power in two parallel institutions carries within it the seeds of possible conflict and Centre and States are no exception to it. So it is in the larger interest of all the stakeholders as well as GST itself that the amendment should clearly demarcate the respective boundaries with regard to legislation between Centre and States. Demarcation of legislative powers will help in defining boundaries of executive powers of respective authorities. There should be no overlapping of procedures and provisions on various issues of GST. The Constitution Of India has provided a mechanism for resolving any conflict between two such legislative powers. Article 254 (1) clearly says that if a conflict arises between two such legislatures, the law made by Parliament shall prevail whether State Legislature has made such law before or after the law made by Parliament. Article 254 (2) further says that if the matter has been reserved for the consideration of the President and has received his assent, then such law will prevail in the State. But the Parliament has power to enact law at any time to amend, vary or repeal such law made by State Legislature. So if GST is going to be a part of the concurrent list, it is clear that Centre is going to enjoy a greater role so far as taxation of goods in intra state transactions are concerned. The First Discussion Paper on GST, issued by Empowered Committee in November 2009, clearly speaks about that GST is going to be a destination based tax. That means that GST will be levied and collected by that State where goods or services or both are going to be consumed. This principle of taxation is going to help those states which have higher base of population or where goods or services are going to be consumed more. States like Uttar Pradesh, Madhya Pradesh, Bihar etc. Would have yielded better revenue if this principle was to be followed. But whether present proposed amendment to the Constitution has safeguarded that provision,is a matter which needs an analysis. Article 269A says: Parliament may, by law, formulate the principles for determining the place of supply, and when a supply of goods, or of services, or both takes place in the course of inter state trade or commerce. The word when here creates some suspicion on the intention of the Centre. Is some other point, other than destination, is going to be the basis of taxation of inter state supply of goods or services or both? If not, then what was the necessity of mentioning the word when, because that will be a deviation from the settled principle of destination. Similarly the newly constructed Place of Supply Rules, also determines the point to tax services in 2

certain cases on service providers. But in most cases service providers are located in different states then that state where service is actually consumed. In such cases also, service tax will be levied and collected by that state where service is not actually consumed. This again appears to be a deviation from the principle of destination. The Constitutional Amendment vide entry no. 18 has made arrangements for assignment of additional tax on supply of goods in the course of inter state trade or commerce. Sub section 2 of entry18 says that the net proceeds of additional tax on supply of goods in any financial year, be deemed to have been assigned to the states from where the supply originates. The fact is that most of the supplies in inter state trade originates from the manufacturing states or the so called rich states. Hence, this provision gives incentive to the interest of manufacturing states and protects their financial interest for a period of two years or such other period as the GST Council may recommend. This additional tax of 1% on inter state trade of goods is going to be realized from consuming states and amount of tax so realized, will be distributed to manufacturing states from where the supply of goods have originated. This provision is again going to be a burden on consuming state like Uttar Pradesh and is a deviation from the principles of destination. Article 279A : Another important constitutional amendment is the new article 279A. This article suggests the constitution of a GST Council to be headed by Union Finance Minister and Union Minister of State for Finance or Revenue as its Member. Other Members include the Minister in Charge of Finance or Taxation or such Minister nominated by each State Government or Union Territories. This Council shall make recommendations to Union, States and Union Territories on almost all vital issues related to GST like rate of tax, exemption, threshold, model of GST laws, principle of levy, apportionment of IGST and Principles that govern Place of Supply Rules. This Council shall also recommend special rates for specified period or raising additional resource during any natural calamity or disaster and any other matter related to GST. The Council shall also recommend as on what date GST will be levied on Petroleum and its product, natural gas and Aviation Turbine Fuel. This shows that levy on these items have been postponed to such date as GST Council will decide. States were agitating since start of discussion on GST, that these items should not fall under the ambit of GST as they will loose considerable amount of revenue. If we take the case of Uttar Pradesh, UP alone got revenue from above items to the tune of Rs 10929.68 Cr in FY 2013 14. How this revenue is going to be compensated, is a matter to be seen in future? The other important feature of this amendment is the weight age system of GST Council and its role in decision making. Sub section 9 0f article 279A says that every decision in the Council shall be taken by a majority of not less than 3/4 th of the weighted votes of the member present. Sub section 9 (a) of this article says that Central Government shall have a weight age of 1/3 rd of total vote cast and sub section of 9 (b) says that votes of all states taken together shall have a weight age of 2/3 rd of total vote cast. This means that no decision in the Council can be taken without the consent of the Central Government as all the states taken together do not have the requisite strength of 3/4 th of total vote cast. Thus Central Government enjoys a type of VETO power in GST Council. No state in the GST Council can 3

get the rate of GST amend or get any goods exempt without the assistance from Central Government. Any State not in the line of the Central policy can hardly protect the fiscal health of its state intact. This endangers the basic fabric of fiscal federal structure as envisaged under the Constitution. The structure of the GST Council as discussed above reflects that it is going to be the apex indirect tax policy making body in the country. This also reflects that Centre is going to play a vital role in successful implementation and administration of GST. States have a little role to play in decision making process of the GST Council. This can be a matter of concern to States that if all the major decisions regarding design issues of GST, model law and procedures of GST are going to be taken by the GST Council, then what is left with States to do for the safeguard of their state revenue? How the States are going to monitor their own fiscal health? How the states are going to fulfil their social responsibility that poor are not taxed disproportionately and their cottage industries are not adversely affected by this so called tax reform process? Therefore, a clear cut division of power needs to be demarcated between Centre and states with regard to GST. States should be given flexibility to decide about the basic design issues of GST like rate of tax on basic necessity goods and services, exemption and threshold, rate of tax on goods of local importance etc. according to needs of the states. The only solace to states in the proposed constitutional amendment is entry 19 which provides compensation to states for the loss of revenue arising on account of implementation of GST for a period which may extend to five years. This compensation mechanism provided under constitution gives some credibility to Centre and keep Centre out of confidence crisis which took place during CST compensation regime. But this clause 19 mentions that compensation to the States will be given on the recommendations of the GST Council. The GST Council, as its constitution stands, will always be under control and influence of the Central Government, so its recommendations can be biased due to any possible political reasons.hence it is required that instead of GST Council recommendations, there should be provisions for the recommendations of any independent Constitutional body like Finance Commission, so that Central Government could not influence the decision of that independent body regarding compensation to the states. We have this experience with the Centre while issue of CST compensation was taken up by the states, so this clause 19 needs amendment to that extent. Finally let us take a look at the Statement of Objects and Reasons (SOR) circulated by Government of India along with the Constitutional Amendments. It can be summarized as follows : (1) SOR nowhere speaks that GST is a destination based tax as committed by Empowered Committee in its First Discussion Paper in November 2009. (2) How model GST legislation, dispute resolution, existing tax holiday schemes, IGST credit mechanism will be transitioned? (3) What would be expected rate of SGST & CGST and what will be the procedure of calculating RNR? 4

(4) What will be time schedule for consolidation of IT infrastructure? (5) Whether the recommendations of GST Council are mandatory and will be followed by all states including Union Territories along with Jammu & Kashmir in the light of its special status by virtue of Article 370? (6) Whether the inclusion of GST in the Concurrent List of Seventh Schedule does not disturb the federal structure of the Constitution? The above and many more such questions are still in search of their answers. The fact is that the interest of Centre and States need not always coincide due to sharp differences in the structure of the economy. It needs considerable efforts to make successful harmonized structure, common national market and harmonized administrative system. Moreover, transitional arrangements under GST require a uniform administrative process to be followed throughout the country. The experience of working with the taxation system suggests that operational issues and administrative process take considerable time in settling down any major tax reform. Should we hope that Constitutional Amendment which has been tabled in Parliament and as discussed above can assure that India can go ahead with an ideal or flawless GST? Do we have framed such GST structure which can be administered without any hassle? The structure should be such which does not disturb the fundamentals and basic features are not compromised. These features always need to be improved as during the process, we experience many procedural and implementational hurdles. It should be ensured that GST reform does not suffer because of poor management specially during transition period. Administrative and implementational issues need to be discussed at length and harmonization methods 0f GST principles and processes need to be widely circulated among all the stakeholders of GST so as to make the system more transparent and adaptable. ******************* 5