GST Structure

We are going to have a dual GST model. The Center and the States both, will levy GST on supply of goods and services. On Supply of goods and services in the course of Inter-state only Center will levy and collect taxes (IGST) which will be apportioned between Centre and States based on the recommendation of GST Council. The Center will have power to make place of supply rules in this regard. On supply of goods and services in the course of or International trade or commerce, states will not have any power to levy and collect taxes.

For the first two years under GST (or as GST Council would recommend), 1% additional tax apart from GST will be levied on inter-state sale of goods which will be assigned to the state of origin of supply of goods. The rules regarding the place of origin will be formed by the Parliament. The Central Government would also have power to grant exemption to any goods from this tax. The point to be noted here is that this tax is to be levied on goods only, thus the differentiation between goods and services would again resume significance.

The proposed amendment in Article 271 restricts the power of the Central Government to levy any surcharge on the GST. We may therefore, be in a better situation wherein GST will not be subjected to any surcharge. (cess -we may still have)

Further, tax on petroleum products will be covered in GST except for crude petroleum, high speed diesel, motor spirit, natural gas and aviation turbine fuel. For these five items, GST Council will specify the date from which GST will be levied. Tobacco & tobacco products; supply of newspapers & advertisements; luxuries, betting & gambling and entertainment & amusement are covered under the GST. However, alcoholic liquor for human consumption has been kept out of GST ambit.

The 122nd amendment will come into force from such date which Central Government may appoint by way of notification, after enactment. For enactment, it has to be passed by two-third majority by both houses of the Parliament of those present and simple majority of total membership of both houses. It has to be then approved by one-half of the state Governments, i.e. atleast 15 states. The said Bill has been passed by Lok Sabha on 6-5-2015 but could not be passed by Rajya Sabha. The same has now been referred to the select committee of the Rajya Sabha.

Fate of Bill in Parliament

It may be noted that 122nd Amendment Bill has since been passed by the Lok Sabha in May 2015 and was referred to the Select Committee by Rajya Sabha on 12.05.2015 .

Select Committee Report tabled in Rajya Sabha

The Select Committee of Rajya Sabha has since tabled its report on GST Bill [i.e., Constitution (122nd) Amendment Bill, 2014] on 22.07.2015. While it endorsed majority of provisions, Congress, AIADMK and Left parties have opposed the GST Bill in its existing form.

The Select Committee has suggested that Government may compensate to States for revenue loss for five years. The earlier version of the GST Bill provided that Center may compensate States for revenue loss for a period of upto five years.

The Committee also suggested that levy of additional 1% tax should be only on “all forms of supply made for a consideration”.

 The following issues emerge:

  • Functions of GST Council

The Bill empowered GST Council to make recommendations for the rates of goods and service tax including floor rates with bands. The Committee has recommended that the word ‘band’ may be defined in GST laws as following:

“Band”: Range of GST rates over the floor rate within which Central Goods and Service Tax (CGST) or State Goods and Service Tax (SGST) may be levied on any specified goods or services or any specified class of goods or services by the Central or a particular State Government as the case may be.

In its report, the Committee has mentioned that it was aware that while discharging the functions conferred upon the GST Council, it would be guided by the need for a harmonized structure of goods and services tax and for the development of a harmonized national market for goods and services. While construing above definition of ‘Band’ one has to ensure that harmonized structure of GST rates must not be altered.

The GST Council is also tasked with making recommendations on taxes that would be subsumed by the Central and State GST laws. It has been recommended that in the drafting of state GST laws, revenue sources of Panchayats, Municipalities etc. must be protected. State governments must also take measures to ensure adequate revenue flow to local bodies.

  • Voting pattern

The Committee found no merit in altering the voting pattern proposed in the Bill.

  • Dispute Settlement Authority

The Bill states that the GST Council would decide upon the modalities to

resolve disputes. The Committee has stated that the creation of a separate dispute settlement authority would hamper the functioning of the GST Council in general and the legislatures in particular.

  • Definition of ‘Supply’

The Bill proposed definition of ‘goods and services tax’ to mean any tax on supply of goods, or services or both. The Committee has opined that the term ‘supply’ should be defined in the various GST laws relating to CGST and SGST, and as such, it may not be appropriate to define the term ‘supply’ in the Bill.

  • Definition of ‘Services’

The Bill proposed to define ‘services’ to mean anything other than goods. The Committee is of the view that term ‘services’ had been so defined in order to give it wide amplitude so that all supplies that are not goods can broadly be covered within the ambit of services and no activity remains outside the taxable net. It also opined that this would also minimize disputes and there is no change proposed in the definition.

  • Additional Goods and Services Tax

The Bill proposed to levy non­cenvatable additional tax at 1% on inter­state supply of goods. The Committee felt that the provision of 1% additional tax in its present form may lead to cascading effect of taxes. Therefore, it has strongly recommended that following Explanation should be added for word ‘supply’:

Supply: “All forms of supply made for a consideration.”

  • Compensation to States

The Bill proposed that the Parliament ‘may’ compensate States for loss of revenue for a period which may be extended to five years. The Committee felt that there was no justification for substitution of the word ‘may’ with ‘shall’. It, has however, recommended that compensation should be provided for whole period of five years.

  • GST rates of banking services

The Committee recommended that the GST rate for the banking industry should be minimum, to ensure international competitiveness. If possible, banking services could be outside the purview of GST.

  • GSTN

The GSTN is the comprehensive back end infrastructure network for the management of tax data and reporting of the GST. The Committee noted that the Non Government shareholding in GSTN is dominated by private banks, and this is not desirable. It recommended that the Non Government Institutional shareholding be limited to public sector banks and financial institutions

It also stated that the information technology preparedness of states must be improved. Further, the IT infrastructure, unified tax credit clearing mechanism may be put in place.

  • Notes of Dissent

Three Notes of Dissent were submitted by Members of Parliament. Mr. Madhusudan Mistry, Mr. Mani Shankar Aiyar, and Mr. Bhalchandra Mungekar (INC) submitted one note of dissent. A separate note was submitted by Mr. A. Navaneethakrishnan (AIADMK). A third note was submitted by Mr.K.N. Balagopal and Mr. D. Raja (CPI). The four Members of Parliament opposed the 1% additional tax. Further, Mr. Navaneethakrishnan suggested that instead of the additional 1% tax, states should be permitted to retain 4% of centre’s share of IGST on all interstate supplies of goods. All three notes were in favour of modifying the voting pattern in the GST Council, by giving states three- fourth of the weighted votes, and the centre one- fourth.

Cabinet clears GST Amendments

The Union Cabinet on 29.07.2015 approved changes suggested by a Rajya Sabha Select Committee to the Goods & Services Tax Amendment Bill , including compensating the States for five years for loss of revenue.

Sharing of GST Revenue with States

The State Governments have not objected to the proposed formula of the Union Government for sharing of revenue with States that would be earned as Goods and Service Tax (GST). Under the proposed GST regime, both Centre and States will simultaneously levy GST across the value chain. Tax will be levied on every supply of goods and services for consideration. Centre would levy and collect Central Goods and Services Tax (CGST) and States would levy and collect the State Goods and Service Tax (SGST) on all transactions within a State. The Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supply of goods and services. The proceeds of IGST will be apportioned between the States and the Centre, under the proposed Article 269A, as provided by Parliament by law on the recommendations of the GST Council. Further, the CGST collected by the Central Government as well as the Union’s share of IGST collected will be devolved to the States as per the provisions of Article 270.

(MOF Press Release Dated 03.08.2015)

Current Status

The Constitution (122nd) Amendment Bill, 2014 could not be taken up the monsoon and winter session of the Parliament due to opposition’s stand to boycott the proceedings. The same is now under agenda for budget session and is likely to be taken up for passage in April, 2016.

By: Dr. Sanjiv Agarwal April 9, 2016

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