Goods and Services Tax (GST)

Goods and Services Tax (GST)

GST collections up 12.54% in February 2024

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Goods and Services Tax (GST)

Mains level : GST Collection

gst

In the news

  • India’s GST revenues saw a robust growth of 12.54% in February, exceeding ₹1.68 lakh crore.
  • This marked the fourth-highest monthly collection since GST’s inception.

Why discuss this?

  • The Goods and Services Tax (GST) system in India has been a pivotal component of the country’s tax structure since its implementation in July 2017.
  • Analyzing the trends and performance of GST revenues offers insights into the economic health and growth trajectory of the nation.

Gross Revenues Overview

  • Yearly Comparison: The fiscal year 2023-24 witnessed a noteworthy increase, reaching ₹18.4 lakh crore, indicating an 11.7% rise from the previous year.
  • Yearly Uptick: This year’s growth stands as the third highest since the implementation of GST.
  • Domestic Transactions: Revenues from domestic transactions surged by 13.9%.
  • Imported Goods: Revenue from goods imports also saw a notable increase, rising by 8.5%.

State-wise Breakdown

  • Overall Collection Analysis: After accounting for refunds, February’s GST collection amounted to ₹1.51 lakh crore, indicating a substantial 13.6% growth from the previous year.
  • State Variability: States exhibited diverse performances, with some experiencing declines while others exceeded national growth averages.
  • Declining Revenues: Five states witnessed contractions, with Mizoram and Manipur showing significant decreases.
  • Outperforming States: Twelve states, including Jammu and Kashmir, Assam, and Maharashtra, surpassed the national average growth rate.

Compensation Cess Details

  • Components of GST Intake: February’s gross GST intake included CGST, SGST, and IGST, amounting to ₹84,098 crore.
  • Cess Collections: Compensation cess collections amounted to ₹12,839 crore, with additional revenue from imported goods.
  • Revenue Distribution: The Central government allocated substantial sums to CGST and SGST from IGST collections.
  • Revenue Allocation: After regular distributions, CGST received ₹73,641 crore, while SGST received ₹75,569 crore.

About Goods and Services Tax (GST)

  • Definition: GST is an indirect tax that has replaced many indirect taxes in India such as excise duty, VAT, services tax, etc.
  • Legislation: The GST Act was passed in Parliament on 29th March 2017 and came into effect on 1st July 2017. It is a single domestic indirect tax law for the entire country.
  • Tax Structure: It is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
  • Taxation Points: Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales, Central GST and State GST are charged. All the inter-state sales are chargeable to the Integrated GST.

Components of GST

  • CGST: It is the tax collected by the Central Government on an intra-state sale (e.g., a transaction happening within Maharashtra).
  • SGST: It is the tax collected by the state government on an intra-state sale (e.g., a transaction happening within Maharashtra).
  • IGST: It is a tax collected by the Central Government for an inter-state sale (e.g., Maharashtra to Tamil Nadu).

Advantages of GST

  • GST has mainly removed the cascading effect on the sale of goods and services.
  • Removal of the cascading effect has impacted the cost of goods.
  • Since the GST regime eliminates the tax on tax, the cost of goods decreases.
  • Also, GST is mainly technologically driven.
  • All the activities like registration, return filing, application for refund and response to notice needs to be done online on the GST portal, which accelerates the processes.

Issues with GST

  • High operational cost.
  • GST has given rise to complexity for many business owners across the nation.
  • GST has received criticism for being called a ‘Disability Tax’ as it now taxes articles such as braille paper, wheelchairs, hearing aid etc.
  • Fuels are not under GST, which goes against the ideals of the unification of commodities.

Try this PYQ from CSP 2015:

Q. All revenues received by the Union. Government by way of taxes and other receipts for the conduct of Government business are credited to the:

(a) Contingency Fund of India

(b) Public Account

(c) Consolidated Fund of India

(d) Deposits and Advances Fund

Post your responses here.
1
Please leave a feedback on thisx

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Goods and Services Tax (GST)

GST Appellate Tribunals to be set around July or August

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST Appellate Tribunal

Mains level : Not Much

Introduction

  • The Goods and Services Tax (GST) Appellate Tribunals, eagerly anticipated to address taxpayer disputes within the six-and-a-half-year-old indirect tax regime, are set to commence operations around July or August.

What is GST Appellate Tribunal?

  • The GST Appellate Tribunal is a quasi-judicial body proposed to be established to resolve disputes related to the Goods and Services Tax (GST) in India.
  • It will function as an independent body to hear appeals against orders passed by the GST authorities or the Appellate Authority.
  • The tribunal will be composed of a national bench and various regional benches, headed by a chairperson appointed by the central government.
  • The proposed tribunal is expected to help expedite the resolution of disputes related to GST and reduce the burden on the judiciary.

Under GST, if a person is not satisfied with the decision passed by any lower court, an appeal can be raised to a higher court, the hierarchy for the same is as follows (from low to high):

  1. Adjudicating Authority
  2. Appellate Authority
  3. Appellate Tribunal
  4. High Court
  5. Supreme Court

Need for such Tribunal

  • Unburden judiciary: GST Appellate Tribunal will help resolve the rising number of disputes under the 68-month-old indirect tax regime that are now clogging High Courts and other judicial fora.
  • Improve efficiency of GST System: Overall, the establishment of the GST Appellate Tribunal is expected to improve the efficiency and effectiveness of the GST system in India.
  • Independent mechanism: The proposed Tribunal will provide an independent and efficient mechanism for resolving disputes related to GST.
  • Avoid tax evasion: It will help to expedite the resolution of disputes, reduce the burden on the judiciary, and promote greater certainty and predictability in the GST system.

Issues with present litigation

  • Compliance issues: The GST system is relatively new in India, having been implemented in 2017, and there have been several issues with compliance and interpretation of rules and regulations.
  • Complex adjudication hierarchy: The current dispute resolution mechanism involves multiple layers of adjudication, starting with the GST officer and as mentioned above.
  • Time-consuming process: This process can be time-consuming, costly, and burdensome for taxpayers, especially small and medium-sized enterprises.

Significance

  • The creation of these tribunals had been in the pipeline since the implementation of the GST regime on July 1, 2017.
  • The number of pending appeals by taxpayers related to central GST levies had surged to over 14,000 (June 2023).

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Goods and Services Tax (GST)

GST Rates Rationalisation back on table

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Goods and Services Tax (GST)

Mains level : Read the attached story

Central Idea

  • The government has revived its focus on Goods and Services Tax (GST) rate rationalization by reconstituting the ministerial group of the GST Council.

About Goods and Services Tax (GST)

  • Launch and Purpose: GST, implemented on 1 July 2017, is a comprehensive indirect tax across India, replacing multiple cascading taxes levied by the central and state governments.
  • Consumption-Based Tax: It is charged at the point of supply and is based on the destination of consumption, benefiting the state where the goods or services are consumed.

GST Slabs and Their Distribution

  • Tax Slabs: GST in India is categorized into five main slabs: 0%, 5%, 12%, 18%, and 28%, with an additional cess on certain luxury and ‘sin’ goods.
  • Product and Service Coverage: The GST system covers over 1300 products and 500+ services, categorized under these slabs.
  • Periodic Revision: The GST Council revises the slab rates periodically, ensuring essential items are taxed lower, while luxury items attract higher rates.
  • 28% Slab and Cess: The highest slab of 28% is reserved for demerit goods like tobacco and luxury automobiles, with an additional cess for revenue generation.

Issues with the Current GST Structure

  • Complexity: The multi-slab structure and varying rates lead to confusion and increased compliance costs for businesses.
  • Rate Heterogeneity: Diverse rates across different goods and services complicate the tax system.
  • Dual GST System: The coexistence of CGST and SGST adds to the complexity and compliance burden.
  • Cascading Effect: Despite being a value-added tax, GST sometimes leads to cascading taxation, increasing the cost of goods and services.
  • Lack of Transparency: Invoicing under GST often lacks clarity on tax breakdown, affecting consumer awareness.
  • Collection Infrastructure: Inadequate infrastructure for GST collection leads to administrative challenges and delays.

Rationale behind GST Rationalization

  • Simplifying Tax Structure: Reducing the number of slabs can simplify the tax system, making it easier for businesses to comply.
  • Addressing Aberrations: Rationalization can correct anomalies where inputs are taxed higher than final products.
  • Revenue Concerns: Merging slabs like 12% and 18% could lead to revenue loss, necessitating careful consideration.

Benefits of GST Rationalization

  • Easier Compliance: A simplified GST structure would ease the compliance burden on businesses.
  • Equitable Tax Distribution: Rationalization ensures a fair distribution of tax burden and efficient use of revenue.
  • Improved Tax Collection: Streamlining GST slabs can lead to more efficient tax collection and reduced compliance costs.

Conclusion

  • Need for Reform: Rationalizing GST rates is crucial for enhancing the efficiency of the tax regime.
  • Expected Outcomes: A reformed GST system is anticipated to be simpler, leading to easier compliance, better revenue collection, and overall efficiency in the taxation system.

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Goods and Services Tax (GST)

Establishment of GST Appellate Tribunals across India

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST Appellate Tribunal

Mains level : Not Much

Central Idea

  • The Finance Ministry has formally established 31 Appellate Tribunals spanning 28 States and eight Union Territories for the Goods and Services Tax (GST).
  • This significant move aims to address the increasing number of taxpayer disputes with the Revenue Department.

What is GST Appellate Tribunal?

  • The GST Appellate Tribunal is a quasi-judicial body proposed to be established to resolve disputes related to the Goods and Services Tax (GST) in India.
  • It will function as an independent body to hear appeals against orders passed by the GST authorities or the Appellate Authority.
  • The tribunal will be composed of a national bench and various regional benches, headed by a chairperson appointed by the central government.
  • The proposed tribunal is expected to help expedite the resolution of disputes related to GST and reduce the burden on the judiciary.

Under GST, if a person is not satisfied with the decision passed by any lower court, an appeal can be raised to a higher court, the hierarchy for the same is as follows (from low to high):

  1. Adjudicating Authority
  2. Appellate Authority
  3. Appellate Tribunal
  4. High Court
  5. Supreme Court

Need for such Tribunal

  • Unburden judiciary: GST Appellate Tribunal will help resolve the rising number of disputes under the 68-month-old indirect tax regime that are now clogging High Courts and other judicial fora.
  • Improve efficiency of GST System: Overall, the establishment of the GST Appellate Tribunal is expected to improve the efficiency and effectiveness of the GST system in India.
  • Independent mechanism: The proposed Tribunal will provide an independent and efficient mechanism for resolving disputes related to GST.
  • Avoid tax evasion: It will help to expedite the resolution of disputes, reduce the burden on the judiciary, and promote greater certainty and predictability in the GST system.

Issues with present litigation

  • Compliance issues: The GST system is relatively new in India, having been implemented in 2017, and there have been several issues with compliance and interpretation of rules and regulations.
  • Complex adjudication hierarchy: The current dispute resolution mechanism involves multiple layers of adjudication, starting with the GST officer and as mentioned above.
  • Time consuming process: This process can be time-consuming, costly, and burdensome for taxpayers, especially small and medium-sized enterprises.

Significance

  • The creation of these tribunals had been in the pipeline since the implementation of the GST regime on July 1, 2017.
  • The number of pending appeals by taxpayers related to central GST levies had surged to over 14,000 (June 2023).

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Goods and Services Tax (GST)

Interim Stay on Taxation of Online Games

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Online Gaming, GST

Mains level : Read the attached story

Central Idea

  • The Supreme Court has issued an interim stay on the Karnataka High Court’s ruling that online games, such as rummy, should not be taxed as ‘betting’ and ‘gambling’ under the Central Goods and Services (GST) Act, 2017.
  • This decision follows the Union Cabinet’s approval to increase the GST rate for online games from 18% to 28%.
  • The interim stay aligns online skill games played for stakes with online gambling for taxation purposes.

Why discuss this?

  • The GST department had issued a show-cause notice to a company for dues worth Rs 21,000 crore, which was quashed by the Karnataka High Court.
  • The Karnataka HC had ruled that online rummy is a game of skill and should not be taxed as gambling.

Taxing Online Games

  • Karnataka High Court Ruling: The Karnataka HC had determined that online rummy is substantially a game of skill, not chance, and should not be considered gambling. This ruling was based on the Goods and Services Act, which taxes games of skill at 19% and games of chance at 28%.
  • GST Department’s Notice: The GST department had issued a notice to GamesKraft under Section 74(5) of the CGST Act, demanding a substantial sum to be deposited along with interest and penalty by September 16, 2022. This notice was challenged in the Karnataka HC and led to an interim stay.
  • Show-Cause Notice: Following the interim stay, the GST department issued a show-cause notice under Section 74(1) of the CGST Act to GamesKraft and its founders, CEOs, and CFOs. This notice sought an explanation regarding the tax evasion and penalties.
  • Distinction between Skill and Chance: The Karnataka HC emphasized the distinction between games of skill and games of chance, citing relevant legal precedents. It noted that the question of whether a game of skill could still be classified as gambling remained to be seen.

Key takeaways

  • The Supreme Court’s interim stay temporarily taxes online skill games played for stakes on par with online gambling.
  • The Karnataka High Court’s ruling that online rummy is a game of skill and not gambling has been challenged by the GST department.
  • Legal distinctions between games of skill and games of chance remain a subject of debate and legal scrutiny in India’s taxation system.

Prospects of online gaming

  • State List Subject:  The state legislators are, vide Entry No. 34 of List II (State List) of the Seventh Schedule, given exclusive power to make laws relating to betting and gambling.
  • Distinction in laws: Most Indian states regulate gaming on the basis of a distinction in law between ‘games of skill’ and ‘games of chance’.
  • Classification of the dominant element: As such, a ‘dominant element’ test is utilized to determine whether chance or skill is the dominating element in determining the result of the game.
  • Linked economic activity: Staking money or property on the outcome of a ‘game of chance’ is prohibited and subjects the guilty parties to criminal sanctions.
  • ‘Game of Skill’ debate: Placing any stakes on the outcome of a ‘game of skill’ is not illegal per se and may be permissible. It is important to note that the Supreme Court recognized that no game is purely a ‘game of skill’ and almost all games have an element of chance.

Conclusion

  • This case reflects the need for a nuanced approach in crafting tax policies that adapt to the evolving landscape of online entertainment and gaming.
  • Further legal proceedings will likely shed more light on the classification of such games and their tax implications.

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Goods and Services Tax (GST)

In news: GST Council Decisions

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST, GST Council

Mains level : NA

Central Idea

  • The Goods and Services Tax (GST) Council convened its 50th meeting on July 11, announcing significant revisions and clarifications to tax rates.
  • Additionally, the council discussed the establishment of GST Appellate Tribunals.
  • It sought to address the concerns surrounding inclusion of the GST Network under the Prevention of Money Laundering Act (PMLA).

What is GST Council?

  • The Goods and Services Tax (GST) Council is a crucial body established under the 101st Constitutional Amendment in 2016 to oversee the implementation of the GST regime in India.
  • Comprised of representatives from the central government and the states, the Council plays a pivotal role in making recommendations and decisions related to GST.

Composition of the GST Council

  • Joint forum: The GST Council is a joint forum consisting of members from the Centre (Union Finance Minister and Union Minister of State for Finance) and representatives from the states.
  • State representation: Each state nominates a minister in charge of finance, taxation, or any other relevant minister to be a member of the Council.

Objectives of the GST Council

  • Recommendation-making authority: The Council is responsible for making recommendations to the Union and the states on important GST-related issues. This includes suggestions on the goods and services that should be subjected to or exempted from GST, as well as the formulation of model GST laws.
  • Decision-making on tax rates: The Council determines the various rate slabs under the GST regime. It has the authority to decide the applicable tax rates for different goods and services.

Recent Tax Rate Changes proposals

  • Uncooked and unfried snack pellets and fish soluble paste: The tax rate on these items was reduced from 18% to 5%.
  • Imitation zari threads or yarn: The GST rate on these items was reduced from 12% to 5%.
  • Food and beverages consumed inside cinema halls: The GST rate for these items was reduced to 5% without any input tax credits, compared to the previous 18% levied on cinema services.
  • Special utility vehicles (SUVs): The tax treatment for SUVs was clarified, ensuring that the higher GST compensation cess does not affect sedans. The conditions for classifying a vehicle as an SUV were revised to exclude the requirement of being popularly seen as an SUV. The ground clearance of 170 mm should now be for an unladen vehicle.
  • Exemption for satellite launch services: The Council offered an exemption on GST for satellite launch services provided by private organizations.

Other recommendations: GST Appellate Tribunals

  • Proposal for setting up GST Appellate Tribunals: States’ proposals to establish 50 Benches of GST Appellate Tribunals were examined. These tribunals will play a crucial role in resolving GST disputes.
  • Operational timeline: The government aims to make the tribunals operational within four to six months, starting with the establishment of Benches in State capitals and places where High Courts have Benches.
  • Appointment and service conditions: The Council cleared the appointment and service conditions for tribunal members and the president, which will come into effect from August 1.

Inclusion of GST Network under PMLA

  • Concerns raised by non-BJP ruled states: Representatives from states not governed by the BJP criticized the decision to bring the GST Network under the purview of the Prevention of Money Laundering Act (PMLA) administered by the Enforcement Directorate (ED).
  • Tamil Nadu’s opposition: Tamil Nadu expressed opposition to the move, stating that it is against the interests of taxpayers and goes against the objective of decriminalizing offenses under the GST law.
  • Explanation and clarification: Revenue Secretary presented an explanation of the provision, stating that it is a requirement of the Financial Action Task Force (FATF) and not directly related to the GST law.
  • Information sharing: The GSTN will not share information about private businesses with other law enforcement agencies. The ED will neither receive nor provide information, but the director of the Financial Intelligence Unit may provide information to the GSTN to empower tax authorities in combating tax evasion and money laundering.

 

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Goods and Services Tax (GST)

Lok Sabha clears forming GST Appellate Tribunal

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GSTAT

Mains level : Disputes resolution under GST regime

The Lok Sabha passed Finance Bill, 2023 with some amendments, including one that seeks to set up the much-awaited GST Appellate Tribunal (GSTAT), which will deal with tax disputes.

What is GST Appellate Tribunal?

  • The GST Appellate Tribunal is a quasi-judicial body proposed to be established to resolve disputes related to the Goods and Services Tax (GST) in India.
  • It will function as an independent body to hear appeals against orders passed by the GST authorities or the Appellate Authority.
  • The tribunal will be composed of a national bench and various regional benches, headed by a chairperson appointed by the central government.
  • The proposed tribunal is expected to help expedite the resolution of disputes related to GST and reduce the burden on the judiciary.

Under GST, if a person is not satisfied with the decision passed by any lower court, an appeal can be raised to a higher court, the hierarchy for the same is as follows (from low to high):

  1. Adjudicating Authority
  2. Appellate Authority
  3. Appellate Tribunal
  4. High Court
  5. Supreme Court

Composition of GSTAT

  • GSTAT will have a “Principal Bench” in New Delhi.
  • It would have the President (probably a former Supreme Court judge), a judicial member, a technical member (centre), and a technical member (state).
  • It will also have state benches.
  • Appeals pertaining to disputes of less than Rs. 50 lakh that don’t deal with a question of law could be decided by a single-member bench, as per the norms approved by the GST Council.

Why need such Tribunal?

  • Unburden judiciary: GST Appellate Tribunal will help resolve the rising number of disputes under the 68-month old indirect tax regime that are now clogging High Courts and other judicial fora.
  • Improve the efficiency of GST System: Overall, the establishment of the GST Appellate Tribunal is expected to improve the efficiency and effectiveness of the GST system in India.
  • Independent mechanism: The proposed Tribunal will provide an independent and efficient mechanism for resolving disputes related to GST.
  • Avoid tax evasion: It will help to expedite the resolution of disputes, reduce the burden on the judiciary, and promote greater certainty and predictability in the GST system.

Issues with present litigation

  • Compliance issues: The GST system is relatively new in India, having been implemented in 2017, and there have been several issues with compliance and interpretation of rules and regulations.
  • Complex adjudication hierarchy: The current dispute resolution mechanism involves multiple layers of adjudication, starting with the GST officer and as mentioned above.
  • Time-consuming process: This process can be time-consuming, costly, and burdensome for taxpayers, especially small and medium-sized enterprises.

Back2Basics: Finance Bill

  • A Finance Bill is a proposed legislation that is introduced by the government to implement the financial proposals of the Union Budget for the upcoming financial year in India.
  • It is a comprehensive document that outlines the government’s revenue and expenditure for the year, including changes in tax laws, tariffs, customs duties, and other fiscal measures.
  • Since the Union Budget deals with these things, it is passed as a Finance Bill.

Types of Finance Bills

  • There are different kinds of Finance Bills — the most important of them is the Money Bill. The Money Bill is concretely defined in Article 110.
  • In India, there are three types of Finance Bills that can be introduced in the Parliament:
  1. Annual Finance Bill: This is the most common type of Finance Bill and is introduced by the government every year to give effect to the tax proposals announced in the Union Budget. It contains provisions related to taxation, expenditure, and revenue collection for the upcoming financial year.
  2. Finance Bill (Money Bill): A Money Bill is a type of Finance Bill that contains only provisions related to taxation and expenditure, but does not include any other matter. Money Bills are deemed to be passed by the Lok Sabha, the lower house of Parliament, and do not require approval from the Rajya Sabha, the upper house of Parliament.
  3. Finance Bill (Non-Money Bill): This type of Finance Bill contains provisions related to taxation and other matters, such as changes in the structure of regulatory bodies or the introduction of new policies. Unlike Money Bills, Non-Money Bills must be passed by both the Lok Sabha and the Rajya Sabha to become law.

How is money bill different from Finance Bill?

  • A Money Bill is certified by the Speaker as such — in other words, only those Financial Bills that carry the Speaker’s certification are Money Bills.
  • Article 110 states that a Bill shall be deemed to be a Money Bill if it contains only provisions dealing with all or any of the following matters:

(a) the imposition, abolition, remission, alteration or regulation of any tax;

(b) the regulation of the borrowing of money or any financial obligations undertaken

(c) the custody of the consolidated Fund or the Contingency Fund of India, the payment of moneys into or the withdrawal of moneys from any such Fund;

(d) the appropriation of moneys out of the consolidated Fund of India;

(e) the declaring of any expenditure to be expenditure charged on the Consolidated Fund of India or the increasing of the amount of any such expenditure;

(f) the receipt of money on account of the Consolidated Fund of India or the public account of India or the custody or issue of such money or the audit of the accounts of the Union or of a State; or

(g) any matter incidental to any of the matters specified in sub clause (a) to (f)

 


 


 

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Goods and Services Tax (GST)

GST revenues hit a record ₹1.59 lakh CR in January

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST share in Revenue

Mains level : GST

gst

India’s Goods and Services Tax (GST) revenues grew 12.7% in January to hit almost ₹1.59 lakh crore ($17.9 billion), the second-highest monthly collections on record, as per revised figures from the Finance Ministry.

What led to hike in GST revenue collection?

  • Economic recovery: Discusses how the steady economic recovery in India has led to higher consumption and spending, resulting in increased GST collections
  • Crackdown on Tax evasion: Several measures were taken by the government to streamline the GST system and reduce tax evasion, including the implementation of e-invoicing and the use of technology to track compliance.
  • Crackdown on fraudulent claims: The government’s efforts to crack down on fraudulent input tax credit claims, have also contributed to the increase in GST collections
  • Increase in imports: The higher value of imported goods due to rising commodity prices is another reason behind the increase in GST collections from imports.

What is GST?

  • GST is an indirect tax that has replaced many indirect taxes in India such as excise duty, VAT, services tax, etc.
  • The Goods and Service Tax Act was passed in Parliament on 29th March 2017 and came into effect on 1st July 2017.
  • It is a single domestic indirect tax law for the entire country.
  • It is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
  • Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales, Central GST and State GST are charged. All the inter-state sales are chargeable to the Integrated GST.

Answer this PYQ in the comment box:

Q. All revenues received by the Union. Government by way of taxes and other receipts for the conduct of Government business are credited to the (CSP 2015):

(a) Contingency Fund of India

(b) Public Account

(c) Consolidated Fund of India

(d) Deposits and Advances Fund

 

Post your answers here
1
Please leave a feedback on thisx

 

What are the components of GST?

There are three taxes applicable under this system:

  1. CGST: It is the tax collected by the Central Government on an intra-state sale (e.g., a transaction happening within Maharashtra)
  2. SGST: It is the tax collected by the state government on an intra-state sale (e.g., a transaction happening within Maharashtra)
  3. IGST: It is a tax collected by the Central Government for an inter-state sale (e.g., Maharashtra to Tamil Nadu)

Advantages of GST

  • GST has mainly removed the cascading effect on the sale of goods and services.
  • Removal of the cascading effect has impacted the cost of goods.
  • Since the GST regime eliminates the tax on tax, the cost of goods decreases.
  • Also, GST is mainly technologically driven.
  • All the activities like registration, return filing, application for refund and response to notice needs to be done online on the GST portal, which accelerates the processes.

Issues with GST

  • High operational cost
  • GST has given rise to complexity for many business owners across the nation.
  • GST has received criticism for being called a ‘Disability Tax’ as it now taxes articles such as braille paper, wheelchairs, hearing aid etc.
  • Petrol is not under GST, which goes against the ideals of the unification of commodities.

Take a look at the share of GST in government earnings for the previous fiscal:

gst

UPSC can ask about the majority component of the Revenue Receipts of the govt. See how Corporate tax is nearing the GST revenues.

Do you think it will surpass GST revenue when the economy is fully recovered?

 

 

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Goods and Services Tax (GST)

GST Appellate Tribunal gets nod

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST, GST Council

Mains level : Read the attached story

The GST Council reached a broad consensus on setting up GST Appellate Tribunal; likely to be included in Finance Bill 2023.

What is GST Appellate Tribunal?

  • The GST Appellate Tribunal is a quasi-judicial body proposed to be established to resolve disputes related to the Goods and Services Tax (GST) in India.
  • It will function as an independent body to hear appeals against orders passed by the GST authorities or the Appellate Authority.
  • The tribunal will be composed of a national bench and various regional benches, headed by a chairperson appointed by the central government.
  • The proposed tribunal is expected to help expedite the resolution of disputes related to GST and reduce the burden on the judiciary.

Under GST, if a person is not satisfied with the decision passed by any lower court, an appeal can be raised to a higher court, the hierarchy for the same is as follows (from low to high):

  1. Adjudicating Authority
  2. Appellate Authority
  3. Appellate Tribunal
  4. High Court
  5. Supreme Court

Why need such Tribunal?

  • Unburden judiciary: GST Appellate Tribunal will help resolve the rising number of disputes under the 68-month old indirect tax regime that are now clogging High Courts and other judicial fora.
  • Improve efficiency of GST System: Overall, the establishment of the GST Appellate Tribunal is expected to improve the efficiency and effectiveness of the GST system in India.
  • Independent mechanism: The proposed Tribunal will provide an independent and efficient mechanism for resolving disputes related to GST.
  • Avoid tax evasion: It will help to expedite the resolution of disputes, reduce the burden on the judiciary, and promote greater certainty and predictability in the GST system.

Issues with present litigation

  • Compliance issues: The GST system is relatively new in India, having been implemented in 2017, and there have been several issues with compliance and interpretation of rules and regulations.
  • Complex adjudication hierarchy: The current dispute resolution mechanism involves multiple layers of adjudication, starting with the GST officer and as mentioned above.
  • Time consuming process: This process can be time-consuming, costly, and burdensome for taxpayers, especially small and medium-sized enterprises.

How is it being established?

  • The proposed GST Appellate Tribunal is expected to be included in the Finance Bill 2023.
  • This means that it will become a part of the central government’s budget, and will have legal standing.

Do you know?

Income Tax Appellate Tribunal (ITAT) was the first Tribunal in India to be created on 25th January, 1941 and is also known as ‘Mother Tribunal’! And it functions under the Ministry of Law and Justice and not the obvious looking Ministry of Finance.


Back2Basics: What is a Finance Bill?

  • A Finance Bill is a proposed legislation that is introduced by the government to implement the financial proposals of the Union Budget for the upcoming financial year in India.
  • It is a comprehensive document that outlines the government’s revenue and expenditure for the year, including changes in tax laws, tariffs, customs duties, and other fiscal measures.
  • Since the Union Budget deals with these things, it is passed as a Finance Bill.

Types of Finance Bills

  • There are different kinds of Finance Bills — the most important of them is the Money Bill. The Money Bill is concretely defined in Article 110.
  • In India, there are three types of Finance Bills that can be introduced in the Parliament:
  1. Annual Finance Bill: This is the most common type of Finance Bill and is introduced by the government every year to give effect to the tax proposals announced in the Union Budget. It contains provisions related to taxation, expenditure, and revenue collection for the upcoming financial year.
  2. Finance Bill (Money Bill): A Money Bill is a type of Finance Bill that contains only provisions related to taxation and expenditure, but does not include any other matter. Money Bills are deemed to be passed by the Lok Sabha, the lower house of Parliament, and do not require approval from the Rajya Sabha, the upper house of Parliament.
  3. Finance Bill (Non-Money Bill): This type of Finance Bill contains provisions related to taxation and other matters, such as changes in the structure of regulatory bodies or the introduction of new policies. Unlike Money Bills, Non-Money Bills must be passed by both the Lok Sabha and the Rajya Sabha to become law.

How is money bill different from Finance Bill?

  • A Money Bill is certified by the Speaker as such — in other words, only those Financial Bills that carry the Speaker’s certification are Money Bills.
  • Article 110 states that a Bill shall be deemed to be a Money Bill if it contains only provisions dealing with all or any of the following matters:

(a) the imposition, abolition, remission, alteration or regulation of any tax;

(b) the regulation of the borrowing of money or any financial obligations undertaken

(c) the custody of the consolidated Fund or the Contingency Fund of India, the payment of moneys into or the withdrawal of moneys from any such Fund;

(d) the appropriation of moneys out of the consolidated Fund of India;

(e) the declaring of any expenditure to be expenditure charged on the Consolidated Fund of India or the increasing of the amount of any such expenditure;

(f) the receipt of money on account of the Consolidated Fund of India or the public account of India or the custody or issue of such money or the audit of the accounts of the Union or of a State; or

(g) any matter incidental to any of the matters specified in sub clause (a) to (f)

 

 

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Goods and Services Tax (GST)

Govt. likely to place Reverse Charging of GST on Scrap before Council

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST, GST COuncil

Mains level : Not Much

gst

Central idea: The article discusses the possibility of the government presenting the reverse charging of Goods and Services Tax (GST) on Steel and other metal scraps before the GST council.

Scrap recycling in India

  • India is now the world’s second-largest steel producer, with output expected to increase by 17.8 per cent to 118.1 million tonnes in 2021.
  • In contrast to countries that take pride in using increasing amounts of steel scrap to produce ferrous metal and thus reduce carbon dioxide (CO2) emissions, India only uses about 30 MT of scrap per year.
  • India is still in its early stages, with low recycling awareness. Unfortunately, only 30 per cent of India’s recyclable scrap is recycled.

What is Reverse Charging of GST?

  • Reverse charging of Goods and Services Tax (GST) is a mechanism in which the liability to pay the tax is shifted from the supplier to the recipient of goods or services.
  • Under normal circumstances, it is the supplier who is liable to pay GST to the government.
  • However, in cases of reverse charging, the recipient of the goods or services becomes liable to pay the tax instead of the supplier.
  • Reverse charging is usually implemented in situations where the supplier is not registered under GST or has failed to deposit the GST dues with the government.
  • Reverse charging is a way for the government to ensure that the GST liability is fulfilled even if the supplier does not fulfill its obligations.

Some examples of goods and services on which reverse charging is already applied are:

  1. Services provided by a goods transport agency
  2. Services provided by an advocate to a business entity
  3. Supply of manpower for any purpose
  4. Renting of a motor vehicle provided by any individual or HUF to a business entity
  5. Supply of specified goods like gold, silver, or precious stones by an unregistered supplier to a registered person.

Why scrap industry?

  • The scrap industry in India is a largely unorganized sector, and many small players operate without proper registration or compliance.
  • This has led to tax evasion and revenue losses for the government.
  • Reverse charging on the scrap industry is aimed at plugging this gap and ensuring that the GST liability is fulfilled even if the supplier (in this case, the scrap dealer) is not registered or fails to deposit the GST dues with the government.

Consequences of the move

  • Compliance Costs: The implementation of reverse charging on the scrap industry may increase compliance costs for stakeholders. Small players in the industry may find it challenging to comply with the new regulations, leading to increased compliance costs.
  • Administrative Burden: The scrap industry in India is largely an unorganized sector, and the application of reverse charging may impose an administrative burden on stakeholders. Many small players may not have the necessary infrastructure or resources to comply with the new regulations.
  • Cash flow impact: Reverse charging could impact the cash flow of small businesses, as they would have to pay GST upfront and then claim it back through input tax credit. This could lead to a shortage of working capital for small businesses.
  • Increased Paperwork: The application of reverse charging on the scrap industry may lead to an increase in paperwork and documentation for stakeholders. This could be challenging for small players who may not have the resources to handle the additional paperwork.
  • Implementation Challenges: The implementation of reverse charging on the scrap industry could be challenging, given that the sector is largely unorganized. It could be challenging to track unregistered players, and the government may face difficulties in enforcing the new regulations.

Woes of Scrap Industry in India

  • Lack of infrastructure: The scrap industry in India is primarily an unorganized sector, with limited access to infrastructure such as proper storage facilities, transport, and handling equipment. This can limit the efficiency and productivity of the sector.
  • Low productivity: The scrap industry in India faces low productivity due to the use of outdated technology and inadequate skills among workers. This can limit the competitiveness of the industry and its ability to meet the demand for scrap.
  • Inadequate regulatory support: The scrap industry in India lacks adequate regulatory support, which can result in a lack of standardization and transparency in the sector. This can lead to issues such as underreporting of sales, tax evasion, and other malpractices.

Stakeholder response

  • The scrap industry has expressed concerns over the potential increase in compliance costs and administrative burden that may arise from the implementation of reverse charging.
  • This might affect the recycle economy.

 

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Goods and Services Tax (GST)

No Rationalization of GST structure for now: Revenue Secretary

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST

Mains level : Need for rationalization of GST slabs

The long-awaited rationalization of the multiple rate structure of the Goods and Services Tax (GST) regime is off the table for now and unlikely to materialize in the near future.

What is GST?

  • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
  • It is charged at the time of supply and depends on the destination of consumption.
  • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).
  • GST, being a consumption-based tax, resulted in loss of revenue for manufacturing-heavy states.

What are GST Slabs?

  • In India, almost 500+ services and over 1300 products fall under the 4 major GST slabs.
  • There are five broad tax rates of zero, 5%, 12%, 18% and 28%, plus a cess levied over and above the 28% on some ‘sin’ goods.
  • The GST Council periodically revises the items under each slab rate to adjust them according to industry demands and market trends.
  • The updated structure ensures that the essential items fall under lower tax brackets, while luxury products and services entail higher GST rates.
  • The 28% rate is levied on demerit goods such as tobacco products, automobiles, and aerated drinks, along with an additional GST compensation cess.

Issues with GST structure

  • Complexity of the GST Structure: The GST structure is quite complex and difficult to understand, which has led to confusion among businesses and consumers alike. This has also led to an increase in the cost of compliance and administration for businesses.
  • Heterogeneity of Rates: One of the main issues with the GST structure is the heterogeneity of rates across different goods and services. This has led to an increase in the cost of compliance for businesses as they need to be aware of the applicable GST rate for each product and service.
  • Dual GST System: India has a dual GST system, which has led to confusion and complexity for businesses that have to deal with both the central GST (CGST) and the state GST (SGST). This has also led to an increased cost of compliance for businesses.
  • Cascading Taxation: The GST structure has led to the problem of cascading taxation, wherein taxes are levied at every stage of the supply chain, leading to an increase in the cost of goods and services.
  • Lack of Transparency: The GST structure has led to a lack of transparency in the pricing of goods and services, as the applicable taxes are not clearly indicated in the invoice.
  • Poor collection infrastructure: The GST system requires a strong infrastructure in order to function properly, which is not always present in India. This can lead to delays in filing and other issues.

Why rationalize GST slabs?

  • Complex duty structure: From businesses’ viewpoint, there are just too many tax rate slabs, compounded by aberrations in the duty structure through their supply chains with some inputs taxed more than the final product.
  • Multiple rate changes: This has been since the introduction of the GST regime in July 2017 have brought the effective GST rate to 11.6% from the original revenue-neutral rate of 15.5%.
  • Stipulated revenue losses: Merging the 12% and 18% GST rates into any tax rate lower than 18% may result in revenue loss.

Benefits of GST rationalization

  • Easier compliance: Rationalizing GST slabs helps simplify the tax structure and make it easier for businesses to comply with the law.
  • Fairness of taxation: It also helps to ensure that the tax burden is shared fairly and that the revenue generated is used efficiently.
  • Efficiency in tax collection: Finally, rationalizing GST slabs leads to more efficient collection of taxes, which helps to reduce the cost of compliance for businesses.

Conclusion

  • Rate rationalization is probably the biggest ‘reform’ that is required to make the GST regime more efficient.
  • As and when the exercise is complete, it is expected that the GST would be a less complex system that not only would make compliances easier but also boost revenue collection.

 

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Goods and Services Tax (GST)

Budget and the Health expenditure

Note4Students

From UPSC perspective, the following things are important :

Prelims level : NA

Mains level : Government’s Budget and Healthcare

expenditure

Context

  • In her 2023-24 Union Budget speech, the finance minister announced that the total central government budget for health (not including research) will be roughly Rs 86,175 crore ($10 billion) that is, roughly Rs 615 for every citizen. This is a 2.7 per cent increase from the previous fiscal year and lower than the rate of inflation.

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expenditure

Government’s current Health spending

  • Current health spending lower than middle income countries: India currently spends about Rs 8 lakh crore ($100 billion) or about 3.2 per cent of its GDP on health. This is much lower than the average health spending share of the GDP at around 5.2 per cent of the Lower- and Middle-Income Countries (LMIC)
  • Health expenditure in India compared to other countries: Of this, the government (Centre and states put together) spends about Rs 2.8 lakh crore (about $35 billion) roughly 1.1 per cent of the GDP. Contrast this with the government health expenditure in countries like China (3 per cent), Thailand (2.7 per cent), Vietnam (2.7 per cent) and Sri Lanka (1.4 per cent).

How health expenditure affects people especially poor?

  • Hospitalisation cost for a day: A Day of hospitalisation at a public hospital is estimated at Rs 2,800. At a private hospital, it is Rs 6,800.
  • Disproportionate financial impact on poor households: A greater proportion of disposable incomes is taken away from a poor household as compared to a non-poor one, further broadening the gap between the two.
  • Impact of Health expenditure on employment and income: If sickness hits a working member of the household, she/he must often withdraw from active employment and their main source of income dries up at the time when they urgently need more money for treatment.
  • Sell or mortgage of assets to cover treatment costs: Households have to often sell or mortgage their productive assets, such as land and cattle, to cover the treatment costs.
  • Burden of health expenditures on vulnerable populations: The poor, elderly and sick are already at a disadvantage and the burden of health expenditure makes this even worse.
  • Falling into poverty due to health expenditures: This further reduces their capacity to bounce back. According to the WHO, 55 million people fall into poverty or deeper poverty every year due to catastrophic expenditures on health.

expenditure

Areas where greater spending by the government could help in the immediate term

  • Focus should be balanced for both communicable and noncommunicable: The National Health Mission allocates less than 3 per cent (Rs 717 crore) to non-communicable diseases (NCDs) compared to communicable diseases and reproductive and child health services, despite NCDs causing more than half of the total burden of disease and this proportion further increases in both rural as well as urban areas.
  • Public health and primary health care focus on rural areas: Urban areas have poorly developed infrastructure for primary care even if secondary and tertiary health care services are better. For example, immunisation coverage is now lower in urban India than in rural India. A third of the country now lives in urban areas and greater resources are needed to improve health here.
  • Health research has been neglected for too long: The allocation for the Department of Health Research in this year’s budget is Rs 2,980 crore, flat from last year. Spending Rs 20 per Indian is inconsistent with the need for innovations and technologies in the sector. The bulk of the resources provided to the Indian Council of Medical Research goes towards maintaining a large payroll of scientists and the output is poor.

Way forward

  • Maximizing India’s potential: India stands on the brink of a massive opportunity. Quality education and health for the 26 million children born each year and the 65 per cent of the population under the age of 35 could help provide a workforce that would propel India forward.
  • Harnessing the Demographic Dividend: India has a growing working-age population, but needs urgent action to harness the demographic dividend and potentially become a developed country within a generation.
  • Adopting Competitive funding System for health research: India should adopt a competitive grant system for government-funded health research like other successful countries, to encourage top-notch research. The Wellcome Trust/DBT-India Alliance is a successful example of this system.

Conclusion

  • The health (and education) of Indians is the most important determinant of what the country can achieve during the next 25 years of Amrit Kaal. We must find ways to both find more money for health, and also more health for the money to ensure that all Indians achieve their true potential.

Mains question

Q. Highlight the present status of Government’s healthcare spending. How out of pocket health expenditure affects people especially poor? Suggest what government must do and areas where it must focus in the immediate term?

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Goods and Services Tax (GST)

States ask Centre to curb its ‘Cess’ habit

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Cess, Surcharge

Mains level : Not Much

cess

Several States, including some governed by the Centre urged to rein in its reliance on raising revenues through cesses and surcharges which reduce their share in the divisible pool of taxes.

What are Cesses and Surcharges?

The Union government has the authority to collect money through a variety of levies referred to as a tax, fee, cess, and surcharge.

(A) Cess

  • Cess is charged on the tax amount and is levied for a specific purpose.
  • In India, cess is applicable to all the taxpayers, and it is calculated over, and above the base tax liability of the taxpayer, cess taxes initially go to the consolidated fund of India (CFI) that has to be used for the purpose for which it was collected.
  • Education Cess, Swachh Bharat Cess

(B) Surcharge

  • The surcharge is levied on the tax payable and not on the total income.
  • It directly goes to the CFI, and after that it can be used for any purpose, just like the normal tax.
  • Surcharge applies to the taxpayer whose income is more than Rs 50 lakh.
  • In simple terms, surcharge is a tax on tax that is not collected for any particular cause, and the union government may use the proceeds of surcharges for any purpose it sees as important.
  • The objective behind the surcharge is to put a high tax burden on people with high incomes.

Difference between the two

  • The rate of cess under income tax is fixed at 4%, whereas the rate of surcharges varies from 10%, 15%, 25% & 37% based on the taxpayers’ total income.
  • Cess is calculated on total tax and surcharge amount; surcharge is calculated on total tax amount only.
  • In a nutshell, while both are taxes, cess is collected from every taxpayer to meet a certain purpose, and the surcharge is an additional tax collected from the taxpayers who have higher slab income.

Key difference over which states dispute

  • Major difference is that each can be shared with the state government, the surcharge can be kept with CFI, and it can be utilised for other taxes.
  • However, cess should be utilised for a particular reason. This restricts the states expenditure.
  • Tamil Nadu noted that the share of cesses and surcharges had grown from 10.4% of gross tax revenue in 2011-12 to 26.7% in 2021-22.
  • This has deprived the States of their legitimate share of revenue collected by the Union Government.

 

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Goods and Services Tax (GST)

GST on Online Gaming, Casinos, Racing

Note4Students

From UPSC perspective, the following things are important :

Prelims level : NA

Mains level : Regulation of online gaming

A ministerial panel is likely to recommend a uniform 28 percent tax GST rate on Online Gaming, irrespective of whether it is a game of skill or chance.

Online gaming sector in India

  • In the past few years, India’s nascent online gaming industry witnessed an unprecedented rise, catapulting it to the top five mobile gaming markets in the world.
  • Registering a growth rate of 38%, online gaming is the next sunrise industry.
  • Currently, there are more than 400 gaming companies in India, and it is home to 420 million online gamers, second only to China, according to an analysis by KPMG.

Types of gaming

  • The types of online gaming include:
  1. E-sports (well-organized electronic sports which include professional players) ex. Chess
  2. Fantasy sports (choosing real-life sports players and winning points based on players’ performance) ex. MPL cricket
  3. Skill-based (mental skill) ex. Archery
  4. Gamble (based on random activity) ex. Playing Cards, Rummy

Why is the gaming industry booming in India?

  1. Digital India boom in the gaming industry
  2. Narrowing of the digital divide
  3. IT boom

Other factors promoting the boom

  1. Growing younger population
  2. Higher disposable income
  3. Inexpensive internet data
  4. Introduction of new gaming genres, and
  5. Increasing number of smartphone and tablet users

Prospects of online gaming

  • State List Subject:  The state legislators are, vide Entry No. 34 of List II (State List) of the Seventh Schedule, given exclusive power to make laws relating to betting and gambling.
  • Distinction in laws: Most Indian states regulate gaming on the basis of a distinction in law between ‘games of skill’ and ‘games of chance’.
  • Classification on dominant element: As such, a ‘dominant element’ test is utilized to determine whether chance or skill is the dominating element in determining the result of the game.
  • Linked economic activity: Staking money or property on the outcome of a ‘game of chance’ is prohibited and subjects the guilty parties to criminal sanctions.
  • ‘Game of Skill’ debate: Placing any stakes on the outcome of a ‘game of skill’ is not illegal per se and may be permissible. It is important to note that the Supreme Court recognized that no game is purely a ‘game of skill’ and almost all games have an element of chance.

Need for regulation

  • No comprehensive regulation:  India currently has no comprehensive legislation with regards to the legality of online gaming or boundaries that specify applicable tax rates within the betting and gambling industry.
  • Ambiguity of the sector: The gaming sector is nascent and is still evolving, and many states are bringing about legislation seeking to bring about some order in the online gaming sector.
  • State list subject: Online gaming in India is allowed in most parts of the country. However, different states have their own legislation with regards to whether online gaming is permitted.
  • Economic advantage: Well-regulated online gaming has its own advantages, such as economic growth and employment benefits.

Issues with online gaming

  • Gaming addiction: Numerous people are developing an addiction to online gaming. This is destroying lives and devastating families.
  • Compulsive gaming: Gaming by children is affecting their performance in schools and impacting their social lives & relationships with family members. Ex. PUBG
  • Impact on psychological health: Online games like PUBG and the Blue Whale Challenge were banned after incidents of violence and suicide.
  • Threat to Data privacy: Inadvertent sharing of personal information can lead to cases of cheating, privacy violations, abuse, and bullying.
  • Betting and gambling: Online games based on the traditional ludo, arguably the most popular online game in India, have run into controversy, and allegations of betting and gambling.

Why hasn’t a comprehensive law yet materialized?

  • Earlier, states like Tamil Nadu, Telangana, Andhra Pradesh, and Karnataka also passed laws banning online games.
  • However, they were quashed by state High Courts on grounds that an outright ban was unfair to games of skill:
  1. Violation of fundamental rights of trade and commerce, liberty and privacy, speech and expression;
  2. Law being manifestly arbitrary and irrational insofar as it did not distinguish between two different categories of games, i.e. games of skill and chance;
  3. Lack of legislative Competence of State legislatures to enact laws on online skill-based games.

Way forward

  • Censoring: Minors should be allowed to proceed only with the consent of their parents — OTP verification on Aadhaar could resolve this.
  • Awareness: Gaming companies should proactively educate users about potential risks and how to identify likely situations of cheating and abuse.
  • Regulating mechanism: A Gaming Authority in the central government should be created.
  • Accountability of the gaming company: It could be made responsible for the online gaming industry, monitoring its operations, preventing societal issues, suitably classifying games of skill or chance, overseeing consumer protection, and combatting illegality and crime.
  • All-encompassing legislation: the Centre should formulate an overarching regulatory framework for online games of skill. India must move beyond skill-versus-chance debates to keep up with the global gaming industry.

 

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Goods and Services Tax (GST)

GST Council

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST Council

Mains level : Not Much

The Union Finance Minister has heaped praises on Goods and Services Tax (GST) Council.

Why in news?

  • FM was reacting to a case made by Fifteenth Finance Commission chief N.K. Singh to set up a Fiscal Council with the Centre and States.
  • This is another such recommended body to act as a bridge between the GST Council and the Finance Commission.

What is the GST Council?

  • The GST regime came into force after the 101st Constitutional Amendment was passed by both Houses of Parliament in 2016.
  • The GST Council – a joint forum of the Centre and the states — was set up by the President as per Article 279A (1) of the amended Constitution.
  • The members of the Council include the Union Finance Minister (chairperson), the Union Minister of State (Finance) from the Centre.
  • Each state can nominate a minister in-charge of finance or taxation or any other minister as a member.

Why was the Council set up?

  • The Council, according to Article 279, is meant to “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”.
  • It also decides on various rate slabs of GST.
  • For instance, an interim report by a panel of ministers has suggested imposing 28 per cent GST on casinos, online gaming and horse racing.
  • A decision on this will be taken at the Council meeting.

Recent reforms

  • The ongoing meeting is the first since a decision of the Supreme Court in May this year, which stated recommendations of the GST Council are not binding.
  • The court said Article 246A of the Constitution gives both Parliament and state legislatures “simultaneous” power to legislate on GST .
  • Recommendations of the Council are the product of a collaborative dialogue involving the Union and States.
  • This was hailed by some states, such as Kerala and Tamil Nadu, who believe states can be more flexible in accepting the recommendations as suited to them.

 

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Goods and Services Tax (GST)

Reforms needed in the next stage of GST

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Input tax credit

Mains level : Paper 3- Next stage of reforms in GST

Context

India has completed five years under the GST regime.

How GST has performed so far

  • Before the GST, there were multiplicity of the Centre and state levies that masked the actual incidence of tax on products, the debilitating effects of the entry tax and the uncertainty of tax rates.
  • Today, in contrast, we have a single tax across the country combined with a stability in rates and a common technology platform in the form of a GSTN.
  • Record number of registrants: The ease of payments has improved over time with the technical glitches having been slowly sorted out, leading to a record number of GST registrants – increasing from 1.08 crore in April 2018 to 1.36 crore in 2022.
  •  The revenue gains have been significant.
  • If we factor in the three-percentage point decline in the incidence of GST duty from 14.8 to 11.8 per cent as suggested by the RBI, the actual proportion in 2021-2022 would have been 7.4 per cent of the GDP (according to a recent article by Arvind Subramanian and Josh Felman).

What were the changes made to ensure the stricter compliance

  • The above improvement can be traced to stricter compliance flowing from three factors.
  • 1] Input credit only after supplier uploads invoice: Denial of input credit to the buyer without the supplier uploading the invoice.
  • 2] The introduction of e-invoicing.
  • 3] Third the introduction of e-waybills for transporters for value exceeding Rs 50,000 per consignment.
  • Greater coordination between CBIC and CBDT: Another factor is greater coordination between the Central Board of Excise and Customs (CBIC) and Central Board of Direct Taxes (CBDT) in compliance verification.

Changes needed

  • 1] Provisions for unregistered GST suppliers: The micro, small and medium enterprises (MSME) sector has been affected by the GST reforms because the large units have been reluctant to buy from them in the absence of input duty credit.
  • An important measure here would be to amend the law to provide that all units buying from unregistered GST suppliers would have to pay duty on a reverse charge basis.
  • 2] Rate rationalisation: While the revenue gains have come through better compliance, the next surge in GST revenues will have to come from an increase in the average incidence of GST duties.
  • This will require a combination of measures — phasing out of exemptions, raising of the merit rate from the present level of 5 per cent and merging the 12 per cent rate with the standard rate, whether to 16 per cent or 18 per cent.
  • 3] Inclusion of fuels and real estate: Including natural gas/ATF under GST should be considered.
  • Further reforms in the factor markets — land, real estate and energy — would require their inclusion in the GST.
  • This is essential because while the economic reforms of the 1990s restructured the product market, the factor market reforms were incomplete.
  • 4] Creation of federal institution: We need to create another institution in the form of a GST state secretariat that can bring together senior officers from the Centre and states in an institutional forum registered under the Society Act.
  • This forum could also provide a common point of contact for trade and industry to redress the grievances on non-policy matters.

Conclusion

As GST enters its sixth year journey, the changes suggested above will fine tune it to propel India towards $5 trillion economy.

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Back2Basics: GST Input Tax Credit

  • Input Tax Credit means claiming the credit of the GST paid on purchase of Goods and Services which are used for the furtherance of business.
  • The Mechanism of Input Tax Credit is the backbone of GST and is one of the most important reasons for the introduction of GST.

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Goods and Services Tax (GST)

What is the Controversy over GST levies on Food?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST Slabs

Mains level : Issues with GST Rationalization

From July 18, a 5% Goods and Services Tax (GST) has been levied on several food items and grains that are sold in a pre-packed, labelled form even if they are not branded.

What is the news?

  • So far, these items, which include curd, lassi, buttermilk, puffed rice, wheat, pulses, oats, maize and flour, were exempted from the GST net.
  • The fresh tax levies have attracted an outcry from traders as well as consumers.

What is GST?

  • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
  • It is charged at the time of supply and depends on the destination of consumption.
  • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).
  • GST, being a consumption-based tax, resulted in loss of revenue for manufacturing-heavy states.

What are GST Slabs?

  • In India, almost 500+ services and over 1300 products fall under the 4 major GST slabs.
  • There are five broad tax rates of zero, 5%, 12%, 18% and 28%, plus a cess levied over and above the 28% on some ‘sin’ goods.
  • The GST Council periodically revises the items under each slab rate to adjust them according to industry demands and market trends.
  • The updated structure ensures that the essential items fall under lower tax brackets, while luxury products and services entail higher GST rates.
  • The 28% rate is levied on demerit goods such as tobacco products, automobiles, and aerated drinks, along with an additional GST compensation cess.

How did the rate hikes come about?

  • The 5% tax on unbranded packed food items was approved by the GST Council.
  • Some of the other items to have lost their tax-exempt status include bank cheques, maps and atlases, hotel rooms that cost up to ₹1,000 a night, and hospital room rents of over ₹5,000 a day.
  • The pre-packed items weighing over 25 kg would not attract GST.

Why such move?

  • This move was part of a broader set of changes in the GST structure to do away with tax exemptions as well as concessional tax rates.
  • The Centre and States had discussed the need to raise revenues from the GST, which at the time of its launch five years ago, was premised on levying a ‘revenue-neutral’ rate of 15.5%.
  • All affected food items, including wheat, pulses, rice, curd and lassi, will be exempt from GST when sold loose.

What has the government said on the issue?

  • FM has hit out at misconceptions about the GST levies on food items and dismissed suggestions that they were imposed unilaterally by the Centre.
  • The 5% levy, she said, was critical to curb tax leakages and was not taken by ‘one member’ of the GST Council alone as all States had agreed to the move.
  • When GST was rolled out, a GST rate of 5% was made applicable on branded cereals, pulses, flour.
  • This was later amended to tax only such items which were sold under a registered brand or brands on which enforceable right was not foregone by the suppliers.
  • This tax exemption triggered ‘rampant misuse’ by reputed manufacturers and brand owners leading to a gradual drop in revenues.

 

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Goods and Services Tax (GST)

What is Transition Tax Credit?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Transitional Tax Credit

Mains level : Not Much

Taxpayers who had missed out on getting the benefit of transitional tax credits during India’s switchover to the Goods and Services Tax (GST) regime five years ago, will now get a fresh window to avail them.

What is Transitional Tax Credit?

  • A tax credit is a component of a company’s tax payment that can be applied to offset a subsequent tax obligation.
  • When India moved to the GST regime in 2017, companies had to transition the credit sitting on their books.
  • So, the closing balance in the old tax regime would become the opening credit balance under GST.
  • When India moved from the old indirect tax regime to GST, a one-time transition of credit was allowed.
  • That is, companies could set off part of the taxes paid during the old tax regime against future GST liabilities.
  • Many companies claimed that they had simply forgotten to claim the transitional credit.

Why in news?

  • The Supreme Court has directed the revenue authorities to facilitate such credits.
  • The move is likely to benefit hundreds of GST assessees who had hitherto not been able to avail such credits.
  • They will be given two-month window to claim during September and October.

 

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Goods and Services Tax (GST)

GST Slab Changes

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST Slabs

Mains level : Rationalization of GST

Customers will have to pay a 5% Goods and Services Tax (GST) on pre-packed, labelled food items such as atta, paneer and curd, besides hospital rooms with rents above ₹5,000.

What is GST?

  • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
  • It is charged at the time of supply and depends on the destination of consumption.
  • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).
  • GST, being a consumption-based tax, resulted in loss of revenue for manufacturing-heavy states.

What are GST Slabs?

  • In India, almost 500+ services and over 1300 products fall under the 4 major GST slabs.
  • There are five broad tax rates of zero, 5%, 12%, 18% and 28%, plus a cess levied over and above the 28% on some ‘sin’ goods.
  • The GST Council periodically revises the items under each slab rate to adjust them according to industry demands and market trends.
  • The updated structure ensures that the essential items fall under lower tax brackets, while luxury products and services entail higher GST rates.
  • The 28% rate is levied on demerit goods such as tobacco products, automobiles, and aerated drinks, along with an additional GST compensation cess.

Why rationalize GST slabs?

  • From businesses’ viewpoint, there are just too many tax rate slabs, compounded by aberrations in the duty structure through their supply chains with some inputs taxed more than the final product.
  • These are far too many rates and do not necessarily constitute a Good and Simple Tax.
  • Multiple rate changes since the introduction of the GST regime in July 2017 have brought the effective GST rate to 11.6% from the original revenue-neutral rate of 15.5%.
  • Merging the 12% and 18% GST rates into any tax rate lower than 18% may result in revenue loss.

 

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Goods and Services Tax (GST)

Impact of GST on inflation

Note4Students

From UPSC perspective, the following things are important :

Prelims level : National Anti-profiteering Authority

Mains level : Paper 3- Impact of GST on inflation

Context

The monumental indirect tax reform, the Goods and Services Tax (GST), has completed five years in existence. The article analyses the impact of GST on inflation.

Background

  • Before the implementation, it was said that it would be a boon to the economy in terms of higher revenue buoyancy, lower inflation, higher revenue, higher growth etc.
  • During the 12 months preceding GST implementation, the Consumer Price Index (CPI) inflation was 3.66%, while it increased to 4.24% post-GST in the next 12 months.
  •  A similar pattern was observed in Australia, New Zealand, and Canada.
  • An Australian Competition and Consumer Commission study showed that GST initially increases inflation.

How GST can affect prices

  • In theory, implementing GST should not lead to a change in overall inflation.
  • The revenue-neutral rate (RNR) is calculated so that it would not cause higher inflation.
  • But revenue neutrality does not mean that prices would not go up or down in the economy.
  • This is because the weight of goods in the consumption basket and their contributions to indirect tax collections are not the same.
  • Importantly, the effect of GST on the prices of certain goods and services depends on the structure and design of taxation.
  • The RBI, in a 2017 report, showed that about half of the groups of items that GST covers are not in the CPI basket.
  • So, the effect of GST on prices was expected to be small.
  • Finally, prior to the GST implementation, it was expected that prices would go down because GST harmonises indirect tax rates and eliminates the cascading effect.
  • Thus, whether GST has any effect depends on how different factors affect each other.

So, how can we ascertain whether GST has had an inflationary impact in India?

  • Inflationary impact can be assessed by turning to statistical modeling?
  • Statistical results provide us with an interesting picture of the impact of GST on price levels.
  • First, we look into the overall price index (CPI).
  • Here, the actual CPI growth in the study period is 4.61%, whereas the counterfactual estimate of inflation is 3.24%.
  • This implies that without the GST implementation, the CPI inflation would have been 3.24%.
  • This indicates that with the implementation of GST, CPI increased by 1.37 percentage points (pp).
  • Second,  CPI core inflation (which strips off volatile components such as food and fuel from the headline inflation) increased by 1.04pp in the post-GST period (actual inflation was 4.57%, counterfactual inflation was 3.53%).
  • Third, GST is found to have a significant positive impact on inflation of commodity groups such as paan, tobacco and intoxicants, clothing.

What explains rise in inflation post GST?

  • Rise in tax rate of some goods: The rise in inflation post-GST implementation could be due to the rise in the tax rate of some goods and services, the inclusion of business activities that were not taxed earlier, or the market structure.
  • The average weighted GST rate was designed to be neutral, so it might not have contributed much to the observed higher inflation.
  • Coverage of business activities under GST not taxed earlier would result in higher prices since the firms would pass on the cost to the consumers.
  • Market power: There is another possibility which would cause result inflation after the GST implementation.
  • As Joseph Stiglitz opined, rising market power is bad for the economy as it raises economic inefficiency and inequality and lowers the economy’s resiliency.
  • Further, taking advantage of market power, it is possible that most firms would have passed the taxes to end consumers.
  • With the existence of market power, firms’ price includes a significant mark-up over marginal costs.
  • Some results point out the possibility of profiteering in select segments after GST.
  • To pre-empt this possibility, the government set up National Anti-profiteering Authority (NAA).

Way forward

  •  NAA should monitor the prices of critical or essential goods and services to see the price impact of GST.
  • Similarly, the Competition Commission of India should observe anti-competitive producer behaviour that hurts consumers via excessive price increases.
  • These measures may ensure that producers do not take advantage of the GST.

Conclusion

Statistical results suggest that GST implementation has resulted in a decrease in inflation of food items and raised inflation of non-food items.

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Goods and Services Tax (GST)

Towards a single low tax regime

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Single slab structure in GST

Context

The introduction of a uniform GST was a watershed moment in India since the country’s earlier regime of taxes and cesses. However, GST is still a complicated tax regime with different slabs.

Unified single tax

  • Empirical data from across the world on the benefits of a unified single tax is incontrovertible
  • This needs bold and clear reformist thinking at the political level.
  • Imposing a high GST in some areas does not make sense.
  • ‘Sin’ taxes are at cross purposes with the government’s policy of generating growth and creating jobs under ‘Make in India’.
  • High taxes on air-conditioners, air conditioned restaurants, chocolates and luxury cars create an economic ripple effect downstream, in a complex web of businesses that have symbiotic relationships.
  • The effect finally reaches down to the bottom of the employment pyramid.
  • Distrust between State and centre: There is distrust between the States and the Centre on revenue sharing.
  • There is also anger at the Centre for riding roughshod over the States’ autonomy and disregarding the federal structure.

Multiple rates: A major shortcoming in the structure of GST

  • One of the most important shortcomings in the structure of GST is multiple rates.
  • The committee headed by the Chief Economic Adviser estimated the tax rate at 15-15.5 per cent.
  • It further recommended that in keeping with growing international practice, India should strive towards a single rate in the medium-term to facilitate administrative simplicity and compliance, but in the immediate context, it should have a three-tier structure (excluding zero).
  • The structure finally adopted was to have four rates of 5, 12, 18, and 28 per cent besides zero, though almost 75 per cent of the revenues accrue from the 12 and 18 per cent slabs.
  • Why single rate structure? The reasons for adopting a single rate structure in most countries are:
  • To have a simple tax system,
  • To prevent misclassifications and litigations arising therefrom,
  • To avoid an inverted duty structure of taxes on inputs exceeding those on outputs requiring detailed scrutiny and refunds.
  • Why multiple rates? The main reason for rate differentiation is equity.
  • But it is argued that this is an inefficient way of targeting benefits for the poor. 
  • Although the exempted and low-rated items are consumed relatively more by the poor, in absolute terms, the consumption may be more by the rich.

Way forward

  • Move people up the value chain: The plan must be to figure out how to rev up the economy by making the rich and upper middle class spend and move more people up the value chain instead of designing a tax system that keeps these products out of the new consumer class’s reach.
  • The same lack of logic applies to taxes on wine, rum and beer, which generate large-scale employment and are the backbone of grape and sugarcane farming and the cocoa industry.
  • In the automobile sector, the GST on electric cars, tractors, cycles, bikes, low-end and luxury cars ranges anywhere from 5% to 50%.
  • The sale of automobiles is the barometer of an economy.
  • Single tax slab: A directive to the bureaucracy is necessary to come up with just two categories: goods eligible for zero tax and goods that will fall under a single rate, say 10% or 12%.
  • Then there are items that are exempt from GST.
  • Bring fuels under GST:  Petrol, diesel, aviation turbine fuel are not under the purview of GST, but come under Central excise and State taxes.
  • A single low tax regime will ensure compliance, widen the tax net, improve ease of doing business, boost the economy, create jobs, increase tax collections and reduce corruption

Conclusion

The Finance Minister should take a cue from the Prime Minister, who hinted at major reforms in the aftermath of COVID-19, and do away with all the confusing tax slabs in one fell swoop.

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Goods and Services Tax (GST)

GST revenues surpass ₹1.44 lakh crore

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST, Major sources of revenue

Mains level : Success and limitations of the GST regime

India recorded its second-highest monthly gross GST revenues in June at ₹1,44,616 crore, 56% more than a year earlier when the second COVID wave had hit economic activity.

What is GST?

  • GST is an indirect tax that has replaced many indirect taxes in India such as excise duty, VAT, services tax, etc.
  • The Goods and Service Tax Act was passed in Parliament on 29th March 2017 and came into effect on 1st July 2017. It is a single domestic indirect tax law for the entire country.
  • It is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
  • Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales, Central GST and State GST are charged. All the inter-state sales are chargeable to the Integrated GST.

Answer this PYQ in the comment box:

Q.All revenues received by the Union. Government by way of taxes and other receipts for the conduct of Government business are credited to the (CSP 2015):

(a) Contingency Fund of India

(b) Public Account

(c) Consolidated Fund of India

(d) Deposits and Advances Fund

 

Post your answers here.
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What are the components of GST?

There are three taxes applicable under this system:

  1. CGST: It is the tax collected by the Central Government on an intra-state sale (e.g., a transaction happening within Maharashtra)
  2. SGST: It is the tax collected by the state government on an intra-state sale (e.g., a transaction happening within Maharashtra)
  3. IGST: It is a tax collected by the Central Government for an inter-state sale (e.g., Maharashtra to Tamil Nadu)

Advantages Of GST

  • GST has mainly removed the cascading effect on the sale of goods and services.
  • Removal of the cascading effect has impacted the cost of goods.
  • Since the GST regime eliminates the tax on tax, the cost of goods decreases.
  • Also, GST is mainly technologically driven.
  • All the activities like registration, return filing, application for refund and response to notice needs to be done online on the GST portal, which accelerates the processes.

Issues with GST

  • High operational cost
  • GST has given rise to complexity for many business owners across the nation.
  • GST has received criticism for being called a ‘Disability Tax’ as it now taxes articles such as braille paper, wheelchairs, hearing aid etc.
  • Petrol is not under GST, which goes against the ideals of the unification of commodities.

Take a look at the share of GST in government earnings for the previous fiscal:

UPSC can ask about the majority component of the Revenue Receipts of the govt. See how Corporate tax is nearing the GST revenues.

Do you think it will surpass GST revenue when the economy is fully recovered?

 

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Goods and Services Tax (GST)

Govt. hikes GST for household items

Note4Students

From UPSC perspective, the following things are important :

Prelims level : New GST slabs

Mains level : Rationalization of GST

The Goods and Services Tax (GST) Council has decided to hike and lower GST on certain commodities.

What is the news?

  • From July 18, tax hikes will kick in for over two dozen goods and services, ranging from unbranded food items, curd and buttermilk to low-cost hotels, cheques and maps.
  • Tax rates will be lowered for about half-a-dozen goods and services, including ropeways and truck rentals where fuel costs are included.
  • It scrapped GST for items imported by private vendors for use by defence forces.

What is GST?

  • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
  • It is charged at the time of supply and depends on the destination of consumption.
  • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).
  • GST, being a consumption-based tax, resulted in loss of revenue for manufacturing-heavy states.

What are GST Slabs?

  • In India, almost 500+ services and over 1300 products fall under the 4 major GST slabs.
  • There are five broad tax rates of zero, 5%, 12%, 18% and 28%, plus a cess levied over and above the 28% on some ‘sin’ goods.
  • The GST Council periodically revises the items under each slab rate to adjust them according to industry demands and market trends.
  • The updated structure ensures that the essential items fall under lower tax brackets, while luxury products and services entail higher GST rates.
  • The 28% rate is levied on demerit goods such as tobacco products, automobiles, and aerated drinks, along with an additional GST compensation cess.

Why rationalize GST slabs?

  • From businesses’ viewpoint, there are just too many tax rate slabs, compounded by aberrations in the duty structure through their supply chains with some inputs are taxed more than the final product.
  • These are far too many rates and do not necessarily constitute a Good and Simple Tax.
  • Multiple rate changes since the introduction of the GST regime in July 2017 have brought the effective GST rate to 11.6% from the original revenue-neutral rate of 15.5%.
  • Merging the 12% and 18% GST rates into any tax rate lower than 18% may result in revenue loss.

Haven’t GST revenues been hitting new records?

  • Yes, they have – GST revenues have scaled fresh highs in three of the first four months of 2022, going past ₹1.67 lakh crore in April.
  • But there is another key factor — the runaway pace of inflation.
  • Wholesale price inflation, which captures producers’ costs, has been over 10% for over a year and peaked at 15.1% in April.
  • Inflation faced by consumers on the ground has spiked to a near-eight year high of 7.8% in April.
  • The rise in prices was the single most important factor for higher tax inflows along with higher imports.

 

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Goods and Services Tax (GST)

What is the GST Council, what does it do?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST Council

Mains level : Read the attached story

The 47th meeting of the Goods and Services Tax Council began in Chandigarh, almost marking five years of the tax system coming into effect on July 1, 2017.

What is the GST Council?

  • The GST regime came into force after the Constitutional (122nd Amendment) Bill was passed by both Houses of Parliament in 2016.
  • More than 15 Indian states then ratified it in their state Assemblies, after which the President gave his assent.
  • The GST Council – a joint forum of the Centre and the states — was set up by the President as per Article 279A (1) of the amended Constitution.
  • The members of the Council include the Union Finance Minister (chairperson), the Union Minister of State (Finance) from the Centre.
  • Each state can nominate a minister in-charge of finance or taxation or any other minister as a member.

Why was the Council set up?

  • The Council, according to Article 279, is meant to “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”.
  • It also decides on various rate slabs of GST.
  • For instance, an interim report by a panel of ministers has suggested imposing 28 per cent GST on casinos, online gaming and horse racing.
  • A decision on this will be taken at the Council meeting.

What has changed this time?

  • The ongoing meeting is the first since a decision of the Supreme Court in May this year, which stated recommendations of the GST Council are not binding.
  • The court said Article 246A of the Constitution gives both Parliament and state legislatures “simultaneous” power to legislate on GST .
  • Recommendations of the Council are the product of a collaborative dialogue involving the Union and States.
  • This was hailed by some states, such as Kerala and Tamil Nadu, who believe states can be more flexible in accepting the recommendations as suited to them.

Agenda in this meet

  • The council’s meeting is also likely to focus on the issue of extension of the GST compensation regime beyond June 2022.
  • This was a special mechanism by which states were assured that their revenues would not be affected by the new GST system.
  • Some states are already demanding that the compensation be continued.
  • Earlier, the Council had agreed to extend the levy of compensation cess till 2026, but only for repayment of the borrowings made in the aftermath of the pandemic to provide compensation to states.

 

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Goods and Services Tax (GST)

What is GST Compensation Cess?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST Compensation Cess

Mains level : Success and limitations of the GST regime

The Centre has extended the time for levy of GST compensation cess by almost four years till March 31, 2026.

What is the news?

  • The Goods and Services Tax (Period of Levy and Collection of Cess) Rules were notified in 2022 by the Finance Ministry.
  • The levy of cess was to end on June 30 but the GST Council, chaired by Union Finance Minister decided to extend it till 2026.

What is GST?

  • GST, being a consumption-based tax, would result in loss of revenue for manufacturing-heavy states.
  • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
  • It is charged at the time of supply and depends on the destination of consumption.
  • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).

Compensation Cess under GST regime

  • Due to the consumption-based nature of GST, manufacturing states like Gujarat, Haryana, Karnataka, Maharashtra and Tamil Nadu feared a revenue loss.
  • Thus, GST Compensation Cess or GST Cess was introduced by the government to compensate for the possible revenue losses suffered by such manufacturing states.
  • However, under existing rules, this compensation cess will be levied only for the first 5 years of the GST regime – from July 1st, 2017 to July 1st, 2022.
  • Compensation cess is levied on five products considered to be ‘sin’ or luxury as mentioned in the GST (Compensation to States) Act, 2017 and includes items such as- Pan Masala, Tobacco, and Automobiles etc.

Alternatives to prevent losses

  • The input tax credit can help a producer by partially reducing GST liability by only paying the difference between the tax already paid on the raw materials of a particular good and that on the final product.
  • In other words, the taxes paid on purchase (input tax) can be subtracted from the taxes paid on the final product (output tax) to reduce the final GST liability.

Distributing GST compensation

  • The compensation cess payable to states is calculated based on the methodology specified in the GST (Compensation to States) Act, 2017.
  • The compensation fund so collected is released to the states every 2 months.
  • Any unused money from the compensation fund at the end of the transition period shall be distributed between the states and the centre as per any applicable formula.

Significance of GST compensation

  • States no longer possess taxation rights after most taxes, barring those on petroleum, alcohol, and stamp duty were subsumed under GST.
  • GST accounts for almost 42% of states’ own tax revenues, and tax revenues account for around 60% of states’ total revenues.
  • Finances of over a dozen states are under severe strain, resulting in delays in salary payments and sharp cuts in capital expenditure outlay amid the pandemic-induced lockdowns and the need to spend on healthcare.

 

Try this question from CSP 2018:

Q.Consider the following items:

  1. Cereal grains hulled
  2. Chicken eggs cooked
  3. Fish processed and canned
  4. Newspapers containing advertising material

Which of the above items is/are exempt under GST (Goods and Services Tax)?

(a) 1 only

(b) 2 and 3 only

(c) 1, 2 and 4 only

(d) 1, 2, 3 and 4

 

Post your answers here.
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Please leave a feedback on thisx

 

 

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Goods and Services Tax (GST)

Implications of GST Council ruling

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST council

Mains level : Paper 2- GST council's role in federal structure of India

Context

The Supreme Court of India recently ruled that “The recommendations of the GST Council are not binding on either the Union or the States…”.

About GST Council

  • The GST Council is a federal body that aims to bring together states and the Centre on a common platform for the nationwide rollout of the indirect tax reform.
  • Article 279 (1) of the amended Indian Constitution states that the GST Council has to be constituted by the President within 60 days of the commencement of the Article 279A.
  • According to the article, the GST Council will be a joint forum for the Centre and the States. It consists of the following members:
  • 1] The Union Finance Minister will be the Chairperson.
  • 2] As a member, the Union Minister of State will be in charge of Revenue of Finance.
  • 3] The Minister in charge of finance or taxation or any other Minister nominated by each State government, as members.
  • The Council has to function as a platform to bring the Union and State governments together.
  • As a mark of cooperative federalism, the Council shall, unanimously or through a majority of 75% of weighted votes, decide on all matters pertaining to GST and recommend such decisions to the Union and State governments.
  • Article 279A (4) specifies that the Council will make recommendations to the Union and the States on the important issues related to GST, such as the goods and services will be subject or exempted from the Goods and Services Tax.
  • Article 246A confers simultaneous or concurrent powers on Parliament and the state legislatures to make laws relating to GST.
  • This article is in sharp contrast to the constitutional scheme that prevailed till 2017.

Background of the case

  • In Union of India Anr. vs Mohit Minerals Pvt. Ltd., the Supreme Court of India on May 19, 2022 ruled on a petition relating to the levy of Integrated Goods and Services Tax (IGST) on ocean freight paid by the foreign seller to a foreign shipping company.
  • Mohit Minerals had filed a writ petition before the Gujarat High Court challenging notifications levying IGST on the ground that customs duty is levied on the component of ocean freight and the levy of IGST on the freight element in the course of transportation would amount to double taxation.
  • GST is paid by the supplier, but if the shipping line is located in a non-taxable territory, then GST is payable by the importer, the recipient of service.
  • Ocean freight is a method of transport by which goods and cargo is transported by ships through shipping lines.

Important aspects of the judgement

  • Power to legislate simultaneously: Article 246A gives powers to the Union and State governments simultaneously to legislate on the GST.
  • In other words, the two tiers of the Indian Union can simultaneously legislate on matters of the GST (except the IGST, which is in the legislative domain of the Union government).
  • In this case, the Government of India had argued that “Neither can Article 279A override Article 246A nor can Article 246A be made subject to Article 279A.
  • However, cooperative federalism is to operate through the GST Council to bring in harmony and alignment in matters pertaining to the GST from both governments.
  • Given this background, the Union government had almost delegated the powers to create laws under the GST Act Section 5(1) to the GST Council.
  • Persuasive value only: The Supreme Court of India adjudicated that the GST Council’s recommendations are non-qualified and the simultaneous legislating powers of the Union and State governments give only persuasive value to the Council’s recommendations.
  • The power of the recommendations rests on the practice of cooperative federalism and collaborative decision-making in the Council.

Issues with voting rights in GST council

  • Inbalance in voting rights: The Union government holds one-third weight for its votes and all States have two-thirds of the weight for their votes.
  • This gives automatic veto power to the Union government because a resolution can be passed with at least three-fourths of the weighted votes.
  • This imbalance in the voting rights between the Union and State governments, makes democratic decision-making difficult.
  • Equal weight to all states creates political problems: Though all the States are not equal in terms of tax capacity, everyone has equal weight for their votes.
  • This creates another political problem as the smaller States with lesser economic stakes can be easily influenced by interest groups.
  • Debate on political lines: The debates in the GST Council will be on political lines rather than on the economics of taxation.
  •  When the States governed by Opposition parties are vocal on counter-points, the States governed by the same party at the Union government are mute spectators.

Way forward

  • Work in a harmonised manner: The Supreme Court has recorded, “Since the Constitution does not envisage a repugnance provision to resolve inconsistencies between the Central and State laws on GST, the GST Council must ideally function, as provided by Article 279A(6) in a harmonised manner to reach a workable fiscal model through cooperation and collaboration.”
  • Cooperative federalism: The nuanced understanding of cooperative federalism shows that there is no space for one-upmanship in either of the two tiers of the Indian federal government and particularly for the Union government under a quasi-federal Constitution.

Conclusion

Given the lopsided power structure favouring the Union government in the GST Council, it is against the spirit of democracy and federalism that the finances of governments can be left to such bodies.

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Goods and Services Tax (GST)

GST Council must uphold fiscal federalism

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Article 279A

Mains level : Paper 3- Fiscal federalism in GST Council

Context

The recent ruling of the Supreme Court held that the states were free to use means of persuasion ranging from collaboration to contestation.

 Simultaneous or concurrent powers under Article 246A

  • Article 246A confers simultaneous or concurrent powers on Parliament and the state legislatures to make laws relating to GST.
  • This article is in sharp contrast to the constitutional scheme that prevailed till 2017.
  • It clearly demarcated taxing powers between the Centre and states with no overlaps.
  • After 2017, several central and state levies were subsumed into GST.
  • Each state was to have its own GST Act, all of them being almost identical to the Central GST Act.
  • Inter-state supplies and imported goods are liable to IGST.

Composition of GST Council

  • The GST Council has the Union finance minister as the chairperson and the Union minister of state in charge of revenue or finance as a member.
  • Centre has one-third voting power, 31 states (including two Union Territories) share the remaining two-thirds of the vote.
  • The GST Council has a total of 33 members.
  • Out of a total of 33 votes, 11 belong to the Centre and 22 votes are shared by 31 states/UT, with each state/UT having a 0.709 vote.
  • Any decision of the GST Council requires a three-fourth majority or a minimum of 25 votes.
  • As the Centre has 11 votes, it requires an additional 14 votes.
  • Unlike so many statutes, Article 279A has made no provision to make the decision of the majority binding on the dissenting states.
  •  Paragraph 2.73 of the Select Committee Report on the 122nd Constitution (Amendment) Bill, 2014, noted that this voting pattern was to maintain a fine balance as, in a federal constitution, the dominance of one over the other was to be disallowed.

Role of GST Council

  • Under Article 279A, the GST Council has to make “recommendations” on various topics including the tax rate and exemptions.
  • The Union of India argued that the “constitutional architecture” showed that Articles 246A and 279A, when read together, made the GST Council the ultimate policy-making and decision-making body for framing GST laws.
  • The GST Council was unique and incomparable to any other constitutional body and its recommendations would override the legislative power of Parliament and state legislatures.
  • Neither of them could legislate on GST issues independent of the recommendations of the GST Council.
  • The argument went further: On a combined reading of Article 279A, the provisions of the IGST and CGST Acts and the recommendations of the GST Council were transformed into legislation.
  • The Supreme Court rightly noted that several sections in the state GST laws, CGST and in IGST, cast a duty even on dissenting states to issue notifications to implement the recommendations of the GST Council.

Observations on federalism

  • Delving into legislative history, the court ruled that a draft Article 279B, which provided for a GST Disputes Settlement Authority, was omitted because it would have effectively overridden the sovereignty of Parliament and the state legislatures, and diminished the fiscal autonomy of the states.
  • It was desirable, the Court said, to have some level of friction, some amount of state contestation, some deliberation-generating froth in our democratic system.
  • Putting to rest any controversy, the court held that the recommendations of the GST Council had only a persuasive value.
  • To regard them as binding edicts would disrupt fiscal federalism because both the Union and states were conferred equal power to legislate on GST.
  • Rule-making power bound by recommendations of GST Council: The Court held that the state governments and Parliament, while exercising their rule-making powers under the provisions of the State GST Acts, CGST & IGST Acts, are bound by the recommendations of the GST Council.
  • States can amend GST laws: But even this did not mean that all recommendations of the GST Council are binding on state legislatures or Parliament to enact primary pieces of legislation on GST.
  • In effect, states can amend their GST laws if they so choose.

Way forward

  •  If the GST Council meets periodically as mandated and there is active participation of the states in making recommendations, no state will oppose a recommendation that has been carefully deliberated and is in the national interest.

Conclusion

Indeed, there is little chance of cracks developing in the GST edifice as long as the spirit of cooperative and collaborative federalism prevails.

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Goods and Services Tax (GST)

Price Rise and GST

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST slabs, Inverted Duty Structure

Mains level : Read the attached story

The GST regime is due for an overhaul in tax rates levied on different products because of structural anomalies and to reduce the multiple tax slabs.

What is GST?

  • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
  • It is charged at the time of supply and depends on the destination of consumption.
  • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).
  • GST, being a consumption-based tax, resulted in loss of revenue for manufacturing-heavy states.

What are GST Slabs?

  • In India, almost 500+ services and over 1300 products fall under the 4 major GST slabs.
  • There are five broad tax rates of zero, 5%, 12%, 18% and 28%, plus a cess levied over and above the 28% on some ‘sin’ goods.
  • The GST Council periodically revises the items under each slab rate to adjust them according to industry demands and market trends.
  • The updated structure ensures that the essential items fall under lower tax brackets, while luxury products and services entail higher GST rates.
  • The 28% rate is levied on demerit goods such as tobacco products, automobiles, and aerated drinks, along with an additional GST compensation cess.

Why rationalize GST slabs?

  • From businesses’ viewpoint, there are just too many tax rate slabs, compounded by aberrations in the duty structure through their supply chains with some inputs are taxed more than the final product.
  • These are far too many rates and do not necessarily constitute a Good and Simple Tax.
  • Multiple rate changes since the introduction of the GST regime in July 2017 have brought the effective GST rate to 11.6% from the original revenue-neutral rate of 15.5%.
  • Merging the 12% and 18% GST rates into any tax rate lower than 18% may result in revenue loss.

Haven’t GST revenues been hitting new records?

  • Yes, they have – GST revenues have scaled fresh highs in three of the first four months of 2022, going past ₹1.67 lakh crore in April.
  • But there is another key factor — the runaway pace of inflation.
  • Wholesale price inflation, which captures producers’ costs, has been over 10% for over a year and peaked at 15.1% in April.
  • Inflation faced by consumers on the ground has spiked to a near-eight year high of 7.8% in April.
  • The rise in prices was the single most important factor for higher tax inflows along with higher imports.

Can we expect the rate reset this year?

  • Any re-arrangement of GST rates will entail some products being taxed higher, with concomitant ripple effects on prices.
  • The Centre and the States are not unmindful of the desperate need to rationalise the rate slabs and structure but we just need to get the timing right.
  • Presently inflation is the top worry.
  • With inflation, much of it imported through pricier fuels, commodities and food items, expected to hover high through the year, the GST rate reset hopes appear bleak in 2022-23.

 

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Goods and Services Tax (GST)

A new road for India’s fiscal federalism

Note4Students

From UPSC perspective, the following things are important :

Prelims level : 101st Constitutional Amendment Act

Mains level : Paper 2- Fiscal federalism

Context

On May 19, in Union of India vs Mohit Minerals, the Supreme Court of India delivered a ruling which is likely to have an impact far wider than what the Centre might have imagined when it brought the case up on appeal.

Background

  • At stake was the validity of a levy imposed on importers, of Integrated Goods and Services Tax (IGST) on ocean freight paid by foreign sellers to foreign shipping lines.
  • The Gujarat High Court had declared the tax illegal.
  • The Supreme Court affirmed the ruling and held that the levy constituted double taxation — that is, that the importer, which was already paying tax on the “composite” supply of goods, could not be asked to pay an additional tax on a perceived “service” that it may have received.

Why the ruling could transform the future of fiscal federalism in India

  • Equal powers to legislate on GST: While delivering the judgement, the Supreme Court held that both Parliament and the State legislatures enjoy equal power to legislate on Goods and Services Tax (GST).
  • The Court said that the Goods and Services Tax Council’s recommendations were just that: recommendations that could never be binding on a legislative body.
  • Until now, governments across India have treated the GST Council’s recommendations — even where they disagreed with them — as sacrosanct, because they believed that this was indeed the law.
  • According to the Court, State legislatures possess the authority to deviate from any advice rendered by the GST Council and to make their own laws by asserting, in the process, their role as equal partners in India’s federal architecture.
  • Conflicting taxation regimes: Because of the ruling, the State governments will be free to exercise independent power to legislate on GST.
  • It is possible that this might lead to conflicting taxation regimes, with the idea of ‘One Nation One Tax’ rendered nugatory.
  • Constitutional power cannot be limited through statute: The Court’s ruling does not mean that a legislature — whether Parliament or the States’ — cannot through statutory law make the Council’s recommendations binding on executive bodies.
  • But a constitutional power, in the Court’s ruling, can never be limited through statute. Such curbs must flow only from the Constitution.
  • And in this case, in the Court’s analysis, no restrictions on legislative power can be gleaned on a meaningful reading of the Constitution.

Background of 101st constitutional Amendment

  • Unification of tax administration: When, in July 2017, the Union government introduced the GST regime through the 101st constitutional Amendment, it did so based on an underlying belief that tax administration across India needed unification.
  • To give effect to this idea, many entries in the State list of Schedule VII of the Constitution were either deleted or amended.
  • A power to legislate on GST was inserted through a newly introduced Article 246A.
  •  No longer could State governments legislate on sale or purchase of goods barring a few exceptions, such as petroleum and liquor through the ordinary legislative route.
  • GST Council: In addition, the 101st Amendment also established, through Article 279A, a GST Council.
  • The Council was given the power to “make recommendations to the Union and States” on several different matters.

Implications of the judgement

  • The use of the word “recommendations” suggested on the one hand that its decisions would be advisory, at best.
  • But, at the same time, the fact that Article 279A directed the establishment of a mechanism to adjudicate disputes between governments on decisions taken by the Council suggested that those governments would, in fact, be bound by any advice rendered to them.
  • GST would be in jeopardy: If the former reading was to be deployed, the purpose behind the introduction of a common GST would be in jeopardy.
  • But the latter interpretation effectively entailed the destruction of the well-laid plans of the Constituent Assembly.
  • Fiscal responsibilities that had been divided with much care and attention between the Union and the States would now stand dissolved.

Federal compact

  • Although States had until now proceeded on a tacit belief that the GST Council’s recommendations were binding, such an approach, in Justice Chandrachud’s words, would run counter both to the express words of the Constitution and the philosophical values underlying the language deployed.
  • Article 246A, which was introduced by the 101st Amendment provides concomitant power both to the Union and to the State governments to legislate on GST.
  • It does not discriminate between the two in terms of its allocation of authority.
  • That allocation, according to the Court, cannot be limited by a reading of Article 279A, which establishes a GST Council, and which treats the Council’s decisions as “recommendations”.

Conclusion

GST was conceived as a product of what some described as “pooled sovereignty”. But perhaps it is only in an administrative area, animated by contestation, where we can see synergy between different sovereign units, where our nation can take a genuine turn towards a more “cooperative federalism”.

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Goods and Services Tax (GST)

GST collections touched a record high of Rs 1.67 lakh crore in April.

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST collection

Mains level : Paper 3- Increased GST collection

Context

There has been a remarkable upswing in GST collections in recent months. Collections touched a record high of Rs 1.67 lakh crore in April.

GST

GST Interstate Model Example

What are the reasons for increased collection?

  • 1] Inflation: First, the sharp rise in inflation has played a significant role.
  • Notwithstanding concerns over the unevenness of the economic recovery, in nominal terms, the economy grew by 19.4 per cent in 2021-22 as per the second advance estimates.
  • Deflating GST collection suggests that a large part of the recent increase in collections is driven by rising prices.
  • 2] Higher imports: Part of the overall increase in collections can be traced to higher imports.
  • Higher buoyancy: Even if one is to exclude the revenue accruing from imports, the rise in GST collections has outstripped GDP growth, indicating higher buoyancy.
  • 3] Tightening of the rules: In order to improve compliance levels, the GST Council has been tweaking the rules to tighten the system.
  • Returns filed have gone up, while the number of non-filers and those who delay filing have fallen.
  • Alongside, the administration has also taken steps to tackle the menace of fake invoices by placing restrictions on the quantum of input tax credit that can be used to pay of tax obligations.
  • The introduction of e-invoicing has also played a role.
  • Until recently, this was being implemented for firms with a turnover of more than Rs 50 crore.
  • From April, this process has been extended to firms above Rs 20 crore.
  • The incremental gains from bringing smaller firms into its ambit, while consequential, are unlikely to be of the same order.
  • 4] Industrial activity:  The higher collections in April 2022 seem to be led by increase in industrial activity. This is borne by strong growth in collections in states such as Maharashtra, Karnataka and Odisha which house lot of industries. Relatively tepid growth in more populous states such as Bihar (-2.47 per cent), West Bengal (7.80 per cent) and Jharkhand (4.86 per cent) shows that the GST collections was not propelled by revival in private consumption.
  •  The real challenge lies in improving compliance levels across the entire spectrum of industries where inputs/raw materials are sourced largely from the informal sector.
  • 5] Changing the structure of the economy: The formalisation of firms, the growing concentration of economic power in the hands of a few, imply that for the same level of output, the tax paid will be higher.

Suggestion

  • Increase tax rate: Around two-fifths of the taxable value (or turnover) falls under the 18 per cent slab as per research by some analysts.
  • This implies that simply merging the 12 per cent and the 18 per cent slab as some have been suggesting would lead to a revenue loss.
  • Before opting for such adjustments, the GST Council must first ascertain the potential revenue (net of cess and refunds) at varying levels of compliance, tax rates and exemptions afforded.
  • Now, as per some estimates presented to the 15th Finance Commission, with existing exemptions in place, the current tax regime should ideally yield revenues equivalent to 8.23 per cent of GDP.
  •  In another scenario, even if existing exemptions are kept in place, and if a single rate of 14 per cent is levied, then collections should rise to 8.93 per cent.

Conclusion

Considering the current economic situation, now may not be an opportune moment to raise taxes. But there is no getting around it. Both the Centre and the states need to work towards this.

 

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Goods and Services Tax (GST)

Supreme Court’s ruling on GST deepens the churn in the tax regime

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Implications of Supreme Court's ruling for GST regime

Context

Last week, the Supreme Court ruled that the decisions taken by the GST Council are merely recommendations with “persuasive value” and are not binding.

GST as a advisory body

  • The court has rejected the Centre’s contention that the entire structure of GST would crumble if the Council’s decisions were not treated as enforceable.
  • In some ways, the verdict states the obvious.
  • Article 246-A inserted after the 122nd constitutional amendment states, “Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every state, have the power to make laws with respect to the GST imposed by the Union or by such state.”
  • Thus, the power to levy the central GST (CGST) vests with Parliament, the power to levy state GST (SGST) vests with state legislatures and Parliament has exclusive power to make laws with respect to the GST on items that are part of inter-state trade or commerce.
  •  Thus, the GST Council is only an advisory body and the actual decisions regarding model GST levies, principles of levy, apportionment of GST levied on inter-state supplies, principles relating to place of supply, exemptions and rate structure and any special provisions will have to be taken by either Parliament in the case of CGST and IGST or the states in the case of SGST.
  • In effect, decisions on the structure and operation of the tax can be made by the Centre and individual states without discussion and deliberation in the Council and both can ignore any recommendation made by the Council.
  • The judgment reiterates that the sovereign right to levy the tax still exists with the Union and state governments and it is for them to consider the recommendations of the Council.
  • The chance of having a harmonised GST and reforms in the tax regime will crucially depend upon continued negotiation and bargaining between the Union and states.
  • Intergovernmental cooperation has been kept alive to ensure a harmonised GST and unless both the Centre and the states see the gains, reforms will be hard to come by and if the Centre desires the reforms more than the states, it will have to ensure a “buy in” from the states to agree for the reform.

Implications of the judgement

  • Given that the GST Council has been declared as only an advisory body with a persuasive value, what happens to the dream of having a harmonised one nation, one tax, if a state or a group of states decides to deviate?
  • But the judgment paves the way for more intensive bargaining and negotiations, placing states on an equal footing with the Centre in taking decisions on the structure and operations of the tax.
  • At present, decisions get approved in the GST Council when passed by a majority of three-fourths of the weighted votes of the members present and voting, with the Centre having one-third weight and individual states (and UTs) having an equal share of the remaining two-thirds weight.
  • However, in the past, all decisions in the Council have been taken by consensus (except in the case of determining the rate on lotteries), and the Supreme Court decision reinforces this convention.
  • The immediate impact of this will be bargaining by states for extending the period of compensation for the loss of revenue.
  •  As the five-year period of compensation gets over at the end of June, this decision will now help the states to bargain hard for the extension.

Way forward

  •  Though the period of collecting compensation cess has been extended till March 2026 to meet the interest and repayment requirements of the funds borrowed from the RBI to meet the compensation requirements, the lasting solution lies in increasing the revenue productivity of the tax by pruning the list of exempted items, rationalising the rates and taking administrative measures.
  • These reforms will require strengthening the cooperative spirit.

Conclusion

This has come at a time when reforms have to be set in motion and hopefully, the Court’s decision will strengthen the cooperative spirit in reforming the domestic consumption tax system in the country.

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Goods and Services Tax (GST)

What is the Service Charge levied by Restaurants on Customers?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Service charges on food

Mains level : Not Much

The Centre has called a meeting of restaurant owners over service charge levied by them on customers.

Why in news?

  • The restaurants are collecting service charges from consumers by default, even though collection of any such charge is voluntary and at the discretion of consumers and not mandatory as per law.

What are the components of a food bill?

  • A restaurant bill in India comprises food charge (from the menu), with an addition of service charge (anywhere between 5 to 15 per cent) and a 5 per cent GST on this amount (IGST+SGST).
  • This is for all kinds of standalone restaurants.
  • In case a restaurant is located inside a hotel wherein room rate is upwards of Rs 7,500 (mostly in case of five-stars), the GST would be 18 per cent.

Nature of Service charge

  • While the GST is a mandatory component as per law, the service charge is supposed to be optional.
  • It is the equivalent of what is known as gratuity around the world, or tip, in casual parlance.
  • Most restaurants decide the service charge on their own, and print it at the bottom of the menu with an asterisk.

Policy measures

  • The Ministry of Consumer Affairs had come out with “Guidelines on Fair Trade Practices Related to Charging of Service Charge from Consumers by Hotels/ Restaurants”.
  • Here it was clearly mentioned that a component of service is inherent in the provision of food and beverages ordered by a customer.
  • Hence the pricing of the product is expected to cover both the goods and service components.
  • It said that the bill “may clearly display that service charge is voluntary, and the service charge column of the bill may be left blank for the customer to fill up before making payment.”

What do the restaurants say?

  • The levy of service charge by a restaurant is a matter of individual policy to decide if it is to be charged or not.
  • There is no illegality in levying such a charge.
  • Once the customer is made aware of such a charge in advance and then decides to place the order, it becomes an agreement between the parties, and is not an unfair trade practice.
  • GST is also paid on the said charge to the Government.

Where does the fund go?

  • Restaurants claim that a major chunk of the service charge thus collected goes to the staff, while the rest goes towards a welfare fund to help them out during good and bad times.
  • It’s a default billing option, even as customers can choose not to pay it if they don’t want to.
  • Of course, they are paid the salaries but the service charge works as an incentive for them.
  • Restaurateurs also say that patrons can decide not to pay the charge and tip the server directly, but in this case, the backroom staff doesn’t get anything.
  • A service charge ensures all staff members are rewarded evenly.

What is the issue then?

  • The issue is that almost all restaurants have put service charge (fixed at their own accord) as a default billing option.
  • And if a consumer is aware that it is not compulsory and wants it removed or wants to tip the server directly, the onus is on them to convince the management why they don’t want to pay it.
  • The department says they received several complaints saying it leads to public embarrassment and spoils the dining experience since at the end of it, they either pay the charge quietly and exit the place feeling cheated, or have to try hard to get it removed.
  • Also, there is no transparency as to where this charge goes.
  • The officials also say that collecting service charge on their own and paying GST on it to the government doesn’t make it authorised.

Problems faced by customers

  • It is this component which has come under dispute from time to time, with consumers arguing they are not bound to pay it.
  • It also said that hotels and restaurants charging tips from customers without their express consent in the name of service charges amounts to unfair trade practice.

 

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Goods and Services Tax (GST)

States have equal powers to make GST-related Laws: SC

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST Council

Mains level : Read the attached story

The Supreme Court has held that Union and State legislatures have equal, simultaneous and unique powers to make laws on Goods and Services Tax (GST) and the recommendations of the GST Council are not binding on them.

What is the case?

  • The apex court’s decision came while confirming a Gujarat High Court ruling that the Centre cannot levy Integrated Goods and Services Tax (IGST) on ocean freight from Indian importers.

Key takeaways of the Judgment

  • The recommendations of the GST Council are the product of a collaborative dialogue involving the Union and the States.
  • They are recommendatory in nature. They only have a persuasive value.
  • To regard them as binding would disrupt fiscal federalism when both the Union and the States are conferred equal power to legislate on GST.

Basis of the Judgment

  • The court emphasised that Article 246A of the Constitution gives the States power to make laws with respect to GST.
  • It treats the Union and the States as “equal units”.
  • It confers a simultaneous power (on Union and States) for enacting laws on GST.
  • Article 279A, in constituting the GST Council, envisions that neither the Centre nor the States are actually dependent on the other.

What are the articles added/modified to the Constitution by the GST Act?

(1) Article 246A: Special Provision for GST

  • This Article was newly inserted to give power to the Parliament and the respective State/Union Legislatures to make laws on GST respectively imposed by each of them.
  • However, the Parliament of India is given the exclusive power to make laws with respect to inter-state supplies.
  • The IGST Act deals with inter-state supplies. Thus, the power to make laws under the IGST Act will rest exclusively with the Parliament.
  • Further, the article excludes the following products from the scope of GST until a date recommended by the GST Council:
  1. Petroleum Crude
  2. High-Speed Diesel
  3. Motor Spirit
  4. Natural Gas
  5. Aviation Turbine Fuel

(2) Article 269A: Levy and Collection of GST for Inter-State Supply

  • While Article 246A gives the Parliament the exclusive power to make laws with respect to inter-state supplies.
  • The manner of distribution of revenue from such supplies between the Centre and the State is covered in Article 269A.
  • It allows the GST Council to frame rules in this regard. Import of goods or services will also be called as inter-state supplies.
  • This gives the Central Government the power to levy IGST on import transactions.
  • Import of goods was subject to Countervailing Duty (CVD) in the earlier scheme of taxation.
  • IGST levy helps a taxpayer to avail the credit of IGST paid on import along the supply chain, which was not possible before.

(3) Article 279A: GST Council

  • This Article gives power to the President to constitute a joint forum of the Centre and States called the GST Council.
  • The GST Council is an apex member committee to modify, reconcile or to procure any law or regulation based on the context of GST in India.

(4) Article 286: Restrictions on Tax Imposition

  • This was an existing article which restricted states from passing any law that allowed them to collect tax on sale or purchase of goods either outside the state or in the case of import transactions.
  • It was further amended to restrict the passing of any laws in case of services too.
  • Further, the term ‘supply’ replaces ‘sale or purchase’.

(5) Article 366: Addition of Important definitions

Article 366 was an existing article amended to include the following definitions:

  1. GST means the tax on supply of goods, services or both. It is important to note that the supply of alcoholic liquor for human consumption is excluded from the purview of GST.
  2. Services refer to anything other than goods.
  3. State includes Union Territory with legislature.

Back2Basics: GST Council

  • The GST Council is a federal body that aims to bring together states and the Centre on a common platform for the nationwide rollout of the indirect tax reform.
  • It is an apex member committee to modify, reconcile or to procure any law or regulation based on the context of goods and services tax in India.
  • The GST Council dictates tax rate, tax exemption, the due date of forms, tax laws, and tax deadlines, keeping in mind special rates and provisions for some states.
  • The predominant responsibility of the GST Council is to ensure to have one uniform tax rate for goods and services across the nation.

How is the GST Council structured?

  • The GST is governed by the GST Council. Article 279 (1) of the amended Indian Constitution states that the GST Council has to be constituted by the President within 60 days of the commencement of the Article 279A.
  • According to the article, the GST Council will be a joint forum for the Centre and the States. It consists of the following members:
  1. The Union Finance Minister will be the Chairperson
  2. As a member, the Union Minister of State will be in charge of Revenue of Finance
  3. The Minister in charge of finance or taxation or any other Minister nominated by each State government, as members.

Terms of reference

  • Article 279A (4) specifies that the Council will make recommendations to the Union and the States on the important issues related to GST, such as the goods and services will be subject or exempted from the Goods and Services Tax.
  • They lay down GST laws, principles that govern the following:
  1. Place of Supply
  2. Threshold limits
  3. GST rates on goods and services
  4. Special rates for raising additional resources during a natural calamity or disaster
  5. Special GST rates for certain States

 

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Goods and Services Tax (GST)

Let’s make GST a good and simple tax

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST slabs

Mains level : Paper 3- Dealing with the shortcomings of GST

Context

The GST has been a remarkable achievement and a unique experiment in cooperative federalism. In this, both the Union and the state governments gave up their tax autonomy in favour of harmonising domestic trade taxes.

Multiple rates: A major shortcoming in the structure of GST

  •  One of the most important shortcomings in the structure of GST is multiple rates.
  • The committee headed by the Chief Economic Adviser estimated the tax rate at 15-15.5 per cent.
  • It further recommended that in keeping with growing international practice, India should strive towards a single rate in the medium-term to facilitate administrative simplicity and compliance, but in the immediate context, it should have a three-tier structure (excluding zero).
  • The structure finally adopted was to have four rates of 5, 12, 18, and 28 per cent besides zero, though almost 75 per cent of the revenues accrue from the 12 and 18 per cent slabs.
  • Why single rate structure? The reasons for adopting a single rate structure in most countries are to have a simple tax system, prevent misclassifications and litigations arising therefrom, and to avoid an inverted duty structure of taxes on inputs exceeding those on outputs requiring detailed scrutiny and refunds.
  • Why multiple rates? The main reason for rate differentiation is equity.
  • But it is argued that this is an inefficient way of targeting benefits for the poor. 
  • Although the exempted and low-rated items are consumed relatively more by the poor, in absolute terms, the consumption may be more by the rich. 

Suggestions

  • Focus on the expenditure side: The ideal way of targeting the benefits to the poor is on the expenditure side, through targeted cash transfers to vulnerable groups and providing quality education and healthcare.
  • Of course, unprocessed food items have to be exempted for reasons of administrative difficulty, but the list should be kept small.
  • Right time to rationalise the rates: Now, in fact, is the opportune time to rationalise the rate structure.
  • The economy is in recovery mode and more importantly, GST revenues have shown reasonably high buoyancy with collections of over Rs 1 lakh crore in the last 10 months and touching a record of Rs 1.68 lakh crore in April 2022.
  • Role of e-invoicing: The revenue increase has not come about only due to the economic recovery.
  •  The more important reason seems to be that at last, the GSTN has been able to stabilise the technology platform.
  • Mandating the issue of e-invoicing for all businesses above Rs 100 crore has enabled better invoice matching and detection of fake invoices that were used to claim the input tax credit.
  • This has helped to improve tax compliance and has also enabled better enforcement.
  • With time, the GSTN should be able to enforce e-invoice requirements on all businesses above Rs 10 crore, which will cover more than 95 per cent of taxpayers.
  • Dealing with the excessive rate differentiation: The GST council is concerned about the problems arising from excessive rate differentiation and has set up a seven-member ministerial panel .
  • But it has been widely reported that the committee is thinking of increasing the lower tax rate from 5 per cent to 8 per cent and moving some essential items from the 5 per cent category to the 3 per cent slab.
  • This will be retrograde because a rate category will be added. The need of the hour is to reduce the rate categories.
  • Merge 12 and 18 per cent categories: It would be preferable to merge the 12 per cent and 18 per cent categories into a 15-16 per cent slab and move the items in the 5 per cent category to the 8 per cent slab and remove the 28 per cent category altogether. 

Conclusion

The merger of 12 and 18 per cent categories will result in the GST structure with two rates and as the cesses will cease after 2026 when the compensation requirement is over, it will really become a “good and simple tax”.

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Goods and Services Tax (GST)

GST Compensation dues

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST Compensation

Mains level : Read the attached story

The West Bengal CM has said that slashing State levies on petrol and diesel will be possible only if the Centre clears its outstanding dues of over ₹97,000 crore, which includes compensation for implementing the Goods and Services Tax (GST).

What is GST?

  • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
  • It is charged at the time of supply and depends on the destination of consumption.
  • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).
  • GST, being a consumption-based tax, resulted in loss of revenue for manufacturing-heavy states.

Compensation under GST regime

  • Due to the consumption-based nature of GST, manufacturing states like Gujarat, Haryana, Karnataka, Maharashtra and Tamil Nadu feared a revenue loss.
  • Thus, GST Compensation Cess or GST Cess was introduced by the government to compensate for the possible revenue losses suffered by such manufacturing states.
  • However, under existing rules, this compensation cess will be levied only for the first 5 years of the GST regime – from July 1st, 2017 to July 1st, 2022.
  • Compensation cess is levied on five products considered to be ‘sin’ or luxury as mentioned in the GST (Compensation to States) Act, 2017 and includes items such as- Pan Masala, Tobacco, and Automobiles etc.

Distributing GST compensation

  • The compensation cess payable to states is calculated based on the methodology specified in the GST (Compensation to States) Act, 2017.
  • The compensation fund so collected is released to the states every 2 months.
  • Any unused money from the compensation fund at the end of the transition period shall be distributed between the states and the centre as per any applicable formula.

Significance of GST compensation

  • States no longer possess taxation rights after most taxes, barring those on petroleum, alcohol, and stamp duty were subsumed under GST.
  • GST accounts for almost 42% of states’ own tax revenues, and tax revenues account for around 60% of states’ total revenues.
  • Finances of over a dozen states are under severe strain, resulting in delays in salary payments and sharp cuts in capital expenditure outlay amid the pandemic-induced lockdowns and the need to spend on healthcare.

What is the status of the outstanding GST compensation due to the States?

  • The Finance Ministry said that outstanding GST compensation dues to States for 2021-22 stood at ₹78,704 crore.
  • This means that dues have been remitted to States for the eight-month period of April 2021 till November 2021.
  • Normally, compensation for 10 months from April-January of any financial year is released during that year and the compensation for February-March is released only in the next financial year.
  • The pending amount will also be released as and when the amount from cess accrues in the compensation fund.

Also read:

[Burning Issue] GST Compensation

 

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Goods and Services Tax (GST)

GST revenues cross 1.3 lakh crore in Feb

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST, Major sources of revenue

Mains level : Success of the GST regime

The Gross Goods and Services Tax (GST) revenue in February was 26% higher than the pre-pandemic levels at ₹1,33,026 crore.

What is GST?

  • GST is an indirect tax that has replaced many indirect taxes in India such as excise duty, VAT, services tax, etc.
  • The Goods and Service Tax Act was passed in Parliament on 29th March 2017 and came into effect on 1st July 2017. It is a single domestic indirect tax law for the entire country.
  • It is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
  • Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales, Central GST and State GST are charged. All the inter-state sales are chargeable to the Integrated GST.

Answer this PYQ in the comment box:

Q.All revenues received by the Union. Government by way of taxes and other receipts for the conduct of Government business are credited to the (CSP 2015):

(a) Contingency Fund of India

(b) Public Account

(c) Consolidated Fund of India

(d) Deposits and Advances Fund

 

Post your answers here.
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What are the components of GST?

There are three taxes applicable under this system:

  1. CGST: It is the tax collected by the Central Government on an intra-state sale (e.g., a transaction happening within Maharashtra)
  2. SGST: It is the tax collected by the state government on an intra-state sale (e.g., a transaction happening within Maharashtra)
  3. IGST: It is a tax collected by the Central Government for an inter-state sale (e.g., Maharashtra to Tamil Nadu)

Advantages Of GST

  • GST has mainly removed the cascading effect on the sale of goods and services.
  • Removal of the cascading effect has impacted the cost of goods.
  • Since the GST regime eliminates the tax on tax, the cost of goods decreases.
  • Also, GST is mainly technologically driven.
  • All the activities like registration, return filing, application for refund and response to notice needs to be done online on the GST portal, which accelerates the processes.

Issues with GST

  • High operational cost
  • GST has given rise to complexity for many business owners across the nation.
  • GST has received criticism for being called a ‘Disability Tax’ as it now taxes articles such as braille paper, wheelchairs, hearing aid etc.
  • Petrol is not under GST, which goes against the ideals of the unification of commodities.

Take a look at the share of GST in government earnings for the previous fiscal:

UPSC can ask about the majority component of the Revenue Receipts of the govt. See how Corporate tax is nearing the GST revenues.

Do you think it will surpass GST revenue when the economy is fully recovered?

 

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Goods and Services Tax (GST)

Extending GST compensation as a reform catalyst

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Tax buoyancy

Mains level : Paper 3- GST and issues

Context

In 2020-21, the compensation payment episode plunged the Union-State relationship to a new low, creating humongous mistrust.

Background of the compensation to the States

  • To allay the fears of States of possible revenue loss by implementing GST in the short term, the Union government promised to pay compensation for any loss of revenue in the evolutionary phase of five years.
  • This was estimated by taking the revenue from the merged taxes in 2015-16 as the base and applying the growth rate of 14% every year.
  •  To finance the compensation requirements, a GST compensation cess was levied on certain items such as tobacco products, automobiles.
  • Period of five years: The agreement to pay compensation for the loss of revenue was for a period of five years which will come to an end by June 2022.
  • Mistrust between Centre and the State: In 2020-21, due to the most severe lockdown following the novel coronavirus pandemic, the loss of revenue to States was estimated at ₹3 lakh-crore of which ₹65,000 crore was expected to accrue from the compensation cess.
  • Of the remaining ₹2.35 lakh-crore, the Union government decided to pay ₹1.1 lakh-crore by borrowing from the Reserve Bank of India.
  • The entire compensation payment episode plunged the Union-State relationship to a new low, creating humongous mistrust.

GST reform is still in transition

  • Misuse of input tax credit: The technology platform could not be firmed up for a long time due to which the initially planned returns could not be filed.
  • This led to large-scale misuse of input tax credit using fake invoices.
  • Revenue uncertainty faced by the States: This is the only major source of revenue for the States.
  • Considering their increased spending commitments to protect the lives and livelihoods of people, they would like to mitigate revenue uncertainty to the extent they can.
  • They have no means to cushion this uncertainty for the Finance Commission which is supposed to take into account the States’ capacities and needs in its recommendations has already submitted its recommendations.
  • Changes needed: More importantly, the structure of GST needs significant changes and the cooperation of States is necessary to carry out the required reforms.

Changes needed in GST structure

  • Reducing exemption items: Almost 50% of the consumption items included in the consumer price index are in the exemption list; broadening the base of the tax requires significant pruning of these items.
  • Bringing petroleum products, real estate etc under GST: Sooner or later, it is necessary to bring petroleum products, real estate, alcohol for human consumption and electricity into the GST fold.
  • Single rate: The present structure is far too complicated with four main rates (5%, 12%, 18% and 28%).
  • This is in addition to special rates on precious and semi-precious stones and metals and cess on ‘demerit’ and luxury items at rates varying from 15% to 96% of the tax rate applicable which have complicated the tax enormously.
  •  Multiple rates complicate the tax system, cause administrative and compliance problems, create inverted duty structure and lead to classification disputes.

Way forward

  • Extending the compensation period: Reforming the structure to unify the rates is imperative and this cannot be done without the cooperation of States.
  • Thus, extending the compensation payment for the next five years is necessary not only because the transition to GST is still underway but also to provide comfort to States to partake in the reform.
  • Reforming the structure is important not only to enhance the buoyancy of the tax in the medium term but also to reduce administrative and compliance costs to improve ease of doing business and minimise distortions.
  • New rate of compensation: It has been pointed out by many including the Fifteenth Finance Commission that the compensation scheme of applying 14% growth on the base year revenue provided for the first five years was far too generous.
  • The issue can be revisited and the rate of growth of reference revenue for calculating compensation can be linked to the growth of GSDP in States.

Conclusion

The transition to GST is still in progress and an extension will provide comfort to States to help roll out crucial changes.

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Goods and Services Tax (GST)

GST Council defers Tax Rate increase on Textiles

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST slabs, Inverted Duty Structure

Mains level : Losses due to GST

Hours before the new GST rate was to take effect, the GST Council  has decided to temporarily roll back the increase in tax rate for the textiles sector.

What was the proposal?

  • The GST Council had recommended making certain rate changes for footwear and textiles to correct the inverted duty structure.

What is Inverted Duty Structure?

  • An inverted duty structure arises when the taxes on output or final product is lower than the taxes on inputs.
  • This creates an inverse accumulation of input tax credit which in most cases has to be refunded.

A loss for the govt

  • Inverted duty structure has implied a stream of revenue outflow for the government prompting the government to relook the duty structure.
  • For footwear, the government refunds around Rs 2,000 crore in a year.

What is the present rate of GST on textiles?

  • At present, tax rate on manmade fibre, yarn and fabrics is 18%, 12% and 5%, respectively.
  • Apparel and clothing up to Rs 1,000 per piece currently attracts 5% GST.

Issues with the tax increase

  • This decision has created a negative impact resulting in drop in demand and recession.
  • The new rate structure would cause closure of around 1 lakh textile units and losses of 15 lakh jobs nationally.

 

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Goods and Services Tax (GST)

States demand extension of GST compensation for another 5 years

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST Compensation

Mains level : Harmonization of GST

Many states have demanded that the GST compensation cess regime be extended for another five years and the share of the Union government in the centrally-sponsored schemes be raised as the COVID-19 pandemic has impacted their revenues.

 What is GST?

  • GST, being a consumption-based tax, would result in loss of revenue for manufacturing-heavy states.
  • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
  • It is charged at the time of supply and depends on the destination of consumption.
  • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).

Compensation under GST regime: GST Compensation Cess

  • Due to the consumption-based nature of GST, manufacturing states like Gujarat, Haryana, Karnataka, Maharashtra and Tamil Nadu feared a revenue loss.
  • Thus, GST Compensation Cess or GST Cess was introduced by the government to compensate for the possible revenue losses suffered by such manufacturing states.
  • However, under existing rules, this compensation cess will be levied only for the first 5 years of the GST regime – from July 1st, 2017 to July 1st, 2022.
  • Compensation cess is levied on five products considered to be ‘sin’ or luxury as mentioned in the GST (Compensation to States) Act, 2017 and includes items such as- Pan Masala, Tobacco, and Automobiles etc.

Why is the compensation necessary?

  • States no longer possess taxation rights after most taxes, barring those on petroleum, alcohol, and stamp duty were subsumed under GST.
  • GST accounts for almost 42% of states’ own tax revenues, and tax revenues account for around 60% of states’ total revenues.
  • Finances of over a dozen states are under severe strain, resulting in delays in salary payments and sharp cuts in capital expenditure outlay amid the pandemic-induced lockdowns and the need to spend on healthcare.

Distributing GST compensation

  • The compensation cess payable to states is calculated based on the methodology specified in the GST (Compensation to States) Act, 2017.
  • The compensation fund so collected is released to the states every 2 months.
  • Any unused money from the compensation fund at the end of the transition period shall be distributed between the states and the centre as per any applicable formula.

Try this question from CSP 2018:

Q. Consider the following items:

  1. Cereal grains hulled
  2. Chicken eggs cooked
  3. Fish processed and canned
  4. Newspapers containing advertising material

Which of the above items is/are exempt under GST (Goods and Services Tax)?

(a) 1 only

(b) 2 and 3 only

(c) 1, 2 and 4 only

(d) 1, 2, 3 and 4

 

Post your answers here.
1
Please leave a feedback on thisx

 

Also read:

[Burning Issue] GST Compensation

 

 

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Goods and Services Tax (GST)

Goods and Services Tax as an unfinished agenda

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Challenges to GST

Context

Seen purely from a revenue point of view and as a fiscal policy tool, India’s GST is still on a rocky road.

Background

  • The GST was launched by India on the midnight of July 1, 2017.
  • Benefits of GST: Hailed as a landmark reform in India’s tax history, it was expected to improve tax-GDP ratio, end tax cascading, enhance efficiency, competitiveness, growth, and ensure lower prices.
  • Fiscal federalism: It was also projected as a watershed in India’s fiscal federalism.
  • the States have forgone a substantial part of their own tax revenue.
  • States were in turn guaranteed a GST compensation assuring 14% growth in their GST revenue during the initial five years.
  • India’s GST architecture: India’s GST architecture is built on the firm foundations of a GST Council and the GST Network (GSTN).
  • GST Council as due federal process: The first is the key decision-making body, chaired by the Union Finance Minister with a Minister of State in charge of Finance and the Finance Ministers of States as members.
  • This is envisaged as a due federal process to protect the interests of the States.

Unresolved issues

[1] Revenue neutrality not achieved

  • India’s GST paradigm stands on two key pillars: revenue neutrality and GST compensation for the States.
  • The assured revenue neutrality remains a mirage and many States have experienced a declining tax-GDP ratio.
  • Decline in tax to GDP ratio of state: In the case of major 18 States, the ratio of own tax revenue to GDP has declined.
  • While the share of the Centre in total GST increased by 6%, that of States put together lagged behind with only a 4.5% increase.
  • Stark differences between the Revenue Neutral Rates (RNR) for the producing States and consumption State have been observed. States producing exempted food grains also lost out.
  • Since the rates were lower under GST vis-à-vis the VAT regime, revenue neutrality was not adhered ab initio.
  • The problems were compounded with massive evasion following the dismantling of check posts, and later on fake invoices, that grew by leaps and bounds.
  • Experience of other countries: The South African experience illustrates how zero-rating and large exemptions have defeated revenue goals.
  • Canadian experience shows that GST could be improved by limiting zero rating, tax-exemptions and harmonising tax rates.
  • The resilience of the economy at the time of rolling out of GST is critical for its wider reception as the Australian experience shows.

[2] Not conducive to co-operative federalism

  • While the States collectively forewent 51.8% of their total tax revenue, the Centre surrendered only 28.8%.
  • Yet, GST is shared equally between the Centre and States despite two expert committees recommended for a higher share for the States.
  • Given the revenue neutrality failure and the host of other issues, many of the States are left with no option except to depend on GST compensation.
  • This is not conducive to sustainable co-operative federalism.

[3] Need for revenue sharing formula for IGST

  • Although IGST is a key source of revenue for many of the States, the clearing house mechanism and the process therein remains unknown territory.
  •  It was pointed out that GST is discriminatory to manufacturing States, indicating the need for a revenue sharing formula that duly incentivises exporting States by sharing IGST revenue among three parties instead of two.

[4] Other issues

  • Swift functioning of Input tax credit: The Malaysian experience demonstrates the need for swift and transparent functioning of the input tax credit system through a flawless IT infrastructure.
  • We operate in an almost information vacuum especially with respect to IGST along with several glitches in the digital architecture.
  • GSTN is now in the doldrums.
  • Data monopoly: It neither makes effective use of the massive and invaluable data being generated nor shares them to enable others to make use of them.
  • Such practice in “data monopoly” was a fact of history in India’s statistical system and has to go sooner rather than later.
  • Australia, having several similarities with India, in terms of Centre and the subnational units, and destination-based, multi-stage tax with input credit provisions, has not been revenue-buoyant.
  • It is a matter for consideration whether widening exemptions and the replacing of income-tax by GST in the case of small and medium enterprises are advisable measures in the Indian context.

Consider the question “What are the challenges facing the GST in India? What India can learn from the experience of other countries’ experience.”

Conclusion

Despite many years of efforts in evolving an Indianised GST system and over 50 months of adjustments with over a thousand notifications, with accompanying uncertainties in the first year and the novel coronavirus pandemic and the lockdown still in the saddle, GST continues to be an unfinished agenda. But how far and how long?

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Goods and Services Tax (GST)

Finance Ministry backs three-rate GST structure

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST slab

Mains level : Harmonization of GST

The Government can rationalize the GST rate structure without losing revenues by rejigging the four major rates of 5%, 12%, 18% and 28% with a three-rate framework of 8%, 15% and 30%, as per a National Institute of Public Finance and Policy (NIPFP) study.

GST Slabs

  • In India, almost 500+ services and over 1300 products fall under the 4 major GST slabs.
  • These comprise rates of 5%, 12%, 18%, and 28%. The GST Council periodically revises the items under each slab rate to adjust them according to industry demands and market trends.
  • The updated structure ensures that the essential items fall under lower tax brackets, while luxury products and services entail higher GST rates.
  • The 28% rate is levied on demerit goods such as tobacco products, automobiles, and aerated drinks, along with an additional GST compensation cess.

Why harmonize GST slabs?

  • Multiple rate changes since the introduction of the GST regime in July 2017 have brought the effective GST rate to 11.6% from the original revenue-neutral rate of 15.5%.
  • Merging the 12% and 18% GST rates into any tax rate lower than 18% may result in revenue loss.
  • The nature of rate changes has also meant that over 40% of taxable turnover value now falls in the 18% tax slab, thus any move to dovetail that slab with a lower rate will trigger losses.

What next?

  • Restructuring GST rates is a timely idea to improve revenues.
  • It is important to sequence the transition to the new rate structure so as to minimize the costs associated with tax compliance, administration, and economic distortions.

 

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Goods and Services Tax (GST)

GST collections hit 5-month high

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Revenue receipts

Mains level : GST

India’s gross Goods and Services Tax (GST) revenues crossed ₹1.17 lakh crore in September, hitting a five-month high.

Take a look towards the share of GST in government earnings for the previous fiscal:

UPSC can ask about the majority component of the Revenue Receipts of the govt. See how Corporate tax is nearing the GST revenues.

Do you think it will surpass GST revenue when the economy is fully recovered?

What is the news?

  • September’s revenues were 23% higher than a year ago and 27.3% more than collections in the pre-pandemic month of September 2019.
  • Revenues from import of goods were 30% higher while indirect tax collected on domestic transactions, including the import of services, were 20% higher in September, compared to the same month in 2020.
  • Among the major States, GST revenues grew 29% in Karnataka, 28% in Gujarat, followed by 22% in Maharashtra and 21% each in Tamil Nadu and Andhra Pradesh.
  • Telangana recorded a 25% surge in revenues, while Odisha saw a sharper 40% rise.

Significance

  • This clearly indicates that the economy is recovering at a fast pace.
  • Coupled with economic growth, anti-evasion activities, especially action against fake billers have also been contributing to the enhanced GST collections.
  • It is expected that the positive trend in the revenues will continue and the second half of the year will post higher revenues.

Issues underlying

  • Though GST revenues are picking up pace after the impact of the Covid-19 pandemic, revenue buoyancy under GST is being seen as a concern.
  • This is especially after the legally mandated compensation to states for revenue shortfall from the GST implementation comes to an end in June 2022.

Back2Basics: Goods and Services Tax

  • The GST is a value-added tax levied on most goods and services sold for domestic consumption.
  • It was launched into operation on the midnight of 1st July 2017.
  • It subsumed almost all domestic indirect taxes (petroleum, alcoholic beverages, and stamp duty are the major exceptions) under one head.
  • The GST is paid by consumers, but it is remitted to the government by the businesses selling the goods and services.
  • GST is levied at four rates viz. 5%, 12%, 18% and 28%. The schedule or list of items that would fall under these multiple slabs is worked out by the GST council.

Types

  • The GST to be levied by the Centre is called Central GST (CGST) and that to be levied by the States is called State GST (SGST).
  • Import of goods or services would be treated as inter-state supplies and would be subject to Integrated Goods & Services Tax (IGST) in addition to the applicable customs duties.

The GST Council

  • It is a constitutional body (Article 279A) for making recommendations to the Union and State Government on issues related to GST.
  • The GST Council is chaired by the Union Finance Minister and other members are the Union State Minister of Revenue or Finance and Ministers in charge of Finance or Taxation of all the States.
  • It is considered as a federal body where both the centre and the states get due representation.

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Goods and Services Tax (GST)

GST Council not for inclusion of Petroleum Products

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Taxing of fuels

Mains level : Limitations of GST

The Goods and Services Tax (GST) Council has decided to keep petroleum products out of the GST regime.

Present taxation of Fuels

  • Currently, taxes on petroleum products are levied by both the Centre and the states.
  • While the Centre levies excise duty, states levy value added tax (VAT).
  • For instance, VAT on petroleum products is as high as 40% in Maharashtra, contributing over ₹25,000 crore annually.
  • By being able to levy VAT on these products, the state governments have control over their revenues.

Impact of inclusion of fuel under GST

  • If petroleum products are included under the GST, there will be a uniform price of fuel across the country.
  • However, petroleum products coming under GST not necessarily means that taxes or prices will come down.
  • If the GST council decides to opt for a lower slab, taxes may come down.
  • At present, India has four primary GST rates – 5 percent, 12 percent, 18 percent and 28 percent.
  • Levying a standard rate of GST on petrol would mean that the prices increase dramatically in Andaman and Nicobar, but on the flip side, they would fall in Maharashtra if the cumulative rate is lower than the current rate.

Key takeaways from States VAT

  • Among the states, Rajasthan levies the highest tax across the country keeping VAT on petrol at 36 percent, followed by Telangana at 35.2 percent.
  • Other states with more than 30 per cent VAT on petrol include Karnataka, Kerala, Assam, Andhra Pradesh, Delhi and Madhya Pradesh.
  • On diesel, the highest VAT rates are charged by states like Odisha, Telangana, Rajasthan and Chhattisgarh.
  • So far, five states, West Bengal, Rajasthan, Meghalaya, Assam and Nagaland have cut taxes on fuel this year.

Back2Basics: Petroleum Pricing Mechanism

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Goods and Services Tax (GST)

How not to deal with recession

Note4Students

From UPSC perspective, the following things are important :

Prelims level : National Development Council

Mains level : Paper 3- Dealing with the recession

Context

The Centre is facing a serious financial crisis because of the exigencies created by the pandemic and its own policies. However, monetising assets and cutting down funds to states could aggravate the crisis.

3 Policies aggravating the crisis

1) NMP and disinvestment

  • Union Finance Minister, while announcing the National Monetisation Pipeline (NMP), said that asset monetisation is based on the philosophy of creation through monetisation and is aimed at “tapping private sector investment for new infrastructure creation”.
  • Loss of dividend: Disinvestment of profitable Navratna companies will result in a loss of dividend, a major source of income for the Centre.
  • Loss due to tax exemptions: Tax exemptions to the investors will take away another major share of income.
  • Central funds will be squeezed and this, in turn, will have a bearing on state finances.
  • NMP will seriously hurt the interests of the country.

2) Cutting down funds to States

  • Kerala’s case: The state was getting about 3.92 per cent from the divisible pool in the 1970s and 1980s.
  • It came down to 2.66 per cent and 2.34 per cent in the awards of the 12th and 13th Finance Commissions.
  • The 14th Finance Commission award increased it to 2.45 (2.50) per cent.
  • Now, the 15th Finance Commission has reduced it to 1.92 per cent.
  • This arbitrary cut is a result of the adoption of certain new yardsticks by the commission without considering the state government’s views
  • The 15th Finance Commission’s special grant (RD grant) of Rs 19,800 crore for this year will no longer be available in the coming years.
  • Karnataka and many other states have also suffered because of the policy to reduce the divisible pool share.

3) Tax exemptions and surcharge

  • Exemptions amounting to Rs 99,842.06 crore were extended to corporate houses in 2019-20.
  • Many taxes on goods were reduced because of electoral compulsions. This reduced central revenues.
  • Along with such tax exemptions, the increased use of cesses and surcharges is responsible for the shrinking of the shareable pool.
  • The shareable resources with the Centre was around Rs 6.8 lakh crore in 2019-20 which has come down to Rs 5.5 lakh crore in 2020-21.
  • All the cesses and surcharges that are not shared with states come to about 20 per cent of the total revenues of the Centre.
  • States have been demanding that this money should be shared with them, particularly while fighting a pandemic.
  • States complaining for resources does not augur well for cooperative federalism.

Way forward

  • Developing basic infrastructure and the production sector is the only way to face an economic crisis.
  • That should not be done by selling or handing over public assets to private individuals and corporations.
  • We need massive public investment that will help people to form cooperatives and collectives in agriculture and industrial production.
  • Parliament, the National Development Council and the GST Council should discuss this unprecedented situation.

Conclusion

We need to find a way out collectively. Handing over the rights on public properties to private individuals will take the country back to the colonial era. This must not be allowed.

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Goods and Services Tax (GST)

Centre and states must strike bargain on GST

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST

Mains level : Paper 3- Changes needed in GST

Context

After one and a half years of dispute, and with the economy showing signs of recovery, a path forward for the GST finally seems visible. This opportunity needs to be seized to strike the Centre-State bargain.

How GST performed so far

  •  The contributors are many but the critical one has been simply a lack of revenues.
  • Initially, the GST performed well, with collections soaring to Rs 11.8 lakh crore in the first full year of implementation in 2018-19.
  • But in 2019-20, the growth rate decelerated sharply. And in 2020-21, collections actually fell.
  • As future collections became uncertain, a gap opened up between the amount that the Centre felt it could afford to promise and the minimum that the states felt they needed and were entitled to.
  • More recently, however, confidence in GST has improved.
  • Collections have revived, averaging Rs 1.1 lakh crore in the first five months of the current fiscal year, exceeding even pre-pandemic levels.

What explains the weak revenue performance of the GST?

  • Slowing economy: The GST’s past performance now seems much better than it once did.
  • We now know that after 2018-19, nominal GDP growth slowed from 10.5 per cent in 2018-19 to 7.8 per cent the next year and -3 per cent in 2020-21.
  • Effective rate cuts: The RBI has pointed out, the effective tax rate has fallen by nearly 3 percentage points because of rate cutting in 2019, in which both the Centre and states were complicit.
  • Thus the weak revenue performance of the GST now seems attributable to wider economic difficulties and policy actions, rather than problems with the tax itself.

Necessary changes: Opportunity for striking bargain for Centre and States

1) Principle of compensation must be re-cast: Create revenue buffer

  • As the GST was a new tax, so states were guaranteed against the teething troubles that would inevitably arise for the next five years.
  • Five years on, this logic is less compelling.
  • The GST as tax reform has reached maturity, well understood by producers, consumers, and tax officials.
  • At the same time, the last few years have exposed the vulnerability of the states to shocks such as Covid-19 pandemic.
  • Way forward: To prevent this situation from recurring, the authorities should create a revenue buffer that could be tapped in a time of need.
  • In sum, there is a bargain waiting to be struck: The states give up their demand for an extension of the compensation mechanism, while the Centre offers a new counter-cyclical buffer.
  • As the figure shows, in good economic times, GST revenues will be robust but it is against downturns that states need protection.
  • The shift to revenue insurance, in turn, should allow the compensation cess to be abolished. 

2) The GST structure needs to be simplified and rationalised

  • The GST structure needs to be simplified and rationalised, as recommended by the Fifteenth Finance Commission and the Revenue Neutral Rate report.
  • New rate structure: A new structure should have one low rate (between 8 and 10 per cent), one standard rate (between 16 and 18 per cent) and one rate for all demerit goods.
  • The single rate on demerit goods also requires eliminating the cesses with all their complexity.

3) The GST Council’s working needs changes

  • Consensus-based decision making in GST Council can be sustained only if there is a shared sense of participatory and inclusive governance. 
  • Nearly two decades ago, when the VAT was being introduced, Yashwant Sinha established a culture of consensual discussions on indirect taxes.
  • He did this by requiring the Empowered Committee of State Finance Ministers to be headed by a finance minister from an Opposition-run state government.
  • The spirit of this idea could be translated to the GST Council.

Consider the question “Inherent importance of GST and its significance for the cooperative federalism underline the necessity for the Centre and the States to strike the win-win bargain. In light of this, examine the issues with the GST and suggest the way forward to deal with these issuef.”

Conclusion

Cooperative federalism is not a gesture or one-off outcome. It is, above all, a disposition, resulting from quotidian democratic practice. By rehabilitating cooperative federalism’s finest achievement — the GST — the Centre and states can help restore India’s broader economic prospects.

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Goods and Services Tax (GST)

GST Council may consider bringing petrol, diesel under GST

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST Council

Mains level : Commodities left out of GST purview

The GST Council might consider taxing petrol, diesel and other petroleum products under the single national GST regime.

About GST Council

  • The GST Council is a constitutional body that aims to bring together states and the Centre on a common platform for the nationwide rollout of the indirect tax reform.
  • It is an apex member committee to modify, reconcile or to procure any law or regulation based on the context of goods and services tax in India.
  • It dictates tax rate, tax exemption, the due date of forms, tax laws, and tax deadlines, keeping in mind special rates and provisions for some states.
  • The predominant responsibility of the GST Council is to ensure to have one uniform tax rate for goods and services across the nation.

How is the GST Council structured?

  • The GST is governed by the GST Council. Article 279 (1) of the amended Indian Constitution states that the GST Council has to be constituted by the President within 60 days of the commencement of Article 279A.
  • According to the article, the GST Council will be a joint forum for the Centre and the States. It consists of the following members:
  1. The Union Finance Minister will be the Chairperson
  2. As a member, the Union Minister of State will be in charge of Revenue of Finance
  3. The Minister in charge of finance or taxation or any other Minister nominated by each State government, as members.

Terms of reference

  • Article 279A (4) specifies that the Council will make recommendations to the Union and the States on the important issues related to GST, such as the goods and services will be subject to or exempted from the Goods and Services Tax.
  • They lay down GST laws, principles that govern the following:
  1. Place of Supply
  2. Threshold limits
  3. GST rates on goods and services
  4. Special rates for raising additional resources during a natural calamity or disaster
  5. Special GST rates for certain States

Why bring Petro/Diesel under GST?

  • GST is being thought to be a solution for the problem of near-record high petrol and diesel rates in the country, as it would end the cascading effect of tax on tax.
  • The state VAT is being levied not just on the cost of production but also on the excise duty charged by the Centre on such output.

Why were they left out of GST?

  • When a national GST subsumed central taxes such as excise duty and state levies like VAT on July 1, 2017, five petroleum goods – petrol, diesel, ATF, natural gas and crude oil – were kept out of its purview.
  • This is because both central and state government finances relied heavily on taxes on these products.
  • Since GST is a consumption-based tax, bringing petroleum under the regime would have mean states where these products are sold get the revenue and not the producer ones.
  • Simply put, Uttar Pradesh and Bihar with their huge population and a resultant high consumption would get more revenues at the cost of states like Gujarat.

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Goods and Services Tax (GST)

What is Input Tax Credit?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Input Tax Credit

Mains level : Not Much

The Supreme Court has confirmed a Madras High Court judgment which upheld a fiscal formula included in the Central Goods and Service Tax Rules to execute refund of unutilized Input Tax Credit (ITC) accumulated on account of input services.

What is Input Tax Credit?

  • Input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs.
  • Say, you are a manufacturer – tax payable on output (FINAL PRODUCT) is Rs 450 tax paid on input (PURCHASES) is Rs 300 You can claim INPUT CREDIT of Rs 300 and you only need to deposit Rs 150 in taxes. See here:

Pc: Cleartax.in

The case in discussion

  • The apex court Bench led, by Justice D.Y. Chandrachud, passed the judgment in the face of two contradicting judgments of Gujarat and Madras High Courts on the validity of Rule 89(5) of the Central GST Rules, 2017.
  • Rule 89(5) provides a formula for the refund of ITC, in “a case of refund on account of inverted duty structure”.
  • The Gujarat High Court had held that by prescribing a formula in sub-Rule (5) of Rule 89 to execute refund of unutilized ITC accumulated on account of input services.
  • The Madras High Court, while delivering its judgment declined to follow the view of the Gujarat High Court.

Answer this PYQ in the comment box:

Consider the following items:

  1. Cereal grains hulled
  2. Chicken eggs cooked
  3. Fish processed and canned
  4. Newspapers containing advertising material

Which of the above items is/are exempt under GST (Goods and Services Tax)?

(a) 1 only

(b) 2 and 3 only

(c) 1, 2 and 4 only

(d) 1, 2, 3 and 4

 

Post your answers here
3
Please leave a feedback on thisx

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Goods and Services Tax (GST)

Govt must constitute GST tribunal: SC

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST

Mains level : GST Appellate Tribunal

The Supreme Court has warned that the government had no option but to constitute the Goods and Services Tax (GST) Appellate Tribunal.

What is GST Appellate Tribunal?

  • The GST Appellate Tribunal (GSTAT) is the second appeal forum under GST for any dissatisfactory order passed by the First Appellate Authorities.
  • The National Appellate Tribunal is also the first common forum to resolve disputes between the centre and the states.
  • Being a common forum, it is the duty of the GST Appellate Tribunal to ensure uniformity in the redressal of disputes arising under GST.
  • It holds the same powers as the court and is deemed Civil Court for trying a case.

Constitution of the GST Appellate Tribunal

The GSTAT has the following structure:

  1. National Bench: The National Appellate Tribunal is situated in New Delhi, constitutes a National President (Head) along with 2 Technical Members (1 from Centre and State each)
  2. Regional Benches: On the recommendations of the GST Council, the government can constitute (by notification) Regional Benches, as required. As of now, there are 3 Regional Benches (situated in Mumbai, Kolkata and Hyderabad) in India.
  3. State Bench and Area Bench

Why in news now?

  • The GST tribunal has not been constituted even four years after the central GST law was passed in 2016.
  • Section 109 of the GST Act mandates the constitution of the Tribunal.
  • Citizens aggrieved are constrained to approach respective High Court and the same was overburdening the work of the High Courts.

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Back2Basics: Goods and Services Tax

  • The GST is a value-added tax levied on most goods and services sold for domestic consumption.
  • It was launched into operation on the midnight of 1st July 2017.
  • It subsumed almost all domestic indirect taxes (petroleum, alcoholic beverages, and stamp duty are the major exceptions) under one head.
  • The GST is paid by consumers, but it is remitted to the government by the businesses selling the goods and services.
  • GST is levied at four rates viz. 5%, 12%, 18% and 28%. The schedule or list of items that would fall under these multiple slabs is worked out by the GST council.

Types

  • The GST to be levied by the Centre is called Central GST (CGST) and that to be levied by the States is called State GST (SGST).
  • Import of goods or services would be treated as inter-state supplies and would be subject to Integrated Goods & Services Tax (IGST) in addition to the applicable customs duties.

The GST Council

  • It is a constitutional body (Article 279A) for making recommendations to the Union and State Government on issues related to GST.
  • The GST Council is chaired by the Union Finance Minister and other members are the Union State Minister of Revenue or Finance and Ministers in charge of Finance or Taxation of all the States.
  • It is considered as a federal body where both the centre and the states get due representation.

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Goods and Services Tax (GST)

Need to deal with the flaws in the existing structure of GST

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GVA

Mains level : Paper 3- Issues in GST

Context

After four years, the promise of the Goods and Services Tax (GST) remains substantially unrealised.

Why tax base of GST is not expanding

  • The GST is strongly co-related to overall GDP.
  • Revenue collection of the GST is dependent on the nominal growth rate of Gross Value Added (GVA) in the economy.
  • Since inception, GVA per quarter has been between ₹40-lakh crore to ₹47-lakh crore and GST revenue has not been higher than ₹2.7-lakh crore to ₹3.1-lakh crore.
  • The Tax to Gross value addition is only about 5% to 6.5% though GVA growth was much higher.
  • Issues: A very large segment is covered by exemption, composition schemes, evasion and lower tax rate.

Five Issues with the GST structure

1) Dominance of the Centre

  • The political architecture of GST is asymmetrically loaded in favour of the Centre.
  • No body to adjudicate: There is no particular body is tasked to adjudicate if there is a dispute between States and between the Centre and the States.
  • Centre’s domination: In the voting, the central government has one-third vote and States have two-thirds of total votes.
  • All states have equal voting rights regardless of size and stake.
  • With the support of a dozen small States whose total GST collection is not more than 5% of the total central government can dominate the decision making process in GST Council.
  • Small states dictate the terms: With equal value for each States’ voting, larger and mid-sized States feel shortchanged.

2) Flaw in tax structure

  • Nearly 45% to 50% of commodity value is outside the purview of the GST, such as petrol and petroleum products.
  • Certain states not getting revenue as origin state: States which export or have inter-State transfers or mineral and fossil fuel extractions are not getting revenue as the origin States and need a compensation mechanism.
  • The pre-existing threshold level of VAT has been tweaked too often which has led to an evaporation of tax base incentivising, enabling evasion and mis-reporting.
  • Most trading and retail establishments, (however small) are out of the fold of the GST.
  • At the retail level, irrespective of whether Input Tax Credit (ITC) is required or not, the burden can be passed off to the consumer.
  • As a result, the loss could be as high as one third.

3) Exemptions

  • Exemptions from registration and taxation of the GST have further eroded the GST tax base compared to the tax base of the pre-existing VAT.
  • Ground for evasion: Exemptions are purely distortionary and also provide a good chance to remain under the radar, thereby directly increasing evasion or misclassification.
  • Theoretically, exemptions at the final stages reduce tax realisation.
  • Multiple rates: As multiple rates are charged at different stages, it goes against the lessons of GST history.
  • This tax works well with a single uniform tax rate for all commodities and services at all stages, inputs and outputs alike.
  • While most countries have a single rate, India stands out and is among the five countries to have four rates/slabs.

4) Exclusion

  • Against the interest of States: Petroleum products remaining outside the purview of GST has helped the Centre to increase cesses and decrease central excise, in what would otherwise have been shareable with the States.
  • Now, States will be keen on including petrol and diesel under the GST as their share of tax goes up in the process, even if there is a special rate fixed for it.
  • Equity requires that petrol and diesel be brought under the GST.
  • Cascading of taxes: Apart from the complexity it creates in record keeping and ‘granting ITC’, in the present form it also leads to a cascading which the GST avowedly tried to avoid.

5) Lack of compliance

  • Compliance with GST return (GSTR-1) filing stipulation and the resultant tax information is not up to date.
  • Fraudulent claims of Input Tax Credit (ITC) because of a lack of timely reconciliation are quite high though it has come down by two thirds.
  • Tax evasion, estimated by a National Institute of Public Finance and Policy’s paper, is at least 5% in minor States and plus 3% in the major States.

Conclusion

Policy gaps along with compliance gaps do need to be addressed. Without proper tax information, infrastructure and base, the States would go in for selective tax enforcement. In the long run, voluntary compliance will suffer and equity in taxation will be violated.

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Goods and Services Tax (GST)

Four years of GST Regime

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST

Mains level : Success oof the GST regime

The Prime Minister has lauded Goods and Services Taxes (GST) on its completion of 4 years and said it has been a milestone in the economic landscape of India.

What is GST?

  • GST is an indirect tax that has replaced many indirect taxes in India such as excise duty, VAT, services tax, etc.
  • The Goods and Service Tax Act was passed in Parliament on 29th March 2017 and came into effect on 1st July 2017. It is a single domestic indirect tax law for the entire country.
  • It is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
  • Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales, Central GST and State GST are charged. All the inter-state sales are chargeable to the Integrated GST.

Answer this PYQ in the comment box:

Q.All revenues received by the Union. Government by way of taxes and other receipts for the conduct of Government business are credited to the (CSP 2015):

(a) Contingency Fund of India

(b) Public Account

(c) Consolidated Fund of India

(d) Deposits and Advances Fund

What are the components of GST?

There are three taxes applicable under this system:

  1. CGST: It is the tax collected by the Central Government on an intra-state sale (e.g., a transaction happening within Maharashtra)
  2. SGST: It is the tax collected by the state government on an intra-state sale (e.g., a transaction happening within Maharashtra)
  3. IGST: It is a tax collected by the Central Government for an inter-state sale (e.g., Maharashtra to Tamil Nadu)

Advantages Of GST

  • GST has mainly removed the cascading effect on the sale of goods and services.
  • Removal of the cascading effect has impacted the cost of goods.
  • Since the GST regime eliminates the tax on tax, the cost of goods decreases.
  • Also, GST is mainly technologically driven.
  • All the activities like registration, return filing, application for refund and response to notice needs to be done online on the GST portal, which accelerates the processes.

Issues with GST

  • High operational cost
  • GST has given rise to complexity for many business owners across the nation.
  • GST has received criticism for being called a ‘Disability Tax’ as it now taxes articles such as braille paper, wheelchairs, hearing aid etc.
  • Petrol is not under GST, which goes against the ideals of the unification of commodities.

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Goods and Services Tax (GST)

National Anti-Profiteering Authority (NAA)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : National Anti-Profiteering Authority (NAA)

Mains level : Not Much

The National Anti-Profiteering Authority (NAA) has directed GST officials across the country to ensure that the tax rate cuts notified on some COVID-19-related essentials are passed on to consumers.

What is National Anti-Profiteering Authority (NAA)?

  • The NAA has been constituted under Section 171 of the Central GST Act, 2017 to ensure that the reduction in the rate of tax or the benefit of the input tax credit is passed on to the recipient by way of commensurate reduction in prices.
  • The decision about the formation of the NAA came in the background of a rate reduction of a large number of items by the GST Council in its 22ndmeeting at Guwahati.
  • At the meeting, the Council reduced rates of more than 200 items including goods and services.
  • This has made a tremendous price reduction effect and the consumers will be benefited only if the traders are making the quick reduction of the prices of respective items.
  • There was a concern that traders are reluctant to make price cuts so that they can make a profit.

Answer this PYQ in the comment box:

Q. Consider the following items:

  1. Cereal grains hulled
  2. Chicken eggs cooked
  3. Fish processed and canned
  4. Newspapers containing advertising material

Which of the above items is/are exempt under GST (Goods and Services Tax)?

(a) 1 only

(b) 2 and 3 only

(c) 1, 2 and 4 only

(d) 1, 2, 3 and 4

What is profiteering?

  • Profiteering means unfair profit realized by traders by manipulating prices, tax rate adjustment etc.
  • In the context of the newly launched GST, profiteering means that traders are not reducing the prices of the commodities when the GST Council reduces the tax rates of commodities and services.
  • Conventionally, several traders will have a strong tendency to quickly increase the price of a commodity whose tax rate has been increased.
  • But on the opposite side, they may delay the price reduction of a commodity whose tax rate has been cut by the government.
  • A delayed or postponed price reduction helps business firms to make a higher profits. The losers here are the consumers.

Functioning of NAA

  • The Authority’s main function is to ensure that traders are not realizing unfair profit by charging high prices from the consumers in the name of GST.
  • Traders may charge high prices from the consumers by naming the GST factor.
  • Similarly, they may not make quick and corresponding price reductions when the GST Council makes a tax cut. All these constitute profiteering.
  • The responsibility of the NAA is to examine and check such profiteering activities and recommend punitive actions including the cancellation of licenses.

Steps were taken by the NAA to ensure that customers get the full benefit of tax cuts:

  • Holding regular meetings with the Zonal Screening Committees and the Chief Commissioners of Central Tax to stress upon consumer awareness programs;
  • Launching a helpline to resolve the queries of citizens regarding registration of complaints against profiteering.
  • Receiving complaints through email and the NAA portal.
  • Working with consumer welfare organizations in order to facilitate outreach activities.

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Goods and Services Tax (GST)

Issues with special treatment of states with higher contribution to GST pool

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST Council

Mains level : Paper 3- Issues with special treatment to states contributing more to GST pool

The article highlights the issues with the demand for special treatment of states with higher contribution to GST pool.

Debate on GST

  • The issue of GST concessions on COVID relief has brought into focus the structural flaws in the GST structure.
  • In this process, the structure and design of GST — essentially a tax on consumption — is being questioned.
  • The issue of  “rich” states versus “poor” ones, the decision-making process in the GST Council, and the representation of various states in the Council have also come into the focus.

Why States should be treated equally in GST Council

1) Consensus on GST

  • The structure and design of GST and its basic features, as enshrined in the 101st Constitution Amendment Act, were unanimously adopted and endorsed by Parliament.
  • The broader and finer points of the law, were thoroughly discussed and debated and recommended by the GST Council after a complete consensus.
  • These were further debated and approved by not only Parliament but also by each of the state legislatures.
  • There was complete consensus even on the issue of delegated legislation — something unheard of in a federal environment.

2) Equality of all states

  • In this process of consensus building, no state was accorded even the slightest of special privilege.
  • That is why the consensus surrounding GST was unprecedented whether in India or any other federation.
  • Therefore, arguing for special treatment of some states is a dangerous idea, particularly in governance, and more so in a welfare state.
  • For, this would open the gates for elitist arguments such as special rights for bigger taxpayers, unequal voting rights in elections and preferential treatment for a select few.

3) Issues with greater contribution to GST revenue pool

  • It is not correct to argue that the GST collected in a state represents the revenue of that particular state for, under the GST mechanism, the tax deposited by a taxpayer in a state is a function of largely the value of supplies made by such taxpayer.
  • Approximately 50 per cent at the aggregate level and much higher at the state level of such values are of an inter-state nature.
  • In other words, most supplies made from any producing state are consumed elsewhere and the revenue in such a situation naturally and rightfully accrues to the destination state.

4) No transfers based on a formula

  • It is equally fallacious to argue that under GST, most of the revenue is collected by the Union and is transferred to the states on the basis of some formula.
  • The quantum of IGST revenue that is settled to any state is directly related to the returns filed in that state and the cross utilisation of credit exhibited in such returns; part of this settlement also comprises tax on supplies destined to that state, as exhibited in the returns of such suppliers.
  • There is no “formula” as such for “transfer” of revenue collected by the Centre. Instead, such “transfers” are directly relatable to the consumption (whether intermediate or final) in any state.

5) Locational or geographical advantage

  • There is another dimension to the higher revenue collection in a few states.
  • One may note that such states enjoy locational or geographical advantages, being mostly coastal and immensely suited to the needs of trade and distribution as also manufacturing.
  • Also, the disadvantage to such states on account of lower availability of certain vital minerals like coal and iron ore was undone by the principle of freight equalisation resorted to in the years following Independence.
  • This contributed, in no small measure, to the development of such states.

6) Unequal transfers of Central receipts

  • The argument of unequal transfers of central receipts also does not hold water, either in India or in any other federation.
  • As is well known, such transfers are intended for correcting horizontal fiscal imbalances in a federation.

Conclusion

We should thus concentrate on carrying forward the glorious traditions of perhaps the only institution of co-operative federalism that we have been able to build so far.

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Goods and Services Tax (GST)

Need to deal with distortions built into GST

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST council decision making

Mains level : Paper 3- Issues with one state one vote system in GST council

The article highlights the issues with the one state one vote system adopted in the GST Council decision making.

Context

The Goods and Services Tax (GST) Council in India is still engaged in a discussion on whether life-saving and hard-to-come-by products should be taxed. Such delay in decision-making can largely be explained by the distorted design and incentive structure of the GST itself.

Imbalance in collection and distribution of taxes

  • The taxes collected under GST are accumulated by the Union government and a portion is transferred back to each state under a formula.
  • As is the case with most federal countries, there is a large imbalance in the collection and distribution of taxes between states.
  • this holds true also for income accrued to, and distributed, from the GST pool.
  • Four states — Maharashtra, Tamil Nadu, Karnataka, and Gujarat contribute nearly as much as the remaining 27 states combined.
  • Most federal countries exhibit this characteristic where a few large, rich, provinces or states contribute disproportionately.

Variation in dependence of States on transfers from the Union government

  • Only about 30 per cent of the overall revenue of the states mentioned above — Maharashtra, Tamil Nadu, Gujarat, and Karnataka — comes from the Union government.
  • But for the remaining 27 states, roughly 60 per cent of their revenues are obtained through transfers from the Union government.
  • For the smaller Northeastern states, these transfers from the Union government constitute 80-90 per cent of their total revenues.
  •  In effect, the states that contribute the most to the GST pool are the least dependent on transfers from the Union government while the ones that contribute the least are the most dependent.

Two problems in net-transfers in India

1) One-sided transfers

  •  In almost every federal union, net-transfers work to reduce differences in development between states over time.
  • However, Over the last 25 years or so, net transfers have become increasingly one-sided in India.
  • That is, the quantum of net-transfers diminishes, as states become more equal through such transfers.
  • But in India, the opposite has occurred.

2) Indirect taxes and cess

  • The Union government of the last seven years has greatly exacerbated this problem through two actions.
  • First, it has reconstructed the composition of taxation away from the fair and progressive channel of direct taxation towards the inherently regressive and unfair channel of indirect taxes.
  • Second, the Union has shifted a large proportion of taxation roughly 18 per cent of its overall revenues into cesses, a special form of taxes that remain outside the GST pool and hence do not have to be shared with the states.
  • Since 2014, cess revenues grew 21 per cent every year leading to a doubling in terms of its share of GDP.

Implications of these two problems for fiscal federalism

  • The combined effect of these problems is that all states (collectively) get a lower share of overall revenues.
  • Individual states face an ever-increasing disparity in the ratio of funds received from the Union as a proportion of taxes collected by the Union from that state.
  • This is an affront to fiscal federalism and an assault on “cooperative federalism”.

Issue of ‘one state one vote’ system

  • States that are more dependent on transfers from the Union want to maximise GST collections while states that are less dependent can afford to be more sensitive to citizens’ concerns.
  • The case of taxes on Covid products is perhaps the starkest instance of such differences.
  • Most large states are ready to forego this tax revenue for humanitarian considerations.
  • But 19 states representing the remaining 30 per cent of the population seem keen to continue to levy GST on Covid products.
  •  These are mostly smaller states.
  • Given the smaller population of such states, the adverse impact of Covid taxes will be minimal for them.
  • But they will reap the benefits of additional revenues from GST on Covid products levied on the much larger populations of the bigger states.

Conclusion

When direct tax policy decisions are legislated by Parliament, which has proportional representation from states according to their size of the population, indirect tax policy decisions should not be subject to one state one vote system.

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Goods and Services Tax (GST)

Fundamental problems facing GST regime

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Fundamental challenges GST regime faces

The article highlights the fundamental challenges the GST faces in the form of trust erosion and politicisation of decision making in GST Council.

Initial issues with GST

  • The multiple rates structure, high tax slabs and the complexity of tax filings as the problems underpinning India’s GST.
  • These were indeed the initial problems in the way GST was implemented, leading to some of its current woes.
  • However, technical fixes such as simplification of GST rates and tax filing systems will not succeed in addressing the fundamental problems with GST.

Fundamental problems

1) Politics influence the decision of GST Council

  • The 43rd meeting of the Goods and Services Tax (GST) Council which consists of 31 States and Union Territorie is to be held on May 28.
  • Ideally, political affiliations should not matter in a Council set up to decide indirect taxes.
  • The GST Council was mandated to meet at least once every quarter, but it had not met for two quarters, due to the pandemic.
  • Several of the 14 members of the groups who belong to parties different from the party ruling in the Centre, requested the Finance Minister to convene the GST meeting to help them manage their finances.
  • None of the 17 members of the ruling group deemed it necessary.
  • Even the need for a meeting to determine tax revenues for States is evidently a political decision.

2) Lack of trust

  • The GST Council is a compact of trust between the States and the Centre, set in the larger context of India’s polity.
  • The tragedy of the GST Council is that it is afflicted with spite and forced to function under the prevailing cloud of politics.
  • If the functioning of the GST Council is subject to the vagaries of elections and consequent vendetta politics, GST will continue to be just a caricature of its initial promise.

3) Uncertainty after the guarantee of 14% growth ends

  • The States paid a huge price for GST in terms of loss of fiscal autonomy.
  • GST has endured so far primarily because the States were guaranteed a 14% growth in their tax revenues every year.
  • This minimised the risks of this new experiment for the States and compensated for their loss of fiscal sovereignty.
  • This revenue guarantee ends in July 2022.
  • This can lead to a crumbling of the precarious edifice on which GST stands today.

Consider the question “What are the challenges faced by the States in the GST regime? What would be the impact on States as a guarantee of 14% growth in tax revenue comes to an end in July 2022?” 

Conclusion

The end of India’s grand GST experiment seems inevitable unless there is a radical shift in the tone and tenor of India’s federal politics, backed by an extension of revenue guarantee for the States for another five years.

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Goods and Services Tax (GST)

E-way bill integrated with FASTag, RFID

Note4Students

From UPSC perspective, the following things are important :

Prelims level : EWB system in GST regime

Mains level : GST benefits

GST officers have been armed with real-time data of commercial vehicle movement on highways with the integration of the e-way bill (EWB) system with FasTag and RFID.

Why such a move?

  • The integration of e-way bill, RFID, and FASTag will enable tax officers to undertake live vigilance in respect of EWB compliances by businesses and will help curb tax evasion.
  • It will aid in preventing revenue leakage by real-time identification of cases of recycling and/or non-generation of EWBs.

What are E-way bills (EWB)?

  • Under the GST regime, transporters should carry the eWay Bill when moving goods from one place to another when certain conditions are satisfied.
  • EWBs are mandatory for inter-state transportation of goods valued over Rs 50,000 from April 2018, with the exemption to precious items such as gold
  • In this system, businesses and transporters have to produce before a GST inspector the e-way bill, if asked.
  • On average, 25 lakh goods vehicle movements from more than 800 tolls are reported on a daily basis to the e-way bill system.

Benefits of the move

  • Tax officers can now access reports on vehicles that have passed the selected tolls without EWBs in the past few minutes.
  • Also, vehicles carrying critical commodities specific to the state and having passed the selected toll can be viewed.
  • Any suspicious vehicles and vehicles of EWBs generated by suspicious taxpayer GSTINs, that have passed the selected toll on a near real-time basis, can also be viewed in this report.
  • The officers can use these reports while conducting vigilance and make the vigilance activity more effective.
  • Also, the officers of the audit and enforcement wing can use these reports to identify fraudulent transactions like bill trading, recycling of EWBs.

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Goods and Services Tax (GST)

Should Petroleum be brought within the ambit of GST?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST

Mains level : Paper 3- Inclusion of petrol and diesel in GST

The article deals with the issues of demand for the inclusion of fuel oils in the GST regime and its implications for the revenue of the states and the Centre.

How much tax we pay on petrol and diesel

  • The Union and state levies put together account for roughly 55 per cent and 52 per cent of the retail price of petrol and diesel respectively.
  • These work out to around 135 per cent and 116 per cent of the base prices of the two products respectively.
  • The central levy on petrol and diesel works out to around 36 per cent of the retail price while the state component is around 20 per cent (diesel) to 28 per cent (petrol).
  • Of the total central levies on petrol and diesel, Rs 1.40 per litre and Rs 1.80 per litre is the basic excise duty for the two fuels, and Rs 11 per litre and Rs 18 per litre is the special additional excise duty.
  • Both these components form part of the divisible pool of taxes i.e. 42 per cent of which (approximately Rs 52,000 crore) goes to the states.
  • The remaining portion of Rs 18 per litre in both cases is the Road and Infrastructure Cess and Rs 2.50 per litre and Rs 4 per litre is the Agriculture Infrastructure and Development Cess which are retained by the Centre.

How other countries tax fuel oils

  • Being demerit goods, fuel oils and liquor are almost universally subject to a dual levy by countries that implement any kind of VAT or GST.
  • The levy is a mix of GST at a fixed percentage of the price which qualifies for credit in the value chain and a fixed amount or percentage of the price which is not creditable and is thus outside GST.
  • Punitive taxes of this order are levied primarily to discourage consumption of environmentally degrading fossil fuels and to garner revenues to fund infrastructure, while the creditable component enables offsetting of taxes on basically capital inputs.
  • These products are subjected to a plethora of levies like VAT, excise duty, storage levies, security levies and environmental taxes in the EU and the total incidence of such taxes ranges from around 45 per cent to 60 per cent.
  • The US is an exception in these matters since it imposes taxes at rates as low as around 15 per cent.

Including fuel oils in the GST regime

  • the 122nd Constitution Amendment Bill in 2014 for GST adopted the delayed choice approach.
  • Under the delayed-choice approach, petroleum products would be subjected to GST with effect from such date as the council may recommend.
  • Accordingly, sections 9(2) and 5(2) of the CGST/SGST Act and the IGST Act respectively, explicitly provide for levy of GST on these products with effect from such date as the Council may recommend.
  • Thus, bringing the aforesaid petro-products under GST is not within the reach of the central government alone.

How much will be the loss of revenue

  • A 28 per cent levy of GST on the base price would fetch around Rs 5.40 per litre on petrol and around Rs 5.45 on diesel to the central and each of the state governments.
  • Contrast the above with the current yield of Rs 32.90 per litre on petrol and Rs 31.80 per litre on diesel to the Centre alone and an average of around Rs 20 per litre and Rs 15 per litre on petrol and diesel, respectively, to each of the states.
  • This, however, would bring down the prices of petrol and diesel to around Rs 55 per litre.
  • This would translate into a revenue loss of around Rs 3 lakh crore on account of petrol and around Rs 1.1 lakh crore on account of diesel to the Centre and the states, at current volumes.

Consider the question “What are the various levies contributing to the prices of petrol and diesel in India? Examine the rationale for the heavy taxing of these products in India.”

Conclusion

Clearly, bringing petro-products under GST would not lower fuel oil prices by itself, unless the Union and the state governments are willing to take deep cuts in their revenues.

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Goods and Services Tax (GST)

Harmonized System of Nomenclature Code

Note4Students

From UPSC perspective, the following things are important :

Prelims level : HSN Code

Mains level : Not Much

It has been made mandatory for a GST taxpayer having a turnover of more than Rs 5 crore in the preceding financial year, to furnish 6 digits HSN Code (Harmonized System of Nomenclature Code). This comes into effect from April 1.

HSN code

  • The Harmonized System, or simply ‘HS’, is a six-digit identification code developed by the World Customs Organization (WCO).
  • Called the “universal economic language” for goods, it is a multipurpose international product nomenclature.
  • Over 200 countries use the system as a basis for their customs tariffs, gathering international trade statistics, making trade policies, and monitoring goods.
  • The system helps in harmonizing customs and trade procedures, thus reducing costs in international trade.

What makes the 6 digit code?

  • A unique six-digit code has numbers arranged in a legal and logical structure, with well-defined rules to achieve uniform classification.
  • Of the six digits, the first two denote the HS Chapter, the next two give the HS heading, and the last two give the HS subheading.
  • The HS Code for pineapple, for example, is 0804.30, which means it belongs to Chapter 08 (Edible fruit & nuts, peel of citrus/melons), Heading 04 (Dates, figs, pineapples, avocados, etc. fresh or dried), and Subheading 30 (Pineapples).

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Goods and Services Tax (GST)

Lottery, gambling, betting taxable under GST Act

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST

Mains level : Not Much

The Supreme Court has held that lottery, gambling and betting are taxable under the Goods and Services Tax (GST) Act.

Try this question from CSP 2018:

Q.Consider the following items:

  1. Cereal grains hulled
  2. Chicken eggs cooked
  3. Fish processed and canned
  4. Newspapers containing advertising material

Which of the above items is/are exempt under GST (Goods and Services Tax)?

(a) 1 only

(b) 2 and 3 only

(c) 1, 2 and 4 only

(d) 1, 2, 3 and 4

What did the court say?

  • A three-judge Bench led by Justice Ashok Bhushan said the levy of GST on lotteries does not amount to “hostile discrimination”.
  • The court held that lottery, betting and gambling are “actionable claims” and come within the definition of ‘goods’ under Section 2(52) of the Central Goods and Services Tax Act, 2017.
  • Lottery, betting and gambling are well known concepts and have been in practice in this country since before Independence and were regulated and taxed by different legislations.

Parliament to decide

  • The court said that the Parliament had an absolute power to go for an “inclusive definition” of the term ‘goods’ to include actionable claims like lottery, gambling and betting.
  • The court accepted the government’s stand that the Parliament has the competence to levy GST on lotteries under Article 246A (inserted after GST Act) of the Constitution.
  • The power to make laws as conferred by Article 246A fully empowers the Parliament to make laws with respect to GST and expansive definition of goods given in Section 2(52).

Must read:

Goods and Services Tax

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Goods and Services Tax (GST)

Taxes and the fundamental rights

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST

Mains level : Paper 2- Testing the legitimacy of tax

The article deals with the issue of a petition challenging the imposition of 5% GST on mobility aids used by disabled citizens.

Background

  • The petitioner, in Nipun Malhotra vs. Union of India, argued in Supreme Court that the tax imposed on mobility aids used by disabled citizenswas patently discriminatory.
  • A decision to impose a tax, the Court said, was a matter of policy over which the judiciary ought not to ordinarily interfere.
  • In adjourning the case, it suggested that the petitioner exhaust his options by submitting his grievances to the GST Council, which is the governing body responsible for determining which products are taxed, and at what rate.

Should the Courts test the legitimacy of the tax

  • It might be keen to ensure that the judiciary does not sit on judgment over matters that fall within the domain of legislative and executive competence.
  • There is nothing inherently distinct about taxing laws; they are in no way plenary and unamenable to judicial review.
  • Quite to the contrary, taxes have a direct bearing on how society is arranged.
  • The nature and rate of tax imposed on a product can impinge both on a person’s freedom and on a person’s right to be treated with equal care and concern.
  • Therefore, it ought to be well within an independent judiciary’s province — as the top courts in Canada and Colombia, among others, have recently held — to examine whether or not an imposition of a tax violates a fundamental right.

Why government impose tax on mobility aids?

  • Until the advent of the GST, mobility aids were almost entirely immune from indirect taxes.
  • In virtually every State, exemptions were granted on the payment of value-added-tax on such goods.
  • However, under GST 18% tax was imposed on these devices and subsequently reduced to 5%.
  • The government claims that it cannot relieve mobility aids from taxation, because to do so will disincentivise domestic manufacturers.
  • Domestic manufacturers can claim “input tax credit” on taxes paid on raw material in the process of manufacturing when it remits the levy collected from the eventual purchaser of the product.
  •  The State’s argument is that in the absence of a levy of GST on the final product, the manufacturer will be burdened with input taxes.
  • Since it cannot claim any credit for those taxes paid, the prices of the final product would have to be concomitantly higher.
  • As a result, the manufacturer will be placed in a relative position of disadvantage to foreign makers.

Issues with the government’s argument

  • This argument, though, suffers from at least two fallacies. First, a reading of the various notifications issued by the GST Council shows that many other products that are essential to human needs are exempt from tax.
  • Second, that the grant of an exemption in cases such as these would disentitle manufacturers from claiming input tax credit is a matter of legislative design.

Way forward

  • Parliament can find other ways to ensure that domestic manufacturers are granted credit for the taxes that they pay on inputs.
  • A decision taken on exempting goods from taxation is a matter of classification.
  •  Given that the classification rests on a state of disability, it must be seen, on any sensible consideration of our equality jurisprudence, as, at least facially, inequitable.
  • The onus must, therefore, rest on the government to show the Court that it had cogent reasons for treating these goods as distinct from other commodities that are exempt from tax.
  • A failure to discharge this onus ought to render the levy illegitimate.
  • The GST Council can take a leaf out of the books of Canada and Australia, and grant a complete exemption on the levy imposed on mobility aids.

Conclusion

It is time we recognised that an unreasonable levy can deeply compromise fundamental human needs. To free taxing statutes from the ramparts of the Constitution is to risk the entrenching of inequality.

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Goods and Services Tax (GST)

Weakening financial capacity of States

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST provisions

Mains level : Paper 2- Declining financial heath of the States

The financial health of the States has been declining in the last several years. The article explains the reasons and its implications for the States.

Role of States in development

  • State governments drive a majority of the country’s development programmes.
  • Greater numbers of people depend on these programmes for their livelihood, development, welfare and security.
  • States need resources to deliver these responsibilities and aspirations.

Factors responsible for declining discal capacity of the States

1) Declining devolution to State

  • Finance Commissions recommend the share of States in the taxes raised by the Union government and recommendations are normally adhered to.
  • The year 2014-15 commenced with a shock: actual devolution was 14% less than the Finance Commission’s projection.
  • Between 2014-15 and 2019-20, the States got ₹7,97,549 crore less than what was projected by the Finance Commission.

2) Cess and surcharge

  • Various cesses and surcharges levied by the Union government are retained fully by it, they do not go into the divisible pool.
  • This allows the Centre to raise revenues, yet not share them with the States.
  • Hence, the Union government imposes or increases cesses and surcharges instead of taxes wherever possible and, in some cases, even replaces taxes with cesses and surcharges.
  • As a result, the States lose out on their share.
  • Between 2014-15 and 2019-20, cesses and surcharges soared from 9.3% to 15% of the gross tax revenue of the Union government.
  • This systematic rise ensures that the revenue that is fully retained by the Union government increases at the cost of the revenue that is shared with the States.
  • This government has exploited this route to reduce the size of the divisible pool.

3) GST shortfall

  • Shortfalls have been persistent and growing from the inception of GST.
  • Compensations have been paid from the GST cess revenue.
  • GST cesses are levied on luxury or sin goods on top of the GST.
  • GST compensation will end with 2021-22. But cesses will continue.
  • With the abnormal exception of this year, the years ahead will generate similar or more cess revenue.
  • Hence, many States have been insisting outside and inside the GST Council that the Union government should borrow this year’s GST shortfall in full and release it to the States.
  • The Union government will not have to pay a rupee of this debt or interest.
  • The entire loan can be repaid out of the assured cess revenue that will continue to accrue beyond 2022.
  • Of the nearly ₹3 lakh crore GST shortfall to the States, the Centre will only compensate ₹1.8 lakh crore.
  • The States will not get the remaining ₹1.2 lakh crore this year.
  • In fact, it flies against the need of the hour to revive the economy.
  • Governments ought to spend money this year to stimulate demand.

4) Declining grants from the Centre

  • Central grants are also likely to drop significantly this year.
  • For instance,₹31,570 crore was allocated as annual grants to Karnataka.
  • Actual grants may be down to ₹17,372 crore.

Implications for the States

  • To overcome such extreme blows to their finances and discharge their welfare and development responsibilities, the States are now forced to resort to colossal borrowings.
  • Repayment burden will overwhelm State budgets for several years.
  • The fall in funds for development and welfare programmes will adversely impact the livelihoods of crores of Indians.
  • The economic growth potential cannot be fully realised.
  • Adverse consequences will be felt in per capita income, human resource development and poverty.
  • This is a negative sum game.

5) Loss of financial autonomy due to GST

Consider the question “What are the reasons for the declining financial health of the States in India? What are the implications for the States? Suggest the ways to deal with the issue.”

Conclusion

States are at the forefront of development and generation of opportunities and growth. Strong States lead to a stronger India. The systematic weakening of States serves neither federalism nor national interest.

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Goods and Services Tax (GST)

Natural gas to come under GST

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST

Mains level : Changes in taxation after GST regime

Officials have indicated that the government is considering bringing natural gas under the ambit of the GST regime.

Try this question from CSP 2018:

Q.Consider the following items:

  1. Cereal grains hulled
  2. Chicken eggs cooked
  3. Fish processed and canned
  4. Newspapers containing advertising material

Which of the above items is/are exempt under GST (Goods and Services Tax)?

(a) 1 only

(b) 2 and 3 only

(c) 1, 2 and 4 only

(d) 1, 2, 3 and 4

Why such demands?

  • Global energy MNCs have called on the government to bring natural gas under the GST regime.
  • Currently petrol, diesel, aviation turbine fuel, natural gas and crude oil fall outside India’s Goods and Services Tax (GST) regime.

Why is it important to bring natural gas under the GST regime?

  • Bringing natural gas under the GST would lead to a reduction in the cascading impact of taxes on industries such as power and steel, which used natural gas as an input.
  • This would do away with the central excise duty and different value-added taxes imposed by states.
  • This would lead to an increase in the adoption of natural gas in line with the government’s stated goal to increase the share of natural gas in the country’s energy basket from 6.3% to 15%.

Back2Basics: GST

  • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
  • It is charged at the time of supply and depends on the destination of consumption.
  • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).

Must read:

https://www.civilsdaily.com/goods-and-services-tax-2/

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Goods and Services Tax (GST)

Federalism, now a partisan internal dialogue

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Federal structure

Mains level : Paper 2- Evolutio of Centre-State relation in India

Against the backdrop of the ongoing tussle between the states and the Centre over the issue of GST compensation, the article analyses the evolution of federalism and power-sharing in India.

GST and federalism

  • At the first sign of stress, the nation unified in a singular system of taxation (GST) turned into a policy of every-state-for-itself.
  • Evidence of seriously miscued revenue estimates without pragmatic tax rate, was accumulating at an alarming pace.
  • The Comptroller and Auditor-General of India (CAG) recently revealed how a cess meant to remedy shortfalls in GST yields, was retained in central government revenues, in violation of all applicable norms.
  • This revelation does little to build trust between the Centre and the States at a time when the States’ facing lack of resource and the central government is advising them to borrow.
  • Some states believe that the onus of borrowing should rest with the central government.

Higher borrowing limit for states with conditions

  • The central government sanctioned a higher borrowing limit for States through the current year.
  • In the bargain, it imposed conditionalities:
  • 1) Enforcing a singular standard for the implementation of policies across a vast and diverse country.
  • 2) Improving India’s ranking as a place for “doing business”.
  • States will have unconditional access to borrowings equivalent to half a percentage point of their gross output.
  • But, subsequently, every tranche of a quarter point will be premised on progress in implementing the “one nation, one ration card” scheme, and improvements in the “ease of doing business”.

Federalism in India

  • Aside from the contents and definitions sections, the word “federal” occurs in only one operational article of the Indian Constitution, in reference to the apex judicial body created in colonial times.
  • When this body was transformed into the Supreme Court at the moment the Constitution came into force, the word seemingly lost all operative value.
  • The distribution of powers and responsibilities between various tiers of the governmental system, was achieved without explicit recognition of federalism as a governing principle.
  • In actual operational terms, the relationship of Centre and States followed different paradigms through various phases of politics.
  •  At the time of Independence, the distribution of powers between Centre and States was transformed into an internal discussion of the Congress.

Evolution of power-sharing and politics

  • The “Congress system”, as the political scientist Rajni Kothari called it, was seen at one time to have sufficient internal flexibility and resilience to absorb all factional pressures.
  • The first challenge came from the cultural terrain, compelling a reluctant national leadership to accept linguistic reorganisation of States.
  • And then, as ambitions of nation-building through rapid industrialisation resulted in the possibility of a non-Congress politics.
  • The Congress lost power in a number of key States in 1967.
  • The polity moved into a new phase when politics was about “waves” at the national or state level either in favour of, or against the Congress.
  • From 1989 onwards, politics settled into another distinct phase, when outcomes at the national level were the resultant of very separate State-level results.

Conclusion

Though federal structure could not be free from Centre-State power struggle, that struggle should not come into the development of the nation. In this context, it is the responsibility of the Centre to address the issues facing the state amid pandemic.

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Goods and Services Tax (GST)

The federalism test

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Article 293

Mains level : Paper 2- Federalism and GST

The GST has been hailed as the grand bargain and the success story of the federalism. But the economic disruption caused by the pandemic has put it to test. The article deals with the issue of GST compensation.

Compensating the loss of GST revenue: 2 options

  • In the 41st meeting of the GST Council, the Union government had presented the states with two options.
  • The Centre had estimated the states’ total loss of GST revenue at Rs 3 lakh crore, of which, Rs 65,000 crore was expected to accrue from the compensation cess.
  • Of the remaining Rs 2.35 lakh crore, the loss due to the pandemic was estimated at Rs 1.28 lakh crore.
  • The first option was to provide states a special window to borrow Rs 97,000 crore from the RBI, which was later revised to Rs 1.1 lakh crore.
  • Under this option, both the interest payments and the repayments would be made from future collections of the compensation cess.
  • In the second option, the entire shortfall of Rs 2.35 lakh crore could be borrowed from the market and the states would have to bear the interest costs, but the repayments would be adjusted against future collections of the cess.
  • 10 states have rejected both the options and have stated that it is the Centre’s responsibility to compensate the states, and therefore, it should borrow.

Commitment of the Centre

  • The minutes of the 7th and 8th GST Council meeting show that most of the states wanted the Centre to commit on paying compensation from the Consolidated Fund of India (CFI).
  • On that demand the Union Finance Minister had stated that in case the amount in the GST compensation fund falls short of the compensation payable in any bi-monthly period, the GST Council shall decide the mode of raising additional resources including borrowing from the market which could be repaid by the collection of cess in the sixth year or further subsequent years.
  • Thus, there was a clear commitment of the Centre on the issue of compensation and the method of recouping the loss.

Impact on the Centre-State relations

  • The payment of compensation has plunged the Union-state relationship to a new low.
  • First, not recognising the Centre’s commitment will make states wary of any future reforms involving an agreement with the Centre.
  • Second, giving selective press statements to pressurise the states into accepting one or the other option does not infuse confidence.
  • Third, there was a statement by the Union finance ministry officials that the GST Council does not have jurisdiction over-borrowing and borrowing is an individual state and Centre’s decision under Article 293 of the Constitution.
  • If so, why were the two borrowing options presented to the states in the meeting of the Council?

Way forward

  • It is the Centre’s commitment to find the compensation mechanism and borrowing is one of the options — that must be discussed in the Council.
  • Furthermore, if the commitment of the Centre is recognised as admitted by the finance minister in the 7th GST council meeting, the Centre should take the responsibility to borrow.
  • Both interest payments and repayment of the principal liability can be met from future collections from the cess.

Conclusion

This issue is of immense significance for the future of Centre-state relations. But pressuring states on the basis of political strength will have adverse consequences for the country’s federal structure.

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Goods and Services Tax (GST)

GST Council and its Functioning

The Goods and Services Tax (GST) Council has failed to iron out differences between some States and the Centre over the plan to get States to borrow from the market to meet the shortfall in compensation cess collections this year.

Try this question from CSP 2018:

Q.Consider the following items:

  1. Cereal grains hulled
  2. Chicken eggs cooked
  3. Fish processed and canned
  4. Newspapers containing advertising material

Which of the above items is/are exempt under GST (Goods and Services Tax)?

(a) 1 only

(b) 2 and 3 only

(c) 1, 2 and 4 only

(d) 1, 2, 3 and 4

About GST Council

  • The GST Council is a federal body that aims to bring together states and the Centre on a common platform for the nationwide rollout of the indirect tax reform.
  • It is an apex member committee to modify, reconcile or to procure any law or regulation based on the context of goods and services tax in India.
  • The GST Council dictates tax rate, tax exemption, the due date of forms, tax laws, and tax deadlines, keeping in mind special rates and provisions for some states.
  • The predominant responsibility of the GST Council is to ensure to have one uniform tax rate for goods and services across the nation.

How is the GST Council structured?

  • The GST is governed by the GST Council. Article 279 (1) of the amended Indian Constitution states that the GST Council has to be constituted by the President within 60 days of the commencement of the Article 279A.
  • According to the article, the GST Council will be a joint forum for the Centre and the States. It consists of the following members:
  1. The Union Finance Minister will be the Chairperson
  2. As a member, the Union Minister of State will be in charge of Revenue of Finance
  3. The Minister in charge of finance or taxation or any other Minister nominated by each State government, as members.

Terms of reference

  • Article 279A (4) specifies that the Council will make recommendations to the Union and the States on the important issues related to GST, such as the goods and services will be subject or exempted from the Goods and Services Tax.
  • They lay down GST laws, principles that govern the following:
  1. Place of Supply
  2. Threshold limits
  3. GST rates on goods and services
  4. Special rates for raising additional resources during a natural calamity or disaster
  5. Special GST rates for certain States

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Goods and Services Tax (GST)

On the GST issue, the Centre must lead

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST Council, GST compensation etc.

Mains level : Paper 3- GST compensation issue

The article deal with the issue of GST compensation and analyses the various estimates of revenue shortfall given by the Centre.

Context

  • The Goods and Services Tax (GST) Council meeting has now been deferred to the first week of October due to sharp disagreement between the States and the Centre.

Background of GST

  • The Centre had brought the States on board GST by promising higher revenue collection.
  • States were lured by the promise of 14% annual growth in GST revenue over the base year of 2015-16.
  • Any shortfall from this (for five years) was to be compensated by levying a cess on luxury and sin goods.

What are the options given by the Centre

  •  The transfers due since April 2020 have been withheld.
  • In the last GST Council meeting held on August 27, the Centre gave the States two options.
  • First, they could borrow ₹97,000 crore (the shortfall in the GST revenue compensation) from the Reserve Bank of India (RBI) under a special window at a low rate of interest.
  • Second, borrow ₹2.35-lakh crore (the total compensation shortfall) from the market with the RBI facilitating it.
  • The burden of repayment would be borne by the future collections from the compensation cess.
  • It was proposed that this cess which was to end in June 2022 could be extended to facilitate the repayment of the debt.

Issues with the estimates

  • Given the uncertainty, how accuracy of the estimates of ₹97,000 crore and ₹2.35-lakh crore offered to the States is questionable.
  • When the Ministry of Finance is refusing to give a figure for growth in 2020-21, how such estimates are arrived at gains significance.

Budgetary calculations

  • The Union Budget presented on February 1, 2020 assumed a nominal growth of 10%.
  • But optimistically, the Centre’s budgetary calculations will be off by at least 20%.
  • Revenue will fall by much more than 20%.
  •  So, income tax collection will also be short by much more than 20%.
  • The direct tax/GDP per cent may be expected to fall from 5.5% last year to less than 4% this fiscal.
  • Thus, at an optimistic guess, if the economy declines by only 10%, the total tax collection will be down by about ₹12-lakh crore in 2020-21.

Conclusion

As many predictions are that the economy will be down by much more than 10% used in the calculations above, the revenue shortfall is likely to be far greater. This points to the dire position of the Centre (and the States) and the inevitability of a large borrowing programme. Only the Centre is in a position to do such massive borrowing.


Back2Basics: Two options for the GST compensation

  • Option 1 has a special window for states, coordinated by the Finance Ministry, to borrow the projected shortfall of Rs 97,000 crore only on account of GST implementation — and not the Covid-19 pandemic.
  • This amount can be fully repaid from the compensation cess fund, without being counted as states’ debt.
  • Option 2 takes into account the impact of the pandemic, proposing states to borrow the entire Rs 2.35 lakh crore and bearing the interest burden though principal will be repaid from the cess proceeds.
  • The GST shortfall amount (Rs 97,000 crore) will not be counted as states’ debt, while the rest of the amount of Rs 1.38 lakh crore will be counted in the books of the states.

Source:

https://indianexpress.com/article/business/economy/gst-compensation-centre-gives-states-2-options-easier-terms-for-lower-borrowing-6575499/

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Goods and Services Tax (GST)

The way out on GST compensation

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST compensation cess

Mains level : Paper 3- GST compensation

The economic disruption due to pandemic has made the issue of GST compensation bone of contention between the Centre and the States. This article argues that it is the GST Council and not the Centre which is responsible to find ways to raise the revenue in such a situation.

GST revenue loss and role of the Centre

  • Due to global pandemic, one significant area of loss of revenue to both the Centre and the states is GST.
  • The states have the comfort of assured 14 per cent growth through the compensation mechanism.
  • The Centre has no such guarantee.
  • The Compensation Act mandates compensating the states for revenue loss on GST implementation from the Compensation Fund.

Role of GST Council

  • The course of action to be adopted in the event of the amount in the Fund falling short of requirements was discussed at length in the GST Council.
  • The late Arun Jaitley, then chairman, had, in the 8th meeting, assured that “in case Compensation Fund fell short of the compensation payable, the GST Council shall decide the mode of raising additional resources including borrowing from the market which could be repaid by collection of cess in the sixth year or further subsequent years”; the Council had agreed to this suggestion.
  • Quite clearly,  it is the Council and not the Government of India that shall decide the mode of raising additional resources in the event of a shortfall and this is reflected in Section 10(1) of the Compensation Act.

Why it makes sense for the States to borrow

  • It is argued that borrowings by the Centre or by the states make no difference in the context of fiscal discipline.
  • The argument further adds that the Centre should borrow in view of its higher borrowing and debt-servicing capacity and its ability to borrow at lower rates.
  • Article 292 (1) mandates that the Centre can borrow on the security of the Consolidated Fund of India (CFI).
  • However, the idea of providing compensation to the states from the Consolidated Fund of India was not agreed to in the Council, it is difficult to agree with the suggestion that GoI borrows on the basis of the said CFI.
  • Large borrowings by the Centre would push up the bond yield rates, pushing up bond yield of the states setting off a spiral leading to hike in the interest rates for businesses and individuals.
  • The states’ borrowing would become costlier if the Centre were to borrow for this purpose.
  • The borrowing capacity of the states, too, is not very inferior.
  • The RBI study of state finances shows that the debt receipts of all the states as a percentage of GDP has hovered between 2.4 per cent and 3.6 per cent during the last four years.
  • The states have on the average borrowed just about 1.25 per cent of the GSDP thus far.
  • The states are consistently borrowing less than they can borrow (legally and financially).
  • The cost of state borrowings for this purpose can be considerably lowered if arranged through a special window.
  • The Centre has already breached the budgeted borrowing limits for the current year.
  • Thus it makes sense for the states to borrow.

Borrowing options for the States

  • There are two ways in which the States can borrow.
  • 1) Borrowing the entire shortfall in the revenue.
  • 2) Borrowing only the shortfall attributable to GST implementation with the remaining shortfall to be made good from the Cess Fund post the transition period.
  • Certain conditionalities have been relaxed for option-1.
  • However, borrowing the entire shortfall, as envisaged in option-1, will hurt both the markets and the private sector, pushing up the interest rate.
  • The single window under option-1 being arranged by the Centre and the entire debt being serviced from future cess receipts will ensure that the cost remains close to the G-sec rate.
  • Moreover, there will be no variation in the interest rate as between the states.

Conclusion

The states should come forward and work with the Centre in the true spirit of cooperative federalism that the Council has come to be known for these past few years.

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Goods and Services Tax (GST)

GST reforms and compensation issue

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST

Mains level : Paper 3- GST compensation issue and reforms needed

The GST compensation issue raises the need for reform in the system. The article discusses this issue and suggests reform.

Background

  • Three years ago, the Centre and the States of the Union of India struck a grand bargain resulting in GST.
  • The States gave up their right to collect sales tax and sundry taxes, and the Centre gave up excise and services tax. 

Issue of compensation

  • Consent of the states was secured by a promise of reimbursing any shortfall in tax revenues for a period of five years.
  • This reimbursement was to be funded by a special cess called the GST compensation cess. 
  • The promised reimbursement was to fill the gap for an assured 14% year on year tax growth for five years.

Why is the Centre denying GST compensation

  • As the economy battles a pandemic and recession, the tax collection has dropped significantly.
  • At the same time, expenditure needs are sharply higher at the State level.
  • Using an equivalent of the Force Majeure clause in commercial contracts, the Centre is abdicating its responsibility of making up for the shortfall in 14% growth in GST revenues to the states.

Why Central government is wrong in denying the compensation

  •  1) The States do not have recourse to multiple options that the Centre has.[like sovereign bond or a loan against public sector unit shares from the Reserve Bank of India]
  • 2) The Centre can get loans at lower rates of borrowing from the markets as compared to the States.
  • 3) In terms of aggregate public sector borrowing, it does not matter for the debt markets, nor the rating agencies, whether it is the States or the Centre that is increasing their indebtedness.
  • 4) Fighting this recession through increased fiscal stimulus is basically the job of macroeconomic stabilisation, which is the Centre’s domain.
  • 5) Using the alibi of the COVID-19 pandemic causes a serious dent in the trust built up between the Centre and States.
  • It will weaken the foundation of cooperative federalism.

Reforms needed

  • GST is a destination-based consumption tax, which must include all goods and services with very few exceptions.
  • That widening of the tax base itself will allow us to go back to the original recommendation of a standard rate of 12%, to be fixed for at least a five-year period.
  • Some extra elbow room for the States’ revenue autonomy could be allowed by States non VATable surcharges on a small list of “sin” goods.
  • In the long term there are many changes in consumption patterns, production configurations and locations, which cannot be anticipated and hence a static concept of Revenue Neutral Rate cannot be reference.
  • The commitment to a low and stable rate is a must.
  • We must recognise the increasing importance of the third tier of government. 
  • After 28 years of the 73rd and 74th Amendments, the local governments do not have the promised transfer of funds, functions and functionaries.
  • Of the 12% GST, 10% should be equally shared between the States and the Centre, and 2% must be earmarked exclusively for the urban and rural local bodies.
  • Fresh approach also calls for an overhaul of the interstate GST and the administration of the e-way bill.

Consider the question “Discuss the issue related to GST compensation to the States by the Central government. Suggest the measures changes in the GST regime to deal with flaws.”

Conclusion

GST is a crucial and long-term structural reform which can address the fiscal needs of the future, strike the right and desired balance to achieve co-operative federalism and also lead to enhanced economic growth. The current design and implementation has failed to deliver on that promise. A new grand bargain is needed.

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Goods and Services Tax (GST)

Issue of GST compensation to states

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Provision of compensation to states under GST

Mains level : Paper 3- Issues of GST compensation to states.

The article analyses the issue of GST compensation to states under GST regime for five years and how this has turned to be contentious issues after the economic disruption caused by Covid-19.

The basis for compensation

  • Under Goods and Services Tax (GST) regime the Centre would make good the loss in the first five years if States faced revenue deficits after the GST’s introduction.
  • States sacrificed their constitutionally granted powers of taxation in the national interest.

GST compensation cess

  • To pay the compensation to states, GST compensation cess was introduced.
  • When the GST compensation cess exceeded the amount that had to be paid to States, the Central government absorbed the surplus.
  •  Now, the economy has slowed down dramatically and the resources raised are insufficient.
  • The Centre is raising questions about whether it is legally accountable to pay compensation.
  • The constitutional framework that ushered in the GST does not provide an escape clause for ‘Acts of God’.

Way forward

  • As stated by the Secretary of the GST Council in the tenth meeting, the central government could raise resources by other means for compensation and this could then be recouped by continuing the cess beyond five years.
  • Monetary measures are the monopoly of the central government.
  • Even borrowing is more efficient and less expensive if it is undertaken by the Central government.
  • As equal representatives of the citizens State governments expected the Centre to demonstrate empathy and provide them relief through the Consolidated Fund of India.

Conclusion

Central government should consider the legal provision in the GST regime and act in the spirit of cooperative federalism.

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Goods and Services Tax (GST)

What is Compensation of GST?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST Compensation

Mains level : Changes in taxation after GST regime

With Centre-State friction over pending compensation payments under the Goods and Services Tax (GST) taking a new turn in the 41st GST Council to meet, the strain on the finances of states is likely to continue in the near term.

Try this question from CSP 2018:

Q.Consider the following items:

  1. Cereal grains hulled
  2. Chicken eggs cooked
  3. Fish processed and canned
  4. Newspapers containing advertising material

Which of the above items is/are exempt under GST (Goods and Services Tax)?

(a) 1 only

(b) 2 and 3 only

(c) 1, 2 and 4 only

(d) 1, 2, 3 and 4

What is GST?

  • GST, being a consumption-based tax, would result in loss of revenue for manufacturing-heavy states.
  • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
  • It is charged at the time of supply and depends on the destination of consumption.
  • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).

Compensation under GST regime

  • Due to the consumption-based nature of GST, manufacturing states like Gujarat, Haryana, Karnataka, Maharashtra and Tamil Nadu feared a revenue loss.
  • Thus, GST Compensation Cess or GST Cess was introduced by the government to compensate for the possible revenue losses suffered by such manufacturing states.
  • However, under existing rules, this compensation cess will be levied only for the first 5 years of the GST regime – from July 1st, 2017 to July 1st, 2022.
  • Compensation cess is levied on five products considered to be ‘sin’ or luxury as mentioned in the GST (Compensation to States) Act, 2017 and includes items such as- Pan Masala, Tobacco, and Automobiles etc.

Alternatives to prevent losses

  • The input tax credit can help a producer by partially reducing GST liability by only paying the difference between the tax already paid on the raw materials of a particular good and that on the final product.
  • In other words, the taxes paid on purchase (input tax) can be subtracted from the taxes paid on the final product (output tax) to reduce the final GST liability.

Distributing GST compensation

  • The compensation cess payable to states is calculated based on the methodology specified in the GST (Compensation to States) Act, 2017.
  • The compensation fund so collected is released to the states every 2 months.
  • Any unused money from the compensation fund at the end of the transition period shall be distributed between the states and the centre as per any applicable formula.

Significance of GST compensation

  • States no longer possess taxation rights after most taxes, barring those on petroleum, alcohol, and stamp duty were subsumed under GST.
  • GST accounts for almost 42% of states’ own tax revenues, and tax revenues account for around 60% of states’ total revenues.
  • Finances of over a dozen states are under severe strain, resulting in delays in salary payments and sharp cuts in capital expenditure outlay amid the pandemic-induced lockdowns and the need to spend on healthcare.

Back2Basics:

Goods and Services Tax

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Goods and Services Tax (GST)

How GST created single market

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST

Mains level : Paper 3- GST and its benefits to various stakeholders

The article analyses the instrumental role played by the GST in transforming nation into a single market dismantling the barriers across the states.

Reduced tax burden on consumers

  • In the pre-GST era, the total of VAT, excise, CST and their cascading effect led to 31 per cent as tax payable, on an average, for a consumer.
  • In its first two years, as the collections improved, the GST Council kept reducing the tax burden on consumers.
  • Most items have been brought in the 18 per cent, 12 per cent or even 5 per cent category.
  •  Most items of daily common use are in the zero to 5 per cent slab.
  • An analysis by the Reserve Bank of India (RBI) observes that since the roll out of GST, the rate changes have brought down the GST incidence from 14 per cent to 11.6 per cent.
  • This explains the revenue loss stated above. The consumer pays less tax now under the GST.

Flexibility and increased compliance

  • Taxation threshold for goods was increased to Rs 40 lakh.
  • The composition limit was increased from Rs 75 lakh to Rs 1.5 crore.
  • For manufacturers, composition tax rate was lowered from 2 per cent to 1 per cent.
  • The composition scheme was extended to services as well.
  • Special lower rates without Input Tax Credit (ITC) were prescribed for construction and restaurants.
  • As per an RBI calculation, the weighted GST rate at present is 11.6 per cent.
  • The revenue-neutral rate determined at the time of GST introduction by its own committee was 15.3 per cent.

Widened tax base

  • Today, there are 1.2 crore GST assessees compared to 65 lakh at the time of introduction of the tax regime.
  • The average revenue collected per month for the nine months (July-March) in 2017-18 was Rs 89,700 crore in  2018-19 it rose by 10 per cent to Rs 97,100 crore.
  • In FY 2019-20, the revenue per month was Rs 1,02,000 crore.
  • This steady increase was despite the various concessions and rate reductions mentioned above.

 Simplification

  • GST is an IT-enabled platform.
  • Accounting and billing software is provided free to the small taxpayers.
  • Those with nil return to file can do so with an SMS.
  • Since the registration is completely online, the refund process is also fully automated.
  • The Centre is the only refund disbursal authority and no physical interface is required.

Agriculture sector under GST

  • Concessions are extended to the agriculture sector under GST, agricultural inputs such as fertilisers, machinery have seen a considerable reduction in rates.
  • Other inputs such as cattle/poultry/aquatic feeds are kept at the nil rate.
  • Agricultural produce such as vegetables, fruits, flowers and foodgrains are exempt from GST.
  • Dairy products — milk, curd, lassi, buttermilk and minor forest produce such as lac, shellac and sisal leaves are also exempt.
  • Silk cocoon, raw silk, wool, jute fibre are nil rated.
  • In the pre-GST era, many of these were in the 5 per cent slab.
  • Service inputs to agriculture are similarly treated.
  • Before the introduction of GST, many such items were taxed at a standard rate of 15 per cent.

MSME  under GST

  • Micro, small and medium enterprises (MSMEs) have consistently received sensitive treatment under the GST regime.
  • Items that have large employment creating activities, rough diamond/precious stone sorting and polishing for example, have seen a GST reduction from 3 per cent to 0.25 per cent.
  • Services rendered by MSMEs have also received such sensitive treatment.

Concerns

  • Tax reduction in some cases has led to an inversion of duty structure.
  • Manufactured goods in lower slabs have suffered due to inversion in the duty structure.
  • With lockdowns and consequential deferrals in tax payments, compensation payments to the states is a concern that the Council has taken cognisance of.

Consider the question “Elaborate on how the GST has been benefiting the various stakeholders and helped in transforming India into a single market?” 

Conclusion

The states have shown maturity and understanding. The spirit of collective responsibility and statesman-like thinking have kept mutual trust and confidence high. The much talked about cooperative federalism is actually in action in the GST Council.

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Goods and Services Tax (GST)

Making up for shortfalls in GST collection

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Various provision under GST

Mains level : Paper 3-GST compensation cess and issues

The article deals with the issue of shortfall in the GST compensation cess and the challenge Central government faces to pay the promised compensation to the states.

Background of the cess

  • GST subsumed several taxes, including those which were the preserve of the States.
  • Therefore it required an amendment to the Constitution of India.
  • The amendment affected the Seventh Schedule, so it required ratification by the legislatures of half the States.
  • Before the GST, States exporting goods to other States collected a tax.
  • But the GST is a destination-based tax, i.e., the State where the goods are sold receive the tax.
  • This implies that manufacturing States would lose out while consuming States would benefit.
  • So, in order to convince manufacturing States to agree to GST, a compensation formula was created.
  • Under which States were promised compensation for loss of revenue for a period up to five years.
  • The Act for compensation to states assumed that the GST revenue of each State would grow at 14% every year, from the amount collected in 2015-16.
  • This scheme is valid for five years, i.e., till June 2022.

Compensation cess fund

  • A compensation cess fund was created from which States would be paid for any shortfall.
  • An additional cess would be imposed on certain items and this cess would be used to pay compensation.
  • The Act states that the cess collected and “such other amounts as may be recommended by the [GST] Council” would be credited to the fund.
  • In the first two years of this scheme, the cess collected exceeded the shortfall of States.
  • In the third year, 2019-20, the fund fell significantly short of the requirement.

The problem and its source

  •  A key source of the problem is that the 2017 Act guaranteed a tax growth rate of 14%, which is unachievable this year.
  • The 14% target was too ambitious to start with.
  • Given the government’s inflation target at 4%, this implied a real GDP growth plus tax buoyancy of 9%.
  • But, the Central government is constitutionally bound to compensate States for loss of revenue for five years.

Solution to the problem

1) The Constitution could be amended to reduce the period of guarantee to three years thus ending June 2020.

  • But most States would be reluctant to agree to this proposal.
  • It could also be seen as going back on the promise made to States.

2) The Central government could fund this shortfall from its own revenue.

  •  The Centre’s finances are stretched due to shortfall in its own tax collection combined with extra expenditure to manage the health and economic crisis.

3) The Centre could borrow on behalf of the cess fund.

  • The tenure of the cess could be extended beyond five years until the cess collected is sufficient to pay off this debt and interest on it.

4) the Centre could convince States that the 14% growth target was always unrealistic.

  • If the Centre can negotiate with States through the GST Council to reset the assured tax level, it could then bring in a Bill in Parliament to amend the 2017 Act.

Consider the question “What were the reasons for making provisions under GST for paying the states compensation for tax revenue shortfall? What are the implications of the provision for the Central government?”

Conclusion

The Constitution makes it obligatory for the Centre to make up for shortfall by the States. The cess collected will not be sufficient for this purpose. The GST Council, which is a constitutional body with representation of the Centre and all the States, should find a practical solution.

B2BASICS

Source: https://www.thehindu.com/opinion/op-ed/making-up-for-shortfalls-in-gst-collection/article32319744.ece

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Goods and Services Tax (GST)

GST on processed food items

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST slabs on food items

Mains level : Not Much

A recent GST ruling sparked off the debate with the Authority for Advance Rulings (AAR, Karnataka Bench) suggesting parottas would be subject to a higher GST rate of 18 per cent as compared to roti.

Try this question from CSP 2018:

Q. Consider the following items:

  1. Cereal grains hulled
  2. Chicken eggs cooked
  3. Fish processed and canned
  4. Newspapers containing advertising material

Which of the above items is/are exempt under GST (Goods and Services Tax)?

(a) 1 only

(b) 2 and 3 only

(c) 1, 2 and 4 only

(d) 1, 2, 3 and 4

What is the Case?

  • Bengaluru-based food products company involved in preparation and supply of ready-to-cook items had approached the AAR regarding whether preparation of whole wheat parotta and Malabar parotta attracting 5 per cent GST.
  • The products khakhra, plain chapatti and roti are completely cooked preparations, do not require any processing for human consumption and hence are ready to eat food preparations.
  • The impugned product (whole wheat Parottas and Malabar Parottas) are not only different from the said khakhras, plain chapatti or roti but also are not like products in common parlance as well as in the respect of essential nature of the product.

Classification of food items for GST

  • Most food items, especially those of essential and unprocessed nature, are charged nil GST.
  • But processed foods attract higher rates of 5%, 12%, or 18% depending on the food product.
  • For instance, pappad, Bread (branded or otherwise), are charged zero GST, but pizza bread is charged 5% GST.
  • Heading 1905 under the Harmonised Commodity Description and Coding System classifies pizza bread, khakhra, plain chapati or roti, rusks, toasted bread in one category, for which a 5% GST rate is levied.
  • Similarly, in the ready for consumption category, unbranded namkeens, bhujia, mixture and similar edible preparation attract 5% GST, while such branded namkeen, bhujia, mixture attract 12% GST.

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Goods and Services Tax (GST)

Fine-tuning GST

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Types of the GST returns.

Mains level : Paper 3- How the GST has performed and ways to improve it.

Context

Even as the 31-month-old GST evolves, the debate on its success rages on. Many have argued that GST is losing its sheen and needs a complete overhaul while others contend that the new tax system is on course and the trials and tribulations were not unexpected.

Analysis of GST collection

  • 39% increase over the average of the base year 2015-16: The average monthly GST collection for the period August 2017 to January 2020 stands at Rs 97,188 crore which is an impressive 39 per cent increase over the average monthly collection of subsumed taxes in the base year 2015-16, at around Rs 70,000 crore.
  • The average growth rate of 9.7% per year: This is an average growth rate of 9.7 per cent over the almost 4-year period post-2015-16 and a compounded growth rate of 8.55 per cent.
    • Though less than 14% but not insignificant: This compounded growth rate is not insignificant even though it is just about 0.61 times the very ambitious 14 per cent rate of growth promised to the states before GST rollout.
  • Perception of infectiveness due to ambitious 14% promise: The average growth rate of the collection in 18 non-special category states (accounting for the bulk of the revenue) during the 3-year period immediately preceding GST stood at around 8.9 per cent.
    • Thus, if the perception about the effectiveness of GST has not been very encouraging, it is only in the context of the very ambitious 14 per cent compounded annual growth rate promised to the states.

Reasons for tepid growth in GST collections

  • The overall economic situation in the country: The revenue performance of GST during the current fiscal year is not out of sync with the overall economic situation in the country.
    • The growth rate in tax yield at 4.69 %: Accordingly, during the 10-month period ending January 2020, the growth rate in tax yield was 4.69 per cent.
    • The relatively tepid growth was primarily due to a negative growth of 4.03 per cent in September-October 2019.
    • After the dip in September-October 2019, GST collections rebounded and this is a reminder that one need not write GST off in a hurry.
  • Complacency in the states due to 14% promise: Complacency in the states on account of assured 14 per cent growth cannot be ruled out.
    • States were jolted with the delay in compensation for August-September 2019 and resorted to vigorous monitoring of compliance and action against toxic and unverified credits, circular trading and tax evasion which had resulted in unmatched credit claims of around Rs 50,000 crore.

Two suggestions as corrective measures

  • The GST Council deliberated on the recent trends in revenue collection and was cognizant of the need for corrective measures. Two options were suggested. One was the “big bang” approach-
  • Big Bang approach: It involves an overhaul of-
    • The legal framework.
    • Processes and systems and-
    • Re-writing GST almost de novo.
  • A steady-state approach: A “steady-state” approach involved-
    • Incremental reforms.
    • Solving problems as they arise.
    • Plugging loopholes.
    • Improving the compliance environment through increased monitoring with better tools.
  • The Council chose the second approach and the signs are already showing.

The steps taken-

  • Red flag reports: The GSTN has developed red flag reports based on GSTR-1, auto-generated GSTR-2A, GSTR-3B and the national e-way bill system.
    • These reports identify non-filers so that action can be taken against active taxpayers who defaulted in filing returns.
    • Till November 2019, around 6 lakh dealers had defaulted in furnishing one or more returns from July 2017 involving estimated tax liabilities of around Rs 25,000 crore.
    • Increase in the filing: An SOP has been developed for proceeding against such return defaulters and this has helped increase the percentage of filing which has contributed to revenue.
  • Making Aadhaar mandatory: To further the ease of doing business, it was decided to grant registration without physical verification and a system of deemed registration was put in place.
    • Spot verification has unearthed non-existent dealers and led to the cancellation of around 1 million entities.
    • It has now been decided to mandate Aadhaar authentication for taking new registration and thereafter the existing registered taxpayer population would have to undergo Aadhaar authentication in a phased manner.
  • Use of analytical tools: Advanced analytic tools are being used to unravel complex networks of firms created just for generating credit and these analyses are being strengthened through machine learning and AI.
    • An all-India offence/enforcement database is being built.
  • System of data exchange with other agencies: In order to identify dealers posing a “hazard” to revenue and do a 360-degree profile of risky taxpayers, a system of regular data exchange with banks, CBDT, ED, RoC and other agencies is being put in place.
    • Fraudsters will find it almost impossible to game the system.
    • The new return system set to roll from April 1 is expected to curb incidences of unmatched turnovers and utilisation of un-validated.
  • System of e-invoicing: In order to validate and improve the quality and fidelity of invoice reporting and return filing, a system of e-invoicing is proposed to be implemented in a phased manner beginning April 1.
    • This will begin with taxpayers with turnovers exceeding Rs 500 crore and will auto-populate e-way bill generation and filing of Anx-1 in the new return system apart from validating credit flow from taxpayers.

Conclusion

These measures will effect qualitative improvement to the compliance eco-system which will not only lead to an improvement in the collection but will also make life easier for taxpayers and tax authorities alike.

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Goods and Services Tax (GST)

[op-ed of the day] GST may not have been revenue-neutral

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- GST-below expected collection, and problems associated with it.

Context

In theory, the shift to GST made eminent sense, yet in practice, some of these expectations have been belied.

Why have GST collections not measured up to expectations?

  • This could be due to a combination of three factors:
  • First:  The tax rates under GST are lower than in the earlier regime-GST was not revenue neutral, to begin with.
  • Second: There has been massive tax evasion due to under-reporting, input credit scams and fake invoices
  • Third: A slowing economy has impacted firm revenues, and thus tax collections.

GST should have been revenue-neutral but it is not

  • Fitment exercises not carried out: The fitment exercise should have been undertaken in a manner so as to ensure that collections pre and post GST are the same.
    • But, this fundamental principle was not adhered to, and other considerations dominated.
    • Revenue neutrality Vs. Multiple objectives: The GST council began its deliberations not with the single objective of revenue neutrality, but with multiple objectives in mind.
    • Closeness to existing tax: Council wanted to ensure that rates were close to the existing tax incidence (accounting for cascading); to ensure minimal impact on inflation.
    • Not regressive: The council also wanted the proposed rate structure was not regressive in nature.
    • The council wanted that items of mass consumption were not taxed at a higher rate.
    • Achieving all these objectives simultaneously proved a difficult task.

The issue of tax evasion

  • It is difficult to arrive at firm estimates of the scale of the problem but there are some indications of its size.
  • In West Bengal, it was estimated that the value of goods (July 2017 to March 2018) entering a state appeared to be under-reported by around Rs 50,000 crore.
  • Rs 60,000 crore in Madhya Pradesh, and Rs 1,50,000 crore in Maharashtra.
  • Numerous cases of tax fraud and fake invoice scams have also been detected since then

Problems involve and possible solutions

  • Invoice matching:  It is argued that invoice matching will help if implemented it from the beginning.
    • It could have helped plug the loopholes.
  • Issue of under-reporting: It is debatable whether invoice matching can end under-reporting (collusion) and fake invoices.
  • Limit of state capacity in handling cases: The Central and state administrations can intervene in only about 3 lakh cases in a year.
    • Their capacity to track lakhs of transactions on a daily basis is questionable.
  • Slowing economy: Already existing structural issues have been compounded by the slowing economy.

Way forward

  • There are certain options available to the government.
  • First: Either recalibrate the expectation or carry on the efforts to plug the loopholes and the shortcoming in the system.
  • Second: Lower the cut-off for composition scheme. A higher level simply encourages business “splitting”.
  • Third: Reduce exemptions.
  • Fourth: The council must deliberate on the rate structure, bringing it in line with pre-GST levels.

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Goods and Services Tax (GST)

Explained: Voting at the GST Council

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST Council

Mains level : Functioning of the GST Council

  • Breaking the tradition of consensus-based decisions in its 37 earlier meetings, the GST Council voted for the first time in its 38th meeting held on December 18.

GST Council voting rules

  • As per The Constitution (One Hundred and First Amendment) Act, 2016, in case of a voting, every decision of the GST Council has to be taken by a majority of not less than three-fourths of the weighted votes of the members present.
  • The vote of the central government has a weightage of one-third of the total votes cast, and the votes of all the state governments taken together have a weightage of two-thirds of the total votes cast in that meeting.
  • As of now, out of the total 30 states and UTs (excluding J&K), 20 are ruled by the NDA.
  • This essentially means that a vote in the Council could largely be an academic exercise — unless a number of the BJP’s allies switch sides.

Impacts of imbibing Voting

  • With the precedent of voting now established, consensus at the Council could be challenged again in the future.
  • The rules of voting in the GST Council are such that the odds are stacked in favour of the Centre in the normal course.
  • However, in case of a vote, any disagreements within the ruling coalition at the Centre may bring its support below the three-fourths majority that is needed for the passage of a decision.

Way Forward

  • Differences of opinion are likely to crop up on proposals to raise rates, especially of the lower slabs, in the future — a concern that made most states rule out an immediate rate hike in the last Council meeting, even as they were in agreement over a broader overhaul of the GST structure.
  • So far, even if states voiced their differences over a proposal in the Council, all decisions had been taken by consensus in the meetings of the GST Council.
  • With a departure from the consensus approach having been made, there could be more instances of voting exercises going forward — especially as revenue-raising measures come up in future meetings.

Back2Basics

GST Council

  • The GST Council is a federal body that aims to bring together states and the Centre on a common platform for the nationwide rollout of the indirect tax reform.
  • It is an apex member committee to modify, reconcile or to procure any law or regulation based on the context of goods and services tax in India.
  • The GST Council dictates tax rate, tax exemption, the due date of forms, tax laws, and tax deadlines, keeping in mind special rates and provisions for some states.
  • The predominant responsibility of the GST Council is to ensure to have one uniform tax rate for goods and services across the nation.

How is the GST Council structured?

  • The Goods and Services Tax (GST) is governed by the GST Council. Article 279 (1) of the amended Indian Constitution states that the GST Council has to be constituted by the President within 60 days of the commencement of the Article 279A.
  • According to the article, GST Council will be a joint forum for the Centre and the States. It consists of the following members:
  1. The Union Finance Minister will be the Chairperson
  2. As a member, the Union Minister of State will be in charge of Revenue of Finance
  3. The Minister in charge of finance or taxation or any other Minister nominated by each State government, as members.

Terms of reference

  • Article 279A (4) specifies that the Council will make recommendations to the Union and the States on the important issues related to GST, such as, the goods and services will be subject or exempted from the Goods and Services Tax.
  • They lay down GST laws, principles that govern the following:
  1. Place of Supply
  2. Threshold limits
  3. GST rates on goods and services
  4. Special rates for raising additional resources during a natural calamity or disaster
  5. Special GST rates for certain States

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This article would focus on Goods and Services Tax (GST), as we know discussion on GST bill is going on in winter session of Parliament. So, let’s just take this in brief here.

gst-head-for-blog


What is the Goods and Services Tax (GST)?

  • As the name suggests, the GST will be levied both on goods (manufacturing) and services.
  • A single, comprehensive tax that will subsume all the other smaller indirect taxes on consumption like service tax, etc.
  • This is how it is done in most developed countries.

Let’s know the structure of GST

  • It would have a dual structure, a Central component levied and collected by the Centre and a state component administered by states.
  • At the Central level, it will subsume Central excise duty, service tax and additional customs duties.
  • At the state level, it will include value-added tax(VAT), entertainment tax, luxury tax, lottery taxes and electricity duty.
  • The central government will have the exclusive power to levy and collect GST in the course of interstate trade or commerce, or imports. This will be known as Integrated GST (IGST).
  • Tobacco and tobacco products will be subject to GST. The centre may also impose excise duty on tobacco.

Which products are exempted from the purview of GST ?

  • Alcohol for human consumption has been exempted.

Initially, GST will not apply to:

  • Petroleum crude
  • High speed diesel
  • Motor spirit (petrol)
  • Natural gas
  • Aviation turbine fuel(ATF)

The GST Council will decide when GST will be levied on them.

What is the scope of GST Council?

The GST Council will consist of –

  • Union Finance Minister (as Chairman)
  • Union Minister of State in charge of Revenue or Finance.
  • Minister in charge of Finance or any other Minister, nominated by each state government.

 

GST Council will make recommendations on –

  • Taxes, cesses, and surcharges to be subsumed under the GST
  • Goods and services which may be subject to, or exempt from GST
  • The threshold limit of turnover for application of GST; (d) rates of GST
  • Model GST laws, principles of levy, apportionment of IGST and principles related to place of supply.

The GST Council may decide the mechanism for resolving disputes arising out of its recommendations.

What are the advantages of GST?

  • It speeds up economic growth of India, as it will add about 1% to India’s GDP growth.
  • Replacing the cascading effect created by existing indirect taxes.
  • Uniformity in tax regime with only one or two tax rates across the supply chain as against multiple tax structure as of present.
  • Improvement in cost competitiveness of goods and services in the international market.

Why 1 per cent Additional tax on supply of goods should not be there?

  • It will be levied by centre in the course of inter-state trade or commerce, this provision impedes a key objective of GST.
  • The GST regime aims to create a harmonised national market for goods and services, and the GST Bill reinforces this objective.
  • The levy of the additional tax distorts the creation of a national market, as a product made in one state and sold in another would be more expensive than one made and sold within the same state.
  • Also, the 1% tax will result in cascading of taxes.
  • This effect will be magnified if the production and distribution chain passes through several states, and if the 1% additional tax applies at each state.
  • The burden of the cascading tax will be borne by the final consumer of the product.

Let’s look at the highlights of Constitution (122nd Amendment), GST Bill, 2014

  • The Bill amends the Constitution to introduce the goods and services tax (GST).
  • Parliament and state legislatures will have concurrent powers to make laws on GST.
  • The Bill empowers the centre to impose an additional tax of up to 1%, on the inter-state supply of goods for two years or more. This tax will accrue to states from where the supply originates.
  • Parliament may, by law, provide compensation to states for any loss of revenue from the introduction of GST, up to a five year period.

What is preventing GST from being a reality?

  • The GST constitutional amendment bill was passed in the Lok Sabha in May 2015.
  • It has been held up in the Rajya Sabha due to objections being raised by the Opposition regarding the Bill as well as issues with no direct connection to GST.
  • The Bill was also placed before a Rajya Sabha select committee, which made its recommendations regarding changes to the Bill. The Cabinet cleared these changes.

What are the Objections from Opposition?

  • The Congress wants a provision capping the GST rate at 18 per cent to be added to the Bill itself.
  • It also wants to scrap the proposed 1 per cent additional levy for manufacturing states.
  • The third demand by the Congress was to change the composition of the GST council.
  • The proposed composition is for the Council to be two-thirds comprised from states and one-third from the Centre.
  • The Congress wants the Centre’s share to be reduced to one-fourth. This demand, however, was rejected by even the Rajya Sabha Standing Committee.

Time to ponder on a few Questions! Some of these may make into Mains 2015!

#1. Will GST really make a breakthrough for economic growth in India? Discuss.

#2. Considering ongoing debate on the introduction of GST bill in Rajya Sabha, critically comment on the important features of the bill.

#3. Critically analyse the structure, objectives and issues arising out of of the Goods and Services Tax system that the government wants to introduce in India?

What do you think on it, Let’s know us!


 

Published with inputs from Arun
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