Goods and Services Tax (GST)

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

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.

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.

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/

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.

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.

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

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/

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.

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.

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.

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

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.

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

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.

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.

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.

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

Goods and Services Tax (GST)

[op-ed snap] A fraying pact

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST Council

Mains level : GST council - consensus

Context

GST Council departed from the consensual nature of decision-making followed so far. The council, for the first time, voted on an issue of the taxation of lotteries. 

Vote

  • The Kerala government stuck to its stance of maintaining the dual rate structure.
  • The final decision to go to a vote illustrates a deterioration in relations between the Centre and states. 
  • It goes against the idea and spirit of cooperative federalism. 
  • This is unlikely to be a one-off. 
  • As GST revenues fall, relations between the Centre and states may be further strained. States are likely to press for extending the compensation period by a few years.

Reasons for the trust deficit

  • Compensation – The genesis of the distrust stems from the Centre delaying compensation to states for their revenue loss. 
  • Under the GST regime, states have to be compensated if their revenue growth falls below 14% each year over the 2015-16 base year. 
  • So far, the practice had been to transfer the compensation amount after two months. The Centre delayed payments for August and September. 
  • The Centre released Rs 35,298 crore as compensation just prior to the council meeting, and the finance minister said that the Centre was committed to discharging its obligation.
  • Economic slowdown – With the economy slowing sharply, there is a concern that the amount being collected through the compensation cess will not be enough to compensate for the shortfall in collections this year. 
  • Centre’s own revenues are likely to fall short of its budgeted target. Tax devolution to states will also be lower this year. 
  • Capital expenditure – Much of the states’ revenue expenditure is sticky in nature. Lower revenues will force them to cut back on capital spending. This will intensify slowdown.

Demands

  • Some state governments have asked for relaxing the fiscal deficit limit to 4%. 
  • It underlines the severity of the stress in both Central and state government finances.
  • Raise tax rates to shore up collections. Though rate rationalisation is required, in some sectors inputs are taxed at higher rates as compared to final products.
  • Raising taxes when the economy is slowing down would have been counterproductive. 

Conclusion

A comprehensive review of the GST architecture that addresses the issues flagged by the CAG is the need of the hour.


Back2Basics

GST Council

A-Z of GST

Goods and Services Tax (GST)

[pib] Seva Bhoj Yojana

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Seva Bhoj Yojana

Mains level : Particulars of the scheme


Seva Bhoj Yojna

  • It is a Central Sector Scheme for providing reimbursement of CGST and Central Government’s share of IGST paid by charitable/religious institutions on purchase of specific raw food items for serving free food to public / devotees.
  • The specific raw food items covered under the Scheme are (i) Ghee (ii) Edible Oil (iii) Sugar/Burra/Jaggery (iv) Rice (v) Atta/Maida/Rava/Flour and (vi) Pulses.
  • Under the scheme the financial assistance will be provided for free ‘prasad’ or free food or free ‘langar’ / ‘bhandara’ (community kitchen) offered by charitable/religious institutions like Gurudwara, Temples, Dharmik Ashram, Mosques, Dargah, Church, Math, Monasteries etc.

Criteria for financial assistance

  • The applicant must be involved in charitable/religious activities by way of free and philanthropic distribution of food/prasad/langar(Community Kitchen)/ bhandara free of cost and without discrimination.
  • The institutions/organizations should have been distributing free food, langar and prasad to atleast 5000 persons in a calendar month can apply under the scheme.
  • Financial Assistance under the scheme shall be given only to those institutions which are not in receipt of any Financial Assistance from the Central/State Government for the purpose of distributing free food.
  • The Institution/Organization blacklisted under the provisions of Foreign Contribution Regulation Act (FCRA) or under the provisions of any Act/Rules of the Central/State shall not be eligible for financial assistance under the scheme.

Goods and Services Tax (GST)

[op-ed snap] GST buoyancy

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GST

Mains level : Reasons for high GST inflows.

CONTEXT

The final month of financial year 2018-19 has given the government some reason for cheer. Targets for indirect tax collections may have been missed for the last year, but collections from the Goods and Services Tax in April for economic activity in March scaled a new high. The GST inflows of ₹1,13,865 crore in April are the highest recorded since the tax regime was introduced in July 2017.

Background

  • They represent an increase of over 10% compared to the same month a year ago, and over 15% buoyancy over the average monthly GST collections in 2018-19 of ₹98,114 crore.
  • To be clear, GST revenues have crossed the ₹1 lakh crore mark in March, January and October as well.
  • The government has acknowledged that economic growth did slow down in 2018-19, owing to declining private consumption growth, a tepid increase in fixed investments and muted exports.
  • The hope would be that the latest GST numbers are a harbinger of better growth momentum for 2019-20.
  • The growth rate of the economy fell from 8.2% in the first quarter to 7.1% in the second and 6.6% in the third, so any improvement in the final quarter numbers due at the end of May should provide some succour.
  • Healthier GST collections, if sustained, will also mean less pressure on the Centre to cover its fiscal deficit.

Reasons

1.Perplexing Trend – The April GST numbers have come as a surprise to many experts, given the lacklustre economic activity witnessed across many sectors in recent months, which should normally have impacted tax collections adversely.

2. Increasing Compliance –

  • This perplexing trend may be attributed to increasing compliance among businesses amidst the aggressive push by the tax authorities to widen the tax base.
  • GST filings, for instance, were the highest in March this year.
  • However, the April surge has occurred despite a decrease in the total number of GSTR-3B returns filed by businesses, from 75.95 lakh in March to 72.13 lakh in April.

3. Tax Rate Cuts – In the absence of more disaggregated data, it could be argued that tax rate cuts by the GST Council in December too may have spurred higher volumes for some goods and services.

4. March Rush – The rush to pay tax arrears at the end of the financial year may have been another seasonal factor contributing to better tax collection during the last month.

5.Enforcement Actions – Enforcement action by the taxman to collect more revenue from registered taxpayers who have not been filing returns could be yet another factor.

Way Forward

Simplification of GST

  • It is still too early to assume that this is the beginning of a secular trend. One must not lose sight of the need for further simplification of the GST regime once the election season is over.
  • A significant number of businesses have already been brought into the tax net since the advent of the GST.
  • In order to encourage greater compliance, there must be efforts to make it easier for small firms to remain in the tax net by cutting down the time and energy required to fill myriad tax returns.

Goods and Services Tax (GST)

Centre should address States’ concern on GST transfers

Note4students

Mains Paper 3: Economy | Issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: GST Transfers

Mains level: Read the attached story


News

  • The GST Council was designed as a federal body between the States and the Centre.
  • The States have been complaining that the Centre is taking advantage of the arrangement and is delaying the dues to be paid to the States.

Concern of the states

  • The States have a feeling that the Centre is taking advantage of the current arrangement.
  • The Centre is supposed to give money to the States, but that distribution is taking time and accounts are not being finalised.
  • There is a feeling that the Centre is trying to keep the money longer than required.
  • The Finance Commission (FC) awards are more in favour of the poorer States, while the non-FC expenditures actually don’t go to poorer States.
  • The empirical evidence showed that, while the transfers mandated by the Finance Commission from the Centre to the States had been to the benefit of the poorer States, the discretionary spending allowed by the Centre had, in fact, only been to the benefit of the richer States.
  • The explanation is possibly that political bargaining is better for the forward States, or their absorption capacity is better.

Recasting NITI Aayog

  • On the future roles of the FCs and the NITI Aayog, there was a need for a body such as the FCs to make sure that there was a stable formula for transfers to the States.
  • There is a need for a federal body, which is trusted by both the States and the Centre that would provide a forum for the political bargaining that was behind the allocation of other funds to the States, such as grants in aid.
  • The right way of going about it is that there should be a political forum and expertise also, which will arrive at the criteria for such transfers.
  • That body should come under the confidence of both the States and the Centre, and not just identify with the Centre.
  • If the NITI Aayog were to occupy this role, then the first thing is for it to get the trust of the States.

Goods and Services Tax (GST)

Tax officials to examine high usage of Input Tax Credits

Note4students

Mains Paper 3: Economy | Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: Input Tax Credit

Mains level: Problem of tax evasion in GST era


News

  • Concerned over a decline in GST revenues, tax officials are likely to examine the high usage of input tax credit (ITC) to set off tax liability by businesses.

What is Input Tax Credit?

  1. The meaning of ITC can be easily understood when we take the words ‘input’ and ‘tax credit’.
  2. Inputs are materials or services that a manufacturer purchase in order to manufacture his product or services which is his output.
  3. Tax credit means the tax a producer was able to reduce while paying his tax on output.
  4. Input tax credit means that when a manufacturer pays the tax on his output, he can deduct the tax he previously paid on the input he purchased.
  5. Here, while paying the tax on his output, he can deduct or take credit for the tax he paid while purchasing inputs.

Why review its usage?

  1. There are losses incurred in GST Revenues.
  2. Availing ITC ideally should not result in loss of revenue but there could be possibility of misuse of the provision by unscrupulous businesses by generating fake invoices just to claim tax credit.
  3. As much as 80 per cent of the total GST liability is being settled by ITC and only 20 per cent is deposited as cash.
  4. GST revenue has averaged around Rs 96,000 crore per month so far this fiscal and this reflects the cash component being deposited by businesses.

What concerns Revenue Officials: Fake Invoices

  1. Under the present dispensation, there is no provision for real time matching of ITC claims with the taxes already paid by suppliers of inputs.
  2. The matching is done on the basis of system generated GSTR-2A, after the credit has been claimed.
  3. Based on the mismatch highlighted by GSTR-2A and ITC claims, the revenue department sends notices to businesses.
  4. Currently there is a time gap between ITC claim and matching them with the taxes paid by suppliers.
  5. Hence there is a possibility of ITC being claimed on the basis of fake invoices.

Way Forward

  1. Once the new return filing system becomes operational, it would become possible for the department to match the ITC claims and taxes paid on a real time basis.
  2. The revenue department would now analyse the large number of ITC claims to find out if they are genuine or based on fake invoices and take corrective action.

Goods and Services Tax (GST)

[pib] Cabinet approves creation of the National Bench of GST Appellate Tribunal (GSTAT)

Note4students

Mains Paper 2: Indian Polity | Statutory, regulatory and various quasi-judicial bodies.

From UPSC perspective, the following things are important:

Prelims level: GST Appellate Tribunal

Mains level: Functions and Terms of reference of the GST appellate tribunal


News

  • The Union Cabinet has approved the creation of National Bench of the Goods and Services Tax Appellate Tribunal (GSTAT).

Goods and Services Tax Appellate Tribunal (GSTAT)

  1. Goods and Services Tax Appellate Tribunal is the forum of second appeal in GST laws and the first common forum of dispute resolution between Centre and States.
  2. The appeals against the orders in first appeals issued by the Appellate Authorities under the Central and State GST Acts lie before the GST Appellate Tribunal, which is common under the Central as well as State GST Acts.
  3. Being a common forum GST Appellate Tribunal will ensure that there is uniformity in redressal of disputes arising under GST, and therefore, in implementation of GST across the country.

Composition of GSTAT

  1. GSTAT shall be presided over by the President and shall consist of one Technical Member (Centre) and one Technical Member (State).
  2. The National Bench of the Appellate Tribunal shall be situated at New Delhi.

Provisions for GSTAT

  1. Chapter XVIII of the CGST Act provides for the Appeal and Review Mechanism for dispute resolution under the GST Regime.
  2. Section 109 of this Chapter under CGST Act empowers the Union Government to constitute, on the recommendation of Council, an Appellate Tribunal.
  3. It shall hear appeals against the orders passed by the Appellate Authority or the Revisional Authority.

Goods and Services Tax (GST)

[op-ed snap] India’s Goods and Services Tax regime isn’t the disaster it is made out to be

Note4students

Mains Paper 3: Economy |Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: Basics aspects of FDI in e-commerce.

Mains level: The news-card analyses the issues of Indian e-commerce industry, in a brief manner.


Context

  • India’s earlier indirect tax regime was often said to be fraught with problems.
  • The task force set up by the 13th Finance Commissionconcluded that the system was “distortionary and inhibited voluntary compliance”.
  • It was to address such concerns that the Goods and Services Tax was envisaged.

Background

  • GST had long appeared inevitable; the only question was about the timing of its implementation.
  • The government was faced with the onerous task of subsuming 17 taxes under the GST.
  • Given the number of taxes to be collapsed into a single regime, across states and the Centre, it was widely expected that the transition would not be effortless, or seamless.
  • It would require a massive effort not only to garner consensus given India’s federal structure but also to reorient administrative and business practices.

Analysis

Complexity of the previous regime

  • The Value added Tax is one of the main levies subsumed under the GST. As now, a multi-state business then was required to register and comply with the processes for filing VAT in each of the states.
  • But the VAT regime was not entirely similar across states – time limit for filing returns, the rates of tax and penalties varied.
  • Thus, a business operating across states had to keep track of the differing filing requirements.
  • A business with diversified operations – producing goods and providing services – had to file separate returns for goods and services.
  • By doing away with this multiplicity, the GST regime has visibly improved the compliance process.

Concerns with GST

  • Today, a year and a half after it was rolled out, the GST is often criticised for its complex filing processes and uncertainty.
  • The GST is also criticised for being uncertain as it has been frequently changed.
  • However no tax system is bereft of some degree of uncertainty. Frequent alterations are expected since the GST replaced another system.

Government’s response to these concerns

  • Responding to the demands of the taxpayers, the government has eased some of the compliance requirements – refund process for a certain category of taxpayers, deadlines for filing and rectification of returns.
  • An iterative process of change is a feature of any nascent tax system. It is hoped that as the GST system matures these concerns will no longer remain.

Increasing compliance

  • The GST was also meant to encourage voluntary compliance.
  • By rationalising tax rates and simplifying the process, the new regime sought to bring in those outside the system.
  • It was expected that through a seamlessly integrated process of claiming input credits, matching detailed invoices and generating e-way bills, those in the supply chain would be persuaded to shift to the formal taxation system.
  • There is now evidence of new entrants to the system. In 2018, it was reported that in addition to the 66 lakh crore entities that migrated from the old system, the GST Network had recorded 58 lakh new registrations.
  • This despite the fact that the threshold for registering on the GST Network (Rs 20 lakh) is much higher than it was for the VAT regime (Rs 1 lakh to Rs 10 lakh).
  • However, some critics have pointed out that many entities registered on the GST Network do not actually file their returns.

Way Forward

  • Simplicity and ease of compliance are what taxpayers primarily demand from a taxation system.
  • For a system that encourages compliance, directly or through network effects, is expected to yield greater revenue in the long run as economic activity picks up for the units reporting minimal activity.
  • The GST will impose transition costs in the short term but will increase the number of taxpayers in the long run and boost tax revenue.

Goods and Services Tax (GST)

[pib] National Anti-Profiteering Authority (NAA)

Note4students

Mains Paper 3: Indian Economy| Issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: GST, GST COUNCIL, NAA

Mains level: Role and mandate NAA in strengthening GST Infrastructure


News

National Anti-Profiteering Authority (NAA)

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

What is profiteering?

  1. Profiteering means unfair profit realized by traders by manipulating prices, tax rate adjustment etc.
  2. 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.
  3. Conventionally, several traders will have a strong tendency to quickly increase the price of a commodity whose tax rate has been increased.
  4. But on the opposite side, they may delay the price reduction of a commodity whose tax rate has been cut by the government.
  5. A delayed or postponed price reduction helps business firms to make higher profit. The losers here are the consumers.

Functioning of NAA

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

Steps 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 programmes;
  • Launching a helpline to resolve the queries of citizens regarding registration of complaints against profiteering.
  • Receiving complaints through email and NAA portal.
  • Working with consumer welfare organizations in order to facilitate outreach activities.

Goods and Services Tax (GST)

[op-ed snap] Moving from chaos to order: The overdue step to a simpler GST

Note4students

Mains Paper 3: Indian Economy| Issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: GST, GST COUNCIL,GSTN

Mains level: The newscard discusses issues with GST structure , in a brief manner.


Context

  • The Indian tryst with indirect tax reform seems to be moving in the opposite direction—from chaos to order. The initial version of the new goods and services tax (GST) was extremely complicated. There are now welcome moves to simplify it.

Background

  • Goods and Services Tax (GST) is a comprehensive indirect tax on manufacture, sale, and consumption of goods and services throughout India. GST would replace respective taxes levied by the central and state governments.

 What is the Principle of GST?

  1. The Centre will levy and collect the Central GST.
  2. States will levy and collect the State GST on the supply of goods and services within a state.
  3. The Centre will levy the Integrated GST (IGST) on the interstate supply of goods and services, and apportion the state’s share of tax to the state where the good or service is consumed.
  4. The 2016 Act requires Parliament to compensate states for any revenue loss owing to the implementation of GST.

GST invisible achievements: Analysis by Economic Survey:

  1. Economists at the Union finance ministry studied GST data in detail and presented some interesting facts in this year’s Economic Survey.
  2. First, the Survey showed that India’s formal non-farm payroll is much higher than is commonly believed. The implementation of the GST, which is bringing more businesses into the tax net,will further push formalization of the economy.
  3. Second, the GST is leading to better tax compliance. The number of unique registrations has now crossed the 10 million mark,which is higher than entities registered in the pre-GST period, though they are not comparable as indirect taxpayers had to register multiple times in the earlier system. The increasing number of taxpayers and better compliance should help raise higher revenue in the medium to long run.
  4. Third, the GST system is creating a vast repository of data that could be useful in policymaking. For example, it is now possible to know the state-wise distribution of international exports. This information can be used to fine tune policies in particular states to boost exports. Per capita gross state domestic product has a high correlation with exports.
  5. Further, the way the GST Council has evolved is a notable achievement. All decisions so far have been taken by consensus. It shows the way complex issues can be addressed through cooperation between the Union and state governments. While the council has a specific purpose, perhaps the idea can be used to address policy issues in other areas.

GST vis-à-vis core economic principles

  1. The integration of the Indian market as well as the rewiring of supply chains because of GST should lower transaction costs and improve economic efficiency.
  2. A good fiscal system should not tax the production of intermediate goods. That is the logic underlying all value-added taxes such as GST. It is a destination tax that is collected at the point of consumption.
  3. Indirect taxes tend to be regressive in nature. However, the preferred solution should not be a complicated GST structure with many rates, but a low standard or modal rate with a small list of exemptions.

Issues with GST structure

  1. The complicated GST structure we began with can partly be explained by the messy federal bargaining in the GST Council and partly by a flawed incentive structure. The cost of the policy failure is obvious.
  2. GST collections have been weaker than expected while compliance costs for enterprises have increased.
  3. The two major incentive design flaws during the initial GST negotiations are as follows
  • Decisions in the GST Council should be unanimous,the bargaining that followed led to a mess.
  • Central govt guaranteed the states that their revenues from GST would grow at 14% a year. Any shortfall would be compensated. The fixed guarantee gave them little incentive to push for a more sensible GST rate structure that would maximize growth.
  1. A World Bank study said that the Indian GST rate was the second highest among the 115 countries with a national value-added tax. It was also the most complicated, with five main tax rates, several exemptions, a cess and a special rate for gold.

Way Forward

  1. As GST stabilizes and settles down, the council will need to continuously work on simplifying the structure to enable higher tax collection and economic growth.
  2. Arbind Modi committee provided 10 key principles for the design of an efficient GST, such as covering all goods and services, including immovable property, a single low rate, destination-based, zero rate on exports, and threshold exemption for small enterprises.
  3. The Modi committee had recommended a 12% GST rate, of which 5% would go to the Union government, 5% to the state governments and the other 2% to the third tier of government.

Back2Basics

GST

  1. It is a destination-basedtaxation system.
  2. It has been established by the 101stConstitutional Amendment Act.
  3. It is an indirect tax for the whole country on the lines of “One Nation One Tax” to make India a unified market.
  4. It is a single tax on supply of Goods and Services in its entire product cycle or life cycle i.e. from manufacturer to the consumer.
  5. It is calculated only in the “Value addition” at any stage of a goods or services.
  6. The final consumer will pay only his part of the tax and not the entire supply chain which was the case earlier.
  7. There is a provision of GST Council to decide upon any matter related to GST whose chairman in the finance minister of India.

What taxes at center and state level are incorporated into the GST?

At the State Level

  • State Value Added Tax/Sales Tax
  • Entertainment Tax (Other than the tax levied by the local bodies)
  • Octroi and Entry Tax
  • Purchase Tax
  • Luxury Tax
  • Taxes on lottery, betting, and gambling

At the Central level

  • Central Excise Duty
  • Additional Excise Duty
  • Service Tax
  • Additional Customs Duty (Countervailing Duty)
  • Special Additional Duty of Customs

GST Council

  1. It is the 1stFederal Institution of India, as per the Finance minister.
  2. It will approve all decision related to taxation in the country.
  3. It consists of Centre, 29 states, Delhi and Puducherry.
  4. Centre has 1/3rdvoting rights and states have 2/3rd voting rights.
  5. Decisions are taken after a majority in the council.

GSTN

  1. GSTN is registered as a not-for-profit companyunder the companies Act.
  2. It has been formed to set up and operate the information technology backbone of the GST.
  3. While the Central (24.5%) and the state (24.5%) governments hold a combined stake of 49%, the remaining 51% stake is divided among five financial institutions—LIC Housing Finance with 11% stake and ICICI Bank, HDFC, HDFC Bank and NSE Strategic Investment Corporation Ltd with 10% stake each.
  4. GSTN had awarded Infosys Ltd the contract to develop the hardware and software for GST.
  5. The idea behind GSTN was to set up an entity that is equidistant from both the Central government and the state governments, as it will advise both the Centre and the states on the information technology network.

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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