Goods and Services Tax (GST) bill

The Constitution One Hundred and Fifteenth (Amendment) Bill 2011 (GST Bill)

The Constitution (One Hundred and Fifteenth Amendment) Bill, 2011 seeks to introduce the Goods and Services Tax to give concurrent taxing powers to both the Union and States. The bill suggests the creation of Goods and Services Tax council and a Goods and Services Tax Dispute Settlement Authority.

Highlights of the Bill

• The Bill seeks to amend the Constitution to provide for the introduction of a Goods and Services Tax (GST).
• The Bill allows both Parliament and state legislatures to frame laws with respect to GST.  Parliament will have the exclusive power to levy GST on imports and inter-state trade.
• The Bill creates a Goods and Services Tax Council consisting of state Finance Ministers, the Union Finance Minister, and Union Minister of State for Revenue to make recommendations with respect to GST.
• The Bill provides for a Dispute Settlement Authority to settle disputes between states or between states and the Union with regard to GST. Appeals from the Authority lie with the Supreme Court.
• The Bill exempts certain commodities from GST, including petroleum products and alcoholic liquor for human consumption.

Key Issues and Analysis

• The GST Council will recommend harmonised tax rates, and disputes regarding these rates will be adjudicated by the Dispute Settlement Authority (with appeal to the Supreme Court).  This structure, in which executive and judicial bodies determine tax rates, may impinge on the rights of legislatures.
• The Bill seeks to amend the Constitution to provide that Parliament and state legislatures may both frame laws with regard to GST without providing for Parliamentary supremacy.  
• The GST Council shall make all decisions by “consensus”.  It is unclear whether this may be interpreted as majority or unanimity.
• The exclusion of certain commodities from GST is contrary to the recommendations of the Thirteenth Finance Commission and Department of Revenue.
• The Bill constitutionally requires a “Union Finance Minister” and “Union Minister of State in charge of Revenue”.  This could undermine the flexibility of the Prime Minister in forming a Council of Ministers.
  ******Impact of introducing a GST
  Reduced cascading of taxes
  Prior to the introduction of VAT, producers faced a burden of ‘tax on tax’. Producers procured input items upon which
  taxes would have been paid. After production, the output value (inclusive of input costs) was taxed. As a result, the tax
  paid on inputs was again taxed at the output stage. This cascading effect continued further down the chain of production,
  resulting in a high tax burden on retail consumers and less competitive exports
  However, the existing VAT regime is incomplete. Many taxes are not included within VAT.
  
  These taxes continue to
  have a cascading effect. Certain sectors are also exempt from VAT.
  
  Exempt sectors cannot claim set-offs for VAT paid
  on inputs, which leads to cascading.Introducing a GST would eliminate such cascading of taxes by
  including all taxes, and all goods and services, under a VAT regime with set-offs across state and central jurisdictions
  *******Simplification and harmonisation
  Under the Constitution, states do not have the power to tax services. In many cases it is difficult to classify a product as
  either a good or service, particularly due to recent advancements in technology. In addition, certain goods and services
  are bundled as a single product. Distinguishing between goods and services complicates the taxation of these products.
  
  Under GST, this distinction will no longer be required.
  Redistribution of tax revenue across states
  Currently, some taxes are levied by states, some by the centre, and some by both. Introduction of a GST will change
  these mechanisms and may lead to redistribution of tax revenue across states as well as between the centre and the states.