Understanding Goods and Services Tax # 1: Historical Background for implementation of GST in India
By: – ARPIT HALDIA
Goods and Services Tax – GST
Dated:- 13-2-2016
Goods and Services Tax i.e. GST has been in the news for numerous reasons during the last decade be it the game changing concept in the history of Indian Economy or which GST Approach should be preferred i.e. common GST or Dual GST or whether Indian political system has the required will and common approach for implementation of GST and discussion has gone to the extent of deciding that whether it would anytime be implemented in India or not.
What exactly is Goods and Services Tax, popularly known as “GST'. The Report of the Task Force on “Goods and Services Tax Thirteenth Finance Commission” referred to the report of the Task Force on “Implementation of the Fiscal Responsibility and Budget Management Act, 2003” as follows:
“Accordingly, the Task Force recommended that a well designed destination-based va
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l address the concerns of each State. We will ensure that their rights are preserved. No State is a loser.
It is unquestionably a very important moment because the whole process of indirect taxation in India will change once the GST itself is implemented. There will be uniformity to taxation as far as the whole country is concerned. There will be a seamless transfer of goods and services.
The other important feature of this taxation is that there would be no tax on tax. It may bring inflation slightly down. Economists estimate that it has a potential to give a boost to India's GDP itself.”
Therefore, GST is a destination based Multipoint Tax system covering in its ambit both Goods and Services. All stages of production and distribution are held as mere pass through wherein tax paid is given as a credit to be adjusted against the liability to be paid at the next stage and tax finally “sticks” or gets added to the cost at the final consumption stage in the taxing jurisdiction. It has
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o refer the observation in “Working Paper GST Reforms and Intergovernmental Considerations in India” for the Department of Economic Affairs Ministry of Finance, Government of India released in the month of March 2009 wherein it was stated that
“The state VAT design is based largely on the blueprint recommended in a 1994 report of the National Institute of Public Finance and Policy, prepared by a team led by late Dr. Amaresh Bagchi (hereinafter, the “Bagchi Report”).”
This Report by Dr Amaresh Bagchi commonly referred to Bagchi Report on “Reform of Domestic Trade Taxes in India: Issues and Options”, National Institute of Public Finance and Policy, New Delhi stated the tax Structure as prevalent in India at that time was as follows:
“Archaic, irrational, and complex – according to knowledgeable experts, the most complex in the world”.
The Task Force on “Implementation of the Fiscal Responsibility and Budget Management Act, 2003” July 2004 commented upon the Tax Structure prevalent
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prevalent prior to implementation of VAT on sale of goods and CENVAT in Excise and Service Tax was irrational and not progressive. It had many defects including cascading effect of multiple taxes and was more prone to tax evasion and avoidance. The Tax Rates were very high as the taxation base was very narrow, therefore there were political lobbying for exemptions and lowering of Tax Rates. The tax system at time was not providing a level playing field to all the market players. The neutrality principle of taxation provides that the taxes should be such that they provide a level playing field to all the market players and tax should not be a factor in the decision making of the consumer. There were classification issues as there were multiple Tax Rates and most surprisingly there were huge conflicts and competition between the States for lowering of Tax Rates going even to the extent as has been narrated in the “Bagchi Report” as follows:
“The States have been trying to 'export” taxes
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felt within few years and more precisely 10 years of implementation of VAT to again shift from VAT to GST as it involved considerable efforts and preparation. If at all there was a requirement of bringing in GST, then why it was not brought in place before VAT rather than first moving to VAT from single point taxation and then moving from VAT to GST.
The answer had been given in “Bagchi Report” as follows:
“Given this background, the only feasible option seems to be a dual system in which the VAT is levied by the two levels of government independently within the existing constitutional framework. This would be possible if the MODVAT now operating through excise tax system is made into a full-fledged manufacturers VAT and the states also adopt a destination based harmonized system of VAT in place of the chaotic sales taxes operating now.”
The most important remark in the “Bagchi report” which also shows the farsightedness of the Study Team and its Team Leader Dr Amaresh Bagchi is a
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implemented.
Further it would not be out of place to mention that the Concurrent VAT Structure similar to what has been suggested for implementation as Dual GST was also part of “Bagchi Report” and was discussed in detail as a possible option in the report.
It would be appropriate here to refer the observation in Working Paper on “GST Reforms and Intergovernmental Considerations in India” for the Department of Economic Affairs Ministry of Finance, Government of India released in the month of March 2009 wherein it was stated that
“Buoyed by the success of the State VAT, the Centre and the States are now embarked on the design and implementation of the perfect solution alluded to in the Bagchi Report. As announced by the Empowered Committee of State Finance Ministers in November 2007, the solution is to take the form of a 'Dual' Goods and Services Tax (GST), to be levied concurrently by both levels of government.
Therefore, preference was given to VAT over GST at that given point of
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mpleted full circle and journey in terms of goods in the Year 2002-03.
* 2004-05: Service taxes were also added to CENVAT.
* 1st April 2005: States started implementation of VAT for sale of goods in the State
However, at present there is no seamless transfer of goods and services in the country and tax is not a mere pass through during production and distribution and is added as cost in many cases during the intermediate stage. However the concept of GST suggests that the tax should stick as a cost only at final consumption stage. Therefore, the concept of VAT in Central and State Taxes prevalent in the present scenario is limited in scope as against the concept of GST.
Historical Background for Implementation of GST highlighted in Extract of Union Budget Speech during the last 10 Years
It has been approximately a decade since the announcement was made by the then Finance Minister Shri P Chidambaram in the budget speech for the Year 2006-07 dated 28th February 2006 for impleme
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s important in view of the fact that even before some of the states had shifted from single point taxation to Multipoint Taxation with regard to the sale of goods, paradigm was sought to be shifted to a much broader based and progressive scheme of Taxation known as GST. This declaration was more than a whisper and laid down the first real intent for the implementation of GST.
In almost all the budget speech since the year 2006-07, there has been a reference to the implementation of GST. The relevant portion of the Speech of Hon'ble Finance Minister in different years is being reproduced herewith to showcase the historical background of the process and preparation for the Implementation of GST. It showcases the fact that various amendments have been incorporated in statutes to bring the present scheme of taxation in line with the principles of Goods and Services Tax. These amendments would be cross referred in subsequent articles to show case that leaving aside the political issues, th
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2008. Consultations are underway on the compensation for losses, if any, and once agreement is reached the new rate will be notified. I am also happy to report that there is considerable progress in preparing a roadmap for introducing the Goods and Services Tax with effect from April 1, 2010.
Observation about GST in the Budget Speech for the Year 2009-10
82. In the course of preparation of this budget, I have had the opportunity to interact with large number of stakeholders and receive valuable inputs. Most suggestions were for structural changes in the tax system. Tax reform, like all reforms, is a process and not an event. Therefore, I propose to pursue structural changes in direct taxes by releasing the new Direct Taxes Code within the next 45 days and in indirect taxes by accelerating the process for the smooth introduction of the Goods and Services Tax (GST) with effect from 1st April, 2010 .
85. I have been informed that the Empowered Committee of State Finance Ministers ha
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that direction are necessary. One measure that would facilitate the process is the further convergence of central excise duty rates to a mean rate – currently 8 per cent. I have reviewed the list of items currently attracting the rate of 4 per cent, the only rate below the mean rate. There is a case for enhancing the rate on many items appearing in this list to 8 per cent, which I propose to do, with the following major exceptions:
• food items; and
• drugs, pharmaceuticals and medical equipment.
Observation about GST in the Budget Speech for the Year 2010-11
26. On Goods and Services Tax, we have been focusing on generating a wide consensus on its design. In November, 2009 the Empowered Committee of the State Finance Ministers placed the first discussion paper on GST in the public domain. The Thirteenth Finance Commission has also made a number of significant recommendations relating to GST, which will contribute to the ongoing discussions. We are actively engaged with
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tion of my proposals on indirect taxes are the need to achieve some degree of fiscal consolidation without impairing the recovery process and moving forward on the road to GST
179. To bridge this gap, I had the option to raise the rate of service tax to 12 per cent as it was before I introduced the third stimulus package. I am not resorting to this option to maintain the growth momentum and also to bring about a convergence in the rates of tax on goods and services. I, therefore, propose to retain the rate of tax on services at 10 per cent to pave the way forward for GST.
Observation about GST in the Budget Speech for the Year 2011-12
Tax Reforms
21. The introduction of the Direct Taxes Code (DTC) and the proposed Goods and Services Tax (GST) will mark a watershed. These reforms will result in moderation of rates, simplification of laws and better compliance.
23. Unlike DTC, decisions on the GST have to be taken in concert with the States with whom our dialogue has made consider
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d in my last Budget, will allow States to align with the roll out of GST. Funds have been released for 31 projects received from the States and Union Territories. Most of the States and UTs have already enabled the facility of dealers making electronic payments. A number of States have already started accepting Electronic Tax Returns and issuing forms required for inter-state trade.
152. In view of the healthy growth in indirect taxes in 2010-11, I had the option to roll back the Central excise duty to levels prevailing in November 2008. I have chosen not to do so for two reasons. I would like to see improved business margins translated into higher investment rates. I would also like to stay my course towards GST. I have therefore decided to maintain the standard rate of Central excise duty at 10 per cent.
153. I propose certain changes in the Central Excise rate structure to prepare the ground for the transition to GST, beginning with a reduction in the number of exemptions. At pres
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tion;
• Modifying provisions of the Cenvat Credit scheme to achieve a more realistic balance between input credits and output tax and harmonising the provisions of the scheme across goods and services;
• Rationalizing penal provisions to reinforce the message that honest taxpayers would be facilitated and deviants would be dealt with severely; and
• Adoption of Point of Taxation rules for services which would shift the basis for tax collection from “cash” towards “accrual” basis as with Central Excise duty.
194. Many experts have argued that it will be desirable to tax services based on a small negative list, so that many untapped sectors are brought into the tax net. Such an approach will be very conducive for a nationwide GST. I propose to initiate an informed public debate on the subject to help us finalise the approach to GST.
Observation about GST in the Budget Speech for the Year 2012-13
27. Similarly, the Constitution Amendment Bill, a preparatory step i
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time to shift gears and accelerate ahead. However, service tax needs to confront two important challenges to sustain the journey.
These are:
• The share of services in taxes remains far below its potential. There is a need to widen the tax base and strengthen its enforcement;
• Service Tax law is complex and sometimes avoidably different from Central Excise.
We need to bring the two as close as possible in the light of our eventual goal of transition to GST. I have attempted to address both these issues this year.
159. Last year, I had initiated a public debate on the desirability of moving towards taxation of services based on a negative list. In the debate that continued for the better part of the year, we received overwhelming support for this new concept. It has been perceived both as sound economics and prudent fiscal management.
160. Thus, I propose to tax all services except those in the negative list. The list comprises 17 heads and has been carefully dra
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t time, it was thought that GST could be brought into effect from 1.4.2010. Alas, that was not to be, although all States swear by the benefit of GST. However, my recent meetings with the Empowered Committee of State Finance Ministers has led me to believe that the State Governments – or, at least, the overwhelming majority – are agreed that there is need for a Constitutional amendment; there is need for State Governments and the Central Government to pass a GST law that will be drafted by the State Finance Ministers and the GST Council; and there is need for the Centre to compensate the States for loss due to the reduction in the CST rate. I hope we can take this consensus forward in the next few months and bring to this House a draft Bill on the Constitutional amendment and a draft Bill 30 on GST. Hope inspires courage. I propose to take the first decisive step by setting apart, in the Budget, a sum of ₹ 9,000 crore towards the first instalment of the balance of CST compensatio
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ar 2014-15 in the budget presented during the month of July 2014, the budget speech contained reference to the implementation of GST as follows:
GST
9. The debate whether to introduce a Goods and Services Tax (GST) must now come to an end. We have discussed the issue for the past many years. Some 4 States have been apprehensive about surrendering their taxation jurisdiction; others want to be adequately compensated. I have discussed the matter with the States both individually and collectively. I do hope we are able to find a solution in the course of this year and approve the legislative scheme which enables the introduction of GST. This will streamline the tax administration, avoid harassment of the business and result in higher revenue collection both for the Centre and the States. I assure all States that government will be more than fair in dealing with them.
Observation about GST in the Budget Speech for the Year 2015-16
11. We are now embarked on two more game changing re
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I propose to subsume the Education Cess and the Secondary and Higher Education Cess in Central Excise duty. In effect, the general rate of Central Excise Duty of 12.36% including the cesses is being rounded off to 12.5%.
121. Introduction of GST is eagerly awaited by Trade and Industry. To facilitate a smooth transition to levy of tax on services by both the Centre and the States, it is proposed to increase the present rate of service tax plus education cesses from 12.36% to a consolidated rate of 14%.
Hassle Free Business Environment:
Created a non-adversarial tax regime, ending tax terrorism; Secured the political agreement on the goods and services tax (GST), that will allow legislative passage of the constitutional amendment bill;
Conclusion: From the above relevant extract of budget speech of the past decade, following conclusions can be carved out on a generalized basis:
* Reforms have taken place in the field of Taxation to adopt the best practices in line with the imple
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