Guest Post by Adithya Reddy
The
constitution amendments introduced to give effect to the proposed levy of Goods
& Services Tax (GST) are primarily enabling amendments conferring
concurrent legislative competence on the Parliament and State Legislatures.
This became necessary because GST takes within its sweep three different
incidences of taxation, two of which fell under List I (manufacture and
services in Entries 84 & 92 C respectively) and one under List II (sales
under Entry 54). Possibility of conflict in exercise of this concurrent
jurisdiction is avoided not by granting superiority to the Parliament but by
constituting a GST council that will ensure uniformity in all matters of GST
levy and administration. Being central levies, excise duty and service tax
always had a uniform national character. Extending this feature to sale of
goods, is, in my view, the most significant change brought about by these
amendments in the constitutional scheme.
constitution amendments introduced to give effect to the proposed levy of Goods
& Services Tax (GST) are primarily enabling amendments conferring
concurrent legislative competence on the Parliament and State Legislatures.
This became necessary because GST takes within its sweep three different
incidences of taxation, two of which fell under List I (manufacture and
services in Entries 84 & 92 C respectively) and one under List II (sales
under Entry 54). Possibility of conflict in exercise of this concurrent
jurisdiction is avoided not by granting superiority to the Parliament but by
constituting a GST council that will ensure uniformity in all matters of GST
levy and administration. Being central levies, excise duty and service tax
always had a uniform national character. Extending this feature to sale of
goods, is, in my view, the most significant change brought about by these
amendments in the constitutional scheme.
It
was not without debate that the Constituent Assembly agreed on letting sales
tax remain within the domain of states. Sales tax was a provincial subject
under the Government of India Act, 1935. Some members were firmly against its
continuation in this way. The concern appeared to be the tendency of states to
over-exploit sales tax. Ramaswamy Mudaliar, for instance, said “as far as
possible, it (sales tax) should be uniform… in all the provinces. You will be
killing the goose if you go on increasing the sales tax”. Mahavir Tyagi was
most forceful in his opposition to leaving sales tax to the mercy of states.
Referring to the original purpose for which sales tax was left for the states,
he said:
was not without debate that the Constituent Assembly agreed on letting sales
tax remain within the domain of states. Sales tax was a provincial subject
under the Government of India Act, 1935. Some members were firmly against its
continuation in this way. The concern appeared to be the tendency of states to
over-exploit sales tax. Ramaswamy Mudaliar, for instance, said “as far as
possible, it (sales tax) should be uniform… in all the provinces. You will be
killing the goose if you go on increasing the sales tax”. Mahavir Tyagi was
most forceful in his opposition to leaving sales tax to the mercy of states.
Referring to the original purpose for which sales tax was left for the states,
he said:
“When various taxes were
enumerated in the list of provincial subjects, it was considered that the sales
tax was a sort of minor help to the provinces, for their revenues were static
and there was no chance for raising them. The provinces mostly depended on
their land revenue which is more or less fixed for a number of years.
Therefore, with the increased activities of the provincial Governments it was
thought better to give them some margin of extra revenue to balance their
budgets.
Now, Sir, they got a
little margin in the shape of this sales tax. As I see things, within a few
years, the situation is totally changed…Now, Sir, the incidence of taxation is
the heaviest in India. India had never faced even in times of war, such an incidence
of taxation as it is bearing today… Because there is no ceiling limit on this
sales tax, they can go on raising the tax …My point is that if we do not fix a
limit, the provincial Governments would go on taxing, and we would be doing
sheer injustice to the people who are at our mercy and who will have no right
to protest or withhold these taxes. They would only have to draw solace from
the fact that they were after all being taxed by the persons for whom they had
voted.”[1]
These
comments were being made in response to Ambedkar’s tabling of draft Art 264A, which
removed inter-state sale of goods from the states’ purview. While Mahavir Tyagi
was so critical of letting local sales tax remaining within the jurisdiction of
states, Amiyo Kumar Ghosh went to the other extreme by demanding that even
inter-state sales should be taxed by the states. One member, however, suggested
something that could have been very similar to what may come to be under the
GST set-up.
comments were being made in response to Ambedkar’s tabling of draft Art 264A, which
removed inter-state sale of goods from the states’ purview. While Mahavir Tyagi
was so critical of letting local sales tax remaining within the jurisdiction of
states, Amiyo Kumar Ghosh went to the other extreme by demanding that even
inter-state sales should be taxed by the states. One member, however, suggested
something that could have been very similar to what may come to be under the
GST set-up.
Professor
Shibban Lal Saxena moved an amendment that proposed to remove restrictions on
both, the State to tax inter-state trade and the Centre to fix rates of local
sales tax; thus suggesting some sort of a concurrent jurisdiction for all forms
of sales tax. Finally, however, draft Art 264A as introduced by Ambedkar became
Art 286 of the Constitution.
Shibban Lal Saxena moved an amendment that proposed to remove restrictions on
both, the State to tax inter-state trade and the Centre to fix rates of local
sales tax; thus suggesting some sort of a concurrent jurisdiction for all forms
of sales tax. Finally, however, draft Art 264A as introduced by Ambedkar became
Art 286 of the Constitution.
The
Article was (then) accompanied by an explanation which lead to the Supreme
Court overruling its own view, within a span of two years, on whether the
consuming state could levy tax on sellers in other states and whether the
explanation was an exception to the prohibition against states taxing
inter-state sales.[2] The issue was set at rest by an
amendment to the Constitution and the enactment of Central Sales Tax Act, 1956
which, regulated taxation of goods moving from one state to another. The Act
ensured uniformity in such taxation.
Article was (then) accompanied by an explanation which lead to the Supreme
Court overruling its own view, within a span of two years, on whether the
consuming state could levy tax on sellers in other states and whether the
explanation was an exception to the prohibition against states taxing
inter-state sales.[2] The issue was set at rest by an
amendment to the Constitution and the enactment of Central Sales Tax Act, 1956
which, regulated taxation of goods moving from one state to another. The Act
ensured uniformity in such taxation.
The
fiscal prudence of this set up was considered by the Taxation Enquiry
Commission headed by John Mathai, which categorically ruled out the possibility
of centralizing sales tax on basis that it “had strong local moorings.” The
business community however was relentless in attacking state-centric sales tax.
FICCI presented a memorandum to the Central Government in 1960 demanding that
sales tax should be levied and collected by the Central Government and then
should be distributed among the States. This memorandum prompted the Government
to set up a committee under the chairmanship of Dr. B.C. Roy to examine the
feasibility of centralizing sales tax. But the states appeared to have
vehemently opposed not just any attempt to centralise sales tax but even the
then existing system of levying central additional excise duty in lieu of sales
tax for a few products like sugar, tobacco and textiles. Even successive
finance commissions could not ignore state autonomy. In what appears to have
been the first political move on this front, the Janata Party promised
abolition of sales tax as a part of its manifesto but could do little to take
things forward.
fiscal prudence of this set up was considered by the Taxation Enquiry
Commission headed by John Mathai, which categorically ruled out the possibility
of centralizing sales tax on basis that it “had strong local moorings.” The
business community however was relentless in attacking state-centric sales tax.
FICCI presented a memorandum to the Central Government in 1960 demanding that
sales tax should be levied and collected by the Central Government and then
should be distributed among the States. This memorandum prompted the Government
to set up a committee under the chairmanship of Dr. B.C. Roy to examine the
feasibility of centralizing sales tax. But the states appeared to have
vehemently opposed not just any attempt to centralise sales tax but even the
then existing system of levying central additional excise duty in lieu of sales
tax for a few products like sugar, tobacco and textiles. Even successive
finance commissions could not ignore state autonomy. In what appears to have
been the first political move on this front, the Janata Party promised
abolition of sales tax as a part of its manifesto but could do little to take
things forward.
Ideally
this position should have changed with the introduction of VAT by most state
legislatures.[3] It was quite incongruous to allow a
state-based levy when the incidence of taxation had shifted from the point of sale
to value addition in a supply chain that could stretch across multiple states. Under
State-centric VAT legislations, the fundamental benefit of VAT, which is the
removal of cascading effect of taxation, could be fully obtained only when the
chain of supply fell within the same state. Once again, opposition from states
to centralisation let this incongruous situation continue for more than decade.
this position should have changed with the introduction of VAT by most state
legislatures.[3] It was quite incongruous to allow a
state-based levy when the incidence of taxation had shifted from the point of sale
to value addition in a supply chain that could stretch across multiple states. Under
State-centric VAT legislations, the fundamental benefit of VAT, which is the
removal of cascading effect of taxation, could be fully obtained only when the
chain of supply fell within the same state. Once again, opposition from states
to centralisation let this incongruous situation continue for more than decade.
The
GST Constitution Amendment changes the constitutional scheme to enable the
centralisation of all taxation on goods and services, while giving states a say
in the matter through the GST Council. How the states reconcile themselves to this
new constitutional arrangement will be the key to the success of GST.
GST Constitution Amendment changes the constitutional scheme to enable the
centralisation of all taxation on goods and services, while giving states a say
in the matter through the GST Council. How the states reconcile themselves to this
new constitutional arrangement will be the key to the success of GST.
There
are at least three problematic issues with the proposed GST. The first, of
course, will be that of separation of powers over taxation. Sec. 7 of the Model
GST law released by the Government says “There shall be levied a tax called the
Central/State Goods and Services Tax (CGST/SGST) on all intra-State supplies of
goods and/or services at the rate specified in the Schedule . . . to this Act
and collected in such manner as may be prescribed.” It is not clear from this
provision whether every supply of goods and/or services will be subject to both
Central GST and State GST or whether there will be a division of assesses
between both levies based on the natures of goods and/or services supplied or
on the basis of turnover. West Bengal, for instance, has already demanded that all dealers with a turnover limit
of less than 1.5 crores should be left for the states to tax.
are at least three problematic issues with the proposed GST. The first, of
course, will be that of separation of powers over taxation. Sec. 7 of the Model
GST law released by the Government says “There shall be levied a tax called the
Central/State Goods and Services Tax (CGST/SGST) on all intra-State supplies of
goods and/or services at the rate specified in the Schedule . . . to this Act
and collected in such manner as may be prescribed.” It is not clear from this
provision whether every supply of goods and/or services will be subject to both
Central GST and State GST or whether there will be a division of assesses
between both levies based on the natures of goods and/or services supplied or
on the basis of turnover. West Bengal, for instance, has already demanded that all dealers with a turnover limit
of less than 1.5 crores should be left for the states to tax.
Next
will be the issue of administration. While the states almost exclusively
administered all aspects of sales tax both under CST and local law, the center
will have to ensure that its current administrative set-up adjusts itself to
tracking supplies within and across states. Coordination between the two
authorities will be crucial. After all, if the final law contemplates
concurrent assessment under central and state GSTs for the same kind of
transactions, an assesse may have to undergo the harrowing experience of facing
two assessments for the same transaction by two sets of officials with
different administrative backgrounds.
will be the issue of administration. While the states almost exclusively
administered all aspects of sales tax both under CST and local law, the center
will have to ensure that its current administrative set-up adjusts itself to
tracking supplies within and across states. Coordination between the two
authorities will be crucial. After all, if the final law contemplates
concurrent assessment under central and state GSTs for the same kind of
transactions, an assesse may have to undergo the harrowing experience of facing
two assessments for the same transaction by two sets of officials with
different administrative backgrounds.
Finally,
the issue of compensating states for loss of revenue by fixing a Revenue-Neutral-Rate
(RNR) of tax is likely to be very contentious.[4]
The apprehension of manufacturing states has been put pithily by a senior bureaucrat of the Tamil Nadu
government:-
the issue of compensating states for loss of revenue by fixing a Revenue-Neutral-Rate
(RNR) of tax is likely to be very contentious.[4]
The apprehension of manufacturing states has been put pithily by a senior bureaucrat of the Tamil Nadu
government:-
“The worries of the manufacturing states
have not been addressed properly by the union government. The revenue loss
compensation assured by the union government for a specific period is a rocket
booster, but it is doubtful that the proposed GST vehicle would launch the
manufacturing states in the revenue trajectory they are travelling in now,
especially after the booster runs out. If there is a failure in this mission,
with no independent powers of taxation, such states may be left in the lurch.”
Therefore, while the long struggle for constitutional
change may have attained fruition, the success of its working through statues
and regulations is likely be as daunting if not more.
change may have attained fruition, the success of its working through statues
and regulations is likely be as daunting if not more.
(Adithya Reddy is a lawyer practicing before the High Court of Madras)
[1] Tyagi’s attempts to persuade Ambedkar on the issue
were caustic, to put it mildly.
were caustic, to put it mildly.
[2] The decision in State of Bombay Vs. United Motors
– 1953 SCR 1069 was overruled in Bengal Immunity Company Ltd Vs State of
Bihar – 1955 2 SCR 61. The decision to constitute a larger bench in Bengal
Immunity was taken only because one of the judges in United Motors (Justice
Bhagwati) claimed to have changed his view on the provision. This manner of
over-ruling precedent, unsurprisingly, attracted Seervai’s ire in his
commentary.
– 1953 SCR 1069 was overruled in Bengal Immunity Company Ltd Vs State of
Bihar – 1955 2 SCR 61. The decision to constitute a larger bench in Bengal
Immunity was taken only because one of the judges in United Motors (Justice
Bhagwati) claimed to have changed his view on the provision. This manner of
over-ruling precedent, unsurprisingly, attracted Seervai’s ire in his
commentary.
[3] The Kelkar Task Force on the implementation of the
FRBM Act, 2003 suggested that progress towards VAT system should be preceded by
a comprehensive goods and service tax. http://finmin.nic.in/reports/5.pdf
FRBM Act, 2003 suggested that progress towards VAT system should be preceded by
a comprehensive goods and service tax. http://finmin.nic.in/reports/5.pdf
[4] The RNR of 15-15.5% recommended by the Arvind
Subramaniam Committee has not been received well by the states: http://www.livemint.com/Politics/e1x83F5GsvWQUcOgiW6kRM/States-reject-GST-rate-proposed-by-Arvind-Subramaninan-panel.html
Subramaniam Committee has not been received well by the states: http://www.livemint.com/Politics/e1x83F5GsvWQUcOgiW6kRM/States-reject-GST-rate-proposed-by-Arvind-Subramaninan-panel.html
