INCOME TAX NOTES

GST in india - Introduction History, Manner of ITC, Constitutional Provisions



GST in India :

1. Features of indirect taxes 
2. Genesis of GST in india 
3. Framework of GST as introduced in India
4. Classification of Goods and Servises
5. Manner of Utilization of ITC (Click Here)
6. Constitutional provisions





DIRECT AND INDIRECT TAXES

Taxes are broadly classified into direct and indirect taxes.



Direct Taxes
:
A direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to the Government by the persons (juristic or natural) on whom it is imposed. A direct tax is one that cannot be shifted by the taxpayer to someone else. A significant direct tax imposed in India is income tax.

Indirect Taxes:
  • If the taxpayer is just a conduit and at every stage the tax-incidence is passed on till it finally reaches the consumer, who really bears the brunt of it, such tax is indirect tax.  An indirect tax is one that can be shifted by the taxpayer to someone else. Its incidence is borne by the consumers who ultimately consume the product or the service, while the immediate liability to pay the tax may fall upon another person such as a manufacturer or provider of service or seller of goods. Also called consumption taxes, they are regressive in nature because they are not based on the principle of ability to pay.
  • All the consumers, including the economically challenged bear the brunt of the indirect taxes equally. Indirect taxes are levied on consumption, expenditure, privilege, or right but not on income or property.
  • Earlier, a number of indirect taxes were levied in India, namely, excise duty, customs duty, service tax, central sales tax (CST), value added tax (VAT), entry tax, purchase tax, entertainment tax, tax on lottery, betting and gambling, luxury tax, tax on advertisements, etc. 
  • However, indirect taxation in India witnessed a paradigm shift on July 01, 2017 with usherance into a unified indirect tax regime wherein a large number of Central and State indirect taxes were amalgamated into a single tax – Goods and Services Tax (GST).
  • The introduction of GST has been a very significant step in the field of indirect tax reforms in India. Customs duty continues in post-GST regime.
  • Economists world over agree that direct and indirect taxes are complementary and therefore, a rational tax structure should incorporate in itself both types of taxes.


FEATURES OF INDIRECT TAXES

(i)     An important source of revenue: Indirect taxes are a major source of tax revenues for Governments worldwide and continue to grow as more countries move to consumption oriented tax regimes. In India, indirect taxes contribute more than 50% of the total tax revenues of Central and State Governments.
(ii)    Tax on commodities and services: It is levied on commodities at the time of manufacture or purchase or sale or import/export thereof.  Hence, it is also known as commodity taxation. It is also levied on provision of services.
(iii)   Shifting of burden: There is a clear shifting of tax burden in respect of indirect taxes. For example, GST paid by the supplier of the goods is recovered from the  buyer  by  including  the  tax  in  the cost  of  the  commodity.
(iv)   No perception of direct pinch: Since, value of indirect taxes is generally inbuilt in the price of the commodity, most of the time the tax payer pays the same without actually knowing that he is paying tax to the Government. Thus, tax payer does not perceive a direct pinch while paying indirect taxes.
(v)    Inflationary: Tax imposed on commodities and services causes an all-round price spiral. In other words, indirect taxation directly affects the prices of commodities and services and leads to inflationary trend.
(vi)   Wider tax base: Unlike direct taxes, the indirect taxes have a wide tax base. Majority of the products or services are subject to indirect taxes with low thresholds.
(vii) Promotes social welfare: High taxes are imposed on the consumption of harmful products (also known as ‘sin goods’) such as alcoholic products, tobacco products etc. This not only checks their consumption but also enables the State to collect substantial revenue.
(viii) Regressive in nature: Generally, the indirect taxes are regressive in nature. The rich and the poor have to pay the same rate of indirect taxes on certain commodities of mass consumption. This may further increase the income disparities between the rich and the    poor.


GENESIS / History OF GST IN INDIA


History genesis of gst in india


1. In the year 2000, the then Prime Minister mooted the concept of GST and set up a committee to design a Goods and Services Tax (GST) model for the country. In 2003, the Central Government formed a task force under Vijay Kelkar, which in 2004 strongly recommended fully integrated ‘GST’ on national basis.

2. Subsequently, the then Union Finance Minister, Shri P. Chidambaram, while presenting the Union Budget (2006-2007), announced that GST would be introduced from April 1, 2010.  Since then, GST missed several deadlines and continued to be shrouded by the clouds of uncertainty.

3. The talks of ushering in GST, however, gained momentum in the year 2014 when the NDA Government tabled the Constitution (122ndAmendment) Bill, 2014 on GST in the Parliament on 19th December, 2014. The 
Lok Sabha passed the Bill on 6th May, 2015 and 
Rajya Sabha on 3rdAugust, 2016
Subsequent to ratification of the Bill by more than 50% of the States, 
Constitution (122ndAmendment) Bill, 2014 received the assent of the President on 8th September, 2016 and 
became Constitution (101stAmendment) Act, 2016,which paved the way for introduction of GST in India.


4. In the following year, on 27th March, 2017, 
the Central GST legislations - Central Goods and Services Tax Bill, 2017, 
Integrated Goods and Services Tax Bill, 2017, 
Union Territory Goods and Services Tax Bill, 2017 and 
Goods and Services Tax (Compensation to States) Bill, 2017 
were introduced in Lok Sabha. 
Lok Sabha passed these bills on 29thMarch, 2017 and with the receipt of the President’s assent on 12th April, 2017, the Bills were enacted. 
The enactment of the Central Acts was followed by the enactment of the State GST laws by various State Legislatures. Telangana, Rajasthan, Chhattisgarh, Punjab, Goa and Bihar were among the first ones to pass their respective State GST laws. 
By 30th June, 2017, all States and Union Territories had passed their respective SGST and UTGST Acts except Jammu and Kashmir. 
With effect from 1st July, 2017, the historic indirect tax reform - GST was introduced. 
GST law was extended to Jammu and Kashmir on 8thJuly, 2017.




What is GST?


Before we proceed with the finer nuances of Indian GST, let us first understand the basic concept of GST.

1. GST is a value added tax levied on manufacture, sale and consumption of goods and services.

2. GST offers comprehensive and continuous chain of tax credits from the producer's point/service provider's point upto the retailer's level/consumer’s level thereby taxing only the value added at each stage of supply chain.

3. The supplier at each stage is permitted to avail credit of GST paid on the purchase of goods and/or services and can set off this credit against the GST payable on the supply of goods and services to be made by him. Thus, only the final consumer bears the GST charged by the last supplier in the supply chain, with set-off benefits at all the previous stages.

4. Since, only the value added at each stage is taxed under GST, there is no tax on tax or cascading of taxes under GST system. GST does not differentiate between goods and services and thus, the two are taxed at a single rate.

Deficiencies in the value added taxation system:

Under the earlier indirect tax regime, despite the introduction of the principle of taxation of value added in India – at the Central level in the form of CENVAT and at the State level in the form of State VAT - its application always remained piecemeal and fragmented on account of the following reasons: 
  • Double taxation of a transaction as both goods and services as the distinction between goods and services was often blurred, e.g. software was liable to both VAT and service tax. 
  • CENVAT did not include chain of value addition in the distributive trade below the stage of production.  Similarly, in the State-level VAT, CENVAT load on the goods was not removed leading to the cascading of taxes. To illustrate, when the goods were manufactured and sold, both central excise duty (CENVAT) and State-Level VAT were levied. 
  • Though CENVAT and State-Level VAT were essentially value added taxes, set off of one against the credit of another was not possible as CENVAT was a central levy and State-Level VAT was a State levy. 
  • There were several taxes in the States, such as, Luxury Tax, Entertainment Tax, etc. which were not subsumed in the VAT. 
  • VAT on goods was not integrated with tax on services, at the State level, to remove the cascading effect of service tax. With service sector being the fastest growing sector in the economy, the exclusion of services from the tax base of the States potentially eroded their tax- buoyancy. 
  • CST was another source of distortion in terms of its cascading nature since it was non-VATABLE.  Being an origin based tax, CST was also against one of the basic principles of consumption taxes that tax should accrue to the jurisdiction where consumption takes place. 


FRAMEWORK OF GST AS INTRODUCED IN INDIA

Dual GST:

 India has adopted a dual GST which is imposed concurrently by the Centre and States, i.e. Centre and States simultaneously tax goods and services. Centre has the power to tax intra-State sales & States are empowered to tax services. GST extends to whole of India including the State of Jammu and Kashmir.


CGST/SGST/UTGST/IGST

-- GST is a destination based tax applicable on all transactions involving supply of goods and services for a consideration subject to exceptions thereof. GST in India comprises of Central Goods and Service Tax (CGST) - levied and collected by Central Government, State Goods and Service Tax (SGST) - levied and collected by State Governments/Union Territories with State Legislatures and Union Territory Goods and Service Tax (UTGST) - levied and collected by Union Territories without State Legislatures, on intra-State supplies of taxable goods and/or services.

-- Inter-State supplies of taxable goods and/or services are subject to Integrated Goods and Service Tax (IGST). IGST is approximately the sum total of CGST and SGST/UTGST and is levied by Centre on all inter-State supplies.


UTGST State List Includes

UTGST applies to only those union territories where we do not have a separate legislature and that list includes the following union territories :

Chandigarh
Lakshadweep
Daman and Diu
Dadra and Nagar Haveli

Andaman and Nicobar islands



Legislative Framework

-- There is single legislation – CGST Act, 2017 - for levying CGST. Similarly, Union Territories without State legislatures [Andaman and Nicobar Islands, Lakshadweep, Dadra and Nagar Haveli, Daman and Diu and Chandigarh] are governed by UTGST Act, 2017 for levying UTGST. States and Union territories with their own legislatures [Delhi and Puducherry] have their own GST legislation for levying SGST.

-- Though there are multiple SGST legislations, the basic features of law, such as chargeability, definition of taxable event and taxable person, classification and valuation of goods and services, procedure for collection and levy of tax and the like are uniform in all the SGST legislations, as far as feasible. This is necessary to preserve the essence of dual GST.


Classification of goods and services


-- HSN (Harmonised System of Nomenclature) code is used for classifying the goods under the GST. 

-- A new Scheme of Classification of Services has been devised wherein the services of various descriptions have been classified under various sections, headings and groups. Each group consists of various Service Codes (Tariff). Chapters referred are the Chapters of the First Schedule to the Customs Tariff Act, 1975.

-- However, the limit of Rs 20 lakh will be reduced to Rs 10 lakh if the person is carrying out business in the Special Category States – [11 Special Category States are specified in Article 279A(4)(g) of the Constitution] - States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand.

Composition Scheme

-- In GST regime, tax (i.e. CGST and SGST/UTGST for intra-State supplies and IGST for inter-State supplies) is payable by every taxable person and in this regard provisions have been prescribed in the law.

-- However, for providing relief to small businesses making intra-State supplies, a simpler method of paying taxes and accounting thereof is also prescribed, known as Composition Levy.


Exemptions 

-- Apart from providing relief to small-scale business, the law also contains provisions for granting exemption from payment of tax on essential goods and/or services.






CONSTITUTIONAL PROVISIONS

India has a three-tier federal structure, comprising the Union Government, the State Governments and the Local Government. The power to levy taxes and duties is distributed among the three tiers of Governments, in accordance with the provisions of the Indian Constitution.
The Constitution of India is the supreme law of India. It consists of a Preamble, 25 parts containing 448 Articles and 12 Schedules.
Power to levy and collect taxes whether, direct or indirect emerges from the Constitution of India. In case any tax law, be it an act, rule, notification or order is not in conformity with the Constitution, it is called ultra vires the Constitution and is illegal and void.
Thus, a study of the basic provisions of the Constitution is essential for understanding the genesis of the various taxes being imposed in India. The significant provisions of the Constitution relating to taxation are:
I. Article 265: Article 265 of the Constitution of India prohibits arbitrary collection of tax. It states that “no tax shall be levied or collected except by authority of law”. The term “authority of law” means that tax proposed to be levied must be within the legislative competence of the Legislature imposing the tax.
II. Article 245: Part XI of the Constitution deals with relationship between the Union and States. The power for enacting the laws is conferred on the Parliament and on the Legislature of a State by Article 245 of the Constitution. The said Article provides as under:
-- Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the legislature of a State may make laws for the whole or any part of the State.
-- No law made by the Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.

III. Article 246: It gives the respective authority to Union and State Governments for levying tax. Whereas Parliament may make laws for the whole of India or any part of the territory of India, the State Legislature may make laws for whole or part of the State.

IV. Seventh Schedule to Article 246: It contains three lists which enumerate the matters under which the Union and the State Governments have the authority to make laws.



LIST –I
LIST –II
LIST –III
Union List
State List
Concurrent List
It contains the matters in respect of which the Parliament (Central Government) has the exclusive right to make laws.
It contains the matters in respect of which the Sate Government has exclsive right to make laws.
It contains the matters in respect of which Both the central &  Sate Government have power to make laws.


Entries 82 to 91 of List I enumerate the subjects where the Central Government has power to levy taxes. Entries 45 to 63 of List II enumerate the subjects where the State Governments have the power to levy taxes. Parliament has a further power to make any law for any part of India not comprised in a State even if such matter is included in the State List.
Income tax is levied by virtue of Entry 82 - Taxes on income other than agricultural income and customs duty vide Entry 83 - Duties of customs including export duties of the Union List.
Power to levy Goods and Services Tax (GST) has been conferred by Article 246A of the Constitution which was introduced by the Constitution (101st Amendment) Act, 2016. Before discussing the significant provisions of the Constitution (101st Amendment) Act, 2016, let us first understand why there arose a need for such constitutional amendment.


Significant provisions of Constitution 

(101st Amendment Act, 2016 )

Article 246 (A) - Power to make laws with respect to Goods and Services Tax:

Article 269A - Levy and collection of GST on inter-State supply

Article 279-A - GST Council

Changes in the 7th Schedule   Union List   State List 

Other Important amendments in existing articles


Article 246 (A) - Power to make laws with respect to Goods and Services Tax:

Newly inserted Article 246A
(1)     Notwithstanding anything contained in Articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.
State Govt + Central Govt = Makes Law for CGST and SGST

(2)     Parliament has exclusive power to make laws  with  respect  to  goods and services tax  where the supply of goods, or of services,  or both takes place in the course of inter-State trade or commerce.
Central Govt has exclusive power makes law for IGST

Explanation.—The provisions of this article, shall, in respect of goods and services tax referred to in clause (5) of article 279A, take effect from the date recommended by the Goods and Services Tax Council.

This article grants power to Centre and State Governments to make laws with respect to GST imposed by Centre or such State.

Centre has the exclusive power to make laws with respect to GST in case of inter-State supply of goods and/or services.

However, in respect to the following goods, the aforesaid provisions shall apply from the date recommended by the GST Council:

The provisions of Article 246A are notwithstanding anything contained in Articles 246 and 254. Article 254 deals with the supremacy of the laws made by Parliament.


Article 269A: Levy and collection of GST on inter-State supply


  • Article 269A stipulates that GST on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council.
  • In addition to above, import of goods or services or both into India will also be deemed to be supply of goods and/ or services in the course of Inter-State trade or Commerce.
  • This will give power to Central Government to levy IGST on the import transactions which were earlier subject to Countervailing duty under the Customs Tariff Act, 1975.
  • Where an amount collected as IGST has been used for payment of SGST or vice versa, such amount shall not form part of the Consolidated Fund of India. This is to facilitate transfer of funds between the Centre and the States.
  • Parliament is empowered to formulate the principles regarding place of supply and when supply of goods, or of services, or both occurs in inter- State trade or commerce.

Definitions of ‘Goods and Services Tax’, ‘Services’ and ‘State’ incorporated under Article 366 :

The terms Goods and Services Tax, services and State have been defined under respective clauses of Article 366 as follows:

  • Goods and services tax means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption. Consequently, GST can be levied on supply of all goods and services except alcoholic liquor for human consumption
  • Services means anything other than goods.
  • State,with reference to articles 246A, 268, 269, 269A and article 279A, includes a Union territory with Legislature. 
Definition of “goods”: The term goods has already been defined under clause (12) of Article 366 in an inclusive manner to provide that “goods includes all materials, commodities, and articles”. 

GST Council: Article 279A

  • Article 279A of the Constitution empowers the President to constitute a joint forum of the Centre and States namely, Goods & Services Tax Council (GST Council).
  • The provisions relating to GST Council came into force on 12th September, 2016. President constituted the GST Council on 15th September, 2016.
  • The Union Finance Minister is the Chairman of this Council and Ministers in charge of Finance/Taxation or any other Minister nominated by each of the States & UTs with Legislatures are its members. Besides, the Union Minister of State in charge of Revenue or Finance is also its member.
  • The function of the Council is to make recommendations to the Union and the States on important issues like tax rates, exemptions, threshold limits, dispute resolution etc.
  • It shall also recommend the date on which GST be levied on petroleum crude, high speed diesel, motor spirit, natural gas and aviation turbine fuel.
petroleum crude
high speed diesel
motor spirit (commonly known as petrol)
natural gas
aviation turbine fuel
  • Every decision of the GST Council is taken by a majority of not less than three-fourths of the weighted votes of the members present and voting. Vote of the Centre has a weightage of one-third of total votes cast and votes of all the State Governments taken together has a weightage of two-thirds of the total votes cast, in that meeting.