One Year of “Goods and Services Tax” in India

Abstract

On July 1 this year, India witnessed the eventful completion of one year of the “Goods and Services Tax” (GST) regime. The changes preceding the implementation of GST have been both wide-ranged and myriad. From multifarious perspectives (i.e. constitutional, legal, technological and administrative) these changes were monumental such that GST has been dubbed as the biggest ever tax reform in India. Given the breadth of these changes and also the large geographic expanse of the country, it was expected that the initial onset of the new indirect tax regime would be beset with confusion. While such expectations did turn out to be true, the policy makers and tax authorities shed their usual inertia to allay the anxiety of business and consumers. The Indian judiciary has also contributed considerably in this space to clear certain conceptual doubts and address the legal challenges facing the GST. In the view of the author the first year of GST in India has been one of mixed outcome but has laid solid foundation for successful implementation of the new regime to particularly address the objective of expanding the tax gross domestic product (GDP) ratio and formalise the gray economy.

 Background to GST’s introduction

The rationale for introduction of GST was principally on account of the constitutional structure of India governing the levy of indirect taxes. Effective from 1950, the Constitution of India provides for a federal structure and distributes the taxing fields amongst the federal (Union Parliament) and provincial legislative institutions (State Legislatures). In respect of indirect taxes, for illustration, excise duties, terminal taxes, consignment taxes, tax on services, etc. were exclusively reserved for the Union Parliament whereas other species of indirect taxes such as taxes on land, buildings and mineral rights, entry taxes, sales tax, electricity duty, etc. were earmarked for the State Legislatures. Given that there are about 30 States in India and each of them enacted their own legislation to impose tax on these varied subjects, the resultant outcome was multiplicity of taxes in the country. The complexity was increased by the fact that there was no underlying consistency or common tax policy inter alia owing to geographical peculiarities and difference in economic outlook adopted by the States. The issues were compounded by contradicting characterisations. For illustration the Union Parliament imposed tax on supply of software to tax considering it as a “service” whereas the very transaction was taxed by the State Legislatures treating software as “goods”. Owing to the constitutional stipulations these peculiar treatments had also obtained judicial endorsement. Additionally, there was no cross-linkage between the Union Parliament’s and State Legislatures’ enactments leading to same subject being taxed multiple times resulting into cascading effect of taxes.

The vagaries of the resultant tax system and its ill-effects on business were officially noted in the year 2009 when the representatives of the Union and the States came together to formally announce the conceptual foundation of the proposed GST.[1] The discussions resulted into the Constitution Amendment Bill of 2011 which proposed various changes into the constitutional scheme to provide for a new comprehensive regime of indirect taxes (i.e. the GST) by replacing the existing subjects such as those enumerated above. While the idea was to ensure that GST would “subsume” all indirect taxes, political compulsions could not achieve the intent which led to certain subjects being excluded from its purview. Subsequent discussions resulted into the Constitution Amendment Bill of 2014 which was largely similar in design to the Bill of 2011 excepting two major changes essentially as a result of bargain between the Union and the States. Firstly, the Union agreed to constitutionally guarantee the States against loss of revenue on account of introduction of GST. Secondly, instead of two new institutions (i.e. (i) the “Goods and Services Tax Council” (GST Council); and (ii) the Goods and Service Tax Dispute Settlement Authority) proposed in the 2011 Bill only the former was retained and the latter was shelved. The GST Council is modelled as a permanent institution whose membership comprises of the Finance Ministers of the Union and States and is entrusted with the responsibility of charting tax policy and recommending the framework for GST implementation. The GST Dispute Settlement Authority was designed as a judicial body to address the deviations by the Union or the States from the recommendations of the GST Council. The States viewed this authority as an encroachment of their tax-sovereignty and thus opposed its formation.

The proposals contained in the Constitution Amendment Bill of 2014 were largely endorsed by the Union Parliament and the State Legislatures in a complex constitutional process which resulted into the Constitution Amendment Act of 2016 (Act). After the sanction of the President of India, the Act came into force in September 2016 giving a one year transition period to the Union Parliament and the States Legislations to enact the requisite legislations for levy of GST within their territory. In the meanwhile the GST Council convened on various occasions to formulate the tax policy and foundational rules for implementation of GST. These led to the GST Council making various recommendations including those on (i) the rules applicable to business, such as those to determine “place of supply”, rules to govern classification of goods and services and applicable GST rates, taxability thresholds, input credit rules, etc.; and (ii) the rules governing the inter se operation and application of the laws which would be enacted by the Union Parliament and State Legislatures.[2] The legislations enacted pursuant to those recommendations came into force effective from July 1-7-2017 i.e. the commencement date of GST.[3]

Appreciating changes occasioned by GST

There are varied and diverse changes in the existing indirect tax system on account of GST. While some changes build upon or exemplify the existing concepts, there are certain changes which are unique and unprecedented in the Indian tax system. It is only the latter which are being enumerated in the subsequent paragraphs as these form the core rationale for introduction of GST.

(A) Foundational changes

In order to accord revenue security to both the Union and States, GST is designed as a “dual levy” on supply. It essentially means that every intra?State supply would be subject to two taxes i.e. (i) “Central Goods and Services Tax” (CGST) levied by the Union Parliament; and (ii) the “State Goods and Services Tax” (SGST) levied by the State Government. Both these levies would be based upon the recommendations of GST Council and thus are similar in all respects, including characterisation, rate, valuation rules, etc. Given the constitutional sanction against extraterritorial levies, inter-State and cross-border supplies are exclusively within the scope of levy by the Union Parliament and subject to “Integrated Goods and Services Tax” (IGST) which is modelled largely on the similar lines of CGST/SGST and is essentially an amalgam of the rate of tax of CGST and SGST taken together. It is also stipulated that the revenue collections on account of IGST will be distributed equally between the Union and the State concerned to which the supply relates. Thus the very foundation of GST is diametrically opposite to the earlier tax systems which were premised on complete exclusivity between the respective levies of Union Parliament and State Legislatures and the revenue collection on such account were not shared.[4]

Another noteworthy aspect is that the subject-matter of levy under GST is “supply”. This is a new legislative field crafted by subsuming various existing fields such as excise duties, sales tax, service tax, etc. The constitutional scheme and the GST legislations reveal that the intent is to tax supplies of goods and services in a consolidated manner instead of subjecting them to varied taxes as in the past. To this effect the rate schedules enumerate the tax rate applicable on identified goods and services. These schedules are modelled largely on the lines of internationally accepted classification i.e. the “harmonised system” for goods and the “United Nations Central Product Classification” for services. However certain identified supplies as excluded, such as employment-related services, services by courts/tribunals, services provided by constitutional functionaries, etc.[5]

Additionally, in order to enable the Union to discharge its obligation to compensate the States for loss of revenue on account of introduction of GST, the GST Council has recommended levy of “compensation cess”.[6] This cess is essentially an additional tax upon select goods and services. Currently this cess is confined only to “sin goods” such as tobacco products, motor vehicles, etc. However, in line with the general scheme of GST as a value added tax, this cess is creditable and even eligible for refund in the event the output supply is exported.

(B) Administrative changes

For the first time India has formally set up a cooperative federal structure in revenue relations between the Union and the States. GST Council is constituted at a permanent overarching tax policy framing institution with extensive powers to not just frame policies but also supervise execution to the last detail. The working of the GST Council is guided by the impelling “need for a harmonised structure of goods and services tax and for the development of a harmonised national market for goods and services”[7] and deviations from its recommendations are subject to an adjudicatory framework[8]. This is one of the most fundamental changes as earlier the Union and States were exclusively competent to frame tax policies for their territory. The first year of GST’s implementation reveals that the country has indeed been unified in both tax policy and rules which are premised on the common thread of GST Council’s recommendations.

Owing to the alignment of Union and State legislations, there has been an upheaval in the ranks of tax authorities. The tax authorities of the Union and States are now obliged to walk in unison as they implement the same set of rules. The hierarchies of these authorities inter se is therefore also aligned. Further, what may encourage cooperation between them, the taxpayers have been distributed amongst the Union and States’ tax authorities for jurisdictional purposes. This saves the taxpayers from assessments by multiple authorities and also focuses the tax authorities’ resources in identification of the evaders in the wake of the combined effort.

Another noteworthy feature witnessed in the GST regime is the extensive hand-holding undertaken by the Union and State authorities towards transitioning business to the new tax regime. In an unusual change of stance, the tax authorities at all levels have been proactively issuing guidance to trade and business. The Central Board of Indirect Taxes has been organising online seminars, etc. in an extensive GST awareness campaign including at the remotest parts of the country[9] and this have been supplemented by an overwhelming number of official press releases[10], administrative circulars[11], twitter tweets[12] in a bid to obviate doubts and confusions in GST implementation. Additionally “Authority for Advance Rulings” (AAR) are institutionalised under the GST legislations and are manned jointly by the Union and State GST officers authorised to issue formal and binding rulings on the queries raised by taxpayers. These AARs are also proactively addressing to individual taxpayers’ queries. The Indian tax system, which has proved to be a hotbed for litigation in the recent past, is thus making sincere attempts for creating a dispute free tax environment in the GST regime.

(C) Technological changes

The sole foundation of GST implementation hinges upon technology. For this purpose a dedicated “technology backbone” has been created which is known as the “Goods and Services Tax Network” (GSTN) with has online and backend access to business and tax intermediaries respectively. All tax filings, reports, etc. are generated upon interface with GSTN and it is intended to be the sole mechanism for interaction between business and tax authorities. It was therefore owing to certain glitches in the system, primarily on account of overwhelming quantum of data generated by the interface, that the statutory tax filing was deferred by the Government itself for a considerable period of time in the initial phases. Added functionalities are being constantly installed to provide a seamless interface while ensuring that all reconciliations are technology driven.

This is a huge change compared to the past where manual interaction with tax authorities was almost invariable for completing tax compliances. For such a large country this change is with an underlying objective of seeking to draw dividends of the intense technological outreach achieved in the last two decades. The policy makers now have all the available data on real time basis which can result into last-mile resolution of issues as also addressing sub-regional and local peculiarities. Increasing interface with technology also means increasingly less interaction with tax authorities in person which also addressed the huge clamour in the country to act against corruption in public offices.

As per official view, GST “has resulted in formalisation of economy” with spillover effect on augmenting tax collections. This view is based on the figures that “[b]etween June and July 2017, 6.6 lakhs (i.e. 0.66mn) new agents, previously outside the tax net, sought GST registration” and in particular various unorganised industries, such as textiles, cement, steel, etc. were brought within the tax net. As per this view, the following is official set out as the brief one year attainment of GST;[13]

The introduction of GST, a common indirect tax for both the States as well as the Central Government with its end-to-end digitisation of all processes, is the biggest reform measure which is already creating more jobs in formal sector and eliminating transactions which are not recorded earlier in the books of accounts and thus, were outside the tax net so far. GST is designed to bring about better tax compliance and transparency in tax system. It is putting a premium on honesty. It would make increasingly difficult for those (who are liable to pay tax) to remain outside the tax net.

Thus the change on account of GST has indeed led to expansion of tax base, where the year-on-year tax buoyancy is estimated[14] to be 1.2 which is commendable progress given the complexity and size of change and the limited transition time extended to business to get attuned to the new tax regime.

Judicial response to GST

A staggering number of disputes have already been escalated to the judiciary by taxpayers seemingly aggrieved by various aspects of GST implementation. A large number of these disputes are essentially grievances against technological failure and thus can be considered as teething troubles. In such cases, the Indian courts have largely directed the tax authorities to accommodate those taxpayers who could not ensure compliance on account of such glitches.[15] In fact a special technology-assistance cell has been created by the tax administration to address such issues.[16]

Another large segment of disputes relate to inter-State movement of goods. The GST legislations have replaced the erstwhile regulations dealing with physical inspection and State-border reporting of goods in such movement. These disputes[17] reveal that the mindset of the tax authorities is yet to be fully aligned with the GST provisions as these disputes reflect the continuation of practices to subject such movements to inspections, detentions, etc. in terms of the earlier laws. However, the tax authorities cannot be fully blamed as a large number of taxpayers have also not chosen to comply with the revised documentary requirements to be met in case of such movements as almost on equal number of the taxpayers’ challenge have been turned down by the judiciary.[18] One can hope that in the coming year both the tax authorities and business will become sensitised for the need to appreciate the new regulations and ensure due compliance.

A certain other significant number of dispute can be described as those touching the core of GST from a tax policy perspective. There are various shades of these challenges but they converse to the point that these challenges essentially relate to higher tax incidence on account of extinguishment of erstwhile tax exemptions in GST regime.[19] In such cases the judicial response has been one of cautious indulgence as no major decision has been issued upsetting the tax policy or design of GST. On the contrary, the challenges which have been addressed conclusively largely reveal endorsement of avowed tax policy.[20]

The AAR have also complimented the decision making of the judicial forums. The State AARs have issued almost about a hundred rulings in the year addressing diverse issues such as taxability of given supplies, classification, applicable tax rate, export status, registration requirements, etc.[21]

Unfinished agenda

The current state of affairs reveals a large unfinished agenda both in terms of tax policy as also implementation of the existing design. On the first count GST Council is yet to recommend inclusion of certain supplies which are out of scope currently. The prominent ones include petroleum products, real estate, liquor, electricity, etc. which are currently excluded from GST coverage principally on account of revenue considerations and also perhaps owing to lack of political will. The demand for most of these commodities is price inelastic and thus keeping them beyond GST allows the Governments to ramp up tax collections without being required to extend input credit entitlements. Thus the resistance for their inclusion. From a policy perspective, however, unless these and other supplies are brought within the coverage of GST the intent of having a harmonised national market may not be attained in the fullest.

Besides the reform agenda, GST was introduced also as a measure to broad base the Indian economy which is plagued by a substantially large gray economy. In order to address high evasion, the policy framers have intended to introduce invoice-by-invoice reporting requirement i.e. each and every invoice (both input and output) has to be reported in GSTN. No other country in the world has ever experimented with such compliance norms on such a large scale. The underlying intent appears to identify and address, by employing tax analytics and technological solutions, to profile likely evaders and enforce compliance. The implementation of this ambitious mechanism, however, await a robust infrastructural support by GSTN which is currently seeking to stabilise the periodic compliance mechanism. Thus the GST compliance mechanism is being enforced in a staggered manner.[22] Once successfully implemented, it is expected that GST may project a compelling case for other countries to introduce similar reporting requirements owing to the extensive effect of such compliance on addressing the grey economy. It is expected that this will be an area of focus in the coming year.

The current rate structure of goods and services also appears to be a work in progress for GST. Currently there are seven rate slabs for goods and five rate slabs for services which range from 0% to 28% of GST which is further supplemented by compensation cess in certain cases. Such vide differences lead to classification disputes as also encourage evasion. The rationale for these rate slabs is purported to be the wide regional disparities and the need to address the peculiarities of the 1.2bn plus population of India. Nonetheless it is expected that a rationalisation may take place in near future.

Conclusion

The introduction of GST has led to record revenue collections. This has dispelled the fear of the States of revenue deficit and thus losing tax autonomy, which were the key reasons for the lack of consensus and the consequent delay in the introduction of GST. Notwithstanding (i) the inevitable differences given the size of the country and (ii) its membership comprising of political executives, the GST Council as an institution has achieved remarkable progress in formulating a nationwide tax policy and bringing the necessary mechanism in place to operationise the reform. No doubt the fullest attainment of the key objectives of GST have been diluted to certain extent owing to the technological hiccups, such are at best trivial teething troubles. One will expect both the policy framers and the tax authorities to continue vigil with the proactive hand holding role they have played for the last one year while also gradually expanding the implementation of key features of GSTN directed to detect and address tax evasion through technological tools.

Appendix: Illustrative list of dispute

(i) Challenge to tax on construction of housing projects for low income families.[23]

(ii) Challenge to levy of GST on one-time lease premium on long-term leases paid on account of local practice inter alia claiming that the transaction is one of immovable property.[24]

(iii) Challenge to non-subsumation of certain administrative charges in the GST design.[25]

(iv) Challenge to alleged extraterritoriality of GST by imposing tax on high seas related ocean freight.[26]

(v) Challenge to restriction on availability of credit of hotel accommodation services.[27]

(vi) Limitations on carry forward of input credits in GST from the erstwhile laws.[28]

(vii) Continuity in GST of special area-related exemptions available under erstwhile laws.[29]

(viii) Challenge to extinguishment of exemption on imports by non?commercial research institutions.[30]

(ix) Challenge to higher tax incidence on imported gold bars.[31]

(x) Challenge to levy of tax on braille paper and braille watches.[32]

[1] Empowered Committee of State Finance Ministers, First Discussion Paper on Goods and Services Tax in India, November 2009. Available at http://www.gstcouncil.gov.in/sites/default/files/First%20Discussion%20Paper%20on%20GST.pdf.

[2] These recommendations are documented in the Minutes of the Meetings of the GST Council. Available at http://www.gstcouncil.gov.in/meetings.

[3] Excluding the “State of Jammu and Kashmir” which has a special status under the Constitution of India and in respect of which the GST regime became effective from 8-7-2017.

[4] Excepting the sharing of proceedings as per specific stipulations relating to federal relations under the Constitution of India.

[5] Schedule III of CGST Act and SGST Acts.

[6] Levied in terms of the Goods and Services Tax (Compensation to States) Act, 2017 enacted by the Union Parliament.

[7] Art. 279-A(6), Constitution of India.

[8] Art. 279-A(11), Constitution of India.

[9] Available at https://gstawareness.cbec.gov.in/.

[10] Available at http://pibarchive.nic.in/gst/.

[11] Available at http://www.cbic.gov.in/htdocs-cbec/gst/index.

[12] Available at https://twitter.com/askGST_GoI.

[13] Government of India Press Release dated 18-6-2018. Available at http://pib.nic.in/newsite/printrelease.aspx?relid=180011.

[14] Kapil Patidar and Arvind Subramanian, GST, a buoyant force, The Indian Express dated 20?6?2018. Available at https://indianexpress.com/article/opinion/columns/economic-survey-revenue-gdp-fiscal-year-growth-indirect-taxes-gst-a-buoyant-force-5224614/.

[15] For illustration, see JK Tyre and Industries Ltd. v. Goods and Services Tax Council, (2018) 53 GSTR 246; Sainik Mining & Allied Services Ltd. v. Union of India [Writ Petition (Tax) No. 79/2018, decision dated 14-5-2018 (Chhattisgarh High Court)].

[16] Government of India Press Release dated 4-4-2018. Available at http://pib.nic.in/PressReleaseIframePage.aspx?PRID=1527571.

[17] For illustration, see VSL Alloys (India) (P) Ltd. v. State of U.P.; (2018) 53 GSTR 248; CTO v. Madhu M.B., (2017) SCC OnLine Ker 29982

[18] For illustration, see Vardh Paper Products Pvt. Ltd. v. Commissioner of Commercial Tax [Misc. Bench No. 12713/2018, decision dated 4-5-2018 (Allahabad High Court)] sustained by Supreme Court in Vardh Paper Products Pvt. Ltd. v. Commissioner of Commercial Tax [SLP (C) No. 13483/2018, decision dated 21-5-2018].

[19]  For ease of reference some of these issues have been enumerated in the Appendix below.

[20]  For illustration, JCB India Ltd. v. Union of India, 2018 SCC OnLine Bom 997 and Builders Assn. of Navi Mumbai v. Union of India, (2018) SCC OnLine Bom 994

[21] Details available at http://gstcouncil.gov.in/rulings-advance-authority.

[22] Details available at http://pib.gov.in/PressReleseDetail.aspx?PRID=1531334.

[23] Reverence Infrastructure (India) LLP v. Union of India [Division Bench Civil Writ Petition No. 14140/2017] pending before Rajasthan High Court.

[24] Builders Assn. of Navi Mumbai v. Union of India, (2018) SCC OnLine Bom 994

[25] U.P. Distilleries’ Assn. v. Union of India [M.B. No. 9750/2018] pending before Allahabad High Court.

[26] Mohit Minerals Pvt. Ltd. v. Union of India [Special Civil Application No. 726/2018] pending before Gujarat High Court.

[27] D. Pauls Travel & Tours Ltd. v. Union of India [WP (C) No. 7320/2017] pending before Delhi High Court.

[28] JCB India Ltd. v. Union of India, (2018) SCC OnLine Bom 997

[29] Godrej Consumer Products Ltd. v. Union of India [OWP No. 638-639/2018] pending before Jammu and Kashmir High Court.

[30] Devashish Polymers Private Ltd. v. Union of India, (2017) SCC OnLine Del 11863

[31] Kundan Care Products Ltd. v. Union of India [WP (C) No. 7425/2017] pending before Delhi High Court.

[32] Nipun Malhotra v. Union of India, WP (C) No. 725/2017] pending before Supreme Court.

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