Following its publicly-stated commitment to introduce GST as the next-generation indirect tax reform in India, the government recently tabled the 122nd Constitutional Amendment Bill, 2014, in Parliament. The Bill brings out the larger picture of the constitutional set-up relating to the proposed GST regime. While, understandably, the details of the legislations will be worked out at a later stage, there are certain aspects which require a conscious re-look before the discussion proceeds to finer nuances of the proposed regime.

The first discussion paper on GST (2009) stated that state-level entry taxes alone would stand subsumed in GST. This understanding formed the basis even in the earlier version—the 2011 Bill—which provided that only the state-level entry taxes would be subsumed in GST, and such taxes to the benefit of panchayats and municipal corporations would continue to be levied even in the GST regime. As a significant departure, the 2014 Bill purports to subsume all entry taxes by omitting entry 52 from the state list, which is apparently the genesis of all powers providing for levy of entry taxes.

It is interesting to note that while the entry 52 is proposed to be omitted, there are separate constitutional provisions (Article 243H and Article 243X), which independently permit the states to make laws for collecting or authorising the collection of taxes for the benefit of municipal corporations and panchayats. The 2014 Bill does not make any reference to these provisions, whereas it specifically adverts or modifies other constitutional provisions that were found to be coming in the way of a harmonious and comprehensive GST.

Currently, such municipal-level taxes are an important source of revenue for many local bodies. It will not be surprising, therefore, if these provisions are highlighted by the corporations or panchayats to make out a case before their respective governments for continued imposition of local-level taxes, post-GST. Without doubt, such local-level compliances are the biggest hurdle in a free-market regime and often a nuisance value in business terms. Therefore, a clear position on this aspect is indeed warranted.

Further, in order to confer power upon the states to tax supply of goods which were generically not considered to be by way of ‘sales’, the Constitution was amended to insert Article 366(29A), thereby permitting levy of sales taxes on supply of goods by way of hire-purchase, lease, works-contract, transfer of right to use basis, etc, commonly known as ‘deemed sales’. The 2011 Bill kept life simpler by omitting the provision, thereby doing away with the entire concept of ‘deemed sales’. The 2014 Bill, however, does not omit the said provision.

It is not clear if this omission is by inadvertence or is intended. However, it can be perceived that the continued retention of Article 366(29A) may interfere with the larger design of GST, for it may result in three kinds of taxable supplies: (1) supply of goods; (2) supply of services; and (3) deemed sales. International experience has shown that, on a conceptual level, it is difficult to handle even the first two kind of supplies simultaneously. The theoretical and practical consequences of retaining a third kind of supplies are, therefore, best left unexplored.

It is not out of place to point out that the application of ‘deemed sales’ and defining its contours has been a heavily-litigated subject matter with still no final word in sight. The continued retention of the third category of taxable supply, if so intended, may not offer a helping hand. We only hope that the controversy which was sought to be undone by the 2011 Bill is not reintroduced under the 2014 Bill.

The common link between the first discussion paper on GST of 2009, the 2011 Bill and the 2014 Bill is that they all purport to subsume the entertainment taxes levied by the state governments. However, they all redefine the existing constitutional provisions to instead confer upon the states the power to enable the municipal corporations, panchayats, to levy such taxes.

If not implemented in a proper design, it may happen that all three agencies—the Centre, states and local bodies—levy taxes on this count. Such an eventuality would be contrary to the intent of GST to simplify and harmonise the indirect tax regime and may instead expose the taxpayers to the possibility of facing different legal regimes.

In addition, there are certain fundamental issues that need to be debated further while finalising the broad design of GST. We hope that the policy-makers would be sensitive to these and other concerns and would make appropriate allowances.

With inputs from Tarun Jain, managing associate, BMR Legal

The author is leader, Indirect Tax, BMR & Associates LLP.
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