Parliament will meet for its winter session from November 24. The legislative agenda has not yet been announced by the government but it has indicated that the Constitution Amendment Bill to enable the introduction of the Goods and Services Tax (GST) may be re-introduced.
GST will be a new tax that will subsume most indirect taxes on goods and services across the country. The tax paid at any stage in the value chain can be used as credit at the next stage—this would result in tax being paid only on the value added to the product or service, and eliminate tax levied on the tax paid at an earlier stage. This also leads to better compliance as each person in the value chain who gets input tax credit has an incentive to ensure that the previous person has paid tax. The other benefit is that the differentiation between goods and services is removed, and tax credit is available across this distinction. Having a uniform tax across India with input credit is also likely to remove the tax bottlenecks in transactions that span two or more states. This would help India evolve from a fragmented market structure to a single national market. Some estimates suggest that introduction of GST will lead to GDP rising by 1-1.5%.
The legal process to make the change is complicated due to the structure of our Constitution. The Seventh Schedule to the Constitution classifies all areas under three lists for the purpose of making laws: the Union List, which enumerates subjects under the sole purview of Parliament; the State List, which has items to be legislated by state legislatures; and the Concurrent List, which has subjects that can be legislated upon by both Parliament and state legislatures. In case of Concurrent List subjects, if there is a contradiction on any specific provision in laws made by Parliament and a state legislature, the central law will override the state law.
Now, let us see what happens when we try to have a common GST given this structure of the Constitution. Currently, the power to impose some of the taxes are included in Union list of the Constitution (e.g., excise duty) while that for some others are in the State List (e.g., sale tax). Therefore, the Constitution needs to be amended to enable the enactment of a uniform law.
What are the various ways in which this can be done? One simple method is to move the power to impose all these taxes to the Union List. The Centre can then levy the tax, and a method of redistributing the tax to states can be formulated. This is the process used in the case of central taxes such as income tax, which are then pooled and redistributed according to law made by Parliament (usually, based on the recommendation of the Finance Commission). However, this methodology has some major drawbacks. States have no say in the rate of tax that is levied under this process, and may be unwilling to give up this power. Also, there is a risk that the state in which the transactions occur and where tax is collected may not get their proportional share of the tax pool at the time of redistribution. This will reduce the incentive for states to formulate policies that lead to higher economic activity as they might not benefit from the potential increase in tax revenue.
Another choice would be to move the power to impose GST to the Concurrent List. However, this move would have the same drawbacks discussed above because Parliament will have the power to make laws that override any law made by state legislatures.
A third approach was adopted in the Bill introduced by the last government after extensive consultation with the Empowered Committee of State Finance Ministers. The Bill removes several of these taxes from the three Lists and creates a new Article of the Constitution to deal with GST. Both Parliament and state legislatures will have the power to make law, but unlike the Concurrent List items, Parliament will not have the power to make a law that overrides a state law. This applies to all goods and services other than six items: petroleum crude, diesel, petrol, natural gas, aviation turbine fuel and alcohol for human consumption. In case of inter-state commerce, Parliament will make law, the central government will collect the tax, and the tax collected will be apportioned between the centre and states according to law made by Parliament.
This formulation could lead to non-uniform taxes across states defeating a key objective of a national GST. In order to address this possibility, the Bill creates a GST Council composed of the union finance minister and the minister of state in charge of revenue, and finance ministers of all states which will determine the GST rates by consensus. The Bill also creates a GST Dispute Settlement Authority to decide on complaints by a state or the centre related to loss of revenue arising from a deviation from the recommendations of the GST Council. The Standing Committee has recommended that this Authority should not be created as it impinges on the powers of legislatures. It has also noted the potential difficulty of evolving a consensus in the GST Council, and recommended that decisions be taken with a 75% majority vote, with the Centre and states having one-third and two-thirds of votes respectively.
The Centre and states are yet to reach an agreement on the details of implementation. One of the major concerns of some states is that they may lose revenue if GST is implemented. Another key issue relates to petroleum products which are intermediate goods but will be excluded from the purview of this Bill. This will lead to cascading of taxes. However, given that a significant part of state revenues come from taxes on these products, they are reluctant to let these products be included within GST.
The legal process for imposing GST is as follows. The Constitution Amendment Bill will need to be passed with two-thirds majority in each House of Parliament and then be ratified by at least 15 state legislatures before getting the assent of the President. This would enable GST to be introduced. Following this, Parliament and state legislatures will need to pass GST Bills that impose central and state GSTs. The Standing Committee has examined the earlier Constitution Amendment Bill but may re-examine the new Bill if it is significantly different. It may also examine the subsequent GST Bill. Given this long process, implementing GST by April 2016 is an ambitious target.
By MR Madhavan
The author is president, PRS Legislative Research, New Delhi