GST, Legislatively Speaking

Subhiksha. S & Pragash. B

Introduction

The new GST regime has brought out phenomenal changes in the economic system. They have turned the indirect tax system upside down. There is no field or business that has not felt the effect of GST. The effect had both positive and negative elements. The Central Goods and Services Tax Act, 2017 is a holistic and exhaustive piece of legislation. The new tax regime aims at reducing double taxation and tax avoidance.

Value addition is made easier and the burden on consumers is reduced. Since everything is digitalized under this scheme, there is very less chance of tax avoidance. Black money from direct taxes is huge in amount and is blatantly visible and discoverable. There is a huge amount of unaccounted money hidden with retailers which breed in the economy without the knowledge of the government or the consumers.

However, the sudden change and lack of clarity in certain points created issues and loopholes which again burdened the consumers. Clarity can be gained through future judicial decisions on questions that are left unanswered by the legislature.

The GST Act aims at bringing all the indirect taxes into one bracket. This reduces the overall indirect tax paid by the ultimate consumer of goods and services. This makes tax planning easy for retailers and reduces the cost on the goods and services, thereby resulting in a reduction in the market price.

Central GST Act: Background

The legislations on GST have been framed with the objective of revolutionizing the indirect tax regime. There is a Central Act for GST and each State has its own GST law. The Central Government has a regulatory role over the tax regime of every state. The Central Government as well as the State Government have the power to frame rules. This way, the State government’s revenue is not compromised. Earlier indirect taxes were under the complete control of the State Governments with no say for the center. Most of the indirect taxes were under List 2.

101st Amendment of the Constitution was enacted in order to give power to the Central Government to interfere with indirect taxes. Through the 101st Amendment, article 246A and Article 269A and Article 279A were inserted and Article 248, Article 249, Article 250, Article 268, Article 269, Article 270, Article 271, Article 286, Article 366 and Article 366 and Article 368 were amended. The sixth schedule and List 1 and List 2 of the seventh schedule were also amended.Article 246A has 2 clauses. Clause 1 says that the parliament and the state legislature have the power to make laws with respect to goods and services tax imposed by the Union or such State. Clause 2 gives the Union Government the power to regulate tax on inter- state trade of goods and services. The other articles were amended to give effect to this provision. Article 279A provides for the establishment of a GST Council.

Entry 84 of List I and Entry 54 and Entry 62 of List II of the seventh schedule were amended. Entry 92 and Entry 92C of List I and Entry 52 and Entry 55 of List II s were omitted. Petroleum and allied products and tobacco were added to Entry 84 Opium, Hemp, etc were put under the head ‘tobacco and tobacco products’. 

Therefore petroleum and fuel come under the absolute control of the Central Government and State wise corruption is taken care of. However, this gives excess autonomy to the Central Government, which could prove to be lethal. Newspapers and advertisements in the same are now out of the control of the Central Government. Central government now loses its hold on the taxation on services. Central Government’s revenue reduces, while the State’s increases Newspapers circulate mostly within regions. Therefore, it is best left with the State Government’s control. However, local political play and manipulation is possible.

The objectives of Uniform taxing policy and Federalism followed by India are completely different and GST is a bold attempt to make an intersection of these distinct aims. The main aim is the simplification of the taxation policy followed by India. We can see that in case of Direct taxes, the taxing policy is governed by Income Tax Act but for indirect taxes before GST it was covered with a number of Statutes which collides with each other. Through various judicial pronouncements, it is evident that a strict and harmonious interpretation[1] is preferred in case of taxing Statutes which will drive away the possible loopholes and contradiction with the constitution of India

Simplifying the Complicated

Section 2 of the Central GST Act is the interpretation clause. There are definitions that are pertinent to today’s digital era and age of e commerce. Such definitions include electronic cash ledger[2], electronic commerce[3], electronic commerce operator[4] and electronic credit ledger[5].  Money[6]under this act includes electronic transfers also. Money is given an inclusive definition and can include any instrument recognized by the RBI.

Earlier definition of goods was taken from Sale of Goods Act. Now, there is a definition for goods under this Act.[7] There is now a new profession created and the people practicing the profession are called ‘Goods and Service Tax practitioners’.[8]

There is a separate legislation which provides for the loss of revenue of State Governments owing to GST[9]. Compensation given to a particular state will be the difference between the projected revenue and the actual revenue. Projected revenue is the revenue that the state could have earned had GST not been implemented. This, however, is determined by the center. So, even if there is compensation, the amount of compensation and the states which are eligible to get compensation is decided by the center.

Input tax credit, interstate and intrastate supplies are clearly elaborated by the legislation. The interpretation clause leaves almost no loopholes and chances for misuse and misconception.

Administration

The officers appointed under this Act are Principal Chief Commissioners of Central Tax or Principal Directors General of Central tax, Chief Commissioners of Central Tax or Directors General of Central Tax, Principal Commissioner of Central Tax or Principal Additional Directors General of Central Tax, Commissioners of Central Tax or Addition Director Generals of central Tax, Additional Commissioners of Central Tax or Additional Directors of Central Tax, Joint Commissioners of Central Tax or Joint Directors of Central Tax, Deputy Commissioners of Central Tax or Deputy Directors of Central Tax, Assistant Commissioners of Central Tax or Assistant Directors of Central Tax[10]. This creates numerous checkpoints and with clear description of each officer’s powers, there is lease scope of misuse of tax money.

The powers of the officers under this Act are decided by the Central Board of Excise and Commissions.The Commissioner has the power to delegate his powers to any of his subordinate officers[11]. Even in the new regime, CBEC has sufficient power and say.

Supply

Section 7 of the central GST Actgives an inclusive definition for supply aiming to cover all the components of supply and to leave no loopholes. Earlier, for VAT and Service Tax, each state had a different legislation and each state had a different definition for supply. Under this regime, CGST provides for a uniform definition to be followed throughout the country. However, this takes a considerable amount of power away from the State Government.

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The definition covers sales, transfers, barters, exchange, license, rent or disposal of property for consideration in the course of business. It also includes import of goods or services irrespective of whether it is for consideration. Schedule I also includes transfers made without consideration.

Schedule II of the act deals with Deemed supply of goods and services. Deemed Supply includes transfer of goods and services on which ownership will pass on a future date on payment of full consideration, lease, tenancy or easement of land and building, treatment or processes on products, transfer of business assets and supply of services which include renting of immovable property, construction and temporary access to intellectual property. Schedule III gives a list of what cannot be considered as supply which includes services by an employee to an employer, funeral services, actionable claims and sale of land or building after occupation or completion.

Composite supply refers to a bundle of supplies consisting of goods or services or both, which are naturally supplied together in the course of business[12]. Mixed supply refers to two or more individual supplies sent together for a single price, but does not fall under composite supply[13]. Tax on composite supply will be determined based on which is the principal supply. Tax on mixed supply will be determined based which of the commodities attracts higher taxes[14].

The liability to pay tax arises at the time of supply. The time of supply is either the date of issue of invoice by the supplier or the date of payment to the supplier, whichever is earlier[15].Time of supply of services is either the date of issue of service or the date of provision of service or the date on which the recipient records the receipt of service in his books of accounts[16].

In case of a change in rate of tax after the supply of goods and services, if the invoice is issued and payment is made, the time of supply would be the date of issue of invoice or the date of payment, whichever is earlier. If invoice is issued before the change in rates and payment is made after the change in rates, the time of supply would be the date of issue of invoice. If payment is made before the change in rates and invoice is issued after the change in rates, the time of supply would be the date of receipt of payment[17].

In case of a change in rate of tax before the supply of goods and services, if the payment if made after the change in rates and invoice is issued before the change in rates, the time of supply would be the date of receipt of payment. If the issue of invoice as well as the payment is done before the change in rates, the time of supply would be the earlier of the two. If the invoice is issued after the change in rates and payment is made before the change in rates, the time of supply would be the date of issue of invoice[18].

Value of supply is the transaction value. It includes taxes, duties, cesses, fees and charges levied under any law, any amount incurred by the recipient but the supplier is liable to pay, incidental expenses, including commission and packing, interest or late fee or penalty and subsidies excluding the ones provided by the Central and State Governments. Value ofsupply does not include any discount given before or at the time of supply if it is duly recorded in the invoice or discount given after the supply if it is established in the agreement for supply and linked to the invoices and if input tax credit is attributable to such discount[19].

Input Tax Credit

Input tax credit is when a manufacturer is entitled to deduction of tax paid on the inputs while paying tax for outputs. Every registered person is entitled to input tax credit on supply of goods and services, provided the tax payer must possess the invoice, the tax payer must have received the goods or services or both, the tax charged must have been paid to the government, the returns must have been duly furnished as per section 39. Depreciation claimed under the Income Tax Act on a tax component, input tax credit on the said component cannot be claimed[20].

When the supply of goods or services or both is partly used for business purposes, then input tax credit can be claimed for the part which is used for business purposes alone[21]. If the components of supply include supplies taxable under IGST Act or zero rated supplies, input tax credit can be claimed only for supplies taxable under CGST Act. Exempt supply includes tax paid on reverse charge basis, transactions in securities, sale of land and sale of building as per clause (b) of Para 5 of Schedule II[22].

A banking company or financial institution supplying services has two options. They can either avail credit for the taxable part of supplies or they can avail a credit of an amount equal to fifty percent of the eligible input tax credit on inputs, capital goods and input services every month[23].

Motor vehicles and conveyances for further supply of such vehicles or conveyance or transportation of passengers or imparting training on driving, flying, navigating such vehicles or conveyances and for transportation of goods no input tax credit cannot be claimed[24].

Input tax credit cannot be claimed for food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an inward supply is used to make an outward supply. Input Tax Credit cannot be claimed for membership of a club, health and fitness centre, rent-a-cab, life insurance and health insurance unless the Government notifies that the employer is obliged to provide such services to the employee or such services are used to provide outward supplies. Input Tax Credit cannot be claimed for travel benefits given to employees on vacation or home travel concessions[25]. Works Contract Services are not eligible for input tax credit unless it is for a further supply of works contract service[26]. Input tax credit cannot be claimed in cases of goods or services received for construction of immovable property[27], goods or services chargeable under composition levy[28], goods or services received by non-resident taxable persons[29], goods or services used for personal consumption[30], goods lost, stolen, destroyed written off or gifted[31], tax paid on credit availed by fraud or misstated, goods seized or detained in transit, confiscated goods and penalties paid for the same[32].

The concept of input tax credit is not new to the Indian law. In the year 1984, a scheme called MODVAT (Modified Value Added Tax) was introduced to cover specific inputs used in manufacture of excisable goods and provides credit for the same. In 1994, the scheme was expanded and capital goods were also included. It was renamed as CENVAT Credit Scheme in 2000. CENVAT made service providers also eligible to avail credit under this scheme. CENVAT Credit Rules, 2004 provided for the list of goods and services which are eligible for input tax credit[33]. Apart from this, VAT law of each state provides for input tax credit. The present tax regime has given uniformity in input tax credit the Central GST Act has added numerous input goods and services, which promotes small businesses.

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Reverse Charge Mechanism

Reverse charge mechanism is when the liability is imposed on the recipient of goods or services, instead of the supplier[34]. The Government has the authority to decide which category of goods or services would fall under reverse charge mechanism[35]. When supply is made by an unregistered person to a registered person, the central tax is payable on reverse charge basis[36]. Reverse charge is applied in services of an e commerce operator[37]. CBEC has also released a list of supplies which will be charged on reverse charge basis. Exempted supply includes supplies made on reverse charge basis[38]. Services supplied by e commerce operators are charged on reverse charge basis.

The time of supply under reverse charge would be the date of receipt of goods or the date of payment or the date immediately after 30 days from the date of issue of an invoice by the supplier, whichever is earlier. In case of services, the time of supply is the date of payment or the date immediately after 60 days from the date of issue of invoice. Persons who are taxable under reverse charge basis must be compulsorily registered[39].

Under the old regime, the services included under reverse charge were insurance agent, service of a director to a company, manpower supply, Goods Transport Agencies, Non-resident service providers and any service involving aggregators. Under the new regime, cashew nuts, Bidi wrapper leaves, Tobacco leaves, silk yarn, raw cotton, supply of lottery, used vehicle, seized and confiscated goods, old and used goods, waste and scrap, services supplied by a person from non-taxable territory, GTA services, legal services by advocates, services supplied by an arbitral tribunal to a business entity, sponsorship services, Governmental services, etc. The list of goods and services falling under reverse charge has been expanded to increase revenue to the State.

GST Council

GST Council is a constitutional body introduced through 101st Constitutional Amendment Act, 2016.[40] The president has to constitute the council within sixty days from the date of the amendment which involves the representatives from the Central government and State governments. The constitution, powers and functioning of the Council is well elaborated in the article itself. It is one of the topics in GST to be subjected to heavy discussion where we can see the views showcasing the conflict in the distribution of the powers.

The GST Council shall comprise of a Chairperson, vice chairperson and members namely, the Union Finance Minister, Union Minister of State in charge of Revenue or Finance and Minister in charge of Finance or taxation or any Minister nominated to represent each state of the country. It involves the representation of both Central government and State Governments. The Council is vested with varied powers and functions which are decided and exercised through meetings and subjecting the conclusion to Voting. Only two Union Territories of India namely, Delhi and Puducherry are represented by ministers whereas other Union Territories are collectively represented by the Union Finance Minister.

One half of the total members of the Council constitute the forum of the meeting. At present there are thirty-three members in GST Council which makes that seventeen members are mandated to proceed with a meeting. But it is nullified by another clause in the same article which shows that no act or proceeding of the GST Council is invalid because of

  1. Any vacancy or defect in the constitution of the Council
  2. Any defect in the appointment of any member of the Council or
  3. Any procedural irregularity which is not affecting the merits of the case.

We can see the contradiction where the mandatory Quorum can be compromised when the discussion is not affecting the merit of the case and the composition of the members can be considered as a mere procedural irregularity. The leniency in Quorum will be a threat to representation of the states which obstructs the uniform policy making.

The huge criticism faced by the GST Council is the weighted average voting method. A decision is said to be accepted by the council when it obtains three-fourth of the consent of the Quorum. The voting power has been split as the Central Government is vested with one-third of the total weighed votes whereas all twenty nine states and two Union territories are provided with two-third of the votes.

On one hand this classification in voting powers enhances the unitary working of the GST Council, mandating the participation of all states to represent their plea. The decision formed through this process will yield a uniform result and brings a solution to the nation as a whole.

On the other hand, this voting system grants a veto power indirectly to the Central Government. Each state is having its own policies, resources and welfare mechanism, thus the needs of the State governments will be different and every state has its own priorities. By granting Veto power it ultimately against the basic structure of constitution– Federalism.

Another criticism faced by the GST Council is the superseding adjudicatory power of the Supreme Court. The Council is given the power to establish a mechanism to adjudicate any dispute arising

  1. Between the Government of India and one or more States; or
  2. Between the Government of India and any State or States on one side and one or more other States on the other side; or
  3. Between two or more States

regarding the recommendations of the council or regarding the implementation

The Supreme Court’s power is subject to Constitution of India.[41] Through the Constitutional Amendment we can see that the GST Council is exempted from the jurisdiction of the Supreme Court. Unlike any other Legislative action and policy which can be subjected to Judicial Review, the decisions of the GST Council cannot be brought under Supreme Court. The article explicitly denotes that any problem has to be settled within itself.

But eventually this criticism can be shut as the power to make legislation is alone given to the GST Council or to suggest some changes in taxability. The ultimate legislation is always subject to the judicial review of the Supreme Court or High Court. If the recommendations of the council are found to be against fundamental rights or against the basic structure of the Constitution, then a citizen is allowed to move his petition to constitutional Courts.

Power of GST Council

The powers given to the council is elaborate which gives autonomy to deal and provide a considerable solution to any problem arising out of indirect taxes. The GST Council is vested with the authority to make recommendations on

  1. Taxes, cesses and subcharges levied by Union, State or local bodies which maybe subsumed under goods and services
  2. The taxable event i.e., the power to decide which products will come under the category of goods and services and which will be exempted from both.
  3. The model laws on the new changes to be brought.
  4. The threshold limit of turnover below which the goods and services are exempted to be taxed.
  5. Special rates or taxes during natural disaster or calamity.
  6. Special consideration to certain states of India which includes Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand; and
  7. Any other case pertaining and essentially to be dealt with Goods and Services Tax which up to the discretion of the Council to decide.
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The council can make recommendation to anything which is pertaining to Goods and Services. In GST, supply was made the taxable event which must be carefully interpreted as any transaction is capable of including supply. There is no abstract definition to Supply[42] but a list of transactions is excluded from the ambit of supply in Schedule III of the Central Goods and Services Tax. On reading the powers and legislation in consonance it is evident that the scope of supply is subject to change. The taxable event Supply is not defined in Constitution Amendment but through Central Act legislation; thus there is a probable threat of different Supply definitions by State Governments and Central Government which will ultimately affect the motto of “One nation – One tax”. There is also a probable risk of including direct taxes under the ambit of Indirect taxes due to the extensive nature of Supply, which if not properly interpreted will lead to cascading effect which led to GST.

The words Goods and Services defined in Constitution of India is also extensive as Goods reads as “goods includes all materials, commodities, and articles”[43] whereas Services are anything other than goods.[44]From the above definitions we can understand the all-including nature of GST.

Composition Levy

Composition levy is a scheme for small businesses which have a turnover of less than Rs. 1,50,00,000/-. The businesses under this scheme will have lesser tax liability and have lesser procedures to comply with. Their business becomes easier and cost effective and liquidity rate is high. The statutory limit provided under the Central GST act was 50 lakhs[45], but through subsequent notifications, it was changed to 75 lakhs and then to one crore and now to one crore and fifty lakhs.

The GST Act says that goods which are exempt from GST are not eligible for composite scheme and the businesses under composite scheme are not eligible to input tax credit. Inter-state supplies of goods are not eligible for composite levy. The rates of tax are prescribed by the GST Act as 1% for other supplies and 5% for services of restaurants. No other services are eligible for composite levy.

The position was not very different before the GST regime. Composite levy was only under VAT Law and therefore, none of the services came under composite levy. The rates under composite levy were also decided by the state governments. The threshold limit was only 10 lakhs to 50 many businesses with lakhs under VAT law.

Much as there is an argument that GST has its toll on small businesses, this is one step to nullify the loophole and give the small businesses support. However, since most of the businesses indulge in interstate supply, the purpose is not served to the fullest.  This scheme needs a lot of changes to get the intended effect. Inter-state supplies and services need to be included.

Conclusion

GST law has had its impact, both positive and negative in the economy. Consumers had their share of problems since the dealers either weren’t clear of the system or took advantage of its loopholes, which, even after one year, are yet to be dealt with. Consumers also enjoyed tax exemption in most of the essential commodities. In the attempt to fix the lacunas in the system, sanitary napkins which were earlier exorbitantly taxed under GST are now exempted.

Small businesses did have a tough time adapting to the system and its digital ways. However, with increase in threshold limit, they do have some breathing space and procedures are also made simpler. Small businesses can now survive easily as the larger businesses and the small businesses share the same fate and it also encourages small businesses more competitive.

Since the whole system is digitalized, tax evasion is under control and makes the system tax payer friendly and the procedures are far less complicated. However, the digital divide in the society puts a section of people in disadvantage. Computers and internet are yet to reach rural areas and will keep such people in the dark.

Much as a good system this is on paper, there are some practical issues to be dealt with. Encouraging small businesses to be more competitive is a good move, but the system needs support them for the same. Spreading awareness about the system is a must and for the system to achieve its objectives. The digital divide must be eradicated and the digital system must be accessible to every businessman. Consumers must be made aware of the rates of taxes and must protect themselves from the dealers who try to misuse the system. With time and judicial decisions, GST can succeed and serve its purpose and contribute in a large way to the economy, thereby resulting in increase of investments.


[1] Godfrey Philips v. State of UP and others, AIR 2005 SC 1103.

[2] The Central Goods and Service Tax, 2017, S.2(43).

[3] The Central Goods and Service Tax, 2017, S.2(44).

[4] The Central Goods and Service Tax, 2017, S.2(45).

[5] The Central Goods and Service Tax, 2017, S.2(46).

[6] The Central Goods and Service Tax, 2017, S.2(75).

[7] The Central Goods and Service Tax, 2017, S.2(52).

[8] The Central Goods and Service Tax, 2017, S.2(55).

[9] The Central Goods and Service Tax, 2017, S.2(54).

[10] The Central Goods and Service Tax, 2017, S.3.

[11] The Central Goods and Service Tax, 2017, S.5.

[12] The Central Goods and Service Tax, 2017, S.2(30).

[13] The Central Goods and Service Tax, 2017, S.2(74).

[14] The Central Goods and Service Tax, 2017, S.8.

[15] The Central Goods and Service Tax, 2017, S.12(2).

[16] The Central Goods and Service Tax, 2017, S.13(2).

[17] The Central Goods and Service Tax, 2017, S.14(a).

[18] The Central Goods and Service Tax, 2017, S.14(b).

[19] The Central Goods and Service Tax, 2017, S.15.

[20] The Central Goods and Service Tax, 2017, S.16.

[21] The Central Goods and Service Tax, 2017, S.17(1).

[22] The Central Goods and Service Tax, 2017, S.17(2).

[23] The Central Goods and Service Tax, 2017, S.17(4).

[24] The Central Goods and Service Tax, 2017, S.17(5)(a).

[25] The Central Goods and Service Tax, 2017, S.17(5)(b).

[26] The Central Goods and Service Tax, 2017, S.17(5)(c).

[27] The Central Goods and Service Tax, 2017, S.17(5)(d).

[28] The Central Goods and Service Tax, 2017, S.17(5)(e).

[29] The Central Goods and Service Tax, 2017, S.17(5)(f).

[30] The Central Goods and Service Tax, 2017, S.17(5)(g).

[31] The Central Goods and Service Tax, 2017, S.17(5)(h).

[32] The Central Goods and Service Tax, 2017, S.17(5)(i).

[33] CENVAT Credit rules, 2004, Rule 3,

[34] The Central Goods and Service Tax, 2017, S.2(98).

[35] The Central Goods and Service Tax, 2017, S.9(3).

[36] The Central Goods and Service Tax, 2017, S.9(4).

[37] The Central Goods and Service Tax, 2017, S.9(5).

[38] The Central Goods and Service Tax, 2017, S.17(3).

[39] The Central Goods and Service Tax, 2017, S.24.

[40] INDIAN CONST. art.279A

[41] INDIAN CONST. art. 131

[42] The Central Goods and Service Tax, 2017, S.9.

[43] INDIAN CONST. art 366(12)

[44] INDIAN CONST. art 366(26A)

[45] The Central Goods and Service Tax, 2017, S.10.