Law of Taxation- II

LAW OF TAXATION II

Final Draft
Goods and Services Act

Submitted To Submitted By
Mr. Anil Sain Himanshu Verma
(Faculty of Law) VIIIth Semester
Roll Number - 55

Final Draft
Page 1
 Law of Taxation- II

INTRODUCTION

If the Value Added Tax (VAT) is considered to be a major improvement over the pre-existing
Central excise duty at the national level and the sales tax system at the State level, then the
Goods and Services Tax (GST) will be a further significant breakthrough – the next logical step
- towards a comprehensive indirect tax reform in the country.

Goods and Service Tax is a tax on goods and services, which is leviable at each point of sale or
provision of service, in which at the time of sale of goods or providing the services the seller or
service provider can claim the input credit of tax which he has paid while purchasing the goods
or procuring the service. On most of the goods and services the rate of tax remains the same but
as per the necessity of the nation some goods or services can be declared “exempted” or “Zero
rated”. The whole system is developed in such a way that it avoids the cascading effect and the
final consumer bears the burden of all the tax. Generally, in such a system Exports are zero
rated and all the taxes paid while purchasing and manufacturing the goods including the taxes
paid on raw material and services are returned to the exporter to make the exports competitive.

The sellers or service providers collect the tax from their customer, who may or may not be the
ultimate customer, and before depositing the same to the exchequer, they deduct the tax they
have already paid. This is simply very similar to VAT which is at present applicable in most of
the states and can be termed as National level VAT on Goods and Services with only one
difference that in this system not only goods but also services are involved and the rate of tax
on goods and services are generally the same.1

The new tax regime — Goods and Service Tax, proposed to be introduced by the Central
Govern ment with the cooperation of the States, would bring about far reaching changes, both
in commodity taxation as well as taxation of services in a unified manner. Taxes levied on
services have the potential to generate more than 64.72%of the revenue. Though service tax
was not contemplated at the advent of the Constitution, technological and scientific
advancements in the past decades have made economists consider a wider and newer tax base
to bring about radical reforms in the tax regime.2

1 http://finmin.nic.in/gst/index.asp
2 http://aiftp.blogspot.in/2012/12/goods-and-service-tax-constitutional.html
Final Draft
Page 2
 Law of Taxation- II

What is GST?

Goods and Services Tax (GST) is a part of the proposed tax reforms that center round evolving
an efficient and harmonized consumption tax system in the country. Presently, there are parallel
systems of indirect taxation at the central and state levels. Each of the systems needs to be
reformed to eventually harmonize them.

Each of the systems needs to be reformed to eventually harmonize them. World over, goods and
services attract the same rate of tax. That is the foundation of a GST. The first step towards
introducing GST is to progressively converge the service tax rate and the CENVAT rate. The
goods and service tax (GST) is proposed to be a comprehensive indirect tax levy on
manufacture, sale and consumption of goods as well as services at a national level. Integration
of goods and services taxation would give India a world class tax system and improve tax
collections.3

The goods and service tax (GST) is proposed to be a comprehensive indirect tax levy on
manufacture, sale and consumption of goods as well as services at a national level. Integration
of goods and services taxation would give India a world class tax system and improve tax
collections. It would end the long standing distortions of differential treatments of
manufacturing and service sector. The introduction of goods and services tax will lead to the
abolition of taxes such as octroi, Central sales tax, State level sales tax, entry tax, stamp duty,
telecom license fees, turnover tax, tax on consumption or sale of electricity, taxes on
transportation of goods and services, and eliminate the cascading effects of multiple layers of
taxation. GST will facilitate seamless credit across the entire supply chain and across all states
under a common tax base.4

3 http://www.indiastat.com/article/30/nikhil/fulltext.pdf
4 http://icai.org/resource_file/96521595-1601.pdf
Final Draft
Page 3
 Law of Taxation- II

Road Map to GST

As we have parallel systems of indirect taxation at the central and state levels, each of the
systems needs to be reformed to eventually harmonize them. The central excise duty should be
converted into a full fledged manufacturing Stage VAT on goods and services and the states
sales tax systems should be transformed into a retail stage destination based VAT, before the
two are integrated. At the central level, beginning has been made by converging widely varying
tax rates and extending input tax credit to convert excise duties into a CENVAT.

The reformed indirect tax system GST-Goods and service tax is proposed to implement on 1st
April 2016 in India. Several countries implemented this tax mechanism followed by France, the
first country introduced GST. Goods and service tax is a new version of VAT which gives a
comprehensive setoff for input tax credit and subsuming many indirect taxes from state and
national level. Finance Minister Arun Jaitley brokered a compromise on Monday evening that
would pave the way for a key constitutional amendment to be tabled in the current
parliamentary session that runs to Dec. 23.

Investors and manufacturers have long coveted the GST as a game-changer that would simplify
taxes while broadening the tax base, adding as much as 2 percentage points to the size of Asia's
third-largest economy.

However, the measure has been held up for years with some of India's 29 states reluctant to give
their assent for fear of revenue losses. Even after Monday's compromise, the tax is not likely to
take effect until April 2016.

As the name denotes the goods and service tax is integrated in GST for setoff benefit of Input
tax credit

Salient Features of GST Model

Keeping in view the report of the Joint Working Group on Goods and Services Tax, the views
received from the States and Government of India, a dual GST structure with defined functions
and responsibilities of the Centre and the States is recommended. An appropriate mechanism
that will be binding on both the Centre and the States would be worked out whereby the

Final Draft
Page 4
 Law of Taxation- II

harmonious rate structure along with the need for further modification could be upheld, if
necessary with a collectively agreed Constitutional Amendment. Salient features of the
proposed model are as follows:

i. A new Article 246A is proposed which will confer simultaneous power to Union and
State legislatures to legislate on GST.
ii. A new Article 279A is proposed for the creation of a Goods & Services Tax Council
which will be a joint forum of the Centre and the States. This Council would function
under the Chairmanship of the Union Finance Minister and will have Ministers in
charge of Finance/Taxation or Minister nominated by each of the States & UTs with
Legislatures, as members. The Council will make recommendations to the Union and
the States on important issues like tax rates, exemptions, threshold limits, dispute
resolution modalities etc.
iii. It is proposed to do away with the concept of ‘declared goods of special importance’
under the Constitution.
iv. Centre will compensate States for loss of revenue arising on account of implementation
of the GST for a period up to five years. A provision in this regard has been made in the
Amendment Bill (The compensation will be on a tapering basis, i.e., 100% for first three
years, 75% in the fourth year and 50% in the fifth year)5.
v. The GST shall have two components: one levied by the Centre (hereinafter referred to
as Central GST), and the other levied by the States (hereinafter referred to as State
GST). Rates for Central GST and State GST would be prescribed appropriately,
reflecting revenue considerations and acceptability. This dual GST model would be
implemented through multiple statutes (one for CGST and SGST statute for every
State). However, the basic features of law such as chargeability, definition of taxable
event and taxable person, measure of levy including valuation provisions, basis of
classification etc. would be uniform across these statutes as far as practicable.
vi. The Central GST and the State GST would be applicable to all transactions of goods and
services made for a consideration except the exempted goods and services, goods which
are outside the purview of GST and the transactions which are below the prescribed
threshold limits.

5 http://taxguru.in/goods-and-service-tax/salient-features-bill-introduce-gst-india.html
Final Draft
Page 5
 Law of Taxation- II

vii. Since the Central GST and State GST are to be treated separately, taxes paid against the
Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST
and could be utilized only against the payment of Central GST. The same principle will
be applicable for the State GST. A taxpayer or exporter would have to maintain separate
details in books of account for utilization or refund of credit. Further, the rules for taking
and utilization of credit for the Central GST and the State GST would be aligned.
viii. Cross utilization of ITC between the Central GST and the State GST would not be
allowed except in the case of inter-State supply of goods and services under the IGST
model.

BENEFITS OF GST MODEL

 Eliminates cascading effect of taxes across all supply chain by reducing cost of doing
business and makes the economy competitive.
 Eliminates multiplicity of taxes, rates, exemptions and exceptions.
 Eliminates dual taxation of the same transaction (e.g. VAT & Service tax on EPC
(engineering, procurement and construction) contracts.
 Reduces cost of production.
 Achieves, uniformity of taxes across the territory, regardless of place of manufacture or
distribution.
 Provides, greater certainty and transparency of taxes.
 Ensures tax compliance across the economy.
 Augments and creates buoyancy in the economy

HOW GST WILL WORK

Charging Tax: The dealers registered under GST (Manufacturers, Wholesalers and Retailers
and Service Providers) are required to charge GST at the specified rate of tax on goods and
services that they supply to customers. The GST payable is included in the price paid by the
recipient of the goods and services. The supplier must deposit this amount of GST with the
Government.

Getting Credit of GST: If the recipient of goods or services is a registered dealer

(Manufacturers, Wholesalers and Retailers and Service Providers), he will normally be able to
claim a credit for the amount of GST he has paid, provided he holds a proper tax invoice. This

Final Draft
Page 6
 Law of Taxation- II

“input tax credit” is setoff against any GST (Out Put), which the dealer charges on goods and
services, which he supplies, to his customers.

Ultimate Burden of Tax on Last Customer: The net effect is that dealers charge GST but do
not keep it, and pay GST but get a credit for it. This means that they act essentially as collecting
agents for the Government. The ultimate burden of the tax falls on the last and final consumer
of the goods and services, as this person gets no credit for the GST paid by him to his sellers or
service providers.

Registration: Dealers will have to register for GST. These dealers will include the suppliers,
manufacturers, service providers, wholesalers and retailers. If a dealer is not registered, he
normally cannot charge GST and cannot claim credit for the GST he pays and further can not
issue a tax invoice.

Tax Period: The tax period will have to be decided by the respective law and normally it is
monthly and/or quarterly. On a particular tax period, which is applicable to the dealer
concerned, the dealer has to deposit the tax if his output credit is more than the input credit after
considering the opening balance, if any, of the input credit.

Refunds: If for a tax period the input credit of a dealer is more than the output credit then he is
eligible for refund subject to the provisions of law applicable in this respect. The excess may be
carried forward to next period or may be refunded immediately depending upon the provision
of law.

Exempted Goods and Services: Certain goods and services may be declared as exempted
goods and services and in that case the input credit cannot be claimed on the GST paid for
purchasing the raw material in this respect or GST paid on services used for providing such
goods and services.

Zero Rated Goods and Services: Generally, export of goods and services are zero-rated and in
that case the GST paid by the exporters of these goods and services is refunded. This is the
basic difference between Zero rated goods and services and exempted goods and services.

Final Draft
Page 7
 Law of Taxation- II

Tax Invoice: Tax invoice is the basic and important document in the GST and a dealer
registered under GST can issue a tax invoice and on the basis of this invoice the credit (Input)
can be claimed. Normally a tax invoice must bear the name of supplying dealer, his tax
identification nos., address and tax invoice nos. coupled with the name and address of the
purchasing dealer, his tax identification nos., address and description of goods sold or service
provided.

Exemptions:

One of the most contentious differences between the ESCFM discussion paper and the report
are the exemption. States have been trying to push for a list of exempted items which has been
the problem with existing taxation system, wherein, because of such exemptions inefficiencies
have crept in. This is because, this defeats the whole purpose of ensuring a flawless GST, the
report is proposing because manufacturing goods which are in exempted list will be at an
advantage over the other goods and services under the comprehensive tax base. This would also
lead to the problem of statutory interpretation, of whether or not a good or service is part of the
exempted list.

The comprehensive and broad tax base envisaged under the flawless GST would be very
severely undermined if certain goods are pushed into the exemptions list. This would also
increase the cost of administration as the implementing authorities would have to determine
whether or not a particular good or service is in the exempted list.

Also as per Poddar and Ahmed6 internationally the most successful GST/VAT systems have
been those which have kept exemptions to the minimum, such as New Zealand, where even
governmental organization are under the GST. This ensures a better tax administration, and
prevents use of such exemptions by business to divert their money. The researchers are in
general agreement with the exemption list proposed by the report. Although one can argue that
it makes clear demarcation that only certain essential service would be exempted. 7 The

6 S.Podar and E.Ahmad, “GST Reforms and Intergovernmental Considerations in India,”

www.finmin.nic.in/WorkingPaper/GST%20Reforms%20and%20Intergovernmental%20Considerations%20in
%20India.pdf visited on 2nd March 2015.
7 Including public services, non governmental educational institutions and hospitals.
Final Draft
Page 8
 Law of Taxation- II

researchers however agree that since the rate of taxation is 12% which is a moderate rate,
exemptions are uncalled for.

Another problem which might emanate from having any kind of exemptions is that the firms
dealing with such exempted goods, as customers, would not have the benefit of receiving credit
for the exempted goods, thereby eliminating the competitive advantage the consuming firm
would’ve had.

Providing certain number of exemptions as stipulated by the report are actually desirable as a
taxation policy, this is because, as it happened in New Zealand, such inclusion of non profit and
public body into VAT/GST system led to a massive increase in the number of tax payers, many
of whom required refunds This becomes very problematic administratively, as such, funds need
to be refunded, which is an activity which expends considerable administration time.

Another approach which is followed is several countries could have been adopted wherein the
activities of a public body are categorised into taxable and exempt activities and only the
taxable activities are taxed and input tax credit is provided on them. However, the difficulty is
again in terms of the use of administrative machinery in determining whether an activity is
taxable or not.

Criticism of GST

The Bill has been a subject matter of intense criticism from legal commentators. Some have
argued that the Bill “is a total deviation from the basic constitutional scheme followed for the
distribution of legislative powers”32 for “Article 246 and a Seventh Schedule [to] the
Constitution as they stand, are part of the basic feature of the Constitution and introduction of
Article 246A as a specific provision for levy of goods and service tax, will dilute the import of
Article 246 and hence the basic structure of the Constitutioh.”33 It is suggested that the
introduction of 246A could have been easily avoided by introducing a legislative entry into the
Concurrent List which would have empowered both the Parliament and the State Legislators to
levy a goods and services tax. The criticism, however, overlooks the fact that the scheme
envisaged by the Bill gives equal powers both to the Parliament as well as the State.
Introduction of an entry in the Concurrent List would not have resolved the hurdle of Article

Final Draft
Page 9
 Law of Taxation- II

254 which gave overriding supremacy to the Parliament in case of a conflict between the law
made by it and that by the State Legislature. The scheme of the Bill acknowledges the
possibility of double taxation at both the levels which could not have been possible without
avoiding Article 254 altogether. In fact GST is envisaged as “a dual levy imposed concurrently
by the Centre and the States, but independently”.

A Constitution Bench of the Supreme Court in Jam Bros. v. Union of India, held that “the
Constitution does not contain any prohibition against double taxation.” This view has been
reiterated by the Supreme Court in Municipal Council, Kota, Rajasthan v. Delhi Cloth &
General Mills Co. Ltd. wherein it was held:

“22. .. . In the absence Of any impediment specifically created in the Constitution of a country
or the legislative enactment itself, the desirability or need otherwise to avoid such levies has
been held to pertain to areas of political wisdom of policy making and adjusting of public
finances of the State, and not for the law courts...”

This, however, does not mean that the Bill is itself free from defects. The Empowered
Committee had in its report envisioned GST with two components: one levied by the Centre
(Central GST), and the other levied by the States (State GST). “This dual GST model would be
implemented through multiple statutes (one for CGST and SGST statute for every State).”

However the Constitutional Amendment Bill does not makes the distinction between Central
and State GST clear. The only provision which to some extent make the distinction between the
power of the Union to levy GST and that of the State to levy GST is the proviso to the proposed
Article 246 A which provides that “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.” This however nowhere restricts the power of the
Parliament to also levy tax on transactions which are subjected to the levy of State GST. In fact
the Bill makes no distinction between what the Empowered Committee had referred to as
Central GST and State GST.

Moreover the concept of “Integrated” GST to which the proviso possibly refers is also not
clearly brought out by the provisions of the Bill .The scope of IGST Model is that “Centre

Final Draft
Page 10
 Law of Taxation- II

would levy IGST which would be CGST plus SGST on all inter-State transactions of taxable
goods and services ... The inter-State seller will pay IGST on value addition after adjusting
available credit of IGST, CGST, and SGST on hjs purchases. The Exporting State will transfer
to the Centre the credit of SGST used in payment of lGSTJ’he Importing dealer will claim
credit of IGST while discharging his output tax liability in his own State. The Centre will
transfer to the importing State the credit of IGST used in payment of SGST.”37 This scheme,
however, is not apparent for a reading of the provisions of the Bill.

The adjudication mechanism envisaged under the Bill is praise worthy. Its scheme is more akin
to conciliatory measures rather than adjudicatory. As the Bill itself provides, the Goods and
Service Tax Council “is to be guided by the need for a harmonized structure of Goods and
Service Tax and for development of a harmonized national market for goods and services” But
how far the recommendations of the Council would be binding on the States and the Union is
unclear. Even though the grievance against the non compliance of the recommendations of the
Council can be made before the Settlement Authority, but its jurisdiction is limited only to
complaints referred by States or the Union. Persons who are affected by the actions of a State
taken in defiance of a recommendation made by the Council would have no remedy to be
sought before the Settlement Authority. It is extremely doubtful, that in view of the scheme
envisaged under the process Articles 279A and 279B, a court of law would have jurisdiction to
deal with such complaints.

Introduction of the Goods and Services Tax in India would undoubtedly be a win-win strategy
for both the Centre and the States. However, reforms of such a magnitude require not only a
well considered legal regime but also stewardship by statesmen whose efforts alone can secure
compliance with the new taxation. While it is legitimate for the States to bargain to retain their
fiscal autonomy, they should not use this autonomy to indulge in political maneuvering.

CONCLUSION

Final Draft
Page 11
 Law of Taxation- II

Refurbishing the current tax system requires implementation of such a new methodology that it
is able to eliminate the drawbacks of the present system of taxation in India. India waits for the
GST, Goods and Service Tax, to arrive the scenario for a better tax system. Added to it the

Direct Tax Code can also replace the Income Tax Act, 1961). But before getting introduced to
this system of GST, one must have a general idea about the whole system.

The dilemma of multiplicity of taxes is being experienced in India over a number of years,
though introduction of CENVAT and VAT has considerably helped in reduction of such
multiplicity but still the sorrow continues to prevail. The problem on account of CENVAT is
that taxes like Additional Custom Duty, Additional Excise Duty, etc. are not included in it,
whereas, Vat fails to include taxes such as Luxury tax, Entertainment tax and others. Added to
this one of the main component of overall tax structure, Service Tax is ignored in both the
cases. Thus, to overcome such miseries implementation of GST is being considered.

GST or Goods and Service Tax will include a uniform rate of taxation in all respect and would
allow an implementation of an incessant link from the primary producer of goods and service to
the retailer’s stage and will also eradicate all cascading effects in such process.

Final Draft
Page 12
 Law of Taxation- II

Referred Websites:

1. http://aiftp.blogspot.in/2014/12/goods-and-service-tax-constitutional.html
2. http://icai.org/resource_file/96521595-1601.pdf
3. http://www.gst.co.in/
4. http://finmin.nic.in/gst/index.asp
5. http://www.indiataxes.com/GST/Highlights_of_New_Proposed_Goods.pdf
6. http://www.opgc.co.in/present_17_12_2014.pdf
7. http://taxguru.in/goods-and-service-tax/goods-services-tax-gst-model-for-india.html
8. http://suranacollege.edu.in/postgraduation/pdf/ebook/tax/Service%20tax.pdf

Final Draft
Page 13