FACULTY OF LAW

ALIGARH MUSLIM UNIVERSITY

CENTRE JANGIPUR MURSHIDABAD

Topic- Defining the Concepts of GST in India: Structure of its Council

and Functions
Subject- Taxation

SUBMITTED TO
DR AIJAJ AHMED RAJ
Assistant Professor, Faculty of Law

SUBMITTED BY
HAROON RASHEED
Roll no.- 17BALLB044
Enrolment no.- GJ 1625
9th Semester, B.A.LL.B. (Hons.)
INTRODUCTION

The concept of GST was mooted to remove the remaining lacunae in the present indirect tax
structure, originally planned to be introduced on April 1, 2010. This phase of reform progressed
up to a point but has been held back for various reasons. Recalling the developments, in
December 2007, a GST committee convened by the Union Finance Minister and EC (VAT)
submitted a report recommending a two-chain GST for the Centre and states covering both goods
and services and with the input tax credit (ITC) principle applicable through both chains. There
would be no credit across the Centre and state chains since that would imply anomalous revenue
ramifications between them negating revenue sharing as determined by the Finance Commission
every five years per the Indian Constitution.

The currently prevailing proposal for the GST structure has much to desire. First, the rate
structures for Central GST (CGST) and State GST (SGST) have not been agreed upon. A
significant flaw here would be to have different rates for goods and services. The whole point of
a GST is not to have to differentiate between goods and services and, instead, to have a seamless
relationship that would negate all judicial cases over disagreements in classification. Having
different rates for goods and services will be quite inconsistent with global practice on VAT or
GST. India must follow global practice in order for its GST to be internationally comparable.

The crux of a GST is to have a broad base that would, in turn, enable a low tax rate. Therefore,
the GST base should be as broad as possible. The list of exemptions from both states and the
Centre, presently numbering in the hundreds, should be further reduced under the GST. If India
has to have a GST, these numbers for exemptions are too high.

There are other significant exclusions from the base. Almost half the revenue coverage -
petroleum, alcoholic beverages and tobacco products - is planned to be kept out of the GST base.
The advantage of keeping them within the GST base is that the tax administrations at central and
state levels will have the necessary information on the complete upstream to downstream process
of production and distribution. Therefore it is important to bring in petroleum and alcoholic
products into the GST base. What countries do in order to get more revenue from these products,
since tobacco and alcohol are considered to be demerit goods and petroleum is a non-renewable
resource, is to levy turnover-based excises on them and then impose the GST rate. This should be
done in India also. A revenue neutral configuration could be worked out so that, initially, the
yield would be the same irrespective of keeping these products outside or inside the GST base.
Government departments should also ideally be within the GST base, as is the case in many
countries, again to structure the GST in a seamless manner. However, if political economy
considerations make it impossible to cover Defence for example, then it has to be accepted
(Defence has essentially remained outside central excises also).

IMPLICATIONS OF CONSUMPTION TAX ON INTER-STATE TRADE MECHANISM

The GST should be a consumption-based tax. Therefore, for SGST, a method has to be found
such that the revenue from inter-state trade goes to the state that imports and consumes rather
than to the state that produces and exports a good or service. The appropriate method is for the
producer/exporter state to collect the revenue from the purchaser/dealer (from an importing state)
and to pass on that revenue to the importer state’s exchequer. This can be facilitated by
transmitting the collected money to a clearing house and, from there, to transfer the money to the
importing/consuming state government.

Theoretically, the clearing house can be the central government itself ie the states send in the
collected revenue to the central government which, in turn, sends the revenue stored with it to the
various importing states. The practical question is, first, who would finance the creation of this
clearing house and, second, how long would an importing state wait for its due revenue to arrive.
A list of designated banks could also act as a clearing house but, for this arrangement also, banks
would have to be compensated as a service provider. Whether it is the banking system or the
central government that acts as a clearing house, a computerized mechanism needs to be
developed for it. It has to be capable of distributing revenue collected in one exporter state to all
states where the goods have gone to be consumed (and it has to repeat this exercise for every
exporting state, and continuously over time). Such a comprehensive computer system is not yet
in place (see Varsano, 1999).
What is continuing now is a 2 per cent CST and the revenue is being retained by the exporting
states. These states want compensation from the Centre if they remove CST (which is necessary
to make the GST into a consumption-based tax). Reflecting its overall fiscal position, it would be
a mammoth task for the central government to feasibly compensate the states perennially for the
abolition of CST which is what is being effectively asked by the states. Recall that, when the
state level VAT was introduced, the compensation for revenue loss by the Centre for the states
was kept at only Rs. 5000 crore and that too for a finite period of three years based on a formula
for diminishing compensation. A new compensation formula needs to be threshed out for CST
abolition based on diminishing revenue compensation from the Centre to states. Thus Sarma and
Bhaskar’s (2012) recent suggestion that:

 The Centre should settle the CST compensation dispute with the states immediately.

 The Centre should provide a firm assurance up front to states that they will provide
compensation to states for possible losses in implementation of GST for a period of at
least five years as suggested by the Thirteenth Finance Commission.
is likely to turn out to be more challenging than at first glance.

The CST has been brought down from the original 4 per cent rate to 2 per cent in anticipation of
a consumption-based GST. But given the lack of computerization to monitor inter-state trade,
reports indicate that VAT evasion has grown by attributing more to inter-state trade which has
only a 2 per cent CST rate than declaring it as within-state sale (which faces a higher VAT rate).
Information based on a pilot project in a manufacturing state that is examining if a taxpayer
reports the same turnover in tax returns for different taxes - income tax, excise and customs,
service tax, VAT - reveals that reported turnover can be very different for different taxes by the
same taxpayer. Thus, measures to minimize tax evasion must be installed before GST is
introduced or CST is abolished.

There are other unresolved issues between the Centre and states. The state level VAT and the
Centre’s CENVAT have thresholds over which these taxes apply. These are Rs. 10 lakhs for
states and Rs. 1.5 crores for the Centre. The Centre prefers to bring down its threshold but the
states basically think of it as encroachment into their small taxpayers that they prefer to keep as
exclusively theirs. Ideally, they should not impose any restriction in the Centre’s decision
regarding its own threshold just as they should be able to maintain their own threshold without
the Centre’s interference and based solely on their administrative capacities.

GST COUNCIL

Finally, the mechanism of decision making in the GST Council has to be carefully calibrated.
The original proposal was flawed; it was based on a simple majority of states present at meetings
that could amend rules. That would allow a handful of states to be able to change fundamental
operations at the Centre’s behest. Now, as is being interpreted, the new proposal requires a
consensus that could result in too strict a requirement for changing rules. It could imply that the
Centre could never make changes to its liking. Instead, states that are not present should also be
allowed to vote within a specified time period. If say, the Centre reserves ? of the voting power
and the states ?, and any change also requires ?, majority, then changes can occur only if all
states are opposed to the Centre, or the Centre carries half the states with itself. This kind of
voting requirement could be complemented with other combinations for different types of
changes. Given the enormity of the implications for Centre-state economic - and political
economy - relations of GST reform, the voting aspect of the GST Council over and above its
administrative structure, requires fine-toothed comb consideration and analysis before a final
decision is made.

The GST Bill proposes a dispute resolution authority to ameliorate any act ion by a state or the
Centre that adversely affects the harmonized GST structure. The states have, however, expressed
their opposition to the formation of a supra body that would have the power to dictate to states
on matters of dispute resolution. The EC prefers the GST Council to devise an appropriate
mechanism to resolve disputes rather than another body, according to its Chairman, with
‘legislative supremacy’. It has asked for the Bill to be amended accordingly and feels that, if a
dispute cannot be resolved at the GST Council, then the matter should pass to the level of the
judiciary. These matters - of the GST Council and of dispute resolution - remain to be resolved to
the satisfaction of both the Centre and the states.
FUNCTIONS OF THE GST COUNCIL

GST Council is basically entrusted with task to make recommendations on the different aspects
of GST to the Union as well as states. GST Council under the Constitution is required to make
recommendations on the following:

(a) the taxes, cesses and surcharges which may be subsumed in the goods and
services tax;
(b) the goods and services that may be subjected to, or exempted from the goods and
services tax;
(c) model GST Laws, principles of levy, apportionment of IGST and the principles
that govern the place of supply;
(d) the threshold limit of turnover below which goods and services may be exempted
from goods and services tax;
(e) GST rates including floor rates;
(f) any special rates for a specified period, to raise additional resources during any
natural calamity or disaster;
(g) special provision with respect to the States of Arunachal Pradesh, Assam, Jammu
and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura,
Himachal Pradesh and Uttarakhand; and
(h) any other matter relating to the GST, as the Council may decide.

The GST Council shall also recommend the date on which GST will be levied on petroleum
crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation
turbine fuel.

CONCLUSIONS
India has travelled a distance in its indirect tax reform. Final reform poses a challenge, in
particular because both the Centre and states play significant roles in this area of taxation and the
reform encompasses both levels of government in a joint effort. Other fiscal federal countries
have not fared as well as India. Argentina has a central VAT and its provinces have
uncoordinated provincial tax structures, many of which cascade. Brazil’s states have often made
unilateral changes in their respective VAT structures even though they meet regularly under
CONFAZ, a council similar to India’s EC (VAT). Even though CONFAZ is convened by their
Central Government’s deputy finance minister, it has little sway over the fiscal or policy
behavior of states, possibly reflecting the narrow VAT at the Centre that applies only to a short
list of industrial products.

Canada has a complex GST buttressed by an advanced ICT infrastructure. The Central
Government has its own, harmonized, GST. It administers not only its own GST but also the
provincial GST’s of smaller provinces such as New Brunswick, Nova Scotia, and New
Foundland. Ontario administers its own GST, while the federal government administers the
harmonized GST there. The province of Quebec, on the other hand, administers both the
harmonized and the provincial GST. Some mineral rich provinces such as Alberta, Saskatchewan
and Winnipeg apparently have not introduced a provincial GST. Overall, Canada’s is no doubt a
complex GST structure.

Thus, examining global experience among fiscal federal countries, India has accomplished more
in terms of VAT uniformity and in ameliorating possible deleterious distortions for economic
decision making. Nevertheless, despite its complex federal-province arrangements, the Canadian
GST may have some salient characteristics that may be useful for India reflecting several
conditions that Indian states have placed on the table before the Indian GST can become viable.
First, states want flexibility in their GST rate structure. They are eschewing the single rate
concept and prefer two - standard and lower - rates, with a floor and a narrow band on top.
Second, they want flexibility on rates during emergencies such as floods or droughts when they
should be allowed to put rates of ordinary times in abeyance. These preoccupations are
comparable to those prevalent in the Canadian Model and should not be impossible to alleviate,
even though they would imply higher taxpayer compliance costs and would require deeper levels
of ICT support than currently envisaged.
In conclusion, India needs to re-formulate its GST Bill with patience and perspicacity (Cnossen,
2012). The objective should be to achieve a low rate structure and ample base with few, if any,
rational exemptions, effective and transparent administrative organization and rules, supported
by a fully installed, world class computer system at the central, state, and inter-state levels, while
being cognizant of modern taxpayer (or customer) concerns. The last, increasingly crucial aspect
of customer facilitation across tax administrations globally, is a matter also worthy of especial
attention as India prepares to roll out the GST.