Goods and Services Tax (“GST”), is the biggest indirect tax reform since independence, which is aimed at dismantling Inter-State barriers to trade in goods and services by subsuming a slew of around 17 indirect taxes viz. Excise Duty, Service Tax, VAT, CST, Luxury tax, Entertainment Tax, Entry Tax, Octroi, etc.

The Constitution (122ndAmendment) Bill, 2014 on GST (“122nd CAB” or “GST Bill”) after getting introduced in Lok Sabha on December 19, 2014, was approved by the Lok Sabha in May last year (May 6, 2015) and referred to a Select Committee of Rajya Sabha which had submitted its Report on 122nd CAB on July 22, 2015. The GST Bill was introduced in Rajya Sabha in May last year where it has been pending because of consensus to be emerged between ruling and opposition party over certain provisions viz. Dropping of 1% additional tax on Inter-State sale of goods, Capping of GST rate in 122nd CAB, Forming of dispute resolution authority.

After being subject to months of haggling and histrionics, the long-delayed GST Bill has finally got the nod of the Rajya Sabha yesterday, with the Government successfully stitching together a political consensus on the GST Bill, to pave the way for much-awaited roll out of the landmark tax reform that will create a national common market. The Rajya Sabha has unanimously passed the ambitious GST Bill as amended with over 2/3 majority. The motion for the constitutional amendment for the GST Bill has been passed with 197 Ayes. AIADMK was the only party that expressed dissent with the Bill and called it unconstitutional. The MPs of the party staged a walkout during the voting process. Nonetheless, it was crucial for the critical amendment to come in as early as possible with only ten days left for the monsoon session to end.

“GST will be the best example of cooperative federalism. Together we will take India to new heights of progress”

Tweet by our Hon’ble Prime Minister, Shri. Narendra Modi

Key amendments in the GST Bill

The key to forging consensus was the amendments the National Democratic Alliance (NDA) effected in the GST Bill, a copy of which was circulated among RajyaSabha members on August 2, 2016, to enable implementation of GST. These proposed amendments importantly includes dropping of 1% additional tax on Inter-State Sale of goods and a definite provision in the statute for 100% compensating the States for any revenue loss for 5 years, amongst others.

We are summarising herewith key amendments to the GST Bill, which was circulated to Rajya Sabha members on August 2, 2016, for easy digest:

Dropping 1% Additional tax on Inter-State supply of goods:

It is proposed to delete the provision under Clause 18 of the GST Bill.

Clause 18 of the GST Bill: The 122nd CAB proposes for levy of an Additional tax, not exceeding 1%, on Inter-State supply of goods in the course of Inter-State trade or commerce. It is proposed that such Additional tax would be levied and collected by the Union for a period of 2 years or such other period as the GST council may recommend, and be assigned to the State from where the supply originates.

Full Compensation to States upto 5 years:

Clause 19 of the GST Bill: The Parliament may, by law, provide for compensation to States for any loss of revenues arising on account of GST, for a period which may extend to five years, based on the recommendations of the GST Council. This implies that Parliament may decide to provide compensation to States and may also decide the time period for which it can provide such compensation, which may extend to five years.

Proposed amendment: The Parliament shall, by law, provide for compensation to States for any loss of revenues arising on account of GST, for a period which may extend to five years, based on the recommendations of the GST Council.  This implies that the Parliament must provide compensation and compensation shall be provided for a maximum time period of five years.

Dispute Resolution Authority:

Clause 12 of the GST Bill: The GST Council may decide upon the modalities to resolve disputes arising out of its recommendations.

2016 proposed amendment: The GST Council shall establish a mechanism to adjudicate any dispute between:

(a) the Government of India and one or more States; or

(b) the Government of India and any State or States on one side and one or more States on the other side; or

(c) two or more States

arising out of its recommendations.

Other changes:

Integrated Goods and Services Tax (“IGST”)

Clause 9: Apportionment of IGST i.e. Article 269A:  It has been clarified that the States’ share of the IGST shall not form a part of the Consolidated fund of India.

Clause 12: IGST term to be replaced with GST on supplies in the course of inter-state trade or commerce: Under Clause 12 of the GST Bill, it was mentioned that the GST Council would make recommendations on the apportionment of the IGST. Since, the term IGST was not defined, it has been proposed to replace this term with “Goods and Services Tax levied on supplies in the course of inter-state trade or commerce under article 269A”.

Inclusion of CGST and IGST in tax devolution to States

It has been proposed that under Clause 10 of the GST Bill, CGST and the Centre’s share of IGST will be distributed between the Centre and States.

Clause 10 of the GST Bill: The GST collected and levied by the Centre, other than States’ share of IGST, (CGST and Centre’s share of IGST) shall also be distributed between the Centre and States.

Impact of GST on prices of goods and services – An important concern for consumers

First and foremost, the important factor in the process of implementation of GST would be the determination of Revenue Neutral Rate (RNR). RNR has to be at a rate which could balance the collection currently generated by the Centre and the State Government(s) from their respective levies.

The Central Government in the month of June, 2015 announced the setting up of two committees to suggest GST rates and to look into IT preparedness for GST. The Government had entrusted Chief Economic Adviser(“CEA”), Dr. Arvind Subramanian—head of one of the two panels—with the task of proposing a RNR, or a rate at which there will be no revenue loss to States under the GST regime. Because the prerogative of deciding the precise numbers will be that of the GST Council to be formulated after enactment of GST Bill, the committee has chosen to recommend a range for the RNR rather than a specific rate.

The committee in its Report submitted in the month of December, 2015, recommended a four-tier rate structure wherein some essential items will be taxed at 12%, gold and precious metals at 2-6%, some so-called sin or demerit goods like luxury cars and tobacco products at 40% and most goods and all services at 17-18%.These rates were derived from a RNR of 15%-15.5%.

Comparison of rates under various Indirect tax levies, at present, along with expected rates under GST, can be summed up as under in respect of goods and services:

On goods - Currently, the Union Excise Duty rate is 12.5% on manufacturing of goods, while VAT is approx. 14.5% on sale of goods in most of the States. This combines to around 26-27%. Then, there are other taxes like Entry Tax, Octroi, etc., eventually leading to an effective indirect tax rate of 26% to 30% in the hands of the end customer.

Considering the standard rate of GST as stated 17% -19% in the light of the RNR Report submitted by the CEA led panel, it is likely that GST might see significant reduction in the prices of most of the goods with corresponding reduction in production cost with standard tax rate at 18% against 26-30% at present.

But, at the same time, prices may go up for certain other goods like textiles, edible oil etc., where either nil rate or lower rate of excise duty is applicable and VAT is also approximately charged at 5%. Thus, the consumers might feel the brunt of GST at 18% as against low indirect taxes presently.

On services - Currently, w.e.f. 01-06-2016, rate of Service tax is 14% plus Swachh Bharat Cess at 0.5% and Krishi Kalyan Cess at 0.5%, totaling to 15%.

Apparently, with GST standard rate at 18%, services in GST regime will become costly. But, at the same time, the long list of non-vatable taxes and cesses would comparatively come down in GST with all the major indirect taxes getting subsumed in GST and input tax credit allowed at each stage of value addition. This may serve as a balancing act, but, only to certain extent.

Indeed a good day for the Economy, still a long way to go: A glance at the way forward to GST by April 2017

Unanimous passage of the GST Bill is indeed a good day for the economy, but, at the same time, it marks just the beginning of a still-to-go-journey.

Since there are key amendments in the original draft of the GST Bill that was passed in the Lok Sabha last year, the GST Bill has to, once again, go back to the LokSabha. Thereafter, the GSTBill will also have to be ratified by at least 50% of the States before being presented to the Hon’ble President of India for his assent. Subsequently, a GST Council will be set up within 60 days of the enactment of the GST Bill, comprising the Union Finance Minister, MOS – Revenue/Finance and State Finance Ministers, which will make important recommendations on GST rates, Exempted goods and services, dual control& adjudication, etc.

Thereafter, two legislations—Central GST (CGST) and Integrated GST (IGST) will have to be passed by Parliament and a State GST (SGST) legislation by each of the State Legislatures.

Passage of the 122nd CAB in the Parliament is being seen as a big victory for the Narendra Modi government. The next big challenge for the Narendra Modi government is to get the States on board and get rest of the process going as quickly as possible to meet the deadline of implementation of GST by April 2017.These steps would require a lot of time, patience and constant deliberations both at the State and Central Government level along with substantial engagement with the industry bodies, traders, service providers and almost every local trade bodies and associations.

“Passing of GST bill: This is only end of a beginning. The real hard work starts now,”

Tweet by Shri. Hasmukh Adhia, Revenue Secretary

Hope the information will assist you in your Professional endeavours. In case of any query/ information, please do not hesitate to write back to us.

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the authors nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this document nor for any actions taken in reliance thereon.

Readers are advised to consult the professional for understanding of this newsletter in the respective scenarios. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. No part of this document should be distributed or copied (except for personal, non-commercial use) without our written permission applicability.

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Bimal Jain
Category GST   Report

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