- Prelims: Indian Economy(Fiscal Policy, GST)
- Mains GS Paper III: Fiscal policy, GST Council, Cooperative Federalism etc
- July 1 marks the completion of five years since the Goods and Services Tax (GST) was introduced in our country.
- It was first discussed in the report of the Kelkar Task Force on indirect taxes in 2003 and was long in the making.
- Since its introduction, GST has naturally faced teething problems. But, it has emerged strongly after facing turbulence from the Covid-19 global pandemic and its fallout.
- It is to the credit of the GST Council that the Centre and the states held each other’s hand to not just face the crisis but to lift our economy onto the path of recovery.
- It is this working together that has made India stand out now as the fastest growing economy, as projected by many, this year and the next.
- The GST Council has played a crucial role in forging a national consensus on key issues related to the tax regime — rates, exemptions, business processes and movement of ITC
INSIGHTS ON THE ISSUE
Goods and Services Tax(GST)
- GST was introduced through the 101st Constitution Amendment Act, 2016.
- It is the biggest indirect tax reform in the country.
- It was introduced on the pretext of ‘One Nation One Tax’.
- It has subsumed indirect taxes like excise duty, Value Added Tax (VAT), service tax, luxury tax
- It is levied at the final consumption point and is essentially a consumption tax.
- It has led to a common national market as it helped mitigate the double taxation, cascading effect of taxes, multiplicity of taxes, classification issues etc.
- The GST paid by a merchant to procure goods or services (i.e. on inputs) can be set off later against the tax applicable on supply of final goods and services.
- The GST avoids the cascading effect or tax on tax which increases the tax burden on the end consumer.
Tax Structure under GST:
- Central GST to cover Excise duty, Service tax etc
- State GST to cover VAT, luxury tax
- Integrated GST (IGST) to cover inter-state trade. It is not a tax per se but a system to coordinate state and union taxes.
- It has a 4-tier tax structure for all goods and services under the slabs- 5%, 12%, 18% and 28%.
Achievements of GST:
- Wider tax base: Over 63.9 lakh taxpayers migrated into the GST in July 2017. This number has more than doubled to over 1.38 crore taxpayers as of June 2022.
- Generation of e-way bill: Over 53 lakh taxpayers and 67,000 transporters are enrolled on the e-way portal, generating, on average, 7.81 crore e-way bills per month. Since the launch of the system, a total of 292 crore e-way bills have been generated of which 42 per cent are for the inter-state transport of goods.
- Increase in average collection: The average monthly collections have increased from Rs 1.04 lakh crore in 2020-21 to Rs 1.24 lakh crore in 2021-22. In the first two months of this year, the average collections are Rs 1.55 lakh crore.
- Removal of tax arbitration: GST has eliminated the tax arbitrage that existed among the states under the CST/VAT regime.
- Increase in logistic supply chain: With no such arbitrage under the IGST and with the e-way bills, the logistics supply chain efficiencies have increased manifold.
- Decrease in tax rate: In the pre-GST regime, on most items, the combined Centre and states rates were more than 31 per cent.
- However, under the GST, the rates of over 400 goods and 80 services have been reduced.
- The highest 28 per cent rate is restricted to sin and luxury items.
- Out of a total of 230 items which were in the 28 per cent slab, close to 200 have been shifted to the lower slabs.
- Special attention to MSMEs: Special attention has been paid to the needs of the micro, small and medium enterprises (MSMEs), their tax and compliance burden be kept low.
- Equally, it was important to ensure that they remain integrated with the supply chains for the purpose of IT by:
- The enhancement of the threshold exemption limit from Rs 20 lakh to Rs 40 lakh for goods.
- Introduction of the quarterly returns and monthly payments (QRMP) scheme which has the potential to benefit 89 per cent of the taxpayers.
- Introduction of GSTN: The creation of GSTN, a professionally managed technology company to run the platform was a step in the right direction. Constant review and upgrading of hardware and software capacities have helped in keeping the system nimble.
- Automated IGST: The system of automated IGST refunds by customs and refund of accumulated input tax credit (ITC) to exporters by the GST authorities has made the neutralization of input taxes on export goods and services seamless and hassle-free.
- Equally, it was important to ensure that they remain integrated with the supply chains for the purpose of IT by:
Issues with GST:
Imposing a high GST:
- ‘Sin’ taxes, for instance, are at cross purposes with the government’s policy of generating growth and creating jobs under Make in India’.
- The hotel generates indirect employment in ancillary areas: it buys bed linen, furnishings, rugs and carpets, air conditioners, cutlery, electrical fittings and furniture, and consumes enormous quantities of food produce. All these generate jobs and income for farmers, construction contractors,artisans and other manufacturers.
- Five star hotels also generate foreign exchange by attracting rich tourists and visitors. So, it’s unwise to tax these hotels to death.
- Creation of ripple effect: High taxes on air conditioners, air conditioned restaurants, chocolates and luxury cars create an economic ripple effect downstream, in a complex web of businesses that have symbiotic relationships. The effect finally reaches down to the bottom of the employment pyramid.
- Different laws for the same product: GST on bread is zero, but the vegetable sandwich is in the 5% tax slab, hitting the vegetable grower directly.
- Tax on employment generating sectors: Taxes on wine, rum and beer, which generate large-scale employment and are the backbone of grape and sugarcane farming and the cocoa industry.
- Hurdles to automobile sector: In the automobile sector, the GST on electric cars, tractors, cycles, bikes, low end and luxury cars ranges anywhere from 5% to 50%. The Sale of automobiles is the barometer of an economy.
- Legal disputes: The confusion has given rise to several disputes. ID Fresh Food, for instance, which makes ready to eat foods like chapatis, rotis, parotas and sells various types of idli and dosa batter appealed against a GST ruling of the Authority for Advance Rulings.
- Exemption for certain items: There are items that are exempt from GST. Petrol, diesel, aviation turbine fuel are not under the purview of GST, but come under Central excise and State taxes.
- Central excise duties and varying State Taxes contribute over 50% of the retail price of petrol and diesel, probably the highest in the world barring banana republics.
- Distrust between centre and states: There is distrust between the States and the Centre on revenue sharing. There is also anger at the Centre for riding roughshod over the States’ autonomy and disregarding the federal structure of the Constitution.
- Real growth decreased in recent years:
- Several states depend heavily on GST compensation:
- Classification Conundrum:
- It is a constitutional body under Article 279A for making recommendations to the Union and State Government on issues related to Goods and Services Tax(GST).
- It is chaired by the Union Finance Minister and other members are the Union State Minister of Revenue or Finance and Ministers in-charge of Finance or Taxation of all the States.
- It is considered as a federal body where both the centre and the states get due representation.
- It is the first constitutional federal body vested with powers to take all major decisions relating to GST
- Composition of GST Council:
- Chairperson: The Union Finance Minister
- The Union Minister of State in charge of Revenue or Finance
- Ministers in-charge of Finance or Taxation of all the States
- Vice-chairperson: The members of the Council from the states have to choose one amongst themselves to be the Vice-Chairperson of the Council.
- Chairperson of the Central Board of Excise and Customs (CBEC): to be included as a permanent invitee (non-voting) to all proceedings of the Council.
Issues with GST Council:
- Political influence in the decision of GST Council:
Ideally, political affiliations should not matter in a Council set up to decide indirect taxes. Even the need for a meeting to determine tax revenues for States is evidently a political decision.
- Lack of trust:
The GST Council is a compact of trust between the States and the Centre, set in the larger context of India’s polity.
The tragedy of the GST Council is that it is afflicted with spite and forced to function under the prevailing cloud of politics
- Uncertainty after the guarantee of 14% growth ends:
- The States paid a huge price for GST in terms of loss of fiscal autonomy.
- GST has endured so far primarily because the States were guaranteed a 14% growth in their tax revenues every year.
- This will minimize the risks of this new experiment for the States and compensate for their loss of fiscal sovereignty.
- This revenue guarantee ends in July 2022.
- This can lead to a crumbling of the precarious edifice on which GST stands today.
- Federalism in essence is a dual government system including the Centre and a number of States. Federalism is one of the pillars of the Basic Structure of the Constitution.
- R. Bommai vs Union of India case, the States are not mere appendages of the Union and the latter should ensure that the powers of the States are not trampled with.
Supreme Court on Federalism:
- Federalism in India is “a dialogue in which the states and the Centre constantly engage in conversations”.
- It is not imperative that one of the federal units (Centre or states) must always possess a higher share of power over the other units.
- It said that recommendations of the GST Council “are the product of a collaborative dialogue involving the Union and States”.
- It pointed out that Article 246A of the Constitution stipulates that both Parliament and state legislatures have “simultaneous” power to legislate on GST.
- It is a horizontal relationship between centre and state, where they “cooperate” in the larger public interest.
- It enables states’ participation in the formulation and implementation of national policies.
- Both centre and State are constitutionally obliged to cooperate with each other on the matters specified in Schedule VII of the constitution.
- The relationship between the Central and state governments is vertical and between state governments is horizontal.
- The endowments of states in the free-market economy, available resource base and their comparative advantages all foster a spirit of competition.
- In Competitive federalism States compete among themselves and also with the Centre for benefits.
- It is not part of the basic structure of the Indian constitution. It is the decision of the executives.
- States compete with each other to attract funds and investment, which facilitates efficiency in administration and enhances developmental activities.
|● Article 246A: Parliament and the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.
● Article 279A:The President shall, within sixty days from the date of commencement of the Constitution (One Hundred and First Amendment) Act, 2016, by order, constitute a Council to be called the Goods and Services Tax Council.
● Cascading effect of tax: when there is a tax levied on a product at every step of sale. The tax is levied on a value that includes tax paid by previous buyers thus making end consumer pay tax on already paid tax.
- GST is a positive step towards shifting the Indian economy from the informal to formal economy. It is important to utilize experiences from global economies that have implemented GST before us,to overcome the impending challenges.
- The gradual widening of the fiscal capacity of the states has to be legally guaranteed without reducing the Centre’s share.
- The recommendations of the GST Council “should be a product of a collaborative dialogue involving the Union and States”.
- As the court has gone ahead to categorically hold that the GST Council recommendations have only persuasive value, there will be a pragmatic approach to the provisions which are subject to judicial review by way of challenge to the constitutionality of such provisions based on GST Council recommendations.
- The Council should focus on administrative changes, which can be introduced in the areas of assessment under GST, advance ruling mechanism, constitution of tribunals, etc. which shall ensure timely disposal of issues and will also provide certainty to the industry.
QUESTION FOR PRACTICE
The GST Council has played a crucial role in forging a national consensus on key issues related to the tax regime. Critically analyze.
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