“We contend that for a nation trying to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”
So said Winston Churchill, on the question as to whether more and more taxes should be levied to bring in more revenue to the Government for spending on welfare projects. In India, Churchill’s views would find more sympathisers with the taxman in perpetual pursuit for more tax revenue under the pretence that the ‘welfare state’ needs it. The experience of the past has been disastrous, as taxes have often soared to confiscatory levels and cesses and surcharges get added with regular frequency. Business and industry has been reduced to a mere cash cow to finance social policies which make no economic sense. The situation in indirect taxes is worsening as the time goes by, with more than one Government trying tax everything under the sun – simultaneously.
In this backdrop, three Governments have tried to replace the overflowing basket of indirect taxes with a single Goods and Services Tax. The Constitution Amendment Bill required for changing the current scenario is now pending in the Upper House of Parliament. The 122nd Constitution Amendment Bill was passed by the Lok Sabha in December, 2014. The current Government wants the GST Constitution Amendment Bill to be passed before the Budget Session and the new regime to kick in from 1st April, 2016.
The Goods and Services Tax has worked spectacularly in other countries which have adopted that model of taxation. The Indian model also sounds good in theory. But whether or not it works as well in India is a matter of how it is implemented and whether the Government is willing to keep the tax rate reasonable. With this caveat, let us proceed to examine the proposed Constitutional framework for the levy of GST.
The Present Scenario
As of now, the taxation of goods and services is divided between the States and the Union. At present, the State Governments have authority to tax the sale or purchase of goods which take place within the State. The Union Government has the authority to tax manufacture of goods and inter-State sale or purchase of goods as well as authority to levy sales tax on all sales within the Union Territories. The Union Government can also levy Customs duties on import or export of goods. The Union Government also levies a tax on services under the residuary power of legislation.
What is a Goods and Services Tax
The Goods and Services Tax is in essence a Value Added Tax. The classic definition and the simplest description of the design of VAT is contained in Para 1.2 of the OECD International VAT/GST Guidelines (November 2015):
“The overarching features of a VAT are to impose a broad-based tax on consumption, which is understood to mean final consumption by households. In principle only private individuals, as distinguished from businesses, engage in the consumption at which a VAT is targeted. In practice, however, many VAT systems impose VAT burden not only on consumption by private individuals, but also on various entities that are involved in non-business activities.”
The Indian GST is also envisaged as a destination-based consumption tax based on the VAT-model of the European Union and the GST models in Australia and New Zealand. The proposal for both the States and the Central Government to tax supplies simultaneously is inspired from the Canadian model. Under the Indian GST model also, both the Central Government and the State Governments will tax supply of goods as well as services within the State. The former will be called the Central GST (CGST) and the latter will be called the State GST (SGST). Inter-State supply of goods and services will be taxed exclusively by the Union and will be called “Integrated GST” (IGST). Taxation of Import and Export of goods and services has been deliberately kept outside the field of State taxation.
The Goods and Services Tax is expected to reduce the cascading effect of multiple taxes which tax each and every aspect of the economic activity without providing for any harmonised set-off mechanism. It is expected to reduce considerably the tussle between the Union and State Governments for maximising their own revenue and the overlapping demands on the same economic activity by both the Union and the State Governments.
The Goods and Services Tax seeks to resolve this conflict of jurisdictions by giving both the Central and State Governments uniform access to tax all supplies of goods and services and provide for set-off machinery to target only the value addition as much as possible. Apart from this, the widening tax base is expected to lead to lesser obstacles in the credit chain which will ultimately reduce the cascading effect of taxes.
Before commencing a deeper study of the Bill, it is necessary to look at some of the definitions which will be relevant to for the purposes of the levy of GST:
“Goods and Services Tax” is sought to be defined by way of a new Article 366(12A) as “any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption”.
“Goods” has already been defined in Article 366(12) as “including all materials, commodities and articles”. We hope that there would be no need to refer to the definition of “goods” in the Sale of Goods Act, 1930 while interpreting the GST legislation since the GST laws are not concerned merely with sale of goods.
“Services” is sought to be defined in Article 366(26A) to mean “anything other than goods”.
Supply
Now, the cornerstone of the levy of Goods and Services Tax is a “supply of goods and services”. Unfortunately, the Constitution Amendment Bill does not define a “supply”. It has been left to Parliament and the State Governments to define “supply” in any which way they choose. This is somewhat similar to the position in the European Union wherein the term “supply” has not been defined in the EU Sixth VAT Directive and has been left to the member-nations to define for themselves.
However, the EU Sixth VAT Directive uses the term “supply for consideration”1 and the EU Sixth VAT Directive itself lays down specific exceptions for treating a transaction without consideration as a “deemed supply”. It is not open to the member-nations of the European Union to make a law in conflict with the provisions of the EU Sixth VAT Directive. In essence the EU Sixth VAT Directive is in nature of a Constitutional document.
Our Constitution Amendment Bill not only avoids defining a “supply”, but also chooses not to use the term “supply for consideration” which is used in the EU Sixth VAT Directive. The authors submit that the term “supply for consideration” would have put Constitutional brakes on the attempts of Parliament or State Legislatures to define “supply” in wider sense and keep on expanding the list of deemed supplies” (supplies which are taxable even if there is no consideration) and thus bring everything from sunshine to moonlight to tax. After all, we do have a history and an addictive tendency to introduce deeming fictions and explanations wherever possible and that too with retrospective effect. It is more probable than not that the number of “deemed supplies” in India will go on increasing with each passing year as the Union and State Governments scramble for more and more revenue. Since each State and Parliament is independent to define the definition of “supply” in its own law, the consequences of the same would lead to a lot of problems in future.
Will Parliament’s GST Law override State’s GST law?
Before we discuss the actual Constitutional provisions relating to GST, it is important to consider what will happen if Parliament’s GST law conflicts with a State GST law. What happens if a State GST law is repugnant to a Central GST law? Would the State GST law be void to the extent it conflicts with the Central GST law? Can the State legislature make changes in its own GST law which are not contemplated in the Central GST law at all?
The answer to all these questions is ‘yes’. There is nothing in the Constitution Amendment Bill which expressly makes State GST law subject to Central GST law. The principle that a State law is subject to Central law is only applicable to subjects which are part of Concurrent list (see Article 254). If a law is properly made under an entry under the State List and it conflicts with a law properly made under an entry in the Union List, the two laws will operate independently and the State law is not void due to repugnancy with Union law. But if the State law as well as the Union law is made under an entry in the Concurrent List, the repugnancy will cause the State law to be void to the extent of the repugnancy.
However, the GST Constitution Amendment Bill does not place the subject of GST under the concurrent list. Indeed, the GST is not sought to be placed in any of the three legislative lists.
The power to levy GST is to be embodied through a completely separate provision, that is Article 246A. Hence, the principles of Article 254 with respect to inconsistency between Union and State laws qua Concurrent list subjects would be rendered completely irrelevant. Indeed, the opening words of the new Article 246A make this very clear by specifically saying “Notwithstanding anything contained in Articles 246 and 254..”2.
Structure of the GST regime
The GST is to be levied by both the Central Government and the State Governments. According to Article 246A(1), Parliament as well as the State Legislature can make laws with respect to goods and services tax. Article 246A(1) is the enabling provision for levying the GST, but it does not itself speak of exactly which legislature will tax which transaction. That task is fulfilled by Articles 269A and 286.
According to Article 269A, only the Government of India can levy a tax on the inter-State trade and commerce and a tax on supplies of goods or services in the course of import of goods and services into India.
On the other hand, Article 286 expressly bans the State Legislatures from imposing a tax on:
(1) Supply outside the State
(2) Supply in the course of import
(3) Supply in the course of export
Thus, the State legislature can only tax a supply within the State. It cannot tax an inter-State supply or a supply in the course of import or export.
Articles 269A(2) and 286(2) give Parliament the exclusive authority to decide, by law:
(1) When a supply is in the course of inter-State trade or commerce
(2) When a supply is in the course of import
(3) When a supply is in the course of export
(4) When a supply is outside the State
These provisions are similar to the provisions governing sales tax law. Before the Constitution was enacted, there was no similar provision in the Government of India Act, 1935 and the Provincial Governments used to invoke the “nexus theory” to tax any transaction of sale even though the sale was completely outside the State on basis of various nexuses like place of storage, place of delivery, place of entering into contract, place of invoicing etc. The Constitution-makers realised that the trade and industry were getting badly affected due to multiple taxation of one transaction and hence the power of State legislatures to levy sales tax was restricted on the principle that only one State can tax a sale. The same principles are now being, fortunately, extended to GST. In absence of these restrictions, the nexus theory would have resurrected to the peril of trade and industry.
Therefore, by way of summarisation, the following can be said to be the division of taxing power between the Union and the States:
(1) Both Parliament and State Legislature can tax a supply within a State
(2) Only Parliament can tax an inter-State supply of goods and services
(3) Only Parliament can tax a supply in the course of import
Which taxes will be subsumed completely in the Goods and Services Tax?
The 122nd Constitution Amendment Bill seeks to subsume most of the levies of indirect taxes. This is sought to be done by deleting or modifying the taxation entries in the three legislative lists. The following entries are sought to be deleted:
Union List
(1) Entry 92: Taxes on sale or purchase of newspapers and on advertisements published therein
(2) Entry 92C : Taxes on services (though the Constitution Amendment inserting this entry was never notified. Service tax continues to be levied under the residuary power of legislation vested in Parliament)
State List
(3) Entry 52: Taxes on the entry of goods into a local area for consumption, use or sale therein
(4) Entry 55: Taxes on advertisements other than advertisements published in the newspapers and advertisements broadcast by radio or television.
Which taxes will be subsumed partially?
Some taxes have been subsumed partially, that is the scope of the entries has been narrowed down. The following taxes will be levied in a modified form:
Union List:
(1) Entry 84: The power to levy excise duties on manufacture of goods has been drastically narrowed down to levy a duty of excise on manufacture of only 6 types of goods:
i. Petroleum crude
ii. High speed diesel
iii. Motor spirit (commonly known as petrol)
iv. Natural gas
v. Avitation turbine fuel
vi. Tobacco and tobacco products
No Central Excise Duty under Entry 84 can be levied on any other product.
State List
(2) Entry 54: Entry 54 deals with the power to levy tax on sale or purchase of goods except newspapers. The scope of Entry 54 is also sought to be reduced and it will only cover these goods:
i. Petroleum crude
ii. High speed diesel
iii. Motor Spirit (commonly known as petrol)
iv. Natural gas
v. Aviation turbine fuel
vi. Alcoholic liquor for human consumption.
However, Entry 54 will not cover sales in the course of inter-State trade or commerce or a sale in the course of international trade or commerce
It is pertinent to note that reference to “tax on purchase” has been deleted completely. It is submitted that the Entry 48 of the Government of India Act, 1948 also did not expressly refer to “tax on purchase”, but only spoke of “tax on sale of goods”. However, the Supreme Court interpreted the term “tax on sale of goods” in a wide manner and held that it includes a tax on purchase of goods in V. M Syed Mohammed and Co. [1954 AIR 314 SC]. Whether the same principle is extendable in the present case where the term “tax on purchase” is deliberately omitted is a matter of fresh controversy.
(3) Entry 62: Hitherto, the State Government had the authority to levy taxes on luxuries, including taxes on entertainments, amusements, betting and gambling. In so far as the authority to levy tax on betting and gambling is concerned, the same has been completely deleted from the Entry 62 and the taxes on betting and gambling will be subsumed in the GST. Taxes on entertainments and amusements will continue to be authorised by the Entry 62, but only to the extent levied and collected by a Panchayat or a Municipality or a Regional Council or a District Council.
Which taxes will be retained in unmodified form: The following taxes will be retained in unmodified form:
Union List:
(1) Entry 82: Taxes on income other than agricultural income
(2) Entry 83: Duties of Customs including export duties
(3) Entry 85: Corporation Tax
(4) Entry 86: Taxes on the capital value of the assets, exclusive of agricultural land, of individuals and companies; taxes on the capital of companies
(5) Entry 87: Estate Duty in respect of property other than agricultural land
(6) Entry 88: Duties in respect of succession to property other than agricultural land
(7) Entry 89: Terminal taxes on goods or passengers, carried by railway, sea or air, taxes on railway fares and freights
(8) Entry 90: Taxes on stamp duties on transactions in stock exchanges and future markets
(9) Entry 92A: Taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce
(10) Entry 92B: Taxes on the consignment of goods (whether the consignment is to the person making it or to any other person), where such consignment takes place in the course of inter-State trade or commerce.
State List:
(11) Entry 46: Taxes on agricultural income
(12) Entry 47: Duties in respect of succession to agricultural land
(13) Entry 48: Estate Duty in respect of agricultural land
(14) Entry 49: Taxes on lands and buildings
(15) Entry 50: Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development
(16) Entry 51: Duties of excise on alcoholic on the following goods manufactured or produced in the State and countervailing duties at the same or lower rates on similar goods manufactured or produced elsewhere in India:
a. Alcoholic liquors for human consumption
b. Opium, Indian hemp and other narcotic drugs and narcotics,
but not including medicinal and toilet preparations containing alcohol or any substance included in sub-paragrabh (b)
(17) Entry 53: Taxes on the consumption or sale of electricity
(18) Entry 56: Taxes on goods and passengers carried by road or on inland waterways
(19) Entry 57: Taxes on vehicles, whether mechanically propelled or not, suitable for use on roads, including tramcars subject to the provisions of entry 35 of List III.
(20) Entry 58: Taxes on animals and boats
(21) Entry 60: Taxes on professions, trades, callings, and employment
(22) Entry 61: Capitation taxes
What happens to the Central Sales Tax and Consignment tax provisions under the GST regime
As can be seen from the list of taxation entries which have not been deleted, the legislative entries relating to Central Sales Tax and Consignment Tax (Entries 92A and 92B of the Union List).
However, an amendment is being made to the Article 269 which provided that the Central sales tax and the consignment tax (when consignment is in inter-State trade or commerce) which has the effect of making sure that the inter-State supplies which are covered Article 269A (IGST) are out of the scope of CST and consignment tax. The exact effect of this amendment is unclear, particularly what tax can be levied under the Central Sales Tax Act as long as Article 269A covers the entire scope of inter-supplies (supply will include a sale or purchase in course of inter-state trade and commerce).
Article 366(29A) continues to be a part of the Constitution even post-GST
The 122nd Constitution Amendment Bill does not delete Article 366(29A). Article 366(29A) was introduced into the Constitution to overcome the decisions of the Courts which held certain types of transactions are not “sales” within the meaning of Sale of Goods Act, 1930 and hence beyond the taxing power of the States. Six categories of deemed sales were introduced –
(1) Transfer of right to use goods
(2) Works contract
(3) Sale by an association to its members
(4) Supply of food in a restaurant etc.
(5) Hire Purchase
(6) Transfer otherwise than in pursuance of a contract of sale but for consideration
Article 366(29A) may be relevant for whatever remains of the Central Sales Tax
As far as relevance of Article 366(29A) is concerned qua the State sales tax Acts, the readers will recall that the power to levy sales tax is now restricted to the following goods:
i. Petroleum crude
ii. High speed diesel
iii. Motor Spirit (commonly known as petrol)
iv. Natural gas
v. Aviation turbine fuel
vi. Alcoholic liquor for human consumption
The authors submit that it is not clear what purpose is going to be served by retention of the Article 366(29A). It is not conceivable that there should be a transfer of right to use petroleum crude or anything which can only be consumed and not “used”. Similarly, there is no possibility of works contract qua these 6 types of goods. Hire-purchase is also not possible on the same reasoning that there is no possibility of hiring a consumable product, it can only be consumed. However, the “transfer otherwise than by way of contract but for consideration” can be invoked in respect of all six categories of goods.
It may be that the Article 366(29A) would be useful for taxing a supply of these 6 goods by association to members or for taxing supply of alcoholic liquor in restaurant, but overall the entire exercise seems to be misguided and haphazard. Only time will tell what role the Article 366(29A) will play in a limited sales tax regime.
What is the Goods and Services Tax Council
The Goods and Services Tax Council is a special body which is being created by the 122nd Constitution Amendment Bill. It is to be tasked with the following functions:
(a) The GST Council will recommend when the date from which the goods and services tax will be levied on:
i. Petroleum crude
ii. High speed diesel
iii. Motor Spirit (commonly known as petrol)
iv. Natural gas
v. Aviation turbine fuel
The Explanation to Article 246A(2) says that Parliament and the State Legislatures will get authority to enact laws to impose the goods and services tax qua the above-mentioned 6 goods from the date of the recommendation. The GST laws will not be automatically extended on such recommendation, an amendment or a separate law has to be passed by the legislature concerned to bring these 6 goods to tax under GST.
Readers should, however, note that these 6 goods are the same goods which are being retained under the Sales tax regime (see Entry 54 State List as amended by 122nd Constitution Amendment Bill). Now, there is no provision in the 122nd Constitution Amendment Bill which says that the States will have to mandatorily stop levying sales tax and the Union will have to compulsorily stop levying Central Excise from the date that the GST Council recommends that GST should be levied on these 6 categories of goods or from the date on which Parliament and the State Legislatures bring these 6 goods to tax under their GST laws.
(b) The GST Council shall make recommenda-tions to the Union and States on:
a. The taxes, cesses and surcharges levied by the Union, the States and local bodies which may be subsumed in the goods and services tax;
b. The goods and services that may be subjected to, or exempted from goods and services tax
c. Model Goods and Services Tax Laws, principles of levy, apportionment of Integrated Goods and Services Tax 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. Rates including floor rates with bands of goods and services tax
f. Any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster
g. Special provisions with respect to the States of Arunachal Pradesh, Assam, Jammu & Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh, Uttarakhand
h. Any other matter relating to goods and services tax as the Council may decide
Needless to say, all these powers are in nature of advisory powers, they do not bind any legislature.
The composition of the GST Council and other details can be found in the proposed Article 279A.
Amendments relating to the GST Constitutional provisions
The GST Constitution Amendment Bill seeks to amend the Proviso to Article 368(2) in order to make provision for a future Constitutional amendment relating to Article 279 (i.e. provisions relating to Goods and Services Tax Council).
The Constitution can be amended only if both Houses of Parliament pass the amendment with 2/3rds majority of those present and voting in each house (50% of members have to attend such sessions) as per the Article 368(2). However, the Proviso to Article 368(2) restricts the powers of amendment in cases specified in that proviso and in such cases, at least half of the State Legislatures have to ratify the such amendment by passing resolutions in their assemblies.
The Article 279A providing for Goods and Services Tax Council has been placed under the Proviso to Article 368(2) by the GST Constitution Amendment Bill. The Article 246A (which empowers Parliament and the State Legislatures to levy GST) will automatically fall within the auspices of the Proviso to Article 368(2) since it is placed within Chapter I of Part XI.
However, the Article 286 which places restrictions on the power of State Legislatures to levy the tax (i.e. No law of State can impose a tax on supply outside the State, supply in the course of import or export or in the course of inter-State trade or commerce) does not come within the scope of the Proviso to Article 368(2). It is submitted that even the original Article 286 outside the scope of the Proviso to Article 368(2). Hence, whatever be the possibility of abuse of that Article, the same has not happened till now.
Additional 1% tax
As a political compromise with the manufacturing States which will lose out on revenue, the GST Constitution Amendment Bill seeks to empower Parliament to levy a 1% tax on supply of goods in the course of inter-State trade or commerce (which will be assigned to the manufacturing States). The levy is to be operational for 2 years or such other period as the GST Council determines. The Originating State is to levy this additional tax just like under the Central Sales Tax Act.
It is also pertinent to note that the levy of additional tax is on “supply of goods”. Hence, services are not covered. The word “sale” has not been used, hence the additional tax can be levied on all transactions which do not qualify as a “sale” under the Sale of Goods Act, 1930 as well as a “deemed sale” under Article 366(29A).
Miscellaneous
Article 246A opens with the words “Notwithstanding anything contained in Articles 246 and 254”. We have already discussed above the significance of giving a non-obstante reference to Article 254. The non-obstante reference to Article 246 is necessary due to the fact that the Article 246 speaks of the three legislative lists. Since the GST is not placed in any of the three legislative lists, it is necessary that Article 246 be overridden to avoid confusion.
Similarly, since the authority to levy GST comes from Article 246A and is not part of the legislative lists, the provisions of the Constitution which say that any matter which does not form part of the three lists will come within Parliament’s residuary power of legislation have to be amended to avoid conflict with the Article 246A (since GST is also a matter not enumerated in the three lists and cannot be allowed to pass into the exclusive residuary lawmaking powers of Parliament. Hence, Article 248 will suffer amendment).
There are some provisions in the Constitution which allow Parliament to legislate in case of national interest and emergency. These powers are enshrined in Articles 249 and 250. The same are proposed to be amended to bring Article 246A within the purview of these extraordinary lawmaking powers.
Certain duties like stamp duties and duties of excise on medicinal and toilet preparations are levied by the Government of India but collected and appropriated by the States under Article 268. Since the Union Government will not have the exclusive authority to levy an excise duty on medicinal and toilet preparations under the Entry 84 as proposed to be amended, the reference to “medicinal and toilet preparations” in Article 268 is sought to be deleted.
Article 268A deals with service tax levied by the Union and collected and appropriated by the Union and States. Since service tax is to be subsumed in the GST, the Article 268A is proposed to be deleted.
The amendments in Articles 270 and 271 is consequent to the changes in the revenue-sharing between the Union and the States after the GST comes into being.
Paragraph 8 of the Sixth Schedule to the Constitution has been amended to give the Autonomous Regional/District Councils of the North East to levy “taxes on entertainment and amusements.”
Vinayak Patkar and Ishaan Patkar
Advocates