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Why GST May Be A Far Cry From 'One Nation, One Tax'

16/12/2016 12:20 PM IST | Updated 19/12/2016 8:37 AM IST
Rupak De Chowdhuri / Reuters

GST is being considered as the biggest indirect tax reform in the history of independent India and is being projected as "one nation, one tax". Businesses are optimistic that GST will create uniform tax throughout the country. The main objectives of GST are to replace multiple indirect taxes with a uniform tax on the supply chain of goods and/or services and to remove cascading effects of taxes (i.e. tax on tax) and to create a common national market for goods and services. The 101st Constitutional Amendment has enabled GST to become a reality. However, the framework of GST set up under the Constitution appears to be drifting away from its main objectives of reducing multiple taxes and creating uniform tax throughout the country.

What we end up is 31 GST legislations, 29 VAT legislations and a union legislation on Central Excise...

The Constitution has empowered concurrently the Centre and the states to levy GST on the supply of goods and/or services within the state. Thus, it will result in one central law on GST (CGST) and about 29 state laws on GST (SGST) as each state will have one SGST. Further, the Centre has been empowered to levy GST on the supply of goods and/or services in the course of inter-state trade or commerce (IGST). The net result of this is 31 legislations of GST (CGST, IGST and 29 SGSTs). The Constitutional amendment has not entirely replaced the existing indirect taxes and has inherited some of the existing indirect taxes like Value Added Tax (VAT) (levied by the states on sale of goods) and Central Excise Duty (levied by the Centre on manufacture of goods) on specified products such as petrol, diesel, aviation fuel and alcohol. In addition to GST, tobacco and tobacco products will be subjected to Central Excise Duty also. Thus, what we end up is 31 GST legislations, 29 VAT legislations and a union legislation on Central Excise. This is definitely a far cry from "one nation, one tax".

Despite having 31 GST legislations, if GST is uniform throughout the country and the impact of it on businesses is the same irrespective of their location in the country then there is meaning in projecting it as one nation, one tax—for example, if the rate of GST for supply of paints in Karnataka is the same as rate of GST for supply of paints in Maharashtra (or any other state), or if paints are exempted from GST in Karnataka then it is exempted in all other states in India. Uniform GST will be able to create a common national market for goods and services. This uniformity can be achieved only if each state's SGST is uniform and identical with CGST. For the purpose of uniform GST and to build consensus between the Centre and the states on matters relating to GST, the GST Council has been set up under the Constitution.

The GST Council consists of the Union Finance Minister, Union Minister Of State For Finance and state finance ministers as its members and will decide on all matters relating to GST, including principles of levy, rate of tax, threshold turnover and model law. But as per Article 279A, GST Council can only recommend to the Centre and the states on matters relating to GST. It is doubtful whether these recommendations can impose limitations on the powers of the Parliament and the state legislatures.

[T]here is nothing in the Constitution that prevents the Centre and the states to enact CGST and SGST in a way that deviates from the recommendations made by the GST Council.

Moreover, Article 246A, which empowers the Parliament and the state legislatures to make laws relating to GST, has no limitations that laws on GST shall have to be as per the recommendations of the GST Council. Further, the GST Council has been entrusted with the responsibility of setting up an adjudicatory mechanism to resolve disputes between the centre and the states and in between the states on matters arising out of the GST Council's recommendations and its implementations. The question is whether the decision of adjudicatory body set up by the GST Council is binding on the centre and the states. It is unlikely that the decision of an adjudicatory body set up by the GST Council can restrict the powers of the Parliament and the states legislatures to enact GST laws deviating from the decisions made by the GST Council when the Constitution itself has given only recommendatory powers to the decisions of GST Council. It appears that there is nothing in the Constitution that prevents the Centre and the states to enact CGST and SGST in a way that deviates from the recommendations made by the GST Council. Thus, we should contain our happiness even if consensus is reached in the GST Council as there is no guarantee that it will be reflected in the GST legislations passed by the Parliament and the state legislatures. The Constitution intends to bring uniformity between CGST and SGSTs through consensus in the GST Council but it seems to have faltered in this process by making decisions of the GST Council only recommendatory.

Implementing GST under the present constitutional framework has all the elements for it to end up as "one nation, multiple taxes".


Is there a hope for uniformity in the principles of levy under the GST regime? Article 366 (12A) defines GST as any tax on supply of goods or services or both (except taxes on supply of alcoholic liquor for human consumption). The event that attracts the levy of GST is the "supply of goods and/or services". The Constitution has not defined as to what constitutes the supply of goods and/or services. This responsibility has been entrusted to the GST Council. As stated above, the recommendation of the GST Council is not binding on Parliament and the state legislatures. Thus there is a possibility for each state to define the "supply of goods and/or services" in SGST in a way that deviates from the definition under CGST. This will lead to more complexity for businesses in complying with CGST and SGST as they are concurrent levies on the same taxable event, i.e., supply of goods and/or services within the state. Therefore, there is an imminent need to define the supply of goods and/or services under the Constitution. By inserting the definition of taxable event in the Constitution, there will be an adequate safeguard for maintaining uniformity in the principles of levy as any repugnancy between the definition of a taxable event in CGST/SGST and the constitutional definition will carry the risk it being declared void by the courts of law.

Considering there aren't adequate safeguards in the Constitution for ensuring uniform GST and the needs of each state vary from one state to another (for example: Karnataka may want to impose a lower rate of tax on coffee and a higher rate of tax on tea and Assam may want to do the opposite), it is possible that SGST may follow in the footsteps of the present VAT (sales tax) regime where each state differs on matters relating to rate of tax, exemptions and threshold turnover. Implementing GST under the present constitutional framework has all the elements for it to end up as "one nation, multiple taxes". In a way, the delay in implementation of GST is a blessing in disguise, and hopefully, the Centre will have a relook at the constitutional framework of GST to ensure uniform GST, but it seems like hoping against hope at the moment. If we end up being successful in having uniform GST under the present constitutional framework then GST will be a cornerstone for cooperative federalism. But history bears testament to the contrary as far as states sacrificing their own interests for the benefit of all other states.

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