The government is now in the last leg of rolling out the new indirect tax regime, the Goods and Services Tax (GST). The target for its rollout has been scheduled to be 1 July 2017. The GST, as we know it today, is the product of the concerted efforts of several experts and expert bodies over the past 10 years. It has gone through various levels of legislative scrutiny and clearances. In addition, operationalising GST involves a lot of effort and work to fix its nuts and bolts.
The GST, as we know it today, is the product of the concerted efforts of several experts and expert bodies over the past 10 years.
The idea of GST can be traced back to the Budget of 2006 when the then Finance Minister P. Chidambaram stated, "It is my sense that there is a large consensus that the country should move towards a national level Goods and Services Tax (GST) that should be shared between the centre and the states." In 2007, an Empowered Group of State Finance Ministers was constituted to deliberate on the structure and design of GST. Subsequently, the UPA-II government in 2011, introduced a Bill seeking Parliamentary approval for imposition of GST. The Bill, however, lapsed with the dissolution of the 15th Lok Sabha.
On 19 December 2014, the current Finance Minister, Mr Arun Jaitley introduced the Constitutional Amendment Bill to initiate the process. Until now, there was a division of taxation powers between the Centre and states; some indirect taxes were levied by the Centre and some by the states. Hence, the shift to GST necessitated a change in the Constitution. The Constitutional Amendment Bill was the first step in providing the Centre and states concurrent taxation powers, subsuming most indirect taxes under a single taxation regime.
The Lok Sabha after hours of deliberation passed the Bill in the Session after. The Rajya Sabha referred the Bill to a Select Committee for it to be examined in detail. The Committee also served as an effective platform for building consensus across political lines. This was especially important since it was required to be passed by 2/3rd majority in both houses, followed by ratification by at least 15 states. The committee examining the Bill met with various industry groups, state government officials, representatives from across ministries and tax experts, among others before submitting its report. Consensus was built across political parties and state governments over months to iron out differences. Some recommendations of the committee were accepted by the government when the Bill was passed in August 2016.
After its passage, the GST Council—largely an executive body comprising representatives (finance ministers) of all state governments, the Union Finance Minister and Union Minister of State for Revenue—was established. While the Centre cannot unilaterally take decisions, states also cannot force upon their decisions in the Council. Every decision requires the backing of the Centre and twenty other states (including UTs).
States in the GST Council negotiated their demands, represented their interests, voiced their concerns to finally arrive at decisions on mutual agreement. The Council proposed GST laws; the Central GST Bill, the Integrated GST Bill, the State GST Bill and compensation to states (GST) Bill. In the last budget session, Parliament passed three of these bills; CGST Act, IGST Act and the Compensation to states Act.
The sheer scale of the GST project makes it an enormous implementation challenge.
For goods which are manufactured and consumed within the boundary of a particular state, both the Centre and the state government will levy a tax. The CGST and SGST Acts provide the framework for the levy of these taxes by the respective governments. In cases of interstate supply of goods and services, the Centre will levy the GST Tax and a part of it will be apportioned to the consuming state. The Integrated GST Act provides the framework for tax imposition on interstate supply of goods and services.
In its final stages of the legislative exercise, all state assemblies have to pass their SGST Bills. For GST to work, its design necessitates that all states come on board and pass the Bills. The GST system rests on the input tax credit principle, meaning that in the supply chain at every stage credit is set off for tax paid on the input in the previous stage. If one state does not adopt GST it will imply that for goods passing through multiple states, there will be a break in the input credit chain.
Over the last three weeks, several state assemblies have convened sessions to pass their State GST Bills. Currently, around 21 state assemblies have passed their GST Bills. Some states like Maharashtra have also brought in separate laws to compensate their municipalities for revenue losses due to GST.
In parallel, the GST Council has had more than 14 meetings of intense deliberations to work out the operational aspects of the new tax. Tax rates, classification of goods under different tax slabs, transition costs are some these aspects. The GST Council in its last meeting finalised the tax rates for more than 1200 Goods and services under the new indirect tax regime. The Council decided on five tax slabs under which the various goods in circulation and services will be taxed. These are nil rate, 5%, 12%, 18% and 28%.
Its success can only be known in the coming months and shall depend on how the legislative frameworks translate into on-the-ground execution.
Several challenging steps still lie ahead. The framing of the rules and regulations of the new laws, migration of taxpayers to the new system, their registration, testing of the GST Network are important steps in the coming weeks. The GST Network which is the architectural backbone of the system will be managing multiple business transactions by every taxpayer. Every month the invoice for each of these multiple transactions will have to be filed. The sheer scale of the GST project makes it an enormous implementation challenge. Its success can only be known in the coming months and shall depend on how the legislative frameworks translate into on-the-ground execution.