Goods and Services Tax

Despite this success with VAT, there are still certain shortcomings in the structure of VAT both at the Central and at the State level. The shortcoming in CENVAT of the Government of India lies in non-inclusion of several Central taxes in the overall framework of CENVAT, such as additional customs duty, surcharges, etc., and thus keeping the benefits of comprehensive input tax and service tax set-off out of reach for manufacturers/dealers. Moreover, no step has yet been taken to capture the value-added chain in the distribution trade below the manufacturing level in the existing scheme of CENVAT. The introduction of Goods and Services Tax (GST) at the Central level will not only include comprehensively more indirect Central taxes and integrate goods and service taxes for the purpose of set-off relief, but may also lead to revenue gain for the Centre through widening of the dealer base by capturing value addition in the distributive trade and increased compliance. 


In the existing State-level VAT structure there are also certain shortcomings. There are, for instance, even now, several taxes which are in the nature of indirect tax on goods and services, such as luxury tax, entertainment tax, etc., and yet not subsumed in the VAT. Moreover, in the present State-level VAT scheme, CENVAT load on the goods remains included in the value of goods to be taxed under State VAT, and contributing to that extent a cascading effect on account of CENVAT element. This CENVAT load needs to be removed. Furthermore, any commodity, in general, is produced on the basis of physical inputs as well as services, and there should be integration of VAT on goods with tax on services at the State level as well, and at the same time there should also be removal of cascading effect of service tax. In the GST, both the cascading effects of CENVAT and service tax are removed with set-off, and a continuous chain of set-off from the original producer’s point and service provider’s point upto the retailer’s level is established which reduces the burden of all cascading effects. This is the essence of GST, and this is why GST is not simply VAT plus service tax but an improvement over the previous system of VAT and disjointed service tax. However, for this GST to be introduced at the State-level, it is essential that the States should be given the power of levy of taxation of all services. This power of levy of service taxes has so long been only with the Centre. A Constitutional Amendment will be needed for giving this power also to the States. Moreover, with the introduction of GST, burden of Central Sales Tax (CST) will also be removed. The GST at the State-level is, therefore, justified for (a) additional power of levy of taxation of services for the States, (b) system of comprehensive set-off relief, including set-off for cascading burden of CENVAT and service taxes, (c) subsuming of several taxes in the GST and (d) removal of burden of CST. Because of the removal of cascading effect, the burden of tax under GST on goods will, in general, fall.

The GST at the Central and at the State level will thus give more relief to industry, trade, agriculture and consumers through a more comprehensive and wider coverage of input tax set-off and service tax setoff, subsuming of several taxes in the GST and phasing out of CST. With the GST being properly formulated by appropriate calibration of rates and adequate compensation where necessary, there may also be revenue/ resource gain for both the Centre and the States, primarily through widening of tax base and possibility of a significant improvement in tax-compliance. In other words, the GST may usher in the possibility of a collective gain for industry, trade, agriculture and common consumers as well as for the Central Government and the State Governments. The GST may, indeed, lead to the possibility of collectively positive-sum game.


Keeping this significance of GST in view, an announcement was made by the then Union Finance Minister in the Union Budget, as mentioned before, to the effect that GST would be introduced from April 1, 2010, and that the Empowered Committee of State Finance Ministers would work with the Central Government to prepare a road map for introduction of the GST. After this announcement, the Empowered Committee, as stated earlier, had set up a Joint Working Group which submitted a report on a model and road map for GST. After accommodating the views of the States appropriately on this report, the views of the Empowered Committee on the model and road map were sent to the Government of India in April, 2008. The comments of the Government of India were received in December, 2008. These comments were duly considered by the Empowered Committee and it was decided that a Committee of Principal Secretaries/Secretaries  (Finance/Taxation) and Commissioners of Trade Taxes should consider the comments received from the Government of India and submit its views and also work out the Central GST and State GST rates. The Committee held detailed deliberations and submitted its recommendations to the Empowered Committee. The Empowered Committee considered these recommendations in its meeting held in January, 2009 and accepted them in principle. The Empowered Committee also decided to constitute a Working Group consisting of Principal Secretaries/Secretaries (Finance/Taxation) and Commissioners of Trade Taxes of all the States/UTs to give their recommendations on (a) the commodities and services that should be kept in the exempted list, (b) the rules and principles of taxing the transactions of services including the transactions in inter-State services, and (c) finalization of the model  suggested for inter-state transaction/movement of goods including stock transfers. The senior representatives from the Government of India were also associated.


Taking into account the recommendations of the Joint Working Group consisting of Principal Secretaries/ Secretaries(Finance/Taxation) and Commissioner of Trade Taxes of all States/UTs, the views expressed by the Government of India and the States in several meetings of the Empowered Committee held during 2009 and also discussions held with the Hon’ble Union Finance Minister, the First Discussion Paper on Goods and Services Tax in India and Frequently Asked questions and Answers were released by the Empowered Committee of State Finance Ministers in the presence of Shri Pranab Mukherjee, Hon’ble Union Finance Minister on 10th November, 2009, inviting interaction with the representatives of industry, trade, agriculture and common people.


It was felt by the Government of India that the Constitution of India has to be suitably amended before dual GST could be implemented. Accordingly, it was decided to form a Joint Working Group under the Chairmanship of Additional Secretary (Revenue), Member Secretary, Empowered Committee (Co-Chairman) and senior officers from the Ministry of Law, Department of Revenue and State Governments. Several meetings of this Group were convened by the Government of India and after taking the views of the States representatives and in consultation with the Department of Law & Justice, Constitutional Amendment Bill for GST was drafted by the Government of India. Subsequently two more draft Constitutional Amendment Bills were received form the Government of India for consideration of the Empowered Committee. The Empowered Committee considered the three drafts of the Constitutional Amendment Bills sent by Government of Indian in its meetings held on 4th August, 2010, 18th August, 2010, 20th September, 2010, 29th October, 2010 and 28th February, 2011. After which the Central Government introduced the 115th Amendment Bill, 2011 in the Lok Sabha to facilitate introduction of GST on 22nd March, 2011.