India’s indirect tax regime is based upon the
federal political structure of the country. Dual taxing powers
are enshrined under the Constitution of India, enabling both
the central and state governments to levy taxes within the
jurisdiction of their respective lists.
Among the key taxes, the central government is responsible
for the levy and collection of taxes on the manufacture of
goods (excise duty) and on the rendition of services (service
tax). The central government is also empowered to levy tax on
the sale of goods involving the movement of goods from one
state to another (central sales tax). However, this is
collected by the state governments where the goods
State governments are empowered to levy and collect taxes on
sales (VAT) and on the entry of goods within the limits of the
state or municipal body (entry tax/octroi/cess). Various other
taxes are levied by state governments such as luxury tax,
entertainment tax, taxes on lotteries and more.
Why is there a need for change?
The existing taxation regime is marred by significant
- As business processes have evolved, the taxing lines
between the state list and the central list have started to
blur, leading to double taxation and extensive
- The central and state taxes are not fungible
against each other, nor are the state taxes
fungible inter-se, leading to a cascading
- The disparity in the rate of taxes as levied by
respective states has led to businesses structuring their
transactions only to achieve a tax advantage;
- While the state VAT laws were conceptualised so as to
have uniform application, over a period of time with various
amendments made by respective state governments, each
state’s law now has to be interpreted and
implemented separately, resulting in a
multiplicity of compliance requirements; and
- The current tax regime is an origin-based taxation
system, as opposed to the destination-based system prevalent
the world over, leading to significant
disparities in revenue distribution to various states.
What is GST and what would it achieve?
The situation has led many to wish for a move towards a
unified GST/VAT model as is followed by Canada, Australia and
the EU. However, considering that India has a federal
structure, an Indian flavor of GST has been proposed –
the dual GST.
Under the contemplated tax regime, the central and state
governments would be empowered to concurrently levy GST on both
goods and services. The GST to be levied by the central
government and state governments would be called central GST
(CGST) and state GST (SGST), respectively. In the case of
inter-state supplies (that is, supplies from one state to
another), an 'integrated goods and services tax’
(IGST) would be applicable.
The introduction of GST would not only lead to the
simplification of the tax regime, but would help remove its
inherent defects. Some of the critical flaws such as the
multiplicity of laws and taxes, the cascading effect of taxes,
the non-fungibility of credits between goods and services, the
possibility for taxpayers to shift their base only to take
advantage of a low tax regime, among other factors, would be
addressed in due course by this new system. Also, there would
be a paradigm shift from origin-based taxation to
destination-based taxation, as is prevalent elsewhere. From a
government standpoint, GST would result in a widening of the
tax base, as well as increasing tax compliance and revenue
The implementation of GST is being widely discussed as one
of the most important pieces of economic (and specifically,
tax) legislation in removing various distortions in the
existing tax regime and bringing growth opportunities for
businesses help India align its tax regime with international
What is holding back GST introduction?
While the Indian GST was first conceptualised in 2009, it is
yet to see the light of day on account of the political
quagmire. The GST law requires the passing of a constitution
amendment Bill, which would empower both the central and state
governments to concurrently levy taxes on goods and services.
This requires its passage by the Lok Sabha [House of
People] and the Rajya Sabha [Council of States] and
ratification by all the states with a two-thirds majority.
In December 2014, the government made a major breakthrough
by passing the constitution amendment Bill before the Lok
Sabha and set a deadline to roll out GST by April 1 2016.
The government thereafter showed alacrity by pursuing the GST
Bill in every parliamentary session so that it could be cleared
the Rajya Sabha, where the opposition party has a
significant majority. However, the discord between the
government and the opposition party continued over certain key
aspects of GST. This was further complicated by various other
political issues, resulting in the non-effective functioning of
the parliament in this regard and hence the failure to pass the
constitution amendment Bill to date.
Will GST become a reality?
While GST was originally meant to be introduced in April
2016, it has missed this bus. It may go through if the
government is able to convince the opposition party to allow it
to, or with the change in the numbers in the Rajya
Sabha in April 2016, which is likely to give a two-thirds
majority, enabling the government to pass the Bill (albeit with
a very thin margin). However, this thin advantage will be
useless if the opposition party, instead of voting on the Bill,
chooses to protest. The passage of a constitution amendment
Bill requires that the house be in order.
In the meantime, the government is working on the
administrative groundwork for the smooth roll-out of the
indirect tax regime. The IT infrastructure required for the GST
regime is being developed. The joint committees created for
formulating thoughts on various aspects of GST have until now
issued reports on refunds, registration, payment processes and
returns for stakeholder consultation. The draft legislation is
being prepared and is expected to be issued soon for public
comments. The upcoming Budget of 2016-2017 should also see the
government taking some determinative steps to move closer to
the GST regime, with the alignment of tax rates to the
recommended standard rate of between 16% and 18% and the
broadening of the tax base with fewer exemptions, while there
could also be some liberalisation on the availability of
While there is little clarity around when GST will become a
reality, hopefully the government will be mindful of the fact
that stakeholders need time to transition. GST is not merely a
change of law, but a strategic business change. Stakeholders
also need to be mindful of this fact and start preparing.
This article was prepared by Ritesh Kanodia, (firstname.lastname@example.org
) and Geet Shah, (email@example.com
) of Dhruva Advisors, member of WTS Global for India