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December, 30th 2014

Meaning of Goods / Services / GST

The Constitutional Amendment Bill defines these terms-

  • "goods" includes all materials, commodities, and articles; [article 366 (12)]
  • "services" means anything other than goods: [article 366 (26A)]
  • "goods and services tax" means any tax on supply of goods or services or both except taxes on the supply of the alcoholic liquor for human consumption; [article 366 (12A)]

Loss of Revenue / Compensation

Parliament may, by law, on the recommendation of the Goods and Services Tax Council, provide for implementation of the goods and services tax for such period which may extend to five years.

GST Structure

The Center and the States both, will levy GST on supply of goods and services. On Supply of goods and services in the course of Inter-state only Center will levy and collect taxes (IGST) which will be apportioned between Centre and States based on the recommendation of GST Council. The Center will have power to make place of supply rules in this regard. On Supply of goods and services in the course of or International trade or commerce, states will not have any power to levy and collect taxes.

For the first two years under GST (or as GST council would recommend), 1% additional tax apart from GST will be levied on inter-state sale of goods which will be assigned to the state of origin of supply of goods. The rules regarding the place of origin will be formed by the Parliament. The Central Government would also have power to grant exemption to any goods from this tax. The point to be noted here is that this tax is to be levied on goods only, thus the differentiation between goods and services would again resume significance.

The proposed amendment in Article 271 restricts the power of the Central Government to levy any surcharge on the GST.

Taxes to be subsumed in GST

GST will subsume the following Central and State indirect taxes:

Union Taxes

State Taxes

  • Central Excise Duty and additional excise duty,
  • CVD and SAD on import of goods,
  • Excise duty levied under Medicinal and Toilet Preparation (Excise Duties) Act, 1955,
  • Service tax,
  • Central Sales Tax,
  • Central Surcharges and cesses relating to supply of goods and services
  • Value Added Taxes,
  • Entertainment tax (other than tax levied by local bodies),
  • Octroi,
  • Entry Tax,
  • Purchase Tax,
  • Luxury Tax,
  • Taxes on lottery, betting, gambling,
  • State Surcharges and cesses relating to supply of goods and services

Further, tax on petroleum products will be covered in GST except for crude petroleum, high speed diesel, motor spirit, natural gas and aviation turbine fuel. For these five items, GST Council will specify the date from which GST will be levied. Tobacco and tobacco products; supply of newspapers and advertisements; luxuries, betting and gambling and entertainment and amusement are covered under the GST. However, alcoholic liquor for human consumption has been kept out of GST ambit.

Way forward

Going by the present mood, the Government of the day feels that it may be able to introduce GST in India w.e.f. 1st April 2016, replacing a host of indirect taxes presently levied by the centre, states and local bodies. It hopes for the parliamentary nod (two-third majority) in the forthcoming Budget session in February, 2015. This is necessary as the Indian Constitution requires amendment to allow states to tax services and the centre to tax goods at the retail level and to provide legal framework for GST by providing for constitution of a GST Council and dispute settlement mechanism.

One of the major obstacles, Central Sales Tax (CST), has been addressed as the centre has agreed for compensation on account of phasing out of CST. A compensation of ₹ 11,000 crores has been announced to make up for 2 percent reduction in GST rate to 2%. The Central Government has agreed for a five year compensation. Petroleum products shall be included in GST and taxed at zero rate for first three years. States will also be compensated for entry tax which has been agreed to be included in GST.

To Conclude

All said and done, introduction of GST is not going to be easy. GST design, structure, IGST, administrative arrangement with states, disputes between centre and states, multiplicity of authorities, different interpretations by various states, standardization of systems and procedures, training, need for huge IT infrastructure etc are some of the concerns which will pose challenge to proposed GST. Common date of introducing GST may also be an issue as few states may not cooperate, given the political compulsions.

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