Constitution Amendment Bill for introducing Goods and Services Tax

2.
Before the key proposals of the Bill are examined, it would be
worthwhile to recap the framework of the proposed GST. The broad
contours of GST were outlined in the First Discussion Paper on Goods and
Services Tax in India, released by the Empowered Committee of State
Finance Ministers in November, 2009. The broad framework of GST
envisaged in the First Discussion Paper was as follows.

(a) Levy of Dual GST on all transactions – Central GST (CGST) and State GST (SGST);

(b) T he following indirect taxes should be subsumed into GST –

–
Central levies : Central Excise Duty, Additional Excise Duties, Excise
on Medicinal and Toilet Preparations, Service Tax, CVD and SAD of
Customs, Surcharges and Cesses;

– State levies : VAT /Sales Tax,
Entertainment Tax (unless levied by local bodies), Luxury Tax, Taxes on
lotteries, betting and gambling, State Surcharges and Cesses, Entry Tax
not in lieu of Octroi;

(c) A ll goods and services should be
covered under GST except Alcoholic beverages and Petroleum products,
i.e. crude, motor spirit (including ATF ) and HSD. While Tobacco was to
be included in GST, decision on coverage of Natural Gas was kept open;

(d)
I nter-State transactions would be subjected to Intermediate GST (IGST =
CGST + SGST) by the Centre. IGST would also be levied on consignment or
stock transfers;

(e) Exports would be zero – rated with similar benefits to SEZs. GST would be levied on import of goods and services;

(f) Credit of IGST, CGST and SGST would be available to the receiver of the goods and services;

(g)
U tilisation of input tax credit would be against corresponding
liability i.e. CGST against CGST and SGST against SGST. The rules for
taking input tax credit and utilisation of suchcredit would be aligned.
Cross utilisation would not be permitted;

(h) Concurrent jurisdiction for administering GST to the Centre and the States;

(i) U niform threshold of Rs.10 lakh and Rs.1.5 crore for registration and liability for payment of tax for SGST and CGST.

3.
T he First Discussion Paper was followed by the report of the Task
Force set up by the Thirteenth Finance Commission in 2009 and comments
on the First Discussion Paper released by the Department of Revenue in
2010. However, for the purposes of the intended framework, the First
Discussion Paper may be taken as the starting point.

4. T he
amendments proposed in the Constitution Amendment Bill may be analysed
with reference to the intended framework outlined above.

5. New definitions
– The Bill proposes 3 new definitions in Article 366 of the
Constitution 366(12A) : ‘Goods and Services tax’ to mean any tax on
supply of goods or services or both except tax on the supply of
alcoholic liquor for human consumption. 366(26A) : ‘Services’ which
means anything other than goods. 366(29B) : State’ for the purposes of
articles 246A, 268, 269, 269A and 279A to include a Union Territory with
Legislature.

5.4 Concept of ‘Supply’: Presently, tax is
being levied on manufacture (Excise), on Sale or Purchases of goods or
on provisions of services. The proposed amendments introduce the concept
of ‘supply’. ‘Supply’, however, is not defined and one will have to
interpret this in terms of the common parlance meaning or its dictionary
meaning.

5.4.1 Presently, amongst the laws likely to be
subsumed, the Centre is empowered to levy tax on import and manufacture.
The powers of the States are in respect of taxation of sales and
purchases of goods. ‘Sales’ has been interpreted to mean ‘sale’ as
defined under the Sale of Goods which, amongst others, pre-supposes a
transaction between 2 parties. The powers of the States, in respect of
deemed sales under Article 366(29A), also presupposes existence of two
parties for the purposes of the transactions enumerated therein.

5.4.2
‘Supply’ on the other hand, conveys something more than sale. ‘Supply’
means to make something available to someone; to provide.

5.4.3 T
he question which arises is whether ‘supply’ could be read as a
transaction for the purposes of levy of tax even in the absence of two
parties. In the context of the Indian tax laws and the Constitution
entries interpreted so far, ‘supply’ may still be read as one between
two parties. The intention on the other hand, obviously is to enable
levy of GST on consignment and stock transfers, where transfers between
branches, depots, factories, offices, etc. do not necessarily involve
two distinct parties.

5.4.4 ‘Supply’ in the proposed amendments
will now cover not only consignments and stock transfers but also
despatches, deliveries, supplies, etc. without the intention of passing
of property, entering into or effecting a transaction. The following
will also constitute ‘supply’ and could be subjected to tax, if so
provided by the Central or State GST laws.

(i) dispatches to job workers for job work, processing and return;
(ii) deliveries for the purposes of repairs, testing, etc;
(iii) delivery of free samples;
(iv) movement of goods for exhibition or demonstration and return;
(v) dispatches on sale or return basis;
(vi) free issues or supplies to manufacturers, contractors, etc;
(vii) gifts and free supplies.

5.5 ‘Consideration’:
Another important aspect is the omission of reference to
‘consideration’ as an important element to constitute a taxable
transaction. So far, powers of the States were saddled with the
requirement of ‘consideration’ in order to levy tax, in so far as tax on
sales or purchases of goods was concerned. Even ‘deemed sales’ under
Article 366(29A) required consideration for the purposes of levy of tax.

5.5.1 T he omission of the requirement of ‘consideration’ will
not only allow taxation of consignment and stock transfers, but also
various transactions enumerated above. It would now be open for
Governments to provide for levy tax on any or all supplies with a view
to garner revenue. This may include –

(i) gratis or free supplies, such as a desert provided free at a restaurant for deficient service;
(ii) partly developed software handed over to a service provider for further development;
(iii) free parking at a theatre or a mall;
(iv) donations and charity;
(v) free products or services in lieu of loyalty points;
(vi) consumption by employees of goods or services; etc.

5.5.2
T he immediate fallout of an attempt to tax a transaction in the
absence of consideration would be the valuation of the goods or services
for the purpose of levy of tax. Substantial valuation disputes have
been witnessed under the Excise law and the Customs Law or at a State
level, on the levy of Entry Tax or Octroi.

‘Services’: The
definition ‘anything other than goods’ appears to be too broad to have
been intended. Immovable property, money, actionable claims, etc. would
be services. ‘Goods’ are defined under Article 366(12) to include all
materials, commodities and articles. Courts have interpreted this to
include tangible as well as intangible properties. Accordingly,
intangible properties such as copyrights, patents, trademarks, etc.
would continue to be goods.

5.6.1    The  ongoing  disputes  in  relation  to  transactions involving supply of software, packaged  as  well as customised, franchisee agreements, rights to record or broadcast events, etc. would therefore continue. This will particularly be so in the context of the levy of additional tax, discussed in para 7.

5.7    The proposed amendments do not provide clarity to the treatment of composite transactions or deemed   sales.   the   question   arises   whether composite transactions will be subjected to tax. At present, composite transactions have been defined under article 366(29a). While this clause (29A) has not been omitted, the phrase ‘tax on one sale or purchase of goods’ which it defines finds no mention in the amendments relating to GSt. the only indication would be use of the word ‘both’ in the definition of ‘goods and services tax’. Will the use of this word ‘both’ be adequate to cover within its scope composite transactions otherwise defined under article 366(29a)? Would separate principles be required to classify composite transactions as goods or services? even otherwise, transactions involving repairs, annual maintenance contracts, photocopying, printing, etc. Which are composite contracts would suffer the perils of interpretation as to the taxing powers with reference to the rates of taxes as well as the place of supply for determining the appropriate State to levy the tax. Similar would be the predicament in the context of works contracts or catering contracts. Should these be transactions of supply of goods or of services? another area  of debate would be in respect of other deemed sales such as leasing of tangibles or intangibles, hire purchase transactions as also treatment of licences relating to tangible or intangible property. Question will also arise regarding treatment of additional charges for anything done to the goods before or at the time of delivery such as packing, freight, transit insurance, installation charges, etc. which may be separately charged on the bill or invoice. Should these charges be treated as components of the supply of goods or as distinct services?

5.8    It will therefore, be imperative to define ‘supply’ as well as introduce the requirement of ‘consideration’ for taxing transaction. Exceptions may be carved out for specific instances such as inter-State stock transfers and consignment transfers. As will be seen  from  the  stated  framework  discussed  in Para 2 and the taxing powers discussed in para  8, inter-State consignments and stock transfers are the only instances where tax is expected to be levied even in the absence of two parties, transfer of ownership or consideration. Under these circumstances, the requirement of ‘consideration’ should be a pre-requisite while defining the taxing powers of the States and may be omitted only so far as the Centre is concerned.

5.9    European   union:   the   Sixth   directive,   which prescribes the guidelines for the member States to levy VAT on goods and services, clearly defines ‘supply’ and also incorporates the requirement of ‘consideration’. Article 2 of the directive provides for taxation of supply of goods, intra-community acquisition of goods, and supply of services, all for a consideration only. It also provides for levy of Vat on importation of goods.

5.9.1    Under article 14, ‘supply of goods’ means transfer of the right to dispose tangible property as owner. It is under article 17 that transfer of goods to another member State is treated as a supply of goods for consideration. Special provision has been made under article 16 for self-supply or use of goods by staff is treated as supply of goods for consideration.

5.9.2    Similarly, provisions have been made under article 24 for ‘supply of services’ which means any transaction which does not constitute supply of goods and, for self-supply and use of services by staff under article 26.

5.10    Australia: under the new tax System (Goods and Services Tax) Act, 1999 ‘taxable supply’ is defined as a supply which is made for consideration (Section 9-5). ‘Supply’, on the other hand, is defined to mean supply in any form including supply of goods, services, etc. (Section 9-10).

6.    Amendments to Sixth and Seventh Schedule : the following amendments have been proposed to the Sixth and Seventh Schedule to the Constitution.

6.1    Sixth Schedule – Paragraph 8 – under the provisions  for  the  administration  of  tribal  areas in   assam,   meghalaya,   tripura   and   mizoram, the power to levy of taxes on entertainment and amusements is proposed to be granted to the district Councils.

6.2    Seventh Schedule List 1 – Entry 84 – this entry has been amended to restrict the powers of the Centre to levy excise duty only on manufacture or production of petroleum crude, high speed diesel, motor spirit (petrol), natural gas, aviation turbine fuel and tobacco and tobacco products.

6.2.1    While tobacco and tobacco products would also be subjected to GST, petroleum products and natural gas would be brought within the coverage of GST at a subsequent date (further discussion in para 8).

6.3    Seventh Schedule, List 1, Entries 92 and 92C – these entries are proposed to be omitted. these  relate  to  taxes  on  sale  or  purchases  of newspapers and on advertisements therein and tax  on  services.  these  levies  will  therefore  be subsumed under GSt.

6.4    Seventh Schedule, List ii – Entry 52 – this entry relating to tax on entry of goods into a local area for consumption, use or sale therein is proposed to be omitted. accordingly, entry tax, octroi and LBT would be subsumed under GST.

6.5    Seventh Schedule, List ii – Entry 54 – this entry is proposed to be substituted to enable States to levy tax on sales or purchases of petroleum crude, high speed diesel, motor spirit (petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption, other than sales in the course of inter-State trade or commerce or in the course of international trade or commerce.

6.6    Seventh Schedule, List ii – Entry 55 – this entry in relation to taxes on advertisements other than advertisements published in newspapers and advertisements broadcast by radio and television is proposed to be deleted. These levies will now be subsumed under GST.

6.7    Seventh  Schedule,  List  ii  –  Entry  62  –  the existing entry relating to taxes on luxuries, including taxes on entertainments, amusements, betting and gambling is proposed to be substituted. The new entry is proposed to enable levy of taxes on entertainment and amusements to the extent levied and collected by a Panchayat or a municipality or a regional Council or a district Council. the power to levy tax on betting and gambling has been omitted.

6.7.1    The exception carved out for tax on entertainment and amusements by local bodies and authorities may be undesirable. While the total revenues of these bodies and authorities from these sources of taxation is not immediately known, such as exception distorts the GSt regime. for example, if such services are provided from other States to the areas under the jurisdiction of local bodies and authorities, iGSt will be levied. how will claim of input tax credit of such IGST be available? on the other hand, should such services be provided from these areas, will there be no levy by these bodies and authorities, as inter-State transactions can only be taxed by the Centre (see para 8).

6.8    From the above, the following may be noted:

(a)    alcoholic Liquor for human consumption would be out of the purview of GST and will be the subject matter of taxation by the States. This includes tax on manufacture as well as sale of alcoholic liquor;

(b)    Excise on tobacco and tobacco products would continue  to  be  levied  by  the  Centre.  therefore, these  will  be  subjected  to  GST  in  addition  to excise duty;

(c)    Luxury tax would be subsumed into GST;

(d)    The  powers  to  levy  tax  on  betting  and  gambling has been omitted. While services in relation to betting and gambling, such as services by bookies, etc. may be taxed under GST, there is no provision to  enable  taxation  of  winnings  from  betting and gambling.

(e)    Entertainment tax and tax on amusements can also be levied by Panchayat, municipality, regional Council or district Council. There is no bar on these levies being introduced in future by these bodies.

7.    Levy of ‘Additional Tax’ – the Bill, vide section 18, proposes to levy ‘additional tax’ on the supply of goods in the course of inter-State trade or commerce at a rate not exceeding one percent for 2 years or such other period as the GSt Council may  recommend.   This  tax  would  be  levied  and collected by the Centre and would be assigned to the States from where the supply originates and the proceeds would not form part of the Consolidated fund.   The   Parliament,   would   formulate   the principles for determining the place of origin.

7.1    The most striking aspect of this proposed section is that this does not amend or introduce any article in the Constitution for the purposes of levy of additional tax. Therefore, this may be read to be a statement of intent and not an enabling provision in the Constitution.

7.2    Another aspect of this proposed levy is the lack of specific provision for assignment of this levy to the States. article 268 and 269 provide for assignment of stamp duties, tax on medicinal and toilet preparations, central sales tax and tax on consignment of goods to the States and such levies do not form part of the Consolidated fund. However, no specific provision has been made in respect of this additional tax in the Constitution. The  question  is,  will  a  separate  provision  be required for assignment of ‘additional tax’  to the States?

7.3    It may be noted that this levy will only be on supply of goods and not on services. further, this will also apply to stock transfers and consignment transfers and  will  not  be  creditable.  Therefore,  this  levy will be a cost. this will therefore increase the tax burden on inter-State transactions and will require businesses to restrict stock movements since every movement of stocks will attract this non creditable  levy.  This  will  also  be  levied  on  other movements discussed in para 5.4.4. movements of goods for job work, repairs/testing, exhibition, etc. would attract this levy on each movement. the levy is against the stated objectives of GSt and is unlikely to be well received by business.

7.4    Also, this levy will be for a period of two years or  such  other  period  as  the  GST  Council  may recommend. There is no time limit prescribed for the levy and the levy can continue perpetually.

8.    New Article 246A – this new article is proposed to   be   inserted   to   provide   for   levy   of   GSt simultaneously by the Centre as well as by the States. It further provides that the Parliament shall  have  the  exclusive  powers  to  levy  GSt  on supply of goods and services taking place in the course of inter-State trade or commerce. Under an explanation, the provisions of this article in respect of petroleum crude, high speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel shall take effect only from the date recommended by the  GSt  Council.  this  explanation  will  enable introduction   of   GST   at   a   subsequent   date. However, the taxing powers of the Centre and States in relation to these products under the Seventh Schedule (discussed in paras 6.2 and 6.5) has not been made subject to this article. Therefore, it will be possible for the Centre and the States to continue with the levy of excise and Vat on these products even after introduction of GSt on these products.

9.    Article 268 : This article provides for assignment of stamp duties and duties of excise on medicinal and  toilet  preparations  to  the  States.  Reference to excise on medicinal and toilet preparations is proposed to be deleted so as to bring these products under GST. Stamp duty on the instruments covered in List I of the Seventh Schedule would continue to be assigned to and therefore levied by the States.

10.    Article 269 : this article provides for assignment of taxes on inter-State sales and purchases of goods and on inter-State consignment of goods to the States this has been made subject to levy of tax under new article 269a.

11.    New Article 269A – this new article provides for levy  of  GSt  on  inter-State  supply  of  goods  and services by the Centre. this tax shall be apportioned in the manner provided by the Parliament on the recommendation of the GSt Council.

11.1    Under this article, supply of goods and services in the course of import into the territory of india shall be deemed to be inter-State supplies. Parliament may formulate the principles for determining when a supply takes place in the course of inter-State trade or commerce.

11.2    This article  will  enable  levy  of  GST on  import  of goods and services. appropriate provisions will have to be made for determining the levy of iGSt on such imports particularly where the rates of taxes may not be uniform across all States. for e.g., if goods are imported at JNPT by an importer based in Bhopal, how should the IGST (CGST + SGST) be calculated?  Should this be at the SGST rate of maharashtra or of madhya Pradesh. Similarly, for services, how should the IGST rate be calculated for multi-locational business? Should this be the SGST rate prevalent in the State when the office is situated and which receives the invoice from the foreign service provider ?

12.    Article 270 : This article provides for distribution of taxes collected by the Centre and forming part of the Consolidated fund. this article is proposed to  be  amended  to  include  any  GST collected  by the Centres on inter-States supplies and which has not been apportioned to the States under the new article 269A.

13.    Article  286:  this article  imposes  restrictions  on the powers of the States to levy tax on transactions taking place in the course of inter-State trade or commerce, import or export. amendments have been proposed to substitute reference to ‘sales and purchases’ and ‘goods’ with supply of goods or services.

13.1 Sub-article (3), which imposed restrictions on taxation of goods of special importance (declared goods) is proposed to be deleted to enable levy of GSt at a higher rate.

14.    New Article 279A : GST Council: New Article is proposed to be inserted for enabling constitution of  the  Goods  and  Services  tax  Council  (GST Council).  The  GST Council  shall  be  constituted by the President within 60 days from the date of commencement of the amendment act. It will comprise  of  the  union  finance  minister  as  the Chairperson. The union minister of State in charge of revenue or finance and the State finance and taxation ministers will be the members.

14.1    The  GST Council  would  make  recommendations to the Centre and the States on the taxes to be subsumed into GST, the goods and services which should  be  taxed  and  exempted,  the  model  GST law,  principles  of  levy,  apportionment  of  IGST, place of supply principles, threshold limits, rates including floor rates with bands, special rates for raising additional resources during any natural calamity or disaster and special provisions for arunachal Pradesh, assam, jammu and Kashmir, meghalaya, manipur, mizoram, nagaland, Sikkim, tripura, himachal Pradesh and uttarakhand.

14.2    The GST Council would also recommend the date from  which  GST  should  be  levied  on  petroleum crudes, high speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel.

14.3    The article prescribes the modalities of functioning of  the  GSt  Council.  the  decisions  of  the  GSt Council would be by a majority determined on the basis of prescribed weightages.  the GSt Council would also decide about the modalities to resolve disputes arising out of its recommendations.

14.4    The GST Council would thus play a recommendatory role and its recommendations would not be binding. it will not be resolving disputes on GST but would only lay down the modalities for resolving disputes.

15.    Compensation to States: Section 19 of the Bill provides for compensation to the States for loss of revenue on account of implementation of GST for a period upto 5 years.  The Parliament will provide for the compensation on the recommendation of the GST Council.

15.1 Section 19 of the Bill does not amend or introduce an article for providing the compensation. therefore, this may be read only as a statement of intent and will have no binding effect to grant any compensation unless a law to that effect is made.

16.    Transitional provisions: Section 20 of the Bill states that any provision of any law relating to tax on goods or services or on both in force in any State immediately before the commencement of the act, which is inconsistent with the amendments carried out the Constitution, shall continue to be  in force until amended or repealed by the State Legislature or other competent authority or until expiration of one year from the commencement of the act, whichever is earlier.

16.1    Transitional   provisions   are   common   in   every amending enactment. however, this section provides the savings in relation to State enactments. moreover, it states that the provisions of the State enactment, which are not consistent with the amendments to the Constitution, shall continue to be in force until repealed or for one year after the commencement of the amendment act. Therefore, it appears that all existing enactments which are inconsistent with the amendments will become ultra vires at the end of one year even if GST is not introduced.

16.2    A question has arisen regarding the proceedings arising out of the existing laws, namely assessments, appeals, recoveries as well as refunds. a view has been expressed that such proceedings cannot be taken up or pursued after the repeal or the expiry of one year in the absence of the taxing powers under the Constitution.

17.    Transactions taking place from,  to  and  within the Exclusive Economic Zone and the Continental Shelf of india – no provision has been made to provide for levy and collection of GST on transactions taking place from, to and within these areas. india does not have sovereignty over these areas though it has the right to extend any Central enactment to these areas (the income tax, Customs, excise and the Service tax laws have been  extended  to  these  areas).  transactions  of supply of goods and services to these area will not be inter-State transactions. how will GSt be levied on these transactions? moreover, in respect of transactions taking place in these areas (production of crude, construction, repairs and maintenance by contractors, catering at the rigs and platforms, etc.),  how  will  GST  be  payable  and  who  will  be the taxing authority? how will tax be payable on supplies from these areas to the landmass of india (movement of crude to refineries, movement of capital equipment from the rigs and platforms or movement of old and obsolete assets, scrap, etc.)?

The  Constitution  amendment  Bill  was  much  awaited to  pave  the  way  for  introduction  of  GST.  While  this  Bill signals the intent to introduce GST from 1st april, 2016, there are various aspects which need detailed review, deliberations and guidance from Constitution experts. Businesses and professionals would critically evaluate these proposals seeking clarity in the taxing powers of the Centre and the States which should translate into clear, concise and unambiguous GST laws.