Indian GST – Dual & Cessed GST

The makers of the Indian Constitution gave India a federal economy where both Central and the State Government had separate rights and obligations towards the citizens of India. To fulfil such obligations, they were empowered by the Constitution to raise funds by levy of taxes on various types of transactions. Whereas the power to levy tax on manufacture of goods was given to the Centre, the power to levy tax on intra-state sale of goods was devolved to the State. This has led to a multiplicity of indirect taxes having cascading effects and scope of double taxation.

The concept of a national Goods and Service tax was first proposed by the then Finance Minister Mr. P Chidambaram in his budget speech in 2005. While announcing the landmark shift from erstwhile Sales tax to VAT, he showed his intent to introduce a GST in the near future. Para 94 of the budget speech reads as follows:

‘94.       In the medium to long term, it is my goal that the entire production–distribution chain should be covered by a national VAT, or even better, a goods and services tax, encompassing both the Centre and the States.’

Finally it has taken more than 11 years for the Government to show some light to a national GST – a one nation one tax scheme. Though the efforts of the Government are commendable, does the proposed Indian GST really justifies the ‘one nation one tax’ slogan? Lets discuss where all the Government has made a compromise in trying to introduce a variant of GST in India.

Dual GST

A true GST is a tax where the Central Government levies and collect taxes and funds are allotted to the States to carry out their functions. But such a GST was not possible in the Indian scenario where the Constitution has mandated a federal structure. Therefore the proposed Indian GST is a dual GST. The powers to tax all transactions will be available with both the Central Government and the consumer State.

The proposed GST has three components:

  • A Central GST to be levied by the  Central Government
  • A State GST to be levied by the State Government
  • A Integrated GST to be levied by the Central Government with the portion of IGST proceeds to go to the destination State Government

Whether CGST and IGST will be nationwide common pool

Unfortunately not. Though a final clarity on this issue is awaited, what we have been hearing is that the CGST and IGST tax liability will be have to be computed and paid state wise. Mr. Upendra Gupta – Commissioner GST has also recently ceded to the fact that the CGST, SGST and IGST liability will be lined to registration and thus will be State wise liability. This will also affect input credit pool of a company. Thus a company having excess CGST credit in Maharashtra can use that CGST credit to pay output CGST or IGST in Maharashtra and not an output CGST/IGST in Haryana or any other state so to say.

1% Origin based tax

The proposed Indian GST is a destination based tax meaning that the tax will go to the consumer State Government. This did now bode well for the four most industrialized states of India – Maharashtra, Tami Nadu, Karnataka and Gujarat. They have been earning considerable CST revenue from goods manufactured in these states in consumer in other States. But under the GST scenario, they were bound to loose such revenue as tax on such goods will accrue to the consumer States.

To pacify lobby of such states, the Modi Government had proposed a 1% origin based tax similar to CST in the Constitutional Amendment Bill, 2014. The provision was termed has retrograde in nature by all stakeholders and thankfully has finally been dropped.

Compensation Cess

GST was supposed to be free from all cesses and surcharges. However, atleast one cess in the name of compensation cess on demerit goods is expected to be there under GST regime. The news was first released after the meeting of GST Council held on 19th October 2016. As on date, the draft of the Compensation Cess Act has been approved by the GST Council and the compensation cess is on the way to become a reality for atleast the first 5 GST years.

The rationale is to provide for a fund which can be used by Centre to compensate the losses to be incurred by the States post imposition of GST. Further, Government does not seem to be interested in reducing the effective indirect tax rates on demerit goods to 28%. Thus a compensation cess over 28% will help maintain the current rate structure for demerit goods. It needs to be seen as to what all items will be made subject to the levy of this compensation cess.

The way ahead

While the GST Council has been able to come to a consensus on most of the issues, two main matters remain to be finalized – fitment of goods and services in the rate structure and decision on cesses to be subsumed in GST. We hope that these activities are completed by end of March 2017 without further fatality to the purity of GST.

Written by CA Mudit Goyal