Goods and Services Tax New Era of Indirect Taxes is set to begin

APRIL 06, 0!0

"# $o%an Aggarwa&
'AL(E Added Tax was introduced in Indian tax structure way back in 2003 and even
today not every state has implemented this tax. Small and medium enterprises
(S!" have to and our #overnment has taken over the task o$ introducin# new
statutes $or implementation o$ %oods and Services tax.
!mpowered &ommittee has released $irst discussion paper on '0 (ovember) 200*
discussin# and explainin# various provisions o$ the proposed %ST scheme.
Reasons for re)*ire+ent of new &egis&ation
!mpowered committee has proposed the introduction o$ %oods and Services tax
(+%ST," in India . -ith its introduction overall burden o$ indirect tax would be
reduced. .ollowin# are the reasons #iven by empowered committee $or introduction
o$ %ST in India .
There is a burden o$ / tax on tax 0 in the existin# system o$ indirect tax laws o$
India ) as both the &!(1AT and the State 1AT have certain de#ree o$
incompleteness.
22 The incompleteness in &!(1AT is that it has yet not been extended to include
chain o$ value addition in the distributive trade below the sta#e o$ production. It has
also not included several central taxes) such as additional excise duties) additional
customs duty) surchar#es etc. in the overall $ramework o$ &!(1AT.
22 At present there are several State taxes applicable such as) luxury tax)
entertainment tax) etc. which have still not been subsumed under 1AT and hence
credit chain is broken in this respect.
-ith the introduction o$ %ST a continuous chain o$ set3o$$ $rom the ori#inal
producer,s point and service provider,s point upto the retailer,s level would be
established which would eliminate the burden o$ all cascadin# e$$ects) includin# the
burden o$ &!(1AT and service tax.
a4or &entral and State taxes will #et subsumed into %ST which will reduce the
multiplicity o$ taxes) and thus brin# down the compliance cost. .ollowin# Taxes are
proposed to be subsumed under %ST5
22 &entral !xcise 6uty
22 Additional !xcise 6uties
22 The !xcise 6uty levied under the edicinal and Toiletries 7reparation Act
22 Service Tax
22 Additional &ustoms 6uty) commonly known as
22 &ountervailin# 6uty
22 Special Additional 6uty o$ &ustoms
22 Surchar#es and &esses.
22 1alue Added Tax
22 &entral Sales Tax
22 !ntertainment tax (unless it is levied by the local bodies"
22 8uxury tax
22 Taxes on lottery) bettin# and #amblin#.
22 State &esses and Surchar#es in so $ar as they relate to supply o$ #oods and
services.
22 !ntry tax not in lieu o$ 9ctroi.
,%argeabi&it#
%ST would be char#ed in the $orm o$ 2 taxes5
22 &entral %ST : 8evied by &entre;
22 State %ST : 8evied by individual states
This dual model o$ taxation would be implemented throu#h multiple statutes i.e. one
$or &entral %overnment and one $or each State %overnment.
The basic provisions o$ law such as char#eability) taxable event) taxable person)
measures o$ levyin# includin# valuation) basis o$ classi$ication etc. would be almost
uni$orm across all &entral as well as State taxation mechanism.
&entral %ST and State %ST would be applicable to all transactions o$ #oods and
services made $or a consideration.
Tax rates
State %ST $or #oods would have two3rate tax structure5
22 8ower rate 3 $or necessary items and #oods o$ basic importance;
22 Standard rate 3 $or other #oods in #eneral.
It is most likely that State %ST and &entre %ST $or services would have only one tax
rate.
This is a complete citation and may be #ood to share with other authors. Ideally
where a whole piece o$ text is taken $rom somewhere else it is #ood to #ive pa#e
number as well and i$ it is an idea that is borrowed $rom someone else the wuthor
must at least #ive the person and document name and year. -orkin# 7aper
(o.'<200*36!A on %ST =e$orms and Inter#overnmental &onsiderations in India
issued by the 6epartment o$ !conomic A$$airs) inistry o$ .inance) %overnment o$
India in the month o$ march) 200*5 It was suggested that GST would need to be
levied at a combined Centre-State tax rate of 20% of which !2% would go to the
Centre " #% to res$ective State%&
eetin# held on '> September 200* by whom and where 5 It was reported in media
that the State %ST $or #oods would have the $ollowin# combination53
22 Items o$ mass consumption5 8ow rate o$ ?@ 3 A @;
22 7recious metals5 =ate o$ '@;
22 %oods o$ local importance) decided by state5 (o tax; and
22 ost items5 Standard rate o$ B@ 3 *@
[Comment: It is $ossible that exem$ted list of goods given under '(T regime ma)
be retained in the exem$ted list under State GST in the initial )ears%]
Ex-ort
22 !xport o$ services and #oods would be tax neutral even under %ST i.e. neither
&entre %ST nor State %ST is proposed to be levied on export transactions.
22 Tax exemption bene$its would also be #iven to Special !conomic Cones (+S!C,".
Dowever) such bene$it will only be allowed to their processin# Eones. (o tax bene$its
would be allowed on sales made $rom an S!C to 6omestic Tari$$ Area.
I+-ort
22 Transactions o$ import o$ #oods or services would be exi#ible to &entre %ST as
well as State %ST.
22 .ull set3o$$ allowed on %ST paid on import o$ %oods F Services. This would be
welcomed by importers as earlier credit o$ certain import duties was not allowed.
Tax credit
&redit would be admissible in respect o$ both the components o$ %ST i.e. &entral
%ST F State %ST. Scheme o$ tax credit would be as $ollows5
22 Taxes paid a#ainst the &entral %ST shall be allowed to be taken as input tax
credit $or the &entral %ST and could be utiliEed only a#ainst the payment o$ &entral
%ST.
22 Taxes paid a#ainst the State %ST shall be allowed to be taken as input tax credit
$or the State %ST and could be utiliEed only a#ainst the payment o$ State %ST
*xce$tion - Tax credit under inter-state transactions
&entre would levy Inte#rated %oods F Services Tax (+I%ST," which would be &entral
%ST plus State %ST on all inter3State transactions o$ taxable #oods and services. The
inter3State seller will pay I%ST on value addition a$ter ad4ustin# available credit o$
I%ST) &entral %ST) and State %ST on his purchases. The importin# dealer will claim
credit o$ I%ST while dischar#in# his output tax liability in his own State.
.t%er
!ach tax payer would be allotted a 7A( linked tax payer identi$ication number o$
'3<'A di#its) which would brin# the %ST 7A( linked system in line with the current
7A( based income tax system) $acilitatin# data exchan#e and tax payer compliance.
Tax payer would also be reGuired to maintain separate accounts $or &entral %ST and
State %ST $or payments and set3o$$s.
Tax payers would submit one periodical return $or both &entral %ST and State %ST
and one copy each will be submitted with the &entral %ST authority and State %ST
authority. Husiness processes o$ &entral %ST and State %ST should (is this the
author,s su##estion. Till now it seemed he is restatin# the o$$icial order" be uni$orm.
Entr# Tax Lega&it# of &ev# and c%aos across vario*s States
APRIL !/, 0!0
"# 0ira& Ra1a
ENTR2 A2) 8ist II o$ the Seventh Schedule o$ the &onstitution o$ India enables the
states to enact law providin# $or levy o$ entry tax into a local area $or consumption)
use or sale therein. !ntry A2 provides as $ollows5
Taxes on entr) of goods into a local area for consum$tion use or sale therein%&
Supreme &ourt in the case o$ (tiabari Tea Com$an) +imited vs% State of (ssam and
,thers -!./!-001#2-(I3 -0242 5SC6 has held that power to tax vested by the
le#islative list in the 7arliament or State le#islatures) is circumscribed by 7art IIII
(Trade) &ommerce and intercourse within the territory o$ India" o$ the &onstitution
and i$ the exercise o$ that power does not con$irm to the reGuirements o$ 7art IIII) it
will be re#arded as invalid. Dence vide this 4ud#ment) Don,ble Supreme &ourt has
con$irmed that even tax le#islation would have to bear the scrutiny o$ 7art : IIII and
in case the tax le#islation in$rin#es with the 7art IIII o$ the &onstitution) then the
same will be held invalid and unconstitutional.
7art IIII o$ the &onstitution deals with Trade) &ommerce and Intercourse within the
territory o$ India.
Analysis o$ the relevant provisions o$ the 7art : IIII5
Article 30'5 .reedom o$ trade) commerce and intercourse5
Sub4ect to the other provisions o$ this 7art) trade) commerce and intercourse
throu#hout the territory o$ India shall be $ree.
Article 30?5 =estriction on trade) commerce and intercourse amon# States
(otwithstandin# anythin# in article 30' or article 303) the 8e#islature o$ a State may
by law 3
22 impose on #oods imported $rom other States or the Jnion territories any tax to
which similar #oods manu$actured or produced in that State are sub4ect) so)
however) as not to discriminate between #oods so imported and #oods so
manu$actured or produced; and
22 impose such reasonable restrictions on the $reedom o$ trade) commerce or
intercourse with or within that State as may be reGuired in the public interest5
7rovided that no Hill or amendment $or the purposes o$ clause (b" shall be introduced
or moved in the 8e#islature o$ a State without the previous sanction o$ the
7resident.K
Dence based on the above) it can be seen that le#ally any state le#islature can
impose entry tax. Dowever in case such entry tax directly and immediately impedes
$ree $low o$ trade and commerce) then it would violate Article 30'.
Article 30' is sub4ect to the limitations and conditions in Articles 302) 303 and 30?
i.e. Article 30' is bindin# upon the Jnion le#islature and the State le#islature) but
the 7arliament can #et rid o$ the limitation imposed by Article 30' by enactin# a law
under Article 302. Similarly) a law made by the State 8e#islature in compliance with
the conditions imposed by Article 30? shall not be hit by Article 30'. Dence in case
entry tax provisions enacted by the state are able to satis$y the conditions imposed
by Article 30?) it can be held le#al .
Article 30? (a" allows the state le#islatures to impose any tax to which similar #oods
manu$actured in its own state are sub4ected so as not to discriminate between
imported #oods and manu$actured in its state; and
Article 30? (b" allows the state le#islatures to impose reasonable restrictions on the
$reedom o$ trade) commerce or intercourse) provided they $ul$ill the $ollowin# three
conditions5
22 Such restrictions shall be in public interest;
22 They shall be reasonable; and
22 They shall be sub4ect to the procurement o$ prior sanction o$ the president.
An exception to the Article 30' and its operation was 4udicially cra$ted by the seven
member bench o$ Don,ble Supreme &ourt in the case o$ (utomobile Trans$ort
03a7asthan2 +td% vs% State of 3a7asthan -(I3 !./2-001.2-(I3 -!10/ 5SC6. In that
case) the challen#e was to the =a4asthan otor 1ehicles Taxation Act) '*A'. The
challen#e to Article 30' was re4ected by holdin# that /the taxes are compensatory
taxes which instead o$ hinderin# trade) commerce and intercourse $acilitate them by
providin# and maintainin# the roadsK. It $urther observed that /i$ a statute $ixes a
char#e $or a convenience or service provided by the State or an a#ency o$ the State)
and imposes it upon those who choose to avail themselves o$ the service or
convenience) the $reedom o$ trade and commerce may well be considered
unimpaired.K Thus) the concept o$ Kcompensatory taxesK was propounded. There$ore)
taxes which would otherwise inter$ere with the un$ettered $reedom under Article 30'
were protected $rom the vice o$ unconstitutionality i$ they are compensatory. Dence
based on this 4ud#ment) the workin# test $or decidin# whether a tax is a
compensatory or not was to enGuire whether the trade is havin# the use o$ certain
$acilities $or the better conduct o$ its business and payin# not patently much more
than what is reGuired $or providin# the $acilitiesK.
.urther Don,ble Supreme &ourt in a three member bench in G 8 8rishnan " ,rs% v%
State of T%9% " ,rs% -!.:;-00/22-(I3 -0;#4 5SC6 held that Kthe very idea o$ a
compensatory tax is service more or less commensurate with the tax leviedK.
Dence these 4ud#ements emphasiEed that the imposition o$ compensatory tax must
be with de$inite purpose o$ meetin# the expenses on account o$ providin# or addin#
to the tradin# $acilities either immediately or in $uture provided Guantum o$ tax is
based on a reasonable nexus to the actual or pro4ected expenditure on the cost o$
the service or $acility.
This workin# test was applied by all the &ourts in India $rom '*>2 to '**A in relation
to motor vehicles taxes to decide whether the levy was compensatory or not.
Dowever in the case o$ <=s% >hagatram 3a7eev8umar vs% Commissioner of Sales
Tax <% ?% and others -!..;-0S@!2-SCC -0/:4 5SC6) wherein the challen#e was to
the .7. Sthaniya Lshetra e al Le 7ravesh 7ar Lar Adhiniyam) '*M>) the Don,ble
Supreme &ourt went on to say) that Kthe concept o$ compensatory nature o$ tax has
been widened and i$ there is substantial or even some link between the tax and the
$acilities extended to dealers directly or indirectly the levy cannot be impu#ned as
invalidK. The dictum in Hha#atram,s case was relied on by a Hench o$ two Nud#es in
the case o$ State of >ihar vs% >ihar Chamber of Commerce -!../-000.2-SCC -0!4/ 5
SC6) which reiterated the position that Ksome connectionK between the tax and the
tradin# $acilities extended to dealers directly or indirectly is su$$icient to characteriEe
it as compensatory tax. The &ourt $urther went to hold that that the State provides
several $acilities to the trade) such as) layin# and maintenance o$ roads) waterways)
markets etc. and on this premise) it was held that the entry tax was compensatory in
nature. The learned Nud#es did not consider it necessary to put the burden on the
State to $urnish the details o$ $acilities provided to the traders and the expenditure
incurred or incurable therea$ter.
Dence post the decisions in Hha#atram,s case and in the case o$ Hihar &hamber o$
&ommerce) the test applied was that even i$ the purpose o$ imposition o$ the tax is
not merely to con$er a special advanta#e on the traders but to bene$it the public in
#eneral includin# the traders) that levy can still be considered to be compensatory.
Accordin# to this view) an indirect or incidental bene$it to traders by reason o$
steppin# up the developmental activities in various local areas o$ the State can be
brou#ht within the concept o$ compensatory tax) the relationship between the tax
known as compensatory tax and the tradin# $acilities not bein# necessarily either
direct or speci$ic. These decisions clearly expanded the scope o$ the 4udicially evolved
compensatory taxes and were in contrast with the doctrine o$ direct and immediate
bene$it as propounded in the (utomobile Trans$ort 03a7asthan2 +td% vs% State of
3a7asthan -(I3 !./2-001.2-(I3 -!10/ 5SC6.
Don,ble Supreme &ourt in a $ive member bench in the case o$ Jindal Stainless Ltd.
and another vs. State of Haryana and others [200614S!C"044SC] #
$2006"!%&L"'4"SC"(%SC"C)*) while dealin# with the issue on constitutional validity o$
8A6T in Daryana has laid down the $ollowin# principles to veri$y whether a particular
tax enactment is valid on the #rounds o$ it bein# a compensatory tax 5
22 The concept o$ compensatory tax is not there in the constitution but is 4udicially
evolved in Automobile Transport case as a part o$ re#ulatory char#e.
22 &ompensatory tax is a compulsory contribution levied broadly in proportion to
the special bene$its derived to de$ray the cost o$ re#ulation or to meet the outlay
incurred $or some special advanta#e to trade) commerce and intercourse. It mi#ht
incidentally brin# in net revenue to the #overnment but that cannot be an essential
in#redient o$ the compensatory tax.
22 -henever any law is impu#ned as violative o$ Article 30' o$ the &onstitution) the
courts have to veri$y whether the impu#ned enactment $acially or patently indicates
Guanti$iable data on which compensatory tax is sou#ht to be levied. The Act must
$acially indicate Guanti$iable or measurable bene$it.
22 I$ the provisions are ambi#uous<even i$ the Act does not indicate $acially the
Guanti$iable bene$it) the burden will be on the State as a service<$acility provider to
show by placin# the material be$ore the &ourt) that the payment o$ compensatory
tax is a reimbursement<recompense $or the Guanti$iable<measurable bene$it
provided<to be provided to its payers.
22 9nce it is shown that the enactment invades $reedom o$ trade) it is necessary to
enGuire whether the State has proved that the restrictions imposed by it by way o$
taxation satis$y the conditions laid down in Article 30?(b"5
22 Such restrictions shall be in public interest;
22 Such restrictions shall be reasonable and
22 Such enactment shall be sub4ect to the procurement o$ prior sanction o$
the president.
.urther the Don,ble Supreme &ourt also decided that constitutional validity o$ various
entry tax enactments) which are sub4ect matter o$ pendin# appeals) S87,s and writ
petitions will now be disposed o$ in li#ht o$ the above principles. Dence Don,ble
Supreme &ourt in its abovementioned 4ud#ment upheld the doctrine o$ direct and
immediate e$$ect as propounded in the Automobile Transport case and #ave a clear
direction to veri$y all the entry tax enactments by applyin# this doctrine.
Hased on the above principles) various appellate authorities and hi#h courts have
held respective State,s !ntry Tax Act,s as unconstitutional5
Daryana : Aindal Stri$s +imited and (nother vs% State of Bar)ana and ,thers% -200#-
00!22-'ST -0!1. -?"B6
3a7asthan 5 Cinesh ?ouches +td% vs% State of 3a7asthan and ,thers% -200#-00!/2-
'ST -04#: 53(A6%
AharDhand 5 Tata Steel +mited vs% State of AharDhand and ,thers -200#-00!:2-'ST
-020. 5AB(6
(ndhra ?radesh 5 Sree 3a)alaseema (lDalies and (llied Chemicals +imited vs% State
of (ndhra ?radesh and others% -200#-00!42-'ST -00!; 5(?6
(runachal ?radesh 5 Aai$raDash (ssociates +imited 0Cement Civision2 vs% State of
(runachal ?radesh and ,thers% -200.-00222-'ST -04!0 5G(@6 E $200+"!%&L"241"SC"
,-!./*
(ssam 5 ITC +imited vs% State of (ssam -200:-000.2- 'ST -2;0 0Gauhati26
Fest >engal - 9ational B)droelectric ?ower Cor$oration +td% vs% (CCT Siliguri charge
and others -200#-00!;2-'ST -0!;# 5F>TT6
8arnataDa Bigh Court has based on the above $rinci$les held the lev) of entr) tax
legal in the case of <ani$al (cadem) of Bigher *ducation vs% State of 8arnataDa and
others -200#-00!42-'ST -04:: 58(36%
(ssam State Government reintroduced the *ntr) Tax (ct after removing the
deficiencies in the earlier (cts and their new entr) tax (ct was held legal 5 Indian ,il
Cor$oration vs% State of (ssam and ,thers -200.-002!2-'ST -00:/ - G(@6
Bowever in case of Bar)ana even the new entr) tax introduced after removing the
deficiencies in the earlier (ct was held illegal 5 Indian ,il Cor$oration vs% State of
Bar)ana -200.-002!2-'ST -00!0 -?"B6
&ertain State #overnments in their respective Di#h &ourts took a view that entry
taxes levied in their states) thou#h are not compensatory and are not complyin# with
the Article 30? (b") are covered under the Article 30? (a" i.e. on account o$
introduction o$ such entry tax) there is no discrimination in the provisions o$ the Act
between the #oods imported $rom outside the state and those manu$actured or
produced in the state. .urther their contention was that clause (a" and (b" o$ Article
30? o$ the &onstitution o$ India is independent o$ each other; i$ law is saved under
Article 30?(a" then it need not be tested with re$erence to clause (b" o$ Article 30?
$or determinin# its validity. Also their view was true nature o$ entry tax is to be seen
and the nature o$ entry tax is conceptually di$$erent $rom transport cases. In most o$
the cases) entry tax was introduced a$ter abolition o$ 9ctroi. Hased on these
ar#uments) $ollowin# entry taxes were held le#al by the respective hi#h courts.
GG 3eliance Industries +imited vs% State of ,rissa -200#-00!/2-'ST -00#; 5,3I6
GG <adh)a ?radesh - Godfre) ?hili$s India +imited vs% State of <adh)a ?radesh and
,thers -200#-00!:2-'ST -01/; 5<?6
In all these above mentioned cases) a##rieved party) be it the State or assesses have
$iled S87 with the Supreme &ourts to decide on the constitutional validity o$ the entry
tax o$ the respective states and $or #rantin# interim stays. Two member bench o$
Supreme &ourt in the case o$ Aai$raDash (ssociates +td% vs% State of <%?% and ,thers
-200. 5 02!-'ST-000!-SC6 # $200+"!%&L"241"SC",-!./* has held that the principles
evolved by the Don,ble Supreme &ourt in the case o$ Jindal Stainless Ltd. and
another vs. State of Haryana and others [2006"!%&L"'4"SC"(%SC"C)] was based on
the approach o$ levy o$ transport cases. Transport cases are conceptually and
contextually di$$erent $rom !ntry Tax cases. The concept o$ compensatory tax really
had its matrix in transportation cases and does not apply to #eneral notion o$ !ntry
Tax. Dence considerin# the importance o$ issues relatin# to Article 30' and 30?) they
have once a#ain re$erred the issue to lar#er bench to answer $ollowin# ma4or
Guestions o$ law5
22 -hether levy o$ entry tax in terms o$ !ntry A2 8ist II o$ Seventh schedule is
violative o$ Article 30' o$ the constitutionO I$ the answer is a$$irmative) can the levy
be protected i$ it is compensatoryO -hat are the yardsticks to be $ollowed $or
determinin# the compensatory character o$ the !ntry TaxO
22 -hether state enactments relatin# to levy o$ entry tax have to be tested with
re$erence to both clauses (a" and (b" o$ Article 30? o$ the constitution $or
determinin# their validity and whether clause (a" or Article 30? is con4unctive with or
separate $rom clause (b" o$ Article 30?O
22 -hether interpretations o$ Article 30' and 30? in case o$ transport cases in
Atiabari case and Automobile Transport case apply to !ntry Tax casesO
22 -hether entry tax can be termed as a tax on movement o$ #oods when there is
no bar at the entry o$ #oods at the State border or when it passes throu#h a local
area within which they are not sold) used or consumedO
Dence $rom the above) it can be seen that there is a lot o$ con$usion across all the
states on the le#ality o$ the levy. Since entry tax has been held unconstitutional by
hi#h courts in ma4ority o$ the states) &ompanies<assessees in these states are clearly
in a lurch whether to pay these entry taxes or stop payin# entry taxes. They have
either stopped payin# entry taxes) or are payin# entry taxes under protest with
absolutely no clarity on the le#ality o$ the levy. The !ntry tax authorities have been
approachin# Supreme &ourt $or #rantin# interim relie$ a#ainst the respective Di#h
&ourt 4ud#ments and Don,ble Supreme has been askin# the assesses to pay the
either part amounts<$ull amounts<$ile the returns on a case to case basis until the
disposal o$ these S87 cases in Supreme &ourt.
In today,s world) &ompanies need clarity whether a particular levy is applicable or
not so that they can accordin#ly decide on their end pricin# to the consumer. As a
country) we cannot keep so many &ompanies<assessees in lurch. -e hope that
Supreme &ourt decides on the constitutional validity o$ these entry tax acts at the
earliest and the &ompanies< assessees are #iven a clear verdict on the le#ality o$
these !ntry Tax Acts once and $or all.
-ith %lobalisation) Industries reGuire lar#er markets and as a &ountry we cannot
develop) i$ we try and $ra#ment every state and #ive liberty to them to levy entry
taxes as per their whims and $ancies. 9bviously States should not resort to such
entry taxes $or au#mentin# its revenues. .urther &entral %overnment needs to
ensure that they do not allow such controversies to rope in the proposed %oods and
Service Tax (%ST" scenario and they make it clear while implementin# %oods and
Services Tax (%ST" that states cannot levy any entry tax on #oods received within
the state $or consumption) use) or sale therein.
GST is inevitab&e3 .n&# ti+ing to be decided a+ong a&& sta4e5%o&ders6 ,"E, $e+ber 7*tt
$a1*+der
APRIL !/, 0!0
"# S 7*tt $a1*+der, $e+ber 8,9:, ,"E,
Excer-ts fro+ t%e s-eec% of t%e $e+ber at o*r Se+inar at 'i;ag<
T0E %oods F Services Tax (%ST" is in the o$$in#. As you know) the Don,ble .inance
inister could not #ive a deadline $or its implementation) and there are reasons $or
it. I,ll explain to you) why) but it is comin#.
This is the time when the churnin# process is on
to decide the ma4or components o$ the %ST.
&ertain parameters have been a#reed amon#st
the States) and between the &entre and the
States. So this time when I #o around the
country and meet the trade and industry) I meet
my own o$$icers; I want to have $eedback $rom
all o$ you on whatever little has been decided.
.eedback on what should be done) what would
$elicitate its implementation in a smoother way
and this $eedback we will $actor into our
discussions and in the (orth Hlock. So at this
time i$ I #et inputs $rom you) not necessarily
today but throu#h perhaps tax law $orum) it will
help. I am hope$ul that today I will be able to
$amiliariEe you with the concept o$ %ST) sensitiEe
you on the important aspect o$ %ST) so that it
will be a teaser $or you to come with certain
ideas) certain su##estions.
So) that,s why this interaction is important. Today also happens to be the post
bud#et discussion. So what I will do) I will divide my presentation in two parts. In the
$irst part I will deal with Hud#et process) actually r Shailendra has set the tone o$
this seminar. De has raised the level already. Dere we are not #oin# to discuss how
much tax has come down on this item and what noti$ication) whether this should be
applicable under this situation. .or that other $orums are there. So he has already
raised the level o$ interactions that is expected o$ today,s interaction.
I$ you have observed our .,s Hud#et Speech and his post bud#et interactions in the
media visual) print and electronic) he has said that in preparation o$ this bud#et he
had tried to respond to three basic challen#es which he had outlined in last year,s
bud#et.
The $irst basic challen#e was how to #o back to the #rowth tra4ectory o$ * percent
and then over to the double di#it with $iscal consolidation. .iscal consolidation
becomes important $or r Shailendra as he,s said with lot a#ony and he has reasons
to be) with the #overnment is a#oniEed $or that and that is the debt mana#ement.
.or debt mana#ement) you need $iscal consolidation. So this was the $irst challen#e.
.or #oin# to the #rowth tra4ectory) the $irst challen#e $or the $iscal consolidation)
what was done as you know) $iscal stimulus was #iven by way o$ reduction in central
excise duties and service tax in two installments. And it really helped) takin# o$$ the
economic meltdown which was shown even in developed world. -e didn,t su$$er that
much and $or that sli#ht credit can be taken by the .inance inistry) the central
excise department. (ow that the economy has come back and is on the up so it is
partially rolled back.
There was a temptation as since the excise duty was increased $rom B to '0) the
service tax was '0 percent; perhaps it could have also been made '2 percent. Hut he
didn,t do that. -hy he didn,t do thatO Hecause he has in his back o$ mind) %ST. And
%ST) #oods and service has to have one rate and that,s why in spite o$ the
temptation) there would have been substantial revenue in the context o$ the debt
which r Shailendra mentioned with context o$ the $iscal de$icit we have) he didn,t #o
$or that.
The 4ob o$ .inance inister and .inance inistry is always havin# a balance. So that
is how $iscal stimulus was #iven with partially roll back but no roll back on service
tax. So it was kept at '0 percent.
The second challen#e is with re#ard to the development which has to be more
inclusive. %67 #rowth only in hi#her strata o$ country won,t help the country and
keepin# that in mind emphasis has been on in$rastructure and most on rural
in$rastructure and once that is done automatically economy #rows. The $i#ure that I
have with me) a total expenditure on in$rastructure would be ?> percent and on rural
in$rastructure alone it would be 2A percent.
The third challen#e is the perennial problem o$ Indian administration) the delivery.
Dundred rupees #iven but how much $inally reaches is the Guestion. Pou have seen
our new economic advisor) the scholar $rom &ornell Jniversity) 6r. Laushik Hasu) he
has brou#ht the idea o$ $ood coupons. A#ain) aim is the delivery. I remember) one o$
my $avorite economic article writers) althou#h I mi#ht not a#ree with him on many o$
the principles but the style o$ writin#) r. Swaminathan Anklesaria Aiyar) he had
written in Swaminomics : on how to reach the people. Actual people #et A rupees o$
the '00 #ranted. So) he was su##estin# bein# at the other extreme) that why not
hire some helicopters and take the currency notes and coins and drop it on the
poorest o$ the poor villa#es. Some would be lost but at least B0@ would reach the
people. This brin#s the issue o$ the delivery.
So these are the three challen#es . mentioned. And talkin# about which r
Shailendra mentioned which is very important is) you don,t expect #overnment to be
everywhere. %overnmentQs role is to enable people to do it. 9nce people are enabled)
they will do the 4ob.
9n central excise) not many issues have been raised but we have taken Guite a $ew
steps and I would tell you the back#round o$ this. -hat we have done about A3>
months be$ore the Hud#et) we had interactions with trade and industry and we asked
them $or su##estions) where you $eel wron# has been done or where we should do
more. -e have been #ettin# lot o$ representations and on basis o$ those) chan#es in
both tari$$ and non3tari$$ measures were made.
Then we had a &hie$ &ommissionersQ and &ommissionersQ con$erence in Shillon# in
9ctober. There lot o$ issues came) like some procedural issues that can be done away
with to $acilitate the trade and certain issues where there,s tax evasion. So these
evasion prone thin#s procedures loopholes had to be plu##ed.
These days we are very transparent. -e tell you what we are doin#. -hen we are
#oin# to chan#e somethin#; we put it on our website. -e invite your views and
opinions. (ever think that your views were not accepted; don,t take it as itQs not
read. -e must have considered it and perhaps it was not $ound possible to be
accepted but in many cases we have accepted the views.
So) $irst the &entral !xcise (on3Tari$$ re$orms5 -e are concerned with the small scale
sectors. To #ive cash $low) there was demand to #ive more cash in their hands) we
increased the payment o$ duty to Guarterly basis. (ow they can pay duty on '0th $or
the end o$ the Guarter. So this is one step $or the SSI. Then) &!(1AT on capital
#oods; there was restriction in $irst year you can,t take credit beyond A0@) but we
made it in such a way that they can take now take entire credit in one #o. And the
date o$ $ilin# o$ Guarterly returns was also made same as non SSI sectors. Then
there was some representation $or the brandin# which is attached with the packin#
boxes. &ertain items were covered and certain not. .or example plastic bottles were
not covered. Larnataka trade and industry came and made a representation and we
also covered that.
Section ''A 2(H" Rthis is re#ardin# the clause to $acilitate that when you come up
be$ore the show cause notice and admit that there has been a short levy) you pay
the duty amount and the interest) there would be no $urther notice issued. Hut then
some more enthusiastic commissioners) they started issuin# show cause notices
under other &!(1AT rules. So we made a decision that no penalty would be levied
and put an explanation there. So once you pay the duty amount and the interest
there would be no Guestion o$ any $urther penalty.
There is one provision) deterrent taxation) on which Taxindiaonline,s position is very
stron# as they,ve written Guite stron#ly but let me submit it in this $orum. -hy do
we #o $or a provision like deterrent taxationO Try to understand) we are $acilitatin#
and liberaliEin# to brin# down the rates so we expect the tax payers also to pay tax.
-ithout usin# the word draconian) this deterrent taxation is only a#ainst a minuscule
percenta#e o$ trade and industry who are really bad boys. They are doin# evasion o$
duties by takin# credit on $ake invoices without receivin# the #oods. -e donQt invoke
these $or classi$ication dispute or valuation dispute. Dere there is small lacuna in
Section 3M and it has been amended accordin#ly.
As you know %uthka) has really #iven us a lot o$ trouble and so much o$ tax evasion.
I know evasion will never #o away totally) but our attempt is to brin# this down as
much as possible. A$ter we brou#ht this scheme) (o$ capacity determination" it has
#one down Guite a bit. Takin# a cue $rom that) similar provisions were made $or
chewin# tobacco.
&ertain amendments were also made with re#ard to the provisions relatin# to the
Settlement &ommission) like earlier) one cannot #o to the Settlement &ommission
more than once etc have been amended.
There was a trade representation5 An item named &hlorinated 7ara$$in -ax. -e
$ound this expression itsel$ is a misnomer. &hlorinated 7ara$$in is not wax. It became
a ma4or issue at Haroda) =a4asthan and 6elhi. -e came to know that and we
corrected that.
There was a time when people used to say) the process is not manu$acture) because
they have to pay duty. (ow times have chan#ed. -ith 961AT and &!(1AT) now
they are sayin#) &omeS &omeS This is manu$actureS Hein# in customs $or a lon# time)
initially I was surprised at this) but later I realiEed that they are askin# to continue
the &!(1AT chain. The provisions are already there $or wire drawin# o$ &opper and
to continue the &!(1AT chain) we made it $or aluminum tubes and pipes also.
Then amendments in &entral !xcise =ules and &!(1AT &redit =ules; There is a
reGuirement o$ pre3authentication o$ invoices under &entral !xcise =ules. Absolutely
redundant and useless. -hen on the invoice si#nature is already there) why a#ain
pre3authenticationO So we have done away with this.
-henever there is a retrospective amendment to any (oti$ication) many in trade
industry includin# TI.L will attack us) because they say you are #oin# back and
collectin# duty. Sometimes retrospective e$$ect is #ood also. -ith re#ard to input
credit used in exempted #oods) the provisions $or proportionate credit reversal are
available only $rom 200B. That we amended retrospectively.
=ule A is bein# amended to provide accelerated depreciation $or computers cleared.
&omputers depreciate very $ast. 6epreciation rate is di$$erent $or computers cleared
$rom !9Js and S7TI units. So we ali#ned it. =ule 'A o$ &!(1AT credit is bein#
amendment to harmoniEe the penal provisions.
It was $ound that in respect o$ enthol) there was a $ake movement o$ #oods)
especially in respect o$ NFL. To do away with evasion) we have done away with duty
on enthol.
So most o$ our measures are a result o$ trade representations) Anti evasion
measures and based on some contribution $rom T=J.
GST6
Jnlike 6T&) %ST reGuires consultation with the States. 2B StatesS .irst) states have
to come to an a#reement. And once they come to an a#reement) those 2B states will
ne#otiate with centre. So it is very di$$icult $or anyone to put a deadline on %ST. It is
earnest endeavor o$ the %overnment to implement the %ST.
=%# GST> 3 It is an endeavor o$ both centre and state #overnments reduce
cascadin# e$$ect o$ tax. In '*B> we brou#ht odi$ied 1AT on certain items) expanded
it to all items in 2000. In 200? &!(1AT credit was allowed across #oods and
services. This was the time when the seeds $or %ST were sown when the credit on
#oods and services was inte#rated.
9n %ST) a committee was setup headed by the $inance minister o$ west Hen#al r.
Ashim Sen 6as %upta) noted economist. -ith his persuasive power) now all the
states have 1AT) a tax on value addition.
Hut) we are still taxin# on tax. .or example when you pay 1AT on the value o$ the
#oods) it includes the element o$ excise duty. So you also pay 1AT on the excise
duty. %ST will now take care o$ this cascadin# e$$ect. -e are havin# many taxes like
luxury tax) entertainment tax) electricity duty) purchase tax) tax on lottery) bettin#)
#amblin#. These taxes will be subsumed in %ST. That is why there is need to have
%ST. It will allow complete set o$$ o$ taxes and also reduce the number o$ taxes. So
multiple points o$ collection and multiple taxes will be reduced.
There will be dual %ST) &%ST will be administered by the &entre and S%ST will be
administered by the State. There will be continuous set o$$ o$ credit. The dual %ST is
not uniGue and most o$ the countries have dual %ST. Around 'A? countries have %ST.
There will be %ST on inter3state movement o$ #ood) called I%ST which is also allowed
to be set o$$. The model o$ I%ST was #iven by one Additional &ommissioner which
was accepted by the empowered committee. It has been decided that the collection
o$ I%ST would be vested with the &entre. &entre will act as a clearin# house. &entral
will act as an honest broker. It will take care o$ which state will #et what. This all
works on an IT in$rastructure in the back end.
I+-ort GST6 &ustoms duty per se is not a part o$ %ST. -hen you import any #oods)
you also pay countervailin# duty eGual to excise duty. The moment it is excise duty)
it becomes part o$ %ST. It would be known as import %ST.
The rate structure under %ST will be optimum dual rate structure. At present the
e$$ective avera#e tax rate on any item both central and state taxes put to#ether is
around 2A@ and this will come down si#ni$icantly in %ST. That is why we cannot wish
away %ST and it is only a matter o$ time be$ore the actual bene$its start $lowin#.
Input tax credit shall be allowed to be utiliEed separately by &%ST F S%ST without
any cross $low o$ credit. &ertain de#ree o$ cross $low o$ credit could be inbuilt in I%ST
which is 30@. In interstate transaction &%ST F S%ST on export o$ #oods services
has to be #enerated. &ompoundin# scheme not yet decided. =e#istration o$ Tax
7ayer could be linked to 7A( to $acilitate exchan#e o$ data.
Areas where conver#ence o$ views continues to elude us5
'. Threshold limit $or exemption;
2. 6ual =ate Structure
3. !xempted %oods
Issues which reGuire $urther discussion5
'. .or %ST we have to #o $or ma4or constitutional amendments. There has to be a
&ouncil headed by the Jnion .inance inister. -ithout its approval no state or &enter
can deviate $rom it.
2. DarmoniEation o$ key procedures between &entre F State.
3. =elevant dates $or determination o$ tax.
?. &onsideration $or its supply.
These are some o$ the ma4or areas o$ contention which need to be thrashed out
soon. Thankin# you all $or #ivin# patient hearin#.