Legislative Brief

The Constitution (122nd Amendment) Bill, 2014 (GST)

Highlights of the Bill
The Constitution (122nd
Amendment) Bill, 2014  The Bill amends the Constitution to introduce the goods and services
was introduced in Lok
Sabha on December 19,
tax (GST).
2014. It was passed in
that House on May 6,
 Parliament and state legislatures will have concurrent powers to make
2015. laws on GST. Only the centre may levy an integrated GST (IGST) on
the interstate supply of goods and services, and imports.
It was referred to a Select  Alcohol for human consumption has been exempted from the purview
Committee of Rajya
Sabha on May 14, 2015. of GST. GST will apply to five petroleum products at a later date.
The Committee is
scheduled to submit its  The GST Council will recommend rates of tax, period of levy of
Report by the end of the additional tax, principles of supply, special provisions to certain states
first week of the Monsoon
session.
etc. The GST Council will consist of the Union Finance Minister, Union
Minister of State for Revenue, and state Finance Ministers.
 The Bill empowers the centre to impose an additional tax of up to 1%,
Recent Briefs:
on the inter-state supply of goods for two years or more. This tax will
accrue to states from where the supply originates.
The Right to Fair
Compensation and  Parliament may, by law, provide compensation to states for any loss of
Transparency in Land
Acquisition, Rehabilitation
revenue from the introduction of GST, up to a five year period.
and Resettlement
(Second Amendment) Bill, Key Issues and Analysis
2015
July 17, 2015  An ideal GST regime intends to create a harmonised system of taxation
by subsuming all indirect taxes under one tax. It seeks to address
The Juvenile Justice (Care
and Protection of challenges with the current indirect tax regime by broadening the tax
Children) Bill, 2014 base, eliminating cascading of taxes, increasing compliance, and
April 20, 2015
reducing economic distortions caused by inter-state variations in taxes.

Mandira Kala
 The provisions of this Bill do not fully conform to an ideal GST regime.
[email protected] Deferring the levy of GST on five petroleum products could lead to
cascading of taxes.
Prianka Rao
[email protected]  The additional 1% tax levied on goods that are transported across states
July 21, 2015 dilutes the objective of creating a harmonised national market for
goods and services. Inter-state trade of a good would be more
expensive than intra-state trade, with the burden being borne by retail
consumers. Further, cascading of taxes will continue.
 The Bill permits the centre to levy and collect GST in the course of inter-
state trade and commerce. Instead, some experts have recommended a
modified bank model for inter-state transactions to ease tax compliance
and administrative burden.

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The Constitution (122nd Amendment) Bill, 2014 (GST) PRS Legislative Research

PART A: HIGHLIGHTS OF THE BILL1

Context
The Constitution provides for the division of taxation powers between the centre and states. Currently, indirect
taxes are imposed on goods and services. These include excise duty, sales tax, service tax, octroi, customs duty
etc. Some of these taxes are levied by the centre and some by the states. For taxes imposed by states, the tax
rates may vary across different states.
The concept of Value Added Tax (VAT) was introduced for central excise duty in 1986 (first as MODVAT and
then as CENVAT). Prior to this, excise duty was levied on both inputs used and the output produced.2 This
meant that an amount paid as tax on the input was subject to taxation again at the output level (with limited set
offs). This was applicable to each intermediate good in the manufacturing process. This „tax on tax‟ led to
cascading of taxes. This problem was sought to be addressed by the VAT regime under which tax paid on the
inputs is deducted from the tax payable on the output produced. Similarly, sales tax also had a cascading effect
through the distribution chain. All states have now adopted the concept of VAT for state sales tax.
The issue of cascading taxation was partly addressed through the VAT regime. However, certain problems
remained. For example, several central and state taxes were excluded from VAT. Sectors such as real estate, oil
and gas production etc. were exempt from VAT. Further, goods and services were taxed differently, thereby
making the taxation of products complex. Some of these challenges are sought to be overcome with the
introduction of the Goods and Services Tax (GST).
The GST regime intends to subsume most indirect taxes under a single taxation regime. GST is a value added
tax levied across goods and services. This is expected to help broaden the tax base, increase tax compliance, and
reduce economic distortions caused by inter-state variations in taxes.3
In 2011, the Constitution (115th Amendment) Bill, 2011 was introduced in Parliament to enable the levy of GST.
However, the Bill lapsed with the dissolution of the 15th Lok Sabha. Subsequently, in December 2014, the
Constitution (122nd Amendment) Bill, 2014 was introduced in Lok Sabha. The Bill was passed by Lok Sabha in
May 2015 and referred to a Select Committee of Rajya Sabha for examination.

Key Features
The Bill enables Parliament and state legislatures to frame laws on GST. The GST Council, that includes
representatives from the centre and all states, will make recommendations on the implementation of GST.
Scope of GST
 GST is applicable on the supply of goods or services.
 Alcoholic liquor for human consumption is exempt from GST.
 Initially, GST will not apply to: (a) petroleum crude, (b) high speed diesel, (c) motor spirit (petrol), (d)
natural gas, and (e) aviation turbine fuel. The GST Council will decide when GST will be levied on them.
 Tobacco and tobacco products will be subject to GST. The centre may also impose excise duty on tobacco.
Levy of GST
 Both, Parliament and state legislatures will have the power to make laws on the taxation of goods and
services. A law made by Parliament in relation to GST will not override a state law on GST.
 The central government will have the exclusive power to levy and collect GST in the course of interstate
trade or commerce, or imports. This will be known as Integrated GST (IGST).
 A central law will prescribe the manner in which the IGST will be shared between the centre and states,
based on the recommendations of the GST Council.
Additional tax on supply of goods
 An additional tax of up to 1% on the supply of goods will be levied by centre in the course of inter-state
trade or commerce. The tax will be collected by the centre and directly assigned to the states from where
the supply originates.

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The Constitution (122nd Amendment) Bill, 2014 (GST) PRS Legislative Research

 This tax will be levied for two years, or for a longer period as recommended by the GST Council. The
central government may exempt certain goods from such additional tax.
 The principles for determining the place of origin from where the supply of such goods takes place will be
formulated by a law of Parliament.
GST Council
 The GST Council will consist of: (a) the Union Finance Minister (as Chairman), (b) the Union Minister of
State in charge of Revenue or Finance, and (c) the Minister in charge of Finance or Taxation or any other
Minister, nominated by each state government. All decisions of the GST Council will be made by three-
fourth majority of the votes cast; the centre shall have one-third of the votes cast, and the states together
shall have two-third of the votes cast.
 The GST Council will make recommendations on: (a) taxes, cesses, and surcharges to be subsumed under
the GST; (b) goods and services which may be subject to, or exempt from GST; (c) the threshold limit of
turnover for application of GST; (d) rates of GST; (e) model GST laws, principles of levy, apportionment of
IGST and principles related to place of supply; (f) special provisions with respect to the eight north eastern
states, Himachal Pradesh, Jammu and Kashmir, and Uttarakhand; and (g) related matters.
 The GST Council may decide the mechanism for resolving disputes arising out of its recommendations.
Compensation to states
 Parliament may, by law, provide for compensation to states for revenue losses arising out of the
implementation of GST, based on the recommendations of the GST Council. Such compensation could be
for a maximum of five years.

PART B: KEY ISSUES AND ANALYSIS

Impact of introducing an ideal GST regime
The idea behind GST is to subsume all existing central and state indirect taxes under one value added tax, which
will be levied on all goods and services. No good or service is exempt, and there is no differentiation between a
good or service, whether as an input or as a finished product. Under GST, tax paid on inputs is deducted from
the tax payable on the output produced. This input credit set off operates through the manufacturing and
distribution stage of production. The tax is collected only at the place of consumption. This design addresses
cascading of taxes.
Table 1 below explains how GST works. It takes the example of a manufacturer who pays excise, and a retailer
who pays sales tax, and explains taxation under the current structure and the GST regime.

Table 1: Comparison of tax under the current indirect tax system and the GST regime
Transaction Current system GST In this example, the cost of the raw material is 100.
Cost of raw material 100 100 The manufacturer and retailer add Rs 20 value each.
The tax rate is assumed to be 10% for all taxes.
Tax on raw material 10 10
Value added by Current tax regime: Both Excise and Sales Tax are
20 20 a VAT system, but the set off for taxes paid is not
manufacturer
applicable across these taxes. Therefore, sales tax
Tax payable by is applicable to the excise duty (CENVAT) paid.
2 (CENVAT: 10% of 20) 2 (GST: 10% of 20)
manufacturer Thus, tax paid is 12 (excise) plus 15.2 (sales tax).
Retailer’s cost 132 132 Note the ‘tax on tax’ effect where the final selling
Retailer’s margin 20 20 price not only has two taxes, but also a tax-on-tax.
15.2 (Sales Tax: 10% of GST regime: There is a single tax with input credit.
Tax payable 2 (GST: 10% of 20) This means that each person pays tax only on the
152)
value added by him. Consequently, the total tax is
Final price paid incl.taxes 167.2 154
less, resulting in a lower price of the good.
Of which taxes 27.2 14

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 The Constitution (122nd Amendment) Bill, 2014 (GST) PRS Legislative Research

Several expert committees have examined the features of the current indirect tax regime against those envisaged
in an ideal GST system. We present this in the Table below:3, 4,5 Note that the GST in the proposed Bill differs
from the ideal GST outlined in Table 2. These differences include exemptions of certain goods and the inclusion
of a 1% additional (origin based) tax. The effect of these deviations is discussed in the following sections.
Table 2: Features and impact of current system with an ideal GST regime
Current regime of indirect taxes An ideal GST structure
Features Goods and services taxed separately* No differentiation between a good and a service; both
subject to one tax
VAT applies at manufacturing stage (CENVAT i.e. excise VAT applies at point of consumption. Set-off on the inputs
duty) as well as at sales stage (state VAT i.e. sales tax). gets credit through the production and distribution stages.
Input credit set-off not available across different taxes. For Input tax credit available across state and central tax
example, set off not available for CENVAT against state VAT. jurisdictions.
Some taxes (CENVAT, service tax) levied at the stage of Follows a destination based principle where tax is collected
production, while some (state VAT) levied on sale. on final consumption.
Many indirect taxes not included in central and state VAT.** Subsumes all indirect taxes under one tax.
Different tax rates levied across products and across states. Single tax rate to apply on all goods and services.
Certain sectors exempt from VAT.*** No goods or services are exempt from GST.
Intra-state transactions get input credit set off but not inter- Input credit set off to be available across intra-state and
state transactions. inter-state transactions.
Impact Cascading of taxes across manufacturing and distribution Eliminates cascading by providing for input credit set off at
chain increases cost of products making them uncompetitive. all stages of production.
Limited incentive for tax compliance Encourages voluntary compliance. A person in the supply
chain gets credit only when tax is paid by previous person.
Distinguishing between goods and services complicates the Single tax to apply to both goods and services, hence
taxation of certain products e.g. computer software. distinguishing between the two not necessary.
VAT does not apply uniformly across sectors and goods. No exemptions. All sectors, goods and services subject to
Sectors such as oil and gas production, real estate exempt. GST that broadens tax base.
States’ levy of entry tax/octroi when goods pass through Facilitates inter-state trade as transactions across state and
states result in bottlenecks at borders, raising inventory costs. municipal jurisdictions are free from tax.
Different tax rates across states leads to economic distortions. Single national tax rate reduces distortions.
Complex tax structure leads to higher administrative costs. Single tax reporting structure as all indirect taxes subsumed.
Sources: Report of the Task force on GST, 13th Finance Commission; Report of the Fourteenth Finance Commission, Chapter 13, „Goods
and Services Tax‟; First Discussion Paper on Goods and Services Tax in India, The Empowered Committee of State Finance Minister; PRS.
Notes: * Service tax cannot be levied by states. It is levied by the centre.
**CENVAT does not include additional excise duty, additional customs duty, central surcharges and cesses. State VAT does not include
luxury tax, entertainment tax, taxes on lottery, advertisements, entry tax etc. CENVAT applies only at the manufacturing stage, and does not
extend down to the distribution stage till the retail sale of goods.
***Exemptions under CENVAT and service tax include: oil and gas production, mining, agriculture, wholesale and retail trade, real estate
construction, and other services. Under state VAT, all services, real property, agriculture, oil and gas production, and mining are exempt.

Exemptions under GST

The Bill excludes alcoholic liquor for human consumption from the purview of GST. Further, GST will apply to
Clauses 12, 14 five petroleum products i.e. (a) petroleum crude, (b) high speed diesel, (c) motor spirit (petrol), (d) natural gas,
(i) and (e) aviation turbine fuel at a later date, to be decided by the GST Council.
Petroleum products are inputs for several other goods and exempting them from the purview of GST could lead
to cascading of taxes. This is because the input tax credit would no longer be available on such products. This
disruption in the tax credit chain would distort the GST structure and could also lead to leakages of revenues.6
The 13th Finance Commission and the Department of Revenue had recommended that all petroleum products and
alcohol be brought under GST.7, 8 The Commission had suggested that states could impose an additional levy on
petroleum products and alcohol, in addition to GST.8

Additional 1% tax deviates from the objective of GST

Clause 18
The Bill states that the centre may levy an additional tax of up to 1%, on the supply of goods in the course
of inter-state trade for two years or longer, as recommended by the GST Council. This tax will be
collected by the centre and accrue directly to the states from where the supply of the good originates.
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 The Constitution (122nd Amendment) Bill, 2014 (GST) PRS Legislative Research

This provision may impede a key objective of GST. The GST regime aims to create a harmonised national
market for goods and services, and the Bill reinforces this objective.9 Such a harmonised national market is
enabled by levying one tax rate across states to ensure free movement of goods whether within a state, or from
one state to another. The levy of the additional tax distorts the creation of a national market, as a product made
in one state and sold in another would be more expensive than one made and sold within the same state.
Also, the 1% tax will result in cascading of taxes. This effect will be magnified if the production and
distribution chain passes through several states, and if the 1% additional tax applies at each state.10 The burden
of the cascading tax will be borne by the final consumer of the product.

Alternatives to the IGST

Clause 9
The Bill permits the centre to levy and collect GST in the course of inter-state trade and commerce, called the
Integrated Goods and Services Tax (IGST). Such tax will be apportioned between the centre and the states in a
manner to be decided by a law made by Parliament.
The Task Force set up by the 13th Finance Commission had suggested an alternative to the IGST.5 The
Commission had recommended a modified bank model with regard to inter-state transactions. Under this model,
the seller levies GST on the buyer state, and deposits the tax collected to a nodal bank. The nodal bank then
credits payment to the consuming state. This model was recommended, given that inter-state transfers under
GST should be designed (i) to avoid any distortions or cascading effects, and so that (ii) tax accrues to the state
where the final consumer is located.5 The Standing Committee examining the Constitution (115th Amendment)
Bill, 2011 had recommended the modified bank model as an alternative to the IGST as it would simplify tax
compliance and ease administrative burden in inter-state transactions.11

Comparison of the recommendations of various bodies

A proposal for introduction of GST has been under consideration since 2007. The Empowered Committee of
State Finance Ministers presented its views in 2009.2 The 13th and 14th Finance Commission also made
recommendations in relation to the introduction of GST, in 2009 and 2015 respectively.6,8
Table 3: Comparison of recommendations of various bodies on introducing a GST regime
Empowered Committee (2009) 13th Finance Commission (2009) 14th Finance Commission (2015)
Coverage  All transactions of goods and services  Most goods and services, including  Universal application of GST
(except exempted goods, and petroleum products, natural gas, over the medium and long
transactions below threshold limits). alcohol and tobacco. term.
Products on  Tobacco.  High speed diesel, motor spirit, Not addressed.
which tax in aviation turbine fuel, alcohol and
addition to GST tobacco.
may be levied
Goods to be  Petroleum products, i.e. motor spirit,  Unprocessed food items No specific recommendations.
exempt from aviation turbine fuel, high speed  Public services (excludes railways,
GST diesel. public sector enterprises)
 Alcoholic beverages.  Service transactions
 Health and education services.
Integrated GST  Centre to levy CGST plus SGST.  Tax collected by the consuming state. Not addressed.
(in interstate  The Modified Bank Model to be  Inter-state transactions to be zero
trade) followed. rated.
Compensation  Compensation for five years.  Compensation for five years.  Independent compensation fund
to states  Could be special grants to be released  To be based on devolution formula. for a limited period.
to the states every month.  Fund to be under the GST Council.  Compensation to states to be (i)
 Based on a neutrally monitored 100% in the first 3 years; (ii)
mechanism. 75% in the fourth year; and (iii)
50% in the fifth and final year.
Sources: The Empowered Committee of State Finance Ministers, November 2009; Report of the 13th Finance Commission, December 2009;
Report of the 14th Finance Commission, February 2015; PRS.

Comparison of the 2014 Bill with the 2011 Bill on introduction of GST
The Table below compares the provisions of the 2014 Bill with the 2011 Bill and the recommendations of the
Standing Committee on the 2011 Bill.

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The Constitution (122nd Amendment) Bill, 2014 (GST) PRS Legislative Research

Table 4: Comparison of the 2014 Bill, 2011 Bill and the recommendations of the Standing Committee
Constitution (115th Amendment )Bill, Standing Committee Constitution (122nd Amendment) Bill,
2011 recommendations on 2011 Bill 2014
Coverage of All goods or services except:  No recommendation on goods to be All goods and services, except:
GST  Alcoholic liquor for human exempt.  Alcoholic liquor for human
consumption.  Goods exempted from GST should consumption.
 Petroleum crude, high speed diesel, not be specified in the Constitution  GST is to be levied on petroleum
motor spirit, natural gas, aviation Amendment Bill as this would make crude, high speed diesel, motor spirit,
turbine fuel. the GST regime rigid. natural gas, aviation turbine fuel at a
 Centre to impose additional levy on later date.
tobacco.  Centre to impose additional levy on
tobacco.
Integrated  Only centre to levy and collect tax.  Instead, the Modified Bank Model  Same as 2011 Bill.
GST  Tax collected to be divided between recommended by 13th Finance
the centre and the states. Commission to be considered.
Additional Tax No provision. Not addressed.  Tax (up to 1%) on the supply of
(in interstate goods in inter-state trade will be given
trade) to supply states, for two years or
more.
Compensation No provision.  An automatic and permanent GST  Parliament may provide for
to states Compensation Fund under the GST compensation to states for a
Council could be created. maximum of five years.
GST Council  Functions: Recommendations on  Functions: Should include floor  Functions: Also includes model GST
taxes to be subsumed, exempted rates, special provisions for some laws, principles of levy and place of
goods, threshold limits, rates. states. supply, apportionment of IGST.
 Decisions: By consensus.  Decisions: 3/4th weighted votes;  Decisions: Standing Committee
1/3 weightage to centre, 2/3 to recommendations incorporated.
states.
Dispute  GST Dispute Settlement Authority to  Omit GST Dispute Settlement  Standing Committee
Resolution determine disputes between centre Authority. recommendations incorporated.
and states.  GST Council to decide upon the
 Parliament may restrict jurisdiction of modalities to resolve disputes.
all courts other than Supreme Court.
Sources: The Constitution (122nd Amendment) Bill, 2014; The Constitution (115th Amendment) Bill, 2011; 73rd Report, The Constitution
(115th Amendment) Bill, 2011, Standing Committee on Finance, 2013; PRS.

1. This Brief is based on the Constitution (122nd Amendment) Bill, 2014 that was introduced in Lok Sabha on December 19,
2014 and passed by it on May 6, 2015.
2. First Discussion Paper on Goods and Services Tax in India, Empowered Committee on State Finance Ministers,
November 2009.
3. Poddar, Satya and Ehtisham Ahmad, GST Reforms and Intergovernmental Considerations in India, Working Paper
No.1/2009-DEA, Department of Economic Affairs, Ministry of Finance, March 2009.
4. GST Reforms and Intergovernmental Considerations in India, Working Paper No.1/2009-DEA, Department of Economic
Affairs, Ministry of Finance, March 2009.
5. Report of the Task force on GST, 13th Finance Commission, December 15, 2009.
6. Report of the 14th Finance Commission, Chapter 13, „Goods and Services Tax‟, February 24, 2015.
7. Comments of the Department of Revenue on the First Discussion Paper on GST, January 2010.
8. Report of the 13th Finance Commission, Chapter 5, „Goods and Services Tax‟, Ministry of Finance, December 2009.
9. Clause 12, The Constitution (122nd Amendment) Bill, 2014.
10. “1% tax above GST may hurt Make in India: CEA”, Business Standard, May 27, 2015, http://www.business-
standard.com/article/economy-policy/1-tax-above-gst-may-hurt-make-in-india-cea-115052700036_1.html.
11. 73rd Report, The Constitution (115th Amendment) Bill, 2011, Standing Committee on Finance, August, 2013.

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