Module-4

A) Introduction to GST

The idea of a nationwide GST in India was first

proposed by the Kelkar Task Force on Indirect taxes
in 2000. The objective was to replace the prevailing
complex and fragmented tax structure with a
unified system that would simplify compliance,
reduce tax cascading, and promote economic
integration. The Empowered Committee of State
Finance Ministers prepared a design and roadmap,
releasing the First Discussion Paper in 2009.

After years of deliberation and negotiations

between the Central and State Governments, the
Constitution (122nd Amendment) Bill, 2014, was
introduced in the Parliament. The Bill aimed to
amend the Constitution to enable the
implementation of GST. The Constitution
Amendment Bill was passed by the Lok Sabha in
May, 2015. The Bill with certain amendments was
finally passed in the Rajya Sabha and thereafter by
the Lok Sabha in August, 2016. Further, the Bill has
been ratified by the required number of States and
has since received the assent of the President.

The Implementation of GST has brought about a

fundamental shift in the financial relations
between the Central Government and the State
Governments in India. GST is a unified tax system
that replaced multiple indirect taxes levied by both
the Central and State Governments. Under GST,
both the Central and State Governments share the
authority to levy and collect taxes on goods and
services. This has led to greater harmonization and
uniformity in the tax structure across States,
promoting economic integration.

The GST system follows a dual structure, comprising

Central GST (CGST) and State GST (SGST), levied
concurrently by the Central and State
governments, respectively. Additionally, an
Integrated GST (IGST) is levied on interstate supplies
and imports, which is collected by the Central
Government but apportioned to the destination
state.

Since its implementation, the Indian GST has

undergone various amendments and refinements
based on feedback from businesses and the
evolving economic scenario. While the GST
implementation initially posed challenges for
businesses in terms of understanding the new
compliance requirements and adapting to the
changes, it has gradually settled into the Indian tax
landscape.

B) Constitutional Framework of GST including GST

Council

The constitutional framework for the GST was given

effect through the GST (101st Amendment Act),
2016 (‘the GST Amendment’). As the GST is a single
tax that replaces multiple other indirect taxes, both
the Centre and the States had to give up their
exclusive powers to levy different indirect taxes.
Through the GST Amendment, the Centre lost out
on its power to levy taxes such as excise duty, while
the States could no longer levy entry tax, VAT etc.

As the GST is a tax that is to be levied concurrently

by the Centre and the States, a GST Council was
established under Article 279A of the Constitution.
The GST Council is headed by the Union Finance
Minister. The other members of this body include
the Union Minister of State for Finance, and the
Finance Ministers of all the State Governments.
The GST Council was envisaged to facilitate
collective decision-making between the Centre and
the States, for all matters concerning the GST,
including the rate of GST applicable on different
goods and services.

As the GST is implemented through a process of

collective decision-making, both the Centre and the
States have lost out on their autonomy to
unilaterally determine their indirect tax policies.
This is reflected in clause (9) of Article 279A, which
lays down the voting pattern that shall be adhered
to before any recommendation of the GST Council is
ratified.
Under the voting pattern, the Centre’s vote shall
have a weightage of one-third of the total votes
cast, which effectively gives it a veto over all
decisions that may be put to vote before the
Council. While the State Governments can also
collectively exercise a veto, no individual State
Government can exercise a veto over any decision
of the Council. But the significant point here is that
the Centre’s veto power allows it to block any
proposal moved before the GST Council, even if all
the State Governments unanimously approve of the
same. This veto power also has implications for the
present crisis, which I shall address in the
concluding sections of this piece.

Interestingly, although Section 18 was part of the

Constitutional Amendment Bill, it did not amend
any provision of the Constitution. But it mandated
Parliament to pass a law that would lay down a
framework under which States would receive
compensation for 5 years from the date of GST
implementation (1st July 2017).
 C) Structure of GST

GST operates under a dual structure, comprising the

Central GST (CGST) levied by the Central
Government and the State GST (SGST) levied by the
State Governments. In the case of Inter-state
transactions, Integrated GST (IGST) is applicable,
which is collected by the Central Government and
apportioned to the respective State. Import of
goods or services would be treated as inter-state
supplies and would be subject to IGST in addition to
the applicable customs duties.

1. CGST, 2017- Central Goods and Services Tax

(CGST) subsumed all the taxes levied by the
central government. For example, central
excise duty, central surcharges and cess
and other such central indirect taxes that
were earlier applicable.

2. SGST, Act 2017- State Goods and Services

Tax (SGST) subsumes all taxes levied by the
state government, that’s, state indirect
 taxes. For example, VAT, sales tax, state
cesses and surcharges, etc.

Actually, on intrastate movement, both CGST and

SGST are applicable.

For example, if a manufacturer makes a product in

Maharashtra and sells it within the state only, SGST
and CGST both will be applicable, wherein SGST will
go to the Maharashtra state government’s coffers
and Central Goods and Service Tax will go to the
central government’s kitty.

3. IGST Act, 2017- Integrated Goods and

Services Tax
Integrated Goods and Services Tax or (IGST) levied
on the interstate movement of goods and services.

There are a few products that still do not come

under the ambit of GST, and sales tax/VAT is still
applicable to them.
For example, alcohol, petrol, diesel, natural gas,
airline fuel and a few others. Examples of services
where GST is not applicable are wages and salary,
electricity and a few others. While the government
wants to limit the price of alcohol and limit
consumption, and hence alcohol has not been
brought under the GST ambit, petrol continues to
bring high amounts of revenue for the states.

4. UTGST Act, 2017- UTGST stands for Union

Territory Goods and Services Tax. It is one of
the components of the GST regime in India,
along with the CGST, SGST, and IGST. UTGST
is applicable on the supply of goods and
services within the Union Territories of
India, which are regions that are directly
governed by the Central government.

The rate of UTGST Is equal to the rate of SGST in the

respective states. The revenue collected from
UTGST is shared between the Central government
and the Union Territory government, as per the
recommendations of the GST Council.
However, SGST can be applied in Union Territories
such as New Delhi and Puducherry, since both have
their individual legislatures, and can be considered
as “States” as per GST process.

5. Compensation to States Act, 2017

The Goods and Services Tax (Compensation to

States) Bill, 2017 was introduced in Lok Sabha on
March 27, 2017. The Bill provides for compensation
to states for any loss in revenue due to the
implementation of GST.

(i) Period of compensation:

Compensation will be provided to
a state for a period of five years
from the date on which the state
brings its State GST Act into force.

(ii) Projected growth rate and base

year: For the purpose of
calculating the compensation
amount in any financial year, year
 2015-16 will be assumed to be the
base year, from revenue will be
projected. The growth rate of
revenue for a state during the
five-year period is assumed be
14% per annum.

(iii) Calculation and release of

compensation: The compensation
payable to a state has to be
provisionally calculated and
released at the end of every two
months. Further, an annual
calculation of the total revenue
will be undertaken, which will be
audited by the Comptroller and
Auditor General of India.

(iv) Levy and compensation of GST

compensation cess: A GST
Compensation Cess may be levied
on the supply of certain goods and
 services, as recommended by the
GST Council. The receipts from the
cess will be deposited to a GST
Compensation Fund. The receipts
will be used for compensating
states for any loss due to the
implementation of GST.

Any unutilised money in the Compensation Fund at

the end of the compensation period will be
distributed in the following manner: (i) 50% of the
fund to be shared between the states in proportion
to revenues of the states, and (ii) the remaining
50% will be part of the centre’s divisible pool of
taxes.