GST Council: Preparing For The Next Big Steps

Last week, Section 12 of the Constitution Amendment Act, 2016 was given effect to, starting September 12, 2016.

Section 12 amends the Constitution of India to insert Article 279A, which provides for the creation of the GST Council – a Council of Union and State Finance Ministers – to administer GST (Goods and Services Tax) in India.

Following the insertion, the President of India constituted the GST Council formally on September 15, 2016.

The GST Council is a Council of Ministers tasked with certain crucial responsibilities. It is chaired by the Union Finance Minister and consists of the Union Minister of State for Finance and the State Minister of Finance or any other Minister nominated by each State Government.

Under Article 279A, the GST Council will make recommendations on the following

• taxes, cesses and surcharges levied by the Union, State or Local Body to be subsumed into GST
  
• exemptions
  
• model GST laws, principles of levy, apportionment of IGST (Integrated GST - on inter-state transactions) and principles of place of supply rules
  
• threshold limits of turnover below which goods and services would be exempt
  
• rates of tax including floor rates with bands for goods and services
  
• special rates for additional revenue in times of natural calamity or disasters
  
• special provisions for North-East
  
• any other matter that the GST Council may decide
  

Rates, Exemptions And Thresholds

The focus of the entire nation is on the GST Council to see what rate of tax (revenue neutral rate) it recommends. It is a delicate balancing act.
- An indirect tax is seen to be a regressive tax as it taxes both the poor and the rich equally.
- A high tax on goods and services would be inflationary and counter-productive leading to more evasion and non-compliance.
- It also has a psychological impact on consumption if the common man sees the percentage of tax increase on consumer items, even if the final price of the goods remains the same.

At the same time, indirect taxes constitute the bulk of tax collection in India. Any reduction in the collection would affect the states’ revenues significantly, though the central government has committed to compensating their revenue shortfall for five years after GST is implemented. But the states are not keen on a low rate of GST and have in effect rejected the recommendations of the Chief Economic Advisor (CEA). In his 2015 report, the CEA recommended a revenue neutral rate of between 15 to 15.5 percent. Therefore, rate poses the most significant decision for the GST Council.

Related to the GST rate are two other considerations for the GST Council. The revenue neutral rate is essentially the entire indirect taxes collected divided by the tax base. The collection of indirect taxes is going to depend upon the list of exemptions that the GST Council will recommend. Currently there are several goods, which are either not taxed or taxed at a lower rate. Industries such as textiles, food, etc have for years existed in a no-tax-low-tax regime. A decision on how to continue with these exemptions is going be crucial for the GST Council.

Another crucial decision pertains to the tax base. The larger the tax base the lower the rate of tax can be fixed. At the same time, pitching the tax base too widely would increase the cost of administration for both the governments (centre and states) and the taxable entity, leading to harassment and evasion. This means that the threshold limits for registering and paying GST is going to be crucial.

The decisions on rate, exemption(s) and threshold are by far the most crucial first steps for the GST Council.

Model GST Laws And Related Decisions

The next big decision that the GST Council will need to take is on the Model GST law.

In 2005-06 a uniform VAT (value-added tax) was sought to be adopted by the states to ensure consistent rates and procedures. However, within a few years, a few individual states digressed from the model laws and today we have fairly divergent VAT regimes in the states.

Getting a model GST law in place for the states, one that is likely to be adopted with minimum deviations, is going to be key. This will depend on how many recommendations made by the states, with respect to provisions and procedures, will be accepted by the Council. For GST to be rolled out on April 1, 2017, it is crucial that the model law is in place by the winter session of Parliament, which is only a few months away.

Related to the decision on the model GST law is going to be decision on centralized registration for services. This has been an area of extensive representation by all major services companies. While the central government has lent a sympathetic ear, centralized registration remains difficult to achieve under the dual GST regime. It will require the states to agree to forego their ability to tax-assess the service providers with an assurance that the tax on services consumed in their state will accrue to their State. It is going to be an important decision for the success of GST and it will be interesting to see what the GST Council decides.

Will The GST Council Rule On Subsuming Tax On Petroleum Products?

Finally, it would interesting to see whether the five petroleum products – petrol, diesel, aviation turbine fuel, natural gas and crude - kept outside GST would see an inclusion into GST. These contribute significantly to the central and state exchequers. Keeping these products outside the levy of GST would increase their prices and can have a cascading impact. Levying GST on these products can increase the rate of tax on an overall basis. Again, it is going to be crucial to see what the GST Council decides.

What The Future Holds

While the tasks confronting the GST Council seem herculean, I do believe it would be interesting to look back at this period in a few years time. The first steps are always daunting but with time and data, the GST Council is likely to be more assured and clear in its decision making. Of course this also depends on how well the states work with each other in the GST Council and how much leeway the centre gives them to unify India into a common market. There are however good omens with the manner in which the centre and states have taken GST on board. But a lot of what we will hopefully count as successes of GST is going be dependent on the first steps that the GST Council takes.

L Badri Narayanan is a lawyer and partner with well known law firm Lakshmikumaran & Sridharan. He specialises in advising technology companies on corporate, commercial, intellectual property and tax laws.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.