GST - Parliamentary Committee's Report on Constitution Amendment - A step forward
THE Constitution (One Hundred Fifteenth Amendment) Bill, 2011 introduced in Lok Sabha on 22 March, 2011, was referred to the Parliamentary Committee on Finance on 29 March, 2011 for examination and report. The Committee headed by Mr.Yashwant Sinha has submitted its report to Parliament.
Highlights of the recommendations
Compensation Mechanism: a well-defined automatic compensation mechanism may be built in, which would ensure that trajectories of revenues being contemplated are maintained at least in the short turn. Suitable amendments may accordingly be made in the Bill providing for a built-in permanent compensation mechanism with a view to addressing the legitimate revenue concerns of States. For this purpose, a GST Compensation Fund may be created under the administrative control of the GST Council.
Administration and Information Technology (IT) Mechanism: Without well-designed IT infrastructure across the country, the benefits of GST may remain elusive. It is also imperative that although a dual GST regime has been proposed, a situation of trade / business dealing with a dual administration and multiplicity of authorities should be avoided, as it may create more hassles rather than ease them. Though not part of the Constitutional Amendment Bill, this issue needs clarity, so that dual GST regime becomes acceptable to trade and commerce at large and fosters tax compliance.
Integrated Goods and Services Tax (IGST): The alternate model, suggested by the Task Force on GST constituted by the 13th Finance Commission could be considered with a view to simplifying and easing compliance and administrative burden and ensuring a smooth clearing house mechanism between States for facilitating the process of IGST after consideration by the GST Council. Further, as the destination-based IGST model favours predominantly consumer States more than producer States, the revenue concerns of these States also needs to be factored in and duly addressed. The proposed model should not thus act as a dampener or dis-incentive for States with a strong manufacturing base.
GST Dispute Settlement Authority: The proposed Article 279B providing for GST Dispute Settlement Authority should be omitted, as this body would have the effect of overriding the supremacy of Parliament and the State Legislatures. However, since any dispensation involving several entities / interests requires a mechanism to resolve disputes / differences, it may be expedient to make a provision in Article 279A itself empowering the GST Council to decide about the modalities to resolve disputes arising out of its recommendations.
Harmonized Tax Structure: Clause 5 of the proposed Article 279A requires the GST Council to be guided by the need for a harmonized structure of goods and service tax and for the development of a harmonized market for goods and services. However, since the words have not been defined in the proposed Bill, such ambiguity should not remain in the Bill. The word "harmonized structure" may be clearly amplified or defined. It should also be clarified that the provisions contained in Clause 5 are in the nature of guiding principles for the Council and not mandatory or obligatory in nature.
Consensus: in tune with the spirit of cooperative federalism, it would be in order if the proposed GST Council functions like the present Empowered Committee, which has had a good track record of not only reforming the tax system but also resolving differences amicably in an institutional mode.
Declared Goods: In order to ensure that there is no unilateral decision by the Centre regarding taxation of "declared goods" kept outside the purview of GST (clauses 3 and 4 of amendment proposed in Article 286) and also to uphold the spirit of cooperative federalism, which is crucial for the structure of dual GST, Clause 3 may be amended so that in place of "subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of tax as Parliament may by law specify", the phrase "subject to such restrictions and conditions of tax as Parliament may by law specify on the recommendations of the GST Council constituted under 279A" may be substituted. This change is expected to allay the fears of States to some extent on loss of fiscal autonomy. In this context, it would also be expedient to insert a new sub-clause in Clause (4) of Article 279A to provide both States and Centre the requisite flexibility to raise additional resources during period of natural calamities and disasters. The proposed Clause 4 of Article 279A may also be suitably amended to provide for special schemes for North-Eastern States, the State of J & K and other special category States. Similarly, the Central Government should also have the flexibility to levy surcharge or cess whenever required or during extra-ordinary circumstances.
Entry Tax: Entry 52 of Seventh Schedule is worded in the Bill as "taxes on the entry of goods into a local area for consumption, use or sale therein to the extent levied and collected by a Panchayat or Municipality". It will not be desirable to go back to the earlier system of levy and collection of octroi by local bodies and this will be a retrograde step, which would hinder free flow of trade and increase compliance burden. The Committee therefore desire that entry tax in general should be subsumed in GST. The relevant Clause / sub-clause in the Bill may be modified accordingly so as to empower the States to collect entry tax for distribution to local bodies instead of leaving it to be collected by different local bodies.
Floor Rate: Threshold of limits of turnover etc. for exempting certain class of taxpayers like small traders / manufacturers / service-providers may also be left to the wisdom of the GST Council. Although it is ideally desirable that the GST regime is made comprehensive and all encompassing for the present, the existing exemption for small business may continue in line with the Government policy to encourage and promote small enterprises including self-employed sector.
Exclusions: Article 366 of the Constitution is proposed to be amended vide Clause 14 in the Bill, wherein taxes on the supply of specified goods is proposed to be excluded from the purview of GST. Such specific exclusions need not be provided in a Constitution (Amendment) Bill, as this will needlessly make the GST regime very rigid. Since the ultimate goal is to have an integrated, comprehensive and seamless GST regime subsuming various Central and State indirect taxes and levies, the Committee recommend that the above-mentioned exclusion provision may be omitted from the Constitution (Amendment) Bill.
GST Monitoring: Considering the fluidity and uncertainties involved in ushering in radical changes in the tax system, there is a need to set up a GST Monitoring / Evaluation Cell, which should closely follow on a continuous basis the immediate impact of GST on key aspects such as growth in GDP, inflation, hoarding, compliance costs for taxpayers, administrative bottlenecks and, last but not the least, the retail prices paid by the ultimate consumer. The GST Monitoring / Evaluation Cell may function under the aegis of the proposed GST Council. This may be incorporated as a clause / sub-clause in the proposed Article 279A of the Bill so as to put monitoring of GST on a firmer footing.
Conclusion: In conclusion, the fears expressed in some quarters about the proposed GST Council being made a constitutional body and infringing upon or even overriding the supremacy of Parliament or State Legislature is not correct as it is envisaged as a recommendatory body. The fruitful experience with the Empowered Committee of State Finance Ministers so far does not seem to give any credence to such apprehensions. This body has provided a useful platform for consensus-building between Centre and States and has evolved democratic practices over time to discuss and resolve issues. As this will be a political and a recommendatory body, it would be in a position to play a constructive and enabling role vis-à-vis the Legislature, which needless to emphasise, would remain supreme in matters of legislation including taxation. The mandate entrusted to the GST Council under the proposed Article 279A of the Constitution (Amendment) Bill does not in any way alter the existing constitutional scheme in so far as the Legislature, both Union and State, is concerned.
On the whole, the Committee is of the view that the Constitutional (Amendment) Bill should not ideally include specific aspects relating to rates, exemptions, exclusions, thresholds, administrative arrangements etc. What should be included in the laws and rules should not form part of the Constitution of India. The present Bill relating to GST, in the Committee's view, has not been well drafted from this perspective and, therefore, requires amendments as suggested above.