A Clear Understanding of Real GST

In the long run-up to introducing GST, the Government was so focused on State governments and negotiating their claims for compensation that it appeared to have missed the fact that India has seven Union Territories that also need to come on board.

Out of the seven, only Delhi and Puducherry have their own legislatures, which would mean that the other five would become tax havens under GST. Being a destination-based tax, supplies to and from Union Territories without Legislature (Daman and Diu, for example) would escape GST. This is certainly not what the Government would have wanted and appears to be a case of drafting dilemmas.

A list of taxes

The GST Council recently came up with a bizarre solution. Just like the State GST (SGST), the thought process at present seems to be to draft a separate law for Union Territories, called UTGST. This would leave us with CGST, SGST, IGST and UTGST, which completely vitiates the tagline of ‘one nation, one tax’. If there are going to be so many GSTs, we might was well replace customs duty with foreign GST (FGST)!

The reason for the GST Council taking this route is clear: another amendment to the Constitution is just not thinkable now. Given the situation post-demonetisation, the Opposition will shoot down any such move. Yet, an amendment to the Constitution seems inevitable if we are to avoid UTGST — either the definition of State can be amended in Article 366 or it can be inserted in Article 246(4), which gives the Government the Power to make laws with respect to any matter for any part of the territory of India which is not included in the State, including the matters enumerated in State List.

As per the General Clauses Act, 1897, the definition of State includes Union Territories. This definition can be brought into the Model GST laws instead of levying a new type of GST just because it is difficult to get a buy-in from other political parties for the present types of GST. As the law develops, GST is becoming more of a political tax than a true value-added tax.

The only matter that was resolved at the recent meeting of the GST Council was the compensation formula to the State governments. The rates of tax on goods and services and the draft GST laws could not be finalised due to differences of opinion on many issues, including how to tax works contracts under GST and the definition of agriculture. It should be a matter of concern that the tough but critical parts of GST are being left to the slog overs. Due to this, compromises would need to be made which could dilute an already much-diluted law.

If tax payers are not given enough and more time to transition to GST, they are going to think of innovative ways to manage the transition. It is imperative that the next meeting of the GST Council in March does not conclude without finalising all pending issues including rates of tax, exemptions and the final Model Law. The Council should also make a statement that GST would be introduced from September 1, 2017 so that the guessing game ends.

The litmus test to ascertain if the introduction of GST was a success would be if — at the end of, say, five years after GST is introduced — there is a general perception that we would have been better off with our present laws. For now, the answer appears to be “Yes”.

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