Module_16_2_

GOODS AND
SEVICES TAX

CERTIFICATE COURSE

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DEVELOPED BY

MODULE - 2

LEGAL BACKGROUND OF GST
IN INDIA

2.1 BRIEF HISTORY OF GST IN INDIA The overall tax burden would have a 25% to 30%
marked reduction from the viewpoint of the
2.1.1 Introduction consumer. It’s also easier to administer The GST on an
overall scale, due to its self-policing and transparent
The introduction of GST is a historical reform in the nature.
Indian taxation system. GST aims to alleviate the
cascading effects of the complex tax system and 2.1.2 Origin of GST
promote the economic growth of the nation. The
prices of the commodities will also be impacted since Various countries have already recognised the Goods
any indirect tax paid before would be imposed on the and Services Tax. For example in Australia, this
consumers in the final stage. GST is proved to be an system was introduced in 2000 to replace the Federal
effective tool of fiscal policy. India has enacted this Wholesale Tax. GST was implemented in New
new proposal to project itself as a beneficial market Zealand in 1986. A hidden Manufacturer’s Sales Tax
to international investments. was replaced by GST in Canada, in the year 1991. In
Singapore, GST was implemented in 1994. GST is a
The mitigation of double taxation or the elimination value-added tax in Malaysia which came into effect in
of the cascading effect of taxation is one of the most 2015.
important benefit. A way has been paved for a
common national market in respect to the initiative. July 2000, is the year of origin of Goods and Services
Post GST implementation, the competitive level of Tax, the Empowered Committee of State Finance
Indian goods in international and domestic markets Ministers with the Hon’ble State Finance Ministers of
have risen comparatively.

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West Bengal, Karnataka, Madhya Pradesh, and Services Tax (GST) by April 1, 2010 was
Maharashtra, Punjab, Uttar Pradesh, Gujarat, Delhi first discussed in the Budget Speech for the
and Meghalaya were set up as members by the financial year 2006 -07.
Government of India with the following objectives: ➢ The proposal included amendments meaning
thereby the reforms or restructuring of not
➢ to monitor the implementation of uniform only the indirect taxes which are applied by
floor rates of sales tax by States and Union the Centre but also by the States, the
Territories; authority of formulating a Design and Road
Map for the application of GST was assigned
➢ to keep in check the phasing out of the sales- to the Empowered Committee of State
tax based incentive schemes; Finance Ministers (EC).
➢ Based on the suggestions from Government
➢ to choose milestones and methods of States of India and the States, the EC published its
to switch over to VAT; and First Discussion paper on Goods and Services
Tax in India in the month of November in the
➢ to keep in check reforms in the Central Sales year 2009.
Tax system existing in the country. ➢ Also, in the month of September in the year of
2009 a Joint Working Group was formed that
2.1.3 Chronology of events leading up to included officers from Central as well as State
Government in order to the take the Goods
introduction of GST and Services Tax related work further.
➢ A Constitution (115th Amendment) Bill was
The Goods and Services Tax has been introduced in initiated in the Lok Sabha in month of March
the country after a 13-year long journey since it was of 2011 in order to amend the Constitution
first deliberated in the report of the Kelkar Task for the introduction of GST. As per the
Force on the indirect taxes. A summary containing procedure that had been laid down, the Bill
the major turn points on the proposal for the was referred to the Standing Committee on
introduction of GST in India is as follows: Finance of the Parliament for the purpose of
examination and report.
➢ In the year 2003, the Kelkar Task Force on
indirect tax had recommended a
comprehensive Goods and Service Tax (GST)
which was based on VAT principle.

➢ A proposal to initiate a National level Goods

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➢ Also, in the pursuance of the decision taken in and opinions of the Parliamentary Standing
a meeting between the Union Finance Committee were investigated in the Ministry
Minister and the Empowered Committee of in consultation with the Legislative
State Finance Ministers in the month of Department. Majority of the suggestions
November on the 8th day of 2012. Also, a were made by the EC and the Standing of the
Committee on GST Design, which included Parliament Committee were accepted and
the officials of the Government of India, State the draft Amendment Bill was revised
Governments and the Empowered considerably.
Committee, was formulated. ➢ The revised draft of the Constitutional
Amendment Bill including all the changes
➢ The Committee did a detailed deliberation on which have been stated above were
GST framework including the Constitution ultimately delivered to the EC for its
(115th) Amendment Bill and submitted its ratification in September 2013.
report in January 2013. Based on the report, ➢ After considering the revised changes
the Empowered Committee certain changes incorporated in the draft of the bill, the EC
in the Constitution Amendment Bill in their again made definite suggestions and
meeting at Bhubaneswar in the year 2013 in recommendations on the Bill after its meeting
January. The Empowered Committee in the was held in Shillong in November 2013. Also,
Bhubaneswar meeting also took a decision to the suggestions and recommendations of the
formulate three committees of officers to EC were included in the draft Constitution
discuss and report on various aspects of GST (115th Amendment) Bill. And the updated
which are as follows:i version of the draft was sent to for ratification
✓ Committee on Place of supply rules and of the EC in the month of March in 2014.
Revenue Neutral Rates ➢ In the month of March in the year 2011, the
✓ Committee on dual control, threshold 115th Constitutional (Amendment) Bill, 2011
and exemptions; for the introduction of Goods and Services
✓ Committee on IGST and GST on imports. Tax was initiated in the Lok Sabha, however it
got lapsed with the dissolving of the 15th Lok
➢ The Parliamentary Standing Committee Sabha.
submitted its report in August 2013 to the
Lok Sabha. The suggestions of the Committee

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➢ In the month of June in the year of 2014, the 2.2.2. The important changes made in constitution
draft Amendment Bill was delivered to the EC (new articles/amended articles) via this law are as
after the ratification of the new Government. follows

➢ Finally with the unanimous consent of the EC ➢ Insertion of new Article 246A
on the Bill, the Cabinet on 17th December
2014 ratified the proposal for the This is a new article inserted in the constitution. It
introduction of a Bill in the Parliament for says that-
altering the Constitution of India in order to
facilitate the initiation of GST nationwide. (1) Notwithstanding anything contained in articles
The Bill was introduced in the Lok Sabha on 246 and 254, Parliament, and, subject to clause (2),
19th December 2014 and was passed by the the Legislature of every State, have power to make
Lok Sabha on 6th May 2015. Finally it was laws with respect to goods and services tax imposed
referred to the Select Committee of the Rajya by the Union or by such State.
Sabha and its report was submitted on 22nd
July 2015. (2) Parliament has exclusive power to make laws with
respect to goods and services tax where the supply of
2.2 CONSTITUTIONAL PROVISIONS goods, or of services, or both takes place in the course
of inter-State trade or commerce.
2.2.1 Introduction
This Article gives power to Union and State
There are various articles in the constitution which government to make the law relating to goods and
state the financial relations between Union and services being transacted within the state.
States. Since GST bills involve a very huge interest of
the state governments, a historical tax reform cannot The Centre and state government both have the
take place without making certain suitable changes jurisdiction over the intra-state trade; while inter-
into the constitution. For the following purpose, state trade and commerce is “exclusively” under
101st amendment of the constitution was passed. central government jurisdiction.
This act received the assent of the President of India
on 8th September, 2016. ➢ Amendment of Article 248(1)- Residuary
Power Of Legislation

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(1) Subject to article 246A, Parliament has exclusive and services tax or enumerated in the State List
power to make any law with respect to any matter not specified in the resolution, it shall be lawful for
enumerated in the Concurrent List or State List. Parliament to make laws for the whole or any part of
(2) Such power shall include the power of making any the territory of India with respect to that matter
law imposing a tax not mentioned in either of those while the resolution remains in force.
Lists.
The above-mentioned article grants an additional
On one hand Article empowers the Parliament to power to the parliament to make laws in respect of
make any law with respect to any matter not goods and service tax. Such power can be exercised
enumerated in the State List or Concurrent List. by Parliament of India and it can make the GST law for
the whole or any part of India provided the council of
On other hand it also narrows down the scope of state passes a resolution supported by not less than
Parliament as it contains the phrase ‘Subject to article two third of the members present and voting.
246A.
➢ Amendment of Article 250(1)- Proclamation
Therefore, these provisions make it clear that the of Emergency
SGST and CGST Act shall be made by State
Government and Central Governments respectively, Notwithstanding anything in this Chapter,
while the IGST Act shall be made by Central Parliament shall, while a Proclamation of Emergency
Government only. is in operation, have power to make laws for the
whole or any part of the territory of India with
➢ Amendment of Article 249 (1)- Power of respect to goods and services tax or of the matters
Parliament to legislate with respect to a enumerated in the State List.
matter in the State List in the national interest
This means that In the event of announcement of
Notwithstanding anything in the foregoing emergency, Parliament of India will be conferred with
provisions of this Chapter, if the Council of States has power to make the for the whole or any part of the
declared by resolution supported by not less than two territory of India with respect to goods and services
thirds of the members present and voting that it is tax or of the matters enumerated in the State List
necessary or expedient in the national interest that under article 250(1).
Parliament should make laws with respect to goods

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➢ Amendment of Article 268 (1)- Duties levied collected and appropriated by the Government of
by the union but collected by the States India and the States in the manner provided in clause
(2).
Article 268 (1) Such stamp duties and such duties of (2) The proceeds in any financial year of any such tax
excise on medicinal and toilet preparations as are levied in accordance with the provisions of clause (1)
mentioned in the Union List shall be levied by the shall be—
Government of India but shall be collected— (a) Collected by the Government of India and the
(a) in the case where such duties are leviable within States;
any [Union territory], by the Government of India, (b) Appropriated by the Government of India and the
and States, in accordance with such principles of
(b) in other cases, by the States within which such collection and appropriation as may be formulated by
duties are respectively leviable. Parliament by law.

The above-mentioned Article provides that the Under the GST law, both the centre and the state
excise duty and the stamp duty shall be levied by governments are empowered to levy tax on goods
union government and shall be collected by state (In or/and services, i.e., the power to levy taxes have
case of State) or by union (In case of union been distributed among both the governments unlike
territory). However, now the duty of excise on a few in the earlier tax law where the power to levy taxes
goods and services has been omitted and the same lied with just the Central government. However, this
has been merged under GST such as duties on Article is yet not in force.
medicinal and toilet preparation. Such stamp as are
mentioned in the Union List shall be levied by the ➢ Amendment of Article 269
Government of India but shall be collected.
Article 269 - Taxes on the sale or purchase of goods
➢ Amendment of Article 268A- Service tax and taxes on the consignment of goods except as
levied by union government and collected and provided in article 269A shall be levied and collected
appropriated by Union & States by the Government of India but shall be assigned and
shall be deemed to have been assigned to the States
Article 268A - (1) Taxes on services shall be levied by on or after the 1st day of April, 1996ii.
the Government of India and such tax shall be

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The provisions Article 269 (1) facilities the levy and ✓ The amount apportioned to a State under
collection of tax on sale of goods in the course of clause (1) shall not form part of the
Interstate trade. It provides that the taxes shall be Consolidated Fund of India.
levied and collected by the Union but shall be
assigned to the States. Now, the provision of this ✓ Where an amount collected as tax levied
clause is subject to new article 269A which provides under clause (1) has been used for
for levy of goods and services tax on supplies in the payment of the tax levied by a State
course of inter-State trade or commerce. under article 246A, such amount shall
not form part of the Consolidated Fund of
➢ Insertion of new Article 269A- Levy And India.
Collection Of Goods And Services Tax In
Course Of Inter-State Trade Or Commerce ✓ Where an amount collected as tax levied
✓ Goods and services tax on supplies in the by a State under article 246A has been
course of inter-State trade or commerce used for payment of the tax levied under
shall be levied and collected by the clause (1), such amount shall not form
Government of India and such tax shall part of the Consolidated Fund of the
be apportioned between the Union and State.
the States in the manner as may be
provided by Parliament by law on the ✓ Parliament may, by law, formulate the
recommendations of the Goods and principles for determining the place of
Services Tax Council. supply, and when a supply of goods, or of
Explanation.—For the purposes of this services, or both takes place in the course
clause, supply of goods, or of services, or of inter-State trade or commerce.
both in the course of import into the
territory of India shall be deemed to be ✓ This article says that in case of the inter-
supply of goods, or of services, or both in state trade, the tax will be levied and
the course of inter-State trade or collected by the Government of India and
commerce. apportioned between the Union and
States in the manner as provided in the
law of parliament on the
recommendation of the GST Council.

✓ The article also states that the proceeds

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✓ which are collected shall be assigned to GST will be distributed between Union and State
the state or centre as per their respective according to Clause (2) of Article 270.
share but shall not be credited to the
consolidated fund of state or India. The ➢ Amendment of Article 271- Surcharge on
reason for this is that under GST, where taxes by union
state collects tax, it assigns centre’s share
to centre, while where centre collects the Notwithstanding anything in articles 269 and 270,
tax, it assigns state’s share to state. Parliament may at any time increase any of the duties
or taxes referred to in those articles except the goods
➢ Amendment of Article 270(1)- Levy and and service tax by a surcharge for purposes of the
Distribution between union and state Union and the whole proceeds of any such surcharge
shall form part of the Consolidated Fund of India.
All taxes and duties referred to in the Union List,
except the duties and taxes referred to in articles This Article empowers the Parliament with the
268,269 and 269A respectively, surcharge on taxes exclusive right to charge the surcharge on any tax and
and duties referred to in article 271 and any cess the proceeds of such surcharge shall for part of
levied for specific purposes under any law made by consolidated fund. But the Parliament does not have
Parliament shall be levied and collected by the a power to charge any tax by way of surcharge on
Government of India and shall be distributed GST. In other words, GST is an exception to above
between the Union and the States in the manner mentioned Article. Therefore, a restriction has been
provided in clause (2). inserted in the provisions of this article, restricting
the powers of the Parliament on levying any
The above-mentioned Article provides that surcharge on the GST.
according to Article 270(2), the certain taxes shall be
distributed between union and states. Above Article ➢ Insertion of Article 279A- Constitution of
does not provide any provision with respect to Goods and Service tax Council
Interstate GST in order to avoid overlapping of
provisions as Article 269(A) provides the provision of ✓ Article 279A provides that the President
distribution of revenue in case of Interstate GST. shall constitute a council, within 60 days
However, the revenue of GST other than Interstate from the date of commencement of this

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Act and such council shall be called o model Goods and Services Tax
Goods and Services Tax Council. Laws, principles of levy,
✓ The GST council will constitute the apportionment of Integrated
following members: Goods and Services Tax and the
principles that govern the place
o Chairperson- Union Finance of supply;
Minister;
o the threshold limit of turnover
o Member From Central Govt- below which goods and services
Union Minister of State in charge may be exempted from goods
of Revenue or Finance; and services tax;

o Members from State Govt – o the rates including floor rates
Minister in charge of Finance or with bands of goods and
Taxation or any other Minister services tax;
nominated by each State
Government. o any special rate or rates for a
specified period, to raise
✓ The members for the committee shall additional resources during any
decide Vice-Chairperson amongst natural calamity or disaster;
them for such period as may decideiii.
o special provision with respect to
✓ The Goods and Services Tax Council the States of Arunachal
shall make recommendations to the Pradesh, Assam, Jammu and
Union and the States on— Kashmir, Manipur, Meghalaya,
o the taxes, cesses and surcharges Mizoram, Nagaland, Sikkim,
levied by the Union, the States Tripura, Himachal Pradesh and
and the local bodies which may Uttarakhand; and
be subsumed in the goods and
services tax; o any other matter relating to the
o the goods and services that may goods and services tax, as the
be subjected to, or exempted Council may decide.
from the goods and services tax;

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All decisions taken at the GST council will be taken ➢ Amendment of Article 286- Restriction on
based on voting. Process of voting is clearly Imposition of tax
articulated in detail in the constitutional amendment
bill. (1) No law of a State shall impose, or authorise the
imposition of, a tax on the sale or purchase of goods
o The quorum of meeting should be 1/2nd where such sale or purchase takes place—
(50%) total members. (a) outside the State; or
(b) in the course of the import of the goods into, or
o Every decision of council shall be taken by export of the goods out of, the territory of India.
majority of members consisting 3/4th (75%) (2) Parliament may by law formulate principles for
of total weighted votes of members present determining when a sale or purchase of goods takes
and voting. place in any of the ways mentioned in clause (1).

o The vote of Central government shall have This article puts a restriction on the state laws from
weight of 1/3rd of total vote cast imposing any tax on purchase or sale of goods outside
the state or in the course of the export of the goods
o The vote of State governments together shall out of or the import of the goods into, the territory of
have weightage of 2/3rd of total vote cast India. Provisions of this article intends to cover
Supply of goods or service or both. This clause will
The above mentioned article states that the council restrict the states from imposition of Interstate GST
shall be constituted with motive of governing the and same will be levied by union government under
matters in relation to goods and services tax. Clauses Article 269A as mentioned earlier. This is a
of this article also provides the structure, functions of consequential amendment to pave the way for
the council etc. Recommendations shall be made to introduction of goods and service tax. All inter-state
Union and state by GST council on cess surcharge, transactions and import and export of goods or
taxes levied by state and central on goods and services or both will taxed by a central legislation.
services, threshold limit or any other matter related
to goods and services tax. Further, it states that the ➢ Amendment of Article 366 (Definition)
quorum to validate a meeting of the GST council.
Consensus of all members of the council will be
essential to take any decision.

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Article 366 consists of several definitions. After the An amendment of this Constitution may be initiated
amendment of Article 366, new clause 12A has been only by the introduction of a Bill for the purpose in
added which defines “Goods & Service tax” which either House of Parliament, and when the Bill is
states as any tax on supply of Goods or Services or passed in each House by a majority of the total
both except taxes on supply of the alcoholic liquor for membership of that House and by a majority of not
human consumption. less than two-thirds of the members of that House
present and voting, [it shall be presented to the
One more new clause i.e., clause 26A has been President who shall give his assent to the Bill and
inserted which defines the term ‘service’ which thereupon] the Constitution shall stand amended in
defines it as, anything other than goods. The accordance with the terms of the Bill:
definition of service is much broader now as
compared to the earlier one which is defined in Provided that if such amendment seeks to make any
finance act 1994. change in—

This Articles specifies the definition of ‘Goods and o Article 54, Article 55, Article 73, Article 162,
Services Tax’, ‘Services’ and ‘State’. As per the Article241, Article 279A or
definitions, only alcoholic liquor for human
consumption has been excluded from the ambit of o Article 279 B
GST Constitutionally. All other forms of alcohol like
alcohol for industrial use and medicinal and toilet This article grants the power to Parliament to amend
preparation containing alcohol which falls in the any provision of constitution of India by introducing
taxing domain of the Central Government have been such amendment into the each house of parliament
included in GST. This exclusion has been done to and get sanctioned from 2/3rd majority of the
address the strong concern of the states regarding membership of the house present. The President
loss of revenue if potable alcohol was to be subsumed shall give his assent and then it becomes an act.
under GST. Before presenting it to the president for his assent,
amendment shall be ratified legislature of states by
➢ Amendment of Article 368- Power to 50% resolution if the amendment is related with any
parliament to amend the constitution matters of state. The provisions of this article also
covers Article 279A which means that before the

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assent of the President, the changes in article 279A goods, dispensaries or road. Further, taxes may be
shall be ratified by state legislator along with the levied on Entertainment and Amusement by such
sanction from each house of Parliament. District

➢ Amendment of Sixth Schedule- Powers to ➢ Amendment in seventh schedule- Union List,
access and collect land revenue and to impose State List and Concurrent List
tax
The provisions for basic Structure of Indian taxation
The District Council for an autonomous district shall is provided in Seventh schedule of the constitution of
have the power to levy and collect all or any of the India. The Centre government and the State
following taxes within such district, that is to say— governments both have the right to taxation under
List I (Union List) and List II (State List) respectively.
(a) taxes on professions, trades, callings and The rights of taxation are given to both i.e. Central
employments; government under List I (Popularly known as Union
(b) taxes on animals, vehicles and boats; List) and to the State under List II (Popularly known as
(c) taxes on the entry of goods into a market for sale State List). Since Article 246A was inserted in the
therein, and tolls on passengers and goods carried in constitution, it became crucial to amend both the
ferries; and above mentioned Lists to provide proper
(d) taxes for the maintenance of schools, dispensaries arrangement of GDT. The amendments are as
or roads. follows:

With the amendment of the sub-paragraph (3) of ➢ Amendment in entry no 84, 92, 92C to Union
paragraph 8 of the Sixth Schedule to the Constitution, List
it empowers the District Council for an autonomous
district to have the power to levy and collect taxes on As per Entry No 84 Duties of excise shall be levied on
entertainment and amusements within such district. tobacco and other goods manufactured or produces
In other words, Sub para 3 of Para no 8 of sixth in India except alcoholic liquor for human
schedule grants the District council of an consumption, opium, and narcotics. Now the excise
autonomous district the power to levy & collect taxes duty is been subsumed by Article no 246A. Hence
on trades, professions, employment, animal, calling, now new Entry no 84 will cover Excise duty on
vehicle, boat, for maintenance of school, on entry of petroleum crude, high speed, petrol, natural gas and

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aviation turbine fuel, tobacco and tobacco products. such tax by now Panchayat, Municipalities, Regional
It means even after introduction of GST, Central or District council.
Excise duty on above product shall remain in force till
the time as GST council thinks fit. 2.3 ISSUES WITH EARLIER INDIRECT TAX
Further Entry no 92 and 92 C covering tax on sale or REGIME
purchase of newspaper and Service tax respectively
have been omitted as already they are merged Into 2.3.1 Multiplicity of Duties / Taxes
GST.
There is a lack in Uniformity in the Present VAT
➢ Amendment in entry no 52, 54, 55 and 62 to structure across the State in which rate of tax is not
State List the only thing restricted but also the credit provisions
as well as procedures. There are differences with
Entry no 52 gives power to levy the entry tax. Now, respect to capital goods, threshold limits,
the entry has been omitted. It means now local bodies classification, exemptions, definition of goods and
can’t levy and collect the entry taxes like octrio, LBT procedures which lead to corporates having
etc. operations in multiple States facing increased
complexities.
Entry No 54– Under this Entry, tax can be collected
on sale or purchase of goods other than newspaper by 2.3.2 lack of uniformity of provisions in State VAT
state government. Now, the state government can statutes
only collect the taxes on sale of petroleum crude,
natural gas, aviation turbine fuel, high speed, petrol, There is a lack in Uniformity in the Present VAT
and alcoholic liquor for human consumption. structure across the State in which rate of tax is not
the only thing restricted but also the credit provisions
Entry No 55 – Further, tax cannot be levied by the as well as procedures. There are differences with
state government on advertisement under this Entry. respect to capital goods, threshold limits,
classification, exemptions, definition of goods and
Entry No 62 – In adition to above, this Entry also procedures which lead to corporates having
provide the provisions for levying of tax on operations in multiple States facing increased
entertainment and amusement and the collection of complexities.

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As regards to classification, different tax rates on another source of complexity under the state VAT.
various goods are primarily the ones facing This problem is acute in the case of right to
complexities. Theoretically, one might expect that distribute/exhibit movies or time slots for
the necessities consumed largely by the poor will broadcasting advertisements known as intangibles
have lower tax rates applied. However, under the and software products. The State Vat governs the
State VAT this is not the case. The precious metals, sales of goods and the Centre Government governs
jewellery and related products have a low rate of 1%. the sales of services thus making this distinction
Selected basic necessities and also a range of important.
industrial inputs and IT products have a middle rate
of 4%. In fact, there are three categories in which ➢ Composite Contracts
basic necessities fall - taxable at 4%, and taxable at
the standard rate of 12.5%, exempted from tax. The The customary distinctions between goods and
classification would appear to be haphazard, with no services found in the Indian Constitution have
well accepted theoretical establishment. This become obsolete. In markets today, consumers are
approach is not conducive to lower compliance costs, offered goods, services, and other types of supplies
whatever might be its political merits. Determining which are being packaged as composite bundles
the tax rate applicable to a given item without under a variety of supply-chain arrangements. For
referring to the legislative schedules is difficult for Example paint job in factory, installation of air-
most retailers. There is a given rise to leakages and conditioner, etc. Applying taxes to such bundles in a
rent seeking (technical term for corruption) as seamless manner is prohibited by both Centre and
consumers are even less awake of tax applicable to the States Under the current division of taxation
various items. More so in the rate schedules, product powers. Creating the overlaps in taxation or
can be shifted from a taxable category to exempt possibility of gaps can be done when each tax only a
category when there are large no of items and there part of the bundle.
is even a minor change in their description.
As per Entry No. 54 in list II (State List) of the Seventh
2.3.3 Sale of goods vs provision of services Schedule read with Article 246(3) of the Constitution
of India, the States can impose “tax on the sale or
Determining whether a particular transaction purchase of goods other than newspapers, subject to
constitutes a sale of goods or supply of services is the provisions of Entry No. 92A of the List-I (Tax on

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Inter-State Sales). Further, the Central Government However, arrangements which have the appearance
is empowered to levy Service tax vide Entry No. 92C of a service contract help the intangibles to be
/ 97 of the Union List (List-I) under seventh schedule supplied. The examples are as follows:
of the Constitution of India. This has become a major
cause of litigations in recent times. Contract for software repair and maintenance
services can be used for supply of software upgrades
2.3.4 Inability of state to levy tax on services (which are goods) as a part of it.

Taxing services have been prohibited for the States. Depending on the roles and responsibilities of the
The leasing contracts, which entail rights to use goods parties the contracts for manufacturing and sale of
without any transfer of their ownership and supply of software goods or rendering software development
goods and services, both are a part of the composite services can have Software development contract as
works contract. The goods supplied as part of a its character.
composite works contracts pose difficulties in
taxation due to this arrangement. The Constitution telecommunication services has Value-added
has been amended to bring such transactions within services (VAS) which is provided as a part of it, include
the ambit of the State taxation (by deeming a tax on supplies (e.g., wallpaper for mobile phones, ring
them to be a tax on the sale or purchase of goods) by tones, jokes, cricket scores and weather reports),
addressing these problems, in the scope of state some of which could be considered goods.
taxation powers, services per se remain outside. Two
perspectives show this limitations in an Service can be viewed as an online subscription to a
unsatisfactory light: newspaper, but purchase of goods constitute
download or purchase of a magazine or book.
First, the distinction between goods and services
have been blurred due to advancement in This kind of blurring also hazes the application of tax
digitalisation and information technology. Under to transactions relating to tangible property. For
Indian jurisprudence, to bring the goods within the example, disputes have rose whether the leasing of
purview of state taxation, they must be defined to equipment without the transfer of possession and
include intangibles, e.g., copyright, and software. control to the lessee would be taxable as a service or
would it be deemed as sale of goods.

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The second major concern with the omission of 2.3.6 Cascading effect of taxes
services from the State taxation powers is its
negative impact on the flexibility of State tax The structure of VAT both at the Central and at the
revenues. With hardly any powers to levy tax on State level have certain shortcomings, despite
incomes or even on the fastest growing components achieving a certain degree of success with the
of the consumer expenditures, they have to rely introduction of VAT.
almost solely on compliance improvements or rate
increases for any buoyancy in their own-source Both the Central and State taxes go through Tax
revenues. One of the suggested alternatives of Cascading. The partial overage of Central and State
assigning power of levy of tax on services to States taxes on account of various exemptions is the most
include allocation of a certain portion of revenue significant contributing factor to Tax Cascading, for
accruing from collection of Central VAT to States as instance, wholesale and retail trade, real estate
under the Australian model. However, this solution construction, Oil and gas production, mining,
also comes with a practical problem of designing of agriculture, and range of services remain outside the
suitable base for allocation of revenue between scope of both the CENVAT and the Service tax levied
different States. by the Centre. Any credit for the CENVAT or the
service tax paid on their inputs cannot be claimed by
2.3.5 Distortion of tax base with multitude of the exempt sectors as they are not allowed to do so.
exemptions Similarly, under the State VAT, for the inputs of the
exempt sectors, no credit is allowed, which include
Variety of area-specific, and conditional and the entire service sector, real property sector,
unconditional exemptions are being eroded due to agriculture, oil and gas production and mining.
the starting base of CENVAT being narrow. CENVAT
did not adhere to the policy attempted by the The Central Sales Tax (CST) on Inter-State sales is
government few years back, to rationalize the another major contributing factor to Tax Cascading,
CENVAT rates by reducing their multiplicity, instead collected by the origin state and for which any level of
they reintroduced concessions for several/ products. government cannot allow any credit. The product
gets embedded in this,

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While tax cascading under the Indian tax system have product to product depending on the magnitude of
no recent estimates available. Judging by the the hidden tax on inputs used in their production and
experience of other countries which had a similar tax distribution only if the statutory rate is uniform. The
structure, it is likely to be significant. For example, as intended impact of government policy towards
per working paper no. 1 /2009 –DEA on Goods and sectors or households may be negated by the indirect
Service Tax by Satya Poddar and Ehtisham Ahmad, or hidden taxation in a cascading system of taxes.
under the Canadian manufacturers’ sales tax, which
was similar to the CENVAT, the non-creditable tax on 2.3.7 Lackluster indigenous production due to
business inputs and machinery and equipment CENVAT
accounted for approximately one-third of total
revenues from the tax. The extent of cascading under The goods manufactured or produced in India have
the provincial retail sales taxes in Canada, which are CENVAT levied on them. This gives rise to
similar to the State VAT, is estimated to be 35-40% of manufacturing which comes under definitional
total revenue collections. At priori, one would expect issues, and determining the value on which the tax is
the magnitude of cascading under the CENVAT, to be levied which comes under valuation issues.
Service tax, and the State VAT to be even higher, While through judicial rulings these concepts have
given the more restricted input credits and wider been seen being evolved, it is recognized that a
exemptions under these taxes. neutral and efficient application of tax can be cured
by limiting the tax to the point of manufacturing.
The most serious flaw of the current system is Tax Manufacturing forms a narrow base.
Cascading. It puts Indian suppliers at a competitive
disadvantage in the international markets by Moreover, in the present State-levy VAT scheme,
increasing the cost of production. It creates a bias in CENVAT load on the goods remains included in the
favour of imports, in which production inputs do not value of goods to be taxed under State VAT, and
bear the hidden burden of taxes. It also depreciates contributing to that extent a cascading effect on
from a neutral application of tax to competing account of CENVAT element. It is for this reason that
products. The effective tax rate (which entails of the multi-point taxation system extending to the retail
statutory rate on the finished products and the level is now used by all countries instead of this form
hidden tax on production inputs) can vary from of taxation.

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It upsurges the cost of production and puts the Indian 2.3.8 Complexities in tax administration
suppliers at a competitive handicap in the
international markets. This creates a bias in favour of The systems at both Central and State levels remain
imports, which do not take on the hidden burden of complex in spite of the improvements made in the tax
taxes on production inputs. design and administration over the past few years.
Their administration leaves a lot to be desired.
Australia is a major example of an industrialized Further, the process for resolution of disputes is slow
country where GST extending to the retail level has and expensive. At the same time, substantial
been levied instead of tax at the manufacturing or compliance gaps is suffered by the system, except in
wholesale level. In spite of the high degree of the highly organized sectors of the economy. There
sophistication in administration in Australia the are various factors which contributes to this sub-
previous tax was found to be unworkable. The supply standard state of affairs. For instance, under the
chain arrangements could not be dealt with in a present VAT regime, each State has its own State Vat
satisfactory manner. Act. The procedures, returns, forms, assessments,
date of payment of tax etc. are different under State
Vat Acts. This makes the life much more complicated
for multi-location corporate.

i A.R Krishnan, Beginners course on GST, (21 September ii The Constitution of India, 1949. Page | 4
iii Ibid.
2016), https://www.wirc-icai.org/material/Material-for-

Presentation.pdf.