India's GST Reform: Redefining Taxation for A New Economic Era

With the introduction of the Goods and Services Tax (GST), India underwent a major indirect tax reform, making it a historic step. In 2002, the Kelkar task force in India, chaired by Dr Vijay Kelkar, the advisor to Finance and Company affairs, proposed measures for simplification of direct and indirect taxes in India. These task forces were established in an effort to demystify the budget-making process, increase transparency, and enable well-informed decision-making.

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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. For the entirety of India, GST is a single domestic indirect tax law that applies to the entire nation after absorbing the majority of indirect taxes. The GST system, which has been embraced by more than 130 nations worldwide, aims to be an easy, transparent, and effective indirect taxation system.

This entails taxing commodities and services jointly because it is no longer feasible to tax them separately due to the blurring of the lines between the two categories. Based on corporate input and the evolving economic landscape, the Indian GST has undergone numerous revisions and enhancements since its implementation.

Although businesses originally found it difficult to comprehend the new compliance requirements and adjust to the changes, the GST implementation has progressively become a part of the Indian tax environment.

In addition to being a significant step toward harmonising India's indirect tax system, this historic reform involved intricate constitutional and political considerations. It took years of careful planning and negotiation between the Centre and the various states to reach an agreement that balanced national economic integration with fiscal federalism.

TIMELINE

The then-Finance Minister, Shri P. Chidambaram, first suggested in his Budget Speech for the fiscal year 2006–07 that a national Goods and Services Tax (GST) be implemented by April 1, 2010.  In 2009, the First Discussion Paper, which contained a design and proposal, was released by the Empowered Committee of State Finance Ministers.

The Empowered Committee of State Finance Ministers, led by Dr. Asim K. Dasgupta, Finance Minister of West Bengal, was tasked with creating a Design and Road Map for the implementation of the GST because the proposal included reforming and restructuring both the Centre's and the States' indirect taxes.

In the Budget Speech for 2010-2011, Pranab Mukherjee, the Finance Minister, expressed his desire to implement GST; nevertheless, he acknowledged the challenges in achieving swift implementation. The Constitution Amendment Bill was presented in 2011 but encountered difficulties concerning compensation to states and various other matters.

Following extensive discussions and negotiations between the Central and State Governments,  the Constitution (122nd Amendment) Bill, 2014, was presented in Parliament.

This Bill sought to modify the Constitution to facilitate the rollout of GST.  In parliament, India's then-appointed finance minister, Arun Jaitley, presents the Constitution (122nd Amendment) Bill, 2014. In February 2015, during his budget address, Jaitley suggested that the government aims to implement the GST system by April 1, 2016.  The Lok Sabha approved the Constitution Amendment Bill in May 2015.

After some changes, the Bill was ultimately passed by the Rajya Sabha and subsequently by the Lok Sabha in August 2016. According to Article 279A (1) of the revised Constitution, the President is required to establish the GST Council within 60 days of the activation of Article 279A. A notification was released on 10th September 2016 to implement Article 279A, which took effect on 12th September 2016.

The 2016 amendment substitutes the GST for several federal and state taxes, including excise duty, service tax, sales tax, entry tax, and entertainment tax.

Alcohol for human consumption will not be subject to GST, even though the majority of goods and services will. Although they are initially exempt, petroleum products could be subject to GST if the GST Council so chooses.

The GST Council is a constitutional body responsible for making recommendations on issues related to the implementation of the Goods and Services Tax (GST) in India. The GST Council met for the first time on September 22–23, 2016, and since then, the Council has met periodically to deliberate and decide on various issues related to GST.

In order to implement GST, the 2016 Constitutional Amendment establishes a GST Council with the Union Finance Minister and representatives from each state.

(i) GST rates; (ii) taxes to be absorbed under GST; (iii) goods and services to be covered under GST; (iv) model laws to be passed by Parliament and state assemblies; (v) IGST apportionment; and (vi) special provisions for the North-Eastern or Himalayan states are among the topics that the Council decides on. The Council has so far held 56 meetings, and its decisions have had a significant impact on the GST implementation in India

ONE NATION ONE TAX

The Goods and Services Tax (GST) is "a path-breaking legislation for New India," according to Prime Minister Narendra Modi. In a ceremony held in the Central Hall of Parliament, this ground-breaking taxation system was introduced on July 1, 2017, at midnight. GST is a significant step towards achieving Sardar Vallabhbhai Patel's goal of creating "Ek Bharat – Shreshtha Bharat," not just a tax reform.

Under the Indian GST, goods and services are categorised into different tax slabs, including 5%, 12%, 18%, and 28%. Significant efforts were undertaken to train tax officers and businesses, as well as develop the necessary technology, in order to get ready for the introduction of the GST.

A non-profit organisation called GST Network (GSTN) was established to supply the IT foundation for the GST system, which includes tax payments, return filing, and taxpayer registration.

The Indian GST has changed and improved since it was first implemented in response to business input and the changing economic landscape. Businesses initially had trouble comprehending the new compliance requirements and adjusting to the changes when the GST was implemented, but it has since adapted to the Indian tax environment. To establish a more unified, effective, and transparent indirect tax system for the benefit of companies and the economy at large, it can be claimed that the history of the GST in India represents a significant change in the nation's tax system.

UNDERSTANDING GST

In order to guarantee that the Center and the States efficiently share taxing authority, the Goods and Services Tax in India is divided into four categories. While state governments impose the State GST (SGST) on the same transactions and credit the corresponding state with the proceeds, the Union Government imposes the Central GST (CGST) on intrastate supplies. Alongside CGST, Union Territory GST (UTGST) also applies to supplies made within Union Territories without a legislature.

The Integrated GST (IGST), which is collected by the Center and dispersed between the Union and the destination state, applies to imports and interstate commerce. When combined, this system produces a dual GST structure in which IGST applies to interstate transactions and CGST and SGST (or UTGST) are levied concurrently on intrastate sales. Through an Input Tax Credit mechanism, the design lessens the cascade of taxes, encourages compliance among businesses, and aids in maintaining a unified system.

GST rates differ depending on the product. India's indirect taxation system changed from being origin-based to destination-based in 2017 with the introduction of the Goods and Services Tax (GST).

As a result, the state where production took place lost the authority to tax goods and services, and the state where consumption occurred gained that authority. Although this idea encouraged equity and economic integration, it also caused producing states to worry about revenue uncertainty.

In order to allay these worries, the Constitution was changed to require states to provide compensation during the transition. In response to the GST Council's recommendation, Parliament passed the GST (Compensation to States) Act, 2017, guaranteeing states a 14% annual revenue increase for the first five years (July 2017–June 2022). Grants financed by a GST Compensation Cess were to be used by the Center to make up any revenue shortfall.

CHALLENGES

Significant challenges were encountered during the first GST rollout in 2017. MSMEs in particular were overburdened by the numerous return filings and other complicated compliance requirements. Frequent system outages brought on by technical issues with the GST Network (GSTN) delayed filings. Confusion and disagreements over rates resulted from the multi-slab tax structure. States that depended on the GST compensation cess were not compensated promptly because revenue collections first fell short of expectations.

Although it encountered opposition, the E-way bill's introduction assisted in reducing tax evasion. With ongoing reforms and simplifications, the GST Council actively addressed concerns in spite of these problems. When the five-year GST compensation period for states ended in 2022, revenue concerns arose due to the fiscal impact of the COVID-19 pandemic.

Citing pandemic-related shortfalls, states urged the Center to extend compensation; however, the government promoted increased fiscal self-reliance and compliance.

The economic recovery was demonstrated by the robust recovery of post-pandemic GST collections, which consistently surpassed ₹1.4 lakh crore per month. The GST Council persisted in its attempts to simplify and rationalize rates. The inclusion of alcohol, electricity, and petroleum in the GST, as well as the advancement of digital reforms like faceless assessments, were the subjects of heated discussions. 

CURRENT SCENARIO

In contrast to the previous multi-slab system of 5 percent, 12 percent, 18 percent, and 28 percent, India's GST system has been redesigned into a more straightforward two-tier rate structure of 5 percent and 18 percent, with luxury and sin goods now subject to a 40 percent tax. Agricultural equipment has been reduced from 12 percent/18 percent to 5 percent, healthcare services have been reduced to 5 percent or exempt, daily necessities have been reduced from 12 percent/18percent to 5 percent, and education services are now completely tax-exempt.

The 28 percent GST on cars and electronic appliances has been lowered to 18 percent. Additionally, process enhancements like automated registration and quicker refunds have made compliance easier for companies. With a higher rate of 40% applied specifically to luxury and sin goods, the GST rate structure has been streamlined into three main slabs: 0%, 5%, and 18%. By lowering taxes on necessities and frequently used goods, this reform seeks to lower costs for the general public and facilitate business tax compliance.

In addition to rate rationalization, process enhancements like automated registration and accelerated refund mechanisms have been implemented, making tax compliance easier for businesses. These reforms aim to create a more efficient and business-friendly tax environment.

Despite progress, there remain discussions on bringing petroleum products, alcohol, and electricity under GST to further unify indirect taxation. The GST Council continues to actively address policy refinements, balancing state compensation matters with the long-term goal of a transparent and unified indirect tax system that supports India’s economic growth.

CONCLUSION

Today's GST system in India is a more business-friendly and efficient framework that has undergone major reforms to streamline compliance and rationalize tax rates. The multi-slab structure has mostly been reorganized into a more straightforward two-tier rate structure, where luxury or sinful goods are subject to higher rates and necessities are either taxed at a reduced rate or are exempt.

Technology improvements like automated registration and expedited refund procedures have made doing business easier. Notwithstanding these developments, there are still talks about bringing electricity, alcohol, and petroleum under the GST and resolving issues with state compensation after the first five years. In keeping with India's commitment to developing GST as a dynamic instrument for fiscal federalism and economic growth, the GST Council is still actively working to improve policies.

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BY SIDDHI KHURANA

CENTRE FOR POLITICS AND LAW

TEAM GEOSTRATA

info@thegeostrata.com