PART – I – INTRODUCTION

Contents
1. Concept & Features of Indirect Tax
2. Pre-GST Indirect Taxation System
3. Amendment of Indian Constitution to enable GST &
4. Formation of GST Council
5. Goods & Services outside the Purview of GST
6. Types of GST – CGST, SGST/UTGST, IGST
7. Date of Applicability of various Acts of GST

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1. Concept & Features of Indirect Tax :-

During the post-Independence period, central excise duty was levied on a few commodities
which were in the nature of raw materials and intermediate inputs, and consumer goods were
by and large outside the purview of this duty. The first set of reforms was suggested by the
Taxation Enquiry Commission (1953-54). The Commission recommended that sales tax should
be used specifically by the States as a source of revenue. The Union Governments’ intervention
was generally allowed only in case of inter-State sales. It also recommended the levy of a tax on
inter-State sales subject to a ceiling of 1%, which the states would administer and also retain
the revenue from it. The power to levy tax on sale and purchase of goods on inter-State trade
and commerce was assigned to the Union by the Constitution (Sixth Amendment) Act, 1956. By
mid-1970s, central excise duty was extended to most manufactured goods. Central excise duty
was levied on a unit, called specific duty and on value, called advalorem duty. The number of
rates was too many with no offsetting of taxes paid on inputs. This led to significant cascading
and classification disputes. The Indirect Taxation Enquiry Committee constituted in 1976 under
Shri L.K. Jha recommended, inter alia, converting specific rates into ad valorem rates, rate
consolidation and input tax credit mechanism of value added tax at manufacturing-level
(MANVAT). In 1986, the recommendation of the “Jha Committee on moving on to value added
tax in manufacturing was partially implemented. This was called Modified Value Added Tax
(MODVAT). In principle, duty was payable on value addition but in the beginning it was limited
to select inputs and manufactured goods only with one-to-one correlation between input and
manufactured goods for eligibility to take input tax credit. The comprehensive coverage of
MODVAT was achieved by 1996-97.

The next wave of reform in indirect tax sphere came with the New Economic Policy of 1991.
The Tax Reforms Committee under the chairmanship of Prof. Raja J Chelliah was appointed in
1991. This Committee recommended broadening of the tax base by taxing services and pruning
exemptions, consolidation and lowering of rates, extension of MODVAT on all inputs including
capital goods. It suggested that if complete benefits were to be derived from the tax reforms
the reform of tax structure must be accompanied by a reform of tax administration. Many of
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the recommendations of the Chelliah Committee were implemented. In 1999-2000, tax rates
were merged into three rates, with additional rates on a few luxury goods. In 2000-01, three
rates were merged into one rate called Central Value Added Tax (CENVAT). A few commodities
were subjected to special excise duty. Taxation of services by the Union was introduced in 1994
bringing in its ambit only three services, namely general insurance, telecommunication and
stock broking. Gradually, over the next decade, more and more services were brought under
the tax net. In 1994, tax rate on three services was 5% which gradually increased and in 2017 it
was 15% (including cess). Before 2012, services were taxed under a positive list approach. This
approach was prone to tax avoidance. In 2012 budget, negative list approach was adopted
where 17 services were out of taxation net and all other services were subject to tax. In 2004,
the Input Tax Credit scheme for CENVAT and Service Tax were merged to permit cross
utilization of credits across these taxes. Before state level VAT was introduced by states in the
first half of the first decade of this century, sales tax was levied in states since independence.
Sales tax had some serious flaws. It was levied by states in an uncoordinated manner the
consequences of which were different rates of sales tax on different commodities in different
states. Rates of sales tax were more than ten in some states and these varied for the same
commodity in different states. Inter-State sales were subjected to levy of Central Sales Tax. As
this tax was appropriated by the exporting State credit, it was not allowed by the dealer in an
importing state. This resulted into exportation of tax from richer to poorer states and also
cascading of taxes. Interestingly, states had power of taxation over services from the very
beginning. States levied tax on advertisements, luxuries, and entertainments, amusements,
betting and gambling. A report, titled “Reform of Domestic Trade Taxes in India”, on reforming
indirect taxes, especially State sales tax, by National Institute of Public Finance and Policy under
the leadership of Dr. Amaresh Bagchi, was prepared in 1994. This Report prepared the ground
for implementation of VAT in States. Some of the key recommendations were: replacing sales
tax by VAT by moving over to a multistage system of taxation; allowing input tax credits for all
inputs, including on machinery and equipment; harmonization and rationalization of tax rates
across States with two or three rates within specified bands; pruning of exemptions and
concessions except for a basic threshold limit and items like unprocessed food; zero rating of
exports, inter-State sales and consignment transfers to registered dealers; taxing inter-State
sales to non-registered persons as local sales; modernization of tax administration,
computerization of operations and simplification of forms and procedures. The first preliminary
discussion on transition from sales tax regime to VAT regime took place in a meeting of Chief
Ministers convened by the Union Finance Minister in 1995. A standing Committee of State
Finance Ministers was constituted, as a result of meeting of the Union Finance Ministers and
Chief Ministers in November, 1999, to deliberate on the design of VAT which was later made by
the Empowered Committee of State Finance Ministers (EC). Haryana was the first State to
implement VAT, in 2003. In 2005, VAT was implemented in most of the states. Uttar Pradesh was
the last State to implement VAT, from January 01,2008.
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2. Pre-GST Indirect Taxation System:-

Broadly, the previous indirect tax regime consisted of Central and State laws. For the Central
Government, Central Excise, Customs and Service tax were the three main components of
indirect taxes. While for State Government, Value Added Tax (VAT) and Central Sales Tax (CST)
were the major taxes along with Octroi, Entertainment Tax etc. Taxation of goods and services
was governed under separate legislatures. In respect of goods, the Centre had the powers to
levy tax on the manufacture of goods (except alcoholic liquor for human consumption, opium,
narcotics etc.) while the states had the powers to levy tax on the sale of goods. In the case of
inter-State sales, the Centre had the power to levy a tax (Central Sales Tax) but, the tax was
collected and retained entirely by the states. As far as services were concerned, it was the
Centre alone that was empowered to levy service tax governed by the Finance Act. Introduction
of the Value Added Tax (VAT) was considered to be a major step and an essential breakthrough
in the field of indirect taxes. Although primarily VAT was successful, there were certain
shortcomings in the structure of VAT. The reasons for such shortcomings was that there was a
mosaic of taxes being levied on goods and services, such as luxury tax, entertainment tax, etc.,
which were not subsumed in the VAT thereby marginalizing the benefits of comprehensive tax
credit mechanism. Further to this, many other taxes were levied by both the Central
Government and the State Government on production, manufacture and distributive trade,
where no set-off was available in the form of input tax credit. These taxes added to the cost of
goods and services and led to tax on tax i.e., cascading of taxes and the erstwhile indirect tax
regime was ineffective to remove this cascading effect of taxes.

There are various economic factors internal as well as external due to which reforms in tax
system become necessary. Issue of reforms in Indian tax system has always been a priority for
all the administrative machinery even at the highest policy forums in the country. Integration of
domestic economy with world economy makes it desirable. Previous structure of indirect
taxation in India had some challenges which needed to be addressed. Some of the challenges
under the previous indirect tax structure could be attributed to:

 Central Excise wherein there were variable rates under Excise Duty such as 2% without
CENVAT, 6%, 10%, 18%, 24%, 27%, coupled with multiple valuation system and various
exemptions.
 VAT where different states were charging VAT at different rates, which were resulting in
imbalance of trade between the states.
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 Also, under VAT, there was a lack of uniformity in terms of registration, due date of
payment, return filing assessment procedures, refund mechanism, appellate process
etc., thus complicating the compliance mechanism. For example: A business
establishment having offices in different states were required to follow the laws of the
respective states.
 In respect of taxation of goods, CENVAT was confined to the manufacturing stage and
did not extend to the distribution chain beyond the factory gate. As such, CENVAT paid
on goods could not be adjusted against State VAT payable on subsequent sale of goods.
This was true both for CENVAT collected on domestically produced goods as well as that
collected as additional duty of customs on imported goods.
 CENVAT comprised of several components in the nature of cesses and surcharges such
as the National Calamity Contingency Duty (NCCD), education and secondary and higher
education cess, additional duty of excise on tobacco and tobacco products etc. This
multiplicity of duties complicated the tax structure and often used to obstruct the
smooth flow of tax credit.
 While input tax credit of CENVAT or additional duty of customs paid on goods was
available to service providers paying Service Tax, they were unable to neutralize the
State VAT or other State taxes paid on their purchase of goods.
 State VAT was payable on the value of goods inclusive of CENVAT paid at the
manufacturing stage and thus the VAT liability of a dealer always used to get inflated
without compensatory set-off.
 Inter-State sale of goods was liable to the Central Sales Tax (CST) levied by the Centre
and collected by the states. This was an origin-based tax and could not be set-off against
VAT in many situations.
 State VAT and CST were not directly applicable to the import of goods on which Special
Additional Duties (SAD) of customs were levied at a uniform rate of 4% by the Centre.
Input tax credit of such duties was available only to those entities who were
manufacturing excisable goods. Other importers had to claim refund of this duty as and
when they pay VAT on subsequent sales.
 VAT dealers were unable to set-off any Service Tax that they paid on procurement of
taxable input services.
 State Governments also levied and collected a variety of other indirect taxes such as
luxury tax, entertainment tax, entry tax etc. for which no set-off was available.
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3. Amendment of Indian Constitution to enable GST:-

In India has a three-tier federal structure, comprising the Union Government, the State
Governments and the Local Government. The power to levy taxes and duties is distributed
among the three tiers of Governments, in accordance with the provisions of the Indian
Constitution. The Constitution of India is the supreme law of India. It consists of a Preamble,
25 parts containing 448 Articles and 12 Schedules.

 Article 265: Article 265 of the Constitution of India prohibits arbitrary collection of tax. It
states that “no tax shall be levied or collected except by authority of law”. The term
“authority of law” means that tax proposed to be levied must be within the legislative
competence of the Legislature imposing the tax.
 Article 245: Part XI of the Constitution deals with relationship between the Union and
States. The power for enacting the laws is conferred on the Parliament and on the
Legislature of a State by Article 245 of the Constitution.
 Article 246: It gives the respective authority to Union and State Governments for levying
tax. Whereas Parliament may make laws for the whole of India or any part of the
territory of India, the State Legislature may make laws for whole or part of the State.
 List I- Union list - Parliament has exclusive power to make laws with respect to any of
the matters enumerated in List I in the Seventh Schedule.
 List II- State list - The Legislature of any State has exclusive power to make laws for such
State or any part thereof with respect to any of the matters enumerated in List II in the
Seventh Schedule.
 List III – Concurrent list - Parliament or the Legislature of any State also, have power to
make laws with respect to any of the matters enumerated in List III in the Seventh
Schedule.
Further, the Parliament has power to make laws with respect to any matter for any part
of the territory of India not included in a State notwithstanding that such matter is a
matter enumerated in the State List.
 Article 246A: Power to make laws with respect to Goods and Services Tax. [Article 246A
w.e.f. September 16, 2016].
 Article 254: Inconsistency between laws made by Parliament and laws made by the
Legislatures of States.

1. Notwithstanding anything contained in Articles 246 and 254, Parliament, and, subject to
clause (2), the Legislature of every State, have power to make laws with respect to goods
andservices tax imposed by the Union or by such State.
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2. Parliament has exclusive power to make laws with respect to goods and services tax where
the supply of goods, of services, or both takes place in the course of inter-State trade or
commerce.

Insertion of Article 246A of the Constitution of India gave powers to the State and Union
Legislatures, along with Parliament, to make and amend GST laws as imposed by them.
Parliament is given a special power over the states to make laws as per inter-State supplies.

explanation: The provisions of this article, shall, with respect to goods and services tax referred
to in clause (5) of article 279A, take effect from the date recommended by the Goods and
Services Tax Council.

 Article 248 amended: Residuary powers of legislation amended. Article 248 grants the
residuary powers to Parliament to make laws with respect to any matter not
enumerated in the Concurrent List or State List.

Such power shall include the power of making any law imposing a tax not mentioned in either
of those Lists. This article has been amended. Now, this power has been subjected to Article
246A, namely the power to make laws with respect to Goods and Services Tax to be imposed by
the Centre and States.

 Article 269A: This Article of the Constitution of India describes the manner of revenue
distribution from inter-State supplies between the centre and state. The GST Council is
empowered to frame the rules in this regard.
 Article 279A: Constitution of GST Council.

The President shall, within 60 days from the date of commencement of the Constitution
(101st Amendment) Act, 2016, by order, constitutes a Council that called the Goods and
Services Tax Council. Accordingly, the President has since constituted the GST Council.

4. Formation of GST Council:-

GST Council is comprised of the Union Finance Minister (who will be the Chairman of the
Council), the Minister of State (Revenue) and the State Finance/Taxation Ministers as members.
It shall make recommendations to the Union and the States on the following issues:
a) The taxes, cesses and surcharges levied by the Centre, the States and the local bodies which
may be subsumed under GST;
As provided for in Article 279A of the Constitution, the Goods and Services Tax Council (GST
Council) was notified with effect from September 12, 2016;
b) The goods and services that may be subjected to or exempted from the GST;
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c) Model GST laws, principles of levy, apportionment of IGST and the principles that govern the
place of supply;
d) The threshold limit of turnover below which the goods and services may be exempted from
GST;
e) The rates including floor rates with bands of GST;
f) Any special rate or rates for a specified period to raise additional resources during any natural
calamity or disaster;
g) Special provision with respect to the north-east states, J&K, Himachal Pradesh and
Uttarakhand; and
h) Any other matter relating to the GST, as the Council may decide.

5. Goods & Services outside the Purview of GST:-

The following subject matters kept outside the purview of GST. As such these are taxed under
the existing laws of centre and states as the case may be.
 Alcohol for human consumption
 Entertainment Tax collected by local bodies
 Petroleum Products: petroleum crude, motor spirit (petrol), high speed diesel, natural
gas and aviation turbine fuel.
 Motor Vehicles Tax
 Electricity
 Property Taxes such as stamp duty.

Tobacco and tobacco products would be subject to GST. In addition, the Centre would have the
power to levy Central Excise duty on this product.

6. Types of GST – CGST, SGST/UTGST, IGST:-

Central Goods and Services Tax (CGST): It is levied & collected under the authority of CGST Act,
2017 passed by the Parliament. It is a tax levied on intra- State Supplies of both goods and/or
services by the Central Government and is governed by the CGST Act, 2017.
State Goods and Services Tax (SGST): It is levied & collected under the authority of SGST Act,
2017 passed by respective State. It is a tax levied on intra- State Supplies of both goods and/or
services by the State Government and is governed by the SGST Act, 2017.
Integrated Goods and Services Tax (IGST): It is levied on all inter-State supplies in the GST
regime. The IGST mechanism ensures that the tax money goes to the state where consumption
takes place. Though IGST is levied by the centre, the revenue does not belong fully to the
centre. The tax revenue collected as IGST goes partially to the Centre as CGST and the
remaining to the State/Union Territory where consumption takes place as SGST/UTGST.
Union Territory Goods and Services Tax (UTGST): It is levied & collected under the authority of
UTGST Act, 2017 passed by the Parliament. This is applicable to Union Territories. UTGST
applicable territories as mentioned in Section 2 of UTGST Act, 2017 are Andamans and Nicobar
Islands; Lakshadweep; Dadra & Nagar Haveli & Daman and Diu; Chandigarh and Other
territories.
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SUPPLY TAX/TAXES
Intra-State CGST+SGST
Intra-Union Territory CGST+UTGST
Inter-State/Import/Special Economic Zone IGST
( SEZ )

7. Date of Applicability of various Acts of GST

After GST Council approved the Central Goods and Services Tax Bill 2017 (The CGST Bill), the
Integrated Goods and Services Tax Bill 2017 (The IGST Bill), the Union Territory Goods and
Services Tax Bill 2017 (The UTGST Bill), the Goods and Services Tax (Compensation to the
States) Bill 2017 (The Compensation Bill), these Bills were passed by the Lok Sabha on 29 March
2017. The Rajya Sabha passed these Bills on 6 April 2017 and were then enacted as Acts on 12
April 2017. Thereafter, State Legislatures of different States have passed respective State Goods
and Services Tax Bills. After the enactment of various GST laws, Goods and Services Tax was
launched all over India with effect from 1 July 2017. The Jammu and Kashmir state legislature
passed its GST act on 7 July 2017, thereby ensuring that the entire nation is brought under a
unified indirect taxation system.