Introduction: Power to Tax and Sovereignty
Power to levy taxes has been universally acknowledged as an essential attribute of sovereignty. Cooley in his Book on Taxation – Volume-1 (4th Edn.) in Chapter-2, recognises the power of taxation to be inherent in a sovereign State. The power, says Cooley, is inherent in the people and is meant to recover a contribution of money or other property in accordance with some reasonable rule or apportionment for the purpose of defraying public expenses.
In Commissioner of Income Tax, Udiapur, Rajasthan v. MCdowell and Co. Ltd. (2009) 10 SCC 755, the Supreme Court observed as follows:
“(iv) As an incident of sovereignty and in the nature of compulsory exaction, a liability founded on principle of contract cannot be a “tax” in its technical sense as an impost, general, local or special.”
Further, a tax is a compulsory exaction of money for general public good and is defined as under by Thomas M. Cooley in his book The Law of Taxation at page 61(Clark A. Nichols ed., 4th ed. 1924) as follows:
“Taxes are the enforced proportional contributions from persons and property, levied by the state by virtue of its sovereignty for the support of government and for all public needs. This definition of taxes, often referred to as “Cooley’s definition,” has been quoted and endorsed, or approved, expressly or otherwise, by many different courts. While this definition of taxes characterizes them as ‘contributions’, other definitions refer to them as ‘imposts’, ‘duty or impost’, ‘charges’, ‘burdens’, or ‘exactions’, ; but these variations in phraseology are of no practical importance.”
GST and the World
Prior to the implementation of the Goods and Service Tax (GST), there were several indirect taxes which were being levied at different levels of the supply chain. The implementation of the GST has resulted in the merger of indirect taxes (central as well as state) thereby making the GST an umbrella tax, which would facilitate Indian Businesses compete globally. GST is inter-alia structured for efficient tax collection, seamless inter-state movement of goods and reduction of the number of indirect taxation departments such as VAT, Excise, Service Tax, etc which resulted in glitches and undue delays.
France was the first country to implement GST to reduce tax-evasion in 1954. Since then, more than 160 countries have implemented GST with some countries having Dual-GST (e.g. Brazil, Canada etc.) model i.e. Federal GST and State GST. India has chosen the Canadian model of dual GST i.e. CGST and SGST or IGST in case of inter-state transport of goods or provision of services.
In Canada, the GST is known as Federal Goods and Service Tax and Harmonized Sales Tax which is being implemented since 1991. A table made below provides a comparison of scheme of GST in India and the prevailing schemes in Canada, Singapore and Malaysia.
|Name of the Law relating to Taxation of Goods and Services
|Goods and Services Tax
|Goods and Service Tax
|Federal Goods and Service Tax & Harmonized Sales Tax
|Goods and Service Tax
|Threshold exemption limit
|20 Lakhs (10 Lakhs for NE States)
|Singapore $ 1 million
(Approx Rs. 4.8 crore)
|Canadian $ 30,000 (Approx Rs. 15.6 lakhs in INR)
(Approx Rs. 75 lakhs)
|0% (for food staples), 5%, 12%, 18% and 28%(+cess for luxury items)
|7% Reduced rates- Zero rated, exempt.
|GST 5% and HST varies from 0% to 15%
|Liability arises on
|Accrual basis: Issue of invoice OR
Receipt of payment
|Accrual Basis: Issue of invoice OR Receipt of payment OR Supply – earliest
Cash basis:(T/O upto SGD$1mn): Payment
|Accrual basis: The date of issue of invoice OR the date of receipt
of payment- earlier.
|Accrual Basis: Delivery of goods OR Issue of invoice OR Receipt of payment
exempted goods or Provision of exempted services (which have been notified such as rent from residential accommodation)
|Real estate, Financial services, Residential rental
|Real estate, Financial Services,
Rent (Residence), Charities, Health, Education
|Basic food, Health Transportation, Residential property, Agricultural land
Therefore, GST model across the commonwealth countries are similar with some variations with respect to the rates and threshold limits, which may be economy specific.
GST in India: Biggest Economic Reform since Independence
GST is a single tax that simplifies the giant tax structure by supporting and enhancing the economic growth of a country, and is levied on the supply of goods and services, right from the manufacturer to the consumer. GST is a destination i.e. final consumption based tax regime, however, credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer would thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. To the credit of the Finance Minister and the GST Council, the efficient input tax credit system ensures that there is no cascading of taxes i.e. taxes on tax paid on inputs that go into manufacture of goods.
In order to avoid the payment of multiple taxes such as excise duty and service tax at Central level and VAT at the State level, GST has unified indirect taxes and created a uniform market throughout the country. Integration of various taxes into a GST system has brought about an effective cross-utilization of credits. The current system taxes production, whereas the GST will aim to tax final consumption. The following taxes have been subsumed in the GST:
At the Central level, Central Excise Duty, Additional Excise Duty, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, and Special Additional Duty of Customs.
At the State level, State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States), Octroi and Entry tax, Purchase Tax, Luxury tax, Taxes on lottery, betting and gambling.
There are following benefits of the GST:
- Two-tiered One-Country-One-Tax regime.
- Subsuming indirect taxes at the centre and the state level.
- Widen the tax regime by covering goods and services and make it transparent.
- Benefit to the manufacturing sector from cascading effect of taxes, thus by improve the cost-competitiveness of goods and services.
- Bring down the prices of goods and services and thus by, increase consumption.
- It would create business-friendly environment, thus by increase tax-GDP ratio thereby enhancing the ease of doing business in India.
- Direct benefit to Manufacturing: Logistics and More Employment – The manufacturing sector has great importance for many developing countries. India’s manufacturing sector has complex tax structure with only 16% share in GDP, India’s manufacturing sector has been close to stagnant for the last two decades. India has shifted itself from an agricultural economy to a manufacturing and service economy. The direct benefit in the hand of manufacturers and logistic companies, warehousing facilitators rather than industries. GST will bring slight change in prices & tax burden on consumers. It will reduce the transit time by which more efficiency will be and benefiting manufactures. Further, logistics sectors would benefit after implementation of GST, reducing compliance cost, dropping number of warehouse and allowing tax credit across the supply chain. Almost all the sector would have indirect benefit from it and expand their operation that will create a more employment.
- Under GST, without costs on Inter-state movement of goods (CST or Entry taxes) and change in the point of taxation to be the consumer, businesses shall have greater flexibility to muster and re-design their supply chains thereby optimizing their logistic cost. Since sellers are also likely to get benefit from changes, Companies ought to negotiate and get benefit on Input Prices.
Conclusion: Challenges ahead
The most critical challenge in the implementation of the GST would be the IT transformation that is required to be made by the businesses and their respective organisations. Technical systems would have to be in synchronisation with the scheme of GST as monthly returns would have to be filed electronically. Secondly, since the threshold exemption limit has been kept low, SME’s and small traders may be would have to compete aggressively. However, with time it would be the SMEs and small traders who would benefit the most from the implementation of the GST, and lastly, the intended revenue collection would depend on the strict implementation in letter and spirit of the GST Act and allied Rules.
(Sagar Suri is an advocate practicing at the High Court of Delhi and Supreme Court of India.)