CONSTITUTIONAL BACKGROUND OF GST IN INDIA

Janani is currently a third-year BA LLB (Hons) student at the Tamil Nadu Dr. Ambedkar Law University, School of Excellence in Law (SOEL). Read More

Abstract

The implementation of Goods and Services Tax (GST) in India, launched in July 2017, marks a significant tax reform. Originating from early 2000s discussions and driven by legislative efforts, GST replaces a complex indirect tax system with a unified framework aimed at simplifying tax administration, enhancing efficiency, and fostering economic integration.

Introduction to Goods and Services Tax (GST)

Goods and Services Tax (GST) is a landmark reform in India’s indirect taxation system, introduced to create a unified and simplified tax structure across the country. Launched on July 1, 2017, GST is a comprehensive, multistage, destination-based tax that is levied on the supply of goods and services. It aims to replace a plethora of indirect taxes previously levied by both the Central and State governments, including excise duty, service tax, VAT, and others, thereby streamlining the taxation process.

GST is designed to address the inefficiencies and complexities of the former tax regime, which involved multiple taxes, cascading effects, and a lack of uniformity across states. It unifies the entire nation into a single market, making the movement of goods and services smoother and more efficient. The implementation of GST follows a dual model, where both the Central and State governments have the authority to levy and collect taxes on a common base. This includes Central GST (CGST) and State GST (SGST) for intrastate transactions, and Integrated GST (IGST) for interstate transactions and imports.

The primary objectives of GST include eliminating the cascading effect of taxes, simplifying the tax compliance process, reducing the overall tax burden on consumers, and enhancing the ease of doing business in India. By introducing uniform tax rates and a robust IT infrastructure for tax administration, GST promotes transparency, accountability, and better compliance, ultimately leading to an increase in government revenue. GST is not just a tax reform but a crucial step towards integrating the Indian economy with global standards, fostering a competitive market environment, and boosting the economic growth of the country. It represents a shift towards a more efficient and equitable tax system, benefiting businesses, consumers, and the government alike.

Need for GST

The introduction of Goods and Services Tax (GST) in India was driven by the need to overhaul a convoluted and inefficient indirect tax system that was characterized by multiple layers of taxation and regulatory complexities. Before GST, the indirect tax landscape was fragmented, with various taxes such as Central Excise Duty, Service Tax, VAT, and state-specific taxes creating a complex web of compliance requirements. This structure led to significant challenges, including the cascading effect of taxes—where tax was levied on an already taxed amount, inflating the cost of goods and services for consumers. Additionally, the multiplicity of taxes imposed by both the Central and State governments resulted in high administrative costs for businesses, complicating their compliance processes and increasing their operational burdens. Interstate trade was further impeded by varied state-specific tax regimes and entry taxes, which not only added to logistical costs but also fragmented the market. GST was introduced to address these issues by consolidating multiple taxes into a single, unified tax regime. It eliminates the cascading effect through a seamless input tax credit mechanism, simplifies compliance by replacing numerous taxes with one, and removes barriers to interstate trade by standardizing tax rates and eliminating entry taxes. This reform aims to enhance the efficiency of the tax system, reduce the overall tax burden on consumers, and foster a more integrated and competitive national market, thereby supporting economic growth and improving the ease of doing business in India.

Constitutional Provisions Relevant to GST in India

The Goods and Services Tax (GST) represents a transformative reform in India’s tax system, necessitating comprehensive amendments to the Indian Constitution. These amendments were primarily enacted through the 101st Constitutional Amendment Act of 2016, which laid the foundation for a unified and efficient tax system. This section delves into the constitutional provisions that are pivotal to the GST framework, detailing their significance and implications.

The 101st Constitutional Amendment Act, 2016

The 101st Constitutional Amendment Act, of 2016, marks a critical juncture in India’s fiscal landscape. This amendment introduced several key changes to the Constitution to accommodate the GST framework:

• Insertion of Article 246A:

Article 246A was introduced to grant both the Central and State legislatures the authority to levy and administer GST. This provision establishes a dual GST model, which is central to the GST regime. Under this model, the Central Goods and Services Tax (CGST) is collected by the Central Government, while the State Goods and Services Tax (SGST) is levied by individual State Governments. For transactions that span multiple states, the Integrated Goods and Services Tax (IGST) is administered by the Central Government.

 The dual GST model is designed to streamline tax collection and administration across different levels of government. CGST and SGST apply to intrastate transactions, ensuring that the tax is levied at each stage of the supply chain within a state. For interstate transactions, IGST facilitates the smooth movement of goods and services across state borders, maintaining a seamless tax flow.    Article 246A delineates the tax responsibilities between the Centre and the States, fostering a cooperative federalism approach. It ensures that both levels of government have clear roles and responsibilities, enhancing the efficiency of tax administration and reducing the complexity of the tax system.

Article 246A empowers both the Central and State legislatures to levy GST, creating a dual tax structure. This provision is instrumental in defining the operational aspects of GST, including the scope of CGST, SGST, and IGST.

  Under this framework, the Central Government administers CGST and IGST, while the State Governments handle SGST. The dual GST model ensures comprehensive tax coverage and facilitates efficient administration by clearly delineating the tax collection responsibilities of each level of government.

 By establishing a clear demarcation of powers, Article 246A enhances the effectiveness of tax administration and reduces the complexity of compliance for businesses and taxpayers.

• Amendments to Article 269A:

 Article 269A addresses the levy and collection of taxes on the supply of goods and services during interstate trade or commerce. This article mandates that such taxes are collected by the Central Government and subsequently apportioned between the Centre and the States based on the principles outlined in GST legislation.  The IGST system, as supported by Article 269A, is crucial for managing interstate transactions. It ensures that taxes are levied on interstate supplies and appropriately distributed, preventing tax barriers and promoting a unified national market. This provision facilitates smooth interstate commerce by eliminating taxrelated impediments and supporting the efficient movement of goods and services across state lines.

Article 269A provides for the levy and collection of taxes on interstate supplies by the Central Government. The IGST mechanism ensures that taxes are appropriately collected on goods and services crossing state boundaries and subsequently apportioned between the Centre and States.   This article supports the creation of a seamless national market by addressing the tax implications of interstate transactions. It helps reduce trade barriers and promotes efficiency in the movement of goods and services.

• Amendments to Article 270:

Article 270 deals with the distribution of tax revenues between the Central and State governments. It stipulates that the revenue from taxes levied and collected by the Centre, including GST, is to be shared with the States according to principles established by law. This provision is essential for maintaining a fiscal balance between the Centre and States. It supports equitable distribution of GST revenue, ensuring that both levels of government have the financial resources needed to fulfil their respective responsibilities. This provision is crucial for maintaining fiscal equilibrium between the Centre and States. It ensures that both levels of government receive a fair share of the tax revenue, supporting their respective financial needs and responsibilities.

The GST Council, established under Article 279A, plays a key role in the GST framework. It is responsible for formulating policies, recommending tax rates, and ensuring the effective implementation of GST laws. The Council includes representatives from both the Central and State governments, reflecting the cooperative nature of GST.

 Article 279A provides the constitutional foundation for the GST Council, detailing its composition, powers, and functions. This article ensures that the Council operates within a well-defined legal framework, facilitating coordination between the Centre and States and enhancing the efficiency of GST implementation.

 Historical Context and Legislative Framework of GST in India

The journey towards implementing Goods and Services Tax (GST) in India is a testament to the evolution of the nation’s tax policy, reflecting a significant shift towards a more unified and efficient tax system. This historical context and legislative framework outline the key milestones in the development of GST in India.

• Initiation of GST Concept (Early 2000s):

The idea of implementing Goods and Services Tax (GST) in India emerged in the early 2000s during Prime Minister Atal Bihari Vajpayee’s tenure, reflecting a strategic move towards modernizing the country’s tax system. The existing indirect tax framework, characterized by Central Excise Duty and State Value Added Tax (VAT), was fraught with inefficiencies such as cascading taxes and complex compliance requirements, which impeded economic growth and interstate trade.

In response to these challenges, the concept of GST was proposed as a unified tax system designed to streamline indirect taxation and create a seamless economic environment. The key objectives were to eliminate tax-on-tax effects, simplify tax administration, and promote a unified market across states. This vision aimed to enhance economic efficiency and integration by replacing multiple, overlapping taxes with a single, comprehensive tax.

To drive this reform, the Empowered Committee of State Finance Ministers was constituted in 2004, chaired by Asim Dasgupta. The committee was tasked with developing a GST framework that would be acceptable to both the central and state governments, reflecting a collaborative approach to tax reform. Their work involved extensive consultations and the creation of a GST model designed to address the concerns of various stakeholders and ensure a balanced distribution of power and revenue between different levels of government.

The early 2000s thus marked the inception of GST as a transformative policy initiative aimed at overhauling India’s indirect tax system and setting the stage for future legislative and administrative developments.

• Empowered Committee of State Finance Ministers (2004):

The Empowered Committee of State Finance Ministers, established in 2004, was a pivotal body in the development and implementation of the Goods and Services Tax (GST) in India. Chaired by Asim Dasgupta, the then Finance Minister of West Bengal, the committee was tasked with designing a comprehensive GST framework that would unify the indirect tax system across the country.

The primary mandate of the Empowered Committee was to create a GST model that could address the inefficiencies of the existing tax structure, which included Central Excise Duty and State Value Added Tax (VAT). The committee aimed to develop a system that would streamline tax administration, eliminate tax-on-tax scenarios, and promote a seamless national market. This was essential for reducing compliance burdens and fostering economic integration among states.

The committee engaged in extensive consultations with various stakeholders, including state governments, industry representatives, and tax experts. These discussions helped shape the GST model, ensuring that it balanced the interests of both the central and state governments. The committee’s work involved devising mechanisms for revenue sharing, setting tax rates, and addressing concerns related to state autonomy and fiscal federalism.

The Empowered Committee played a crucial role in building consensus around GST, which was instrumental in moving the reform forward. Its recommendations laid the groundwork for subsequent legislative efforts, culminating in the passage of the Constitution (One Hundred and First Amendment) Act, 2016, and the formal implementation of GST in July 2017. The committee’s efforts marked a significant step towards transforming India’s indirect tax landscape, aiming for greater efficiency and integration.

In 2011, the Constitution (115th Amendment) Bill was introduced to incorporate GST provisions into the Indian Constitution. The bill aimed to address the constitutional challenges of implementing GST and to provide a legal framework for its introduction. Despite the initial momentum, the bill faced significant political opposition and was met with scepticism from various quarters. The dissolution of the Lok Sabha in 2014 led to the lapse of the bill, halting progress at that juncture.

• Electoral Shift and Renewed Focus (2014):

The year 2014 marked a significant turning point in India’s GST reform journey, driven by the electoral shift that brought the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) to power. This political change revitalized the focus on implementing Goods and Services Tax (GST), which had previously stalled.

In the 2014 general elections, the BJP, under the leadership of Narendra Modi, secured a decisive victory. The new government’s agenda included a strong commitment to economic reforms, with GST emerging as a key priority. The previous efforts to introduce GST had faced hurdles, including political opposition and legislative delays, but the BJP’s clear mandate provided renewed momentum for the reform.

Upon assuming office, Finance Minister Arun Jaitley prioritized GST as a central aspect of the government’s economic strategy. In 2015, he introduced the Constitution (122nd Amendment) Bill, which aimed to amend the Constitution to facilitate GST’s implementation. This bill sought to address the challenges faced by earlier legislative proposals and incorporate feedback from various stakeholders.

The renewed focus on GST reflected the government’s broader goals of modernizing the tax system and fostering economic growth. By streamlining the indirect tax regime and reducing compliance burdens, GST was seen as a critical reform for enhancing efficiency and promoting a unified national market. The electoral shift in 2014 thus provided a fresh impetus for advancing GST, leading to the successful passage of the bill and the eventual implementation of the tax system in July 2017.

• Constitution (122nd Amendment) Bill (2015):

 In 2015, Finance Minister Arun Jaitley introduced the Constitution (122nd Amendment) Bill. This bill sought to amend the Constitution to facilitate the implementation of GST, addressing the limitations of previous proposals and incorporating feedback from various stakeholders. The bill was passed by the Lok Sabha in May 2015 and by the Rajya Sabha in August 2016. The primary objective of the Constitution (122nd Amendment) Bill was to amend the Indian Constitution to create a legal framework for the introduction of GST. The bill aimed to address the shortcomings of the earlier proposals and to establish a robust GST regime that would replace the existing indirect tax structure, which included Central Excise Duty and State VAT.

The legislative process involved extensive deliberations and negotiations to address concerns from different states and political parties. Following ratification by at least 15 states, the bill received presidential assent on September 8, 2016. This marked the enactment of the Constitution (One Hundred and First Amendment) Act, 2016, which formally incorporated GST into the Constitution.

Case laws

Federation of Hotel & Restaurant Associations of India v. Union of India[1]

In this case, the Supreme Court upheld the constitutional validity of the 101st Constitutional Amendment, which paved the way for the introduction of GST in India. The petitioners challenged the amendment because it violated the basic structure of the Constitution by affecting the financial autonomy of states. However, the court ruled that the amendment did not violate the basic structure and that the GST Council’s decision-making process adequately protected the interests of states.

Mohit Minerals Pvt. Ltd. v. Union of India[2]

This case dealt with the issue of compensation cess under the GST regime. The petitioner challenged the levy of compensation cess on imported coal, arguing that it violated the principle of non-discrimination under Article 301 of the Constitution. The Supreme Court, however, held that the compensation cess was a valid tax and did not amount to an unconstitutional restriction on trade.

Bharti Airtel Ltd. v. Union of India

This case focused on the issue of input tax credit (ITC) under GST. The petitioner challenged the provisions of the GST Act that restrict the availability of ITC for certain transactions. The Delhi High Court ruled that these restrictions were unconstitutional as they violated the principle of non-discrimination under Article 14 of the Constitution. However, the Supreme Court upheld the High Court’s order, emphasizing the need for a balanced approach in interpreting ITC provisions.

These case laws demonstrate the role of the judiciary in shaping the constitutional framework of GST in India. They highlight the courts’ efforts to balance the interests of taxpayers, states, and the central government while ensuring the smooth implementation of GST within the constitutional parameters.

Conclusion

The roll of Goods and Services Tax (GST) in India represents a significant overhaul of the country’s tax system. Initiated in the early 2000s to tackle the inefficiencies of a complex indirect tax structure, the development of GST milestones, including the formation of the Empowered Committee of State Finance Ministers in 2004, tasked with designing a unified tax model. Although the Constitution (115th Amendment) Bill faced setbacks, the renewed focus under the BJP-led NDA government in 2014 led to the introduction of the Constitution (122nd Amendment) Bill in 2015. This bill, enacted as the Constitution (One Hundred and First Amendment) Act, 2016, established the GST framework. The implementation of GST in July 2017 aimed to simplify tax administration, remove tax cascading, and promote economic integration. This reform underscores India’s effort to modernize its tax system and support cohesive economic growth.

References

• Bibliography

1. Taxmann’s, All About GST, A Complete Guide to New Model GST Law, Taxmann Publications (P). Ltd, 5^th edition, 2017.
2. Constitution of India, 1950.
3. GST Laws with Allied Acts & Rules.
4. Dr J N Pandey’s, Constitutional Law of India, Central Law Agency, 59^th edition 2022.

• Webliography

1. https://www.gstcouncil.gov.in/brief-history-gst#:~:text=After%20years%20of%20deliberation%20and,Lok%20Sabha%20in%20May%2C%202015.
2. https://www.bankbazaar.com/tax/history-of-gst.html
3. https://www.gstcouncil.gov.in/gst-council
4. https://unacademy.com/content/kerala-psc/study-material/finance/gst-concept-and-implications/
5. https://www.5paisa.com/stock-market-guide/tax/history-of-gst-in-india
6. https://www.icsi.edu/webmodules/Customs%20Laws/2016-ATLP-10.pdf

[1] AIR 2018 SUPREME COURT 73, 2018 (2) SCC 97, (2018) 1 KER LJ 205, (2018) 2 MAD LJ 99, (2018) 1 RECCIVR 513, (2018) 1 JLJR 207ALLINDCAS 171 (SC), (201) 2 CAL HN 11, (2018) 1 ALL WC 512, (2018) 249 DLT 777, 2018 (1) SCC (CRI) 461, 2018 (2) KCCR SN 101 (SC)

[2] Civil Appeal No. 1390 of 2022