GST concludes indirect tax reform but much depends on implementation by states and model GST law

Gautham_Gururaj_authorThe Constitution (One Hundred and Twenty Second Amendment) Bill, 2014 (“Bill”) seeks to introduce the goods and services tax (“GST”) by conferring concurrent taxing powers on the Union and state governments on every transaction involving the supply of goods or the supply of services or both. It would immediately allow the Union to levy tax on the sale of goods which has been in the domain of the states, and the states similarly would be able to levy tax on services which until now was mostly in the domain of the Union government.

The introduction of the GST in this manner would, without doubt, be the most widespread restructuring of India’s indirect taxation system, which currently involves a multiplicity of taxes as well as cascading effects.

Removal of cascading effects

For instance, the central excise duty component suffered by goods during the manufacturing process and the additional excise duty component on imported goods are included in the value of the goods when the states levy value added tax (“VAT”). The Bill seeks to subsume various central indirect taxes and levies such as central excise duty, additional excise duties, additional customs duty, special additional duty of customs, service tax, and surcharges and cesses in relation to the supply of goods and services. The Bill also simultaneously provides for the subsuming of value added tax or sales tax, entertainment tax, central sales tax, octroi or entry tax, purchase tax, luxury tax, taxes on lottery, betting and gambling, and state cesses and surcharges imposed by the states in relation to the supply of goods and services. The removal of these various taxes and the introduction of a single point GST will thus remove the cascading effect of taxes and also simplify the number of taxes that are levied on a transaction involving goods or services. While the current scheme of the Central Excise Act, 1944 and the Finance Act, 1994 provided for the removal of the cascading effect of taxes in respect of certain central indirect taxes, and the VAT system introduced in states provided for the removal of the cascading effect in respect of tax on the sale of goods, the GST will be the first time that the cascading effect will stand removed in respect of both central and state indirect taxes. The GST, therefore, can be seen as a logical step for having an indirect tax system that seeks to capture only the value addition in the goods and services at each level, and not capture the taxes being levied at each level for the purposes of further taxation.

Types of GST taxes

To implement GST, the Bill proposes the introduction of Article 246A into the Constitution – a non obstante clause that provides that the Parliament, and with the exception of tax on the supply of goods and services in the course of inter-state trade or commerce, the states shall have the power to make laws with respect to goods and services tax to be imposed by the Union or by the states. Keeping in mind the federal structure, the Union and the states will levy the GST at each point of time in the taxation of goods and services, with the Union levying a central goods and services tax (“CGST”) and the states levying a state goods and services tax (“SGST”).


The Union Finance Minister Arun Jaitley introduced the constitutional amendment bill on the goods and services tax in the Lok Sabha on December 19, 2014.

The Bill also proposes an amendment to Article 286 of the Constitution to ensure that the supply of goods and services continues to remain outside the purview of the states’ power to tax if such supply takes place outside the state or in the course of import of goods into India or the export of goods outside India. However, this amendment is merely clarificatory. The substance and the intention of the provision continues to remain the same. Equally important is the amendment proposed to Article 248. The exclusive power of the Parliament to make any law with respect to any matter not enumerated in the Concurrent List or the State List in Schedule VII, including the imposition of tax on such matters, will now be subject to Article 246A. This essentially means that any new matters involving goods or services, including their taxes, will necessarily have to be routed by the Union through the mechanism of the GST; and thereby necessarily enabling the states to tax such matters as well.

Additionally, Article 246A(2) empowers the Parliament with the exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-state trade or commerce. This tax is called the integrated goods and services tax (“IGST”). Hence, every point in taxation will necessarily be subject to CGST, and either SGST or IGST, depending on whether the movement of goods or supply of services involves intra-state or inter-state trade or commerce. Under the proposed Article 269A, the IGST should be levied and collected by the Union but be apportioned between the Union and the States.

The additional tax – a wrong move

The manner of taxation on products such as alcohol and petroleum under the GST mechanism has been a point of disagreement between the Union and the states because of the amount of revenue generated by the states in taxing these products. The Bill has sought to address this issue and keep the states happy by keeping the taxation of alcohol and petroleum outside the purview of GST altogether. This essentially means that the states will continue to tax the sale of alcohol and petroleum under its existing state excise and sale tax laws. Additionally, to address the long standing (but slightly unjustified) concerns of revenue loss to the states, the Bill proposes an additional tax not exceeding 1 per cent on the supply of goods in the course of inter-state trade or commerce to be levied and collected by the Union Government for a period of at least two years, but assigned to the states from where the supply of goods originates. However, since this 1 per cent additional tax is intended to be collected in addition to the IGST under Article 269A, it appears that this 1 per cent additional tax falls outside the purview of the GST framework altogether; else, it could have been specifically incorporated into Article 269A itself.

This is an incorrect move under the Bill and the intention of simplifying the tax net will be partially lost if certain taxes are proposed to be kept outside the GST scheme. Further, if the 1 per cent additional tax is kept outside the GST scheme, then the assessees will not be able to avail credit of the 1 per cent additional tax being paid on the supply of goods in the course of inter-state trade or commerce; and this will become a cost that will eventually be passed on to the end customers.

The council

A commendable and necessary but tricky insertion in the Bill is the creation of the GST Council under the proposed Article 279A of the Constitution. The GST Council is intended to be an all-powerful body comprising the Union Finance Minister, the Union Minister of State for Finance, and the State Finance Minister of each state government to formulate principles and make recommendations on the following aspects of the GST:

(a) the rates, including floor rates with bands of GST;

(b) the goods and services that may be subjected to, or exempted from GST;

(c) model goods and services tax laws for adoption by the Union and the states and principles for the levy and apportionment of IGST;

(d) the threshold limit of turnover below which goods and services may be exempted from GST;

(e) special provisions with respect to the North Eastern States, Jammu and Kashmir, Himachal Pradesh and Uttarakhand; and

(f) any other matter relating to GST, as the GST Council may decide.

iLaw_InternationalCoursesHaving a GST Council of this nature will ensure greater coordination between the Union and states and among states. While the decisions of the GST Council are intended to be binding on the Union and the states, the principal issue here is the extent to which the model GST Law will be binding on and be implemented by the states. If one or more states, for instance, decide to make even procedural changes while adopting and enacting the model GST Law, then one of the purposes of GST – the benefit of uniformity – will be lost on the assessees; not to mention, give rise to much confusion among the assessees who are subject to taxation in multiple states. Secondly, instead of providing floor rates and bands of GST, it would have been advisable that the Bill provided for a fixed rate of taxation under the GST (subject to certain exemptions and abatements, of course). Providing for flexibility in terms of the rates that can be charged as SGST could potentially become the subject matter of much confusion in the hands of the assessees, not to mention a whole lot of business structuring and restructuring around taxation. At the same time, this proposal could lead to a healthy competition between the states and could result in SGST being charged only at the floor rates in the long run. The third and most important issue could arise not with the model GST law itself, but with its implementation. Would an issue under the SGST raised by a state government in respect of an assessee also become an issue under the CGST to be taken note of by the Union government, and vice-versa? What happens if there is a difference of opinion between the CGST authorities and SGST authorities in respect of the same issue involving the same assessee? Can proceedings be commenced only under CGST or only under SGST, or do they necessarily have to be clubbed? Which authorities get jurisdiction over the matter? Does an assessee have to respond to dual proceedings under CGST and SGST in respect of the same cause of action? While one does not expect the Bill to address these issues naturally, one hopes that the model GST law clearly enunciates and addresses such issues; and the GST Council ensures that little or no modifications are made by the states while enacting the model GST law.

Interesting in itself is the mode of decision-making by the GST Council, which has been provided in Article 279A(9). Every decision of the GST Council shall be taken by a majority of not less than three-fourths of the weighted votes of the members present and voting: (A) the vote of the Union government shall have a weightage of one-third of the total votes cast, and (B) the votes of all the state governments taken together shall have a weightage of two-thirds of the total votes cast in that meeting. One wonders how the states acceded to a situation wherein the Union government has a weightage of one-third of the votes cast. And given the current political map of India, this could result in a situation where the majority group at the Union government has complete control over the decision making process of the GST Council.

Concluding step in indirect tax reform

The introduction of the GST is the concluding step in the reformation of the indirect tax system in India. From an assessee and government point of view, GST enables ease of compliance, transparency on the exact amount of tax being suffered by goods and services, and ease of administration. From the perspective of the end consumer, the removal of the cascading effect of taxes will result in an immediate reduction on the overall tax burden on goods and services; and it is hoped that this reduction in the tax burden will in turn help bring down the cost of goods and services, moving ahead.

The Union government has repeatedly said that it intends to rollout the GST with effect from April 1, 2016. Hence, it is unlikely that the Central Government will undertake any major tinkering with the scheme of indirect taxation in the forthcoming Union Budget, especially considering that the it also intends to introduce the Bill in this budget session of the Parliament. Having said that, the forthcoming Union Budget can actually be utilised as a good opportunity to merge certain lesser avenues of taxation into the central excise and services taxes and also do away with a several cesses that form the body of central indirect taxation. Additionally, procedural compliances can be simplified and brought closer to a format that the Union government intends to adopt for compliances under the CGST. Doing so will not only ease the road for the introduction of the GST in its intended form, but also provide assessees a full twelve months to get accustomed to the compliance processes.

Gautham Gururaj is an advocate based in Bangalore.


Article 370 – Understand the historical context and the text before you talk about repeal

RichaKaur_myLawPrime Minister Narendra Modi revived the debate over Article 370 of the Constitution of India during his election campaign. A brief tour of the factors that influenced the drafting of that constitutional provision and the interpretation of its text will provide better context to the debate that has followed Mr. Modi’s remarks. These factors include some of the events that transpired between the departure of the British from the subcontinent in August 1947 and the adoption of the Constitution of Jammu and Kashmir in January 1957.

The events that should inform any discussion about Article 370

Out of the 562 princely states in India, Kashmir was among those that the British did not rule directly. The British government transferred the state forever to Maharaja Gulab Singh under the Treaty of Amritsar, 1846, and fixed a nominal annual payment to protect his territories from external enemies. A key development in the history of Jammu and Kashmir in the twentieth century is the crystallisation of the popular opposition to the Maharaja’s rule through the Jammu and Kashmir National Conference, led by Sheikh Abdullah. With India’s independence, Maharaja Hari Singh, the ruler of Kashmir in 1947, had three options: to remain independent, merge with India, or merge with Pakistan. Pressing the Maharaja, who initially wanted to remain independent, to accede to India, Prime Minister Jawaharlal Nehru, in one of his letters said,

It is of the most vital importance that Kashmir should remain in the Indian Union. But however much we may want this, it cannot be done ultimately except through the goodwill of the mass of the population. Even if military forces held Kashmir for a while, a later consequence might be a strong reaction against this. Essentially, therefore, this is a problem of psychological approach to the mass of the people and of making them feel being in the Indian Union will benefit them. If the average Muslim feels that he has no safe or secure place in the Union, then obviously he will look elsewhere. Our basic policy must keep this in view, or else, we fail.

From left to right – Hari Singh, Nehru, and Sheikh Abdullah.

When Hari Singh declared Jammu and Kashmir independent in 1947, Pakistan immediately launched a guerrilla war to free the region, which had a majority of Muslims, from Hindu rule. The Maharaja, realising his inability to protect his territory, requested the Indian government for help. The Indian government insisted that Kashmir accede to India before it would send its army. The Maharaja agreed to the same and the Indian government and the Maharaja signed the accession treaty (“the Instrument”) on October 26, 1947.

Importantly, Clause 5 of the Instrument said that it could not be altered without the state’s consent. Clause 7 specifically protected the state’s right to ratify the application of any future constitution of India in its territory. It read:

Nothing in this Instrument shall be deemed to commit me in any way to acceptance of any future Constitution of India or fetter my discretion to enter into arrangements with the Government of India under any such future Constitution.”

The Instrument did not result in the merger of Kashmir – governed by its own Constitution of 1939 – into India and only created a temporary settlement under which India’s government would look after the subjects of defence, foreign affairs, and communication while Kashmir would have its own constitution, flag, and Prime Minister. In a broadcast on November 2, 1947, Nehru spoke of the temporary nature of the Instrument.

“…Both the Kashmir government and the National Conference pressed us to accept this accession and to send troops by air, but made condition that the accession would have to be considered by the people of Kashmir later when the peace and order were established…

AdvancedProfessionalCertificationinCorporateLawPractice_apcclpSome of the other important events that influenced the drafting of Article 370 were the political turmoil in Jammu and Kashmir, the United Nations resolutions calling for a plebiscite in the state on the issue of accession to India, the governments of both India and Pakistan establishing political control over the territories of Kashmir under their control, and the representatives of all the other states choosing, in India’s Constituent Assembly, to not assert their right to separate constitutions.

Jammu and Kashmir, unlike the other princely states, was not willing to accept the Constitution of India and was adamant on acting only on the basis of the terms of Instrument, specifically Clause 7. Gopalaswami Ayyangar, a Minister without portfolio in Nehru’s government, moved the Bill for Article 370 in India’s Constituent Assembly. He made the following argument.

Till India became a Republic, the relationship of all the States with the Government of India was based on the Instrument of Accession. In the case of other Indian States, the Instruments of Accession will be a thing of the past in the new Constitution; the States have been integrated with the Federal Republic in such a manner that they do not have to accede or execute a document of accession for becoming units of the Republic. It would not be so in the case of Kashmir since that particular State is not yet ripe for this kind of integration due to special conditions prevailing in Kashmir. In the first place there has been a war going on within the limits of Jammu and Kashmir State — part of the State is still in the hands of the enemies, and in the second place, the Government of India have committed themselves to the people of Kashmir in certain respects. They have committed themselves to the position that an opportunity will be given to the people of the State to decide for themselves the nature of their Constitution.

Sardar Patel, the then Minister of States in India, declared in the Constituent Assembly,

In view of the special problem with which the Jammu and Kashmir Government is faced, we have made special provisions for the continuance of the State with the Union on the existing basis.

Soon after India adopted its constitution, the National Conference’s leader Sheikh Abdullah — the interim Prime Minister of the state and the most popular leader of the state’s Muslims —called for independence from India. The government of India dismissed his government and placed him in preventive detention. Seven years after the Constitution of India was adopted, the Constitution of Jammu and Kashmir came into full force. Among its 158 sections is Section 3, which clearly states that, “The State of Jammu and Kashmir is and shall be an integral part of the Union of India” and is not amenable to change even using the amending provisions of that constitution.

Apart from these events, we can also learn much from the text of Article 370, including the use of the word “temporary” in its title.

Lessons from the text of Article 370

Mr. Ayyangar had said in the Constituent Assembly that Article 370 is labeled a ‘temporary’ provision in order to keep the door open for the day when the state of Jammu and Kashmir would merge with India and fully accept the Constitution of India.


Sub-clause (a) of Clause (1) states that Article 238, which regulated the relationship between the Union and the princely states before the Seventh Amendment repealed it in 1956, shall not apply in relation to Jammu and Kashmir. Sub-clause (b) provides that the Parliament can make laws for the state of Jammu and Kashmir on matters in the Union and the Concurrent Lists (in Schedule Seven of the Constitution of India) only if the President (after consultation with the government of the state) declares that such a subject fits the description of the matters of defence, communication, finance, and external affairs. Sub-clauses (c) and (d) make it clear that at the time the Constitution came into effect, only Article 1 – which defines the components of the Union of India – and Article 370 itself, applied to the state. Other constitutional provisions can only be made applicable to the state with the agreement of the state government.

Therefore, even though Jammu and Kashmir is a constituent state of the Union of India under Schedule 1 of the Constitution of India, it is exempt from many provisions of the Constitution and is even allowed to have a separate constitution. With Union laws – other than those governing the subjects of defence, external affairs, finance, and communications – not applicable to the state without the permission of the government of Jammu and Kashmir, the state’s residents live under a separate set of laws, including those related to citizenship, ownership of property, and fundamental rights. The provisions of Article 370 and the other exceptions in the Constitution regarding the state have created a unique relationship between the Union government and the state. As MP Jain points out, “the two characteristic features of this special relationship are, (1) the State has much greater measure of autonomy and power than enjoyed by the other States and (2) Centre’s jurisdiction within the State is more limited than what it has with respect to other States.

Today, a number of provisions of the Constitution of India stand extended to the state of Jammu and Kashmir. Important amongst these are Article 356, which deals with the imposition of President’s rule in a state and the jurisdictions of the Supreme Court, the Election Commission, and the Comptroller and Auditor General. There is however, a vast area that still remains under the exclusive jurisdiction of the state government. The Indian Penal Code, 1860, the Prevention of Corruption Act, 1988, the Religious Institutions (Prevention of Misuse) Act, 1988, and the Delhi Special Police Establishment Act, 1946 are some crucial Union laws that are not at all applicable to the state. The Protection of Human Rights Act, 1993, the Commissions of Inquiry Act, 1952, the Unlawful Activities (Prevention) Act, 1967, and the Representation of the People Act, 1951 are only partly applicable.

Can Article 370 be amended under the provisions of the Constitution?

Article370(2)and(3)_annotatedThe answer is no. Article 368, which contains the provisions governing the amendment of the Constitution, applies to all the other states of India except Kashmir. In relation to Kashmir, a proviso has been added to Article 368 by the Constitution (Application to Jammu and Kashmir) Order, 1954, which says that no constitutional amendment “shall have effect in relation to the State of Jammu and Kashmir” unless applied by an order of the President of India, under Article 370. Clause 3 of Article 370 states that the President can issue a notification to cease the operation of Article 370 or to restrict it operation only on the recommendation of the Constituent Assembly of the state.

Thus any modification or deletion of this Article requires the recommendation of the state’s Constituent Assembly — an improbable condition, given that the Constituent Assembly of Jammu and Kashmir was dissolved in November 1957.

A solution that has been suggested to this obstacle is an amendment of the Constitution of India to remove the requirement that the recommendation of the Constituent Assembly is necessary to remove the Article. But even such an amendment under Article 368 requires issuance of a Presidential order under Article 370, which in turn will require the state government’s concurrence by the President under Clause (1)(d) of the current provision.

The consequences of repeal

Given that Article 370 represents Jammu and Kashmir’s “unique relationship” with India, a probable consequence of its repeal would be the undermining of the position of the state in relation to India. A.G. Noorani has argued that Article 1, which lists the territories of India, is applicable in relation to the state of Jammu and Kashmir only through Article 370 and that, therefore, the extinction of Article 370 would mean the exclusion of Jammu and Kashmir from the constitutionally listed territories of the Union of India. If, as he says, the application of Article 1 to Jammu and Kashmir is subservient to Article 370, the abrogation of Article 370 would sever the constitutional link between India and Jammu and Kashmir and the Indian constitution will automatically cease to be applicable to Jammu and Kashmir. As the former Chief Justice of the Jammu and Kashmir High Court, BA Khan argued last year, “if Article 370 is abrogated, then technically and legally, the foundation of Jammu and Kashmir’s accession to India would cease to exist.”

(Richa Kaur is part of the faculty on

(The article has been amended to reflect the fact that the proviso to Article 368 for the purpose of Jammu and Kashmir, has been added by the Constitution (Application to Jammu and Kashmir) Order, 1954. – Ed.)