When India awoke to a new tax – Brief history of GST

It was 10:30 PM on June 30th 2017. The city of Delhi stretched its weary legs and welcomed the cold night after a long summer day with temperatures well above 40oC. But, unlike its not-so-upmarket neighbours, Lutyens Delhi was unusually abuzz with activity. White Hindustan Motors’ Ambassadors, the ubiquitous symbol around corridors of power in India, zoomed by roads lined with security personnel. The circular Central hall of Parliament was lit just as beautifully as it was on a midnight seventy years ago when Pandit Jawaharlal Nehru announced from a podium in the hall the awakening of a nation to life and freedom.Beneath the intricately designed dome of the hall sat a galaxy of India’s most prominent men and women.

The crowd included former prime minister H D Deve Gowda;  Ratan Tata and Amitabh Bacchan, patriarchs of Indian industry and cinema respectively; Lata Mangeshkar, singer; RBI governor Urjit Patel and his predecessors Bimal Jalan, Y V Reddy and D Subbarao (Their presence made Raghuram Rajan’s absence all the more conspicuous) and the ministers and members of parliament. This wasnt a crowd unused to grandiose; yet there was a palpable eagerness amongst the attendees coupled with the understanding that they were at a moment when history was being written.

The conversations and exchanges died down as the trumpets blared and the Prime Minister Narendra Modi walked in followed by the Vice President Hamid Ansari and the President of India, Pranab Mukherjee. At the stroke of the midnight hour, the President and the Prime Minister together pressed the switch playing a video signalling the arrival of the Goods and Services Tax (GST) in India, awakening the nation to its biggest tax reform.

1498888297_minute-after-stroke-midnight-president-pranab-mukherjee-prime-minister-narendra-modi-pressed

(Photo source : International business times )

While GST was launched in India from July 1st 2017, its story began 17 years ago and will not end on July 1 2017  as the government itself admits that the GST has to go through a lot of evolution and is far from perfect. Here I look at a brief history of GST.

Why a GST ?

Any discussion on the Goods and Services Tax (GST) in India has to be mindful of the  federal structure of our nation. India, which was a group of independent princely states had to be brought under the umbrella of one nation. In the need to form one government with authority over many states, concessions had to given to these states. Thus, India was formed as a federal state with powers being divided between the central government and the state governments. Federalism ensures our unity within diversity.

Indirect taxes have a tendency to lead to cascading of taxes (tax on tax). This was countered to a large extent by introducing Value Added Tax (VAT) in India for goods which was rolled out in some states in 2005 and soon was adopted in more states. There were still problems to be solved.

The right to collect taxes was divided between the Centre and the states. States had the power to tax the sale of goods and Centre had the power to tax services. Principally, it is hard today to distinguish between goods and services. How does one decide what portion of a restaurant bill you pay is for the food (good) and what portion for the service the restaurant gave. What portion of the price of a building is the material used in its construction and what is the service of the mason.

There were also different rates of  VAT in different states and problems in claiming input tax credits for inter state purchase of inputs by producers. These hindrances had to be cleared with tax reforms.

A 17 year history of GST in India

 

Timeline of GST in India
2000 Advised by his economic advisory panel of IG Patel, Bimal Jalan and C Rangarajan (all former RBI governors); Prime Minister Atal Bihari Vajpayee sets up a committee to design the framework of the Indian GST tax structure. The committee is headed by the then finance minister of West Bengal Dr. Asim Dasgupta.
2004 Vijay L Kelkar committee recommends GST, highlighting the loopholes in the then tax structure.

The empowered committee formed in 2000 is reconstituted to include all State finance ministers and was registered as a Society under the Societies Registration Act.

Feb-2006 The first deadline for implementing GST is set by the then Finance Minister P Chidambaram in the budget speech as April 1, 2010.
Nov-2009 The empowered committee published the first discussion paper on GST online inviting comments and discussions. Finance minister Pranab Mukherjee announces basic structure of GST
2010 Finance ministry begins the computerization of commercial taxes in states and the rollout of GST is deferred to April 2011
Mar-2011 The constitutional amendment bill to pass the GST is introduced in the parliament by the then ruling party – Congress. The bill gets referred to a Parliamentary Standing Committee on Finance led by Yashwant Sinha for recommendations.
2012 Finance Minister Chidambaram holds meetings with state ministers to resolve the concerns of states by December 2012
2013 The standing committee submits its recommendations to parliament.
2014 The bill with the recommendations of the committee lapses as Lok sabha dissolves. The new finance minister Arun Jaitley introduces the GST bill in Lok Sabha
2015 Lok Sabha passes the bill on May 6, 2015 and is then presented in the Rajya Sabha. Rajya Sabha refers the bill to a joint committee of Lok Sabha and Rajya Sabha.
2016 Rajya Sabha passes the bill with two thirds majority in August and by September 16 states ratify the GST bill and The President gives assent to the bill.

The Union cabinet clears the formation of a GST council, a constitutional body including the union finance minister and finance ministers of all states to advise on matters related to GST.

The council in November recommends a four slab tax structure with additional cess on luxury items and sin goods.

2017 Lok Sabha and Rajya Sabha pass four key GST bills – Cental GST, Integrated GST, Union Territory GST and Compensation bill to compensate states for loss of revenue from GST.

All states except Jammu and Kashmir pass State GST bill.

GST is rolled out in India from July 1 2017.

 

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s