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Goods and Services Tax: The Introduction Process

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 Goods and Services Tax: The Introduction Process

G. Raghuram
K.S. Deepa

W.P. No.2015-03-01
March 2015

The main objective of the working paper series of the IIMA is to help faculty members, research
staff and doctoral students to speedily share their research findings with professional colleagues
and test their research findings at the pre-publication stage. IIMA is committed to maintain
academic freedom. The opinion(s), view(s) and conclusion(s) expressed in the working paper are
those of the authors and not that of IIMA.

INDIAN INSTITUTE OF MANAGEMENT

AHMEDABAD-380 015
INDIA
 Goods and Services Tax: The Introduction Process

G. Raghuram
Professor
Indian Institute of Management, Ahmedabad
Email: [email protected]

K.S. Deepa
Graduate Student, Master of Public Policy
National Law School of India University
Bangalore
Email: [email protected]

Abstract
This paper focuses on the process of introducing the Goods and Services Tax (GST), bringing
out the perspectives of different stakeholders and the contentious issues. The GST was expected
to subsume a variety of taxes and simplify the indirect tax regime. The Empowered Committee
(EC) was mandated in 2007, to bring about consensus among the States to move towards GST.
The important stakeholders in the process were the Government of India (GoI), individual States,
industry and the committees commissioned by the GoI or EC. However, the EC faced challenges
since there were issues of control between the Centre and States, perceived loss of revenue by
some States, extent of uniformity across various commodities and their tax rates, input credit
mechanism and dispute settlement. The deadline for the introduction of GST kept getting
postponed due to the slow resolution of the challenging issues. Finally, it was tabled in the
Parliament as the 122nd Constitutional Amendment Bill (CAB) in December 2014.

Keywords: GST, Constitutional Amendment, Indirect Tax, Federalism

W.P. No. 2015-03-01 Page No. 2

 Goods and Services Tax: The Introduction Process
On December 20, 2014, the Empowered Committee (EC) of the State Finance Ministers (FMs)
agreed to support the 122nd Constitution Amendment Bill (CAB) if the States were adequately
compensated for the loss of revenue. On December 19, 2014, the 122nd CAB was tabled in
Parliament for the introduction of Goods and Services Tax (GST) that allowed a parallel levy of
indirect taxes on the supply of goods or services or both by the Centre and State Governments
(including Union Territories). It introduced a dual taxation system subsuming the various
indirect taxes levied then (Exhibit 1). The 122nd CAB was a culmination of the sustained efforts
of the EC, which had been working since its constitution on July 17, 2000 (Exhibit 2).
According to the 122nd CAB,1 the term 'GST' was defined by introducing a clause 12A in Article
366 of the Constitution of India, to mean “any tax on supply of goods or services or both except
taxes on supply of the alcoholic liquor for human consumption.” „Services‟ under the 122nd CAB
means anything other than goods. „State‟ with reference to articles 246A, 268, 269, 269A and
article 279A includes a Union territory with the Legislature.
Thus, all the supply of goods or services or both would attract Centre level Goods and Service
Tax (CGST; to be levied by the Centre) and State level Goods and Service Tax (SGST; to be
levied by State) unless kept out of the purview of GST. As GST would be applicable to 'supply',
the erstwhile taxable events such as 'manufacture', 'sale' and 'provision of services' would lose
their relevance. GST would enable a larger tax collection base and prevent cascading of taxes1.
The EC was formed on July 17, 2000 with FMs of seven states as its members with the objective
to monitor the smooth implementation of the then proposed Value Added Tax (VAT) across the
country. Later on, the reconstituted EC with FMs of all the States was registered as a society on
August 17, 2004 with Asim Dasgupta (then FM, West Bengal) as its Chairman.2

Indirect Taxation Reforms in India

Charges levied by the State on consumption, expenditure, privilege, or right, but not on income
or property are called Indirect Taxes (Exhibit 3). There was an effort to reform indirect taxes
with the formation of an Indirect Taxation Enquiry Committee (ITEC) in 1976 (Annexure 1).
The ITEC submitted its report in 1978. After a decade of submission of the report by ITEC, a
Long Term Fiscal Policy report (Annexure I) was presented along with the Union Budget of
1985-86 under VP Singh, the then Union FM. Accepting its recommendations, a Modified
Value Added Tax (MODVAT) was introduced on a few commodities on March 1, 1986. A Tax
Reforms Committee with Raja J Chelliah as its Chairman was formed on August 29, 1991. The
committee gave its recommendations to introduce VAT at the manufacturing level covering all

Written by G Raghuram and KS Deepa. The authors acknowledge the contributions made by Abhiruchi Kaul and
Stuti Bansal.
1
The Constitution (One Hundred and Twenty Second) Amendment Bill 2014,
http://www.prsindia.org/uploads/media/Constitution%20115/SCR%20summary-%20GST.pdf, accessed on
December 21, 2014
2
http://www.empcom.gov.in/content/6_1_AboutUs.aspx, accessed on December 22, 2014

W.P. No. 2015-03-01 Page No. 3

goods in December 1991. The recommendations were accepted and introduced partially by the
Government of India (GoI) in the Budget of 1993-94.3
On November 16, 1999, it was decided by Yashwant Sinha, the then Union FM in a meeting of
State Chief Ministers (CMs) to take steps for introduction of nationwide State level VAT in
order to avoid the cascading effect of taxes. MODVAT was renamed as Central level Value
Added Tax (CENVAT) wef April 1, 2000, which introduced new CENVAT Credit Rules. The
EC formed was to supervise the implementation of VAT and to monitor the phasing out of the
sales tax based incentive schemes. These Rules sought to introduce simplified CENVAT
provisions and procedures for allowing credit of duty paid on specified inputs and capital goods
used in or in relation to manufacture of specified final products. CENVAT Credit Rules were
introduced wef March 1, 2002. The new rules contained complete provisions for taking credit of
duty paid on inputs and capital goods.4 A Task Force on Indirect Taxes, formed in July 2002
under the chairmanship of Vijay Kelkar, Adviser to Minister of Finance and Company Affairs,
gave its view that “VAT is a major reform in the indirect tax system of India.”5 The EC had been
working for the execution of State level VAT dealing with inside (State demands) and outside
(industry, exporters and other stakeholders) pressures.
Moving towards GST
A Task Force on the implementation of Fiscal Responsibility and Budget Management Act was
formed by the Central Government on February 18, 2004 under the chairmanship of Vijay
Kelkar in 2003. The report submitted to the Central Government on July 16, 2004, strongly
recommended the adoption of GST for the indirect taxation in India.6
The Kelkar Task Force report stated that India has been moving slowly but steadily towards
VAT since 1986 but the system still had many problems leading to a low tax GDP ratio (Exhibit
4). Giving solution to the problems, they suggested the introduction of „CGST‟. The report said,
“the tax on services should be fully integrated with the existing CENVAT on goods by a modern
VAT type levy on all goods and services to be imposed by the central government (CGST).” The
report also gave the features to be included in the design of CGST.7
The concept of GST was introduced in the Parliament for the first time on February 28, 2006 by
P Chidambaram, the then Union FM in the Union Budget Speech of 2006-07. He remarked, “It is
my sense that there is a large consensus that the country should move towards a national level
GST that should be shared between the Centre and the States. I propose that we set April 1, 2010
as the date for introducing GST. The world over, goods and services attract the same rate of tax.
That is the foundation of a GST.”8

3
Sury, M M (ed) (2006). Taxation in India 1925 to 2007: History, Policy, Trends and Outlook, Indian Tax foundation,
New Delhi
4
https://www.welingkaronline.org/DLP/FINANCE%20-%20CENVAT%20AND%20ITS%20IMPLICATIONS.pdf,
accessed on January 22, 2015
5
Sury, M M (ed) (2006). Taxation in India 1925 to 2007: History, Policy, Trends and Outlook, Indian Tax foundation,
New Delhi
6
http://www.caaa.in/Image/23ugsthb.pdf , accessed on January 22, 2015
7
Report of Task Force on Implementation of FRBM Act, 2003 dated July 16, 2004
8
http://indiabudget.nic.in/ub2006-07/bs/speecha.htm, accessed on Janurary 14, 2015

W.P. No. 2015-03-01 Page No. 4

In the budget speech of 2007-08, P Chidambaram reiterated, “At my request, the EC of State
FMs has agreed to work with the Central Government to prepare a roadmap for introducing a
national level GST wef April 1, 2010.”9
After the announcement made by P Chidambaram, the EC decided to set up a Joint Working
Group on May 10, 2007, with Dr Parthasarthi Shome, the then Adviser to the Union FM and
Satish Chandra, the Member-Secretary of EC as Co-conveners, and the concerned Joint
Secretaries of the Department of Revenue of Union Finance Ministry and all Finance Secretaries
of the States as its members.
This Joint Working Group, after intensive internal discussions as well as interaction with experts
and representatives of Chambers of Commerce and Industry, submitted its report10 to the EC on
November 19, 2007.
The objectives of this report were:
 To study the various models of GST existing globally
 To identify the possible alternative models for introduction of GST in India
 To examine their various characteristics and assess their suitability in India‟s fiscal federal
context.
 To identify the Central Taxes and State Taxes which possess properties to be appropriately
subsumed under GST
 To suggest a model for the base and rate structure of GST
 To constitute sub working groups
This report was then discussed in detail at the meeting of EC held on November 28, 2007. On the
basis of this discussion and written observations of the States, certain modifications were made
and a final version of the views of EC at that stage was prepared.
In his 2008 budget speech, P Chidambaram announced the reduction of Central Sales Tax (CST)
from four percent to two percent. He also expressed the desire of GoI to introduce GST from
April 1, 2010.
The views of the EC prepared in November was sent to the GoI on April 30, 2008. In the
meantime, Manmohan Singh, the then Prime Minister (PM) took over as interim FM on
November 28, 2008 from P Chidambaram. The comments of the GoI were received on
December 12, 2008 and were duly considered by the EC on December 16, 2008.”
However, the report was never made public. In the meantime, Parthasarthi Shome had quit his
post as advisor to the FM on January 11, 2008, after being passed over for the post of Union
Revenue Secretary.
A Committee of Principal Secretaries/Secretaries (Finance/Taxation) and Commissioners of
Trade/Taxes of all States was set up to consider the comments of GoI and work out CGST and
SGST rates. They had detailed deliberations on January 5 and 6, 2009 and submitted their
recommendations to the EC. These were accepted by the EC on January 21, 2009.
On the same day, the EC also decided to constitute a Working Group consisting of Principal
Secretaries/Secretaries (Finance/Taxation), Commissioners of Trade/Taxes of all States and
9
Ibid.
10
http://tinxsys.com/TinxsysInternetWeb/GSTJointWorkingGroup.pdf, accessed on January 22, 2015

W.P. No. 2015-03-01 Page No. 5

senior representatives of GoI to give their recommendations concerning three issues. They were
related to (i) commodities and services on the exempted list, (ii) rules and principles in taxing
services and (iii) finalising the model of interstate stock transfers of goods and services.
Pranab Mukherjee took over as Union FM from Manmohan Singh on January 24, 2009. The
Working Group met on February 10, 2009 and formed three sub working groups to study the
three issues.
Structure of GST
The Working Group submitted their detailed recommendations on the three issues which
provided a structure of GST. They submitted their report on November 11, 2009. The report
favoured a dual GST system. The dual system implied that tax was to be levied concurrently,
both at the Centre and at the State level called CGST and SGST respectively.
In the meantime, Sukumar Mukhopadhyay, former member of the Central Board of Excise and
Customs (CBEC) called the dual GST system as the best solution for a country like India in June
2009. A single GST system was also not agreed upon by the States, fearing revenue loss because
a single system of tax would be levied by GoI alone.
On June 29, 2009, Govinda Rao, then a member of Union FM‟s Economic Council had urged
PM Manmohan Singh to delay the implementation of new tax rules till the Centre and the States
reached a consensus. The FM of Tamil Nadu, K Anbazhagan had also shared the same
viewpoint.
The new Union FM Pranab Mukherjee, while presenting the Budget on July 6, 2009 reiterated
that GST would come into effect from April 1, 2010.
A FICCI-Technopak report on Fast Moving Consumer Goods (FMCGs) was released in July
2009. This report suggested that the GoI needed to rapidly implement GST to replace the
multiple indirect taxes currently levied on FMCGs. This would lead to reduced prices and
increased tax collections.
In September 2009, the States reached a consensus on a two rate system as suggested by Asim
Dasgupta. This system implied a concessional rate for essential items and a standard rate for
other goods. The two rate system proposed by the states also had a special GST for precious
metals and a list of exempted items. In the same month, Asim Dasgupta also announced that a
Joint Working Group would be formed to decide the framework of the dual tax system and issues
relating to special rates. The committee was mandated to submit its report in two months time.
Chattisgarh, Haryana, Tamil Nadu, Rajasthan and Madhya Pradesh expressed their reservations
on the introduction of GST.
On October 17, 2009, Sushil K Modi, then Deputy CM of Bihar demanded adequate
compensation from the Centre. In his view, Bihar would lose Rs 600 cr since entry tax would get
merged with GST and another Rs 260 cr as service tax from the Centre would be subsumed
under GST. At that time, entry tax was imposed by the States and service tax was levied by the
Centre and distributed to the States. Following this, on October 26, 2009, Rajnath Singh,
President of BJP, opposed the GST regime stating that the trader organizations should also be
considered before bringing forward any new laws.

W.P. No. 2015-03-01 Page No. 6

Saurabh Patel, the then Minister of State for Finance and Industry, Gujarat, asked the Central
Government on November 2, 2009 for the protection of industries under GST administration. He
also wanted an open debate on GST and the list of exempted items.
First Discussion Paper
A First Discussion Paper (FDP) was released by the EC inviting interactions with industry, trade,
agriculture and common people on November 10, 2009. The FDP gave details of the structure of
the GST model to be introduced in India and an Annexure on frequently asked questions and
answers on GST. 11 This document also gave justification for adopting GST, stating that it would
improve the existing VAT. It also described the process of preparation of GST and a
comprehensive structure of the GST model.
Due to the ongoing talks related to shifting towards GST at that time, the States started asking
the Central Government for compensations up to five years in order to overcome the revenue
losses. It was feared that since some States were not big consumers of services, they would lose
revenue. Also, having a single rate all over would remove the autonomy that the States had
earlier to fix State tax rates.
On December 12, 2009, Asim Dasgupta announced that GST would have four slabs: a standard
rate for the majority of goods and services, a moderate rate for essential items, 1 percent rate for
precious metals and exempted items.
A Task Force on GST formed by the Thirteenth Finance Commission (FC) gave its report on
December 15, 2009. This report said, “the discussions on the introduction of a comprehensive
dual GST, both at the Centre and State level, have been in progress since early 2006. It is
unfortunate that no agreement on the GST has yet been reached even though the target date for
its introduction ie, 1st April, 2010, is less than six months.” It also suggested pushing the date of
implementation of GST to October 1, 2010.12 The Task Force on GST was formed by the
Thirteenth FC in June 2008, with Arbind Modi, the then Joint Secretary, Department of Revenue
as its Chairman.
National Council of Applied Economic Research (NCAER) was asked by the Thirteenth FC to
prepare a report on the impact of GST on India‟s growth and international trade. The study was
done with Rajesh Chadha, Senior Fellow at NCAER as project leader. It was submitted in
December 2009.
Soon after that, on December 20, 2009, the PM‟s Economic Advisory Council Chairman, C
Rangarajan said that he favoured a single slab each for goods and services or one common rate
for both, unlike the proposal mooted by the States. This was followed by the reports of the EC
stating that while the 13th Financial Commission had recognised a single GST of 12 per cent, it
had decided to adopt a two rate structure.
A discussion of FMs of BJP ruled states on January 7, 2010 revealed their preference for
introducing GST in April 2011. The main concern raised at this meeting was that the GST rates
were not yet confirmed. The states also feared revenue loss and low compensation packages. On
January 13, 2010, Pranab Mukherjee met the state FMs as a pre budget exercise, to discuss the
issues of GST rates, compensation packages and modalities of implementation of GST. It was

11
First Discussion Paper on GST released on November 10, 2009, accessed on December 20, 2014
12
Report of Task Force on Goods & Services Tax, accessed on December 19, 2014

W.P. No. 2015-03-01 Page No. 7

confirmed at this meeting that the implementation of GST would be pushed to April 2011 as it
would take seven to eight months to pass the Constitutional amendments necessary to introduce
the GST bill.
On January 22, 2010 FC briefed the FM on its recommendations on sharing tax receipts between
the GoI and the states. This had a significant bearing on GST. It was proposed that the CST
would be subsumed in GST leading to a revenue loss to the states concerned.13
In the budget speech delivered on February 27, 2010 the FM revealed the GoI‟s intention to
implement GST from April 2011. He also called for a Technology Advisory Group for Unique
Project (TAGUP) “for an effective tax administration and financial governance system through
the creation of IT projects that are secure and efficient” (Exhibit 5).
On May 22, 2010, the GoI decided to introduce Direct Tax Code (DTC) to replace the Income
Tax Act, 1961 (Exhibit 6).
On June 8, 2010, the FM set up a seven member committee as TAGUP,14 headed by Nandan
Nilekani to recommend technical, regulatory and legal changes required to implement five
projects including GST. TAGUP was asked to submit its recommendations in a report within six
months to the FM.
In order to evolve a consensus with States on a single rate structure for GST, the FM met with
EC on July 21, 2010. He proposed a three tier tax structure in which a combined rate of 20%,
12% and 16% were to be charged respectively for goods, essential items and services. Out of
these rates, the States would receive rates of 10%, 6 % and 8 % respectively. Central indirect
taxes like excise duty and service tax, and state indirect taxes like VAT and octroi would be
subsumed in GST. The FM also considered stepping up the compensation package of the states
above the rates prescribed by the Thirteenth FC.
In the National Development Council (NDC) meet on July 25, 2010, the State CMs expressed
their reservations on the implementation of GST on account of lower compensation package and
loss of revenue of the states. The Gujarat CM Narendra Modi suggested that adequate IT
infrastructure should be in place before the implementation of GST. The Punjab CM Prakash
Singh Badal took strong objection to the absorption of purchase tax on agricultural crops under
the GST stating that states would lose revenue on a continuous basis.
Towards Constitutional Amendment
On August 4, 2010 the State CMs met for scrutinizing the CAB drafted by the Centre in order to
introduce the GST. To pass the bill with two thirds majority, 362 members of Lok Sabha and 161
members of the Rajya Sabha had to give assent to the draft bill (Exhibit 7).
The States rejected the draft bill based on two reasons.15 The draft bill provided for a GST
Council consisting of State FMs, the Union FM, and the Union Minister of State (MoS) for
Revenue to make recommendations with respect to GST. In matters where a consensus could not
be reached, the Union FM had a veto over the State FMs. The States opposed this provision.

13
CST is the tax that the GoI levies on goods that pass among states and distributes it to the states.
14
http://www.thehindu.com/news/national/finance-ministry-sets-up-technology-advisory-
group/article449063.ece, accessed on January 31,2015
15
http://www.thehindu.com/todays-paper/tp-national/states-reject-gst-draft-bill-over-centres-veto-
powers/article552468.ece, accessed on February 2, 2015

W.P. No. 2015-03-01 Page No. 8

The draft bill also empowered Parliament to establish a GST Dispute Settlement Authority
(GDSA), an executive body. This Authority would adjudicate disputes referred to it by a State or
GoI and the final appeal lay with the Supreme Court of India (SC). The States viewed this
provision as interference of the executive and the judiciary in legislative provenance.
After this meeting, the EC asked for a Second Discussion Paper. This move made it clear that the
draft bill could not be introduced in the monsoon session of the Parliament.
On August 9, 2010, GoI discussed the draft bill with BJP, the main opposition party. Following
this, on August 16, 2010, Pranab Mukherjee gave the BJP a revised draft bill removing the veto
power of the Union FM. The BJP convened a meeting of eight FMs of the NDA ruled states
(Karnataka, Madhya Pradesh, Gujarat, Chhattisgarh, Himachal Pradesh, Uttarakhand, Bihar and
Punjab) to build consensus over the draft bill.
At the meeting convened on August 18, 2010, no consensus was reached. The States decided to
individually present their views to the EC.
On August 31, 2010, Revenue Secretary Sunil Mitra announced that DTC would come into
effect from April 1, 2012. This would bring down the revenue for the Centre by Rs 53,172 cr. He
mentioned that this loss could be made up for, only with the simultaneous introduction of GST.
On September 13, 2010, the DTC bill was introduced in the Parliament.
On October 31, 2010, the Finance Ministry clarified that the demand of EC for altering the basic
structure of the GST including removing GST Council and GDSA was not acceptable. NDA
ruled States and Uttar Pradesh (UP) continued their opposition.
On February 5, 2011, Nandan Nilekani submitted the TAGUP report to the FM. 16 TAGUP was
asked to make detailed recommendations regarding the technological architecture of five IT
intensive projects including GST. It was also asked to address and make recommendations
regarding human resources to co-ordinate projects among GoI, State and local governments and
between government and other organisations. The key recommendations of TAGUP were (i)
setting up National Information Utilities (NIU) to handle IT systems for five projects, including
GST and (ii) putting in place a Mission Execution Team with a dedicated mission leader to
coordinate projects between governments and other organisations.
On February 13, 2011, Pranab Mukherjee decided to call for a meeting with State FMs during
the recess17 of the budget. The purpose of this meet was to build a consensus over the third
version18 of the draft GST bill that was presented on January 28, 2011. The FM clarified that GoI
wanted to introduce the GST bill in the second half of the budget session, that was to take place
between April 4 and April 21, 2011. The third draft empowered the Parliament to set up a GST
council. The earlier drafts had endorsed the setting up of the GST council by a Presidential order.

16
http://www.thehindu.com/news/national/nilekani-submits-tagup-report-to-pranab/article1156635.ece,
accessed on February 4, 2015
17
Recess of the budget is a month long interval between the first half of the budget session in which the budget is
presented and the second half. Recess is used by PSCs to analyse ministry wise provisions given in the budget.
18
The first version of the draft bill was made by GoI in July 21, 2010. The second version on August 11, 2010,
immediately followed the opposition of State CMs, in which the veto of the FM in GST Council was removed.

W.P. No. 2015-03-01 Page No. 9

On February 28, 2011, in his budget speech, Pranab Mukherjee announced that DTC would be
implemented from April 1, 2012. He expressed the desire of GoI to simultaneously implement
GST on the same day.
On March 22, 2011, Finance Bill 2011 was passed by the Lok Sabha (LS). In this bill, it was
revealed that National Securities Depository Ltd would be the technical partner for operating the
IT structure of the proposed GST.19 On the same day, the 115th CAB, popularly called the GST
bill, was tabled in the Parliament by Pranab Mukherjee.20 On March 29, 2011, the bill was
referred to the Parliamentary Standing Committee (PSC) on Finance, headed by Yashwant Sinha,
to make a detailed examination (Exhibit 9).
On May 13, 2011, Asim Dasgupta lost assembly elections in West Bengal and stepped down as
the Chairman of the EC.
In response to a public notice inviting views on the 115th CAB issued by the PSC, FICCI
submitted its response through a letter dated June 24, 2011.21 In its response, FICCI
recommended (i) the speedy implementation of IGST in lieu of CST, (ii) uniform rate of GST on
both goods and services, (iii) simple tax structure with minimal tax rates, (iv) uniform threshold
limit for goods and services both at the Central and State level and (v) a unified appellate and
adjudication authority for dispute settlement.
The PSC had two detailed sittings with the EC22 on June 8 and June 27, 2011, in which concerns
raised by the States regarding the 115th CAB were discussed.
At the EC meeting on July 18, 2011, Sushil K Modi was unanimously elected as the new
chairman.23 The EC also decided to meet in mid August to discuss the compensation package to
be given to the States, due to the phasing out of the CST.
On August 4, 2011, Pranab Mukherjee met with Sushil K Modi to discuss how the EC would
deliberate on the issues related to GST. On the same day, Nandan Nilekani had a meeting with
Pranab Mukherjee on introducing a centralised IT infrastructure for GST.
The EC met on August 19, 2011, to discuss the IT infrastructure for GST, the compensation
package in lieu of CST and the 115th CAB. Due to further delay in implementing GST, the States
concurred to extend the CST compensation package to the year 2010. In this meeting, the States
also raised their concerns about the loss of their fiscal autonomy and the powers of GDSA. They
wanted the GoI to empower them to levy a cess in case of natural calamity.

19
http://www.jsalaw.com/Admin/uplodedfiles/PublicationFiles/Budget%20news%20letter.pdf, accessed on
February 4, 2015
20 th
This refers to the third draft of the 115 Constitutional Amendment Bill.
21
http://www.ficci.com/spdocument/20238/Towards-the-GST-Approach-Paper-Apri-2013.pdf, accessed on
February 5, 2015
22
The first meeting was attended by Asim Dasgupta to represent the views of the EC during his chairmanship. The
second meet was attended by Sushil K Modi, representing the concerns to be considered by EC in the coming
months.
23
http://www.thehindu.com/news/states-to-look-for-new-chief-to-steer-gst/article2016033.ece, accessed on
February 5, 2015

W.P. No. 2015-03-01 Page No. 10

Compensation for the States
In response to the outcome of the EC meet, GoI asked the States to file for CST compensation
for the previous financial year of 2010-11.
In the next meet of the EC on October 14, 2011, three issues were discussed. The first issue was
about the unresolved taxation concerns of GoI and the States with respect to VAT. The States
mulled over the possibility of additional excise duty on textiles, tobacco and sugar. They also
considered imposing VAT on textiles and sugar. The States discussed their views on online
payment of taxes. The EC decided to come out with a report on its experience of its „GST Team‟
that recently visited Europe to study GST issues.
On January 10, 2012, the EC made four recommendations. The EC asked GoI (i) to remove the
upper limit of professional tax,24 (ii) to end „centrally sponsored schemes‟ and to provide funds
directly to the States according to their needs and with suitable guidelines, (iii) to transfer health
and education funds to the Consolidated Fund of the States instead of districts, and (iv) to
empower the States to impose VAT on imports.
In the pre budget discussion with State FMs on January 19, 2012, Pranab Mukherjee assured the
States on their concerns raised during the previous EC meeting. He also discussed the issue of
improved and inclusive growth as the country was about to enter the 12th Five Year Plan (FYP).
Pranab Mukherjee presented the Union budget on March 16, 2012. In his budget speech, he
alluded to the model legislation for the Centre and the States for CGST and SGST that was under
progress. Referring to the structure of GST Network (GSTN) approved by the EC, he said that
GSTN would be set up as a National Information Utility (NIU) by August 2012.25
On March 4, 2012, the EC asked for an adequate compensation package in lieu of CST. They put
out a negative list of 35 services to be kept out of the GST. It was decided that implementation of
GST would be postponed to April 1, 2013. On March 5, 2012, Pranab Mukherjee constituted a
PSC to look into the litigation of indirect taxes.
Subir Gokarn, the Deputy Governor of the Reserve Bank of India addressed the Confederation of
Indian Industries (CII) annual meet on March 30, 2012.26 In his address, he conjectured that the
proposed GST would create space for the interest rate to come down and contribute to growth.
He also said that GST would bring down inflation.
On March 30, 2012, the GoI set up a study team headed by MK Gupta, Vice Chairman of the
Central Excise and Customs Settlement Commission.27 The mandate of the study team was (i) to
evolve a common tax code, (ii) to look into the proposal to subsume service tax and Central

24
Professional Tax could be levied by the States under article 176 of the Constitution. Based on a 1988
amendment, the upper cap was set at Rs 2500. The States wanted this cap removed since professional
remuneration had increased substantially in the intervening years.
25
The GSTN was a proposed system through which GST returns filing and payments processing for all States was
based on a shared platform through registered PAN network.
26
http://www.thehindu.com/business/Economy/gst-will-help-contain-inflation/article3263158.ece, accessed on
February 6, 2015
27
http://www.thehindu.com/business/Economy/centre-sets-up-study-team-to-evolve-common-tax-
code/article3297428.ece, accessed on February 6, 2015

W.P. No. 2015-03-01 Page No. 11

excise duty under the GST, (iii) to simplify the input tax credit system and (iv) to make the
procedure of GST trade friendly. The study team was asked to weigh in the inputs from various
segments of the industry and submit a report to the FM by September 30, 2012.
In the second consultative meeting of the committee attached to his ministry, Pranab Mukherjee
outlined the benefits of the proposed GST to the Centre, State and the consumer, on May 23,
2012. He mentioned that the GST would (i) remove cascading effect of the indirect taxes at the
Centre, (ii) encourage the States to realise tax commensurate with consumption and (iii) make
the tax regime, transparent to the consumer and reduce the tax burden by 25-30 per cent.
On June 26, 2012, Pranab Mukherjee stepped down as Union FM, in order to file his
nominations as the Presidential candidate.28 PM Manmohan Singh assumed role of the interim
Union FM.
On July 1, 2012, the new service tax regime came into force.29 This was based on a uniform rate
of 12 per cent and a negative list of 28 activities.
Commerce and Industries Minister Anand Sharma in an interaction with the industry on July 15,
2012, mentioned that GST would attract investment. On July 31, 2012, P Chidambaram took
over as the Union FM.
On October 25, 2012, the EC met with P Chidambaram to discuss their concerns regarding the
GST. The EC argued for (i) restoration of CST pending further compensation after 2010-11 and
(ii) petroleum products to be kept in the exempted list. The talk ended in an impasse.
On January 2, 2013, the Fourteenth FC was constituted by Pranab Mukherjee under the
chairmanship of Y V Reddy.30 The FC was mandated to recommend fiscal policy reforms for
the period 2015-16 to 2020-21.
On January 25, 2013, the Ministry of Petroleum and Natural Resources asked the Union FM to
bring crude oil, petrol, diesel, Air Turbine Fuel (ATF) and natural gas under the GST. The 13th
FC had also recommended the same and had stated that the States could levy additional excise
tax on these items over the GST. But the FDP and PSC report had specified petroleum products
in the exempted list.
In his budget speech of 2013-14,31 P Chidambaram announced that (i) the first instalment of the
CST compensation package for the States of Rs 9000 cr would be immediately released and (ii)
the DTC would be introduced in the second half of the budget session. He also called for the
speedy implementation of the GST.
In an interaction with ASSOCHAM on March 22, 2013,32 Parthasarathi Shome, Advisor to the
Union FM, mentioned that the EC was examining the structural and administrative reforms
28
http://www.thehindu.com/news/national/pranab-takes-leave-pm-sees-void/article3569281.ece, accessed on
February 6, 2015
29
http://www.thehindu.com/business/Economy/new-service-tax-regime-comes-into-effect-from-
sunday/article3589492.ece, accessed on February 7, 2015
30
http://finmin.nic.in/14fincomm/14fcrengVol1.pdf, February 28, 2015
31
http://indiabudget.nic.in/budget2012-2013/ub2012-13/bs/bs.pdf, accessed on February 8, 2015
32
http://www.thehindu.com/business/Industry/gst-has-a-good-probability-in-tax-horizon-parthasarathi-
shome/article4535047.ece, accessed on February 11, 2015

W.P. No. 2015-03-01 Page No. 12

required for the introduction of GST. He also said that GST could not be implemented unless
there was a seamless distribution of input credits, facilitating interstate trade and getting refunds
from one State to another.
At the meet on May 10, 2013, the EC decided that there would be no dichotomy between the
exemption list of the Centre and the States. The EC approved 12 out of 96 items in the State
exemption list and asked the Centre to prune their list of 243 items. The EC also asked for
increasing the threshold of exemption of dual GST of small traders from Rs 25 lakhs to Rs 1.5 cr.
The EC also asked for compensation for the States for five years from 2009-10, after the phasing
out of CST.
On May 28, 2013, the PM in an interaction with Japanese and Indian businessmen, expressed the
hope that GST would be implemented after the 2014 general elections.
On July 17, 2013, Sushil K Modi resigned as EC chairman following the split of Janata Dal (U)
and the BJP in Bihar. On July 22, 2013, Abdul Rahim Rather was elected the third chairman of
the EC.33
In an interaction with the PSC on August 9, 2013,34 the 13th FC Chairman Vijay Kelkar
mentioned that after the implementation of the GST, (i) agricultural prices would increase by
0.61-1.18 per cent, (ii) manufacturing foods would be available at a reduced price of 1.22-2.53
per cent (iii) about 20 million high end jobs were expected to emerge in the economy and that
(iv) inflation would come down35.
On August 7, 2013, the PSC tabled its 73rd report in the Parliament.36 The main
recommendations of the report were that GST could be implemented only after (i) studying its
impact on State revenues and (ii) delineating the compensation for the States. The PSC report
also recommended Modified Bank Model of GST (Exhibit 8) as suggested by the 13th FC than
the IGST suggested by the FDP.
The Finance Ministry set up the Tax Administration Reform Commission (TARC) on October
22, 2013. The mandate of the committee was to (i) prevent economic offenses, (ii) review
existing mechanism of dispute resolution, (iii) devise methods to widen the tax base, (iv)
strengthen inter agency information sharing and (v) propose methods to increase voluntary tax
compliance.
Exemption List of Goods
At the EC meet on November 23, 2013, the States rejected the GoI‟s proposal to include alcohol
and petroleum in the GST and the power to notify declared goods.37 The States also argued for

33
http://www.thehindu.com/news/national/gst-will-be-in-place-by-2014/article4758993.ece, accessed on
February 12, 2015
34
http://www.thehindu.com/business/Industry/agricultural-commodity-prices-to-rise-post-gst-
kelkar/article5007105.ece, accessed on February 12, 2015
35
The figures given were based on a study commissioned by the FC to study implication of GST on the economy.
Refer Task Force on Goods & Services Tax (2009), pp.92-94
36
http://www.prsindia.org/uploads/media/Constitution%20115/SCR%20summary-%20GST.pdf
, accessed on February 12, 2015
37
Article 286(3)(a) of Constitution of India authorises Parliament to declare some goods as of ‘special importance’
and to impose restrictions and conditions in regard to power of States in regard to levy, rates and other incidence
of tax on such goods.

W.P. No. 2015-03-01 Page No. 13

an independent mechanism to compensate the States for their loss of revenue. The States wanted
special status for Jammu & Kashmir.
On December 19, 2013, Indian Council of Research on International Economic Relation
(ICRIER) report38 on food processing industry in India mentioned the impact of GST on non
alcoholic beverages. The report suggested that GST should treat food and non alcoholic
beverages with uniform low tax. It also mentioned that fiscal and regulatory barriers should be
removed to facilitate interstate movement of goods.
On February 3, 2014, P Chidambaram confessed that GST was unlikely to be passed in the
interim budget session. In his interim budget speech of February 17, 2014, he identified GST as
a key to augmenting State revenue and moving towards a modern tax regime.
The Indian National Congress (INC) released its election manifesto on March 27, 2014 in which
it promised to pass the GST bill within a year, if voted to power.39 Aam Aadmi Party (AAP) put
forth the idea of a tax system of „simplicity, transparency and certainty‟ without explicitly
mentioning GST in the election manifesto released on April 4, 2015.40 In its election manifesto
released on April 7, 2014, BJP mentioned that „simplifying and rationalising tax policy‟ was a
priority. The BJP promised to bring on board all the States for the implementation of GST and
address their concerns.41.
On May 26, 2014, Arun Jaitley became the Union FM following the general elections.42 He met
the EC on June 10, 2014 where he emphasised that GST was a key policy of the new GoI to
facilitate economic revival.
At the EC meet on July 3, 2014, Andhra Pradesh FM Yanamala Ramakrishnudu brought up three
concerns of the States. They were (i) the non receipt of CST compensation from the Centre since
2009-10, (ii) petroleum products, food, alcohol and tobacco to be kept out of the purview of GST
and (iii) clarity on the roles of GDSA and FC.
In his pre budget meet with the EC on July 6, 2014, Arun Jaitley discussed four issues. They
were (i) introduction of the 122nd CAB, (ii) release of the CST compensation package, (iii)
proposal to merge service tax and Central excise duty into GST and (iv) effective Revenue
Neutral Rate (RNR).43 On the same day, Microsoft, National Association for Software and
Services Companies (NASSCOM) and Blackberry asked for clarity on GST and tax on software
licenses.

38
http://www.thehindu.com/business/Industry/gst-will-benefit-food-processing-industry-
pawar/article5478407.ece, accessed on February 12, 2015

39
http://www.thehinducentre.com/multimedia/archive/01816/Indian_National_Co_1816826a.pdf, accessed on
February 17, 2015
40
http://www.aamaadmiparty.org/aap-manifesto-2014, accessed on February 17, 2015
41
http://www.bjp.org/images/pdf_2014/full_manifesto_english_07.04.2014.pdf, accessed on February 17, 2015
42
http://www.thehindu.com/news/national/gst-govt-wants-quick-consensus/article6098433.ece, accessed on
February 13, 2015
43
RNR is a taxing procedure in which the taxing authority receives the same tax amount after changing the tax
rates. This is done by off setting lower tax incomes from one group with higher tax income from another

W.P. No. 2015-03-01 Page No. 14

In his Union budget speech on July 10, 2014, Arun Jaitley called for the speedy implementation
of the GST.44
In a letter to the Union FM on August 6, 2014, the Madhya Pradesh CM Shivraj Singh Chauhan
raised four concerns.45 He said that the 122nd CAB was a departure from the division of power
between the Centre and the States as envisaged in the Constitution. He also said that timely
compensation of CST was a concern. He asked the GoI to operationalize Article 268 A that has
been inactive for the past ten years. He also hoped that the GST Council was a recommendatory
body.
On November 17, 2014, the GoI agreed to include compensation to the States in the 122nd CAB.
Arun Jaitley floated a draft Cabinet note on the 122nd CAB for inter ministerial consideration.46 It
was decided that further discussion was required to determine (i) RNR for GST and (ii) threshold
limit for imposing GST on small traders.
On December 1, 2014, the Finance Ministry came out with a roadmap for GST
implementation.47 It was decided that the 122nd CAB would be tabled in the winter session of the
Parliament. The operationalization of the GST was decided to be from April 1, 2016.
The 14th FC was commissioned to look into indirect taxation issues. The subcommittees attached
to the Finance Ministry looked into the RNR and suggested a rate of 27 per cent.
At the EC meet on December 11, 2014, the States rejected the 122nd CAB. The States welcomed
the GoI‟s announcement to release the CST compensation of Rs 11,000 cr and asked the
compensation clause to be included in the 122nd CAB. They also argued for petroleum products,
stamp duties and alcohol to be kept on the exemption list.
On December 13, 2014, Arun Jaitley met with the EC to resolve the contentious issues.
Maharashtra FM asked the service tax coming from Mumbai to be kept out of GST. Gujarat had
apprehensions about the compensation package. The meet ended inconclusively.
On December 15, 2014, the Fourteenth FC submitted its report to the President on its
recommendations on various issues including GST.
In a meet with EC again on December 17, 2014, to resolve the impasse, the following proposals
were put forth by Arun Jaitley. On the compensation package, GoI agreed to pay compensation
to the States for five years beginning from 2009-10. This payment was to be made in three
phases. On keeping the petroleum products out of GST, GoI rejected the States‟ demand and
decided to keep it within GST with „nil‟ rate. GoI also agreed to keep alcohol out of GST.
On December 18, 2014, the Union Cabinet gave its approval to the 122nd CAB on GST.48 The
bill envisaged (i) all indirect taxes to be subsumed under the GST, (ii) all petroleum products and

44
http://indiabudget.nic.in/FM_Speech_Delhi_Budget_2014_2015.pdf , accessed on February 14, 2015
45
http://www.thehindu.com/news/national/madhya-pradesh-chief-minister-shivraj-singh-chouhan-fires-salvo-on-
gst/article6285079.ece, accessed on February 14, 2015
46
http://www.thehindu.com/news/national/jaitley-mulling-to-introduce-gst-bill-in-winter-
session/article6651331.ece, accessed on February 13, 2015
47
http://www.thehindu.com/business/Economy/gst-compensation-to-be-included-in-constitutional-
bill/article6608322.ece, accessed on December 13, 2015

W.P. No. 2015-03-01 Page No. 15

real estate transactions to be brought under the GST and (iii) the compensation clause for CST
for the first five transitional years to be included in the draft bill.
On December 19, 2014, Arun Jaitley told the Rajya Sabha that the 122nd CAB would be taken up
in the next session of the Parliament. On December 20, 2014, the EC raised concern that the draft
bill was not discussed by the States before the Cabinet cleared the bill (Exhibit 9). The EC
agreed to extend its support if the States were adequately compensated.

48
http://www.thehindu.com/business/Industry/cabinet-nod-for-amended-bill/article6701784.ece, accessed on
February 13, 2015

W.P. No. 2015-03-01 Page No. 16

 Exhibit 1
The Evolving Tax Structure towards GST
Table 1
Tax before VAT
Levied by Type Name
Centre Direct  Personal Income
 Corporate Income
 Capital Gains
 Fringe Benefit
 Securities Transaction
 Banking Cash Transaction
Indirect  Service
 Customs Duty
 Additional Customs
 Basic Excise
 Special Excise
 Additional Excise
 National Calamity Contingent Duty
 CST
 Education Cess
 Surcharge
State Direct  Estate
 Gift
 Inheritance
 Payroll
 Self Employment
 Wealth
 Endowment
Indirect  Flat Rate Fuel
 Entertainment
 Lottery, Betting, Gambling
 Entry
 Transfer
 Usage
 General Sales
 Additional Surcharge
 Turnover
Local  Octroi or Entry Tax‟49
Government  Utilities (electricity, water and drainage)
 Property

49
http://business.mapsofindia.com/india-tax/system.html, accessed on February 15, 2015

W.P. No. 2015-03-01 Page No. 17

 Table 2
Taxes Subsumed under VAT and GST

VAT
(CENVAT)50 (State VAT)51
(Subsume the Following of the Central Tax) (Subsume the Following of the State Tax)
Basic Excise Usage
Special Excise General Sales
Additional Excise Additional Surcharge
National Calamity Contingent Duty Turnover
Education Cess

GST
CENVAT
State VAT
Service
CST
Entertainment
Lottery, Betting, Gambling
Entry (State)
Octroi
Utilities
Surcharge
Source: ctax.kar.nic.in/what_vat/About%20vat%20nnew.pdf,
accessed on February 16, 2015

50
https://www.welingkaronline.org/DLP/FINANCE%20-%20CENVAT%20AND%20ITS%20IMPLICATIONS.pdf,
accessed on February 17, 2005
51
http://www.archive.india.gov.in/citizen/taxes.php?id=5, accessed on February 17, 2015

W.P. No. 2015-03-01 Page No. 18

 Exhibit 2

EC Mandate and Constitution

Mandate of the EC

The objective of the EC when it was formed was (i) to monitor the implementation of uniform
floor rates of sales tax in the States and UTs, (ii) to monitor the sales tax based incentive
schemes in the States, (iii) to decide the milestones and methods of States to switch over to VAT
and (iv) to monitor the reforms in Central Sales Tax (CST). 52

In the year 2007-08, the mandate of the EC was expanded. In addition to the above objectives,
the EC was mandated „to work with the Central government to prepare a roadmap for
introducing GST in country wef April 1, 2010, and to deal with all related matters‟.53

Constitution of the EC

The EC was formed on July 7, 2000, by the GoI. The founding members of the EC were the nine
State FMs of West Bengal, Karnataka, Madhya Pradesh, Maharashtra, Punjab, Uttar Pradesh,
Delhi, Gujarat and Meghalaya. On August 12, 2004, the EC was reconstituted with the State
FMs or Taxation Ministers of all the States and Union Territories (UT) as its members. On
August 17, 2004, it was decided that EC would be registered as a Society under the Societies
Registration Act (XXI of 1860).54 Two additional members of the bureaucracy, Additional
Secretary (Revenue), GoI and Member Secretary, EC, were then added to the EC.

On December 12, 2006, further reconstitution of the EC was considered at the annual general
meeting. As per the bye laws of the Society, three resolutions were adopted. The first resolution
was that the existing structure of the EC with all the State FMs, Additional Secretary (Revenue)
and Member Secretary was reconstituted for a period of three years from 2006. It was also
decided that if the CM of a State or UT who is also the FM of the State, could nominate another
member who is a minister or a political representative in the rank of a minister, to the EC. This
nominated member may be from any political party. The third resolution was to implement the
first two resolutions by changing the Rules of the EC. The Member Secretary was empowered to
make changes to the Rules.

52
http://www.empcom.gov.in/WriteReadData/UserFiles/file/Annual%20Report/Annual_Report_2007_2008_en.pd
f, accessed on February 9, 2015
53
Ibid., pp.23
54
http://www.empcom.gov.in/WriteReadData/UserFiles/file/Annual%20Report/Aunual%20Report%202006-
2007_Eng.pdf, accessed on February 9, 2015

W.P. No. 2015-03-01 Page No. 19

The EC Secretariat

The EC Secretariat had the Member Secretary, EC as the highest ranking official. The Member
Secretary was to be a retired senior level bureaucrat. There was also an Advisor to EC, who was
a former bureaucrat. Officer on special duty was usually selected from the senior level
bureaucracy in the sales tax department of any member State. There were also two officers in the
role of a Senior Administrative Officer and Principal Private Secretary in the Secretariat. In
addition, there was a part time finance and an assistant finance officer. All the officers were
designated as members on an annual basis and their tenure extension was considered at the
annual meeting of the EC.

Consultative Committee

On December 6, 2004, a consultative committee was formed for discussing issues at the national
and State level, related to the implementation of VAT. Apart from the Chairman and member
secretary of the EC, the committee had representatives from the Confederation of Indian
Industries (CII), Federation of Indian Chambers of Commerce and Industry (FICCI), The
Associated Chambers of Commerce of India (ASSOCHAM), Conferederation of All India
Traders, Federation of All India Trader‟s Association and Bharatiya Udyog Vyapar Mandal
(BUVM).

W.P. No. 2015-03-01 Page No. 20

 Exhibit 3
Taxation Structure in India before VAT
Taxes in India are classified as Direct and Indirect taxes. A tax that is paid directly by an
individual or organization to the imposing entity is called a direct tax.55 Direct taxes are those in
which the impact and incidence of tax are on the same agent. A tax that is shifted from one agent
to the other till the last agent incurs the tax burden is an indirect tax. Indirect taxes are those in
which the impact and incidence of the tax are on different agents.
Before the introduction of VAT on April 1, 2005, tax collection in India was divided between the
Central, State and Local governments.
Schedule VII of the Constitution states the tax structure in India that was divided between the
three tiers of government.

Table 1
Direct Tax

Levied by Name
Centre  Income other than agricultural income
 Corporate

State  Land Revenue

 Agricultural income
 Land and buildings
 Capital value of an asset except
agricultural land
 Succession and estate duties on
agricultural lands
 Vehicles, animals and boats
 Profession, trade, calling and
employment

Centre and Appropriated by the States  Estate and succession duties other than
on agricultural land

Source: http://nacen.gov.in/inspire/uploads/downloads/53ce2a715edb1.pdf, accessed on February 16, 2015

55
http://www.investopedia.com/terms/d/directtax.asp, accessed on February 15, 2015

W.P. No. 2015-03-01 Page No. 21

 Table 2
Indirect Tax

Levied by Name
Centre  Customs Duty
 Sale or purchase of goods in interstate
trade

State  Sale and purchase of goods, except

newspapers
 Excise on alcohol and narcotics
 Entry of goods into a local area
 Consumption and sale of electricity
 Mineral rights (subject to limitations
imposed by the Parliament)
 Stamp duty except on financial
documents
 Goods and passengers carried by inland
waterways

Levied by the Centre, Collected and  Excise Duty except on alcohol and
Appropriated by the States narcotics not contained in medical or
toilet preparation
 Rates of stamp duties on financial
documents

Levied and Collected by the Centre,  Railway freight and fares

Appropriated by the States  Goods or passengers carried by rail or
air
 Tax other than stamp duties on
transactions in stock exchanges and
futures markets
 Sale and purchase of newspaper or
advertisements therein

Source: http://nacen.gov.in/inspire/uploads/downloads/53ce2a715edb1.pdf, accessed on February 16, 2015

W.P. No. 2015-03-01 Page No. 22

 Exhibit 4
Tax to GDP Ratio and Indirect Taxes
The ratio of total government tax collection to a country‟s Gross domestic Product (GDP) is
called the tax to GDP ratio.56 Tax to GDP ratio over the years indicates, how much tax collection
as a percentage of GDP has gone up, for a given country. When tax collected grows slower than
the GDP, the ratio drops.

Trends in Tax to GDP Ratio since 1971

As per estimates, for a developing country, tax to GDP ratio must be in the ratio of 18 per cent,
in order to ensure economic growth. For a developed country, the ratio is in the range of 70 per
cent. At 16.49 per cent, India had one of the lowest tax to GDP ratio and third lowest tax base
among the G20 countries in 2013. The tax to GDP ratio for direct and indirect taxes stood at 5.97
and 10.52 respectively.

Table 1
Tax to GDP Ratio from 1950-51 to 2013-14

Tax 1950- 1960- 1970- 1980- 1990- 2000- 2005- 2010- 2013-
51 61 71 81 91 01 06 11 14
Direct Tax 2.22 2.24 2.12 2.18 2.09 3.31 4.54 5.78 5.97
to GDP
Ratio
Indirect 3.81 4.86 7.04 9.22 11.09 9.23 9.98 9.35 10.52
Tax to GDP
Ratio
Total Tax 6.03 7.10 9.16 11.40 13.18 12.54 15.52 15.13 16.49
to GDP
Ratio
Source: Public Finance Statistics 2013-1457

India‟s tax to GDP ratio can be analysed before and after the 1991 comprehensive tax reforms.
Till 1980s, we an observe a steady increase in Tax to GDP ratios due to two important reasons.
There was a steady growth rate of the economy and quantitative restrictions were progressively

56
http://www.investopedia.com/terms/t/tax-to-gdp-ratio.asp, accessed on February 10, 2015
57
http://finmin.nic.in/reports/IPFStat201314.pdf, accessed on February 10, 2015

W.P. No. 2015-03-01 Page No. 23

substituted by tariffs in the beginning of the 1980s through the first attempts at economic
liberalization. For instance, tax to GDP ratio increased from 11.40 percent in 1970-71 to 13.4
percent in 1991 (Table 1). There was a severe drought in 1987 followed by economic stagflation.
This was succeeded by economic crisis of 1991 that led to a drop in the tariff collection and a
declining tax to GDP ratio of 14.4 in 1996.58

“In terms of tax composition, the proportion of direct taxes has been decreasing from 21 percent
in 1970-71 to 14 percent in 1990-91. After the economic reforms, the share of direct taxes has
grown steadily to 24 per cent in 1997-98. This was due to an increase in both increase in income
and corporate tax. However, it is not clear how much of the increase is due to the increase in the
pay omission wages and how much of the increase is attributable to better tax compliance.”59

The fastest growth rate of any tax category during the period was for customs that steadily
increased from 11 per cent in 1970-71 to 23 per cent in 1990-91. After the introduction of import
duties in 1992, the revenue from customs fell due to reduction in tariff rates as part of Structural
Adjustment Program (SAP).60

The decline in tax to GDP ratio after the reforms is hence attributable to the decline in the yield
of indirect taxes. One reason for the lower revenue from indirect taxes was the reduction of tariff
rates that was drastically high before the reforms. This was not offset by calibrating the excise
duties. Therefore, both tariffs and excise duties showed a decline of 2.6 and seven percentage
points respectively.

The tax to GDP ratio of the Centre and States during the period can be compared. The decline in
the ratio for Centre has been faster than the States due to the reduction of tariffs.

58
http://www.unescap.org/sites/default/files/apdj-7-2-3-rao.pdf, accessed on February 10, 2015
59
Ibid., pp. 71.
60
Structural Adjustment Programs (SAPs) are economic policies for developing countries that have been promoted
by the World Bank and International Monetary Fund (IMF) since the early 1980s by the provision of conditional
loans.

W.P. No. 2015-03-01 Page No. 24

 Exhibit 5
Mandate and Key Recommendations of TAGUP
Constitution and Mandate

TAGUP was a seven member GoI advisory group set up by the FM on June 8, 2010. The
mandate of TAGUP61 was to look into technology part of five large financial sector projects. It
was headed by Nandan Nilekani. The other members were

i. C. B. Bhave - Former SEBI chairman

ii. R. Chandrasekhar - IT Secretary
iii. Nachiket Mor - Board Member RBI
iv. Dhirendra Swarup
v. S. S. Khan
vi. P. R. V. Ramanan
The committee was mandated to make recommendations on the roadmap to roll out the
following five financial projects

 Tax Information Network (TIN)

 New Pension Scheme (NPS)
 National Treasury Management Agency (NTMA)
 Expenditure Information Network (EIN)
 Goods and Services Tax (GST).

Key Recommendations

TAGUP submitted its report on February 5, 2011. It had two key recommendations.62

The TAGUP has suggested that for complex IT-intensive projects, NIUs working in the spirit of
partnership with the government be put in place to handle all aspects of IT systems. NIUs should
be financially independent and empowered to take quick and efficient business decisions
pertaining to attracting and retaining talent, procurement, rapid response to business exigencies
and adopting new technologies, among other things.

The report also mentioned that, “every project should have a dedicated Mission Leader within
the government with a Mission Execution Team. The team should be manned by personnel, who
possess a diverse set of skills, including intimate familiarity with the government processes,
specialisation in verticals such as technology, outreach, law, as well as the ability to manage a
large decentralised organisation, among others. The group also recommends certain monetary
and non-monetary incentives for the team.” 63

61
http://en.wikipedia.org/wiki/TAGUP, accessed on February 5, 2015
62
http://www.thehindu.com/news/national/nilekani-submits-tagup-report-to-
pranab/article1156635.ece, accessed on February 5, 2015
63
Ibid.

W.P. No. 2015-03-01 Page No. 25

 Exhibit 6
Main Provisions of the DTC Bill 2010
DTC 201064 sought to consolidate and amend the law relating to all direct taxes. The Act repeals
the Income Tax Act 1961 and Wealth tax Act 1957. DTC 2010 proposed the following changes.

Existing Rate of Income Tax

DTC changed the existing rates of income taxes in India. Companies and unincorporated bodies
would be taxed at 30 percent of their total income. A non profit organisation would not have to
pay tax for income below Rs 1 lakh. For income above Rs 1 lakh, they would be charged at the
rate of 15 percent of their total income. For individuals, income tax was exempted for income
below two lakh rupees. Tax rate was 10 per cent, 20 percent and 30 per cent respectively for
incomes between 2-5 lakhs, 5-10 lakhs and above ten lakhs.

Minimum Alternate Tax

The DTC proposed a minimum alternate tax on companies. The tax had to be paid in case the
normal income tax of a company was less than the tax on the book profit of a company,
applicable at 20 per cent.

Marginal Tax

The DTC had proposed a marginal tax on certain investments such as provident funds and
pension schemes at the time of redemption.

Wealth Tax

Wealth above one crore rupees would be taxed at one per cent. Wealth below one crore rupees
was exempted from the wealth tax.

Tax Deductions

The DTC allowed deductions of savings up to one lakh rupees to approved funds, five lakh
rupees to life insurance and Rs 50,000 for health insurance or education of children. Deduction
on housing loans would be up to Rs 1,50,000. There would be no limit on deductions on loans
for higher education.

64
http://www.prsindia.org/uploads/media/Direct%20Tax%20Code,%202010.%20Bill%20Summary.pdf, accessed
on February 15, 2015

W.P. No. 2015-03-01 Page No. 26

Capital Gains Tax

For assets on which securities transaction tax is payable, the long term capital gains (if held for
more than one year) would not apply. Short term capital gains would be computed as half of the
actual gains. For other investment assets, long term capital gains would be given indexation
benefits.

W.P. No. 2015-03-01 Page No. 27

 Exhibit 7
Note on Amendment Procedure in India for CAB
Amendment to the Indian Constitution is the process of making changes to the nation's
fundamental law. The procedure of amendment in the Constitution is laid down in Part XX
(Article 368) of the Constitution of India.65

Types of CAB

There are two types of bills that seek to amend the Constitution.66 They are
i. Bills that have to be passed by Parliament by Special Majority.67
ii. Bills that have to be passed by Special Majority and also to be ratified by not less than
one-half of the State Legislatures.

(i) By Special Majority

„The procedure for such bills is prescribed under Article 368 (2) of the Constitution. These can
be introduced in either House of Parliament. Such bills can never be treated as Money Bills or
Financial Bills. No recommendation of the President is needed for introducing these bills. These
bills have to be passed by a majority of the „total membership‟ of that House and by a majority
of not less than two-thirds of the members of that House present and voting.

(ii) By Special Majority and Ratification

This comprises of Constitutional Amendment Bills which seek to make any change in articles
relating to the following.
a. The Election of the President.
b. The extent of the Executive Power of the Union and the States.
c. The Supreme Court and the High Courts.
d. Any of the Lists in the Seventh Schedule.
e. The representation of States in Parliament.
f. The provisions of Article 368 itself‟.68

Consensus Building for CAB

The consensus building procedure for CAB have procedures mandated under the Rules of
Procedures and Conduct of Business in the Lok Sabha.69 The procedures for CAB is covered
under Chapter XI in sections 155-159.

65
http://en.wikipedia.org/wiki/Amendment_of_the_Constitution_of_India, accessed on February 15, 2015
66
http://www.desikanoon.co.in/2014/05/amendment-procedure-in-india.html, accessed on February 15, 2015
67
Special majority of Parliament refers to two thirds of its members present and voting
68
Ibid.

W.P. No. 2015-03-01 Page No. 28

The setting up of Parliamentary Committees including EC is under section 254 of the Rules. The
formation of PSC is mandated under section 331C of the Rules. Its functions and mandate are
given under 331E.

Under the mandate of the EC and PSC, there are provisions to present discussion papers, form
sub committees, focus groups and special advisory groups.

69
http://164.100.47.132/LssNew/rules/RULES-2010-P-FINAL_1.pdf, accessed on February 15, 2015

W.P. No. 2015-03-01 Page No. 29

 Exhibit 8
PSC Report Summary on 115th CAB
The PSC report made nine suggestions about the 115th CAB.70

1. Implementation of GST

The PSC noted that implementation of the GST should be preceded by adequate groundwork on
the experience of other countries and a credible study on the impact of the GST regime on state
revenues.

2. Compensation Mechanism

PSC recommended a well defined and permanent compensation mechanism. For this purpose, it
suggested the creation of a GST Compensation Fund under the administrative control of the GST
Council.

3. On IGST and Modified Bank Model

Under the 115th CAB, CST was to be replaced by IGST giving exclusive rights to GoI to levy tax
on interstate trading of good and services and imports. In principle, IGST was thought of as
revenue neutral.

The PSC favoured the Modified Bank Model propose by the 13th FC. Under this model, the GoI
and the States were to identify a nodal bank that would receive the CGST and SGST and act as a
„clearing house‟ for the tax.

4. Special Powers

PSC recommended that though the power to notify declared goods vested with GoI, the
Parliament should have the power to restrict and impose conditions on the recommendations of
the GST council regarding the same.

The PSC also recommended the addition of a subclause that enabled the Parliament to raise
additional taxes in exceptional circumstances.

PSC recommended that Jammu & Kashmir and the northeastern States should be specified under
the „special status category‟.

Another recommendation of the PSC was that the States must be allowed to increase GST based
on a predetermined floor rate.

70
http://www.prsindia.org/uploads/media/Constitution%20115/SCR%20summary-%20GST.pdf, accessed on
February 15, 2015

W.P. No. 2015-03-01 Page No. 30

5. GDSA

The PSC recommended that GDSA be replaced by the GST council that is empowered to settle
disputes.

6. Harmonized Tax Structure (HTS)

The PSC recommended that HTS should be the guiding principle and not the obligatory feature
of the GST.

7. IT Infrastructure

Regarding the IT infrastructure, the PSC proposed that the Centre provide the finance and
capacity building facilities in the States.

8. Monitoring

The PSC also suggested the formation of a GST evaluation committee to monitor and evaluate
the implementation of GST. The mandate was to study the immediate impact of GST on
inflation, GDP, retail price and other parameters.

9. Delegated Legislation

The PSC opined that specific concerns of the State like exemptions, threshold and rates be
included in the bye laws and rules and not in the CAB itself.

W.P. No. 2015-03-01 Page No. 31

 Exhibit 9

Contentious Issues and their Resolution

Issue Original Demand of EC Modified Final version in Status

Proposal by Proposal by the 122nd CAB
GoI GoI (December 19,
2014)
Basis of FC, TAGUP, PSC, FDP EC- FM meet
Claims subcommittee
attached to
FM, Industry
Exempted List All goods and Alcohol, Unprocessed Alcohol, Resolved
of Goods and services to be petroleum food article, unprocessed food without
Services subsumed products, education and article in the consensus72
under GST tobacco, health services exemption list
essential food, by NGOs,
stamp duties select public Petroleum
services71 products with nil
No dichotomy rate under GST
between Union
and State list Education, health
services of the
NGOs
CST CST to be CST Compensation Compensation Resolved
Compensation completely Compensation on a tapering clause in 122nd
subsumed for five years basis73 of Rs CAB making it a
under GST since 2009-10 33,000 crores constitutional
from GoI to provision
Compensation Compensation the States in independent of the
to be yearly mechanism to three phases GoI
based on State be independent from 2013-14
claim of GoI Compensation for
five years from
2009-10
Dual System of Uniform CGST and CGST and CGST and SGST Resolved
Tax (CGST and CGST and SGST to be SGST to be to be fixed based
SGST) SGST different fixed based on on a floor rate and
a floor rate and a narrow tax band
Threshold Threshold limit a narrow tax to be allowed
limit of small to 1.5 crore band to be
traders to be turnover from allowed In addition GoI to
removed existing Rs 25 levy IGST
lakh

71
Public services will not include Railways, Post and Telegraph, other commercial Departments, Public Sector
enterprises, banks and Insurance, health and education services
72
This category refers to those areas without unanimous consensus from the States
73
This means 100% compensation for the first three years, 75% for the fourth year and 50% for the fifth year

W.P. No. 2015-03-01 Page No. 32

Two Rate Single tax rate Two tax rates Three tier Three tier Resolved
System of standard rate structure of tax structure of tax
for goods, with 12 percent with 12 percent
moderate rate for essential for essential for
for essential for goods, 16 goods, 16 percent
goods, with a percent for for other goods
special rate for other goods and 20 percent for
precious metals and 20 percent services
and an for services
exemption list
GST Council Consisting of Without veto Unresolved
and GDSA Union FM, (who
State FMs and Parliamentary would be
MoS Revenue To be dropped Without veto order the dispute
because of veto, for FM settling
Formed by Presidential Recommendatory /appeal
presidential order Parliamentary powers on tax rate authority)
order order and exemption list
To be
Veto for union differentiated Modalities of
FM if from FC role Dispute settlement
consensus not
reached No mention of
GDSA
Dispute
settlement
referred to by
GoI or the
States

SC final
appellate
authority

Input Credit IGST with GoI Modified Bank IGST GoI to levy IGST Resolved
acting as a Model with without
clearing house nodal bank consensus
for input tax acting as a
credit clearing house
for input tax
credit.

W.P. No. 2015-03-01 Page No. 33

 Annexure 1
Indirect Taxation Reforms before GST
ITEC 197674

ITEC was formed by the GoI to review the existing structure of the indirect tax system on July
19, 1976 under the Chairmanship of LK Jha, the former governor of the RBI. ITEC submitted its
report in January 1978.

The report studied the taxes being imposed for different goods at various levels. It found major
differences in the rates and methods of taxes being imposed in several States. ITEC suggested
VAT to overcome the prevalent multiple tax rate structure. The report defined VAT as “a tax to
be paid by all sellers of goods and services, other than those specifically exempted, on the basis
of value added by their respective firms.”

It stated that implementation of VAT in other countries was “preceded by a detailed public
debate in chambers of commerce, industry, associations and other firms; in Parliament and
educational institutions.”
The report concluded that from an economic point of view, a tax system covering the addition of
value at all points of progression and trade is the best, as long as it does not generate difficulties
of cascading and distortion in relative factor prices.
On the other hand, the report also said that even though one integrated system based on VAT is
the best possible solution, India should opt for the second best solution.VAT was to be applied to
the manufacturing State (MANVAT) along with a restructured system of sales tax.
The long term objective of MANVAT would be to apply it not only at the manufacturing stage,
but extends it to cover imports, thereby freeing inputs from taxation which is the crucial principle
of VAT. The report further gave the details of how the MANVAT would be applied to the then
current taxation system.
Long Term Fiscal Policy (LTFP) 198575
LTFP was announced in the Union budget of 1985-86 by V P Singh.
The LTFP set out the broad direction and strategy for fiscal reforms, mainly taxation, to further
the objectives of growth and social justice. The policy proposed reforms in the structure of
customs and excise duties by the merging of various central excise duties into a single rate.

74
Sury, MM (2006). Taxation in India: History, Policies, Trends and Outlook, Indian Taxation, New Delhi
75
http://indiabudget.nic.in/es1985-86/6%20Fiscal%20Policy%20and%20Government%20Budget.pdf, accessed on
February 16, 2015

W.P. No. 2015-03-01 Page No. 34

It stated that VAT is the solution for removing cascading of taxes, but due to “the problems of
incorporating the sales tax of States into a centrally administered VAT,” a modified VAT or
MODVAT should be introduced.
A system of giving proforma credit to select excisable commodities was already in place, but the
number of commodities was very less. It was suggested that all the commodities be brought
under MODVAT. Small scale industries were not to be included initially.
The recommendations of the LTFP were accepted and MODVAT was introduced on a few
commodities on March 1, 1986 with reference to specified Chapters of the Central Excise Tariff
Act, 1985.
Tax Reforms Committee (TRC) 199176
A committee of experts was constituted by the GoI through its Resolution dated August 29, 1991
to examine the direct and the indirect tax structure. It was headed by Raja J Chelliah with five
other members.
It recommended the adoption of „a simple broad based domestic indirect tax system‟ which
would cover almost all commodities except a few raw produce of agriculture and many services
with a few rates of duties.
The committee gave its view that the then excise system should be steadily converted into a VAT
at the manufacturing level. The report of the committee gave steps to transit the indirect taxes
into VAT at the Central Level. Extension of the VAT to the wholesale stage was also
recommended. The committee suggested that the sales tax could be converted to a „State VAT
within the manufacturing sector‟.
Reforms in the 90s
Yashwant Sinha, the Union FM called a conference asking the State FMs to study the sales tax
on goods and services including CST in December 1995. In a meeting of all State CMs on
November 16, 1999 by the then Union FM, it was decided to take steps for introduction of State
level harmonized VAT.
On April 1, 2000, the three existing VAT rates on manufacture, imports and sales, further
merged into a single rate called the CENVAT. The tax base was also widened as some
exemptions were replaced by an eight per cent tax.
EC of State FMs was formed on July 17, 2000 for the smooth implementation of State level
VAT.

76
http://www.finmin.nic.in/the_ministry/dept_revenue/Executive_Summary.pdf, accessed on February 16, 2015

W.P. No. 2015-03-01 Page No. 35

Task Force on Indirect Taxes 200277
A Task Force on Indirect Taxes was formed in September 2002 under the Chairmanship of Vijay
Kelkar, Advisor to Ministry of Finance and Company Affairs. The Task Force brought out a
consultative paper in October 2002.
In its recommendations, the Task Force envisaged a constitutionally backed implementation of
VAT from April 1, 2003. The compensation for States had to be through a mutually agreed upon
additional resource mobilization and not through budgetary support. It also suggested that an
Harmonised SyatemSN of goods and services and a uniform tax rate must be in place.

77
http://www.finmin.nic.in/kelkar/report.pdf, accessed on Februray 16, 2015

W.P. No. 2015-03-01 Page No. 36

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3. Report of Task Force on Implementation of FRBM Act, Government of India, New

Delhi

4. Thirteenth Finance Commission (2009). Report of Task Force on Goods & Service Tax.

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