1.

Introduction

The strength of a nation’s economy depends upon the system of taxation which if taken correct
approaches, can keeps revenue consistent, stimulates industrial activity and manages growth in
our economy. Through efficient measures, the tax system can lead to revenue mobilization in
response to growth and result in revenue grows slightly faster than GDP. India’s well developed
tax structure has a three-tier federal structure consisting of the Union Government, the State
Governments and the Local Bodies. According to the Constitution of India, the government has
the right to levy taxes on individuals and organizations. However, the constitution states (Article
265)1 that no one has the right to levy or charge taxes except the authority of law. Whatever tax
is being charged has to be backed by the law passed by the legislature or the parliament. A Direct
tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to the
government by the persons (juristic or natural) on whom it is imposed. A direct tax is one that
cannot be shifted by the taxpayer to someone else. Goods and Service Tax (herein after referred
as ‘GST’) is a new revelation that made its appearance in Indian Indirect Tax Regime. The tax is
earlier supposed to make its grand entry on April 01, 2010 has now been postponed till April,
2011. In the budget speech of 2010-11, Indian Finance Minister has promised to make an attempt
to make GST applicable in India from 2011 along with Direct Tax Code (herein after referred as
‘DTC’) in direct tax (income tax regime). The introduction of Goods and Services Tax (GST) is
a very significant step in the field of indirect tax reforms in India. In the pre GST regime, there
was multiplicity of indirect taxes. The central excise duty and service tax was levied by the
Central Government, while VAT and Entry Tax was levied by the State Government. Moreover,
there was cascading effect of taxes, i.e. tax on tax, at various stages as credit of taxes levied by
one government was not available against payment of taxes levied by the other.

1
Article 265 of Constitution of India.
2. Concept of Tax and Genesis of GST
The traditional taxation has been in force in India in different forms from ancient times. Manu,
the ancient law giver, lay down that traders and artisans should pay one-fifth of their profits in
silver and gold, while agriculturists, depending upon their circumstances, were to pay one-sixth,
one eighth or one-tenth of their produce. Kalidasa in the Raghuvansha says thus of King
Dileepa: ‘It was only for the good of his subjects that he collected taxes from them, just as the
Sun draws moisture from the Earth to give it back a thousand fold’. The word ‘kara’, which
refers to taxes, finds mention in the SrimadBhagvatam. The Sanskrit word ‘danda’, is the
manifest form of a government’s identity and consciousness. Chanakya mentions in the
ArthaShastra, about ‘Koshamoolodanda’ and comments that the treasury and its inflows are the
sources of a government’s might. Most of the taxes of Ancient India were highly productive and
the combination of direct taxes with indirect taxes secured flexibility in the tax system. In the
medieval period, the Sultans of Delhi collected taxes under five main categories. The Mughal
emperors granted land revenue rights to a mansabdar in exchange of promises of soldiers during
wartime. The Treaty of Allahabad of 1765 empowered the British and the French with the right
to collect taxes on behalf of the Emperor. Thus, the British system of collectors of land revenues
was firmly established well before the disintegration of the Mughal Empire after 1857. During
the latter half of the 19th century large shifts and overhauls took place. In July 1860, James
Wilson, the first Finance Member of the Governor General in Council, quoted thus from the
authority of Manu while introducing the act for levying income tax in the country, “As the leech,
the calf and the bee take their food little by little, even so must the King draw from his realm,
moderate annual taxes.”

Genesis

Unfolding the pages of history, the idea of national GST in India was first mooted by Kelkar
Committee in the year 2004. The Committee recommended national GST. The first
announcement for the introduction of GST was made in Budget Speech on 28th April,2006 by
the then Finance Minister, P. Chidambaram. The proposed target date to introduce nationwide
GST was 1st April, 2010. The Empowered Committee of State Finance Ministers (EC) which
had formulated the design of State VAT was requested to come up with a roadmap and structure
for the GST. Joint Working Groups of officials having representatives of the States as well as the
Centre were set up to examine various aspects of the GST and draw up reports specifically on
exemptions and thresholds, taxation of services and taxation of inter-State supplies. Based on
discussions within and between it and the Central Government, the EC released its First
Discussion Paper (FDP) on GST in November, 2009. This spells out the features of the proposed
GST and has formed the basis for discussion between the Centre and the States so far.

The introduction of the Goods and Services Tax (GST) is a very significant step in the field of
indirect tax reforms in India. By amalgamating a large number of Central and State taxes into a
single tax, GST will mitigate ill effects of cascading or double taxation in a major way and pave
the way for a common national market. From the consumers point of view, the biggest advantage
would be in terms of reduction in the overall tax burden on goods, which is currently estimated
to be around 25%-30%. It would also imply that the actual burden of indirect taxes on goods and
services would be much more transparent to the consumer. Introduction of GST would also make
Indian products competitive in the domestic and international markets owing to the full
neutralization of input taxes across the value chain of production and distribution. Studies show
that this would have a boosting impact on economic growth. Last but not the least, this tax,
because of its transparent and self-policing character, would be easier to administer. It would
also encourage a shift from the informal to formal economy. The government proposes to
introduce GST with effect from 1st July 2017.
3. Constitutional Background

In 1922 historic enactment of a new Income Tax Act led to the setting up of a comprehensive
taxation system with its own administrative machinery. The Income-tax Act, 1922, gave, for the
first time, a specific nomenclature to various Income-tax authorities.7 In 1924, a Central Board
of Revenue was created to administer central taxes. The attainment of Independence marked
another paradigm shift for taxation. Now the objective of collecting revenues was no longer the
preservation or advancement of British interests, but their own welfare. The major direct taxes
levied by the Centre areon personal and corporate income excluding tax on agricultural income
for which the authority to levy tax is with the states and wealth tax. The indirect taxes levied and
collected by the Centre are Central Excise Duty, customs duty and service tax. A fixed
proportion of the taxes collected by the Centre devolve to the states, based on the
recommendations of the Central Finance Commission, which is set up every five years to review
this sharing mechanism.

The basic framework for the tax system in independent India was provided in the constitutional
assignment of tax powers. The principle of separation in tax powers between the central and state
governments is adopted as the basis of policy. Schedule VII enumerates the subject matters of
taxation with the use of three lists. List - I mentioning the areas on which only the parliament is
competent to makes laws, List - II dealing with the areas on which only the state legislature can
make laws, and List - III Listing the areas on which both the Parliament and the State Legislature
can make laws upon concurrently is provided in Schedule VII. While there are separate heads of
taxation provided under lists I and II of Seventh Schedule of Indian Constitution, there is no head
of taxation in the Concurrent List.

As stated earlier the central government has the power to levy the major broad-based and mobile
tax bases, which include taxes on nonagricultural incomes and wealth, corporate income taxes,
customs duties, and excise duties on manufactured products. Over the years the last item has
evolved into a manufacturers’ VAT on goods. Similarly tax powers assigned to the states include
taxes on agricultural incomes and wealth, sales taxes, and excises on alcoholic products, taxes on
motor vehicles and on transport of passengers and goods, stamp duties and registration fees on
transfers of property, and taxes and duties on electricity. States also have powers to levy taxes on
entertainment and on income earned by engaging in a profession, trade or employment; some
states have retained these powers for themselves, while others have assigned them to local
bodies.

The Constitution of India was amended from 16th of September,2016 to make provision for the
introduction of GST. By this amendments in the Constitution both the Centre and the States shall
have concurrent power to levy and collect the GST on both goods and services.

GST and Centre-State Financial Relations

Currently, fiscal powers between the Centre and the States are clearly demarcated in the
Constitution with almost no overlap between the respective domains. The Centre has the powers
to levy tax on the manufacture of goods (except alcoholic liquor for human consumption, opium
, narcotics etc.) while the States have the powers to levy tax on sale of goods. In case of inter-
states sales, the Centre has the powers to levy a tax (the Central Sales Tax) but, the tax is
collected and retained entirely by the originating States. As for services, it is the Centre alone
that is empowered to levy Service Tax. Since the States are not empowered to levy any tax on
the sale or purchase of goods in the course of their importation into or exportations from India,
the Centre levies and collects this tax in addition to the Basic Customs Duty. This additional duty
of customs (commonly known as CVD and SAD) counterbalance excise duty, sales tax, State
VAT and other taxes levied on the like domestic product. Introduction of GST required
amendments in the Constitution so as to empower the Centre and the States concurrently to levy
and collect GST.

India operates with combination of a federal as well as a decentralised structure, which is why
the power to levy various indirect taxes has been distributed among the central as well as the
state governments. As per article 265 of the Constitution of India “No tax shall be levied or
collected except by authority of law”. To give effect to the same, article 246 of the Constitution
of India enumerates the subject-matter of laws made by the parliament and by the state
legislature, wherein as per clause (1) it provides that parliament has exclusive power to make
laws with respect to any of the matters enumerated in List I in the Seventh Schedule referred to
as the “Union List”, as per clause (3) the legislature of any state has exclusive power to make
laws for such state with respect to any of the matters enumerated in List II in the seventh
schedule referred to as the “State List”, clause (2) provides that parliament and legislature of
states shall have power to make laws with respect to matters enumerated in List III in the seventh
schedule referred to as the “Concurrent List”. Also, as per article 248 “Subject to article 246A,
parliament has exclusive power to make any law with respect to any matter not enumerated in
the concurrent list or state list”, to give effect to the same entry no. 97 is there in the Union list
i.e. the List I to give the residuary power to the parliament with respect to matters which have not
been enumerated in List II or III. Entry No 97 of the List I is reproduced below

“Any other matter not enumerated in List II or List III including any tax not mentioned in
either of those lists.”

Under the old indirect tax structure, number of taxes were being levied by the Central
Government, State Government or local authority and each tax was having a different taxable
event. However, the major sources of income of Central govt. and State govt. were excise duty,
customs duty, service tax and Sales tax/VAT.

In order to accomplish the motive of “One Nation One Tax” and introduce GST, equal power to
make laws with respect to Goods and Services Tax had to be given to Parliament and the
legislature of every state, which was not possible by enlisting the matter under the concurrent list
i.e. List 3 in the seventh schedule because of article 254 of the Constitution of India, since it
provides that in case of inconsistency between laws made by Parliament and laws made by the
legislature of States then the law made by parliament prevail and the law made by the legislature
of the States shall be void. Hence, due to the presence of Article 254 of the constitution, states
would have never agreed to levy GST by enlisting it under the concurrent list, which is why
article 246A has been inserted into the Constitution of India containing “Special provision with
respect to goods and services tax” the same has been reproduced below:
“246A. (1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject
to clause (2), the Legislature of every State, have power to make laws with respect to goods and
services tax imposed by the Union or by such State.

(2) Parliament has 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.

Explanation.—The provisions of this article, shall, in respect of goods and services tax referred
to in clause (5) of article 279A, take effect from the date recommended by the Goods and
Services Tax Council.’’

Article 246A clause (1) provides power to Parliament and legislature of every State to make laws
with respect to goods and services tax imposed by Union or by Such State, which gave rise to the
Central Goods and Services Tax (CGST) & State Goods and Services Tax (SGST). And clause
(2) further provides that parliament has exclusive power to make laws with respect to goods and
services tax when transaction is in the course of inter-state trade or commerce, which gave rise to
Integrated Goods and Service Tax (IGST). Also, article 279A has been inserted in the
Constitution which provides that the President of India shall constitute GST Council which shall
consist of Union Finance Minister as a Chairperson, Union Minister of State in charge of Finance
as a member, the State Finance Minister or State Revenue Minister or any other minister
nominated by each State as a member of the council. The council shall select one of them as
Vice Chairperson of Council. The council shall

1. Make recommendations to the Union and the States on various matters.

2. Recommend with regards to date on which GST shall be levied on petroleum crude, high
speed diesel, motor spirit, natural gas and aviation turbine fuel.

3. The determine procedure for performing its functions.

4. To resolve any dispute arising out of any of its recommendations.

Further some of the important definitions in the Constitution of India related to GST are as
follows:

1. Goods and services tax

Clause (12A) of article 366

“(12A) “goods and services tax” means any tax on supply of goods, or services or both except
taxes on the supply of the alcoholic liquor for human consumption;”

Hence, it has been clarified by the Constitution of India that the taxable event in the GST regime
will be “Supply” & GST cannot be levied on alcoholic liquor for human consumption.

2. Goods

Clause (12) of article 366

“(12) “goods” includes all materials, commodities, and articles.”

3. Services

Clause (26A) of article 366

“(26A) “Services” means anything other than goods.”

GST is a consumption based tax, i.e. tax will be payable in the State in which goods and services
or both are finally consumed. Exports are not taxable, because the place of consumption is
outside India. Imports are taxable, because the place of consumption is in India. GST is based on
VAT system of allowing input tax credit of tax paid on inputs, input services and capital goods,
for payment of tax on output supply. Thus, the States from which goods are supplied will not get
any tax as goods are consumed in another State.

India has adopted “Concurrent dual GST” model. The need for Dual GST model is based on the
following premise:  At existing framework, both levels of Government, that is, Centre and
State, as per Constitution holds concurrent powers to levy tax on domestic goods and services. 
The Concurrent Dual GST model would be a dual levy imposed concurrently by the Centre and
the States, but independently;  Both Centre and State will operate over a common base, that is,
the base for levy and imposition of duty/tax liability would be identical.

Under the Concurrent Dual GST Model taxes shall be levied as per place of supply of goods and
services. In case of supplies within the State or Union Territory – (a) Central GST (CGST) will
be payable to the Central Government (b) State GST (SGST) or Union Territory GST(UTGST)
will be payable to the State Government or Administrator of Union Territory( as applicable)
CGST and SGST will also apply in Union Territories having legislature, i.e. Delhi and
Puducherry. Area upto 12 nautical miles inside the sea is part sof State or Union Territory which
is nearest, so SGST or UTGST will be payable.
4. Conclusion

Since the year 1991, the Indian tax system has undergone some significant change and these
changes were initiated in accordance with the country's W. T. O. commitments as well as the
liberal financial policies. Some of the major changes in the structure of taxation in the nation are
discussed above .Indian tax system has come a long way from the narrow based, complicated
and confusing to the one that is far more efficient. The various reforms have been done to
improve revenue productivity and also to minimize distortions. The reforms that converted the
state level sales tax into VAT are noteworthy here. Even after the reforms of 1991, the steps to
make the tax system broad-based, productive and efficient continued which resulted in the
present GST. The latest reform reaches an innovative idea of GST with motives to subsume all
indirect taxes at the center and the state level , to make one-country-one-tax ,to reduce the
cascading effect of taxes on taxes and thus to increase productivity and transparency, increase
tax-GDP ratio and to reduce/eliminate tax evasion and corruption. GST is a single tax on the
supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes
paid at each stage will be available in the subsequent stage of value addition. GST essentially is a
tax only on value addition at each stage. The final consumer will bear only the GST charged by
the last dealer in the supply chain, with set-off benefits at all the previous stages. Under GST,
there would be only one tax from the manufacturer to the consumer, leading to transparency of
taxes paid to the final consumer. So there will be relief in overall tax burden. This is because
under the GST regime, the entire supply chain will be efficient leading to gains and prevention of
leakages. It is expected that it will result in the overall tax burden on most commodities to come
down, which will benefit consumers.