GST Council: New era of indirect tax administration

By L Badri Narayanan and Asish Philip Abraham, Lakshmikumaran & Sridharan
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The GST Council is a constitutional body set up to administer the goods and services tax in terms of article 279A of India’s constitution. The council had 10 meetings in the past six months and resolved many issues as required for a successful roll-out of GST from 1 July 2017. The council is chaired by the central finance minister and consists of the central minister of state for finance and the state ministers of finance or any other minister nominated by each state government.

Badri_Narayanan_-_Lakshmikumaran_&_Sridharan
L Badri narayanan
Partner
Lakshmikumaran & Sridharan

Under article 279A, the GST Council has certain crucial responsibilities and is to make recommendations on the following: (a) taxes, cesses and surcharges levied by the centre, state or local body to be subsumed into GST; (b) exemptions; (c) model GST laws, principles of levy, apportionment of integrated GST (IGST) and principles of place of supply rules; (d) threshold limits of turnover below which goods and services would be exempt; (e) rates of tax including floor rates with bands for goods and services; (f) special rates for additional revenue in times of natural calamity or disasters; (g) special provisions for the Northeast; (h) any other matter that the GST Council may decide.

Administration of the taxpayer base is a contentious issue which the council needs to resolve. The council members agree that small taxpayers should be administered by one tax authority under GST. This will reduce their compliance cost and the government’s tax collection cost. To implement this welcome step, the council has deliberated on horizontal division and vertical division of the taxpayer base for GST administration.

Under the horizontal model states would have sole control over taxpayers with a turnover up to ₹15 million a year (US$225,000) and those with a turnover over ₹15 million would be administered both by the centre and states. Under the vertical model the taxpayer base would be divided between the centre and states based on a pre-decided ratio. Both models propose cross-empowerment of the tax authorities for administrative purposes.

The council has proposed a formula for dual control over the assessees, for the purposes of scrutiny and audit, under which assessees with a GST turnover of ₹15 million or less will be assessed in ratio of 90:10 by the states and the centre respectively. For assessees with a GST turnover of over ₹15 million, the ratio would be 50:50. This might lead to practical challenges for a company with multiple locations, as some of its registrations may be administered by state tax authorities and others by the central tax authority.

L&S-Asish_Philip_Abraham
Asish Philip Abraham
Principal associate
Lakshmikumaran & Sridharan

The above formula, if approved, would require changes in the IGST law. Further, it was decided that although the power to levy and collect IGST is with the centre, a special legal provision will be put in place for the cross-empowerment of the states in the same manner/ratio as provided in the assessment ratio. This also would require changes in the IGST law. It was clarified that in cases where a conflict arises between two states while collecting IGST, on an issue such as the relevant place of supply, the assessment will be carried out by the centre.

The council has also suggested amending the definition of “territory” to empower state governments to levy GST for supply made in territorial waters.

The constitution requires that the centre compensate the states with respect of revenue losses suffered due to the introduction of GST. The 10th meeting of the council, held on 18 February, approved the draft compensation bill.

Additionally, a few minor issues which cropped up while drafting the final laws were addressed and disposed of. The issues were in relation to the definition of “agriculture” and “agriculturist”, determination of threshold limit for composition levy, exemptions to be included in the transitional provisions, and classification of works contract, among others.

A time schedule was decided with respect to finalization of the drafts of CGST, SGST and IGST laws. The exercise of apportioning rates into the four slabs was proposed to be carried out simultaneously. The final laws were to be perused and approved by the council at meetings on 4 and 5 March, subsequent to which the laws were to be tabled before the respective legislative houses for approval.

A long path awaits the GST Council in unifying India into a common market for goods and services and a smooth transition to the new regime. The council has ushered a new era of indirect tax administration in India.

L Badri Narayanan is a partner and Asish Philip Abraham is a principal associate at Lakshmikumaran & Sridharan.

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