Cheat Sheet: Evolution and Constitutional Background of GST

1. Pre-Independence Tax Structure

1.1 Colonial Tax System

• British India had multiple layers of taxation with overlapping jurisdictions
• Sales tax first introduced in 1938 in erstwhile Bombay Presidency
• No uniform indirect tax structure across provinces
• Multiple cascading taxes leading to tax-on-tax effect

1.2 Government of India Act, 1935

2. Constitutional Framework Under Indian Constitution, 1950

2.1 Original Distribution of Taxing Powers

2.2 Key Constitutional Provisions

2.3 Constitutional Limitations on Tax Powers

• Article 286(1): No state law can impose tax on sale or purchase of goods where such sale or purchase takes place outside state or in course of import/export
• Article 286(2): Parliament empowered to formulate principles for determining when sale or purchase takes place in specified circumstances
• Article 286(3): No state law can impose tax on sale or purchase of declared goods except as per principles laid down by Parliament
• Article 301: Freedom of trade, commerce and intercourse throughout India

3. Pre-GST Indirect Tax Regime

3.1 Central Taxes

3.2 State Taxes

3.3 Problems with Pre-GST Regime

• Cascading effect: Tax on tax due to non-availability of complete input tax credit chain
• Multiple taxes: 17+ indirect taxes levied by Centre and states
• Tax on inter-state transactions: CST not allowing input tax credit
• Different tax rates across states leading to distortion in trade
• Artificial division between goods and services creating classification disputes
• Compliance burden: Multiple registrations, returns, and assessments
• Tax barriers: Checkpoints at state borders impeding seamless movement of goods

4. Evolution Towards GST

4.1 Initial Proposals and Committees

4.2 Key Milestones in GST Evolution

4.3 Ratification Process

• Required ratification by at least 50% of state legislatures as per Article 368(2)
• More than 50% states ratified the amendment bill within required timeframe
• President's assent received on September 8, 2016
• Became Constitution (101st Amendment) Act, 2016
• Notification date: September 16, 2016

5. Constitution (101st Amendment) Act, 2016

5.1 Key Features of Amendment

5.2 Article 246A - Special Provision for GST

• Clause (1): Parliament has power to make laws on GST on supplies in course of inter-state trade or commerce
• Clause (2): State Legislature has power to make laws on GST on supplies within state
• Concurrent taxing power limited to goods and services only
• Does not extend to alcoholic liquor for human consumption
• Parliament has power to make laws on GST on imports (Article 246A(1))

5.3 Article 269A - Levy and Collection of GST on Inter-State Supplies

• IGST on inter-state supplies levied and collected by Union
• IGST apportioned between Union and states in manner provided by Parliament
• Principles for determining place of supply formulated by Parliament
• Supplies in course of import deemed inter-state supply

5.4 Article 279A - GST Council

6. Constitutional Amendments Made

6.1 Amendments to Union List (Seventh Schedule - List I)

6.2 Amendments to State List (Seventh Schedule - List II)

6.3 Five Petroleum Products Kept Outside GST

• Petroleum crude
• Motor spirit (petrol)
• High speed diesel
• Natural gas
• Aviation turbine fuel
• To be brought under GST from date recommended by GST Council

6.4 Alcoholic Liquor for Human Consumption

• Completely excluded from GST purview
• States continue to levy excise duty and VAT/sales tax
• Entry 8 of State List (excise duty on alcoholic liquor) retained
• Entry 54 of State List amended to allow state taxation

7. GST Council - Detailed Structure

7.1 Composition and Membership

7.2 Quorum and Voting

• Quorum: 50% of total members
• Decisions require 3/4th majority of weighted votes cast
• Centre holds 1/3rd voting weight
• All states collectively hold 2/3rd voting weight
• Each state has equal vote weight

7.3 Functions of GST Council (Article 279A(4))

7.4 Nature of GST Council Recommendations

• Constitutionally recommendatory, not mandatory
• Union and State Governments not legally bound to accept recommendations
• However, cooperative federalism principle expects compliance
• Supreme Court in Union of India v. Mohit Minerals (2022) clarified recommendatory nature

8. Legislative Framework for GST Implementation

8.1 Four GST Statutes Enacted

8.2 Compensation Cess Legislation

• GST (Compensation to States) Act, 2017 enacted by Parliament
• Levies compensation cess on certain goods and services
• Collected in addition to GST for compensating states for revenue loss
• Compensation for 5 years from July 1, 2017 (base year 2015-16 with 14% annual growth assumed)
• Compensation period extended to June 2022 due to COVID-19 revenue shortfalls

8.3 Implementation Date

• GST laws came into force on July 1, 2017 (except Jammu & Kashmir)
• Jammu & Kashmir implemented GST from July 8, 2017
• After reorganization of J&K in 2019, J&K and Ladakh brought under UTGST Act

9. Dual GST Model

9.1 Structure of Dual GST

9.2 Input Tax Credit Mechanism

• CGST credit used to pay CGST and IGST
• SGST credit used to pay SGST and IGST
• IGST credit used to pay IGST, CGST, and SGST (in that order)
• Cross-utilization between CGST and SGST not permitted
• Full input tax credit available throughout supply chain

9.3 Rationale for Dual Model

• Preserves fiscal federalism by allowing both Centre and States to tax
• Maintains revenue autonomy of states
• Ensures both Centre and States participate in GST governance
• Addresses concerns of states regarding loss of fiscal sovereignty

10. Special Provisions and Exclusions

10.1 Transactions Outside GST

10.2 Special Category States

• Article 279A(4)(g) mandates special provisions for special category states
• 11 states granted special category status: Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh, Uttarakhand, Jammu & Kashmir (before reorganization)
• Higher revenue share from IGST collections
• Extended transition periods for compliance
• Special exemptions and concessions as per GST Council recommendations

10.3 Goods Taxable by States (Entry 54, State List)

• Petroleum crude
• High speed diesel
• Motor spirit (petrol)
• Natural gas
• Aviation turbine fuel
• Alcoholic liquor for human consumption

11. Constitutional Safeguards in GST

11.1 Compensation to States

11.2 Protection of State Legislative Powers

• Article 246A grants concurrent power; states not subordinated to Centre in GST matters
• State GST laws independently enacted by State Legislatures
• States retain power to amend rates/exemptions as per GST Council recommendations
• States have equal representation and voting power in GST Council
• States collectively hold 2/3rd voting weight in GST Council

11.3 Sunset Clauses

• Article 279A(1) inserted sunset clause stating "for five years"
• After five years, GST Council continues to function but compensation obligation ends
• No automatic sunset of GST Council itself; continues to operate
• Parliament may legislate to alter GST provisions after compensation period

12. Key Judicial Pronouncements on GST

12.1 Union of India v. Mohit Minerals (2022)

• Supreme Court examined nature of GST Council recommendations
• Held that recommendations are not binding on Union and State Governments
• Recommendations persuasive but not obligatory under Article 279A
• Union and States retain independent legislative power under Article 246A
• GST Council is a collaborative federal institution, not superior authority

12.2 Other Notable Cases

13. Advantages of GST Over Previous Regime

13.1 Economic Benefits

• Elimination of cascading effect through seamless input tax credit
• Reduction in overall tax burden on goods and services
• Creation of unified national market by removing fiscal barriers
• Simplification of tax structure with fewer taxes
• Improved tax compliance through technology-driven administration
• Reduction in logistics costs by eliminating checkpoints
• Boost to GDP estimated at 1.5-2% over medium term

13.2 Administrative Benefits

• Single registration for all-India operations
• Uniform definitions of taxable event across India
• Online filing and processing reducing compliance burden
• Automatic matching of input tax credit through GSTN
• Reduction in tax evasion through invoice matching mechanism
• Transparency in tax administration through digital platform

13.3 Taxpayer Benefits

• Single interface for tax compliance
• Reduction in multiplicity of documentation
• Quick refunds through online processing
• Clear demarcation between goods and services eliminated
• Reduced litigation due to uniform laws and interpretations

14. Challenges in GST Implementation

14.1 Initial Implementation Issues

• Technical glitches in GSTN (GST Network) portal during initial months
• Multiple rate slabs (5%, 12%, 18%, 28% plus cess) causing classification disputes
• Inverted duty structure in certain sectors
• Complex return filing procedures (initially 3 monthly returns)
• Working capital blockage for small businesses
• Learning curve for taxpayers and tax administrators

14.2 Revenue Concerns

• Revenue shortfalls compared to projections in several states
• Compensation cess collections insufficient during 2020-21 and 2021-22
• Centre-State disputes over borrowing for compensation during COVID-19
• Concerns about revenue autonomy post-compensation period

14.3 Structural Issues

• Exclusion of petroleum products and electricity from GST
• High rate of 28% for certain goods defeating anti-inflationary objective
• GST on GST issue (tax on tax) on certain composite supplies
• Frequent changes in rates and procedures creating uncertainty
• Multiple rate slabs deviating from ideal single-rate GST model

15. Important Definitions for Constitutional Context

16. Timeline of GST Implementation - Key Dates