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GST: Union-State Relation

GST: Union-State Relation

What is Goods and Services Tax (GST)?

  • GST is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
  • GST is a comprehensive Indirect Tax which has replaced many Indirect Taxes in India.
  • The Goods and Service Tax Act was passed in the Parliament on 29th March 2017 and came into effect on 1st July 2017
  • Under the GST council and 101st constitutional amendment, the tax is levied at every point of sale.
  • GST is categorized into CGST, SGST or IGST depending on whether the transaction is Intrastate or Interstate.

Central Goods and Services Tax and State Goods and Services Tax

  • CGST is a tax levied on Intra State supplies of both goods and services by the Central Government and is governed by the CGST Act. SGST is also be levied on the same Intra State supply but will be governed by the State Government.
  • This implies that both the Central and the State governments agree on combining their levies with an appropriate proportion for revenue sharing between them.
  • However, it is clearly mentioned in Section 8 of the GST Act that the taxes be levied on all Intra-State supplies of goods and/or services but the rate of tax shall not be exceeding 14%, each.

Integrated Goods and Services Tax

  • IGST is a tax levied on all Inter-State supplies of goods and/or services and is governed by the IGST Act.
  • IGST is applicable on any supply of goods and/or services in both cases of import into India and export from India.

Taxes Exclusively Assigned to the Union | GST: Union-State Relation

  • Income tax
  • Customs and export duties
  • Corporation tax, taxes on capital value of assets of individuals and companies
  • Excise duty on tobacco, jute,’ cotton etc
  • Income from the earning departments like the railways and postal departments
  • Estate duty and succession duty in respect of property and other than agricultural land

Taxes Exclusively Assigned to States

  • Stamp duty except on documents included in the Union List
  • Income from land revenue
  • Income tax on agricultural lands
  • Succession duty and Estate duty in respect of agricultural land
  • Taxes on vehicles used on roads, animals, boats, taxes on the consumption or sale of electricity, tolls, taxes on lands and buildings
  • Taxes on goods and passengers carried by road or inland water
  • Duties on alcoholic liquors for human consumption, opium, Indian hemp and other narcotic drugs, taxes on the entry of goods into local areas, taxes on luxuries, entertainments, amusements, betting and gambling, etc
  • Taxes on professions, traders, calling and employment

Taxes Levied by Union but Collected and Appropriated by the State

  • Stamp duties on bills of exchange, cheques, promissory notes, bills of landing, letters of credit, policies of insurance, transfer of shares etc
  • Excise duties on medicinal toilet preparation containing alcohol or opium or indian hemp or other narcotic drugs

Taxes Levied and Collected by the Union but Assigned to States

  • Duties in respect of succession to property other than agricultural land
  • Terminal taxes on goods or passengers carried by railways, sea or air
  • State duty in respect of property other than agricultural land
  • Taxes other than stamp duties on transactions in stock exchanges and future markets
  • Taxes on railway freights and fares
  • Taxes on purchase or sale of goods other than newspapers where such sale or purchases take place in the course of inter – state trade or commerce
  • Taxes on the sale or purchase of newspapers and on advertisements published therein

Taxes Levied and Collected by the Union but Shared

  • Taxes on income other than agricultural income
  • Excise duties other than those on medicinal and toilet preparations
  • The basis of distribution is determined by the Parliament through a law.

Current Status of GST   | GST: Union-State Relation

  • GST is currently levied on every product except petroleum, alcohol, tobacco and stamp duty on real estate in four slabs of 5, 12, 18 and 28 per cent. Most of the articles that are used daily have zero GST as per the latest revision of the tax rates last year.
  • 5 per cent articles covered by 18 per cent or lower GST slab. Under the previous, value added tax (VAT) regime, standard taxation rate was much higher. Only luxury and sin goods are now taxed at highest 28 per cent GST rate.

What is GST Compensation Cess?

  • GST cess is imposed to compensate for the State’s loss of revenue due to the implementation of GST.
  • GST is charged at the time of supply and depends on the destination of consumption. For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).
  • Due to the consumption-based nature of GST, manufacturing states like Gujarat, Haryana, Karnataka etc. feared a revenue loss. Thus, GST Compensation Cess was introduced by the government to compensate for the possible revenue losses suffered by manufacturing states.
  • This compensation cess is levied only for the first 5 years of GST regime: from 2017 to 2022.

Current Issues With Respect To GST

  • According to the GST Act, the Centre will ensure that the tax revenue growth at 14%. If there is any shortfall, the center will compensate for 5 years. As per the GST act, the Centre has to release the proceeds every two months.  The States have been compensated only till the month of October 2019 [as of 17th December 2019].
  • Since states do not have enough fiscal space, they are facing liquidity issues. It is affecting small states and UTs more because GST proceeds constitute 40% of their revenue.
  • When GST was enacted in 2017, the CEA said that revenue neutral rate (Revenue Neutral Rate is a rate of GST at which the amount of taxes currently collected by the government and the amount expected to be collected after GST remains the same) will be around 15-15.5%. But right now that rate is 6%. Coupled with a deceleration in the economy, it has resulted in lower GST collections.
  • Additionally, revenue sources for both Centre and States have trimmed. For example, the Centre, to kickstart the economy, has cut down corporate taxes, which has resulted in Rs 60000 crore shortfall in the revenue.

Conclusion | GST: Union-State Relation

  • The discussion on revenue position is critical as lower GST and compensation cess collections have been a matter of concern in the last few months.
  • Give the severity of the problems as far as the Goods and Service Tax is concerned and the State government  considering serious legal recourse to secure the pending amount from the Centre, Union government, State and all the stakeholders needs to work together in order to resolve the issue.




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