The concept of Goods and Services Tax (GST) in the present form first came to India in a formal manner in the July 2004 Report of the Task Force on Implementation of Fiscal Responsibility and Budget Management Act of the Ministry of Finance.
The chairman of the Task Force was Vijay Kelkar. There were, of course, some members from the Ministry of Finance and outside. The Report came out even before April 2005 when the state Value Added Tax (VAT) was introduced all over India, except in a few states.
The major proposal of the Task Force was that the VAT principle should be comprehensively used to tax the consumption of almost all the goods and services for which there was need for an agreement between the states and the Centre.
It would be a "grand bargain", the Task Force argued, whereby the states would have the power to tax all services concurrently with the Centre. Consequently, both the Centre and the state governments would exercise concurrent but independent jurisdiction "over common tax base" extending to all goods and services, and in both cases, going up to the final consumer.
This Fiscal Responsibility and Budget Management (FRBM) Report unequivocally advocated a common tax base for all goods and services, with both the Centre and the states taxing on the common tax base at different rates such as six, 12 and 20 by the Centre and four, eight and 14 by the states.
This Report invited criticism due to its assumption that no Constitutional amendment was necessary to introduce the common base where all the taxes could be taxed by the Centre and the states at the same time.
Later, in 2009, another version of GST came up. It can be found in the text of the speech delivered by Vijay Kelkar, chairman of the Thirteenth Finance Commission, on the occasion of the Third National Conference of the Associated Chambers of Commerce and Industry of India (Assocham) on "GST for accelerated economic growth and competitiveness".
It says that one important item in the terms of reference of the Finance Commission relates to consideration of "the impact of the proposed implementation of the goods and service tax with effect from April 1, 2010, including its impact on the country's foreign trade". Kelkar goes on to say, "The Finance Commission has appointed a Task Force to advise the Commission on the implementation of GST.
For the purpose of computing the revenue neutral rate, the Task Force assumed that apart from VAT, stamp duty, vehicle tax, taxes on goods and passengers, taxes and duties on electricity, entertainment tax, entry tax, luxury tax, taxes on lotteries, betting and gambling, purchase tax as well as all state cesses and surcharges will be subsumed into the state GST.
The Central Sales Tax will stand abolished. From the Central government's side, central excise, additional excise duties, service tax, Additional Customs Duty (CVD) and all cesses and surcharges (other than educational cess) will be subsumed into the central GST."
It is very clear in this exposition that the power of levying service tax is not being given to the states. It remains only with the Centre. It is also clear that in this model, the central GST and the state GST involve subsuming separately central taxes and state taxes. There is no subsuming of all central and states taxes together.
This means it is not a common tax base but two separate tax bases. What is important to note is also that the central GST is up to the manufacturing stage and not up to the retail stage, while the state GST would be up to the retail stage.
This model made eminent sense and some analysts accepted it as the correct and a more rational model.
However, when the Report of the Task Force on Goods and Services Tax (Thirteenth Finance Commission) came out on December 15, 2009, we found that it envisaged an entirely different combination of taxes namely, one common base of all central and state taxes. The main features of this are the following:
It should be a dual levy imposed concurrently by the Centre and the states, but independently to promote cooperative federalism.
Both the Central Goods and Services Tax (CGST) and the State Goods and Services Tax (SGST) should be levied on a common and identical base.
The tax base should comprehensively extend over all goods and services up to the final consumer point.
There would be no distinction between capital goods and services, and this would eliminate classification disputes.
Full input credit will be given to all capital goods and inputs, and nothing will be staggered.
This proposal is to combine all central and state taxes to make a common base on which the tax will be imposed concurrently by the Centre and the states. An important point is that service tax is now proposed to be subsumed in the overall combination of taxes and the leviability is being shared by the Centre and the states. It is not the same thing as two different combinations of central taxes and state taxes as it was in the Assocham speech.
The approaches towards the configuration of GST in these three expositions reveal variations of different extremes. The FRBM Report was for a common base consisting of all central and state taxes.
The June 2009 exposition in Assocham seminar was for two different combinations of central taxes into one and state taxes into another. It did not give the states the power to levy service tax or excise duties, and they remained with the Centre. There was no common tax base.
Again in the December 15 Report, there is a common base for all central and state taxes being subsumed into one common base.
No reason has been given for such conceptual shifts. This looks like a flip-flop on the basic structure of GST and the author common to all the proposals, therefore, does not generate confidence about the authenticity of the proposal. One of the important reasons could be that none of the reports involved any experts from the indirect tax front.