Concept and History of Indirect Taxation in India

The history of Indirect Taxation in India dates back to few centuries and we get some cue of the same in Kautilya’s Arthasashtra. Those days’ taxes were collected in the form of crop and/or any agricultural product. Such collections were generally ear-marked for some specific purposes or for the development of the State. Taxes were also raised separately for meeting internal and external exigencies like famine, flood, war etc. It was also known as ‘Lagaan.’

According to Manu Smriti, the king should arrange the collection of taxes in such a manner that the tax payer did not feel the pinch of paying taxes. He laid down that traders and artisans should pay 1/5th of their profits in silver and gold, while the agriculturists were to pay 1/6th, 1/8th and 1/10th of their produce depending upon their circumstances.

Kautilya has also described in great detail the system of tax administration in the Mauryan Empire. It is remarkable that the present day tax system is in many ways similar to the system of taxation in vogue about 2300 years ago. Arthasastra mentioned that each tax was specific and there was no scope for arbitrariness. Tax collectors determined the schedule of each payment, and its time, manner and quantity being all pre-determined.

Kautilya also laid down that during war or emergencies like famine or floods, etc. the taxation system should be made more stringent and the king could also raise war loans. The land revenue could be raised from 1/6th to 1/4th during the emergencies. The people engaged in commerce were to pay big donations to war efforts.

Modern Indirect Taxation System

During the British Raj, mostly the raw materials were exported from India and later it used to come back as finished products and consumables. Most of the raw materials were exported to England. The Rulers those days used to discourage any manufacture of finished products in India so that they can have the major profit by way of value addition. Indian market was flooded with British products. Few rare exceptions were there, few products like clothes etc were also produced in India in cottage industries. The prices of India made products were much lesser, for obvious reasons, compared to the imported British products. At that point only the British thought to impose taxes on India made products. The modern history of Indirect taxes start from the early 20th century while Excise duty was imposed on Salt, Sugar, Motor Spirit etc. Gradually the base of Excise duties was increased. The Central Excise Act was formulated in 1944 and thereafter has gone for gradual change year by year till 1969 the physical control was generally done away with few exceptions.

In sovereign India, in the early 1960, the Boothalingam Committee had recommended introduction of a general excise levy of 10 per cent on all goods (with some exceptions) produced in the country. However, the government did not accept this recommendation.

Sales tax was first introduced in India in the province of Bombay, where a tax was imposed on sales of tobacco within certain very limited urban and suburban areas by the Bombay Tobacco (Amendment) Act, 1938, which came into force on the 24th March, 1938.

Thereafter, a lot of indirect tax has been added to the taxation system and we had around 20 indirect taxes in India before GST (Goods and Service tax) has been implemented.

GST is a centralized tax structure on goods and services throughout the country, which would subsume about 15 or more taxes in one kitty. It would finally aim at One Tax, One Country.

A chronological history of the path to GST in India

1994: Shri Amaresh Baghchi Report, 1994 suggested that the introduction of “Value Added Tax (VAT)” will act as root for implementation of Goods and Services Tax in India

2000: Shri Atal Bihari Vajpayee, the then prime minister of India by BJP lead Government, flags off discussions on the GST. A committee was set up headed by the then finance minister of West Bengal, Shri Asim Dasgupta, to design the GST model and put in place the back-end technology and logistics for its implementation. Shri Asim Dasgupta remained the chairman of the committee until 2011.

2004: A task force chaired by Shri Vijay L. Kelkar, then advisor to the finance ministry, says the existing tax system is in built with so many problems. It suggests a comprehensive GST.

2005, February: Honourable Finance Minister Shri P. Chidambaram in his Budget Speech for 2005-06 says: “In the medium-to-long term, it is my goal that the entire production-distribution chain should be covered by a national VAT (value added tax), or even better, a goods and services tax, encompassing both the centre and the states.”

2006, February: Shri P. Chidambaram sets a target of April 1, 2010. He further said “The world over, goods and services attract the same rate of tax. That is the foundation of a GST. People must get used to the idea of a GST,” he says.

2006, November: Shri Parthasarthy Shome, adviser to finance minister Chidambaram, says states will have to take all measures of reform to pave the way for the GST. “At the moment, the issue of discussion between the state and the centre is compensation for central sales tax,” Shome says.

2007, February: The union budget for 2007-08 retains the April 1, 2010 deadline for implementation of the GST.

2008, February: While reading out the union budget for 2008-09, the Finance Minister Shri P.Chidambaram said “I am also happy to report that there is considerable progress in preparing a roadmap for introducing the Goods and Services Tax with effect from April 1, 2010.”

2009, July: India’s new Finance Minister, Shri Pranab Mukherjee, announces the basic structure for the GST. The government retains the April 1, 2010, deadline.

2009, November: The Committee head by Shri Asim Dasgupta releases its first discussion paper on the GST in the public domain, looking to generate a debate and obtain inputs from stakeholders.

2010, February: The government launches a mission mode project for the computerization of commercial taxes in states which is expected to lay the foundation for the GST. The budgetary outlay for the project is Rs1,133 Crores, of which the centre’s share is Rs. 800 Crores. The GST implementation is pushed back by another year.

2011, March: The UPA (Congress party-led) government introduces a Constitution Amendment Bill in the Lok Sabha to implement GST. India’s opposition parties protest. The bill is sent to a parliamentary standing committee headed by former finance minister Shri Yashwant Sinha. A bill is usually sent to the standing committee—that comprises members from Lok Sabha and Rajya Sabha—for a detailed examination.

(For more information parliamentary committees please read parliamentary instruments)

2012, June: The standing committee begins discussion. India’s opposition parties raise concerns over clause 279B which allows the centre to have extra discretionary powers over the GST dispute authority.

2012, November: Finance minister Shri P. Chidambaram holds meetings with State Finance Ministers. The two sides set December 31, 2012 as the deadline to solve all issues.

2013, February: In his budget speech, Shri P. Chidambaram announces that the government has made provisions of Rs 9,000 Crore for compensation to states. “I hope we can take this consensus forward in the next few months and bring to this house a draft bill on the constitutional amendment and a draft bill on the GST. I appeal to the state finance ministers to realize the serious intent of the government to introduce GST and come forward to work with the government and bring about a transformational change in the tax structure of the country,” Shri P. Chidambaram said.

2013, August: The standing committee submits its report to parliament. The panel approves the legislation with some amendments on the provision of tax structure and resolution mechanism. “What should be included in the laws and rules should not form part of the constitution of India. The present bill relating to GST, in the committee’s view, has not been well drafted from this perspective and, therefore, require amendments as suggested,” the report said.

2013, October: Shri Narendra Modi-ruled state of Gujarat opposes the bill. “If the union government, through an ordinance, enacts the GST regime, Gujarat will have to bear Rs14,000 crore loss per annum due to the destination-based taxation principle,” Shri Saurabh Patel, a minister in Modi’s government says.

2014, May: The constitution amendment bill lapses with the dissolution of the 15th Lok Sabha. The same month, the BJP, led by Shri Narendra Modi, is voted into power and formed the government and he become India’s 14th Prime Minister.

(Any bill be it Constitutional Amendment or Money Bill or any bill will lapse with the dissolution of the House of People or Lok Sabha, even if the Bill has been passed by the Upper House or the Council of States or Rajya Sabha.)

2014, December: Seven months later, India’s new finance minister, Shri Arun Jaitley, introduces the bill in the parliament. The Congress party, now in opposition, demands that the bill be sent to a standing committee.

2015, February: In budget speech, Shri Arun Jaitley, the Finance Minister announces that the government is keen in implementing the GST by April 1, 2016 and hopes it will be cleared by parliament.

2015, May: The Lok Sabha passes the Constitution amendment Bill to GST. “I straight away concede that 27% (revenue-neutral rate) would be very high. We have decided to keep petroleum out and every state finance minister is not interested in imposing higher taxes on its own people, and neither the central government. Therefore, this figure is going to (get) much more diluted compared to the figure (27%) which has been mentioned,” Shri Arun Jaitley said.

2015, August: The government is unable to push the bill in Rajya Sabha where it does not have a clear NDA majority. “Parliament disruption is frustrating for the whole country. This was a disruption without a cause,” Shri Arun Jaitley told the media on 13, August 2015.

2016, March: Shri Arun Jaitley said that he agrees with the Congress’s demand that the GST rate must not be above 18%. But he disagrees that the rate should be fixed since “unforeseen emergencies” would require the government to raise the rate of tax in the future. If the government fixes a particular rate in the bill, it will have to take parliament’s permission each time it wants to raise the tax.

2016, August: The Congress seems to finally agree with the Modi government after it agrees to the four broad amendments to the bill. “All the issues we have raised are there in the GST constitutional amendment,” Shri Anand Sharma, a former minister for commerce and a senior Congress leader, tells NDTV. “On the capping (on GST rate), we still want ring-fencing and (the) states to come to an agreement with the centre.”

The long-awaited GST regime is now rolled out from July 1, 2017 with the following four GST related Bills:

> Central GST Bill, 2017

>The Integrated GST Bill, 2017

>Union Territory GST Bill, 2017

>GST (Compensation to States) Bill, 2017

The law replaced various indirect taxes with one simple tax, creating a boundary less and a unified national market that will also lead to increase in country’s GDP. Implementation of GST would bring many professionals opportunities for Company Secretaries, Chartered Accountants, Lawyers, Tax Consultants and Tax Accountants in Practice and employment in terms of compliance, advisory, tax planning, etc