Goods and Services Tax (GST) represents a significant reform in India’s indirect taxation system. Its introduction on 1st July 2017 was not merely a change in the tax structure but a transformational step requiring a constitutional amendment. This is because the pre-GST tax framework in India was built on a dual system of taxation where both the Centre and States levied taxes on different aspects of goods and services. To implement GST, extensive changes in the Constitution of India were essential, primarily through the 101st Constitutional Amendment Act, 2016.
The constitutional background of GST involves the historical context, the need for constitutional amendments, key provisions of the 101st Amendment, distribution of powers, and institutional mechanisms that enabled this unified tax system.
Historical Context
Before GST, India had a multi-layered indirect tax structure. Taxes such as excise duty, service tax, central sales tax (CST) were imposed by the Centre, while VAT, entry tax, octroi, entertainment tax, luxury tax and others were imposed by the States.
This arrangement was rooted in the Seventh Schedule of the Constitution, which allocated tax powers separately between the Union List (List I) and the State List (List II). For example:
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The Centre could levy excise duty on the manufacture of goods (Entry 84 of Union List).
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States could levy taxes on the sale of goods within the state (Entry 54 of State List).
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Services were exclusively taxed by the Centre (through service tax).
There was no overlapping of powers. Consequently, this division of powers led to a fragmented tax structure. As goods moved from production to consumption, they attracted multiple taxes, creating a cascading effect.
This situation hindered:
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The creation of a common market.
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Ease of doing business.
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Efficiency in revenue collection.
To overcome these challenges, a comprehensive and unified tax system was proposed, requiring a constitutional restructuring because GST would involve both goods and services being taxed by both Centre and States simultaneously.
Need for Constitutional Amendment:
The Constitution did not allow the Centre to levy tax on the sale of goods beyond manufacturing, nor did it allow States to levy taxes on services.
Key limitations of the old system were:
1. Exclusive domains
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The Centre could tax only goods up to the stage of manufacturing and services.
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The States could tax goods only after they entered the distribution stage (sale).
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2. No concurrent power
Both could not impose a tax simultaneously on the same transaction.
3. Inter-State trade
Only the Centre could tax inter-state sale of goods (CST), while States could tax intra-state sales.
To introduce GST, both Centre and States needed concurrent power to levy tax on the supply of goods and services, which did not exist in the Constitution.
Therefore, a Constitutional Amendment was necessary to:
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Remove the strict division of powers between the Centre and States.
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Allow dual GST (CGST + SGST).
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Introduce Integrated GST (IGST) for inter-state supplies.
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Establish an institutional framework like the GST Council.
The 101st Constitutional Amendment Act, 2016:
The 101st Constitutional Amendment Act, passed in August 2016, provided the legal foundation for GST in India. This amendment inserted, modified, or repealed certain articles and added new provisions to the Constitution.
Key Features of the 101st Amendment:
- Insertion of Article 246A – Special provision for GST.
- Insertion of Article 269A – Levy and collection of GST in the course of inter-State trade.
- Insertion of Article 279A – Creation of the GST Council.
- Amendments to the Seventh Schedule – Changes in the Union and State Lists.
- Compensation to States – Provision for compensating states for revenue losses for a period of 5 years.
This Amendment is the backbone of GST’s constitutional framework.
Key Provisions:
1. Article 246A – Special Power to Levy GST
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Article 246A gives concurrent powers to both the Parliament and the State Legislatures to make laws with respect to GST.
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This article overrides Articles 246 and 254, which earlier defined the exclusive powers of Parliament and State legislatures.
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Parliament has exclusive power to make laws on inter-state supply of goods and services, while both Parliament and States can legislate on intra-state supplies.
Importance: This article empowers dual GST, i.e., both CGST and SGST are levied on a single supply within a state.
2. Article 269A – GST on Inter-State Trade
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IGST is levied on inter-state supply of goods and services.
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Tax is collected by the Central Government, and the revenue is apportioned between the Centre and the States according to a formula recommended by the GST Council.
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Import of goods and services is treated as inter-state supply, so IGST is applicable.
This article ensures a uniform taxation mechanism for inter-state transactions.
3. Article 279A – The GST Council
Article 279A established the GST Council, a constitutional body, to recommend key aspects of GST law.
Composition:
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Chairperson: Union Finance Minister.
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Members: Union Minister of State (Finance) and Finance Ministers of all States.
Functions:
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Recommend tax rates, exemptions, threshold limits, model GST laws, special provisions for states, and apportionment of IGST.
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Ensure harmonization and coordination between the Centre and States.
The GST Council plays a crucial role in cooperative federalism.
4. Amendments to the Seventh Schedule
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Entry 84 of Union List: Earlier allowed excise duty on manufacturing. After GST, excise duty remains only on a few products like petroleum and tobacco.
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Entry 92C (Taxes on services): Deleted, as service tax is now subsumed under GST.
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Entry 54 of State List (Taxes on sale of goods): Amended to limit the power of States only to tax goods excluded from GST (e.g., alcohol for human consumption).
This restructuring allowed a comprehensive GST regime.
5. Compensation to States
The amendment provides that Parliament shall, by law, compensate states for loss of revenue arising from GST implementation for five years. This is crucial as States feared losing revenue due to the shift from a cascading tax system to GST.
The GST (Compensation to States) Act, 2017 was enacted to operationalize this provision.
Division of Taxing Powers Post-GST
The 101st Amendment enables dual GST:
1. Intra-State Supply
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Central GST (CGST): Levied by the Centre.
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State GST (SGST): Levied by the State (or Union Territory GST for UTs).
2. Inter-State Supply
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Integrated GST (IGST): Levied by the Centre, with revenue shared.
This system ensures that both levels of government have a share in taxation.
Impact of the Constitutional Amendment:
1. Legal Uniformity
The 101st Amendment legally unified the indirect tax structure, making way for “One Nation, One Tax, One Market.”
2. Empowerment of Centre and States
Both levels of government now share the responsibility and power to levy GST.
3. End of Exclusive Domains
The clear separation of tax powers was replaced with a concurrent model.
4. Strengthened Cooperative Federalism
The GST Council fosters coordination, balancing the interests of both the Centre and States.
5. Challenges of the Constitutional Setup
Despite its benefits, the constitutional framework faces challenges:
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Coordination issues: Achieving consensus in the GST Council sometimes delays decisions.
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Revenue dependency: States depend on the Centre for IGST settlements and compensation.
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Exclusion of certain items: Petroleum products, electricity, and alcohol remain outside GST, requiring separate taxation powers.