Yesterday, the government circulated certain official amendments to the Constitution (122nd Amendment) Bill, 2014 on GST. The Bill is currently pending in Rajya Sabha. The Bill was introduced and passed in Lok Sabha in May 2015. It was then referred to a Select Committee of Rajya Sabha which submitted its report in July 2015. With the Bill listed for passage this week, we explain key provisions in the Bill, and the amendments proposed. What is the GST? Currently, indirect taxes are imposed on goods and services. These include excise duty, sales tax, service tax, octroi, customs duty etc. Some of these taxes are levied by the centre and some by the states. For taxes imposed by states, the tax rates may vary across different states. Also, goods and services are taxed differently. The Goods and Services Tax (GST) is a value added tax levied across goods and services at the point of consumption. The idea of a GST regime is to subsume most indirect taxes under a single taxation regime. This is expected to help broaden the tax base, increase tax compliance, and reduce economic distortions caused by inter-state variations in taxes. What does the 2014 Bill on GST do? The 2014 Bill amends the Constitution to give concurrent powers to Parliament and state legislatures to levy a Goods and Services tax (GST). This implies that the centre will levy a central GST (CGST), while states will be permitted to levy a state GST (SGST). For goods and services that pass through several states, or imports, the centre will levy another tax, the Integrated GST (IGST). Alcohol for human consumption has been kept out of the purview of GST. Further, GST will be levied on 5 types of petroleum products at a later date, to be decided by the GST Council. The Council is a body comprising of Finance Ministers of the centre and all states (including Delhi and Puducherry). This body will make recommendations in relation to the implementation of GST, including the rates, principles of levy, etc. The Council is also to decide the modalities for resolution of disputes that arise out of its recommendations. States may be given compensation for any revenue losses they may face from the introduction of the GST regime. Such compensation may be provided for a period of up to five years. Further, the centre may levy an additional tax, up to 1%, in the course of interstate trade. The revenues from the levy of this tax will be given to the state from where the good originates. Expert bodies like the Select Committee and the Arvind Subramanian Committee have observed that this provision could lead to cascading of taxes (as tax on tax will be levied).[i] It also distorts the creation of a national market, as a product made in one state and sold in another would be more expensive than one made and sold within the same state. What are the key changes proposed by the 2016 amendments? The amendments propose three key changes to the 2014 Bill. They relate to (i) additional tax up to 1%; (ii) compensation to states; and (iii) dispute resolution by the GST Council.
These amendments will be taken up for discussion with the Bill in Rajya Sabha this week. The Bill requires a special majority for its passage as it is a Constitution Amendment Bill (that is at least 50% majority of the total membership in the House, and 2/3rds majority of all members present and voting). If the Bill is passed with amendments, it will have to be sent back to Lok Sabha for consideration and passage. After its passage in Parliament, at least 50% state legislatures will have to pass resolutions to ratify the Bill. Once the constitutional framework is in place, the centre will have to pass simple laws to levy CGST and IGST. Similarly, all states will have to pass a simple law on SGST. These laws will specify the rates of the GST to be levied, the goods and services that will be included, the threshold of the turnover of businesses to be included, etc. Note that the Arvind Subramanian Committee, set up by the Finance Ministry, recommended the rates of GST that may be levied. The table below details the bands of rates proposed.
| Table 1: Rates of GST recommended by Expert Committee headed by Arvind Subramanian | ||
| Type of rate | Rate | Details |
| Revenue Neutral Rate | 15% | Single rate which maintains revenue at current levels. |
| Standard Rate | 17-18% | Too be applied to most goods and services |
| Lower rates | 12% | To be applied to certain goods consumed by the poor |
| Demerit rate | 40% | To be applied on luxury cars, aerated beverages, paan masala, and tobacco |
| Source: Arvind Subramanian Committee Report (2015) | ||
Several other measures related to the back end infrastructure for registration and reporting of GST, administrative officials related to GST, etc. will also have to be put in place, before GST can be rolled out. [For further details on the full list of amendments, please see here. For other details on the GST Bill, please see here.]
All companies are currently governed by the Companies Act, 1956. The Act has been amended 24 times since then. Three committees were formed in the last ten years, chaired by Justice V B Eradi (2001), Naresh Chandra (2002) and J J Irani (2005) to look into various aspects of corporate governance and company law. The Companies Bill, 2009 incorporates some of these recommendations. Main features The major themes of the Bill are as follows: It moves a number of issues that are currently specified in the Act (and its schedules) to the Rules; this change will make the law more flexible, as changes can be made through government notification, and would not require an amendment bill in Parliament. On a number of issues, the Bill moves the onus of oversight towards shareholders and away from the government. It also requires a super-majority of 75 percent shareholder votes for certain decisions. The powers of creditors have been enhanced in cases where a company is in financial distress. It has new provisions regarding independent directors and auditors in order to strengthen corporate governance. Finally, the bill increases penalties, and provides for special courts. Types of companies The Bill provides for six types of companies. Public companies need to have at least seven shareholders, and private companies between two and 50 shareholders. Charitable companies should have at least one shareholder, may have only certain specified objectives, and may not distribute dividend. Three new types of companies have been defined, which have less stringent provisions. These are one-person companies, small companies (private companies with capital less than Rs 50 million and turnover below Rs 200 million), and dormant companies (formed for future projects, or no operations for two years). Corporate Governance The Bill defines the duties of directors and norms for composition of boards. The number of directors is capped at 12. At least one director should be resident in India for at least 183 days in a calendar year and at least a third of the board should consist of independent directors. The Bill also sets guidelines for auditors. Certain related persons such as creditors, debtors, shareholders and guarantors cannot be appointed as auditors. Certain services such as book-keeping, internal audit and management services may not be undertaken by the auditors. Removal of an auditor before completion of term requires approval of 75 percent of the shareholders. Adjudication The Bill provides for a National Company Law Tribunal (NCLT) to adjudicate disputes between companies and their stakeholders. It also establishes an Appellate Tribunal. The NCLT may ask the government to investigate the working of a company on an application made by 100 shareholders or those who hold 10 percent of the voting power. Arrangements All arrangements such as mergers, takeovers, debt split, share splits and reduction in share capital must be approved by 75 percent of creditors or shareholders, and sanctioned by the NCLT. Standing Committee’s Recommendations The Parliamentary Standing Committee on Finance has submitted its report, and suggested several significant amendments. Corporate governance Substantive matters covered in various corporate governance guidelines should be contained in the Bill. These include: separation of offices of Chairman and Chief Executive Officer; limiting the number of companies in which an individual may become director; attributes for independent directors; appointment of auditors. Delegated legislation The Committee noted that the Bill provided excessive scope for delegated legislation. Several substantive provisions were left for rule-making and the Ministry was asked to reconsider provisions made for excessive delegated legislation. The Ministry has agreed to make some changes to include the following provisions in the Act: the definition of small companies; the manner of subscribing names to the Memorandum of Association; the format of Memorandum of Association to be prescribed in the Schedule; the manner of conducting Extraordinary General Meetings; documents to be filed with the Registrar of Companies. The Committee recommended that provisions relating to independent directors in the Bill should be distinguished from other directors. There should be a clear expression of their mode of appointment, qualifications, extent of independence from management, roles, responsibilities, and liabilities. The Committee also recommended that the appointment process of independent Directors should be made independent of the company’s management. This should be done by constituting a panel to be maintained by the Ministry of Corporate Affairs, out of which companies can choose their requirement of independent directors. Investor protection The Ministry, in response to the Committee’s concerns for ensuring protection of small investors and minority shareholders, indicated new proposals. These include: enhanced disclosure requirements at the time of incorporation; shareholder’s associations/groups enabled to take legal action in case of any fraudulent action by the company; directors of a company which has defaulted in payment of interest to depositors to be disqualified for future appointment as directors. The Ministry also made some suggestions on protection of minority shareholders/small investors, which the Committee accepted, including the source of promoter’s contribution to be disclosed in the Prospectus; stricter rules for bigger and solvent companies on acceptance of deposits from the public; return to be filed with Registrar in case of promoters/top ten shareholders stake changing beyond a limit. Corporate Delinquency Recommendations include: subsidiary companies not to have further subsidiaries; main objects for raising public offer should be mentioned on the first page of the prospectus; tenure of independent director should be provided in law; the office of the Chairman and the Managing Director/CEO should be separated. The Committee emphasised that the procedural defaults should be viewed in a different perspective from fraudulent practices. Shareholder democracy The Committee recommended that the system of proxy voting should be discontinued. It also stated that the quorum for company meetings should be higher than the proposed five members, and should be increased to a reasonable percentage. Foreign companies The Bill requires foreign companies having a place of business in India and with Indian shareholding to comply with certain provisions in the proposed Bill. The Committee observed that the Bill does not clearly explain the applicability of the Bill to foreign companies incorporated outside India with a place of business in India. It recommended that all such foreign companies should be brought within the ambit of the chapter dealing with foreign companies. Next steps The report of the Standing Committee indicates that the Ministry has accepted many of its recommendations. It is likely that the government will take up the Bill for consideration and passing during the winter session, which starts on 9th November. This article was published in PRAGATI on November 1, 2010
