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Finally GST overcomes RS roadblock

In the biggest tax reform since Independence, the national sales tax or GST Bill was on Wednesday approved by the Rajya Sabha to replace a raft of different state and local taxes with a single unified value added tax system to turn the country into world’s biggest single market.

The 66-year-old Constitution, which gives power to Centre to levy taxes like excise, and empowers states to collect retail sales taxes, was amended though the 122nd Constitution Amendment Bill. Prime Minister Narendra Modi said the GST will “also be the best example of cooperative federalism” and “Together we will take India to new heights of progress”.

The legislation was approved by the Upper House with 203 votes in favour and none against, after a seven-hour debate during which a rare bonhomie was witnessed among the ruling and the opposition parties. Replying to the debate, Finance Minister Arun Jaitley said the GST rate will be kept “as low as possible” but did not commit to a specific rate despite opposition benches pressing for it.

“We will also try and keep the rate as low as possible, certainly much lower than what the present situation is. And as compliance increases, the possibility of that rate coming down further would be there,” he said.

The tax rate, he said, would be decided by the GST Council comprising of Union Finance Minister and representatives of all 29 states.

“We must trust the sense of responsibility of the states who belong to the same political parties as us. Who in their last meeting said that our guiding principle is going to be – one we will lower the burden of tax,” he said.

The Finance Minister said presently 80 per cent of goods attract 12.5 per cent of Central excise duty while at the state level 55 per cent of items are charged with 14.5 per cent VAT or sales tax.

The weighted average of the two in 65 per cent of the items comes to 27 per cent. Adding cess, octroi and entry tax takes the figure to 30 per cent, he said.

In deciding the GST rate, “we are guided by two factors – 27 per cent is too high, it is inflationary, it costs the people, so it should come down... the second they said we will collect what is essential for our present revenue requirement,” he said. Jaitley said members will have an opportunity to speak on subjects when the supporting GST Bill comes up in November.

The GST, he said, will make the system more efficient, increase tax compliance and tax avoidance will become more difficult. Also, there will be no cascading effect of tax on tax, he said adding there are certain items which will either attract lower rate of tax or no tax at all. Ruling out GST impacting inflation, Jaitley said 54 per cent of goods in the basket used to calculate consumer price inflation are tax exempt and another 32 per cent attract low rate of tax. Only 15 per cent are taxed at standard rate.

The GST, which was first proposed a decade back, is seen as potentially transformative for India’s economy, adding as much as 2 percentage points to the GDP while also improving the ease of doing business and encourage investment in manufacturing. It is also expected to result in greater tax compliance, boosting government revenues.

The GST will replace more than a dozen levies central and state levies, including central excise duty, service tax and central sales tax as well as VAT on sale of goods and entry tax, to make movement of goods seamless across 1.3 billion market. Instead of the good being taxed multiple times at different rates, under the new GST regime goods would be taxed at point of consumption.

The Bill passed on Wednesday will create a GST Council comprising Union Finance Minister and his counterparts from the states. This body will determine the final rate. The Constitution (122nd Amendment) Bill, 2014, that would lay the ground for roll out of GST regime, was passed by the opposition-dominated Upper House after the government moved four amendments.

These included one on scrapping of the proposed tax of up to 1 per cent on inter-state transactions to compensate manufacturing states and another one promising to compensate states for any revenue loss in first five years of GST implementation.

The other amendments pertained to a new formulation on a dispute-resolution mechanism and an endorsement of the resolution by the empowered committee of state FMs on a revenue-neutral rate to bring down tax on the common man while protecting revenues of states. 

The way forward

  The challenge before government is to rollout the new tax regime from April 1, 2017 but that does not happen with just the Rajya Sabha passing constitution amendment bill

  The changes in the constitution amendment bill introduced by Finance Minister Arun Jaitley and passed by the Rajya Sabha would now have to go back to the Lok Sabha for approval

  Thereafter more than half of the state assemblies will have to ratify the constitution amendment bill passed by the Parliament over the next eight months. This is going to be a daunting task as governments of different hues rule different states

  To roll out the GST the Centre would be further needed to introduce the India and Central GST bills. This is likely to be done during the winter session of Parliament

  The passage of these legislations would enable setting up of the GST Council, the apex body to arbitrate on the disputes arising under the new tax regime
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