The chances of the goods and services tax (GST) taking effect from April 2016 increased on Wednesday with the Lok Sabha passing...
The chances of the goods and services tax (GST) taking effect from April 2016 increased on Wednesday with the Lok Sabha passing the Constitutional (122nd Amendment) Bill with the requisite majority. While businesses welcomed the development, finance minister Arun Jaitley gladdened them further by stating that the the GST rate will be “much more diluted” than the revenue neutral rate (RNR) of 27% proposed by the Delhi-based think tank NFPIP. “I straight away concede that 27% would be very high,” Jaitely said in Parliament, adding that the rate could be decided by the proposed GST Council comprising the Centre and states.
Analysts reckon that even if the Rajya Sabha sends the Bill to its select committee, the legislative process, which includes its approval by more than half of the state assemblies, could still be completed in time to bring the proposed multi-point tax on consumption, structurally limited to the value added, by the scheduled date.
The Congress, which had insisted on sending the Bill to the standing committee on finance, staged a walkout before it was put to vote.
Satya Poddar, tax partner (policy advisory group), EY India, said, “Passage of the Bill is indeed a historic event and a turning point in the evolution of fiscal federalism in India… It creates an enabling framework for replacement of the current patchwork of Centre and state taxes by a single tax, harmonised across the Centre and states, which is simple, fair and efficient.” He, however, added: “The devil is in the detail. Let us hope that, with political wrangles behind us, the governments will roll up their sleeves and design a truly simple and rational tax that will earn it the label of game changer.”
Welcoming the passage of the GST Bill in the Lok Sabha, Chandrajit Banerjee, director general, CII, said: “The provision of an integrated goods and services tax (IGST) system where only the Centre may levy and collect GST on supplies in the course of interstate trade or commerce, which would then be divided between the Centre and the states, would provide the much-needed clarity and transparency to the indirect tax system in the country.”
Experts were, however, wary about the proposed additional 1% tax that could impinge on the GST, being bereft of the latter’s chief traits like credit on input taxes and being destination-based. Rajeev Dimri, leader, indirect tax, BMR& Associates, said: “While responding to a specific question on the cascading effect (of the additional tax), the finance minister stated that the objective was to provide compensation to the states in which goods were manufactured, (but) no explanation was provided on how the cascading effect of levy of such additional tax would be minimised.” The extra impost is proposed for the initial two years.
GST, which has examples in more than 120 countries around the world, will subsume most major indirect taxes levied by the Centre and states except the basic customs duty. The central excise duty, state VAT, entertainment tax, octroi, entry tax, luxury tax and purchase tax on goods and services are among the taxes that would be replaced by GST. Introduction of GST requires constitutional change because the states need to be given powers to tax services and the Centre, to tax transactions beyond the first point of sale (factory gate).
The idea of moving towards GST was first mooted by P Chidambaram, then finance minister, in his Budget for 2006-07.
Initially proposed to be introduced form April 1, 2010, GST has missed several deadlines as there was lack of consensus between the Centre and states on various issues, including compensation to states, composition and powers of the GST Council, the threshold where the tax would kick in and also the RNR.
GST would have central and state components (although the tax would be levied on roughly the same universe of transactions). A computer network GSTN is being readied for smooth operation of the proposed system.
Prashant Deshpande, senior director, Deloitte, said that industry had suggested to the government to exclude interstate stock transfers from this levy. R Muralidharan, senior director, Deloitte, said that when VAT was introduced, states’ revenues had gone up by 20-25% on account of better compliance. A similar trend could repeat in the case of GST too, which could, in turn, help in keeping the tax rates low, he said.
Jaitley said the final GST rate would be the decided by the GST Council by three-fourths majority. The Centre’s vote will have the weight of one-third of the total votes cast and states two-third. The House did not approve several amendments proposed by Opposition members and finally cleared the Bill by 352 votes against 37. Jaitley assured the members that states’ revenue loss will be compensated.