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  1. Panel against GST on stock transfers

Panel against GST on stock transfers

A Rajya Sabha select committee came out with a set of practical solutions that could hopefully be a shot in the arm for the states and political parties that are yet to commit to supporting the Constitutional Bill for the goods and services tax (GST).

By: | New Delhi | Updated: July 23, 2015 1:28 AM
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The Congress, AIADMK and CPM have proposed changes in the way voting rights are assigned in the GST council, to make the states’ position stronger.

A Rajya Sabha select committee on Wednesday came out with a set of practical solutions that could hopefully be a shot in the arm for the states and political parties that are yet to commit to supporting the Constitutional Bill for the goods and services tax (GST), even as it made an attempt to preserve the integrity of the tax. The committee retained the 1% origin-based tax on inter-state trade, proposed for the initial two years of the emergent regime, but sought to reduce its regressive, cascading trait by recommending that stock transfers within firms be kept out of its ambit.

While sticking to most provisions in the Bill passed by the Lok Sabha in May, including the one that bestowed the authority to decide the tax rate on the proposed GST council, the select panel, however, suggested that the overall GST rate should not go beyond 20% while maximum rate for merit goods could be 14%. If this proposal is implemented, it could help businesses and consumers alike and be economically gainful, analysts said.

Analysts recalled that a revenue neutral rate proposed earlier by Delhi-based think tank NIPFP was close to 27%.

The panel also proposed 5-year full compensation to states for any revenue loss arising from GST adoption, a move that could suffice to allay fears of revenue erosion among some states.

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Yet, it remained doubtful if the government could get the Bill passed in the Upper House in the current session, given the dissent notes added to the report by the Congress, the AIADMK and the CPM . If these three parties, together having a strength of 88 in the 245-member Rajya Sabha, decide to vote against the Bill, getting the required two-third majority, even if all other parties and independents support it, would be impossible. Given that the BJP, along with its allies, have only 63 seats in the House, the government managers could hope that any one or more of these parties would change their stance or at least abstain from voting. The Congress has said it would reveal its strategy only on the floor of the House and would do a clause-by-clause dissection of the Bill.

The Congress, AIADMK and CPM have proposed changes in the way voting rights are assigned in the GST council, to make the states’ position stronger.

Finance minister Arun Jaitley criticised Congress for its dissent note and said he hoped the opposition party would reconsider its position on the Bill. “It is hardly a dissent note on the bill, it is a dissent against the Congress party’s own proposals which were originally given. Congress MPs are giving a dissent against the suggestions made by their own Chief Ministers,” the minister said calling the dissent “irresponsible.”

The proposal to not levy an origin-based tax on inter-state self-supplies, analysts said, would help businesses, especially the large ones with pan-India market presence. This tax, meant to help the manufacturing states and not in tune with the principle of destination-based tax on consumption, would have led to even 5-6 percentage points of additional tax burden if the goods are taken across several states, to reach the final user and could have even put domestic production at a disadvantage against imports. While some analysts said not levying the tax on stock transfers is a small reprieve, others pointed out that in case of most big companies, 85% of the goods produced from a factory goes to other states.

“The proposed 1% origin based tax is a non-creditable cost and contaminates GST. The amendment (suggested by the panel) is a huge improvement but not a complete solution to this problem,” said Rajeev Dimri, Leader, indirect tax, BMR and Associates.

The panel suggested that banking services should be kept out of GST or at least be charged a lower rate so that a sharp increase in the tax burden, if GST rate is way above the 14% now levied on services, would not add to the cost of doing business in India. Petroleum products are within the GST purview constitutionally, these would be kept initially; the GST council can bring them in at an appropriate time.

Congress party’s demand for a constitutional provision mandating GST Council to bring petroleum products within GST in five years of the new regime’s beginning as well as AIDMK demand for their constitutional exclusion from GST were not accepted. Also, calls from parties for extra taxation rights for states on tobacco as well as Congress’ demand for a dispute settlement body were not accepted.

The panel suggested a definition of the ‘narrow band’ of tax that the centre and states may levy over and above the applicable GST rate on certain items. Bipin Sapra, tax partner, EY India said the committee’s recommendation that stock transfers or self supplies should be exempted from the 1% origin based tax offered only a small reprieve. Sapra said the recommendation not to keep GST rate beyond 20% was a welcome one and that a lower rate would increase economic activity and hence revenues.

R Muralidharan, Senior Director, Deloitte, said it was necessary for the government to ensure that the basic features of an ideal GST are not diluted much. “Towards this it is necessary to widen the tax base, keep the GST rates moderate (below 20%) and to ensure that there are no variations in the tax rates and GST.”

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Tags: GST Bill

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