The constitution amendment bill to put in place a single goods and services tax will be taken up for discussion in Parliament later this week
New Delhi: The constitution amendment bill to put in place a single goods and services tax (GST) will be taken up for discussion in Parliament later this week and the government will seek its passage before the ongoing budget session concludes on 8 May, finance minister Arun Jaitley said on Wednesday.
At the end of a meeting of state finance ministers, Jaitley said a broad consensus had emerged among states in support of GST, which he has in the past described as the single most important tax reform in post-independent India.
“A lot of homework has been done already,” he said. “I will give a notice in Lok Sabha (for taking up the bill) in a couple of days,” he said, adding that states had proposed some changes in the language of the proposed law which the central government will look into.
If indeed Parliament passes the bill, the stage will be set for the rollout of GST from 1 April next year. When enacted, GST is expected to broaden the tax base, improve export competitiveness by removing several tax distortions and create a unified national market by removing inter-state barriers to trade. The resulting ease of doing business is expected to boost national income by as much as two percentage points, by some calculations.
Jaitley may have to strike a balance between meeting the demand of state governments and preventing further distortion of GST’s architecture by excluding more products from the purview of the proposed tax.
In the meeting, states such as Haryana and Punjab opposed a proposal to subsume purchase tax in GST, arguing that it will lead to revenue losses. A few manufacturing states like Maharashtra and Gujarat stressed the need for levying an additional 1% tax on production beyond the two years stipulated in the constitution amendment bill. These states have also demanded that this tax be increased to 2%.
The additional 1% tax is to be levied on the inter-state supply of goods, which would be paid to states where goods originate, as compensation for the lost central sales tax revenue in the first two years of the change to GST.
States such as West Bengal, Mizoram and Tamil Nadu demanded that they be allowed to levy higher taxes on tobacco and tobacco products, similar to what the amendment bill allows for the central government.
States are also seeking a recast of the language of the bill, like replacing the word ‘may’ with ‘shall’ in a provision that talks about compensation for losses arising from implementation of GST.
The constitution amendment speaks of “compensation to the States for loss of revenue arising on account of implementation of the Goods and Services Tax for a period which may extend to five years”.
K.M. Mani, chairman of the empowered committee of state finance ministers, said that though the states had their individual concerns, most favour an early implementation of GST.
“Some states have concerns over revenue losses and have demanded that they should be compensated for revenue losses for an indefinite period. But we all want an early implementation,” Mani, who is the finance minister of Kerala, said. “I met the Prime Minister also today and he is also determined to make GST a reality as soon as possible,” he said.
The government will need the support of two-thirds of the members in both Houses of Parliament to get the constitution amendment bill passed. This will have to be ratified by 50% of the state legislatures as well.
Satya Poddar, partner, tax and regulatory policy advisory, at consulting firm EY, said some of the existing provisions in the constitution amendment bill, as well as the suggestions by states, will defeat the very purpose of GST.
“The main aim of bringing in GST was to broaden the base, lower the tax rate and remove the cascading effects of taxes on inputs. But the additional 1% tax proposed in the constitution amendment bill, as well as the high revenue neutral rate of 27%, that is being considered will be a big disaster,” he said.
Revenue neutral rate, or RNR, is the tax rate at which there will be no revenue losses from implementation of GST.
“The 1% tax will lead to cascading effects, the high RNR will encourage tax evasion and reduce compliance and more exemptions will narrow the base and increase the tax rate,” he said.
Once the constitution amendment bill is passed, the centre and the states will look to pass the model GST bill.
Mani said the reports of sub-committees on dual control, threshold level or the level below which GST is levied, GST on imports, RNR, business processes under GST and the model GST law will be discussed in the next meeting of state finance ministers on 7-8 May in Kerala.
Tamil Nadu, in the meeting, said the centre should evolve a consensus on various aspects of GST, like tax rates and bands, before pushing the constitution amendment bill.
“Broad consensus on the critical issues should be evolved through the empowered committee before the enactment of the bill is taken up,” said M.C. Sampath, minister for commercial taxes and registration, Tamil Nadu.
Prashant Deshpande, senior director at Deloitte in India, said the suggestions by states arise from their concerns of worsening fiscal pressures, be it provisions relating to tobacco or purchase tax or fixing a period for compensation for losses.
“The industry would expect to see the formation of GST council as early as possible to have clarity on the law which the council is mandated to recommend. The council should also give an opportunity to the stakeholders to make suggestions with respect to the industry sectors they represent,” he said in a note.