Letting manufacturing states levy 1% additional tax on supply of goods as part of GST rollout may encourage imports, Subramanian said.
New Delhi: The government’s decision to allow manufacturing states to levy 1% additional tax on supply of goods as part of the Goods and Services Tax (GST) rollout has the potential to undermine its Make In India programme by encouraging imports rather than inter-state movement of goods, chief economic adviser Arvind Subramanian said on Tuesday.
“While GST is a destination-based tax, the 1% additional tax is origin-based tax which is against the concept of GST. We should use the time we have got (while the select committee examines the GST bill) to reexamine it,” he said, while giving an interim update on the economy on the occasion of the Narendra Modi government’s first anniversary.
The additional 1% tax to the integrated GST, or IGST, was allowed to be imposed as producing states like Gujarat and Maharashtra argued that they will lose out to consuming states due to the destination-based nature of GST.
IGST, or the sum of central GST and state GST, will be levied on inter-state movement of goods and will be collected by the centre and later distributed to states.
The government was forced to form a Parliamentary select committee to study the constitutional amendment bill on 12 May following a strident demand by opposition parties that command a majority in Rajya Sabha. The bill has already been passed by the Lok Sabha, where the government is in majority.
The National Democratic Alliance (NDA) government wants to pass the bill in the early part of Parliament’s monsoon session so that it can roll out the GST on 1 April 2016. The select committee is expected to submit its report on the last day of the first week of the monsoon session, which is likely to begin in July.
After both Houses of Parliament pass the bill, at least half of India’s 29 states must ratify it before it is sent for the president’s assent. Following this, the centre will set up a GST council. Later, the centre and the states will have to pass separate bills so that the new tax regime takes effect.
GST aims to unify various central and state taxes, including the excise duty, service tax and value-added tax, to create a common market by reducing barriers on inter-state movement of goods and services.
The government introduced the bill in Lok Sabha in December 2014 after claiming it had achieved a broad consensus with the states. The centre has promised to compensate states for five years to allay concerns that they may lose revenue once the GST is rolled out. It has also inserted a provision to allow manufacturing states to levy the additional 1% tax on supply of goods for two years.
For now, GST will not apply to petroleum products.