The modalities for levy of 1% tax over and above the GST rate by states as well as the ‘band’ rate would be finalised while framing the rules
The Cabinet also approved National Investment & Infrastructure Fund (NIIF), a new consumer protection law, and allowed foreigners to invest in Alternate Investment Funds registered with market regulator Sebi.
The key changes approved by the cabinet in the GST law is full five-year compensation to the states for possible loss of revenues, which is crucial to the government gaining support of states such as West Bengal and Odisha in the Rajya Sabha where the government lacks majority.
The select committee suggested that the entire revenue loss be compensated for full five years as opposed to tapering compensation provided in the Bill.
The details of the 1 per cent tax to be levied over and above the GST rates to compensate the manufacturing states for a possible loss of revenue will be finalised while framing the rules, people familiar with the deliberations said.
This 1 per cent tax, which is seen as distorting the GST and causing cascading of taxes, has been one of the many grounds on which the Congress has been opposing the passage of the Bill.
GST proposes to replace most central and state levies with one single tax and is projected to add as much as 2 per cent to the country’s GDP.
The Rajya Sabha Select panel was set up by the government in the budget session to break the deadlock in Parliament. The GST Bill was passed in the Lok Sabha, but ran into opposition in the Upper House.
The panel headed by BJP’s Bhupender Yadav had in its report last week suggested a maximum GST rate of 20 per cent and suggested measures to address the distortions by the 1 per cent additional tax by states suggesting it be levied only on actual sales and not on inter-company transfer of stock.
Besides the government could also give it flexibility to keep the levy at up to 1 per cent, giving it room to prescribe a lower rate if a lesser compensation is needed for manufacturing states. The government is hopeful of getting the Bill passed if Parliament functions. The Congress, which submitted a dissent note to the select panel, is still opposed to the Bill, suggesting government could face trouble.
“Cabinet approving amendments to the GST Bill quickly is indeed positive. One would hope now that the government would be able to bring the opposition on board to get the Bill passed by Parliament in the current session,” said Pratik Jain, partner, KPMG.
Besides the government could also give it flexibility to keep the levy at up to 1 per cent, giving it room to prescribe a lower rate if a lesser compensation is needed for manufacturing states.
NATIONAL INFRASTRUCTURE AND INVESTMENT FUND
In a big boost to infra financing, the Cabinet approved creation of NIIF as a trust that will have a corpus of Rs 20,000 crore. The government’s contribution would be limited to 49 per cent of the subscribed capital. It will seek participation from strategic investors such as sovereign fund, quasi sovereign funds and multilateral or bilateral investors, which can help leverage this fund to many times.
Cash-rich PSUs, pension funds, provident funds, National Small Saving Fund will be able to pick up stake in the fund. It will be able to use funds from monetisation of government-owned land.
ALTERNATE INVESTMENT FUNDS
The Union Cabinet also allowed foreign investors to invest in Alternate Investment Funds registered with market regulator Sebi. AIFs registered as trust, or structured or incorporated as company or limited liability partnership (LLP) would be able to attract foreign funds.
In 2012, the regulator had allowed new class of market intermediaries named AIFs, which are basically funds established or incorporated in India for the purpose of pooling in of capital from Indian and foreign investors for further investments. Sebi then subsequently asked the government to allow foreign investments into alternate investment funds or AIFs and also further downstream investments by them under the foreign direct investment policy framework. Downstream investments by these funds would have be in line with the over all FDI policy.