A day after the meeting of the Empowered Committee of State Finance Ministers raised its concerns about the GST Bill, the Cabinet cleared the changes in the Constitutional Amendment Bill in line with the demands made by the panel, clearing the way for the much-needed tax reform to be passed in the current Parliament session.
The move by the Cabinet, chaired by prime minister Narendra Modi, is commendable for the swift action taken and shows the seriousness of the NDA government in taking up the reform process, according to experts.
On Wednesday, the Cabinet approved the dropping of the 1 percent additional manufacturing tax and also provided guarantee to compensate states for any revenue loss in the first five years of the rollout of the proposed indirect tax regime.
“It is indeed commendable that the Cabinet has taken up the GST matter within a day of the meeting of the Empowered Committee of state finance ministers. This depicts the resolve and commitment of the Government to move ahead on GST,” MS Mani, Senior Director – Indirect Tax, Deloitte Haskins & Sells LLP, said in a statement.
“The decision to do away with the 1% tax proposed earlier to compensate the manufacturing states will remove a major aberration in the GST value chain. Further, the statement that the states would be compensated for revenue losses for five years would go a long way in addressing their concerns on a very crucial aspect of the GST process,” he added.
Apart from the Congress party, the 1 percent additional tax has been a bone of contention even for the industry, which termed it a “bombshell” that would defeat the whole purpose of PM Modi’s pet Make in India scheme. The levy was introduced to placate manufacturing states such as Gujarat and Tamil Nadu, which would lose revenue on account of the GST.
Pratik Jain, partner at KPMG had told Business Standard that the 1 percent additional tax will compromise the efficiency of the supply chain.
As far as compensation for state governments is concerned, the state finance ministers on Tuesday had said that wording in the Bill needs to be changed to bring about clarity.
“You will be happy to know that unanimously a wording was proposed which is clear that five years and that it will be implemented, a very nice constitutional amendment wording was proposed by the empowered committee which I proposed on the behalf of all the finance ministers. I believe that much of it will be accepted,” West Bengal finance minister Amit Mitra, who heads the empowered panel, had told the CNBC-TV18 in an interview.
The Cabinet-approved Bill now provides that the Centre will give 100 percent compensation to states for first three years, 75 percent and 50 percent for the next two years.
With the Centre accepting the changes, the NDA government has indeed made a giant step forward to bring on board all the state governments.
Harishanker Subramaniam, national leader, indirect tax, Ernst and Young, said the Cabinet approval is a “very welcome” step.
“The cabinet’s clearance of crucial amendments in the Constitution Amendment Bill in response to Empowered Committee discussions like removal of 1% origin tax, and 5 years compensation to States is indeed very welcome and will pave the way for political consensus and early passage of bill in the monsoon session,” he said in a statement.
According to a PTI report, with states on board and the Cabinet approving the amendments, the government is hopeful of passage of the long-pending Goods and Services Tax (GST) Bill in the ongoing monsoon session of Parliament, which ends on August 12.
However, for the Congress there are still two more demands that have not been completely met. These demands are including the GST rate in the statute and setting up a Supreme Court judge-headed dispute resolution body. These demands have not been accepted.
However, the Constitutional Amendment Bill will include a clause on the dispute resolution mechanism. As per the clause, any dispute between states and the Centre will be adjudicated by the GST Council, which will have representation from both the Centre and states. An NDTV report says the government has agreed to give states more power in the independent body.
As far as including GST rate in the Constitution is concerned, there is a talk of mentioning the rate in one of the two supporting legislations that need to be passed after the Constitution is amended.
These two changes will only meet the Congress demands halfway. It remains to be seen whether it will indeed placate the party leaders, who are now cornered on the issue with most coming on board with the Centre.
The Bill, with the changes, is expected to be taken up in the Rajya Sabha as early as this week, but certainly by next week. Once the Rajya Sabha approves the legislation, the amended Bill will have to go back to the Lok Sabha again for approval.