Modi government stakes its prestige on GST Bill

The NDA government is staking its prestige on the early passage of the Goods and Services Tax (GST). Given how the Congress Party stalled the entire monsoon session in the Rajya Sabha to thwart the BJP from moving on this issue, a desperate finance minister Arun Jaitley is toying with a few bold options,  including convening a special session of Parliament next month or by treating the GST legislation as a money bill so that the concurrence of the Upper House is but a fait accompli!

GST is known for its end-user consumption tax as it cuts through multiple taxes at the state and central levels which makes the indirect tax structure complicated. The objectives of GST include the need to widen the tax base through the coverage of diverse economic activities. This is to be achieved by pruning exemptions, mitigating cascading and double taxation, besides facilitating better compliance by lowering overall tax burden on goods and services.

Currently, the Constitution empowers the Centre to levy excise duty on manufacturing and service tax on the supply of services. It also empowers state governments to levy sales tax or value added tax (VAT) on the sale of goods. This exclusive division of fiscal powers has resulted in multiplicity of indirect taxes in the country, impeding free movements of goods across India. Besides, central sales tax (CST) is levied on intra-state sale of goods by the central government but collected and retained by the exporting states. Moreover, many states levy an entry tax on goods in local areas. What is upsetting for the trade and industry is the absence of uniform tax rates and structure across states compounded by the ‘tax-on-tax’ system. There is no credit of excise duty and service tax at the stage of manufacture that is available to the traders while paying state level sales tax or VAT and vice-versa.

The GST bill, technically called the Constitution (One Hundred and Twenty-second Amendment) Bill, 2014, was passed by the lower House on May 6, 2015. But it was sent to the Select Committee of the Upper House at the fag end of the budget session with several opposition parties demanding their views be heard. Just ahead of the monsoon session, the Committee came out with its report with the Cabinet broadly approving most of its contentious recommendations within a week. The bill fashioned by the Modi government keeps taxes on alcohol, electricity and real estate outside the scope of GST. Taxes on petroleum products are also outside the purview of GST though the Bill provides for their inclusion later with the concurrence of the GST Council.

The other notable features include compensating states for revenue shortfall due to the GST for five years, and limiting the scope of the one per cent additional tax on inter-state supply to “all forms of supply made for a consideration”, ie, on actual sales and not on inter-company stock or inventory transfers. The Cabinet agreed that a “band” tax rate would be finalised for the GST while framing the rules, at the same time hoping that the GST Council might opt for a broad base and moderate rate” so that the confidence of the consumers is not dented and high inflation averted.

Important formalities like obtaining a majority of the state assemblies to ratify the Bill once passed by Parliament and getting the Presidential approval need to be completed. In addition, allied organisational matters need to be thrashed out. These include the GST Council comprising Union finance minister (FM) and state finance ministers resolving critical issues like the tax rate under GST, deciding the threshold revenue level beyond which GST will be implemented and the structure and voting pattern of the GST. Given this expansive list, the rollout deadline of April 1, 2016, appears to be a tall order.   

The author is a Delhi-based economic journalist