Plans to introduce India’s most ambitious reform initiative, the unified Goods and Services Tax (GST), has entered the final leg with the Cabinet on Wednesday approving a fresh Constitution Amendment Bill factoring in key changes on sticky issues including a compensation plan for states.
The Cabinet clearance, which paves way for the government to introduce the Bill in Parliament’s ongoing winter session, will have to be passed by a two-third majority in the Parliament and also ratified by at least half of the state assemblies.
GST, which will stitch together a common national market by subsuming a welter of local levies such as octoroi, VAT and others into a single tax, has faced political hurdles as states fear it will rob them of their fiscal powers.
States had been rejecting the draft Bill as not addressing their concerns, particularly on entry tax, tax on petroleum products and potential revenue loss.
The Centre finally agreed to offer a compensation package to states for potential revenue loss with a five-year sunset clause.
Specifying the compensation plan in the Bill is aimed at easing states’ anxieties and offering them a statutory safety net.
Under the package, the Centre could reimburse 100% of the revenue loss in the first year, 75% in the second year and 50% thereafter till the fifth year, after which the position would be reviewed.The Centre agreed to keep petroleum products out of GST, but only for two years. Many states earn almost a third of their revenues from taxes on petroleum products.