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Govt makes final push, Cong unrelenting: All about GST tangle

The government introduced the Constitution Amendment Bill in the Rajya Sabha on Tuesday to roll out the goods and services tax (GST) offering to compensate states for at least five years to offset any potential revenue loss after migrating to the new system.

business Updated: Aug 12, 2015 07:42 IST
HT Correspondent
A scene in the Rajya Sabha in New Delhi on Tuesday. (PTI Photo)
A scene in the Rajya Sabha in New Delhi on Tuesday. (PTI Photo)

The government introduced the Constitution Amendment Bill in the Rajya Sabha on Tuesday to roll out the goods and services tax (GST) offering to compensate states for at least five years to offset any potential revenue loss after migrating to the new system.

The new system, if implemented, will significantly alter the country’s tax administration by replacing a string of central and local levies such as excise, valueadded tax and octroi with a single unified tax and stitching together a common national market.

Its implementation, however, stared at political hurdles with the Congress opposing the bill in its current form.

The bill is based on the recommendations of a Rajya Sabha select committee, which examined the legislation after it was passed by the Lok Sabha in May.

Read: Govt introduces GST bill in Rajya Sabha as Cong protests continue

The panel has recommended keeping the GST rates moderate to ensure that the new tax system is not inflationary. The bill passed in the Lok Sabha in May offers a compensation package of up to 100% in the first three years, 75% in the fourth year and 50% in the fifth year.

Since GST is a “destination based” tax and is levied at the place where goods and services are consumed, there was a fear that this could potentially give more revenues to consuming states such as Uttar Pradesh, Kerala and West Bengal compared to producing or industrialised states such as Maharashtra, Gujarat or Tamil Nadu.

The bill passed in the Lok Sabha provided for an additional tax of 1% above the GST for a maximum period of two years to compensate any revenue loss to “producing” states.

The Rajya Sabha panel had said that the provision of the 1% additional tax in its current form could lead to a “cascading effect”. The new Bill has suggested the 1% entry tax should be made applicable only in the case of inter-state supply of goods.

This means that this additional tax may not be applicable for intra-company movement of goods across states. The bill has also not specified the GST rate in the bill as had been demanded by the Congress.

“GDP will be boosted. That is the economic consensus, if GST is introduced. But Congress for some reason does not want that,” Jaitley said. “It will help to eventually bring down prices because there will be no tax on tax.

“Today tax paid at various stages gets added to the cost and thereafter including the tax component, the next tax is imposed,” he said, adding that the new indirect tax regime would eliminate corruption and harassment of the trading community. The GST will enlarge overall kitty of taxation, he said, adding “and this will greatly be to the advantage of consuming state which are lesser developed states”.

It will become "very difficult" to roll out the new indirect tax regime by the April 2016 target if GST bill is not passed in the current session of Parliament, chairman of empowered committee of state finance ministers KM Mani said.

He added that in case the passage of the Constitution Amendment Bill - to implement the GGST - is pushed to the winter session, efforts will be made to enforce it from April 1.

Read: War of words after GST bill stalled; Jaitley targets Sonia, Rahul

Why GST is an important indirect tax reform plan