India on Tuesday took a big step towards rolling out the landmark goods and services tax (GST), with the Centre and states agreeing on broad principles to fix the tax rate.
The consensus could see the bill’s passage in the Rajya Sabha as early as next week, dramatically altering India’s indirect tax structure by replacing a string of central and local levies such as excise, value added tax and octroi into a single unified tax and stitch together a common national market.
Finance minister Arun Jaitley met state finance ministers on Tuesday as the government stepped up efforts to iron out differences on the proposed GST that has remained stuck in Parliament for want of political consensus.
The meeting discussed the changes that Congress has sought, including the demand for capping the GST rate at 18% in the Constitution Amendment Bill itself.
“As you know that no tax rates are provided in the Constitution. It was discussed and the conclusion reached that Union finance minister will communicate to other parties,” said West Bengal finance minister Amit Mitra, who is the chairman of the empowered committee of state finance ministers on GST.
“He will explain it to them that it can’t come in (the) Constitutional Amendment (bill) but it can come in GST Bill or GST Act.”
The supplementary legislation — the GST Act -- may specify a cap within which the rates should ideally be maintained. It is an enabling legislation that is necessary for rolling out the new tax system.
According to the bill, passed in the Lok Sabha in May 2015, the rates were to be decided by a GST council headed by the central finance minister with state finance ministers as members.
The Centre has been arguing that a cap on the GST rate in the Constitution Amendment Bill would make the system rigid. The Constitution will have to be amended with a two-thirds majority each time the rates needed to be changed in the future.
The Congress increasingly found itself isolated as regional parties supported early passage of the Bill. Last week, the party had softened its stance from insisting on a cap in the 122nd Constitution Amendment Bill to “legal ring-fencing” of the GST rates.
“This is one step forward. Finally the government seems to have accepted our demand for a cap. There will be more negotiations,” said Congress leader Jairam Ramesh.
There was also broad agreement on the principle that the ordinary businessman and the common tax man will benefit from introduction of GST by way of lower tax rates while the states will not face any loss of revenue.
“The principle of the GST rate has been decided. The rate should provide relief to common man while not resulting in loss of revenue to states,” Mitra told reporters.
The “broad consensus put together is satisfactory to all political parties and all states,” he said adding “fool proof” wording for compensation to states has been worked out.
In the Bill, the Centre had proposed 100% compensation for first three years, 75% and 50% for the next two years. However, the Select Committee of the Rajya Sabha has recommended 100% compensation for probable loss of revenue for five years.
Mitra said that small businesses with turnover up to Rs 1.5 crore in a year would remain within the states’ control, while larger businesses will come under dual control of states and the centre.
Lack of political consensus has kept the landmark Constitution amendment bill stuck in the Rajya Sabha where the ruling the National Democratic Alliance (NDA) is in a minority.
Both Houses of Parliament and at least half of the state assemblies will have to ratify it before it finally becomes a law.
It has missed several roll-out deadlines including the last one of April 1, 2016.