India inched a step closer to a nationwide Goods and Services Tax (GST) with the government agreeing on Wednesday to drop the contentious 1% manufacturing tax and to fully compensate states for five years for potential revenue losses after the new system kicks in.
The Union Cabinet, headed by Prime Minister Narendra Modi, approved these changes a day after finance minister Arun Jaitley met state finance ministers to iron out glitches in the tax reform measure that has remained stuck in Parliament for want of political consensus.
“The amendments to the GST Constitutional Amendment Bill have been cleared,” a top official said after the meeting of the Cabinet meeting.
In the Bill passed in the Lok Sabha in May last year, 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.
In the meeting on Tuesday, states pressed for a stronger legal assurance on compensation in case of revenue loss after migrating to GST.
States want 100% compensation for the first five years and wants this specified in the main law through “fool proof” wording in the Constitution Amendment Bill, which the Cabinet has now approved.
The government has also agreed to drop the so-called “entry tax” or “manufacturing tax” of 1%, proposed to protect revenues of producing states like Maharashtra, Gujarat or Tamil Nadu.
The Congress has been pressing for scrapping this levy arguing this will distort the system.
The latest moves have raised hopes about the bill’s passage in the Rajya Sabha as early as next week.
Once adopted, GST will change India’s indirect tax structure by replacing a string of central and local levies such as excise, value added tax and octroi with a single unified tax and stitch together a common national market.
The Congress’s other two demands—capping the GST rate in the Constitution Amendment Bill and a Supreme Court judge-headed dispute resolution body has not been accepted yet.
The Cabinet has approved changes in the Constitution amendment bill specifying that any dispute between states and the Centre will be adjudicated by the GST Council, which will have representation from both the Centre and states.
Union finance minister Arun Jatiley met West Bengal chief minister Mamata Banerjee and NCP leader Praful Patel. “We spoke about the GST. I find most of the Opposition parties are in support of the bill,” Patel told HT.
Jaitley will talk to CPI (M) general secretary Sitaram Yechury, whose party wants two changes in the proposed legislation.
Banerjee had announced her support for the GST but opposed the NDA government’s bid to bring businesses which earn less than Rs 1.5 core annually under the Centre’s control.
“We can’t accept these changes. This will mean the states will have no control over any business,” Banerjee said.
Banerjee also met Modi where the GST issue was discussed.
The Congress said it would respond only after the new proposals are sent to it.
“Let them come back to us, we will have internal discussions and then formulate our stand,” said leader of the opposition in the Rajya Sabha Ghulam Nabi Azad.