Two of India's biggest tax reform initiatives — the Direct Taxes Code (DTC) and the Goods and Services Tax (GST) — has entered the final leg, finance minister P Chidambaram said on Thursday.
Chidambaram said that the government will release Rs. 9,000 crore as the first tranche of compensation for losses incurred by states due to reduction in the Central Sales Tax rate, a precondition for the rollout of GST — the indirect taxes regime.
"I propose to take the first decisive step by setting apart, in budget, a sum of Rs. 9,000 crore towards the first installment of balance of CST compensation," Chidambaram said, presenting the Budget 2013-14 in Parliament.
If adopted, GST can dramatically alter tax administration by giving a one-shot solution to a welter of levies such as excise, value-added tax and octroi.
Recently, the Centre and states resolved the contentious issue of CST compensation, with states agreeing to a lower payment of Rs. 34,000 crore for phasing out CST, a precondition for rollout of the GST.
The Centre will bear 100% of the loss accrued to states in 2010-11 fiscal on account of lowering CST. However, for 2011-12 and 2012-13 financial years, the Centre will provide for 75% and 50% of the losses.
"At that time, it was thought that GST could be brought into effect from April 1, 2010. Alas, that was not to be, although all states swear by the benefit of GST," Chidambaram said.
However, in recent meetings with the Empowered Committee of State Finance Ministers has led the finance minister to believe that the state governments — or, at least, the overwhelming majority — agreed that there is need for a Constitutional amendment.
"There is need for states and the Centre to pass a GST law that will be drafted by the state finance ministers and the GST Council. And there is need for the Centre to compensate the states for loss due to the reduction in the CST rate," he said.
Chidambaram hoped that this consensus can be taken forward in the next few months and bring a draft Constitutional amendment and a draft Bill on GST.
On DTC, Chidambaram said work on the DTC Bill, which seeks to overhaul income tax laws, is in progress and the amended Bill will be introduced in the ongoing Budget session.
The Standing Committee headed by senior BJP leader Yashwant Sinha, had suggested raising the tax exemption tax limit to Rs. 3 lakh as against Rs. 2 lakh proposed in the original DTC Bill and has also suggested a rejig in tax slabs.