BackGST clears Parliament, action shifts to the states
While the states will be pushing for a higher goods and services tax rate, the centre will seek to balance the inflationary impact of the move
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New Delhi: For a law that has been a work in progress for more than 10 years, the speed at which the endgame unfolded was incredible.
The constitutional amendment bill for introducing a goods and services tax (GST) to replace a slew of levies at the central and state levels was introduced in Rajya Sabha, the upper House of Parliament, on 3 August and passed the same day after an eight-hour debate.
The amended bill was re-sent to Lok Sabha, the elected lower House that had originally approved the legislation in May 2015, and passed on Monday, 8 August.
Excluding the weekend holiday, it took just three days for the seminal tax reform to win passage through the bicameral Parliament—something few had been betting on, given that the ruling National Democratic Alliance (NDA) is in a minority in Rajya Sabha, where staunch resistance from the Congress party had blocked the bill.
In the end, the vote in Rajya Sabha was 203 in favour, 0 against, after the All India Anna Dravida Munnetra Kazhagam, or the AIADMK, that rules the southern Tamil Nadu state staged a walkout.
The Congress, which first proposed the tax in 2006, voted in favour of the bill, which seeks to create a common market of 1.25 billion people by dismantling inter-state barriers to trade in goods and services.
The action will now shift to the states as the government seeks to get the bill ratified by a majority of states within the next few weeks to stay on course for its 1 April 2017 deadline to enforce the reform.
To be sure, consensus over the rates under GST will not be easy to achieve as the Centre favours a moderate rate and the states are seeking a minimum rate of 20%, fearful of losing revenue.
Issues of administrative control over traders and the revenue threshold below which traders will be exempted from GST also could prove to be a hurdle.
Highlighting the challenge faced by the NDA in implementation, finance minister Arun Jaitley quipped to former finance minister P. Chidambaram, “To implement GST is a headache and to be a former finance minister is a luxury."
Yet, the end of the stalemate was welcomed by rating agencies as credit-positive as it reflected the NDA’s ability to bring in reforms that need legislative approval. “The moment is a milestone moment, not only because it gives a constitutional framework, without which the biggest fiscal reform in India would not have been possible, but also because it reflects the convergence of ideas among the various states and political parties after 10 long years of continuous discussions and negotiations in a democratic set-up," Girish Vanvari, partner and head of tax, KPMG in India, wrote in a note.
GST, a destination-based tax, will subsume various indirect taxes at the central and the state levels, including excise duty, service tax, value-added tax, entertainment tax and luxury tax.
It will eliminate the cascading impact of the current indirect tax regime and check tax evasion. When implemented, it is expected to add 2 percentage points to the gross domestic product and improve revenue buoyancy.
Prime Minister Narendra Modi told Lok Sabha GST was an important step towards freeing India from “tax terrorism" and said the “consumer will be king under GST".
“We did not want a divided Parliament to pass it because it would not be good for this tax as political parties rule some state or the other. It is the strength of the democracy that most of the states and political parties now support this bill," said Modi, adding that GST will aid in reducing tax evasion and eliminating corruption as it will minimize the interface between the tax payer and tax officials.
Modi also sought to counter the perception that GST will lead to inflationary pressures.
“More than 55% of the items in the consumer price inflation index—food and essential items—are outside GST," he said.
Once the Constitution amendment bill receives the President’s nod, a GST council will be set up that will finalize the design of the tax, including issues such as the tax rates, revenue thresholds and steps to prevent dual control over traders.
The council will finalize the draft of the three model legislations—central GST law (CGST), state GST law and the integrated GST law (IGST). The CGST law and IGST law has to be passed by Parliament while the state GST law has to be passed by the respective state legislatures.
The government is aiming to get the two legislations passed in the winter session of Parliament.
Finance minister Jaitley sought to assuage concerns about high tax rates under GST and the consequent impact on the common man.
“The GST council will decide on the rates. No state will want a rate that will lead to excess profiteering or a rate that will not even pay the wages of its employees," he said.
While the passage of the Bill in Lok Sabha had never been in doubt because of the commanding majority the NDA has in the House, it was in Raja Sabha that it faced its biggest test. That it passed the test was a tribute to the dogged and painstaking efforts made by the government to forge a political consensus.
The Constitution amendment bill had been stuck in Rajya Sabha after it received the Lok Sabha’s nod in May last year after the Congress insisted that three of its demands—capping the GST rate in the bill at 18%, doing away with an additional 1% tax, and enabling an independent dispute resolution authority—be incorporated.
“We continue to work with all parties & states to introduce a system that benefits all Indians & promotes a vibrant & unified national market," Modi said on Twitter after Rajya Sabha voted for the bill. “I would like to add that GST will also be the best example of cooperative federalism. Together, we will take India to new heights of progress."
Rajya Sabha’s passage of the bill burnished the reformist credentials of the NDA, particularly Modi. It also did credit to the government’s floor-management skills, given that the NDA is in a minority in the upper House.
Even so, the debate in Rajya Sabha revealed the challenges ahead of the government as it proceeds to the next stage of GST implementation—ensuring passage of supporting legislations.
While the states, driven by revenue considerations, will be pushing for a higher GST rate, the centre will be seeking to balance the inflationary impact of such a move and strike the right trade-off.
Consensus also eludes issues such as administrative control over traders with a revenue threshold of less than ₹ 1.5 crore.
“Passing of GST bill: This is only end of a beginning," revenue secretary Hasmukh Adhia said in a series of tweets. “The real hard work starts now... We will make all attempts to implement GST asap. We are ready with state of art IT design for GST implementation."
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