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New Delhi: Finance minister Arun Jaitley on Friday introduced the constitutional amendment Bill for the April 2016 national rollout of the goods and services tax (GST) in the Lok Sabha, a major reform expected to cut transaction costs for business and boost India’s economy.

All goods and services, with the exception of alcohol, will come under GST, according to the provisions of the 122nd constitutional amendment Bill.

All efforts have been made to ensure that states do not suffer any loss of revenue when GST is implemented, Jaitley said at a media briefing after introducing the Bill, which he called the biggest tax reform since independence.

The government plans to push for the passage of the legislation in the budget session of Parliament that will begin in February.

The bill proposes to include petroleum under GST but has left the decision of when to start levying GST on such products on the GST council—a body to be formed at a later date.

The council will have one-third representation from the centre and two-thirds from the states and its decisions will need to be approved by a three-fourth majority.

GST will replace central taxes like excise duty and service tax and state levies such as sales, value-added, entertainment and purchase taxes. All entry taxes like octroi will also be subsumed under GST.

With the centre managing to allay the fears of the states with regard to inclusion of petroleum products, the government has managed to bring in a near-perfect design for GST in the long term. States like Gujarat, which had initially opposed the inclusion of petroleum under GST, are now in favour, the finance minister said.

The Bill tries to balance the concerns of states on loss of revenue and autonomy and the need for a tax structure that will remove barriers across states and ensure seamless flow of goods and services across the country, Jaitley said, adding that he did not feel there was a need for the Bill to be again referred to a parliamentary standing committee.

The centre has made a provision in the Bill promising to compensate states for five years for losses arising from GST’s implementation. While states will be compensated for 100% of their losses in the first three years, it will be 75% in the fourth year and 50% in the fifth year.

In addition, states will be allowed to levy an additional 1% non-vatable tax on inter-state supply of goods for the initial two years. This tax will be levied and retained by producing states in addition to the integrated GST, or IGST, that will be levied. IGST, or the sum of central GST and state GST, will be levied on inter-state movement of goods and will be collected by the centre and later distributed to states.

This is expected to allay concerns of producing states that will suffer revenue losses from inclusion of petroleum in GST.

In addition, there will be a provision of a narrow tax band over and above the floor rates of CGST and SGST to give some autonomy to the centre and the states.

Jaitley said that producing states like Gujarat and Maharashtra that fear revenue losses from GST’s implementation will be benefited as service tax revenues will start accruing to them.

The presentation of the Bill starts the process of ushering in the most important tax reform post-independence, Harishanker Subramaniam, partner and national leader, indirect tax, at consultancy firm EY, said in a note.

He, however, raised concern on the additional 1% levy proposed in the Bill.

“What is evident is that the centre has more than met the demands of the state in the spirit of cooperative federalism and to that extent it’s far from a classical GST. The biggest concern is the additional 1% levy the states have been allowed to charge as an origin tax (akin to CST on interstate transactions) outside the GST structure for a period of 2 years or as further decided by the GST council," Subramaniam said. “This intrinsically will be a conflict to the destination based concept under GST and will lead to continued cascading."

The legislation will need to be approved by a two-thirds majority in both houses of Parliament and will need to be ratified by 50% of state legislative assemblies before coming into effect.

The Bharatiya Janata Party-led National Democratic Alliance has 334 MPs in Lok Sabha, while the ruling alliance is in a minority with 57 members in a 245-member Upper House.

The government will need the support of major opposition parties, including the Congress, which has 68 MPs in Rajya Sabha, and other parties like Samajwadi Party, Bahujan Samaj Party, Janata Dal (United) and Trinamool Congress, for the passage of the Bill.

Reacting to the bill, West Bengal’s finance minister Amit Mitra said the state supports GST but stressed the need for the centre to compensate the state for revenue losses arising from the implementation of the reform. On Thursday, Mitra had opposed the inclusion of petroleum in GST in a media briefing.

The centre has shown enough flexibility to address the states’ concerns on critical areas such as compensation and inclusion of petroleum products, according to Pratik Jain, partner at consultancy KPMG in India.

“The fact that there is no constitutional embargo on levying GST on petroleum products is encouraging, though the modalities of taxation on these products is still not clear," Jain said. “However, an additional tax up to 1% on inter-state supplies comes as a disappointment as any origin-based taxation is fundamentally against the principles of GST and would be barrier to a common market which GST seeks to achieve."

The central government will levy excise duty and states will levy value-added tax till the GST council decides to bring petrol under GST’s net, a finance ministry official said on condition of anonymity.

Mint’s Gyan Varma and PTI contributed to this story.

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