The Goods and Services Tax (GST) Bill was tabled in the Lok Sabha today. This bill has faced stringent opposition from states in the past, the main reason why the bill couldn't be passed by the previous Congress government.
The bill seeks to rationalise state and central indirect taxes into a harmonised tax structure. Currently, companies pay multiple taxes at the state and central levels, which raises the prices of their products, making them less competitive compared with imports from China and other low-cost locations. The hassle and time wasted in filing myriad taxes also deters entrepreneurs and foreign companies from investing in India.
The Narendra Modi government made passage of this bill a top priority. Finance Minister Arun Jaitley reached out to states early, so that the government could table this major legislation in time for the winter session.
Here are seven things you should know about the bill:
1. Passing the bill includes an amendment to the constitution. That means it needs to be cleared by two-third majority in both houses of parliament. The BJP's overwhelming majority in the Lok Sabha means that hurdle is easy to clear, but it might run into opposition in the Rajya Sabha where the BJP is in a minority. Modi will need to reach out to opposition members to get their vote else he won't have the numbers. In addition, at least half of the state governments need to pass the bill. That is why the states' support is crucial.
2. If the bill clears the Rajya Sabha, it will be the country’s biggest tax reform in years and also indicate that the Modi government has the ability to get difficult legislation passed. That might also stem the waning confidence among businesses that feel Modi has been unexpectedly slow on reforms.
3. To make sure the GST is implemented across India, state and central governments will need to build necessary infrastructure - such as fully computerised commercial tax departments and a unified information technology system - to monitor and collect the new tax. If the bill passes both houses, it will still take another year if not more for the required infrastructure to be in place. That's why Jaitley has set a target of April 2016 for it to come into effect.
4. Work on the infrastructure upgrades began two years ago, but not all states were on board fearing revenue losses and loss of discretionary fiscal authority. For example, Maharashtra, earns more than 13,000 crore annually from octroi, and Haryana earns more than 2,000 crore from purchase tax. These and other states will lose revenue from such levies under GST and have demanded compensation from the central government.
5. Finance Minister Jaitley reached out to all states to get their support before the bill was cleared. He offered to compensate the states for any loss of revenues for first five years following the implementation of GST. States will receive Rs.11,000 crore this fiscal towards partial compensation of the losses suffered by them.
6. The existing, heavily bureaucratic structure of taxes levied by the central and state governments such as excise duty, octroi, central sales tax, and value-added tax will be replaced by a single GST structure. Businesses will find it much easier to operate and expand. Implementation of GST could boost economic growth by 1 to 2 percentage points, according to estimates by the Confederation of Indian Industry.
7. E-commerce firms have run into issues with regulatory authorities, such as Amazon's case in Karnataka. The GST is expected to plug gaps in tax laws and resolve such problems.