07/05/2015 7:56 AM IST | Updated 15/07/2016 8:25 AM IST

Next Test For GST: Rajya Sabha

Indian Finance Minister Arun Jaitley delivers remarks at the Peterson Institute for International Economics  April 16, 2015, in Washington, DC.       AFP PHOTO/PAUL J. RICHARDS        (Photo credit should read PAUL J. RICHARDS/AFP/Getty Images)
PAUL J. RICHARDS via Getty Images
Indian Finance Minister Arun Jaitley delivers remarks at the Peterson Institute for International Economics April 16, 2015, in Washington, DC. AFP PHOTO/PAUL J. RICHARDS (Photo credit should read PAUL J. RICHARDS/AFP/Getty Images)

NEW DELHI — The Goods and Service Tax (GST) Bill, a key reforms measure seeking to create a national market, was approved by the Lok Sabha with support from parties like BJD and TMC and a walkout by the Congress after a promise that the recommended tax rate of 27 per cent will be diluted.

While the Constitution Amendment bill was approved by the mandatory two-thirds majority with ease, there are question marks over its fate in the Rajya Sabha where the ruling BJP-led NDA lacks majority. The Upper House is to take up for consideration the GST Bill today.

Congress and other parties have demanded that the Bill be referred to a Standing Committee, which has been rejected by Finance Minister Arun Jaitley.

The Bill will then need ratification of more than half of 29 states before scheduled roll out in April next year.

"The whole country would become a single market and therefore it would give a necessary fillip as far as trade is concerned," Jaitley said while winding up a debate in the Lok Sabha.

Parties like TMC and BJD had reservations over the impact of the GST on state revenues.

Jaitley promised the states that they would be fully compensated for any loss of revenue arising from implementation of GST.

"Our clear understanding with the states is, in a tapering manner the losses incurred by the states will be fully compensated for five years," he said.

The GST, the biggest indirect tax reform since 1947 which is expected to boost manufacturing, 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.

All goods and services, except alcohol, will be covered by GST. Petroleum products will come under GST but the decision over when to start levying the new tax has been left to the GST Council to decide.

GST, which was first mooted 12 years ago but couldn't be approved as states feared curb on their fiscal powers, would boost economic growth by up to 2 per cent, Jaitley had said.

While the GST panel had set the tax rate at 27 per cent, well above the global average of 16.4 per cent, Jaitley said the proposed rate was "too high" and needed to be "much more diluted".

The reform of the indirect taxation was initiated by the Kelkar Committee in 2003 following which the UPA government in 2006 proposed a GST.

The Constitution Amendment Bill to implement the Goods and Services Tax (GST), originally mooted by the UPA, was passed by 352 votes against 37 after the government rejected the opposition demand of referring it to Standing Committee.

Prime Minister Narendra Modi was not present in the House at the time of voting.

Jaitley said the Standing Committee has already examined various provisions of the new legislation and several of its suggestions have been incorporated.

"A bill is not a dancing instrument that it will be jumping from Standing Committee to Standing Committee," he said, adding the implementation of GST would lower inflation and promote growth in the long run.

Commending the bill, Jaitley said this is a "very important moment" because the whole process of indirect taxation in India will change once the GST is implemented.

He said concerns of both manufacturing states like Maharashtra, Tamil Nadu and Gujarat, and other consuming states have been taken into account and states would stand to gain by implementation of GST.

Industry and experts hailed the passage of the Bill saying that it would boost economic growth but first it has to pass muster in the Rajya Sabha.

"Now, even if the Bill goes to a select committee of the Rajya Sabha, one would hope that GST meets its deadline of April 1, 2016," KPMG India Partner (Indirect Tax) Pratik Jain said.

CII Director General Chandrajit Banerjee said, "In our view, this is the first step in making India a single market.

In terms of providing incentive to industry, this is the most extensive and far-reaching reform in the tax domain, which would encourage industry to grow significantly".

Responding to members' concerns that 27 per cent revenue- neutral rate (RNR) for GST as proposed by an expert panel would fuel inflation, Jaitley said, "I straightaway concede that 27 per cent would be very high... Government or GST Council has not decided on the rate... This figure is going to be much more diluted."

The RNR is the rate at which there will be no revenue loss to the states after GST implementation. The RNR for GST is under consideration and a final view on this would be taken by the GST Council.

The proposed GST Council will have Union Finance Minister as its Chairman and comprise two-third of members from states and one-third from the Centre. The decision of GST Council will need to be approved by a three-fourth majority.

"Necessarily cooperative federalism would be at play. To reach three-fourth, both Centre and states would have to work together," he said.

Once GST is implemented, the Centre and states will have concurrent power to levy tax on goods and services.

Jaitley said once the Centre doled out a package which includes 5-year compensation, 1 per cent additional tax and non taxation of petroleum products, the manufacturing states came on board.

"I do not foresee any state incurring a loss and the Constitution Amendment Bill provides that they would be compensated for five years," Jaitley said, adding the states would also get the share of service tax and that would compensate them for the losses.

Asserting that the government is committed to cooperative federalism, Jaitley said, "Federalism means strong states but it doesn't mean a weak Centre." He was responding when some members questioned why the Centre should have a veto power in voting GST Council even while having 1/3rd weightage in voting.

As per the GST structure, 100 per cent compensation would be provided by the Centre to states for first three years, 75 per cent for fourth year and 50 per cent for the fifth year.

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