India makes crucial tweaks to push through stalled GST reform

The proposed tax reform seeks to replace a slew of taxes and levies in 29 states, transforming the nation of near 1.3 billion people into a customs union. Photograph:( Getty )

PTI New Delhi, Delhi, India Jul 27, 2016, 04.20 PM (IST)
The Indian government on Wednesday made crucial ammendments to its goods and services tax bill in a move to enlist the support of opposition parties as well as state governments.

Indian finance minister Arun Jaitley met his state counterparts on Tuesday to forge a political consensus on the bill that is held up in parliament.

As part of the ammendments, the government has dropped a contentious 1 percent additional levy on inter-state movement of goods, and has agreed to compensate states for any revenue losses for five years.

While there is a broad political support for the measure, differences persist on the details, in particular pitching the tax at the right level to offset possible revenue losses.

The cabinet, headed by Prime Minister Narendra Modi, decided to include in the Constitutional Amendment Bill that any dispute between states and the centre will be adjudicated by the GST Council, which will have representation from both the Centre and states.

With states on board and the cabinet approving the amendments, the government is hopeful of passage of the long-pending Goods and Services Tax (GST) Bill in the ongoing monsoon session of Parliament, which ends on August 12.

The GST Bill, with the changes approved by the cabinet, could come up in the upper house of Parliament, the Rajya Sabha as early as this week, but certainly by next week.

By doing away with the 1 per cent inter-state tax over and above the GST rate, the government has met one of the three key demands over which the main opposition party Congress has been blocking the bill in the upper house.

The other demands of including GST rate in the statute and a Supreme Court judge-headed dispute resolution body has not been accepted. It remains to be seen if meeting of its demands halfway will persuade the Congress to support the legislation.

The proposed tax reform, the biggest since India's independence from Britain in 1947, seeks to replace a slew of taxes and levies in 29 states, transforming the nation of near 1.3 billion people into a customs union.

The Bill, in its present form, provides that the centre will give 100 per cent compensation to states for first three years, 75 per cent and 50 per cent for the next two years.

However, the select committee of the Rajya Sabha had in its report recommended 100 per cent compensation for probable loss of revenue for five years.

As per the amendments, the centre will now constitutionally guarantee states any loss of revenue from the GST subsuming all indirect taxes, including VAT, in the first five years of introduction.

Analysts say the goods and services levy (GST) could boost India's economic growth by up to 2 percentage points.

(PTI, Reuters)