A meeting of Finance Minister Arun Jaitley with Empowered Committee of State Finance Ministers on Tuesday saw emergence of a broad consensus on the passage of the GST (Goods and Services Tax) Bill, but the Congress kept the Government on the tenterhook by its silence on the development. In the meeting, the Centre and the States agreed on the principle that the tax rate will be lower than the current levels and the Centre will compensate the States for five years for revenue loss.
Going against the Congress demand that the Government should bring a Constitutional cap to make 18 per cent as sacrosanct GST rate, the meeting agreed that the rate should not be part of the statute. The Congress may have been isolated but it can still derail the passage of the Bill because of its number in the Upper House.
The meeting of Finance Ministers also agreed to include in the Constitutional Amendment Bill the mechanism of compensating States for any loss of revenue in first five years of GST subsuming all indirect tax, including VAT.
There was also broad agreement on the principle that the ordinary businessman and the common taxpayers will benefit from introduction of GST by way of lower tax rates while the States will not face any loss of revenue, West Bengal Finance Minister and panel chairman Amit Mitra said after the meeting. Also, there was “consensus to keep the GST rate out of the Constitutional Amendment Bill,” he claimed.
The Government is keen to get the GST Bill approved in the current Monsoon Session of Parliament ending August 12 but is facing opposition from the Congress which wants a low tax rate to be part of the Constitutional Amendment Bill while the one per cent additional tax in hands of states over and above the GST rate be scrapped.
“As you know that no tax rates are provided in the Constitution. It was discussed and conclusion reached that Union Finance Minister will communicate to other parties. He will explain it to them that it can’t come in Constitutional Amendment but it can come in GST Bill or GST Act,” Mitra said. Kerala’s Finance Minister Thomas Issac also said there was a “larger consensus” emerged in the meeting. He said there was a debate on revenue neutral rate.
The “broad consensus put together is satisfactory to all political parties and all States,” Mitra said, adding “foolproof” wording for compensation to states has been worked out. There are indications that the Government may now bring the GST Bill in the Rajya Sabha next week instead of earlier plans of doing it this week. Mitra said while there was no talk on specific tax rate, it emerged at the meeting that the rate should be such that is lower than existing levels otherwise “there is no point of reform.”
The States, he said, were of the view that small businesses with turnover up to Rs 1.5 crore in a year should come under purview of only State Governments and dual control of States and Centre can be exercised over businesses larger than them.
Once the Constitutional Amendment Bill is passed by Parliament by two-thirds majority, both the Houses will have to pass another Bill to implement the GST.
In the Bill, the Centre had proposed 100 per cent compensation for first three years, 75 per cent and 50 per cent for the next two years. However, the Select Committee of the Rajya Sabha has recommended 100 per cent compensation for probable loss of revenue for five years.
The meeting of the empowered committee was crucial as the Centre is looking to build consensus over the three demands of the Congress, which included that Constitutional capping of GST rate.
“On the question of rate, it was very important that wording has been worked out which first of all essentially means that the incidence of tax on common man has to be significantly reduced. At the same time the safeguard on the existing level of trends of revenue of the Union and States.
“...These are the two objectives that broad framework of words have been worked out and we hope that all political parties will be in agreement,” Mitra added. He said that today the effective rate of taxes is huge and consensus was there should be a reduction in the tax rate with GST implementation.
On the Congress demand for scrapping of one per cent additional tax, Mitra said, “What has been absorbed in GST is known to you. So there is nothing for me to say”.
Jaitley had earlier indicated his openness in scrapping the 1 per cent additional tax after a panel headed by Chief Economic Adviser Arvind Subramanian favoured it.
Congress-ruled Karnataka, however, held on to its demand that GST rate should be mentioned in Constitutional amendment bill to safeguard the interest of tax payers. “GST taxation should be specifically brought in Constitutional amendment bill so that the tax payers are told what the rates would be,” HC Mahadevappa, a minister in the Siddaramaiah Government said.
Kerala Finance Minister Thomas Isaac said the GST revenue neutral rate (RNR) was discussed and general consensus has been to drop this concept of RNR in Constitutional amendment.
“We will ensure a rate and structure which will reduce the effective tax burden on the common man. We know that effective rate on consumer products is about 30 per cent. It’ll be considerably brought down. Rate cap will not be put in Constitutional Bill,” Isaac said. He said there will be more meetings of the State Finance Ministers.