India on Wednesday took a major step towards joining around 160 countries across the world with a uniform tax regime. Setting a stellar example of a bipartisan unity among the political rivals when it came to serving the interest of the nation, the Elders unanimously passed the Constitutional (122nd) Amendment Bill in the Rajya Sabha. This will now pave the way for bringing in the Goods and Services Tax (GST) Bill during the Winter Session of Parliament.
Prime Minister Narendra Modi hailed the passage of the Constitutional Amendment Bill on GST as a truly historic occasion and thanked leaders and members of all parties. “The GST will be the best example of cooperative federalism. Together we will take India to new heights of progress,” he tweeted.
He added, “Our MPs must be congratulated for their path-breaking decision to give India an indirect tax system for the 21st century. We continue to work with all parties & States to introduce a system that benefits all Indians & promotes a vibrant & unified national market.”
The Bill paves the way for introduction of the biggest-ever tax reform measures in the country. The lok Sabha had passed the Bill last year itself.
However, the exact tax rate has not yet been decided though the Government assured that it would be kept “as low as possible”. The majority of the Opposition members insisted that the Government should be aware that a higher tax would add to inflation and make life difficult for the common man.
Samajwadi Party member Naresh Agrawal went on to caution the ruling party that if taxes were pegged high, the BJP could pay a price in the forthcoming Uttar Pradesh Assembly elections.
There is no clarity so far on the timeframe for the rollout of the new indirect tax regime. The Revenue Secretary is expected to clear ambiguity on this count on Thursday.
The GST will still have to clear two more hurdles. The Government will have to pass the Central GST (CGST) legislation in Parliament in the Winter Session and State Governments will have to get their own State GST (SGST) passed by their respective State Assemblies. Also, the GST Network (GSTN) that will form the IT backbone for the entire levy would have to be evolved.
Opposing the Bill, AIADMK members walked out during the voting, with the party’s MPs contending that the Bill was an infringement on the rights of the State. The AIADMK has all along claimed that Tamil Nadu will lose as much as Rs 9,200 crore every year if GST is implemented.
The Bill was approved by the Upper House with 203 votes in favour and none against after a seven-hour debate during which a rare bonhomie was witnessed among the ruling and Opposition parties. Six official amendments, including the scrapping of one per cent additional tax, moved by the Government were approved unanimously. The Bill will now go back to the lower House to incorporate amendments approved by the Rajya Sabha and will also have to be approved by 50 per cent of all the State Assemblies.
At one point, a strenuous situation arose when the Congress stuck to its demand that Jaitley should announce that the GST Bill would be brought as a Finance Bill and not as a Money Bill. When Deputy Chairman PJ Kurien started voting on the clauses of the Bill, Chidambaram insisted on his party’s stand and was joined by Kapil Sibal and leader of Opposition Ghulam Nabi Azad. On the assurance of Jaitley that it would be done according to the provisions of the Constitution, the Congress allowed the voting process.
The Bill passed on Wednesday lays the ground for the rollout of the uniform Goods and Services Tax regime that will subsume all indirect taxes, including Central Excise Duty and State VAT/Sales Tax and could add around 1.5 per cent to the GDP in a couple of years. With the economy already turning around, the Modi Government can hope to reach a double-digit growth when it faces the lok Sabha election in 2019.
The GST will remove a great deal of confusion in tax collection, make life easy for businessmen and consumers, curb generation of black money and go a long way in weeding out corruption in tax collection. There are fears that the measure could be inflationary in the short-term, but in the long run, it could change the dynamics of tax collection and growth.
After 1991, when India opened its economy to the world, the GST is seen as the biggest reform which will make the country an attractive destination for foreign investments. Manufacturing is expected to get more competitive due to the emergence of a national market as against the present fragmented one.
Experts feel that the low tax-to-GDP ratio of the country will go up, helping the Government to adhere to fiscal discipline and keep inflation in check. It will improve productivity and transparency.
The passage was facilitated after Congress, which had been stalling the measure for over two years, came on board after the Government made six changes in the Bill, including the scrapping of 1 per cent manufacturing tax and incorporated clearer provisions for compensating States for revenue loss for five years.
Replying to the debate, Finance Minister Arun Jaitley said the GST rate will be kept “as low as possible” but did not commit to a specific rate despite Opposition Benches pressing for it. “We will try and keep the rate as low as possible, certainly much lower than what the present situation is. And as compliance increases, the possibility of that rate coming down further would be there,” he said.
The tax rate, he said, would be decided by the GST Council comprising the Union Finance Minister and representatives of all 29 States. “We must trust the sense of responsibility of the States who belong to the same political parties as us. Who in their last meeting said that our guiding principle is going to be one, we will lower the burden of tax,” he said.
Jaitley said at present 80 per cent of goods attract 12.5 per cent of Central Excise Duty while at the State level 55 per cent of items are charged with 14.5 per cent VAT or Sales Tax. The weighted average of the two in 65 per cent of the items comes to 27 per cent. Adding cess, Octroi and entry tax takes the figure to 30 per cent, he said.
In deciding the GST rate, “We are guided by two factors, 27 per cent is too high, it is inflationary, it costs the people, so it should come down... The second is we will collect what is essential for our present revenue requirement,” he said. Jaitley said members will have an opportunity to speak on subjects when the supporting GST Bill comes up in November.
The GST, he said, will make the system more efficient, increase tax compliance and tax avoidance will become more difficult as it will be detected at some stage or the other. Also, there will be no cascading effect of a tax-on-tax, he said adding there are certain items which will either attract lower tax or no tax at all. Ruling out GST impacting inflation, Jaitley said 54 per cent of goods in the basket used to calculate consumer price inflation are tax exempt and another 32 per cent attract low tax. Only 15 per cent are taxed at standard rates.
Earlier, moving the motion Jaitley said this tax reform is one of the most “significant in recent history and will radically change the tax regime.” The country will have uniform tax and both the Center and States will earn more revenue after GST comes into being he said. Allaying apprehensions of States’ rights, he said instead of “losing sovereignty,” the country will be “pooling sovereignty” with a seamless transfer of revenue to States.
Thanking all parties for backing the constitutional amendment, Jaitley said with the setting up of a GST Council to address disputes with the Centre and States working in consensus, “Indian federalism will be at play.”
Elaborating upon the architecture of the proposed council, he said the States will have a representation of two-thirds voting power. Moreover, in order to settle a particular issue or dispute, three-fourths of the votes will be required and the Center and States can veto each other.
The Bill is guided by two main principles that tax should gradually come down so that it is more citizen-friendly and also that tax should be adequate enough to generate revenue for States, Jaitley said.