Cabinet approves removal of 1% additional tax on inter-state sales – GST bill hopes to brighten

New Delhi: India is moving closer to formulating a comprehensive reform of its indirect tax structure. The Union Cabinet in its meeting on 27 July 2016 agreed to the changes in the Goods and Services Tax (GST) Constitutional Amendment Bill and dropped the 1% manufacturing tax. It also vowed to compensate any loss which the states accrue in the next five years after the GST regime is initiated.

The council of ministers, which has the Prime Minister as its head has agreed to include in the Constitutional Amendment Bill the clause that any dispute between states and the Central government will be decided by the GST Council. The Council will have adequate representation from each state as well as the centre.

The Centre is confident that most states and the opposition are on board, and it is hopeful of passing the bill in the present Monsoon Session of the Parliament. The sticking point was the 1% additional tax, and the BJP was inclined to drop it. However, the producing states were adamant in keeping it and only after the Centre promised to compensate the losses for the coming five years they relented.

The government wants to make the GST effective from April 1, 2017. It has reached out to like-minded parties as well as discordant parties like the AIADMK (All India Anna Dravida Munnetra Kazhagam) which has voiced some reservation.

“The government has accepted the demand to drop 1% inter-state tax, and they are also ready to have the rate in GST Act, so the party should not have a problem in extending support,” a senior Congress functionary told ET.

If enforced the law will create a single national market and break down state boundaries. Experts contend that the move will lift the GDP by 1%. The approval of the amendments by the Central Cabinet augurs well to create an atmosphere of political consensus which will help in the early passage of the bill.

The NDA government wants to move the bill next week in the parliament, and the Business Advisory Committee has allocated 5 hours for discussion on the matter. Most states back the bill and its present format especially after the removal of 1% manufacturing tax and the setting up of the GST Council to resolve disputes.

The support of the opposition parties is crucial since the NDA does not enjoy a majority in the Upper House. Since it is a constitutional amendment bill, it will have to be passed by two-thirds majority in the Rajya Sabha and also 50% state assemblies.