1. The GST provides a major taxation reform by introducing a national sales tax that will replace a myriad of overlapping state duties that deter investment.
2. The cabinet last evening approved a constitutional amendment bill that allows for this.
3. The draft legislation is expected to be introduced in the current parliamentary session which concludes next week. Four working days remain for the winter session.
4. Investors and manufacturers have long advocated the GST as a way to simplify taxes while broadening the tax base, adding as much as 2 percentage points to economic growth in Asia's third-largest economy.
5. Some of India's 29 states were reluctant to give their assent for fear of revenue losses. Finance Minister Arun Jaitley brokered a compromise on Monday, offering to compensate the states for any loss of revenues following the implementation of the GST.
6. The government aims to bring the tax into effect from April 1, 2016.
7. But the bill may not be cleared in this session of parliament. It could be taken up for debate in the Budget session which will begin in February.
8. Since the bill seeks to amend the constitution, it needs to be cleared by a two-third majority of both houses of parliament. The government will face no problem in the Lok Sabha, where it has huge numbers, but it is in a minority in the RAjya Sabha and will need the opposition's support.
9. The proposal will then have to be cleared by at least half of the country's state legislatures before it becomes a law.
10. GST will replace a number of indirect taxes currently levied by both the Central and State Governments and seeks to provide a common national market for goods and services. Once in force, GST will reduce the total number of indirect taxes apart from the customs duty (only on imported goods) to just three.
After a prolonged wait, the Cabinet on Wednesday approved the Constitutional Amendment Bill on the Goods and Service Tax (GST), paving the way for the legislation to be introduced in the current winter session of Parliament, which will end on December 23.
The Bill is learnt to have sought to include petroleum within GST, but the Centre would be allowed to impose excise duty on it and the states value-added tax (VAT) for initial years.
Petroleum was one of the contentious issues between the Centre and the states and had delayed the Bill.
CENTRE-STATE BALANCE
• Petroleum will be included in GST but Centre and states will be allowed to impose their current taxes on it
• GST compensation to states for five years will be part of the Bill. Centre will provide full compensation for three years and then progressively reduce it
• Entry tax levied by local bodies to be subsumed within GST
States wanted petroleum products excluded from GST as they earn over 50 per cent of their revenues from this head. However, the Centre wanted to keep it within GST so that the chain of providing reimbursement for input taxes is not broken.
The other contentious issue was compensation to states for revenue loss after GST is introduced. Wary after the Centre's unkept promises on compensation for a cut in the Central Sales Tax (CST) rate, the states wanted to include GST compensation within the Bill. They also asked the Centre to promise that GST compensation would be provided for five years.
The Bill, it is learnt, contains the compensation for five years, but on a tapering basis.
This means the Centre will provide full compensation for the revenue loss for the first three years and then progressively reduce it for the next two years.
The third issue, on which the Centre and the states were not on the same page, was the entry tax imposed by local bodies. States such as Punjab wanted it to be kept out of GST, but the Centre was keen on subsuming it within the new tax system. Ultimately, the Bill has subsumed the entry tax within GST.
"This is a welcome move because petro products and entry taxes have been subsumed in the GST. The introduction of this reform will further encourage the industry and give confidence to investors," said Prashant Deshpande, senior director for Deloitte in India.
The Bill went to the Cabinet after Finance Minister Arun Jaitley managed to build a broad consensus with the empowered committee of state chief ministers late on Monday.
Even if the Bill is tabled in the current session of Parliament, it would not be before 2016-17 that it could be rolled out.
Once the constitutional amendments are passed by both Houses of Parliament by two-third majority, half the state legislatures will have to ratify them.
After that the actual GST Bill will be tabled to be discussed and passed in both Houses of Parliament. State legislatures will also have to table and pass their own state GST Bills.
