New Delhi: India is on the verge of creating history. With the Lok Sabha signing off on the last batch of bills on the goods and services tax (GST), India is just a step away from rolling out an indirect tax regime that will for the first time economically unify the country.

Not only is this a game-changing tax reform initiative, it also puts in place a template for cooperative federalism because the states, thanks to the creation of the GST council, are as much a stakeholder as the Centre.

The rollout has been made possible after the states and the centre agreed to merge their existing taxation powers to evolve a uniform tax structure.

GST: The final countdown begins

On Wednesday, clearing the last legislative hurdle, the Lok Sabha gave its nod to the last batch of bills crucial for the implementation of this seminal tax reform. The lower house passed the four bills—central GST bill, the integrated GST bill, the union territory GST bill, and the GST (compensation to states) bill.

Since these bills were tabled as money bills, the Rajya Sabha can only make recommendations on the proposed laws and that too within 14 days of the bills being sent to the upper house. This means the government will be able to push through these bills in Parliament before the end of the ongoing budget session on 12 April.

As the GST bills were tabled as money bills, Rajya Sabha can only make recommendations and that too within 14 days of the bills being sent to the upper house

To be sure, the state legislatures will also have to give their nod to the state GST bill to facilitate a pan-India rollout of the tax from 1 July.

This seminal piece of tax reform will be ready for implementation after the GST Council approves the classification of commodities under various slabs.

Cooperative federalism

Highlighting the uniqueness of this reform, which has been in the works for more than 10 years, finance minister Arun Jaitley said it is for the first time that the centre and the states have come together and pooled their sovereignty into the GST council to make it a reality.

“GST is the first of its kind federal contract with constitutional sanction. We (Parliament) are free to make our recommendations to the council but at the same we will have to honour this federal contract where states and the centre have pooled their sovereignty and arrived at the various provisions of these bills," he said in the Lok Sabha.

GST: Pooling sovereignty, promoting federalism

GST subsumes a host of indirect taxes levied by the centre and the states including excise duty, service tax, value added tax, entertainment tax , luxury tax and entry tax. This means that both the centre and the states are giving up their autonomy when it comes to collecting these indirect taxes---a major part of their revenue steam.

The concerns

Bringing all states on board this tax reform, which is expected to add up to two percentage points to India’s GDP growth rate and remove cascading impact of taxes, forced the centre to yield on many issues, some of which could force up input costs to industry, impact the ease of doing business and increase inflationary pressures, at least in the short term.

A multiple rate structure, increased compliance for service providers and the search, seizure and penal provisions all threaten to reduce the benefits of this indirect tax reform as initially envisaged.

Biju Janata Dal MP Bhartruhari Mahtab was critical of GST’s role in reducing prices of goods and services. “Will the prices come down after implementation of this law? Expectations have grown sky-high. But it is illusionary. We will come to know only after one year," he said.

He also questioned the government’s move to tax agriculture.

GST caps Arun Jaitley’s finest hour in public life

Jaitley defended the decision to define agriculture, clarifying that it is only for the purposes of exempting farmers from registration. “These products (livestock, dairy farming) could still be zero-rated," he added.

Congress MP Veerappa Moily was critical of many of the provisions of the bill. “One nation, one tax is only a myth. No one can call these bills a game changer. It is just a small baby step forward," he said. Moily said that clarity still eludes any of the provisions of GST including taxation of special economic zones and the way the anti-profiteering mechanism will work. “Anti-profiteering provision is draconian in nature. It will cause hardships to industry," he said.

Next steps

The GST Council is expected to finalize nine sets of rules including those on valuation and the transition towards GST in its next meeting on 31 March. It will also start the process of fitting various goods and services into the four slabs--5%, 12%, 18% and 28% -- over April and May.

“The tax rates will be determined depending on the nature of the item and who uses it," Jaitley said adding that a ‘hawai chappal’ (flipflops) cannot be taxed at the same rate as a BMW car.

The GST Network , the information technology backbone, is also in the process of testing its software and hardware and will open it up for limited trial runs over the next couple of months.

The government has also constituted 10 working groups to look into industry-specific issues to ensure a smooth transition.

Jaitley said the government was trying to convince the council to bring real estate and petroleum products under GST’s ambit but stressed that any decision will be taken by consensus and not by a vote.

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