NEW DELHI: Indian Finance minister Arun Jaitley introduced the much awaited bill in Lok Sabha to amend the Constitution for introduction of goods and services tax (GST), which he described as the biggest tax reform in Independent India.
It raised the prospects of an ordinance to amend the insurance Act in case opposition parties don’t let the government discuss the second bill that NDA is trying to push in the current session of Parliament.
“It is expected that introduction of GST will foster a common and seamless Indian market and contribute significantly to the growth of the economy,” the finance minister told reporters, adding that the government is planning a switch to GST from April 2016. The bill, finalized after a week of intense consultations with the states, addresses most of the concerns including allowing the states to tax petroleum products, which accounts for close to half the revenue for some of them, till they decide. Alcohol for human consumption is the only item that is being kept out.
At the same time, Jaitely promised that the Centre will compensate states for the losses incurred by them after the introduction of the tax to create a unified market. In addition, service tax will also be included in the pool. Although the finance ministry does not expect significant loss due to a more robust system, it has agreed to provide 100% compensation during the first three years, 75% in the fourth and 50% in the fifth year.
States such as Gujarat, Maharashtra and Karnataka that stand to lose due as the final tax will be collected by the state in which the goods are being consumed have been given the option to levy an additional tax for two years.
The Constitution amendment bill provides for giving states and the Centre simultaneous powers to legislate on GST and also set up a GST Council with the Union FM and state ministers as members. The Centre will have a one-third say, while the states together will have two-thirds. Any decision will need the backing of 75% of the members. “The states will have a majority and the Centre alone can’t push a decision. The two have to decide together and no one can decide arbitrarily,” Jaitley said.
“GST will simplify and harmonize the indirect tax regime in the country. GST will broaden the tax base, and result in better tax compliance due to a robust IT infrastructure. Due to the seamless transfer of input tax credit from one state to another in the chain of value addition, there is an in-built mechanism in the design of GST that would incentivize tax compliance by traders. It is thus, expected that introduction of GST will foster a common and seamless Indian market and contribute significantly to the growth of the economy,” the finance ministry said in a statement.
Once GST is in place, central taxes such as central excise duty, additional excise duties, service tax, additional customs duty (CVD) and special additional duty of customs (SAD) will be subsumed into it. Similarly, state-level taxes such as VAT/sales tax, central sales tax, entertainment tax, octroi and entry tax, purchase tax and luxury tax will be subsumed in GST.
Both Centre and States will simultaneously levy GST with the latter levying and collecting Central Goods and Services Tax (CGST). Similarly states will levy and collect the State Goods and Services Tax (SGST) on all transactions within a state. The Centre will levy and collect the Integrated Goods and Services Tax (IGST) on all inter-state supply of goods and services. There will be flow of input tax credit from one state to another and proceeds of IGST will be apportioned among the states.
While GST rates will be uniform across the country, to give some fiscal autonomy to the states and the Centre, there will a provision of a narrow tax band over and above the floor rates of CGST and SGST.