Changes to LS Bill on GST to reduce cascading effect of 1% added tax

Amendments also include extending full compensation to the states for the first five years

The government on Tuesday moved in the Rajya Sabha a Bill with all the changes, suggested by a select panel of the Upper House, in the constitution amendment Bill passed by the Lok Sabha. The changes came out with a mechanism to reduce the cascading effect of the proposed up to one per cent cess over goods and services tax (GST) by limiting it to only interstate sale of goods against the earlier provision of interstate movement of goods.

Amendments also included extending full compensation to the states for the first five years, instead of the earlier provision of three years to be reduced in the fourth and the fifth year. The Bill, passed by the Lok Sabha, had a provision that the compensation would taper off to 75 per cent of losses in the fourth year and 50 per cent in the fifth year. However, the new provision has to be approved by the proposed GST council, to be represented by the Union finance minister and state finance ministers and then it would be incorporated in a law.

The Bill, tabled in the Rajya Sabha, says, "Parliament may, by law, on the recommendation of the goods and service tax council provide for compensation to the states for loss of revenue arising on account of implementation of goods and service tax for a period of five years." The provision is an exact copy of the suggestions by the RS panel.

The constitution amendment Bill, passed by the Lok Sabha earlier, has a provision of one per cent additional tax over GST for interstate supply of goods to help producing states, as GST is a destination-based tax. However, this drew flak from industry and experts, who claimed it would lead to a cascading effect.

To balance the interests of the two sides, the Rajya Sabha panel recommended the proposed GST law should say that interstate movement of goods would be taxable only if it is without a monetary consideration, which meant inventories transfer within the same company would not draw this tax.