GST to reforms, Centre accepts panel recommendations

Finance ministry is not in favour of giving an option to states to stay out of GST and has already made its decision clear

After failing to push through some key reforms despite an economic crisis and putting the Direct Taxes Code on the backburner, the government is pinning hopes on a much-awaited tax reform — the Goods & Services Tax (GST).

The finance ministry has accepted almost all the recommendations of the standing committee on Finance on the Constitution Amendment Bill for GST and is likely to seal a deal with the states later this month.

The empowered committee (EC) of state finance ministers, which also comprises representatives from the finance ministry, would meet on September 19 to discuss the Constitution Amendment Bill that paves the way for the introduction of the GST.

IN A NUTSHELL

• entre accepts all recommendations that are part of Constitution Bill
• Reservations exist on some suggestions, like the one on compensation mechanism
• Floor rate and ceiling in GST, but options to states to stay out not given
• States may agree to most recommendations, except subsuming entry tax
• Bill may be tabled in winter session if states give their go-ahead.

The EC’s recent visit to South Africa to study the GST model of the African country might also be discussed in the meeting.

In line with the recommendations of the standing committee, the finance ministry has made changes to the Bill, which has been vetted by the law ministry.  It, however, does not support some recommendations of the committee, such as the automatic compensation mechanism wherein a fund might be created under the GST Council and GST design. But as these are not part of the Constitution Amendment Bill, a consensus with states can be built up later.

The ministry is also not in favour of giving an option to the states to stay out of GST and has already made its decision clear to the states. The standing committee had suggested that like the Value-Added Tax, the states might also be given flexibility in joining GST.    

A finance ministry official, who did not wish to be identified, told Business Standard:  “The Standing Committee report is very progressive. We have accepted all the recommendations which pertain to the Constitution Amendment Bill. More than 80 per cent of the issues with states have been resolved.”

The Standing Committee, headed by Bharatiya Janata Party leader Yashwant Sinha, had suggested keeping a floor rate and ceiling for GST, taking decisions in the GST Council by voting and not consensus, and removal of a provision to set up a Dispute Settlement Authority, among others.

The EC is also likely to put its stamp on many of the recommendations of the Standing Committee, possibly barring entry tax.

The Parliamentary panel had suggested subsuming entry tax in GST, instead of leaving it to be collected by different local bodies. The Centre would assure the states that if entry tax is subsumed in GST, their revenue neutral rate would be adjusted accordingly.  

After reaching a consensus with the EC on the Bill in its upcoming meeting, the finance ministry would take it to the Cabinet for introduction in the winter session of Parliament.

The passage of the Constitution Amendment Bill in Parliament would be a huge step forward and could facilitate its early introduction when the new government comes into power.

The Bill would have to be passed by a two-third majority in Parliament. Then, it would have to be ratified by legislatures of at least half the states.

The next step would be to table the GST Bill in Parliament, while states would introduce the legislation in their respective Assemblies.