Cabinet drops 1% additional tax from GST Bill

IT WAS ALSO DECIDED TO FULLY COMPENSATE STATES FOR 5 YEARS ON POTENTIAL REVENUE LOSS AFTER THE NEW SYSTEM KICKS IN

India inched a step closer to a nationwide Goods and Services Tax (GST) with the government agreeing on Wednesday to drop the contentious 1% manufacturing tax and to fully compensate states for five years for potential revenue losses after the new system kicks in.

The Union Cabinet, headed by Prime Minister Narendra Modi, approved these changes a day after finance minister Arun Jaitley met state finance ministers to iron out glitches in the tax reform measure that has remained stuck in Parliament for want of political consensus.

“The amendments to the GST Constitutional Amendment Bill have been cleared,” a top official said after the meeting of the Cabinet meeting.

In the Bill passed in the Lok Sabha in May last year, the Centre had proposed 100% compensation for first three years, 75% and 50% for the next two years. However, the select committee of the Rajya Sabha has recommended 100% compensation for probable loss of revenue for five years.

In the meeting on Tuesday, states pressed for a stronger legal assurance on compensation in case of revenue loss after migrating to GST.

States want 100% compensation for the first five years and wants this specified in the main law through “fool proof ” wording in the Constitution Amendment Bill, which the Cabinet has now approved.

The government has also agreed to drop the so-called “entry tax” or “manufacturing tax” of 1%, proposed to protect revenues of producing states like Maharashtra, Gujarat or Tamil Nadu.

The Congress has been pressing for scrapping this levy arguing this will distort the system.

The latest moves have raised hopes about the bill’s passage in the Rajya Sabha as early as next week.

Once adopted, GST will change India’s indirect tax structure by replacing a string of central and local levies such as excise, value added tax and octroi with a single unified tax and stitch together a common national market.

The Congress’s other two demands—capping the GST rate in the Constitution Amendment Bill and a Supreme Court judge headed dispute resolution body has not been accepted yet.

The Cabinet has approved changes in the Constitution amendment bill specifying that any dispute between states and the Centre will be adjudicated by the GST Council, which will have representation from both the Centre and states.