After a prolonged wait, the Cabinet on Wednesday approved the Constitutional Amendment Bill on the Goods and Service Tax (GST), paving the way for the legislation to be introduced in the current winter session of Parliament, which will end on December 23.
The Bill is learnt to have sought to include petroleum within GST, but the Centre would be allowed to impose excise duty on it and the states value-added tax (VAT) for initial years.
Petroleum was one of the contentious issues between the Centre and the states and had delayed the Bill.
States wanted petroleum products excluded from GST as they earn over 50 per cent of their revenues from this head. However, the Centre wanted to keep it within GST so that the chain of providing reimbursement for input taxes is not broken.
The other contentious issue was compensation to states for revenue loss after GST is introduced. Wary after the Centre’s unkept promises on compensation for a cut in the Central Sales Tax (CST) rate, the states wanted to include GST compensation within the Bill. They also asked the Centre to promise that GST compensation would be provided for five years.
The Bill, it is learnt, contains the compensation for five years, but on a tapering basis.
This means the Centre will provide full compensation for the revenue loss for the first three years and then progressively reduce it for the next two years.
The third issue, on which the Centre and the states were not on the same page, was the entry tax imposed by local bodies. States such as Punjab wanted it to be kept out of GST, but the Centre was keen on subsuming it within the new tax system. Ultimately, the Bill has subsumed the entry tax within GST.
“This is a welcome move because petro products and entry taxes have been subsumed in the GST. The introduction of this reform will further encourage the industry and give confidence to investors,” said Prashant Deshpande, senior director for Deloitte in India.
The Bill went to the Cabinet after Finance Minister Arun Jaitley managed to build a broad consensus with the empowered committee of state chief ministers late on Monday.
Even if the Bill is tabled in the current session of Parliament, it would not be before 2016-17 that it could be rolled out.
Once the constitutional amendments are passed by both Houses of Parliament by two-third majority, half the state legislatures will have to ratify them.
After that the actual GST Bill will be tabled to be discussed and passed in both Houses of Parliament. State legislatures will also have to table and pass their own state GST Bills.