Bill tabled, India moves closer to GST regime

The government on Tuesday moved closer to introducing the much-awaited goods and services tax (GST) with finance minister Pranab Mukherjee tabling the Constitution Amendment Bill in Parliament.

Introduction of GST has been a dream of the UPA government, keen to usher in indirect tax reforms in the country.

Hitherto, states have been disapproving of the GST roadmap over revenue sharing and over the power to increase or decrease taxes being vested in the Centre, among other things.

Despite the disagreements, Mukherjee had announced in his budget speech that the bill would be introduced in Parliament in the ongoing session.

A step forward was taken last week when the fourth draft of the Bill was approved by the Union Cabinet, chaired by Prime Minister Manmohan Singh. The three earlier drafts were rejected by States citing autonomy issues.

GST seeks to subsume indirect taxes such as central excise duty and service tax at the central level and value added tax (VAT) at the state level, while also subsuming some other local levies.
GST is expected to result in a simplified tax system and uniform pricing of products across the country.

Petroleum products and alcohol are likely to be outside the ambit of GST.

Further, the District Councils and Regional Councils are empowered to levy entertainment tax on entertainment and amusement.

The present regime of indirect tax has two components —- one levied by the Centre (ie central excise and service tax) and the other levied by the States (ie value added tax), implying that both will need to have concurrent powers to tax a goods or service.

At present, the Centre can impose taxes on goods (at the factory gate) and on services, while the States can only tax goods on sale. States do not have the power to levy tax on services.

It was therefore required to take the first step by facilitating a Constitutional Amendment Bill and allow the Centre and States to levy tax simultaneously on goods and services.

The bill empowers Parliament to levy GST on interstate trade and imports.

The bill has proposed that a GST Council be formed through a presidential order for taking decisions on all important matters. GST Council would be the main body for taking decisions on key issues like fixation of tax rates, exemption list, threshold limit, and any other matter related to GST.

In addition, composition of the GST Dispute Resolution Authority, proposed to be a part of the Constitution Amendment Bill, will be decided by Parliament.

The Centre has not discussed the fourth draft with the Empowered Committee of State Finance Ministers as it would be first considered by the Standing Committee of Parliament, which comprises members of many political parties.  

After its passage in Parliament, the bill would have to be cleared by not less than half of the state legislatures. Further, each state would need to approve the Bill with two-thirds majority.

This would be a crucial step as well as a hurdle, given the past rejections by the states fearing loss of discretionary fiscal powers.
It remains to be seen whether the government can meet its April 2012 deadline for rollout of GST.

The writer is tax partner, Ernst & Young. Views are personal.