Ending A decade-old wait for the goods and services tax (GST) reform, Parliament Wednesday gave its approval to a Constitutional amendment on introducing a single indirect tax regime across the country.
The boldest tax reform since the opening up of the economy 25 years ago was made possible by a rare political consensus that saw every party, barring the AIADMK, lending its support to the Constitution (122nd Amendment) Bill, 2014 in Rajya Sabha.
All 203 members present in the House voted in favour of the legislation which, being a Constitutional amendment, required the support of at least two-third of members present and voting with the condition that the total support must not be lower than a simple majority in the 244-member House.
Prime Minister Narendra Modi hailed the passage of the GST Bill. “This reform will promote Make in India, help exports and thus boost employment while providing enhanced revenue. I would like to add that GST will also be the best example of cooperative federalism.
Together we will take India to new heights of progress… We continue to work with all parties and states to introduce a system that benefits all Indians and promotes a vibrant and unified national market,” he said in a message posted on Twitter.
Earlier, moving the Bill in the Upper House, Finance Minister Arun Jaitley said “GST is one of the most significant tax reforms in the history of India” and the Bill had been brought to the House after a “broad consensus” with parties.
Lok Sabha had already passed the Bill which seeks to replace multiple taxes levied by the Centre and states such as excise, value added tax, octroi and sales tax with one uniform tax that will be shared by both states and the Centre. But now that Rajya Sabha has made a few amendments, Lok Sabha will have to pass it again.
“The merits of the system itself are that it will convert India into one uniform economic market with a uniform tax rate, bring about seamless transfer of goods and services across the country, enable us to check evasion and, therefore, enlarge revenue, as far as the Centre and the states are concerned,” Jaitley said, adding “many economists and analysts believe this will also give a boost as far as growth rates in the country are concerned”.
The Bill got wholehearted support of the main Opposition Congress which, otherwise, has been engaged in a bitter confrontation with the government inside and outside Parliament on a range of issues.
The Congress led-UPA government of Manmohan Singh first proposed the GST in the 2006 Budget and had brought it as a Bill in 2011, which could not be passed. The breakthrough came in a series of backroom political meetings in which the government agreed to address some of the key concerns.
To bring the Congress on board, the government last week cleared changes in the Bill including doing away with the additional 1 per cent tax by producing states and compensating all states for any revenue loss in the first five years post the GST rollout. The government did not, however, accede to the main Congress demand of specifying the GST rate in the Constitution itself.
Congress leader P Chidambaram, who as Finance Minister had proposed the GST in 2006, said his party was never opposed to the “idea of GST”.
“In fact, the country is ready to embrace the idea of GST. We had opposed it (in recent past) because we thought it was possible to have a more perfect Bill (than the one without the agreed amendments)… But there can never be a perfect Bill,” he said.
Chidambaram said his party still had a few issues with the structure being proposed by the government, especially with the fact that the standard rate of GST had not been specified. He said a report by the Chief Economic Advisor had suggested a standard rate in the region of 18 per cent, and the Congress party fully agreed with that.
The government, he said, probably was in favour of a higher rate of taxation and that was the reason why it had not yet spelt it out. He warned that a higher rate could invite a backlash from the people.
“GST is an indirect tax. An indirect tax, by definition, is a regressive tax. Any indirect tax falls equally on the rich and the poor… that is why, the world over, the trend is to keep indirect taxes as low as possible… the taxes that fall more on the rich and less on the poor are income tax and corporate tax. Those are the taxes which must be the principal source of revenue for the government,” Chidambaram said.
He said the Congress demand to cap the standard rate at 18 per cent and include it either in the Constitutional amendment itself or in one of the enabling legislation that is to follow in November was to ensure that the executive was not able to change this rate without seeking the approval of Parliament.
“Today, the excise duty can be changed by the whims of the executive… customs duties are changed by the whims of the executive. But the income tax is not changed by the whims of the executive because it is enshrined in law… A rate must only be changed with the approval of Parliament,” he said.
“In the name of the people, I ask you to keep this rate at the rate recommended by your CEA (Chief Economic Advisor), namely, the standard rate should not exceed 18 per cent. I know you are not incorporating it in the Constitutional amendment Bill… but three months later, when you come back with the GST Bill (another enabling legislation), you must mention a tax rate,” Chidambaram said, underlining that his party will campaign throughout the country and lobby with other political parties to ensure that this rate is not more than 18 per cent.
Replying to the discussion later in the evening, Jaitley said that many states felt that coming down to 18 per cent from the present tax rates which add up to between 27 and 30 per cent was too steep a descent, too quickly. He said the report of the CEA had not recommended an 18 per cent rate but a band between 16.9 and 18.9 per cent.
Jaitley pointed out that the CEA’s report was based on data of 2013-14 and it did not take into account the compensation that the Centre had agreed to pay to the states which fear loss of revenue in the initial few years.
“If you add these two factors, the band suggested by the CEA goes up higher,” he said.
The Finance Minister said the government, in consultation with the states, would try for the “most reasonable rate”. “This rate, as compliance (to GST regime) increases, will progressively come down,” he said.
As the next step, the Centre has to enact two laws, one on the creation of Central GST (CGST) and another on Integrated GST (IGST). The state governments, on their part, have to pass a legislation on creation of state GST.
Chidambaram, and almost every other member from non-NDA parties, also demanded an assurance from Jaitley that the two Bills would not be categorised as money Bills to avoid voting in Rajya Sabha where the government does not have majority.
Jaitley, however, did not give any such assurance, saying the Bill was yet to be drafted and the state governments were yet to make recommendations in this regard.
AIADMK members walked out of Rajya Sabha before voting began.
The electronic voting system provided some amusement at the end as the number of votes kept changing during the clause-by-clause examination of the Bill.
When the Bill was introduced, the electronic board showed 197 members in support and no one against. With the doors already having been closed, subsequent voting on separate clauses of the Bill showed varying numbers of MPs — 200, 201 and 203 — supporting, while those against remained zero.
The changing figures prompted Congress member Anand Sharma to remark that four additional people had walked in through the doors.
The Bill was taken to have been passed with 203 members in support and no one against.