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Government may scrap 1% inter-state tax to move closer to GST
December, 04th 2015

India may have moved closer to the muchawaited goods & services tax (GST) with the government and Opposition finding some common ground on crucial elements of the proposed levy. This follows PM Narendra Modi and the ruling Bharatiya Janata Party reaching out to Congress in the search for a compromise to break the stalemate on GST. The government is likely to concede the Congress demand to do away with the 1% tax on interstate sales, which was proposed to compensate manufacturing states such as Maharashtra, Gujarat and Tamil Nadu that fear loss of revenue in the new indirect tax regime. Government sources, however, indicated that capping the GST rate in the Constitution -- as demanded by Congress -- is not acceptable.

Though the Centre is not willing to cap the GST rate in the Constitution, government sources said alternatives such as including it in the law related to this could be looked at. Chief Economic Adviser Arvind Subramanian is likely to submit the report on a revenue neutral rate for GST on Friday. This will provide a crucial input to the GST Council in settingrates. The government, however, is keen to keep rates reasonable so that any inflationary impact of the tax is contained. The Modi administration is also keen to take all stakeholders on board and will not go ahead without that, sources said. For its part, Congress is unlikely to press for changes in the composition of the GST Council and go with what the Centre has proposed in the constitution amendment Bill that's needed to allow states to tax services and the Centre to tax goods at the retail stage

The constitution amendment Bill will also lead to the creation of the GST Council. Congress had sought a three-fourths vote in the GST Council for states as opposed to two-thirds proposed now. The latter had in fact been finalised by the previous Congress-led United Progress Alliance government. "We also want a good GST... we are willing to take it up," said a senior Congress leader, adding that the party had an open mind on its demand that the rate be provided in the constitution amendment Bill ..

The government is open to the idea of including the cap in the GST law, which can be more easily changed than the Constitution.

The proposed GST seeks to replace excise duty, service tax, value-added tax, entry tax and octroi with a single levy and create a unified national market in the country from April 1, 2016, a deadline that may be missed if Congress continues to oppose the Bill in the Upper House where the BJP-led National Democratic Alliance does not have the requisite numbers ..

The government has awarded the contract to build and operate GST's IT backbone to Infosys, reflecting its keenness to implement the tax reform by the deadline. GST, touted as the most comprehensive reform of indirect taxes since Independence, could lift the country's GDP growth by 1-2 percentage points, it has been estimated.

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