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New Cabinet-Approved GST Bill drops 1% Inter-State Sales Tax
July, 28th 2016

The cabinet today cleared changes in the GST Constitutional Amendment Bill, dropping the 1% manufacturing tax and and guaranteeing compensation for any revenue losses states may experience in the first five years of rolling out the proposed indirect tax scheme.

The cabinet, headed by Prime Minister Narendra Modi, decided that the GST Council will adjudicate any disputes that arise between the Centre and states. To this end, the council will have representatives from both the Centre and the states. Since the cabinet and states approve of the amendments, the government is hopeful that the amended GST Bill will pass in the ongoing monsoon session of parliament, which ends on August 12.

The GST Bill, with the changes approved by the cabinet, could come up in the Rajya Sabha as early as this week, but certainly by next week. The changes approved by the cabinet are to the Constitutional Amendment Bill that was approved by the Lok Sabha in August last year. Once the Rajya Sabha approves the legislation, the amended Bill will have to go back to the Lok Sabha again for approval. “The amendments to the GST Constitutional Amendment Bill have been cleared,” a top official said after a Union Cabinet meeting, which was chaired by Modi.

The amendments were taken up by the Cabinet after finance minister Arun Jaitley‘s assurance to states’ finance ministers that the Bill will include a mechanism of compensating states for all the revenue lost for five years. The Bill, in its present form, provides that the Centre will give 100% compensation to states for the first three years, 75% and 50% for the next two years.

However, the report from the Select Committee of the Rajya Sabha originally recommended 100% compensation for probable loss of revenue for five years. As per the amendments, the Centre will now constitutionally guarantee states any loss of revenue from the GST subsuming all indirect taxes, including VAT, in the first five years of introduction. By doing away with the 1% inter-state tax over and above the GST rate, the government has met one of the three key demands that the Congress made to block the Bill in the Upper House.

The other demands of including GST rate in the statute and a Supreme Court judge-headed dispute resolution body have not been accepted. It remains to be seen if Congress will support the Bill after these partial changes. There is a talk of mentioning the GST rate in one of the two supporting legislations that need to be passed after the Constitution is amended, a move that may pacify the Congress.

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