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GST clears the Lok Sabha hurdle; to be brought before the Rajya Sabha now

07 May 2015 Evaluate

Moving a step forward in implementing the biggest tax reform in decades, the Goods and Services Tax (GST) cleared a key hurdle in Parliament, when it was passed in Lok Sabha. The main opposition, Congress walked out of the Lower House after the government turned down its demand to send the bill to a standing committee, making a cakewalk for the Lok Sabha approval for the Constitution (122nd Amendment) (GST) Bill, 2014. The bill is likely to be brought before the Rajya Sabha on Thursday before the budget session ends on 13 May, where the Bharatiya Janata Party-led NDA is in a minority, with just 62 members in a 245-member house.

Finance Minister Arun Jaitley hailing the bill as the biggest reform in India since Independence in 1947, said that it could add up to 2 percentage points to the growth of Asia's third-largest economy. Once enacted, all goods and services with the exception of alcohol, will come under GST’s ambit. Several compromises have been made on the Bill, the GST won’t apply to alcohol and petroleum products will be taxed separately at first, while the manufacturing states will be allowed to levy an additional tax of 1% on supply of goods.

A government think-tank had proposed the tax rate be set at 27%, but in his reply to the debate on the bill, Jaitley conceded that a 27% revenue-neutral GST rate will be very high and indicated that the proposed GST rate will be much lower than the 27% figure that has been mentioned. He further added that “neither the state finance ministers nor the central government are interested in imposing higher taxes on our own people. Therefore, this figure is going to be much more diluted. These are rates that will be decided by the GST council itself.”

GST will replace a multitude of central taxes like excise duty and service tax and state levies such as octroi, sales, value-added, entertainment and purchase taxes and expected to broaden the tax base, sharpen the competitive edge of Indian exports by removing several tax distortions and create a unified national market by removing inter-state barriers to trade. The centre has included a provision in the bill that assures states compensation for five years for losses arising from GST implementation. States will be compensated for 100% of their losses in the first three years, 75% in the fourth year and 50% in the fifth year.

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