Modi government open to Congress demand, tax rate may be put in GST law

NEW DELHI: The government could look at incorporating the goods and services tax (GST) rate in the legislation pertaining to it rather than the constitutional amendment that will pave the way for the long-awaited levy, in a possible compromise with the opposition Congress. Prime Minister Narendra Modi has said that GST will be rolled out as scheduled next year and has reached out to predecessor Manmohan Singh and Congress president Sonia Gandhi to try and ensure it gets parliamentary approval in the little time that’s left.
The government wants to roll out GST by April 1, 2016, a deadline that will be missed if Congress doesn’t lend its support. The government needs Congress support to pass the constitutional amendment bill in the Rajya Sabha where the ruling National Democratic Alliance lacks a majority. It’s hopeful of ironing out issues and reaching an agreement with the opposition after the meeting Modi had with Singh and Gandhi.

Congress wants an 18% cap on tax in the constitutional amendment bill, which the government is opposed to on the ground that this will make the levy inflexible—any change will then need another alteration in the constitution. The compromise option that the government could look at is to put the cap in GST law that will be moved after the constitutional amendment is approved. The government also has an open mind on the 1% tax proposed on inter-state sales, which the Congress wants dropped. There could be more negotiations to arrive at a deal after the contours are thrashed out.



“Putting rates in GST legislation is doable....The GST council will decide it,” said a government official. The government has already awarded the contract to build and operate the IT systems for the GST to Infosys, making it clear that it is keen to push ahead with the reform. The GST seeks to replace excise duty, service tax, value added tax, entry tax and octroi with a single levy, and in the process create a unified national market in the country. The Constitution amendment bill essentially aims to empower states to tax services and the central government to tax goods at retail stage besides creating the GST council that will set the rates. After passage of the Constitution amendment bill, the central government and states have to come out with central and state GST laws. At present, rates are enshrined in the central excise law and can be raised or reduced by notification within the approved cap.

Putting the rate in Constitution implies that it would need a constitutional amendment each time it is to be revised and states may find it difficult to agree to this. Tax experts favour putting it in the GST law. “Freezing the GST rate in Constitution limits the flexibility of the executive in amending the rates if a situation so demands. The GST council is a constitutional body with due representation of the Centre and states and should be allowed to take a decision on the rates,” said Bipin Sapra, partner, EY. Moreover, in effect GST will not have a single rate. Precious metals will attract the lowest rate of about 1%, while the so-called sin taxes will be higher than the median.

Therefore, capping it at 18% in the Constitution may not be feasible. The government itself is keen on keeping the GST rate at 16-18% to ensure that it doesn’t pinch consumers on the services side. At present, services are taxed at 14.5% which will rise to the GST rates once the new levy is rolled out. The third demand of the Congress relates to having a dispute settlement mechanism in the bill. The UPA government’s original bill had proposed setting up of a GST Dispute Settlement Authority.

But the parliamentary standing committee did not favour the idea saying that the authority would have overriding powers over Parliament and state legislatures. Since, states were also strongly opposed to a judge heading this body, the UPA itself decided that GST Council would decide the modalities of dispute resolution. A number of other opposition parties also do not support the latest Congress view on the dispute resolution mechanism.

ET View:

A GST Cap in the Constitution is Sensible

That is a given. The GST rate, in any case, will have to be prescribed in the law to be in place after the amendments to the Constitution. The whole idea of setting an 18% cap in the Constitution is to ensure that states do not jack up the rate to earn more revenues. This will only push up retail prices and hurt consumers. States would, of course, be free to set any rate below 18%. There can be some leeway on the final rate to be prescribed, if at all. A cap will also turn the government’s focus on widening the base to curb tax evasion and raise more revenues. The 1% inter-state tax is plain regressive, and must go.