The Constitution (122nd Amendment) Bill 2014, intends to amend the Indian Constitution to confer concurrent tax powers on the Union as well as the States and Union territories to make laws for levying Goods and Services Tax (GST).
The objective of this amendment is to replace a plethora of indirect taxes being levied by the Central Government and various State Governments with a single GST and create a common national market for goods and services.
Under the proposed amendment, alcohol for human consumption has been exempted and with regard to five petroleum products (petroleum crude, high speed diesel, petrol, natural gas, aviation turbine fuel), GST will apply on a later date.
The amendment also envisages the setting up of a GST Council that will recommend rates of tax, period of levy of additional tax, special provisions to certain states, apportionment of Integrated GST, the threshold limit of turnover below which goods and services may be exempted from GST, etc. Furthermore, under this the central government is empowered to impose an additional tax of up to 1 percent on inter-state supply of goods for two years or more. This tax will be given to states from where the supply originates.
Even though the constitutional amendment has been passed by the Lok Sabha in May 2015, it is still pending in Rajya Sabha where the ruling dispensation does not have the requisite majority. Besides, differences between the ruling and opposition parties have resulted in a deadlock.
The lack of consensus between the ruling coalition and the principal opposition party is around the following three points:
Scrapping of 1 percent additional tax on inter-state sales: The additional 1 percent tax in my opinion goes against the very basic idea of GST which is aimed at a common unified market. The panel headed by Chief Economic Advisor set up by the Central Government has also recommended removing this additional one per cent tax on inter-state sales over and above the GST rate.
Providing for an independent Dispute Resolution Mechanism: As per the proposed amendment, the GST Council which is a formal grouping of the Centre, and States will take decisions on all operational aspects of GST by way of voting. While the Centre has been given 1/3rdvote, all the states together will have 2/3rd vote and all resolutions have to be passed by a 3/4th majority of this council. When the previous government introduced the constitutional amendment for GST (115th Amendment), it provided for a three member Dispute Settlement Authority (DSA) headed by a judicial member to settle disputes between states or between states and the Central Government on GST with an appeal provision to the Supreme Court. The present constitutional amendment does not provide for a separate dispute settlement body on the basis of the recommendation of the parliamentary standing committee on finance.
In my opinion, it is always a good idea to have an independent three member DSA which consists of at least one judicial member who may be a retired Supreme Court judge. The mandate of the DSA is to adjudicate any dispute referred to it by a State Government or Central Government arising out of a deviation from any of the recommendations of the GST Council that results in a loss of revenue for the governments or anything that affects the harmonised structure of GST. This means that there is virtually no scope for any unnecessary intervention by DSA and whatever be the decision of DSA, the ultimate control over finances will always be with Parliament and state legislatures.
Constitutional Cap on the rate of GST: The demand of the principal opposition party to provide for 18 percent constitutional cap on GST rates is opposed by the government on the ground that putting a constitutional cap on rates would make the system very rigid as it is extremely difficult to amend the constitution in case of an emergency. I feel that there should be some cap with respect to the GST rates, but it should not be made part of the constitution. The constitutional rate cap can be inserted by aligning it to the provisions dealing with financial emergency under Article 360 or it can be framed as a cap on indirect tax based as a percentage of GDP. Instead, the maximum rate can be put into the GST Act itself and if this is done then changing the rate to tackle any emergency is easier as it would only require approval from both houses of parliament with a simple majority.
However, governments should also understand that GST rates must not be increased frequently unless there are some very important reasons for doing so.
Even if our proposed GST model is not perfect because of its exclusion of certain items, the urgent need of the hour is to get the GST Amendment passed by Parliament.
(The author is professor, Indian Institute of Management, Calcutta. Views are personal)