Failed tea party: why Govt's been advised to go against promises made on GST

QUICK PILL

The new regime

• The NDA govt is trying to introduce a Goods and Services Tax to replace all indirect taxes

• Lok Sabha passed the GST Bill last year, but in the Rajya Sabha, the NDA is facing a number crunch

The advice

• Congress wants the govt to fix the rate for GST at 18%

• However, experts have advised the govt not to fix a rate till the Chief Economic Advisor submits a report

More in the story

• Will acquiescing to the Congress\'s demand cost the govt financially?

• How the Congress has arm-twisted the govt on another important issue

The stalemate over the Goods and Services Tax (GST) issue seems to be coming to a conclusion, with most differences between the government and the opposition getting resolved.

The meeting between the NDA leadership and the Congress top brass on Friday, 27 November, is being projected as highly successful and breaking the stalemate, except for one key issue.

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However, on that issue, advisors to the government have said that the demands of the Congress cannot be met in their entirety.

Expert advice

The experts advising the government on the GST matter have told it not to agree to the Congress's demand of fixing the rate of GST at 18% in the Constitutional Amendment for the GST Act, or even in the GST legislation.

According to sources close to the development, the NDA leadership consulted a group of experts after the Friday meeting, and they conveyed that setting the ceiling at 18% may land the government in trouble.

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"The government has been advised that until the panel headed by Chief Economic Advisor Arvind Subramanian submits its report, it should not agree at any rate for GST," a source close to the government told Catch.

Arriving at a revenue-neutral rate for implementing GST is the toughest task for the government. Any wrong calculation can lead to a massive reduction in the government's revenues in the year after the implementation of the new Act.

The NDA govt and the Congress are close to resolving the stalemate over the GST Bill

"The 18% rate is not going to cover the amount lost on higher-taxed items like petroleum products, tobacco, as well as luxury items. The government will have to calculate its revenue at different rates to be able to decide the rate for GST," said the source.

The Congress, which in principal agrees to the need of having GST in the country, has opposed the government's move to keep flexible rates for GST.

The concession

The GST is to replace all the indirect taxes, like excise duty, service tax, cess, CENVAT, octroi and surcharges, to provide a uniform rate of taxation in the country.

However, its implementation could lead to a loss of revenue for manufacturing states as, under a GST regime, all the taxes are to be collected in the states where products are consumed.

Experts advising the govt have told it not to accept Cong's demand for a fixed rate of 18% for GST

To counter this, the government had proposed an additional 1% tax for manufacturing states, until they get revenue neutral. This means a situation where the governments are in a no-loss, no-gain position in terms of indirect tax collection after implementing the GST.

The Congress's opposition to this clause has made the government re-think this provision. The government is now agreeable to the demand of removing this 1% taxation above the rate of GST.

The deadline

The GST Bill was passed in the Lok Sabha last year. However, since the NDA does not have a majority in the Rajya Sabha, it has to depend on consensus with the opposition parties to pass the bill.

Regardless, the government insists it will be able to meet its deadline of 1 April 2016 for the implementation of GST if it gets passed in the ongoing winter session of Parliament.

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