In historic tax reform, Rajya Sabha passes GST Constitutional Amendment Bill

The landmark legislation paves the way for a common market across the country, subsuming a raft of state-level taxes

Close to exactly 60 years after Indian states were reorganised with distinct boundaries along linguistic lines, a new tax reform proposal passed by Parliament today will effectively blur those states’ fiscal borders, creating for the first time a national common market for goods and services.
 
After multiple failed efforts, political parties in the Rajya Sabha on Wednesday finally put aside their differences to arrive at a compromise formula to pass the Goods and Services Tax Constitutional Amendment Bill, which aims to do away with multiple rates of taxation at each state’s level and to replace those with a uniform rate nationwide.

The bill was passed minutes after 9 p.m., after a scheduled five hours of debate ran well over six, with all 197 members present voting in favour of the reform. 

Some of the amendments to the main bill, also introduced by Finance Minister Arun Jaitley, however, had a few dissenters.

The AIADMK had walked out earlier.

Earlier in the day, former finance minister P Chidambaram called for debate on the bill, cautioning against omitting a tax rate which could lead to the judiciary striking down such a legislation. He also described the latest draft as having been clumsily drafted, and again called for a Constitutional cap on the tax rate at 18%.
 
The GST has been hailed as a landmark piece of tax reform by economists, market analysts and corporate houses alike, all of whom hope that the legislation will do away with the often convoluted maze of tax measures imposed by each state on the same goods or services, leading to differential pricing depending on which part of the country one lives in.
 
The tax measure has been held up for years now, after having made its first appearance in Chidambaram’s Budget speech in 2006. It was first introduced in the Lok Sabha by the Congress-led government in 2011 but was held up by the then in Opposition BJP’s recalcitrance. When the party came to power in 2014 with an overwhelming majority in the lower House, it reintroduced the GST proposal in December 2014, only to run into a strong-willed Congress in the Upper House, where it still controlled a majority along with its allies. Additionally, the Bill needed the consent of multiple states that aren’t ruled by the BJP among fears that it would dilute states’ fiscal powers and would erode the federalist principle of the republic.
 
Over the course of this year, most states and opposition parties have come around, especially following a conference of state finance ministers and an inter-state council that helped iron out key differences such as revenue sharing, a revenue-neutral rate, compensation for revenue loss, and the removal of a one per cent additional levy.
 
The government on Tuesday circulated among Rajya Sabha members a list of nine amendments to the Goods and Services Tax (GST) Constitution Amendment Bill, which includes yielding to the Congress demand of scrapping the one per cent levy on inter-state supply of goods.

The passage of the bill was held up for years by political infighting, and its advancement marks a victory for Prime Minister Narendra Modi as he eyes an economic boost for Asia's third-largest economy.

Investors have billed the GST as a "silver bullet" for India's economy that would supplant multiple federal and state levies - a chaotic structure that inflates costs for businesses.

"GST bill passed by upper house is a game changing, path breaking and the most important reform since independence. Look forward to an exciting time ahead. The country is on the way towards double digit growth. Very bullish on scrip called India. A historic, transformational and a game changing move. The whole world would like to participate in the Indian growth story. Feeling bullish.

Industry reaction

Economic boost: "GST holds the potential to boost economic activity substantially, improve the government’s revenue, and help achieve better transmission of prices. It would enable more seamless and efficient crediting of taxes paid on capital goods, which would then become 12-14% cheaper, increasing demand for them, raising investment, and hence, economic growth," said Motilal Oswal, CMD, Motilal Oswal Financial Services Ltd.

The real black money law: Sachin Menon, Partner and Head, Indirect tax at KPMG in India, said: "The GST will hit at the root of black economy, as avenues for generating black money will be reduced to alcohol and real estate. With every transaction need to be mandatorily reported in the GST network, which tracks all reported transaction from source till consumption, it will be difficult to generate black money in a chain of transactions. That sense, GST is the real black money law."
 
Organised sector to gain: Mihir Vora, Director & Chief Investment Officer, Max Life Insurance said: "The passage of the Bill further enhances confidence in India's commitment to economic reforms. While implementation will take a few quarters, the writing is now on the wall - the organized sector will gain at the cost of the informal sector."

He said Max Life was not looking to change its investment strategy much. "We have exposure to logistics, cement, auto etc. companies which may benefit from implementation of the GST," he added.

Heartburn over: Amit Kumar Sarkar, Partner, Grant Thornton India LLP, said: “The GST Constitution Amendment Bill finally sees the light of day after many years of speculation and heartburn. While there are still many steps to introduce GST in India, we remain optimistic that the toughest hurdle is now crossed over. The question around GST is no longer "if" it's coming but now "when" is it coming.”