The 247-member National Reform Council rejected the draft charter by 135 votes to 105, with seven abstentions.
As a result of the draft charter being voted down, the National Reform Council's term will end and a new 21-member constitution drafting committee will be set up.
It will have 180 days to draft a new charter.
After the new drafting committee finish its work, a new draft constitution will be put for a public referendum in four months.
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The junta later appointed the 247-member National Reform Council to help write a new constitution.
The military government retains its substantial powers until a new constitution is drafted. The rejection would delay Thailand's transition to electoral democracy.
The government had previously said elections could take place in mid 2016, but analysts now say elections aren't likely until 2017.
The rejection of the draft charter was expected following heavy lobbying during the past week, reportedly by NRC members closely linked to the military, Bangkok Post said.