Cabinet Drops 1% Additional Tax on Inter-State Sales From GST Bill

The Union Cabinet on Wednesday cleared changes in the Goods and Service Tax (GST) Constitutional Amendment Bill, dropping the 1 percent manufacturing tax and providing guarantee to compensate states for any revenue loss in the first five years of rollout of the proposed indirect tax regime, as reported by PTI.

The Cabinet, headed by Prime Minister Narendra Modi, decided to include in the Constitutional Amendment Bill that any dispute between states and the Centre will be adjudicated by the GST Council, which will have representation from both the Centre and states.

With states on board and the Cabinet approving the amendments, the government is hopeful of passage of the long-pending GST Bill in the ongoing monsoon session of Parliament, which ends on August 12. The GST Bill, with the changes approved by the Cabinet, could come up in the Rajya Sabha as early as this week, but certainly by next week.

‘Welcome Move’, Say Tax Experts

Jigar Doshi, Partner, Sudit K. Parekh & Co comments on the background of the 1 percent additional tax and the impact of its removal. He says “In a welcome move from the government, the Cabinet (after accepting the suggestions of State Finance Ministers) has finally agreed to do away with the distortionary 1 percent additional tax. This additional tax was initially introduced in the 122nd Constitutional Amendment Bill (CAB) to placate those manufacturing states who had high CST revenues. Unlike the normal GST, which is proposed to be a destination-based tax, the additional tax was an origin based inter-state tax on goods, meant to replace the current CST tax for a temporary period of two years.
Being a tax of compensatory nature, it was understood that no input tax credit paid on this tax would’ve been allowed against any kind of output liability, thus leading to tax cascation (like in the case of CST tax). Thus, quashing of additional tax will substantially iron out tax cascation problems from across the value chain of business in the GST regime. This decision will certainly be a relief to traders and manufacturers who have inter-state supplies of goods. Also those businesses with multi-state presence, who have stock transfer transactions from one state to another, should also stand to benefit from this move if GST would have been made applicable eventually on stock transfers.
Apart from the above, the cabinet has also agreed to reword the compensation mechanism in the CAB to give a “fool proof” assurance to the states that the Centre will certainly provide 100 percent compensation for state tax revenue losses for five years.
Acceptance of these suggestions from the Empowered Committee sends a very positive signal to other political parties. The government has now made clear that it is making active efforts to build consensus among all parties in Parliament. The government has already walked half the way and intends to build consensus by making sure that every political party is on board for the GST regime. A GST survey recently conducted by a leading newspaper company, found that the government has already built up to 55-60 percent support for GST in the Rajya Sabha. And now this positive decision will only go on to strengthen GST Bill’s position in the Rajya Sabha which will be hopefully listed for a debate in the next week.”

Also Read: GST Bill: Centre, States Agree on Lower Tax Rate, Compensation For States