Constitutional Amendment Bill on Goods and Service Tax (GST) to be introduced in forthcoming Budget Session

Background- The Empowered Committee of State Finance Ministers (EC) met on 11 February 2011 to discuss the third draft of the Constitutional Amendments required for introduction of GST (the Third Draft) and the compensation plan for loss of revenue on account of reduced Central Sales Tax (CST) rate. Later during the day, the EC also met the Union Finance Minister (FM).

As a precursor to the meeting, the Union Cabinet on 10 February 2011 approved an ad-hoc compensation of INR 7029 crores to States for the loss incurred by them during 2010-11 on account of reduction in CST rate. While the precise guidelines and quantum of CST compensation to States have not been finalized, this is seen as an attempt by the Government to provide an impetus to the GST implementation process.

Highlights of the Third Draft and the way-forward

The key difference in the second Constitutional amendment draft released on 12 August 2010 (the Second Draft) and the Third Draft circulated to EC on 29 January 2011 is with respect to Article 279A on formation of the GST Council.

While the Second Draft had proposed formation of the GST Council by a Presidential order, the Third Draft has proposed to create a GST Council through an Act of Parliament.

Further, the Second Draft laid down the structure of GST Council with Union FM as Chairperson, Union Minister of State in charge of Revenue as Member and Finance Minister of States as Members, the Third Draft only provides that GST Council shall consist of representative of Union and each of the States.

Media reports suggest that out of the 26 States present in the meeting, 16 States supported the revised draft, while 10 States opposed it. However, post meeting with the EC, the FM has said that the Third Draft would be tabled in the Parliament in the latter half of the Budget session, which starts on 21 February 2011.

Subsequent to the above, the Constitutional Amendment Bill would be referred to the Standing Committee of the Parliament. Once the said Bill is reviewed by the Committee, the Government may be in a position to get it passed in the Winter Session of Parliament. This would require assent of two-thirds of the Members present and voting and one-half of the total Members of the Parliament. Further, the Bill will then have to be ratified by the legislatures of at least half of the States.

Conclusion

The Third Draft has introduced flexibility on key concern areas of the States, to be decided subsequently through negotiations. The Central Government seems to have taken a positive stride and the first hurdle could be passed by tabling the Constitutional Amendment Bill in the Budget session.

Where the Bill is introduced in the Parliament, the debate on the Constitutional Amendment could become a National debate, allowing the key stakeholders to participate in the implementation process of this crucial indirect tax reform.

While, this is certainly a positive development, the challenge before the Central Government is to bring consensus between all Parties for a successful outcome. If the Constitutional Bill is passed in the Winter Session, then implementation of GST on 1 April 2012 certainly looks possible.

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