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Last Updated : Jul 28, 2016 07:47 PM IST | Source: CNBC-TV18

Cabinet approves GST Constitutional Amendment Bill

The Bill will also mention that dispute resolution will be decided by the GST council. The government has also included five years compensation clause for state governments for any loss that they may incur.

In a positive push for the Goods and Services Tax (GST) Bill, the Cabinet today gave green signal to GST Constitutional Amendment Bill.

The Cabinet has removed the controversial one percent manufacturing tax from the Constitutional Bill, which was one of the demands of the Opposition, led by Congress.

The government has also included five years compensation clause for state governments for any loss that they may incur. Earlier, this time period was mentioned as 'up to' five years in the draft GST Bill.

The Bill will also mention that dispute resolution will be decided by the GST council.

Calling the news positive, Rajeev Dimri of BMR Advisors says that while some issues have been resolves, some still exists like the revenue neutral rate (RNR).

However, he adds that since states are been given compensation, they should not be concerned about the rate.

While the move is in the right direction, its further course will depend upon discussion between government and the Congress, says Thomas Isaac, Finance Minister of Kerala.

If the Bill doesn’t see light in the ongoing monsoon session, then GST will only come into effect in 2020, Isaac says.

A select GST panel has drafted a new Bill comprising of above changes. Post this, attempts will be made to push the Amendment Bill to Rajya Sabha.

Below is the verbatim transcript of the discussion with Shereen Bhan on CNBC-TV18.

Q: We are given to understand that the cabinet has now cleared the amendments to the GST Constitutional Bill. Can you take us through what were the assurances given by the Finance Minister in terms of the amendments that would have been moved, we are still awaiting the fine print so do you believe that the 1 percent manufacturing tax for instance would have had to be changed?

Isaac: Most important thing is the wording of the course related to compensation. Their original bill stated that the parliament may by law, may not shall. So, shall has been instituted so that there is certainty that compensation will be paid. An adjective has been added to compensation; full compensation, not some compensation. Finally, third amendment has been that full compensation for five years. I think this is the major change that has come.

Secondly, the destination principle has been completely reiterated by removing that 1 percent additional tax for the producer states. Most of the changes have been in wording rather than very substantial changes.

Q: What was the assurance on the 1 percent manufacturing tax, did the Finance Minister give an assurance that that would be dropped?

Isaac: Since they are going to pay full compensation for five years and they have guaranteed full neutral buoyancy of the revenue, so I think they have been satisfied with that. However, major work is going to come on the basis of constitutional amendment which sets the framework, we will have to now draw up a law which will determine the procedures and details and so on where we will be specifying the revenue neutral rates, the rate structure, kind of classification of commodities for various rates, so, these are the most important elements which are yet to be decided.

So, constitutional amendment passage is only the beginning. Major negotiations are yet to come.

Q: This is the news that we are just getting in at this point in time. So, the 1 percent goes, the compensation clause, the wording has now been changed to ensure that the compensation is guaranteed to state governments and dispute resolution by way of the GST Council. What do you make of the changes?

Dimri: The couple of changes, this 1 percent was more or less a foregone conclusion and I think that is more a formality. About this compensation assurance because language in the original draft was somewhat not as strong as the states would have liked and that gives them a better assurance because now there is a constitutional provision for compensation and that puts them at ease about some of the misgivings that they had.

So, while these are smaller changes but I think these are great steps in the direction about consensus building across states. So, no material change in what the expectations of the industry was but still a great move forward.

Q: Do you believe that this now sets the stage for the passage in this session and I also very quickly want to get your comments on the conversation that I just had with the Finance Minister of Kerala where he seems to suggest that most state governments or the finance minister’s of most state governments in that meeting yesterday are not in agreement with the Arvind Subramanian panel’s recommendations on the revenue neutral rate and they have arrived at a different set of principles, not at a rate yet but a different set of principles that could guide the possible revenue neutral rate. How would you read that?

Dimri: It is two ways to look at it. This 18 percent may not cut for all states, I think that is a possibility. One size doesn’t fit all for sure however if the states have an assurance for five years for a compensation, my question is why are states so concerned about revenue loss. I think it is in everybody’s interest, government’s as well as in the industry’s interest where the introduction of GST happens at rates that are far more palatable.

If the states are not denied of any loss, it may be a good thing forward. So, while I agree in principle that one size may not fit all but in the larger scheme I wonder why states should have a major objection to that.

Q: Even as far as the dispute resolution is concerned, we understand now that it will be the GST Council, do you see that satisfying most states because this was an area of concern as well?

Dimri: If it is not the GST Council then there can’t be any other body. The fact is that where there are two sides of a transaction, the disputes across states are quite natural to our eyes; the possibility cannot be ruled out. If it is not GST Council then it will have to be some inter-state tribunal; there is no other possible mechanism.

So if the GST Council has to be given some real substantive powers, I think the dispute resolution is one of the things that the industry would want and the states would want. To my mind there is no other real alternative to this.

Q: Your first reactions to the changes that have now been cleared by cabinet, 1 percent manufacturing tax goes which was along expected lines, the compensation clause, the wording has now been changed and even as far as the dispute resolution is concerned the GST council will take that forward.

Panchal: It is a welcome move especially the 1 percent additional tax being done away with, that will give a lot of room for industry to really look at the supply chain. So, that is definitely a welcome move and special emphasis on guarantying the compensation, this really takes us one step forward. We need to look out for the government to introduce the bill next week.

Q: What is your sense now in terms of areas of concern that need further clarification? Of course this would mean that we are assuming that the bill will go through in this session itself but on the back of what you have seen from the model law and the changes that have now been cleared by cabinet, what further clarifications would you like to see?

Panchal: There are several areas of the model law where the industry would have to engage in a discussion in terms of the place of supply rules, the scope of credit, the entire model law has to go through a discussion with various sections of the industry towards simplifying the GST law.

However the first step is that the bill should get passed and then the industry can engage in a discussion with the GST council. So, essentially place of rules, scope of credit, these are some of the areas to be looked out for.

For full discussion, watch accompanying videos...

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First Published on Jul 27, 2016 08:27 pm
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