The Cabinet Committee on Economic Affairs has taken one more step towards the implementation of the Goods and Services Tax, set to come into effect in April 2016, by dealing with several issues regarding the regime that have, in the past, served as substantial roadblocks to its implementation. The first of these has to do with the quantum of compensation to be paid to the States in case the revenue generated as GST falls short of what they have so far been earning through the existing tax system. Earlier, the Central government had agreed to provide the States compensation at the rate of 100 per cent for three years, 75 per cent in the fourth year, and 50 per cent in the fifth year. However, in June 2015 the States raised a fresh demand of full compensation for all five years, which at the time the Centre termed as a move that could potentially delay the roll-out of GST as scheduled. Another major sticking point was the 1 per cent additional tax on the supply of goods. This provision was added to the Bill on the insistence of the States that lead on the manufacturing front. They had argued that they should be compensated for the investment they had already made in manufacturing infrastructure. Many States opposed this additional tax saying, perhaps rightly, that it went against the spirit of the GST system and that it would have a cascading impact on prices. In fact, even Chief Economic Advisor Arvind Subramanian had at the time warned of the negative impact of the additional tax. The question to be asked is, what is the point of implementing a consolidated tax, only to have piecemeal levies added to it?
The Cabinet on Wednesday cleared an amendment by which the States will get to fulfil their wish of full compensation for five years, a move that should bring most of them on board without any of the reservations they currently hold. Regarding the 1 per cent additional tax, the Cabinet took a more circumspect route, exempting stock transfers within group companies from the additional tax on inter-State supplies, but keeping the overall tax in place. That issue may still see some resistance from some States. These nevertheless represent significant steps towards the implementation of GST by the April 2016 deadline, as they are solutions to the most significant hurdles faced by the Bill. The government and the Cabinet must be commended on their speedy handling of these issues since GST represents one of the most significant rounds of tax reform to be implemented, and it has the potential to benefit all those involved — the Centre, the States, the private sector, and consumers.