In 2000, then Prime Minister Atal Bihari Vajpayee set up a committee which was mandated with facilitating the states to switch from sales tax to the value-added tax (VAT) regime. On April 1, 2005, state-level VAT replaced sales tax in many states. Subsequently, the committee was mandated with facilitating states to switch to Goods & Service Tax (GST), in consultation with the Centre. GST works on the exact same principles as VAT, hence in many countries it is in fact called VAT. Under the UPA, successive finance ministers promised GST in successive years, with the deadline being extended year on year without any headway.
Why the delay for so many years?
GST subsumes many state and central taxes. In effect, it reduces the power of states to tax their citizens. Hence it was essential that all the states and the centre were on the same page at every stage of the GST Act. This did not happen during the UPA rule. Expectedly, states were worried that they would lose a big pie of their revenue by getting into GST.
Even till the fag end of 2013, nearing the end of UPA’s tenure, along with BJP states, few Congress states and few other states with Non-Congress Non-BJP Governments, were opposed to certain provisions in the UPA’s version of GST. Till the last discussion of GST under UPA in November 2013, the states had some major demands:
1. Keeping Petroleum out of GST ambit
2. Keeping Alcohol out of GST ambit
3. Keeping Entry Tax out of GST ambit
4. Some sort of guarantee from Centre for potential revenue loss
The UPA could not negotiate with the states on the above demands and hence even after being 10 years in power, GST could not be brought under the UPA rule.
The new BJP Government was desperate to get GST rolled out as soon as possible. So, it decided to accept some of the states demands, and give them some comfort, so that they can agree with the centre at other places. Out of the above 4 demands, 3 were accepted, and a bonus benefit was passed on to the state:
1. Petroleum was kept out of GST
2. Alcohol was kept out of GST
3. A proposal was sent to law ministry to work out a “Constitutional Guarantee” to compensate states
4. And the Bonus: The power to states of levying additional 1% tax levy, for maximum 2 years, to help augment state revenues (Eventually even this levy was dropped)
In exchange for this, the Centre convinced the states to allow Entry Tax to be subsumed into the GST ambit. All this was achieved some time in late 2014, barely 6 months into the tenure of the new Government.
With the states on board, the GST bill was passed in the Lok Sabha, where BJP had an absolute majority, in May 2015 itself. At that stage Congress walked out of the house before voting, demanding that the Bill be sent to the standing committee.
Later, although Congress states were on board, the Central leaders of Congress came up with new demands for GST, among which were the demand to scrap the additional 1% tax levy, and to peg the GST rate at 18%, that too in the Constitution Amendment Bill. Next, the bill had to be passed by a two-thirds majority in the Rajya Sabha, where the BJP did not have the numbers.
Eventually the 1% tax levy was dropped and other demands were met, paving the way for GST. Rajya Sabha passed the GST Constitution Amendment Bill, and half of the state assemblies also approved the Constitution Amendments.
The draft GST laws were discussed and deliberated by the GST Council, which has representatives from both the Centre and all States. Finally yesterday, after extensive public consultation, the four items of legislation — central GST, integrated-GST, union territory-GST and the compensation Bill were passed in the Lok Sabha. Next, the Rajya Sabha will have to pass these laws, which should be easy since they are money bills.
After this the GST Council has to approve the GST rules, set the schedules determining tax rates, and all states have to enact the state GST laws. All this has to be done before 1st July 2017 to ensure a timely roll-out
What will change under GST?
Think of it as a super-all-inclusive tax, which will eliminate most other Indirect taxes. Its aim is to standardise taxation across the country and remove cascading effect of taxes i.e. Tax on tax egs: VAT is charged on Excise too. GST is already in place in over 160 countries world wide, so India is late to the party. Experts say, GST could increase GDP by 1-2% and reduce costs of inputs by around 10%.
With this, compliance will ease out, free flow of goods over state boundaries will increase. Credits for inputs will be more easily available, paving the way for reduction in costs. A common national market will emerge, where in less developed, but consumer driven states will benefit. Make in India will get a huge push, as also Ease of Doing Business.
For a simpler explanation of GST, watch this video: