Indian government approves GST but states to challenge
- 18 December 2014 | Richard Asquith
The Indian Cabinet approved a new Goods & Services Tax (GST) Bill on Wednesday this week, which takes the country closer to the implementation of a full consumption tax. The implementation target date is now 1 April 2016 subject to continuing resistance from certain states.
The next stage is the introduction of the Bill to Parliament, which should happen next week. The first GST Bill was proposed over five years ago but has met with fierce resistance from the states which are worried about losing controls over their tax revenues.
However, a two-year agreement on the phased introduction of GST on fuel this week appeared to have broken the deadlock. There is also to be a three-year phased compensation payment for the states' losses on some local taxes. The new regime will come in two parts: Central GST (C-GST); and State GST (S-GST). Indian Entry Tax will also by incorporated into the new GST. This is a tax in some states on goods crossing into their territory from another Indian state. It is a major barrier to the free movement of goods within the country.
States excluded from new GST proposal?
Some states have since claimed they were not consolidated on this latest compromise Bill. West Bengal stated on Thursday that most states did not know of this new deal and may block it. The states will claim that they face heavy losses on the withdrawal of the Central Sales Tax. This is a source-based tax, which favors states (such as West Bengal) with large production bases. The new GST regime, which mirrors the Organisation for Economic Development and Cooperation (OECD)'s favored destination-based indirect tax, will shift tax revenues to states with large populations.
The plans for the new Indian GST regime may give an estimated 1.5% boost to India’s annual GDP, and help promote its internal free market.