The GST comes closer to becoming a reality as BJP and Congress inch towards consensus

The road for the passage of the Good and Services Tax Bill in the Rajya Sabha finally seems to be clearing up. After bickering over it for two years, the ruling Bharatiya Janata Party and the Congress have evolved a consensus on the crucial proposed legislation that seeks to introduce a single tax in place of the plethora of indirect taxes levied by the Centre and state governments.

The BJP reportedly held a fresh round of talks with the Congress and other parties on Monday, after which the Opposition party, sources said, indicated that a “broad understanding” had been reached on the bill.

The Bill, which was cleared by the Lok Sabha last year but was blocked by the upper house owing to stiff opposition by the Congress and other parties, will be introduced in the Rajya Sabha on Wednesday.

The BJP earlier wanted take it up on Tuesday, but had to put off by a day because Opposition leader Ghulam Nabi Azad and Sonia Gandhi are in Varanasi, where the Congress president is going to undertake a road show ahead of next year’s crucial Uttar Pradesh elections.

Major tax reform

The GST, which is expected to simplify India’s taxation regime and boost growth, has been awaiting clearance for a decade now. It was first introduced by the Congress-led United Progressive Alliance government in 2006, but it was blocked owing to opposition by the BJP, at the behest of Narendra Modi, who was the chief minister of Gujarat at the time.

Then, when Modi took over as Prime Minister in 2014, his government revived the GST bill. Till its clearance in the Lok Sabha last year, the journey of the bill was smooth. However, it ran into trouble in the Rajya Sabha, where the BJP is in a minority. The Congress, in particular, the largest party in the Rajya Sabha, with 60 of 245, refused to budge from its stance, while other parties like AIADMK and the Left also opposed it.

The Congress said it would only back the Bill if the following three conditions were met: Waiving of the additional 1% tax levied by manufacturing states (as that could favour industrial states such as the BJP-ruled Gujarat and Maharashtra), the setting up of an independent grievance redressal mechanism to resolve revenue-sharing disputes between states and putting a cap of 18% on the tax and stating this in the Constitution.

The third concern comes from the fact that since the GST is an umbrella tax to replace smaller taxes such as Octroi, sales tax etc, a ceiling rate should be fixed.

While the BJP wasn't keen to give in to these demands, getting the Congress on board was essential, particularly because this is a Constitution Amendment Bill – meaning the Constitution will have to be amended to introduce the GST – and requires the support of two-thirds of the Upper House.

Finance minister Arun Jaitley first rejected the Congress’ demands on grounds that they were an after-thought – the provisions had not included in the bill introduced by the UPA government. He was particularly opposed specifying the cap on GST rate in the Constitution, as the government would be required to approach Parliament each time it wanted to revise taxes.

Bridging the gap

Over the last few weeks, however, as the monsoon session of Parliament is underway, there were indications of a thaw in the Congress’ stance while regional parties like the Samajwadi Party and Bahujan Samaj Party also said they would aid the passage of the Bill.

Last month, the warring sides agreed to engage in serious negotiations in to iron out their issues. With most parties, except the AIADMK, supporting the Bill, the Congress decided to show flexibility – else it would have been isolated in Parliament. Moreover, it was also facing flak from the corporate sector for its obstructionist stand.

On its part, the Modi government also agreed to meet the Congress half-way. After days of backroom parleys, Jaitley agreed to doing away with the 1% additional tax for manufacturing states. The Centre will compensate these states with additional funds for five years for the resultant loss in revenue in the immediate aftermath of the GST’s implementation. The finance minister also agreed to the constitution of an independent redressal committee.

However, the Congress’ demand for a cap on the tax rate remains a sticking point. Most state governments that Jaitley consulted last week did not want to forgo their right to set the tax rate. Further, the various states are yet to agree on the quantum of the tax to be levied – negotiations over this will continue over the next few months. The state governments maintain that the tax rate should neither burden the consumer and nor should it result in a revenue loss for them.

If the bill is passed in the Rajya Sabha on Wednesday, it will be a big win for the Modi government, which had come in for all-round criticism for going slow on economic reforms and was also in the dock for its inability to work harmoniously with the opposition.