Yesterday, the government circulated certain official amendments to the Constitution (122nd Amendment) Bill, 2014 on GST. The Bill is currently pending in Rajya Sabha. The Bill was introduced and passed in Lok Sabha in May 2015. It was then referred to a Select Committee of Rajya Sabha which submitted its report in July 2015. With the Bill listed for passage this week, we explain key provisions in the Bill, and the amendments proposed. What is the GST? Currently, indirect taxes are imposed on goods and services. These include excise duty, sales tax, service tax, octroi, customs duty etc. Some of these taxes are levied by the centre and some by the states. For taxes imposed by states, the tax rates may vary across different states. Also, goods and services are taxed differently. The Goods and Services Tax (GST) is a value added tax levied across goods and services at the point of consumption. The idea of a GST regime is to subsume most indirect taxes under a single taxation regime. This is expected to help broaden the tax base, increase tax compliance, and reduce economic distortions caused by inter-state variations in taxes. What does the 2014 Bill on GST do? The 2014 Bill amends the Constitution to give concurrent powers to Parliament and state legislatures to levy a Goods and Services tax (GST). This implies that the centre will levy a central GST (CGST), while states will be permitted to levy a state GST (SGST). For goods and services that pass through several states, or imports, the centre will levy another tax, the Integrated GST (IGST). Alcohol for human consumption has been kept out of the purview of GST. Further, GST will be levied on 5 types of petroleum products at a later date, to be decided by the GST Council. The Council is a body comprising of Finance Ministers of the centre and all states (including Delhi and Puducherry). This body will make recommendations in relation to the implementation of GST, including the rates, principles of levy, etc. The Council is also to decide the modalities for resolution of disputes that arise out of its recommendations. States may be given compensation for any revenue losses they may face from the introduction of the GST regime. Such compensation may be provided for a period of up to five years. Further, the centre may levy an additional tax, up to 1%, in the course of interstate trade. The revenues from the levy of this tax will be given to the state from where the good originates. Expert bodies like the Select Committee and the Arvind Subramanian Committee have observed that this provision could lead to cascading of taxes (as tax on tax will be levied).[i] It also distorts the creation of a national market, as a product made in one state and sold in another would be more expensive than one made and sold within the same state. What are the key changes proposed by the 2016 amendments? The amendments propose three key changes to the 2014 Bill. They relate to (i) additional tax up to 1%; (ii) compensation to states; and (iii) dispute resolution by the GST Council.
These amendments will be taken up for discussion with the Bill in Rajya Sabha this week. The Bill requires a special majority for its passage as it is a Constitution Amendment Bill (that is at least 50% majority of the total membership in the House, and 2/3rds majority of all members present and voting). If the Bill is passed with amendments, it will have to be sent back to Lok Sabha for consideration and passage. After its passage in Parliament, at least 50% state legislatures will have to pass resolutions to ratify the Bill. Once the constitutional framework is in place, the centre will have to pass simple laws to levy CGST and IGST. Similarly, all states will have to pass a simple law on SGST. These laws will specify the rates of the GST to be levied, the goods and services that will be included, the threshold of the turnover of businesses to be included, etc. Note that the Arvind Subramanian Committee, set up by the Finance Ministry, recommended the rates of GST that may be levied. The table below details the bands of rates proposed.
| Table 1: Rates of GST recommended by Expert Committee headed by Arvind Subramanian | ||
| Type of rate | Rate | Details |
| Revenue Neutral Rate | 15% | Single rate which maintains revenue at current levels. |
| Standard Rate | 17-18% | Too be applied to most goods and services |
| Lower rates | 12% | To be applied to certain goods consumed by the poor |
| Demerit rate | 40% | To be applied on luxury cars, aerated beverages, paan masala, and tobacco |
| Source: Arvind Subramanian Committee Report (2015) | ||
Several other measures related to the back end infrastructure for registration and reporting of GST, administrative officials related to GST, etc. will also have to be put in place, before GST can be rolled out. [For further details on the full list of amendments, please see here. For other details on the GST Bill, please see here.]
The Union Cabinet approved the implementation of Seventh Pay Commission recommendations yesterday. The Commission was tasked with reviewing and proposing changes to the pay, pension and efficiency of government employees. These recommendations will apply to 33 lakh central government employees, in addition to 14 lakh armed forces personnel and 52 lakh pensioners. This will take effect from January 1, 2016. 
Pay, Allowances and Pension of central government employees In relation to an employee, the Commission proposed to increase (i) the minimum salary to Rs 18,000 per month, and (ii) the maximum salary to Rs 2,50,000 per month. It also recommended moving away from the existing system of pay bands and grade pay, which is used to determine an employee’s salary. Instead, it proposed a new pay matrix which will take into account the hierarchy of employees, and their pay progression during the course of employment. The Commission also suggested that this matrix should be reviewed periodically, with a frequency of less than 10 years. The Pay Commission also suggested a linkage between performance and remuneration of an employee. For this, it proposed the introduction of performance related pay which will be based on an annual appraisal of the employee. In addition, it recommended that annual increments of an employee should be withheld, if he is unable to meet the benchmark required for regular promotion or career progression. The Commission also sought to abolish or merge some of the allowances that may be given to employees by various government departments. It suggested that, of the 196 allowances that exist, 52 should be abolished and 36 should either be merged under existing heads, or be included under proposed allowances. Some of these allowances involved payment of a meagre amount of close to Rs 100 per month. In addition, the rates of House Rent Allowance (HRA) were revised. The Commission proposed a methodology to increase the HRA rates every time the Dearness Allowance given to employees increased to 50% or 100%. Dearness Allowance is given to employees in lieu of increases in the cost of living, on account of inflation. The Commission had also proposed a new methodology for computing pension for pensioners who retired before January 1, 2016. This is aimed at bringing parity between past and current pensioners. As part of the new methodology, two options for calculation of pension have been prescribed, and the pensioner may opt for either one. Financial Impact on the government 
The implementation of the Seventh Pay Commission recommendations is expected to cost the government Rs 1,02,100 crore. Of this amount, 72% will be borne by the central government, and 28% by the railways. As a result, the overall expenditure is expected to increase by 23.6%, with a 16% increase in expenses on pay, 63% in allowances and 24% in pension. Addressing the issue of vacancy 
As of 2014, the central government had a job vacancy of 18.5%.[i] These vacancies may need to be filled or abolished, if required, to reduce redundancy.[ii] It may be noted that the Second Administrative Reforms Commission had observed that reducing the number of government employees is necessary for modern and professional governance. Further, it had expressed concern that the increasing expenditure on salaries of government employees may be at the cost of investment in priority areas such as infrastructure development and poverty alleviation.[iii] Inducting specialised personnel in the government The Second Administrative Reforms Commission had also observed that some senior positions in the central government require specific skill sets (including technical and administrative know-how).[iii] One way of developing these skill-sets is to recruit personnel directly into these departments so that they can over a period of time develop the required skills. For example, personnel from the Central Engineering Service (Roads) may aspire and be qualified to hold senior positions in the Ministry of Road, Transport and Highways or a body like the National Highways Authority of India. However, another view is that special skill-sets may be inducted in the government through lateral entry of experts from outside government. This will allow for widening of the pool of candidates and greater competition for these positions.[iii] The Second Administrative Reforms Commission had also recommended that senior positions in the government should be open to all services. The last Pay Commission’s recommendations, in 2008, led to an increased demand in the automobile, consumer products and real estate related sectors. With the Seventh Pay Commission’s recommendations expected to take effect from January 1, 2016, their impact on the economy and the consumer market will become known in due course of time. [i] Report of the Seventh Central Pay Commission, Ministry of Finance, 2015 http://finmin.nic.in/7cpc/7cpc_report_eng.pdf. [ii] “Union govt has 729,000 vacancies: report”, Live Mint, November 30, 2015, http://www.livemint.com/Home-Page/X6U6xFe5oR2pW4simMmAhK/Union-govt-has-729000-vacancies-report.html. [iii] 10th and 13th Reports of the Second Administrative Reforms Commission, 2008 and 2009.
