New Delhi: Offering a breather to industry, the Rajya Sabha select panel looking into the goods and services tax (GST) bill has recommended diluting a provision for an extra 1% levy on inter-state supply of goods—a clause that has been opposed by companies because of its potential to create a cascading impact on prices.

The committee, which submitted its report on the 122nd constitution amendment bill to the Rajya Sabha chairman on Wednesday, has recommended that the government clarify while drafting the GST law that the additional 1% tax will be applicable only when goods are supplied to buyers.

This will ensure that companies will not have to pay the tax when they move their goods from one warehouse to another across state borders. Although this falls short of industry’s demand for completely doing away with the extra tax, the committee’s recommendation will offer some respite to companies.

The government included the 1% tax on supply of goods for two years in the constitution amendment bill to bring on board manufacturing states like Gujarat that had expressed concerns over revenue loss from GST’s implementation due to the destination-based nature of this tax reform.

But since then, the provision has faced opposition from both within and outside the government because it will distort GST and have a cascading impact on prices.

Chief economic advisor Arvind Subramanian has pointed out that this levy will encourage imports rather than movement of goods from one state to the other.

“Think about a product going to Gujarat from Tamil Nadu, crossing four states, the product will embody an additional tax of 4-5%. That might make it easier to import to Tamil Nadu from Bangkok or wherever. So, in a sense, it has the potential to undermine ‘Make In India’. So that’s why we need to look at this provision carefully,” Subramanian had said.

The select committee’s recommendation that the 1% extra tax would be applicable only to the supply of goods to buyers and not to stock transfers “is a huge step in minimizing the problem but it does not take away the problem”, said Rajeev Dimri, indirect tax leader at BMR and Associates Llp.

“This origin-based tax is contradictory to GST’s destination-based principle,” said Dimri. “There is also no clarity on how many years this tax may be levied. Though the bill mentions a sunset clause of two years, it has left the decision of extending this further to the GST council. Industry would have been happy if there was certainty that this tax will be levied only for two years.”

Meanwhile, with the functioning of Parliament at a standstill for the last two days because of a political tussle between the National Democratic Alliance (NDA) government and opposition parties led by the Congress, concerns have arisen over the passage of the bill in the monsoon session. The government is targeting the rollout of GST starting on 1 April 2016.

The NDA has a comfortable majority in the Lok Sabha but lacks sufficient numbers in the Rajya Sabha. The constitutional amendment bill for GST needs the support of two-thirds of the members in both Houses of Parliament.

In the upper House, the government needs the support of at least 163 out of the total 245 members to get the bill passed. The Bharatiya Janata Party-led NDA’s strength in the Rajya Sabha is only 63, requiring it to seek the support of other parties.

Given that the Congress, the Communist Party of India, the Communist Party of India (Marxist) and the All India Anna Dravida Munnetra Kazhagam have given dissent notes on the select panel’s report, their support for the bill is doubtful.

Finance minister Arun Jaitley said the government will look to push the legislation through in the monsoon session and try to forge a consensus among all opposition parties. He also criticised the Congress for opposing the bill.

“I hope that the Congress party will reconsider its irresponsible decision,” he said.

In its report, the select committee also suggested that state governments take concrete steps to ensure flow of funds to local bodies that may lose out on revenue because of GST implementation (as entry taxes are being subsumed).

However, the committee did not specify the states that should be provided full compensation for five years to make up for any potential drop in revenue.

The report only said the government may provide “compensation to states for the loss of revenue arising on account of implementation of goods and services tax for a period of 5 years”.

As per the government’s commitment, states will be fully compensated for losses in the first three years, to the tune of 75% in the fourth year and 50% in the fifth year. However, all states have sought full compensation for the entire five years.

On the GST rate, the committee has pointed out that a high GST rate will erode the confidence of consumers and lead to inflation and suggested a moderate rate. The committee also recommended that the GST rate for banking services be kept moderate.

“Administratively, both the centre and the states are taking all steps to meet 1 April 2016 deadline,” revenue secretary Shaktikanta Das said.

“Effort of central government and state government would be to have a reasonable rate of GST so that the GST experience is a successful experience for the whole country,” he said.

The government has set up a committee under Subramanian to arrive at the GST rate. Das added that the empowered committee of state finance ministers has set up a sub-committee to look at ways to minimize the cascading effect of the additional 1% levy.

PTI contributed to this story.