GST logjam: Centre to take middle path on compensation, oil

Preparing legal framework to protect states from revenue loss

The finance ministry, which has been trying to evolve a consensus on the Constitution amendment Bill for rollout of a Goods and Services Tax (GST) regime, is learnt to have found a middle path to address states' concerns.

Among the contentious issues was states' demand for a provision in the Constitution to compensate them for any losses they made under the proposed indirect tax regime. The ministry is now understood to be considering another legal framework that will ensure the Constitution does not have to be amended for this purpose, and at the same time, states' trust does not erode.

To resolve another nagging issue - of petroleum products, which states want constitutionally kept outside the GST ambit as these comprise 26 per cent of their revenues - the Centre is likely to include these products in the new regime but tax these at the rate of zero per cent. States could continue to levy sales tax or value-added tax on these, while the Centre would retain its right to impose excise duty. Such a mechanism will protect the revenues of both states and the Centre, and the GST chain, too, will not be broken.

A LONG TAXING ROAD

• ORIGINAL SCHEDULE: GST was to originally come into effect from April 1, 2010
• CONSENSUS ELUSIVE: The implementation was delayed as the Centre and states were not on the same page on several issues
• CST BARRIER: There were differences over compensation to states for their loss on account of a cut in central sales tax; the issue has now been resolved
• DEMANDS GALORE:  States want GST compensation to be provided for in the Constitution; demand that petroleum products be kept out of GST and entry tax not be subsumed in the indirect tax regime
• PLEASE-ALL PATH: The Centre is not ready to yield to states’ demand on entry tax but it is trying to tread a middle path on all other issues

However, the Centre does not seem inclined to yield to states' demand that entry tax be kept outside GST. It is firm that the tax will have to be subsumed in the new indirect tax regime.

On the issue of petroleum products, a senior finance ministry official, who did not wish to be named, said: "We are working out a formula where their revenues can be protected. We are suggesting subsuming these products in GST but making these zero-rated. The idea has been discussed with a few states and the response seems positive."

The inclusion of petroleum products in GST makes economic sense, as these products are a major input for other industries. If these are kept out of the GST framework, there would be cascading of taxes for all other sectors of the economy and the cost of production would increase. An exclusion would also disrupt audit trail and cause revenue leakages.

Both Finance Minister Arun Jaitley and Revenue Secretary Shaktikanta Das are individually speaking to state finance ministers and senior officials. The idea is to bring them on board before the next meeting of the empowered committee of state finance ministers, likely next month on the members' return from China, where they are visiting later this month to study that country's GST model.

On states' demand for GST compensation, the official quoted earlier said: "Why do states want a provision in the Constitution? The key issue is the trust factor. Do you really need to amend Constitution for that? We are working out an arrangement to build a legal framework by which compensation can be given."

Though the official did not elaborate on what legal backing could be provided, it is likely the 14th Finance Commission's recommendations, to come next month, would suggest a mechanism for compensation in the event of revenue loss to states. The commission, headed by former Reserve Bank of India Governor, Y V Reddy, is likely to meet states on Wednesday to get their views on the issue.

Some states, particularly the Bharatiya Janata Party-ruled ones like Madhya Pradesh and Gujarat, have become more receptive to the Centre's suggestions on GST since a change of guard at the Centre in May. However, exclusion of petroleum and GST compensation are states' common concerns.

"Petroleum should be out initially. You cannot put your biggest revenue-earning egg in the same basket (as other indirect taxes). But the real issue is compensation. We don't know what will be the revenue implications of this new tax. If we are guaranteed full compensation, we have no problem," said a state official involved in the talks who did not wish to be named.

The states' concerns on GST compensation stem from their past experience with regard to Central Sales Tax (CST) compensation. To avoid CST-like confusions, they are insisting on a provision in the Constitution.

The finance ministers during the United Progressive Alliance (UPA) rule had put the condition that CST compensation would be released only when states agree on the rollout of GST. Jaitley, however, has given his word to the states that their dues of Rs 34,000 crore would be cleared over a period of three years. The Centre is confident that states would not make any loss under GST, as they would get to share service tax revenue with it. It is unwilling to yield on a constitutional provision because compensation to states is proposed for only five years; "the Constitution cannot be changed every now and then".

The Centre's unwillingness to keep entry tax in lieu of octroi outside GST comes from the understanding that excluding so many taxes from GST might defeat the purpose of making India a common market. Also, such a move would push up the revenue-neutral rate for GST. The Centre might suggest that states could levy additional State GST (SGST), within a band, to protect their revenues after entry tax is subsumed.