Decks cleared for FY15 GST rollout

Centre, states clear first hurdle, agree on compensation formula for losses on account of reduction in Central Sales Tax rate

 

On Monday, the Centre and states agreed on a compensation formula for Central Sales Tax (CST), a major hurdle in implementing the Goods & Services Tax (GST).

However, it is unlikely the new indirect tax regime would be introduced in 2013-14. The sub-panel on GST design gave its report, but no conclusion could be reached on Monday; the recommendations would be discussed tomorrow.

Earlier in the day, a sub-panel of central and state government officials recommended, for a cut in CST from four per cent to two per cent, states be given 100 per cent compensation for 2010-11, 75 per cent for 2011-12 and 50 per cent for 2012-13. The Centre would have to pay Rs 34,000 crore as CST arrears.
 

THE WAY FORWARD

• The Constitution Amendment Bill is currently being vetted by a standing committee of Parliament
• Its passage requires a two-third majority of sitting and voting MPs in both houses of Parliament. Then, at least half the states must ratify it
• An enabler for GST, the Bill will empower states to impose service tax, Centre to levy tax beyond manufacturing
• GST Bill will have to be prepared by the Centre and passed by Parliament
• Similarly, states would have to prepare their own GST Bills on the lines of the model Bill and get those passed by their respective Assemblies
• On introduction, GST would replace Central excise duty, service tax and value-added tax besides several local taxes

“The empowered committee of state finance ministers has given its approval to the report,” Sushil Modi, Bihar finance minister and chairman of the empowered committee, said after the meeting. He, however, remained doubtful over the GST rollout next financial year. “GST implementation from the coming financial year seems difficult. It is unlikely to happen, as the government is yet to fulfil certain statutory prerequisites for that.”

He added some states were earlier concerned the Centre wasn’t giving full compensation for losses on account of a cut in CST. However, after the Centre expressed its inability to provide full compensation, citing fiscal constraints, the states finally agreed, albeit with some conditions. They demanded the compensation be paid immediately and the Centre provide a timeframe for it. They also threatened to return to the four per cent CST regime if 100 per cent compensation wasn’t provided for 2013-14.

“Unless the compensation is 100 per cent, it would be difficult for us to support GST,” said a state FM. The Centre had said if GST wasn’t introduced next year, it would compensate CST losses for that period as well, Modi said.

Andhra, Gujarat, Tamil Nadu, Odisha, West Bengal and Haryana would benefit the most from CST compensation. A provision for compensation to be paid in line with the August 2008 formula is likely to be made in Budget 2013-14.

Finance Minister P Chidambaram had recently said if states arrived at a consensus, he would give an outline for GST in the Budget.

States demanded whenever GST was implemented, compensation should be provided for five years. “States fear in the first few years, they would make heavy losses. Though the Centre has assured compensation, states want a mechanism so that they don’t have to go to the Union government with a begging bowl,” Modi said.