A proposal to introduce a list of categories to be exempted from the service tax is likely to be announced in the upcoming Budget, but it may fail to give a push to the long-pending Goods and Services Tax (GST) system.
While allowing the Centre to come out with a negative list for services, the states — which are opposing the GST in the current form — made it clear that the Union government not interfere in their jurisdiction.
The main bone of contention between the Centre and the states on the GST is that the states fear losing flexibility to alter tax rates in the new regime. Many state governments have used this power to attract industry investments by offering tax concessions. However, at the moment the biggest concern of the states is the Central Sales Tax (CST) compensation. States have said talks on the GST cannot progress until the Centre resolves this matter.
States suggested the formula used for calculating compensation for loss of CST revenue for 2007-08 to 2009-10 be followed for working out the compensation for 2010-11 also. The Centre’s view is that the compensation was initially envisaged only for three years, and a new formula should be worked out now.
CST, a tax on inter-state movement of goods, was reduced from four per cent to three per cent in 2007-08 and to two per cent in 2008-09 after the introduction of value added tax (VAT). A delay in the implementation of the GST regime prompted the states to ask for compensation further for 2010-11 and 2011-12, but the Cabinet has not approved a new formula beyond 2009-10.
The government has made a provision of Rs 12,000 crore in the Budget this year for the CST compensation. An amount of Rs 2,411 crore has already been released to 10 states for loss of the CST revenue in 2010-11. The finance ministry proposed to give another Rs 2,500 crore, arguing some states have increased the VAT rates. But states are asking for about Rs 10,000 crore.
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Sushil Modi, chairman of the Empowered Committee of State Finance Ministers, said the earliest GST can come in is April 1, 2013. States, finance ministry officials and tax experts have lost the hope of rolling out the GST in 2012-13.
For the GST to be introduced in 2013-14, all issues should be sorted out in the next few months so that Parliament and state legislatures have time to consider the Constitution Amendment Bill introduced in the Budget for this financial year. If a consensus is not evolved, the GST rollout could be indefinitely delayed. As 2014-15 is going to be election year, the GST talks may take a back seat.
Decisions on vexed issues that will facilitate introduction of the GST — such as flexibility to the states to increase rates in emergency situation, dispute settlement authority, a floor rate with a band, and above all compensation to the states for losses made by them on account of reduction in the central sales tax — are nowhere in the picture.
The states specifically asked the Centre to keep certain categories of services in the negative list. These, they believe, are ones that fall under the states’ domain — such as construction, renting or lease of immovable property, restaurants, transportation of goods, beauty parlours, health and fitness centres, advertisement, entertainment toll, betting and gambling. The states do not impose services tax, but tax these services in other forms.
After the success of state-level VAT, then finance minister P Chidambaram had in the Budget for 2006-07 proposed that the GST would be implemented from April 1, 2010. The government extended the deadline by a year in the Budget for 2010-11. In the Budget for this financial year, a Constitution Amendment Bill was introduced in Parliament to enable a roll-out of the new indirect tax system. The Constitutional Amendment Bill for the GST is with the Standing Committee of Parliament on Finance.
If that panel gives its suggestions in the Budget Session, the government can present the document in Parliament by the next monsoon session, where it will need to garner a two-third majority. Evolving such a consensus is a Herculean task, according to experts. The proposals will have to be ratified by legislatures of at least half the states. The next step will be to table the GST Bill in Parliament, while states will introduce their respective bills in the Assemblies concerned.
But it is going to be a crucial year for the present United Progressive Alliance government to make headway on the talks and finalise a structure for the GST. If decisions on all these issues are not taken up quickly, the ruling government may lose another opportunity to bring in the GST in its regime.