The political differences over corruption and unaccounted money appears set to derail implementation of the much-discussed Goods and Services Tax (GST), formally scheduled to take final shape by April next year.
A senior finance ministry official told Business Standard that unlike value-added tax (VAT), implementation of GST demanded full support from all states at the time of its coming into force, something difficult task for the Centre to achieve in the current scenario.
He noted that legislation for the levy of GST can be introduced only after enacting the Constitutional amendment in this regard, introduced in Parliament on March 23.
The Bill needs to be passed by a two-third majority in both Houses of Parliament and subsequent ratification by at least half of all state legislatures. Subsequently, the GST Bills would need to be passed by a simple majority.
Levy of the tax can commence only after the GST law has been enacted by the respective legislatures. Unlike state VAT, the date of commencement of this levy would have to be synchronised across Centre and states. The integrated GST (IGST) model cannot function effectively otherwise.
The Constitution envisages transfer of resources from the Centre to the states through the devolution of tax revenues based on a formula recommended by the Finance Commission from time to time. While this scheme would remain largely unaltered under GST, new provisions would be necessary for the periodic settlement of accounts between the Centre and the states to enable pass-through of input tax credit in transactions involving inter-state supply of goods or services.
In the new tax regime, it is the Centre that would levy and collect IGST. Since IGST paid by an exporting dealer would be collected by the central government, the Centre would subsequently pay an equivalent amount to the state concerned.
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The account settlement for IGST would require recovery of sums from net-exporting states and transfer of sums to net-importing states.
While the detailed scheme for the settlement of accounts in this manner would be contained in the IGST law, there needs to be an enabling provision in the Constitution to support it and allow funds to flow in both directions.
The finance ministry official said the whole process could be completed successfully only if there was political consensus on the issue.