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Talks between the Centre and state governments over the proposed Goods & Services Tax (GST) almost collapsed here on Monday. States unanimously refused to subsume petroleum and alcohol in the proposed tax regime, cautioning the Centre to take no move affecting their fiscal autonomy. With this, the possibility of a Constitution Amendment Bill on the GST changes coming up in Parliament in the current tenure of the UPA government appears to have become remote.
In fact, differences between the Union government and the states over the draft Constitution amendment have widened further. States have strongly voiced their opinion on keeping entry tax in the indirect tax regime and on the absence of a permanent mechanism to compensate them for revenue loss from GST.
“India is a federation. Nothing should go in the Bill that is against the spirit of cooperative federalism,” said Abdul Rahim Rather, chairman of the Empowered Committee (EC) of State Finance Ministers. Rather, also finance minister of Jammu & Kashmir, spoke to reporters after the meeting on Monday.
The EC told the Centre that for a GST to take off, a provision should be made in the proposed Constitution amendment legislation on compensation from losses due to a shift to GST. Parliament's standing committee on finance had suggested providing for a GST Compensation Fund in the Constitutional amendment to address the revenue concerns of states; the Centre didn’t do so in the draft Bill.
Besides, states have opposed the powers proposed to be vested with the Centre to declare any goods as being of special importance and so, deny states the power to impose a duty on the goods concerned over a stipulated rate. “The government should not have (this) power... Entry tax in lieu of octroi should not be subsumed, in order to protect the interests of local bodies,” Rather added.
With the states hardening their stance ahead of the legislative assembly polls and general elections, chances of the Centre tabling the Bill to amend the Constitution in the winter session of Parliament are dim. Some governments are worried that agreeing for a GST before going to the polls could go against their interest.
“Such big taxation issues can never be taken up before the elections. No state wants to block its chances of coming back to power after favouring GST. It is more of a political decision now,” said a state government official. He said some states had made it clear that it would not be appropriate for an outgoing government to take a policy decision of this magnitude.
Tamil Nadu’s finance minister, B V Ramana, in a written speech, said the Constitution amendment was the Union government’s endeavour to “bulldoze and, thus, encroach upon the powers vested with the states”. Gujarat and Madhya Pradesh (also ruled by non-Congress parties) had similar views. The states also brought up the issue of compensation for revenue losses due to earlier cuts in Central Sales Tax (CST) rates and questioned the Union’s intent in not providing for this even after making a formal provision in its budge for the year. Rather has written to Union finance minister P Chidambaram in this regard. The government had made a provision of Rs 9,000 crore for CST compensation in the Union budget but has not given anything yet to the states. With a high fiscal deficit and the tough stance taken by the states on GST, there are indications that the amount might not be disbursed to the states.
The states’ stand has foiled the UPA government’s plan to at least make a beginning on GST by getting the Constitution amendment cleared. Earlier this year, then EC chairman Sushil Modi had said a broad consensus had been reached on 80 per cent of the issues. However, asked whether the current government was committed to rolling out GST soon, he had said, “This is an election year. So, you don’t know to what extent the government can take a decision in this regard.”
States had earlier given in-principle approval to subsume entry tax in lieu of octroi in GST and keeping petroleum outside the Constitution amendment Bill, which meant it could be taxed, if needed. A U-turn now could be attributed to a changing political scenario, officials said.
Now, the only way out is that the Centre agrees to the recommendations of the states. However, finance ministry officials, said the latter’s demands were against the principles of economics. GST, originally scheduled to be rolled out from April 1, 2010, has already missed several deadlines, due to differences between the states and the Centre.
GST CONUNDRUM
The Goods and Services Tax (GST) was originally scheduled to be introduced from April 1, 2010. However, differences between the Centre and states over the proposed Constitution amendment Bill has led to persistent missing of the deadlines. The new tax regime might not come even on April 1, 2014 owing to the upcoming Lok Sabha elections. Here is a brief explanation of various issues on GST:
Why is a Constitution Amendment Bill required?
GST will change the existing framework of indirect taxation given in the Constitution. According to the current arrangement, the Centre cannot impose a tax beyond manufacturing, because of which sales tax and value-added tax (VAT) are imposed by states. On the other hand, states cannot impose service tax. However, GST will require both the Centre and states to levy taxes on the common pool of goods and services.
What is the mechanism of passing the Bill?
The Bill requires a two-third majority in each houses of Parliament to get passed. Besides, ratification of at least half the states, besides President's assent, is required to make the Bill a law.
Where is the Bill stuck?
A standing committee of Parliament proposed that taxes on alcohol and petroleum products be kept out of the Bill. The Centre agreed, but proposed to keep these taxes under GST. Some states do not concur with the view. States oppose subsuming of entry tax into GST as well.
Will consensus on the Constitution Amendment Bill make GST operational?
No, because GST Bills have to be prepared. While the Centre will come out with its own Bill, each state will have to get its own Bills passed in their respective Assemblies. A committee is working on a model GST Bill. That way, the Constitution Amendment Bill is just an enabling legislation for GST.
How will GST be different from the current system of taxation?
Currently, the Centre imposes excise duty and service tax, while the states impose VAT and in some cases sales tax. All these, more or less, would be subsumed in GST. This would make India a kind of common market for taxation purposes. However, the earlier proposal to have a common rate with states and the Centre might undergo a change, as the states are insisting on a band of taxes to give them flexibility. Customs duty will be out of GST.
Are there any other differences between the Centre and states?
Who will have administrative control over tax assessees — the Centre or states -is another contentious issue. Earlier, it was proposed that traders with annual turnover of less than Rs 1.5 crore could come under the administrative control of states, while those above this limit or involved in inter-state movement of goods should be controlled by both the Centre and the states.
