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In a 22-page memorandum, which was submitted by Tamil Nadu Chief Minister J Jayalalithaa to Prime Minister Narendra Modi, who visited her at Poes Garden residence, Jayalalithaa said, Tamil Nadu is concerned about the impact the proposed GST on the fiscal autonomy of States and the huge permanent revenue loss it is likely to cause to a manufacturing and net exporting state like Tamil Nadu.
"I had suggested an alternative radical approach in which the levy, collection and appropriation of the substitutes for VAT, Central Excise Duty and Service Tax within a State could be delegated completely to the State machinery, with the Central machinery focusing on interstate taxation," said Jayalalithaa.
Some of the concerns raised by the state have been addressed - the provision for declared goods, which is against the principle of harmoniation has been removed; alcoholic liquor meant for human consumption has been kept outside the purview of GST; and the provisions relating to Advisory Committees for dispute resolution have been dropped.
However, still concerns were not addressed including GST Council as a constitutional body impinges on the legislative sovereignty of both the Parliament and the State Legislature and completely jeopardises the autonomy of the States in fiscal matters.
"We strongly object to the provision for the GST Council. The existing mechanism of the Empowered Committee of State Ministers which dealt with VAT issues is adequate. Ideally, no statutory GST Council is required, the decision making rule and voting weightage in the proposed Council are completely unacceptable. They give the Government of India an effective veto in the GST Council and no distinction is sought to be made amongst the States in weightage. Hence, if at all a Council is formed, the weightage of the vote of the Central Government should be reduced to one-fourth of the total votes cast and that of the States should be increased to three-fourths of the total votes cast," said Jayalalithaa.
She added, further, the weightage of each State's vote should be in proportion to the representation of each State in the Council of the States, since this is important as the changeover to GST has different implications for different States based on their size and reliance on own tax revenues.
She reiterated, petroleum and petroleum products must be kept outside GST in view of the revenue impact and the positive environmental and social impact of high effective taxation on these items and there is a need to enable the States to levy higher taxes on tobacco and tobacco products on par with the Centre, as States like Tamil Nadu already levy a higher rate of tax on tobacco and tobacco products on account of the public health concerns.
Jayalalithaa said, manufacturing State like Tamil Nadu will permanently lose "substantial" revenue if GST is implemented, due to the shift of the levy from the point of origin to the point of destination and also due to the phasing out of CST and transfer of input tax credit on inter-State sales and inter-State stock transfers to the destination States.
Due to the difficulty in fixing even nominally high revenue neutral rates, it is expected that the extent of revenue loss under GST would be around Rs.9270 crores for Tamil Nadu, which reiterated the need for a constitutionally mandated independent compensation mechanism for full (100 per cent) compensation of revenue losses suffered by the States for a period of not less than five years.
In lieu of the proposed additional levy of 1 per cent tax on Inter-State supply of goods, Tamil Nadu suggests that the origin States may be allowed to retain 4 per cent of the Central GST part of the Inter-State GST that would be leviable on inter-State supply of goods and services as this would ensure speedy recompense for a portion of the revenue loss and will reduce the amount of compensation payable. Further, as this comes out of the CGST component, it does not affect the destination State's revenue or cause any cascading.
Before the Constitutional Amendment Bill on GST is taken up, Centre should strive for a broad consensus on important issues like the compensation period and methodology, revenue neutral rates, floor rates with bands, commodities to be excluded from GST, the IGST model and clarity on dual administrative control, so that the genuine apprehensions of States regarding loss of fiscal autonomy and permanent revenue loss are allayed," said Jayalalithaa.
