New Delhi: The scheduled meeting of the empowered group of state finance ministers on 22 August is likely to be derailed after Tamil Nadu’s ruling Dravida Munnetra Kazhagam (DMK), a key constituent of the ruling United Progressive Alliance (UPA), questioning the legitimacy of the group to decide the terms of the proposed goods and services tax (GST).
The empowered committee, headed by West Bengal finance minister Asim Dasgupta, was expected to finalize the structure of GST during the weekend meeting and failure to do so would mean that the UPA will be hard-pressed to meet the self-imposed deadline of introducing the tax by 1 April.
According to the finance minister of one of the states, who did not want to be identified due to the sensitivity of the issue, the discussions at the meeting are likely to be dominated by the Tamil Nadu chief minister’s letter questioning the empowered panel’s standing. “This means that we certainly are not going to meet the deadline,” the minister said.
GST is an attempt to economically integrate all states. Currently, states have the power to independently levy indirect taxes on some goods. As a result, some of the decisions made by companies have more to do with tax avoidance than operating efficiency, say analysts.
Under GST, there will be uniform tax rates on almost all important goods and services across states.
In June, in a letter addressed to Prime Minister Manmohan Singh, which was sent to all chief ministers and also widely reported in the media, M. Karunanidhi questioned the standing of the empowered committee to take the decision on behalf of all states.
“The chief minister has pointed out that the group has not been empowered by the Constitution, so it cannot take decisions on behalf of all the states,” the finance minister said. “He also said it is a deliberative body to help forge a national consensus and that what chairman (of the committee) says cannot be the national consensus.”
Separately, top officials in Madhya Pradesh and Chhattisgarh governments told Mint that they had also written to the Prime Minister expressing their concerns over the ambitious tax reform. “There are still many issues on which consensus among states has not emerged. In addition, accurate estimation of losses to the state has also not been possible so far. Similarly, commitment for compensation for the losses to the states as well as the compensation mechanism is to be agreed upon,” Chhattisgarh chief minister Raman Singh said in the letter sent earlier this month.
Madhya Pradesh raised a political argument, too. Claiming that the proposed design was “highly regressive” and will be “unpopular with the common man”, the letter from the state said: “The realignment of taxes will have unintended consequence because of shift in tax incidence from the rich to the poor... Proposed design will increase the tax burden and compliance cost for the small-scale industries sector and may adversely affect the viability of survival of such units. Very high visible rate of taxation on items of daily needs is likely to encourage the underground economy, resulting in massive tax evasion” chief minister Shivraj Singh Chauhan said in his letter to the Prime Minister, adding that Madhya Pradesh will lose substantial revenue, which will be a major constraint on the state economy.
The empowered committee of state finance ministers was constituted to ease India’s move to the current value-added tax (VAT) system. Once that was achieved, the panel began to discuss and also come up with a road map to transition to GST.
“My understanding is there is no statutory backing (for the empowered committee). That doesn’t detract that the committee has a persuasive value and (preparing) a blueprint for action,” said S. Madhavan, executive director of audit and consulting firm PricewaterhouseCoopers.
According to a senior official closely associated with the transition to GST, Tamil Nadu’s move indicates that “all knives are out” to stall the process. The attempt to stall the process could be posturing to extract more concessions, according to people associated with the transition.
As reported by Mint on 11 and 12 June, the main Opposition the Bharatiya Janata Party-ruled states had opposed the implementation of GST and sought a “serious” relook at the scheme, saying that it was “anti-poor”. Addressing the state finance ministers’ meet on 11 June, Tamil Nadu finance minister K. Anbazhagan joined the list of state finance ministers who are uncomfortable with the 1 April 2010 deadline to implement GST.
“The road map towards GST must be carefully chalked out based on consensus and not compulsion. I feel that the targeted implementation date of 1-4-2010 is premature and hurried, especially since even VAT, the precursor to GST, has not yet stabilized,” he said in a written speech.
liz.m@livemint.com