New Delhi: The Union government made sweeping concessions to convince states to meet the 1 April 2011 deadline for the roll-out of a goods and services tax (GST) as part of efforts to create a common market across India.
But the states still threatened to play spoilsport as they are reluctant to surrender their right to unilaterally change tax rates at the end of two rounds of meetings on Wednesday, one among the states and the other between the states and the Centre.
Among the significant compromises finance minister Pranab Mukherjee made was to accept the states’ November 2009 proposed GST, which involves a system of multiple tax slabs that would not include key items such as alcohol, petroleum products, electricity and real estate.
In January, the Centre had responded with a proposal seeking a single tax rate, a wide base that would include items such as alcohol and a common threshold for tax. The aim was to create a structure that would prevent politicians from using tax as a tool of patronage and remove the incentive for industry to arbitrage between different tax slabs.
Graphic: Ahmed Raza Khan/Mint
The idea behind the GST talks was to create a common market where costs would be lowered by allowing companies to offset tax paid on inputs and consumers would, unlike today, know the indirect tax rates. Under GST, tax will be levied and collected at the point of consumption.
“The finance minister’s speech is extremely encouraging. By coming out with the Central GST rate (10% standard, and 6% concessional for goods and 8% for services), he has fast-forwarded the whole GST initiative,” Pratik Jain, executive director (indirect tax) at audit and consulting firm KPMG, said in an emailed statement on the implications of the compromise.
Mukherjee’s formula envisages two separate rates for goods and another rate for services in the first year (2011-12). Subsequently, over the next two years, depending on tax collections, the tax rates will be both lowered and compressed to one rate: 16%.
Two state finance ministers and a finance ministry official, who did not want to be named, said Mukherjee’s approach has been that it’s necessary to get even a flawed GST off the ground and improvements can be made later.
As a sweetener, Mukherjee also proposed open-ended compensation to states that suffer a slippage in revenue by switching to GST from the current value-added tax regime. The Centre has also offered to compensate states fully for revenue foregone by lowering the Central sales tax, said Asim Dasgupta, West Bengal’s finance minister and head of the states’ body.
“We seem to be much closer to GST now than many of us thought earlier,” Jain said.
The key hitch now is the question of states’ autonomy over taxation powers.
Mukherjee has ruled out a compromise in this aspect, said Raghavji (who uses one name), finance minister of Madhya Pradesh and V.S. Acharya, home minister of Karnataka.
The finance minister has also moved to create a team that will implement the technology backbone for GST. Nandan Nilekani, chairman of the Unique Identification Authority of India, has been asked to head a group of officials to oversee the task.