New Delhi: Union finance minister (FM) Pranab Mukherjee on Friday did not give in to pressure mounted by state governments, setting the stage for tough negotiations ahead of the introduction of a single goods and services tax (GST).
As a result, the two sides were not able to announce a fresh date for the GST roll-out, which originally was supposed to be kicked off on 1 April.
Both sides are likely to meet again later this month, once the states finalize a blueprint for GST that will include, among other details, the desired tax rates. At present, the states are opposing the 12% single GST proposed by the task force of the 13th Finance Commisssion (TFC).
Stalemate: Finance minister Pranab Mukherjee’s compensation formula for FY10 involved states absorbing Rs4,500 crore loss in their books. Pankaj Nangia / Bloomberg
Mukherjee on Friday met with finance ministers of some states to finalize the deadline to the transition to GST and also resolve outstanding issues between the Centre and the states on compensation for Central sales tax (CST).
Mukherjee’s proposal to resolve the dispute on CST compensation entailed states having to absorb some of the loss in revenue on account of gradual reduction of the CST rate from 4% to 2% as part of indirect tax reform.
According to the finance minister of a state present at the meeting, but who did not want to be named, the situation remains fluid. A satisfactory compensation package on account of CST reduction was the key to bridging the trust deficit between the Centre and the states, but Mukherjee’s proposal was inadequate, the minister said.
When merchandise manufactured in one state is sold in another state, CST accrues to the state where the manufacturing centre is located.
Manufacturing states have, in phases, reduced CST to the current level of 2%, for which the Centre compensates them to offset tax revenue foregone. CST would be scrapped in a GST regime.
GST is India’s most ambitious indirect tax reform, which seeks to stitch together a common market and reduce costs to replace the current fragmented regime.
Ahead of Friday’s meeting, the two critical issues that appeared to adversely affect the roll-out of GST were the states’ growing distrust of the Central government on account of unresolved CST compensation issues and differences over the GST rate.
“We have a philosophy document, we don’t have a blueprint right now,” said Rajiv Dimri, leader (indirect tax practice) at consultancy firm BMR Advisors, while reacting to the existing working paper put out by the states.
Mukherjee’s CST compensation formula for the ongoing fiscal involved the states absorbing a total Rs4,500 crore loss in their books, Asim Dasgupta, West Bengal’s finance minister said. The residual amount of revenue foregone by the states, Rs9,500 crore, would be borne by the Centre.
Mukherjee also ruled out compensation to the states on CST in the next fiscal year, Dasgupta said. Arriving at an acceptable GST rate has been bogged down by differences among the states and also between the states and other entities such as the TFC task force on GST architecture.
The thumb rule is that the larger the number of taxes subsumed in GST, the lower will be the revenue neutral rate. The states have been reluctant to subsume all taxes into GST as it would mean a loss of power to unilaterally change some taxes.