New Delhi: India’s attempt to move to a unified tax regime for goods and services has been held up by a growing distrust of the Union government among the states, and the reluctance of the latter to give up their powers to levy taxes.
The fallout of this distrust, evident during a meeting of state finance ministers on Thursday, is that the eventual rate of the goods and services tax (GST) is likely to be more than the 12% suggested last month by a task force set up by the 13th Finance Commission (TFC).
For instance, economic think tank National Institute of Public Finance and Policy (NIPFP) gave the empowered committee of state finance ministers a study that said the revenue-neutral rate (RNR) of only the states in a GST model with two tax slabs would be 11% (the Central component would need to be added to this), a state finance minister who did not want to be identified, said.
In the event the GST architecture has just one tax slab, RNR of just the states would be 9% (again, the Central component would need to be added to this), NIPFP concluded.
NIPFP’s assumptions and methodology differ from that of TFC’s task force.
Once the Central government’s GST is added to NIPFP’s estimate, the final GST rate would be significantly higher than the 12% suggested by TFC’s task force.
Separately, a Central government official, who did not want to be identified, said the finance ministry’s estimate showed that RNR for only the Central government is about 9%. RNR is the tax rate which would yield the same amount of tax revenue that is currently generated. “This debate on fundamental issues has to take place before they can move forward,” Satya Poddar, partner at consultancy Ernst and Young, said on the day’s developments. Poddar helped TFC’s task force with its report.
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 tax regime.
According to state finance ministers and bureaucrats, the recent GST report by the TFC- appointed task force and unresolved issues between the Centre and the states on last fiscal’s compensation to the latter for having earlier lowered the Central sales tax (CST) are the main reasons for the growing distrust between the two stakeholders in GST.
When merchandise manufactured in one state is sold in another state, CST accrues to the state where the manufacturing centre is located. As part of India’s indirect tax reform, manufacturing states have gradually reduced CST to the current level of 2%, for which the Central government compensates them to offset tax revenue foregone.
Gujarat’s finance minister, Saurabh Patel, identified outstanding differences with the Central government on CST compensation as a factor which made some states jittery. The minutes of an earlier empowered committee meeting said the states would not agree to GST unless CST issues are resolved, according to Patel.
Asim Dasgupta, West Bengal’s finance minister and chairman of the empowered committee of state finance ministers, told the media that state finance ministers would meet Union finance minister Pranab Mukherjee on Friday to talk about CST compensation and also discuss a roll-out date for GST.
Former Union finance minister P. Chidambaram had fixed April 2010 as the date to roll out GST, but Mukherjee last month said it would not be possible to meet the deadline.
Other than CST, the TFC task force report appeared to have made states distrustful of the Centre’s approach. TFC is a statutory body appointed by the President, but a GST report commissioned by it seemed to have been interpreted by finance ministers of some states as an attempt by the Central government to push them into an unacceptable position.
“Asim Dasgupta has credibility in the empowered committee that has been undermined by the task force (report),” a state finance minister, who did not want to be identified, said. “Its (report) has not contributed to anything,” the minister added.
Separately, Dasgupta told reporters on Thursday that the states had reservations about not just the methodology of the task force’s report, but also the entire approach.
The essence of the task force’s approach to GST architecture has been to subsume practically all relevant Central and state indirect taxes into its GST tax base. In addition, the task force report also draws in a lot more taxpayers into the net. The cumulative effective of a wider tax base and an enhanced taxpayer population helped the task force arrive at a low RNR of 12%.
For states, the flip side of the wider tax base is that it effectively takes away the power of a state government to unilaterally change some rates on any significant tax. The loss of taxation powers has not gone down well with some state finance ministers.
According to one Central government official present at Thursday’s meeting, the challenge to transition to GST boiled down to a problem of “mindset”. Stakeholders who are comfortable with the existing system are unlikely to want to risk a transition to a new system, another Central government official said.