The roll-out of the goods and services tax (GST) seems headed for another delay as state governments said on Wednesday that the constitutional changes recommended by the finance ministry to facilitate the introduction of the levy were lopsided and unfair to states.
“It’s not going to be introduced by April and it looks like we’ll continue with VAT (value-added tax) even in 2011-12,” T.M. Thomas Isaac, Kerala’s finance minister (FM), said after Wednesday’s meeting of the empowered panel of state FMs.
Even as state FMs held forth against the proposed constitutional amendments in a closed-door meeting, Union finance minister Pranab Mukherjee sought to link the introduction of GST with reining in inflation and urged all political parties to back the levy’s introduction.
“The empowered committee of state finance ministers, they are meeting,” he said in Parliament. “If we can do that (introduce GST), not only petroleum products, but also the entire range of products can be covered will be under (the new tax) mechanism and it will be a win-win game. Time is running out.”
Former finance minister P. Chidambaram had originally set 1 April this year as the deadline to roll out GST, but the Centre and the states could not agree on the architecture. In the last Union budget, Mukherjee reset the deadline to 1 April next year.
GST is India’s most ambitious indirect tax reform, aiming to stitch together a common market, which is expected to translate into lower prices and eventually higher revenue for all governments.
To meet the April deadline, Mukherjee, in July, watered down his ministry’s desire to roll out a simple GST architecture that would eliminate the discretionary power exercised by governments. His formula envisages two separate rates for goods and another rate for services in the first year (2011-12). Over the next two years, depending on tax collections, the tax rates will be both lowered and compressed to one: 16%. Many states have opposed the idea of uniform rates for all commodities.
Mukherjee also circulated among state representatives a draft of the constitutional amendments needed to introduce GST. The draft was opposed by several states, including those run by the Congress.
According to Asim Dasgupta, West Bengal’s FM, the states have agreed to GST “in principle”, but oppose the infringement of their autonomy.
The primary complaint of the states was against the clause that provides the Union finance minister veto power over all key aspects, including rates, thereby setting the stage for tough negotiations with states that are unwilling to let go of all autonomy over taxation.
“The special power conferred on the Union finance minister to virtually veto any majority decision of the council gives a one-sided preferential treatment to the Union government, which is neither fair nor equitable,” said K. Anbazhagan, Tamil Nadu’s FM. Anbazhagan’s Dravida Munnetra Kazhagam is a part of the United Progressive Alliance government at the Centre.
Gujarat, a Bharatiya Janata Party (BJP)-ruled state, has all along been supportive of the idea of GST. On Wednesday, state FM Saurabh Patel signalled a possible delay in the process. “It’ll take at least a few months to finalize the views of the states on the proposed constitutional amendments,” he said.
Bahujan Samaj Party-ruled Uttar Pradesh, which has supported GST so far, also expressed its reservations.
Some participants indicated that GST could become hostage to the rivalry between the Congress and the BJP.
Tax experts say the situation can be turned around.
“There is certainly some degree of despondency on part of the Centre on whether it (the constitutional amendment) can be salvaged,” said Satya Poddar, partner at audit and consulting firm Ernst and Young. “It can be salvaged by allowing it some adequate flexibility on both Central veto and empowerment of states to levy some additional taxes.”
GST’s constitutional amendments need the support of two-thirds of the members present and voting in both Houses of Parliament. In addition, legislative assemblies of at least half the states need to approve the amendment.
The resistance to the draft amendment has undermined Mukherjee’s attempt to bridge the trust deficit between the Centre and the states, which had surfaced in the last fiscal over compensation to states after reduction of Central sales tax.
According to Isaac, the states will meet Mukherjee in a fortnight to discuss the constitutional amendments.
Dasgupta continued to be upbeat about the outcome. The states trust Mukherjee and they can “do a very quick job” to solve the problems, he said.