New Delhi: The draft constitutional amendment proposed by the Centre to usher in the goods and services tax (GST) 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 draft amendment, circulated by the finance ministry to states at the conclusion of Wednesday’s meeting to discuss the GST contours, mirrors the suggestion of the 13th Finance Commission (TFC) on veto power—it had done so as it wanted to prevent states from ganging up against the Centre.
The draft amendment, which was reviewed by Mint, suggests setting up a GST council made up of the Union finance minister and the minister of state dealing with revenue, and finance ministers from all the states.
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“Every decision taken by the GST council, with a majority of two-thirds of the members present and voting, and agreed to by the Union finance minister, shall be binding on the government of India and all the state governments,” the draft amendment said.
GST binds states to the uniform rate through the constitutional amendment, which also details the principles that should guide the GST council’s decisions. One of the principles is to have “due regard to the development of a common national market for goods and services”.
Even though they would have majority in the GST council, the proposed amendments ensure that the Union finance minister can shoot down any proposal coming from the states on tax rates, goods to be left out of GST and also the taxes to be subsumed in GST.
To be sure, the amendments do ensure that the Centre too cannot unilaterally effect changes in taxes, but empowers itself the right to veto.
At the end of Wednesday’s meeting, finance ministers of some states said autonomy was a sensitive issue for states, indicating tough negotiations between the two sides when they meet next on 4 August.
“We are looking forward to constructive suggestion from empowered committee on this landmark legislation (constitutional amendment),” finance minister Pranab Mukherjee said on Thursday while addressing industry body Federation of Indian Chambers of Commerce and Industry on tax reforms.
According to Madhya Pradesh finance minister Raghavji (he uses only one name), who spoke after Wednesday’s meeting, the implication of GST on states’ fiscal autonomy is that neither the state legislature nor the state cabinet any longer have a say in taxation. The autonomy issue would be keenly debated in the next meeting, he said.
Over the last two years, compensation to states for loss of revenue after switching to GST and the loss of fiscal autonomy emerged as two of the most contentious issues.
On Wednesday, Mukherjee offset states’ fears over loss of revenue by promising open-ended fiscal support to states in case GST yields less than what they currently raise under the value-added tax (VAT) system.
However, the nature of the amendments proposed by the finance ministry imply that the issue of fiscal autonomy will become more contentious.
“It is a challenge because it is a very significant change affecting fiscal federalism in India,” said Satya Poddar, partner at audit and consulting firm Ernst and Young. “You have to be careful because the change will last decades.”
The states are set to lose fiscal autonomy both individually and collectively. At an individual level, states would lose autonomy as the draft amendment clearly takes away powers to unilaterally tinker with the tax rates.
Presently, under the VAT system, states had an informal agreement to divide taxable goods into three categories and fix three different rates. However, states such as Gujarat and Delhi have deviated from the agreement due to local compulsions and have enhanced tax rates.