New Delhi: India’s most ambitious tax reform, the move to a goods and services tax (GST) that would have ensured a uniform nationwide tax rate, received a setback on Wednesday with the Bharatiya Janata Party (BJP)-ruled states seeking a “serious relook” at the scheme, labelling it “anti-poor”.
“It looks like it is a political move by (the) BJP as all major states ruled by the party raised objections to the proposals put forward by the empowered committee of state finance ministers. GST cannot be implemented before the deadline of 1 April 2010,” said a state finance minister, who attended a meeting of this committee in New Delhi on Wednesday.
The BJP is the main rival of the Congress, the dominant constituent of the United Progressive Alliance government at the Centre.
The committee met to discuss the road map to move to GST. On Thursday, it is scheduled to meet finance minister Pranab Mukherjee. The move to GST has been welcomed by companies, many of which have to deal with a multiplicity of tax rates across India. It is expected to streamline the movement of goods within the country.
According to the state finance minister, who did not want to be identified, all the major BJP-ruled states raised objections to various proposals made by the committee, and Madhya Pradesh opposed the very concept of GST.
“Representatives from Madhya Pradesh, Chhattisgarh and Karnataka were raising some silly issues to derail the process. But Gujarat had some genuine concerns, such as the inadequate IT (information technology) infrastructure,” the minister added.
An expert said the opposition to GST wasn’t entirely unexpected.
“So far, political commitment has been strong, but at the same time we thought that once people understood some technical details, there would be some second thoughts,” said Satya Poddar, partner at audit and consulting firm Ernst and Young, who has advised some states on GST.
GST is an attempt to economically integrate all states. Currently, states have the power to independently levy indirect taxes on some goods. As a result, some of the decisions made by companies have more to do with tax avoidance than operating efficiency, say analysts. Under GST, there will be uniform tax rates on almost all important goods and services across states.
According to Poddar, uniformity and harmonization of tax systems and rates are essential to GST. This may have led some finance ministers to wonder about their relevance in a post-GST situation, he said.
The Madhya Pradesh representative argued in the meeting that GST would cause an increase in the prices of essential commodities such as foodgrain, according to the minister.
The state has said it could lose around Rs2,000 crore if it moves to GST, said another person, who attended the meeting as the representative of a BJP-ruled state. This person, who asked not to be identified, added that “GST is also a compromise on the federal nature of the country in which the states have the power to levy taxes”.
“It would be surprising if everyone is revenue neutral at some rate. The question is, how big is the difference?” asked Poddar.
The preliminary road map to GST anticipated this problem and suggested the Central government might have to temporarily offset a drop in tax revenues of some states following the switch to GST.
Officials from BJP-ruled states, who attended Wednesday’s meeting, also pointed out that there has been no commensurate growth in the gross domestic product in the countries that follow the GST regime.
An official from the Madhya Pradesh government, who requested anonymity, said the state was not opposing the scheme “blindly”.
This person added that the state wants a “detailed study” on the subject and a “relook” at GST.
Meanwhile, one of the sub-committees appointed by the empowered committee has proposed the Central government should take the initiative to put in place a strong IT infrastructure before the introduction of GST.