New Delhi: The effort to put in place a single goods and services tax (GST) got a major boost on Monday when the state governments accepted a concession offered by the Union government.
The Congress-led United Progressive Alliance (UPA) had in an effort to win over the state governments offered a compensation package for 2008-09 to offset revenue losses under the existing value-added tax (VAT) regime even though the states had not carried out the committed reforms. At Monday’s meeting, the government, in a compromise, offered the same compensation formula that was employed in 2007-08.
According to a member of the empowered group of state finance ministers on GST who met Union finance minister Pranab Mukherjee, while the deadline of 1 April may be missed, GST would be in place within the next fiscal year.
Cooperative stand: Asim Dasgupta, chairman of the empowered group of state finance ministers on GST, on Monday expressed confidence that the new tax regime would be introduced from the scheduled date of 1 April. Indranil Bhoumik / Mint
GST, an attempt to stitch together a common market in India, will replace a tangled web of national, state and local taxes and is aimed as the culmination of a process of indirect tax reforms that began in 1991. The levy is ideally expected to help firms produce more efficiently and give consumers more clarity about the taxes they pay on goods and services.
The group will meet on 27 October to finalize the draft discussion paper and will release it on 10 November when they are scheduled to meet Mukherjee to discuss GST implementation. The group will hold discussions with the stakeholders, including trade and industry, after finalization of the draft.
Mukherjee convened the meeting after some state finance ministers threatened to quit the committee overseeing implementation of GST, taking offence at the tone of a finance ministry letter on 17 September that queried why the states should be compensated when they had not undertaken their side of the bargain.
In the letter, reported by Mint on 15 October, sent by Mukherjee to Asim Dasgupta, chairman of the empowered committee, the finance ministry had said: “However, our calculation shows that continuing last year’s compensation package without any change even in 2009-10, without the states imposing VAT on textile and sugar and increasing their basic VAT rate from 4% to 5%, will require the government of India to provide in the budget an additional amount of Rs14,000 crore for compensation to the states, which was not envisaged earlier.”
“The (Union) finance minister also assured that there would be a joint mechanism to verify the compensation claims made by different states,” said the member of the committee, who did not want to be identified.
With the Union government’s “cooperative” stand, a major roadblock for GST implementation has been cleared, the member said. “Things are moving forward very fast. The GST could be implemented next financial year, even if it may not meet the deadline,” he added.
However, Dasgupta on Monday expressed confidence that the new tax regime would be introduced from the scheduled date of 1 April.
“I remain confident about the target to be achieved. When I say we are working at it, we are very serious. Problems of each state have to be accommodated in a democratic manner. That is my responsibility,” Dasgupta, also the finance minister of West Bengal, told reporters after the meeting with Mukherjee.
In their meeting with Mukherjee, the state finance ministers have reiterated their objection to the Centre’s attempt to link the VAT rates to compensation.
When Mukherjee pointed out that the states had not enhanced the lower VAT rate nor had they brought textiles and sugar into the VAT net, they said that was the prerogative of the states.
The state ministers were also of the view that it was difficult for them to bring textiles and sugar under VAT because of the slowdown as well as the sweetener’s high domestic prices.
Gujarat has pointed out that the state had increased lower and higher VAT rates, but insisted that it was the state’s right to do so and it should not be included in the formula to decide compensation.
PTI contributed to this story.