New Delhi: India moved a step closer to implementing the goods and services tax (GST) after state governments agreed to allow petroleum products under its ambit.
The final GST structure, however, could see substantial changes with state governments demanding major modifications in the constitutional amendment Bill currently being deliberated by the standing committee of finance, including doing away with a proposed dispute resolution authority and authorizing a GST council to decide on compensation issues, said a person familiar with the development.
GST is India’s most far-reaching tax reform and aims to integrate the country into a common market by dismantling fiscal barriers between states. Initially supposed to be launched on 1 April 2010, it has been delayed due to a lack of consensus between the Centre and the states, with state governments fearing a loss of autonomy.
The revised roll-out date of 1 April 2013 is also unlikely to be met with finance minister Pranab Mukherjee expected to resign next week to contest the presidential polls. Analysts and stakeholders say 2014 being an election year, GST may have to be implemented only by the next government.
Tax reforms: A parliamentary panel headed by BJP leader Yashwant Sinha is deliberating on a constitutional amendment Bill on GST. Photo: Satish Kaushik/Mint
“The states have agreed that petroleum products can be kept within GST as long as they are allowed to levy additional levies to protect revenue. This shift in stance was conveyed to the standing committee on Friday,” said the person mentioned earlier, asking not to be identified since discussions of the standing committee are confidential.
Until now, the states were against including petroleum products under GST fearing they would lose revenue. For many states, petroleum products contribute to more than one-third of their tax revenue.
The constitutional amendment Bill, too, excludes petroleum products from GST.
But industry lobby groups are demanding that petroleum be brought under GST so there is no break in the credit chain.
The task force appointed by the thirteenth Finance Commission suggested bringing practically all items, including petroleum products, into the GST base, and a single tax rate across states to ensure uniformity in the tax structure.
“States do not want a dispute resolution authority included in the constitution amendment Bill,” said the person familiar with the developments, who declined to be named. “They have also demanded that compensation issues to offset losses to states post-GST implementation should be decided by the GST council that will be set up.”
The parliamentary standing committee of finance, headed by Bharatiya Janata Party leader Yashwant Sinha, began discussions on the constitution amendment Bill with stakeholders earlier this month. On Friday, it held discussions with industry bodies and Sushil Modi, Bihar deputy chief minister and chairman of the empowered committee of state finance ministers. The panel is expected to table its report by the monsoon session.
The Bill will need to be passed by both the houses of Parliament and 50% of the state assemblies. It will be difficult for the Centre to garner support from the states for the legislation if their major demands are not met. “The inclusion of petroleum products will prevent distortions and help industries providing services to the petroleum sector to claim tax credit under GST,” said Prashant Deshpande, leader (indirect tax), at Deloitte in India. “At present, downstream industries cannot claim tax credit, and this breaks the credit chain. But even if it is included within GST, it needs to be clarified if they will be eligible for availing input tax credit.”
Pratik Jain, partner at consultancy firm KPMG, said the shift in stance by states is a positive move for the industry and will take the GST process forward. “It is better not to exempt any sector in the constitution amendment Bill because changing it in the future will be difficult. Petroleum products can be brought within the GST net with adequate provisions for safeguarding the revenue of states,” he said.