New Delhi: Finance minister Pranab Mukherjee reached out to the states on Wednesday in an attempt to remove the distrust that has blocked progress in the ongoing negotiations to roll out a goods and services tax (GST) by the beginning of the next fiscal.
Lending an ear: Union finance minister Pranab Mukherjee. Arvind Yadav / HT
“I am going to release funds,” Mukherjee said, referring to compensation that the states have sought from the Union government to offset the loss in revenue after cutting central sales tax (CST).
The states have lowered CST over a couple of years to the current 2% as a move to transition to GST. In January, GST negotiations between the Centre and the states were marred by disputes over the compensation. The two sides have not had a full-fledged discussion on GST since then, partly on account of the budget-making process, which got under way across the country in February.
By moving to GST, policymakers are trying to stitch together a common market in India to replace the current fragmented structure. The roll-out of GST is expected to eventually lower transaction costs for businesses and bring down prices for customers.
When merchandise, manufactured in one state is sold in another state, CST accrues to the state where the manufacturing took place. The states had agreed to initially lower CST and eventually eliminate it when the transition to GST took place as it is akin to exporting tax to the state where the consumption takes place. GST, unlike CST, will be levied only at the point of consumption.
“The government’s willingness to release funds will remove a friction point which has been disruptive in GST implementation,” said Satya Poddar, partner at Ernst and Young.
Mukherjee, who spoke about GST in his address at the Confederation of Indian Industry’s (CII’s) annual session, said the Union government would shortly start releasing CST compensation funds to the states. Tamil Nadu and Gujarat, two states with a high concentration of manufacturing industries, were among the most vocal in the demand for CST compensation during the January meetings between the two sides.
Mukherjee’s attempt to reach out to the states in order to restart GST negotiations in a more congenial environment is seen as a necessary condition to transitioning to a new indirect tax regime.
According to Mukherjee, GST does not require just broad consensus between the Centre and the states, it also requires absolute consensus.
A roll-out of GST would need constitutional amendments as the existing demarcation between the kinds of taxes the Centre and the states can collect would have to be removed.
Mukherjee said he would now have to engage state chief ministers and finance ministers to push forward negotiations on GST by convincing them that a transition to it would be a “win-win” situation.