New Delhi: Finance minister Pranab Mukherjee struck a fine balance in the ongoing negotiations on the transition to the proposed goods and services tax (GST) by showing some flexibility on states’ grievances but simultaneously asking them to widen their tax base.
Thursday’s meeting between Mukherjee and the state finance ministers was dominated by talks on compensation to states on the revenue foregone on account of having reduced central sales tax (CST) preparatory to the transition to GST.
According to West Bengal’s chief minister Asim Dasgupta, who also heads the body representing states in GST negotiations, the central government has promised to offset about 68%, or Rs9,676 crore, of the Rs14,181 crore of revenue states have forgone in 2009-10 on account of the CST rate cut.
When merchandise manufactured in one state is sold in another state, CST accrues to the state where the manufacturing centre is located.
Manufacturing states have cut CST to the current level of 2%, for which the Centre compensates them to offset forgone tax revenue.
CST would be scrapped in a GST regime.
The amount of compensation is similar to the amount Mukherjee offered states 20 days ago. But unlike the earlier meeting, Mukherjee showed flexibility on this occasion as he offered to discuss the possibility of the centre compensating states for the entire Rs14,181 crore revenue foregone at a later date, said a finance minister present at the meeting, who did not want to be named.
On the previous occasion, Mukherjee suggested states bear third of revenue forgone in their budget, which some states said was unfair.
According to Karnataka home minister V.S. Acharya, who was present at the meeting, Mukherjee suggested states bring textiles and sugar into the value-added tax (VAT) base. VAT is a tax on consumption levied by states and is to be folded into GST when the transition takes place.
In the backdrop of high food inflation, Acharya felt states could not immediately bring sugar into the VAT net.
Satya Poddar, partner at audit consultancy Ernst and Young, felt the move to get states to levy VAT on sugar and textiles was linked to an attempt to create a more comprehensive VAT base, which would lead to a better estimate of a fair GST rate.
“In this context (GST negotiations), the Centre’s saying, let the base be comprehensive,” Poddar said. “I don’t see any technical difficulty in bringing textiles in VAT. If they haven’t done it, it’s inertia.”