Bhubaneswar: Ending a long impasse, state governments on Tuesday accepted most of the major changes proposed in the design of the goods and services tax (GST).
The move will give a fresh fillip to the growing efforts to transition to a GST regime by 1 April 2014.
The second day of a meeting of the empowered committee of state finance ministers saw the state governments accept most of the suggestions made by a committee set up by finance minister P. Chidambaram to look into the design of the tax, in a move that will see big changes in the final architecture of GST.
“This meeting puts an end to the long deadlock. We can move forward on GST. The central government has agreed to bring in the necessary changes in the Constitution amendment Bill to reflect the consensus achieved,” said Sushil Kumar Modi, chairman of the empowered committee of state finance ministers. “They will write to the parliamentary standing committee on finance to convey this.”
In November 2012, Chidambaram constituted two committees with representatives from both the Centre and states, to look into the issue of central sales tax (CST) compensation and the design of GST.
On Monday, the empowered committee gave its nod to the CST compensation formula put forward by the Centre, removing one major hurdle for GST.
On issues where consensus continued to be elusive, they have decided to form three panels to resolve the issue of an integrated GST to be levied on inter-state trade, a mechanism to avoid problems for traders emerging from duality of administrative control of the Centre and states, and a revenue-neutral tax rate that will ensure states won’t suffer a revenue loss.
The issue of duality has arisen as the sense is that small traders will have to interact with both state tax department officials and those of the central government because of the levy of both central and state GST. To avoid this, the states are demanding the creation of a common agency.
The committee will also look into what items should be exempted from GST and the threshold revenue limit after which GST is levied.
“At present, all states, put together, exempt 100 items from taxes. The central government exempts another 200 items. We need to form a common list and see what all items will be finally exempted from GST,” Modi said. “Also, a common revenue threshold has to be decided. Currently, while states exempt traders with less than Rs.10 lakh revenue from paying VAT (value-added tax) and sales tax, central government has an exemption limit of Rs.1.5 crore for excise duty.”
States have also demanded that the declared goods category be excluded from GST. Declared goods are items of special importance that attract lower tax rates of 4-5%; the Centre decides which items form a part of declared goods.
To allay their fears, the state governments have also sought that some checks and balances be inserted in the functioning of the GST council so as to avoid too much power being vested with the Union government. They have proposed that the central government’s view should have one-third weightage and the balance should be that of the states; and all decisions will be clinched if three-fourths of the council votes in favour.
Besides allowing the states to decide the timing of their transition to a GST regime, the central government accepted the demand of states to levy a floor rate with a narrow band. In the earlier version, states were allowed to levy only a single tax rate. Now they have been given some flexibility and allowed to levy rates in a narrow range based on the floor rate.
Similarly, the Centre will do away with the dispute resolution authority demanded by the states. Earlier, if a state government defied the decision of the GST council, then the dispute resolution authority was empowered to take action. States were opposed to the authority and had demanded that this clause be dropped from the draft Constitution amendment Bill.
Instead, the proposed GST council, having representatives from states and chaired by the Union finance minister, will devise a mechanism to resolve disputes.
Goods such as petroleum products will be brought under the ambit of GST and the rates will be decided by the council. At present, the Constitution amendment Bill puts petroleum products outside of GST. The Centre has also acceded to the states’ demand that they be given power to raise additional resources during a natural calamity or disaster.
“The agreement between the Centre and states on important issues of GST design is a big positive and indicates some forward movement for this tax reform. Finally, states and the Centre are showing some intention to introduce GST,” said Bipin Sapra, tax partner at audit and consulting firm Ernst and Young. “Giving states autonomy to decide the rates within a band and the option to time their entry into GST are positive moves, but their implementation will be important. These could lead to higher compliance costs and large- scale litigation if not implemented with a proper framework.”
Some Bharatiya Janata Party (BJP)-ruled states such as Madhya Pradesh, however, continued to oppose GST and want the roll-out to happen after the general election.
“The Bill will go to both the Houses of Parliament. Then it will go to states. It will take at least 10 months. Elections are due. Let the new government decide on GST. Ethically, it is not correct. The government should get the mandate from the people,” said Madhya Pradesh finance minister Raghavji, who uses one name. He added that if the BJP government comes to power in 2014, a different design of GST could come into force, which will be much more beneficial to the states.
The 115th Constitution amendment Bill, necessary for GST implementation, was tabled in the Lok Sabha in March 2011 and is currently being examined by the parliamentary standing committee on finance headed by BJP leader Yashwant Sinha.
GST aims to economically unify the country by removing all barriers for trade among states. With major issues around GST design and CST getting resolved, a political consensus could see GST being rolled out from 2014-15.
Modi said that though a consensus has been achieved on many important aspects of architecture, some areas of disagreement remain for which these committees have been set up. “The sub-committees will have representatives from the central and the state governments and will present their report in three months,” said Modi.
Of the three sub-committees set up, the first will look into the issue of integrated GST on inter-state trade and how will imports be taxed under GST. Madhya Pradesh and Gujarat had expressed concerns over the Centre collecting IGST (central GST plus state GST) fearing that it would impinge on the states’ autonomy. The Constitution amendment Bill empowers the Centre to levy IGST on inter-state trade, the proceeds of which will be subsequently divided between the Centre and the states.
At the same time, the state governments wanted clarity on how imports will be taxed under GST.