New Delhi: A meeting on Monday between state finance ministers and representatives of the Union government failed to break a deadlock over constitutional amendments required to usher in the goods and services tax (GST) regime.
They are set to meet again next month to find a way out.
GST is India’s most ambitious indirect tax reform plan, which aims to stitch together a common market by dismantling fiscal barriers between states.
Currently, states and the Centre tax goods independently. The transition to GST is expected to enhance transparency and bring down costs.
Some state ministers who attended the Monday meeting said talks were hampered by political differences between India’s two largest parties by parliamentary seats—the Congress and the Bharatiya Janata Party (BJP)—as well as by the fear among state governments that their powers will be curtailed by the new regime.
In his Budget speech in February, Union finance minister Pranab Mukherjee said he was aiming to get the states shift to GST by 1 April 2011. But the impasse over constitutional reforms has already ruled out that deadline, Mint reported on 19 August.
Mukherjee belongs to the Congress party, which heads the United Progressive Alliance (UPA) government at the Centre.
The BJP is India’s main opposition party and controls several state governments.
“The (Union) finance minister should perhaps talk to the BJP leaders,” the finance minister of a state, who did not want to be named, said when asked about the reason for the deadlock. “It’s political”.
Some BJP-administered states such as Karnataka and Gujarat have supported the idea of GST. “We support it ,” V.S. Acharya, Karnataka’s home minister, reiterated on Monday.
But some other BJP-administered states—such as Madhya Pradesh—have taken a hardline stance against immediate transition to GST, particularly in the past two months.
In addition, Tamil Nadu, which is ruled by UPA constituent Dravida Munnetra Kazhagam, has also expressed doubts about the constitutional changes proposed by the Centre.
The states fear the transition to GST will check their power to tinker with tax rates. Tamil Nadu had earlier suggested that the GST architecture fix a floor tax rate and allow states the freedom to increase rates, if necessary.
The Tamil Nadu government had argued that if fiscal barriers between states are demolished, one state could not set tax rates that are out of sync with other states as businesses would start moving out.
Acharya said states with a relatively high proportion of tax to the gross state domestic product were worried as their studies indicated tax revenue would shrink under GST.
In July, Mukherjee had suggested that states classify most products into two categories and tax them at 5% and 10%, respectively.
Though the Centre promised to compensate states for revenue shortfall over the next four years, some states were concerned about short-term implications, Acharya said.
According to Acharya, on average the states’ tax revenue was around 6.7% of gross state domestic product. In Karnataka, the ratio of tax to gross state domestic product was 11%, followed closely by Tamil Nadu and Andhra Pradesh.
The higher the ratio, the lesser the possibility of significantly expanding tax revenue through GST even after accounting for the fact states would be allowed to tax services under GST, he said.