New Delhi: The efforts to stitch together a common market in India through the introduction of a single goods and services tax (GST) by 1 April suffered a serious jolt on Wednesday, after 35 states and Union territories agreed on three rates for transactions of goods.

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In a move that has more to do with politics than economics, the states proposed a lower GST rate for items of mass consumption, a regular rate for other goods and a nominal charge of 1% on precious metals. There will also be a small list of goods exempted from this tax.

Announcing this, West Bengal finance minister (FM) Asim Dasgupta added that the agreement between state governments did not cover services.

Creating road map: West Bengal finance minister Asim Dasgupta chairs the empowered committee of state FMs that has to get GST rolling. Indranil Bhoumik/Mint

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The new tax structure proposed on Wednesday is similar to the value-added taxes (VAT) that states currently impose, though GST was envisaged as an improvement over the current system.

The states want multiple rates to stem revenue losses as well to hold the price line of some goods. Mint had reported on 31 August that state governments were coming around to a multiple-rate GST to ensure that mass consumption goods are spared a higher rate.

Dasgupta, chairman of the empowered committee of state finance ministers, the group that has to chart out the roadmap for GST, declined to disclose the rates for different categories of goods. However, FMs who participated in Wednesday’s meeting said the normal rate was likely to be around 5% and the standard rate could be anything between 8% and 12.5%.

Besides the states, the Union government too will charge its GST rate, which was earlier expected to be 8%.

After Wednesday’s developments, Dasgupta is scheduled to meet FM Pranab Mukherjee on 8 October.

In the past few months, negotiations among states have run into difficulties (Mint, 31 August) as richer states such as Maharashtra did not always have the same interests as poorer ones such as Madhya Pradesh.

According to a state FM, Wednesday’s compromises reflected Dasgupta’s aim to narrow the differences and get GST off the ground. Subsequently, GST could be reformed to achieve the original objective, the minister added.

“We don’t have any time to lose," Dasgupta told the media, after announcing that bureaucrats from the Centre and states would assemble into working groups to prepare a framework for constitutional amendments and a “model GST legislation".

“It’s a very confusing decision. The decision tends to be at a very high political level. There is no process yet for working out operational details," said Satya Poddar, partner at audit and consultancy firm Ernst and Young.

A negative implication of Wednesday’s decision by the empowered committee is that it may become difficult to counter litigation arising out of disputes on categorization of goods and services, he said.

Currently, some of the outstanding disputes are on pre-paid mobile phone cards and packaged software where the tax department and firms differ on categorization, which attracts different tax rates. In “value-added services" such as these, a single GST would have removed the root cause of disputes, Poddar said.

With states asking for three rates, “the best thing to do (would be) to have items at standard rates, which can be blended into services", he said.

According to the state FM at Wednesday’s meeting, states are open to charging 8% as a uniform tax rate for services. If the Union government adds the same rate on services, they will be taxed at 16%, compared with the current level of 10%.

Today, service tax is levied exclusively by the Union government, but a part of the proceeds is shared with states according to the formula fixed by the Twelfth Finance Commission.

Identifying the items of mass consumption that would attract the “lower rate" is expected to be tricky, as each state has unique needs.

For instance, Madhya Pradesh FM Raghavji (who goes by one name) pointed out in the meeting that the state has kept cereals, pulses and sugar out of the VAT net “despite incurring substantial revenue loss to give relief to the poor".

A written copy of Raghavji’s speech pointed out the proceedings of the empowered committee have given an impression that foodgrain would be taxed under GST.

After the meeting, Dasgupta said foodgrain were discussed, but there is no consensus on its categorization as yet.

To mitigate fears of some states that they would be steamrolled into accepting categorizations that would harm their interests, Dasgupta said states would be allowed to choose goods of local importance, which could be kept out of GST.