Centre blinks again on GST, but BJP holds back

Centre blinks again on GST, but BJP holds back

New Delhi: A fresh initiative to ensure a joint announcement for the roll-out of the proposed goods and services tax (GST) by 1 April 2011 is likely on Wednesday after the Centre formally communicated to states its willingness to further soften its stance.

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This would be the second such compromise the Centre has made in the last month to offset states’ fears on GST.

“The finance minister (Pranab Mukherjee) has responded positively to the changes the empowered committee has suggested," Thomas Isaac, Kerala’s finance minister, said of the constitutional changes.

However, finance ministers of states administered by the Bharatiya Janata Party (BJP) may still throw a spanner in the works, with the central leadership of the party weighing in on the discussions. Immediately after their meeting at the residence of BJP leader L.K. Advani on Tuesday evening, the ministers indicated they were not yet willing to sign on the Centre’s GST proposal.

Click here to listen to a podcast on how GST is a clearer and more uniform tax structure.

The debate over the fine print has begun to crop up after the Union government diluted its stand on the draft constitutional amendment required for implementing GST as states, in their previous meeting on 4 August, strongly opposed the draft.

Since then, the Centre has backtracked on some key provisions of the draft amendment to manage a consensus.

State finance ministers said the main changes proposed in the draft by the Centre are that the Union finance minister’s veto power in the GST council should be replaced by a “consensus" decision. If a consensus eludes the council, then the Union finance minister’s proposal would only be a recommendation.

Further, state finance ministers would, by rotation, serve as vice-chairpersons of the GST council. Similarly, the Centre accepted the proposal of states to exclude the dispute settlement mechanism from the proposed constitutional amendment.

The Union government has also offered to delete the five principles, which were to serve as markers for the GST council as the states felt the principles were “ideological statements rather than principles".

The Centre’s first constitutional draft proposed a GST council, with the Union finance minister as chairperson and states’ representatives as members. It would design the tax architecture and set tax rates. The GST council was to be guided by five principles such as “development of a common national market". The amendments, much to the states’ annoyance, provided the Union finance minister with a veto power over the council’s majority decision.

Now, the veto power has been replaced by “consensus". However, as the new draft circulated to state finance ministers has not defined the word “consensus", some of the finance ministers of the BJP-administered states continue to be apprehensive.

“What is consensus? Will it be majority?" asked Raghavji (he uses only one name), finance minister of BJP-administered Madhya Pradesh. Raghavji has for long been opposed to the advent of GST on the ground that it would erode the fiscal autonomy of states.

Raghavji’s concern was echoed by finance ministers of some other BJP-administered states. One of the ministers, who did not want to be identified as the issue is still being discussed, said the question that follows is—would a consensus be “binding"?

“No decision in the VAT (value-added tax) council was taken on a majority view, but was through several rounds of discussions," Isaac said. “All minority opinions also were considered. The VAT council decisions were also not binding, but still it is working. It can be the same in GST, too."

GST is India’s ambitious indirect tax reform, which aims to create a unified market by harmonizing tax systems. GST is expected to lower the cost environment for businesses, which will eventually translate into lower prices for customers. In July, Mukherjee watered down his ministry’s desire to roll out a simple GST architecture that would eliminate the discretionary power exercised by governments. His formula envisaged two separate rates for goods and another rate for services in the first year (2011-12). Over the next two years, depending on tax collections, the rates will be both lowered and compressed to one (16%). Many states are opposed to the idea of uniform tax rates for all goods and services.


Ruhi Tewari contributed to this story.