GST’s fate hangs in the balance

New Delhi: It may be a case of “so near, yet so far” for India’s ambitious unified tax, which promised to be one of the biggest achievements of the Congress-led United Progressive Alliance (UPA) government.

add_main_imageSeveral unresolved issues between the central government and the states may prevent consensus on the final design of the so-called goods and services tax (GST) in the 10-11 May meeting of the empowered committee of state finance ministers in Mussoorie, Uttarakhand.

More discussions are needed on issues such as the revenue neutral rate (or one that will not result in any loss of tax revenue for states) and tax on inter-state movement of goods, said Sushil Kumar Modi, chairman of the empowered committee and finance minister of Bihar. NextMAds

GST promised to be one of India’s biggest financial reforms. Some experts say it could add up to a full percentage point, maybe even more, to the country’s gross domestic product. But progress towards the tax that would have created a unified market has been patchy because it requires the states to share their constitutional power of taxing goods with the Centre. In the run-up to the unification, the states also agreed to a reduction in the central sales tax, or CST, (revenue from which accrued to them) and part of the delay is also because of disagreements regarding pending compensation for this from the national exchequer.

In an attempt to speed things along before the Mussoorie meeting, the central government and the states had agreed to form three sub-committees comprising officials from both sides to look into some unresolved issues.

“Of the three committees that were set up, only one committee on threshold limit and dual control has submitted its final report, with the other two submitting only interim reports,” Modi said.

The first sub-committee dealt with inter-state movement of goods and it was asked to look into issues around levy of integrated GST (IGST) on inter-state trade and taxation of imports under GST. While it has been suggested that the Centre levy IGST and divide the proceeds among states, some issues such as the autonomy of states and the division of revenue between an exporter and importer state persist.

The second committee’s mandate was to look into deciding the revenue neutral rate. Various revenue neutral rates such as 12%, 16% and 20% are being debated, with states being allowed to choose a rate within a narrow band. This committee was also asked to look into so-called “place of supply” rules that determine which state should get the service tax for services provided in one state, but used in another.

The third committee was asked to look into the issue of dual control, the threshold revenue limit after which GST would be levied, and exemptions. States had demanded that dual control should be minimized for small traders— those with business below a particular threshold not having to interact with central and state government officials. Only this committee has submitted its final report. sixthMAds

The committee has recommended a threshold limit of 25 lakh beyond which GST will be levied by both the Centre and the states. To be sure, there is a possibility that the states may not agree to this threshold limit, since they favour a higher threshold of ₹ 1.5 crore for the Centre (this currently prevails for excise duty).

If a common threshold limit of ₹ 25 lakh is agreed upon, small traders having revenue of between ₹ 25 lakh and 1.5 crore will also come under the central GST, something that the states are wary about.

Analysts point out that even in the absence of an agreement on some of these issues, the government can still push for the constitutional amendment Bill in the monsoon session— provided more business gets done in that session than in the budget session of Parliament.

“While issues like revenue neutral rate are important mechanics to determine how GST will eventually unfold in India, it will not be a part of the Constitution amendment Bill. It will be part of the legislation that will follow the constitutional amendment,” said Rajeev Dimri, indirect tax leader at BMR Advisors. “So, if the government wants, it can table the Constitution amendment Bill in the Parliament.”

“On issues like the dispute resolution panel and inclusion of goods like petroleum under GST, where a constitutional amendment is needed, consensus has evolved in the Bhubaneswar meeting,” he added. This referred to a January meeting of state finance ministers in the Orissa capital.

Mint reported last month that finance minister P. Chidambaram is keen on rolling out GST during the tenure of the current UPA government and is willing to consider giving certain concessions to states to arrive at a consensus. Chidambaram said recently that there was a 70% chance that the Centre will be able to get the Bills required for GST implementation passed in the remainder of its term, which ends in 2014.

Still, with the opposition in no mood to ease up on the government over corruption allegations, getting a constitutional amendment passed with two-thirds majority may be difficult.

The states will also discuss the issue of CST compensation at the Mussoorie meeting. After the Centre agreed in January on the compensation formula for the years 2010-11, 2011-12 and 2012-13, states have been pressing it to lay down a clear road map for compensation due to states for the years till the GST regime is rolled out. Even after the implementation of GST, states want a plan for compensation of losses to them due to GST and the removal of CST, for five years.

The Mussoorie meeting will also discuss the Centre’s move to disallow public sector units from claiming royalty and privilege fees paid to states as expenditure, thereby increasing their tax outgo. Though states such as Tamil Nadu, Gujarat and Bihar have opposed this budget provision, Chidambaram didn’t make any changes to this provision while moving amendments to the Finance Bill last week.