Kolkata: The National Democratic Alliance (NDA) government is making its most determined bid to ensure fruition of the country’s biggest tax reform, the goods and services tax (GST).

The government used a meeting of state finance ministers in Kolkata on Tuesday to evolve a broad consensus for the roll-out of GST in April 2017 by accommodating most of the demands raised by states. And it released the draft law detailing the fine print of the indirect tax reform—after the states gave it their go-ahead—for public discussion.

In the process, the Congress, which continues to insist on including a cap on the GST rate in the constitutional amendment bill, found itself isolated.

Significantly, barring Tamil Nadu’s, no state finance minister, including those belonging to the Congress, opposed GST, a person familiar with the development said. In fact, Congress finance ministers opined that it is better not to put a cap on the GST rate in the constitutional amendment bill, the same person added.

Another meeting of the empowered group of state finance ministers is being convened in July to resolve outstanding issues.

GST aims to integrate the country into a common market by removing barriers to trade in goods and services across states. It will subsume all indirect taxes of the centre and states, including excise duty, value-added tax, service tax and octroi.

From the Union government’s point of view, this key indirect tax reform is now in its last mile and the NDA is likely to press for the passage of the legislation when Parliament reconvenes for the monsoon session.

Further, the electoral math in the Rajya Sabha, where the NDA is in a minority, is now relatively less unfavourable after the conclusion of the recent round of elections to the Upper house.

If the NDA fails to go through with its intent, implementation of the GST is unlikely in the rest of its term, which ends in 2019.

The isolation of Congress

Most states are not in favour of setting the GST ceiling rate in the constitution amendment bill, finance minister Arun Jaitley said after the meeting of the empowered committee of state finance ministers, effectively countering the Congress’s demand for a cap of 18% in the bill itself.

However, there was no consensus on what the revenue-neutral rate will be under GST. A revenue-neutral rate is a tax rate that does not cause a loss to states in a new tax regime.

Also, on the issue of dual control, while the centre has agreed that traders with a revenue threshold of upto 1.5 crore will be only under the control of state tax authorities, an effective mechanism for traders above this revenue threshold has to be worked out.

Both these issues will be discussed at the next meeting of the empowered committee in July.

“Every state has given its detailed views on the GST itself. Virtually every state has supported the idea of GST. One state (Tamil Nadu) has said they have reservations on GST and have offered a few suggestions on how to make the GST implementable. We will look into it," Jaitley said.

“There is a complete consensus that there should be no constitutional cap. It is best left to discretion of the GST council since there may be a need to increase rates at times of a disaster," he added.

The meeting was attended by finance ministers of 22 states as well as senior central government officials, including revenue secretary Hasmukh Adhia.

“Today’s meeting was a show of strength by the government. The majority of the states are not supporting the inclusion of the 18% cap in the constitution amendment bill. It is a message to the Congress that support the bill or we will push it through the Rajya Sabha without your support," said Harishanker Subramaniam, national leader, indirect tax, EY.

“The draft GST model law is in public domain for stakeholder consultations, which is an important milestone. This will provide the much-needed window for stakeholders to understand the nuances of the law and provide their comments. The next important step will be the passage of constitution amendment bill in monsoon session to set the ball rolling for GST implementation by April 2017," he said.

April 2017

Jaitley expressed hope that GST will be implemented by 1 April 2017 but noted that it will be crucial for the constitution amendment bill to be passed in the upcoming monsoon session to meet the deadline.

He pointed out that the passage of the bill will have to be followed by a ratification of the proposed law by a majority of states.

After this, the central GST and the integrated GST laws will have to be passed by Parliament and state GST laws by states by the end of the year.

Jaitley said he had assured states that their losses in a GST regime will be compensated by the centre for five years.

He also said the government was flexible on the demand for scrapping a 1% additional tax, adding that it would will lead to a higher outgo from the centre to producing states.

Doing away with the 1% tax, capping the GST rate in the constitution amendment bill and introducing a clause on a separate dispute resolution authority have been the main demands of the Congress.

In a rethink, Gujarat finance minister Saurabh Patel said that the state had no problem if the centre wanted to do away with the additional 1% tax since it would be compensated for the losses for the first five years.

The centre had included the additional 1% non-VATable levy in the constitution amendment bill specifically on the demands of producing states such as Gujarat.

The road ahead

In the next meeting of the empowered committee, central government officials, led by chief economic adviser Arvind Subramanian, will make a presentation on the possible revenue-neutral rate calculations.

States have expressed concern over the wide variation in the revenue-neutral rate proposed by the government panel led by Subramanian and the report that was submitted by the National Institute of Public Finance and Policy (NIPFP).

While the rates proposed by the Subramanian panel are below 18%, those proposed by NIPFP are above 26%.

“There is a huge difference between the two. If the rate is too high, it would be very bad for businesses and if the rate is too low, it would be very bad for the states as deficits would increase. So we have to find an appropriate RNR (revenue-neutral rate)," said West Bengal finance minister Amit Mitra.

The next meeting will also take a call on how the dual control issue will be worked out, with presentations by revenue experts. “Since the administration of state and central taxes will merge into one, there is a need to bring about a seamless system. It should not lead to conflict and the process should work out harmoniously between the centre and the states," Jaitley said.

“On the issue of dual control, it has been agreed by the centre that up to 1.5 crore, states will administer the taxes and after that threshold, a seamless process will have to be worked out," Mitra said.

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