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Centre plays hardball, rejects states riders for rolling out GST
October, 09th 2014

While the Narendra Modi government is keen to bring the states on board for the proposed comprehensive goods and services tax (GST) given its economy-wide benefits, it won’t yield to the sates’ strategy to use the grand bargain for unreasonable revenue gains and unhindered fiscal freedom.

The Centre is learnt to have turned down a key demand from mineral-rich, grain-producing and manufacturing states that they must be given a portion of the Centre’s revenue from GST on interstate trade to offset their perceived revenue loss to “consumption states” in the GST regime. It has also rejected a proposal from all states that the mandate of dispute resolution should not be given to the proposed GST Council, which is meant to have a constitutional role. These demands were made by respective states as a precondition for their adoption of the superior tax system that would avoid cascading of taxes and reduce the multiplicity of indirect taxes.

FE had earlier reported that states like Gujarat and Tamil Nadu that export goods to other states demanded an upfront share of Centre’s revenue from interstate trade. Their contention is that GST, being a destination-based tax on consumption, shifts the tax base away from investment and production and hence could be detrimental to their revenue interests. Mineral-rich states like Odisha and those with big oil refining capacities have also raised similar concerns.

Sources privy to discussions between central and state finance ministers said that transferring proceeds from 2 percentage points of the central government’s component of GST on interstate commerce to the exporting state would reduce the Centre’s revenue, unless the revenue-neutral rate (RNR) for it is raised.

The GST has two components — central (CGST) and state (SGST) — that roughly apply on the same base.

While the combined RNR is yet to be determined, it is widely expected to be between 16% and 20%. As per the current thinking, GST on interstate transactions or IGST will be levied at the same rate as the combined RNR (initially, IGST was proposed to be zero-rated). The state component of IGST would go to the importing state, in contrast to the present system of the exporting state getting the proceeds of the central sales tax on cross-border commerce.

“Although theoretically it is possible for the central tax rate on interstate sales to be higher than the state tax rate, it is generally desirable to have

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