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GST may provide for rate changes outside Budget
November, 27th 2009

The Centre and the state governments may retain the powers of reducing rates for the proposed goods and services tax (GST) without going through the Parliamentary process.

Despite stability and uniformity of rates being the basis for the concept of GST, the model GST Bills are likely to have a provision for giving the governments the flexibility to bring down rates, though with a certain degree of discipline.

The Department of Revenue is in consultation with state governments and the Ministry of Law and Justice to draft model Bills for introducing Central GST and state GST.

These will be in addition to the Constitutional amendment, which will need to be passed by Parliament with a two-third majority and then cleared by all the state legislatures.

At present, the schedule for laws governing indirect taxes provide for a rate cap, which is changed through the Budgetary process. The Union government can bring down the excise rates, while the states can reduce VAT rates from the capped level during the course of a financial year without the approval of the legislature.

In the case of VAT, states have agreed to floor rates for various items and the deviations from the agreed rates are less than 3 per cent of the total list.

"For GST, we want to ensure that the Centre and the states follow rate discipline but, at the same time, the window for reduction will be kept open to tackle emergencies, like the economic slowdown," a senior official told Business Standard.

Some experts, however, are of the view that such flexibility should not be provided at all.

"It will create a huge problem of uniformity for state GST, though central GST will still be uniform," said Rohit Jain, partner, Economic Laws Practice. With differential rates, the industry will also set up base wherever there is tax benefit and not according to the supply chain benefits, he added.

Jain pointed out that, even if the reduction window is not available in the model Bill, the states can decide not to follow it and dilute provisions.

"This can be prevented though, if the central compensation for loss of revenue is linked to the model. The impact of deviation from the model should be not compensated," he said.

For any rate change at the state level, Pratik Jain, executive director, KPMG, suggests a nodal agency for ratification. Otherwise, he fears, there can be variations. A mechanism for ensuring discipline will be spelt out by the Constitutional amendment, he said.

The adoption of Central GST law and state GST law will happen after the Constitutional amendment is adopted.

"The process of amending the Constitution will take three to four months. Even if it is introduced in the ongoing winter session, it will be referred to the Select Committee of Parliament. It can be passed only in the Budget session, after which the states will approve it," said an official.

The central GST and state GST bills will be identical in most parts and will specify things like what is taxable, the time applicability, how tax will be determined, classification of items and definition of terms like supply.

The Centre and the states are also working on pruning the list of exempted items. The list will be part of the rules and procedures that will be notified by the GST laws. There are about 300 items that are exempted from central excise duty and about 100 items from payment of state VAT.

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