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Some breakthrough, some impasse likely at Shillong GST meet
November, 18th 2013

The contentious issues in the way of the Constitution Amendment Bill for the proposed Goods and Services Tax (GST) are not likely to be fully resolved at a two-day meeting of the Empowered Committee (EC) of state finance ministers here, beginning on Monday.

The Centre, whose officials would also take part in the meeting, might agree to the states’ demand for keeping entry taxes on goods out of GST but would insist that petroleum products and liquor be subsumed in the unified indirect tax regime.

The stand-off between the Centre and the states over constitutional changes for the introduction of GST, however, may not end. States are also insisting on an in-built permanent mechanism to compensate losses arising out of revenue loss from GST.

The Centre is willing to soften its stance on the issue of entry tax but it is not ready to budge on the other two issues. Though some states might agree to keep petroleum and alcohol out of the Constitution Amendment Bill, the issue of automatic compensation mechanism could be the spoiler. “We are not averse to the levy of entry tax by local bodies in lieu of octroi. Since the Standing Committee on Finance of Parliament had proposed subsuming it, we also went ahead with that…But in the case of petroleum and alcohol, it is not possible to keep these out of GST. We have spoken to the states and some of them have agreed to reconsider their views,” said a finance ministry official, who did not wish to be identified.

The biggest bone of contention could be GST compensation. After a bad experience with the Centre on Central Sales Tax compensation, the states now want to make sure they don’t have to plead before the Union government for their dues. The standing committee had suggested providing for a GST Compensation Fund in the Constitutional Amendment Bill, to address revenue concerns of states.

Although the Centre has assured the states that it would adequately compensate them for any losses arising due to a switch to the new tax regime, it is not ready to make this provision in the Constitution.

Unless an agreement is reached on all these issues in the Shillong meet, the Centre would not be able to table the Bill in the winter session of Parliament. This means the new government will have to start afresh the talks with states, furthering delaying roll-out of GST.

Simultaneously, committees of central and state officials are also working on design and structure of GST. Committees on the “revenue neutral rate” (RNR) and ‘taxes on inter-state movement of goods’ have not seen much progress. While not much deliberations have gone on deciding RNR, as it could be done at a later stage by the GST Council, many states are not agreeing to an Integrated GST (IGST) model, where the Centre would collect the tax and pass on to the destination state. IGST is to be imposed on inter-state movement of goods and services.

The committee on “dual control, threshold and exemption” has reached some consensus on a threshold of Rs 25 lakh for the levy of GST. On the issue of dual control, there are wide differences.

It was proposed earlier that traders with an annual turnover of less than Rs 1.5 crore could come under the administrative control of states, while those above this limit or involved in inter-state movement of goods should be controlled by both the Centre and the states.

The EC will also discuss the road ahead for GSTN, the IT platform for the new proposed tax, in the two-day meeting.

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