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GST may subsume all entry taxes
November, 27th 2014

In a move that is likely to draw opposition from some states, the Centre is going to propose subsuming in the proposed goods & services tax (GST) all types of entry tax, including the one for local bodies, when it tables the Constitution Amendment Bill in Parliament. The Bill also seeks to subsume petroleum products in GST but keep alcohol out of it.

The Constitution Amendment Bill tabled in the 15th Lok Sabha by the United Progressive Alliance government had proposed to subsume in GST only the general entry tax - those on import of goods in a state - while keeping entry tax in lieu of octroi (Etiloo, levied by municipal bodies on goods entering a local area) outside its purview.

States had argued, after introduction of GST, they should be empowered to collect entry tax for distribution to local bodies, instead of local bodies collecting those, to avoid harassment of traders at check posts. At present, Etiloo is collected by the state administration in most states and devolved to local bodies. In the case of Maharashtra, though, it is levied by local bodies. The Centre has decided to completely do away with the tax, regardless of whether it is levied by the state concerned or a local body.

"Any kind of entry tax will restrict free flow of goods and services and defeat the purpose of making India a common market. It is a cause for protracted litigation," said a finance ministry official asking not to be identified.

At about Rs 50,000 crore, entry taxes account for 14 per cent of states' total tax collection of about Rs 3,50,000 crore. According to experts, most entry taxes are in the nature if Etiloo and account for the bulk of this revenue.

The rate of entry tax varies from state to state. West Bengal, for example, levies a flat rate of one per cent but the tax paid does not qualify for a set-off against value-added tax. Bihar levies it on 35 goods at rates between two per cent and 16 per cent; petroleum products and alcohol at the highest rates. Uttar Pradesh follows a similar pattern. The rate in Madhya Pradesh is five-six per cent on most items. Select goods are taxed at only one per cent and, in such cases, a set-off is not allowed. The average rate in Maharashtra is five per cent.

If Etiloo is subsumed in GST, Maharashtra will incur the biggest loss, of over Rs 16,000 crore. The state had opposed the proposed move, which was supported by West Bengal, Odisha, Tamil Nadu, Kerala, and Uttar Pradesh. However, with the Bharatiya Janata Party part of the state government now, there might not be much resistance from Maharashtra.

According to sources in state governments, Karnataka, which might lose about Rs 8,000 crore if Etiloo is not retained, has supported the proposal. So have Gujarat and Bihar, because if Etiloo is kept outside the ambit of GST, it would not be possible for taxpayers to claim the credit for payment of entry tax in their returns.

"We are in favour of doing away with the entry tax. It puts a huge compliance burden on taxpayers and increases administrative costs for the state machinery," said a state government official who did not wish to be named.

The flip side of removing entry tax is that the compensation to be paid to states for any possible losses on account of switching to GST will increase; or, the revenue-neutral rate (RNR) that has already been estimated to be very high (at 27 per cent) by a sub-committee of Centre and state government officials, will further go up.

"If all entry taxes, including those levied by states in lieu of octroi, are included in GST, it will be difficult to give a uniform benefit across states. The RNR calculation will be difficult," said EY tax partner Bipin Sapra.

Article 301 of the Constitution precludes states from taxing inter-state transactions. This is meant to prevent barriers to inter-state trade. Article 304 allows a state to impose tax on goods imported from other states in line with the tax imposed on similar goods produced in that state, to avoid any discrimination between the two.

"The continuation of entry tax outside GST would perpetuate such complexities and litigation and impose barriers to trade," industry body CII had told Parliament's standing committee on finance.

Before taking the Bill to Parliament, the Centre is likely to discuss the draft Constitution Amendment Bill with the empowered committee of state finance ministers, at their meeting, likely in the first week of December.

While the Centre will also seek to subsume petroleum products in GST, it has agreed to keep alcohol, another major revenue for states, constitutionally out of GST.

"At a meeting with the 14th Finance Commission in July, the empowered committee had conveyed that most issues had been settled, except entry tax, compensation, petroleum and tax on inter-state movement of goods," added the state government official.

The Centre is not willing to concede on states' demand to provide for GST compensation in the Constitution, but it is working on a legal mechanism to address their concerns. The 14th Finance Commission will suggest the compensation mechanism for states in its report, likely to be given to the government next month.

"If they ensure compensation through a legal mechanism, we will support the Bill. But the Centre's suggestion to keep petroleum products under GST and make it zero-rated might not work," the official said.

Once a broad understanding is reached with states, the finance ministry will table the Bill in the Lok Sabha before the end of the winter session on December 23. The government is trying to meet the April 2016 deadline for introduction of GST.

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