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Tax reforms: stage set for GST deal
January, 28th 2013

The centre and states are poised to strike a compromise that will pave the way for the roll-out of the legal framework for the single goods and services tax (GST) regime from the next fiscal year itself, said a person familiar with the developments who didn’t want to be identified.
If this happens, GST could be launched on 1 April 2014.

The breakthrough was achieved after an expert panel recommended the blueprint for a compromise in the design of GST and the hammering out of a compensation formula for central sales tax acceptable to states. The states will be allowed to time their entry, as was done during the introduction of the current value-added tax (VAT) regime.
The committee constituted by finance minister P. Chidambaram was made up of bureaucrats from the relevant ministries in the states and the centre.

The decks will be cleared if the states convey their formal assent at the end of the two-day session of the empowered committee of state finance ministers due to begin in Bhubaneswar from Monday. Of course, the finance minister too would have to give his assent for the deal to be formally clinched.

Regardless of this, the proposal will be a strong reform signal, especially to overseas investors, who had become edgy following a prolonged phase of policy paralysis that only ended in September.

The committee has also recommended that all goods including petroleum products be brought under GST with the exception of alcohol for human consumption, the same person disclosed.

The draft of the Constitution amendment Bill, currently under the consideration of the standing committee on finance, puts petroleum products and alcohol for human consumption outside the purview of GST.

The committee has, however, suggested that the states and the centre should be permitted to levy additional taxes over and above the GST rate on these items.

Chidambaram constituted two committees in November last year, with representatives from both the centre and states, to look into the issue of central sales tax compensation and the design of GST. The committees submitted their reports last week.

The empowered committee of state finance ministers, headed by Bihar’s deputy chief minister Sushil Kumar Modi, is to take up the two reports for discussion.

If these recommendations are accepted by the empowered committee of state finance ministers and approved by the centre, suitable amendments will be brought in the Constitution amendment Bill to incorporate the changes.

In a signal that the centre was equally keen on fast tracking GST, Chidambaram told investors on the first leg of his overseas roadshows that the government will seek to amend the Constitution in the monsoon session of Parliament and get it passed in the winter session.

The implementation of GST, a singular tax reform that will remove all barriers across states and economically unify the country, has been delayed due to differences between the centre and the states over its final design and the issue of Central Sales Tax (CST) compensation. CST is in the process of being phased out ahead of the introduction of GST.
There may be dissent over some aspects of GST’s design, but it’s not clear whether this will render a consensus impossible. While states such as Tamil Nadu and Kerala are opposed to the inclusion of products such as petrol under GST, Madhya Pradesh and Gujarat are resistant to the centre levying taxes on areas outside of manufacturing because they feel this will encroach on the states’ autonomy.

The Constitution amendment Bill empowers the centre to levy IGST (central GST plus state GST) on inter-state trade, which will be subsequently divided between the centre and the states.

“Madhya Pradesh and Gujarat are opposed to clause 246 (a) in the Constitution amendment Bill, which gives concurrent powers to the states and centre to levy GST. They feel that the centre should not be allowed to tax retail trade as it will impinge on their autonomy,” said the person cited above.

The exclusion of declared goods—items of special importance that attract lower rates of 4-5%—from GST will be decided by the finance minister, according to the report.

In a move that may help both sides arrive at a compromise, the committee on CST compensation has recommended a staggered payment in the proportion of 100%, 75% and 50% of the compensation due for 2010-11, 2011-12 and 2012-13, respectively. This number will be arrived at based on the principles laid down in the 2008 agreement between the centre and states defining CST compensation.

But the recommendation, largely in line with the demand from states, could cost the exchequer around Rs.20,000 crore per year and would be subject to a final nod from Chidambaram.

States had demanded that the CST payout should not be reduced because of an increase in VAT by some states to 5% from 4%. They were also not in favour of the CST compensation calculations taking into account additional revenue accruing to states because of taxes on items such as sugar, tobacco and textiles.

States had demanded a compensation of Rs.19,000 crore in 2010-11, of which only around Rs.6,000 crore was paid by the centre. For transition to GST, states had cut CST to 2% from 4% as part of a gradual phase-out of the tax. The Central government compensates states for the revenue forgone. But with a lack of progress on GST, the centre, in January 2012, had refused further payouts. Some states had suggested that the CST rate should again be increased to 4% because of the centre’s reluctance to pay the tax.

The committee has also suggested that if GST was not rolled out by 2013-14, the states and the centre should have a fresh round of discussions to arrive at the compensation figure for fiscal year 2014.

“Given the current state of uncertainty regarding rollout of GST, the suggestion to let states come in at a later date will bring in some certainty and is a welcome move. Bringing all states on board at one go may be politically difficult. It is possible that the experience of the states that join the GST may prompt others to join in,” said Prashant Deshpande, leader, indirect tax, at Deloitte in India.

“However, interstate transactions will become much more complex since there will be two indirect tax systems that will be in operation. What will be the system that will be put in place when one GST state buys or sells goods from a non-GST state? All this will have to be worked out,” he said.

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