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States favour compensatory VAT, industry may resist
May, 20th 2013

State governments are likely to favour a system in which they will not be dependent on another state to get their share of tax revenue in interstate trade under the proposed goods and services tax (GST).

But this model is likely to be resisted by industry as it will require traders to seek refunds from states for goods exported to another state—a process that until now has entailed long delays, said analysts.

GST, a tax reform that seeks to create one common market for all goods and services in India, has been long delayed due to differences between the centre and states, and between the states themselves, over issues including how to tax interstate movement of merchandise.

State governments, worried about revenue-sharing arrangements between themselves, are considering a compensatory value added tax (CVAT)?model rather than the integrated GST, or IGST, model to tax interstate movement of goods.

First proposed by the Andhra Pradesh government, CVAT was put forward as an alternative by the committee on IGST, comprising central and state government officials, at a meeting of the empowered committee of state finance ministers in Mussoorie, Uttarakhand, last week.

Under compensatory VAT, states will levy the tax on goods that are consumed within the state as well as those that will be exported to other states. But traders will be able to avail refunds from the state government on the tax levied on exported goods.

“States were worried that they may not get their share of revenues from the other state due to various reasons. Because of this they may prefer the CVAT model,” said a finance ministry official who did not wish to be identified. “Under this, every state will become an independent body and will not have to be dependent on another state.”
Though the government has set up the GST network—the technological backbone crucial for settlement of interstate transactions—states are still worried about settlements.

“Which refund scheme of the central or state government has actually worked? Be it VAT refunds or service tax refunds for exporters, there have either been rejections or long delays,” said Rajeev Dimri, leader of indirect tax practice at BMR Advisors.

Under the integrated GST model, the proposal was that the centre would levy the IGST rate (central GST plus state GST) on all interstate transactions of goods and services. The state GST portion would then be divided among the states depending on their entitlement with the help of the GST network.
So for example, if a tax is paid by the seller in one state, the buyer can claim credit for the tax paid in the consuming state.

When the centre makes the overall settlement, with the help of a clearing house, the consuming state will get its share of revenue from the producing state.
The GST network “will to a large extent depend on data,” Dimri said.

“If a big dealer in a particular state does not file the returns on time, this means that the whole process of processing the returns will get delayed. Also, there will be lakhs of transactions that will have to be processed by the GST network. States are wary about how all this will work,” he said.

An official with one of the industry lobbies, who did not wish to be identified, said the whole appeal of GST will be lost for industry.

“A system of refunds will lead to increase in transaction costs, bureaucratic delays and corruption. It will mean that industry’s money is locked up for a long indefinite period,” he said.

“The industry will prefer a straight system where the tax is paid in one state by the seller and the credit is claimed by the buyer as soon as the goods reach the state.”
Though the centre and the states have managed to arrive at a consensus on a number of contentious issues around GST, a singular tax reform, in the last few months, some issues remain unresolved.

These include the threshold limit, beyond which GST will be levied, and the revenue-neutral rate, the rate at which there will no revenue loss to states. On most of these issues, the states have found it difficult to arrive at a consensus among themselves.

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