The proposed Goods and Services Tax (GST) might be introduced only from 2016-17, even as the Centre has agreed to sort out states' concerns over compensation for a cut in Central Sales Tax (CST), a long-pending issue obstructing progress in indirect tax reforms.
"The agreement resolves a major hurdle but does not mean GST will come into effect from this October or November. It will take time," said Prashant Deshpande, partner, Deloitte India.
At a meeting with state counterparts last week, Union Finance Minister Arun Jaitley had said, "Fixing the compensation issue is critical to roll out GST."
CST, a tax on inter-state movement of goods, was cut from four per cent to two per cent, in phases. In late 2012, states had reached an understanding with the Centre for full compensation for 2010-11, 75 per cent for 2011-12 and 50 per cent for 2012-13. This would require the Centre to shell out Rs 34,000 crore.
However, in Budget 2013-14, then finance minister P Chidambaram provided only Rs 9,000 crore, of which only Rs 1,900 crore was released. States complained they hadn't been given compensation since 2011-12.
CST is one of the problems in the way of GST. Issues concerning the Constitution Amendment Bill, an enabling provision to allow the Centre to tax goods beyond manufacturing and states to impose services tax, are also taking time to resolve.
"I think introduction of GST might come from April 2016. It is unlikely from next year," said Pratik Jain, partner, indirect tax, KPMG in India.
States also want the Centre to give a binding commitment in the Constitution Amendment Bill for compensating their revenue loses due to GST for three years. The Centre has agreed to the compensation but states want the Bill to say so. Then comes the issue of keeping petroleum out of GST. The Centre wanted this to be mentioned in the Bill but not states.
States also wanted a portion of the central pool of tax on inter-state movement of goods and services. They also demanded that entry tax not be subsumed in GST, as it is a major source of revenue for local bodies.
Even if agreement is reached on rolling out a distorted GST, without petroleum and without subsuming entry tax, passage of the Constitution amendment will require much party coordination by the government. The ruling coalition is short of the two-thirds majority needed for the amendment in the Lok Sabha. In the Rajya Sabha, the ruling alliance has 62 seats but needs 160 to pass the Bill. Then, half the state Assemblies need to okay the Bill; the central government's supporters rule in only seven of 29 states.
The Centre will also have to enact a model GST law. Then, states will frame their own Bills and get these passed in their respective Assemblies. These then will have to be sent to the Centre for the President's assent.