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Centre may drop veto from GST Bill
August, 11th 2010

Weighs options to get tax reform back on track.

Amid opposition from the states, the Centre may smoke the peace pipe by dropping the contentious provision in the Constitutional Amendment Bill on a Goods and Services Tax (GST) that proposed to arm the Union finance minister with veto power. The Bill is being redrafted to say no proposal will be cleared by the GST council unless there is a consensus among all the 30 states and Union Territories, as well as the Centre.

Basically, the idea is that there should be a consensus among all the stakeholders. One can call it veto to all the states or no veto power to anyone, an official told Business Standard after the finance ministry discussed options with the law ministry on Tuesday.

If the proposal goes through, in the GST regime, the requirement of consensus will mean that a proposal from the Centre or any state can be turned down even if one state objects to it. This can make it difficult for the Centre as well as the states to mutually arrive at a decision.

Earlier, the Centre wanted to retain the veto power even if two-thirds of the states present during a meeting were in favour of a proposal. So, if 10 states were present, and seven voted in favour of a proposal, the Centre could still have its way.

The move faced opposition from even the Congress-ruled states such as Andhra Pradesh.

The deadlock over veto powers to the Centre had threatened to derail implementation of GST from April 2011. Under the new regime, all indirect levies, barring customs and octroi, will be subsumed under GST.

Another official said the proposed structure, which will be discussed with state finance ministers next week, is similar to the Empowered Committee (EC) of State Finance Ministers on Value Added Tax (VAT), which takes all decisions collectively after building a consensus. The official said the model largely worked in case of EC, even though many states deviated from the VAT rates of 4 per cent and 12.5 per cent.

If the central government had shown sensitivity, things could have been resolved long back. But I am afraid the BJP-ruled states and some others like the DMK (Dravida Munnetra Kazhagam that is in power in Tamil Nadu) have adopted a negative attitude and are making it a political issue, said Kerala Finance Minister Thomas Issac.

Bihars Deputy Chief Minister Sushil Kumar Modi, however, dismissed suggestions of the Bharatiya Janata Party (BJP) playing spoilsport. It (GST) was in our election manifesto and there is no question of going back on it. But it is very difficult to arrive at a consensus (when so many parties are involved) Veto is not the only issue. There should be special powers for (each state) Assembly, so that states have the flexibility in changing rates in case the need arises, he said.

The Centre is, however, unlikely to budge from its position on some of the other issues.

For instance, the government is planning to have a Disputes Settlement Authority with Constitutional backing. States had opposed the idea and proposed setting it up under the GST legislation. The officials, however, said it would not be legally possible because all the disputes between the Centre and the states and between the states are to be settled under the Constitution.

If the Disputes Settlement Authority is not set up under the Constitution, it will be a situation similar to VAT where states deviated from the agreed principles without attracting any penalty, he added.

The finance ministry has also found continuation of central sales tax in the GST regime is not possible because within the framework of the Constitution, the Centre cannot tax same activity twice.

The revised draft will be discussed with the EC on August 18. Once approved by EC, the government will send it to the Cabinet and the President for their approval to table it in Parliament. The government will have just about a week to place it in Parliament unless the session is extended beyond August 27.

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