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FM gives more leeway to states on GST
August, 07th 2010

The Centre will rework the draft constitutional amendment as it bends backwards to accommodate states concerns to ensure a timely rollout of the countrys most ambitious indirect tax reform, goods and service tax (GST), from the next financial year.

Cutting across party lines, states have objected to the constitutional amendments suggested by the Centre to facilitate GST, which will replace a plethora of indirect taxes, saying that they impinged on their fiscal autonomy.

The Centre may redraft the amendment and take states suggestion of having a state finance minister as a vice-chairman of the joint council that will decide on the structure and rates under the GST, a government official told ET.

Union finance ministers veto power in the council, which has become the main issue with the states, may be limited to the central GST, in the new formulation that is expected to finalised over the next few days.

The empowered panel of state finance ministers will take up the new proposal on August 18 and if approved the Centre will introduce the bill in Parliament after presidential assent.

Finance minister Pranab Mukherjee had indicated the possibility of a tweak in the proposed changes in Parliament on Thursday. I have no intention of becoming the super finance minister to interfere with the states, he said adding that it was not possible to stage Hamlet without the Prince of Denmark... States are the princes of Denmark. He had also made an emotional plea to all political parties to support this reform that would not only cool prices but also give a boost to countrys GDP.

Mr Mukherjee met empowered panel chairman Asim Dasgupta on Friday to understand states concerns and convey centres stance. This has been a very useful meeting with the Union finance minister aimed at convergence on issues relating to constitutional amendment for GST. This is the closest of convergence, Mr Dasgupta told reporters after the meeting.

GST will replace all central and state indirect taxes on goods and services with a single levy, helping create a seamless pan-Indian market for goods and services. The single tax will, however, require constitutional changes to allow Parliament and state assemblies to impose tax on same items.

Currently, the Centre can impose tax on goods at the factory gate and services while states can impose tax at retail level on goods. States do not have the power to levy tax on services.

The constitutional amendments proposed by the Centre also seeks to create a joint council of all state finance ministers with union finance minister as its chairman and having a power to veto any proposal.

States unwillingness to support the Centres proposal made it near impossible for the government to introduce the constitution amendment bill in the monsoon session of Parliament that concludes on August 27 and, which will leave the government with inadequate time to roll out GST from April 1, 2011 even if it managed to achieve a consensus later.

The bill has to be passed by a two-third majority in Parliament and also has to be ratified by at least 15 state assemblies, which makes a political consensus necessary.

The Centre has already diluted its stand on a number of issues to get states on board. It has agreed to a three-rate structure for GST, in line with the recommendation of the state FMs panel, under which goods will attract a levy of 20%, services 16% and essential items a concessional 12%.

A list of 99 essential items, exempt under the current value-added tax regime, will also be exempted from tax under the GST. It has also offered to compensate the states in full for any revenue loss on account of implementing GST.

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