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GST deadline derailed by states
August, 19th 2010

The introduction of a good and services tax (GST) is likely to miss the deadline of April 2011 after the Centre and states failed to break the deadlock over their differences on the tax architecture.

As a result, the requisite legislation cannot be introduced in the ongoing monsoon session. The parliamentary procedure made it imperative to do so to meet the deadline.

The Bharatiya Janata Party (BJP), the principal opposition party, refused to budge from its stand even after the Centre relented on its position and thereby ruled out attempts to forge a consensus.

Constitutional amendments will not be introduced in the monsoon session because of the political decision taken by the BJP, said Thomas Isaac, Keralas finance minister. In that case, it will not be possible technically to meet the deadline of 1 April 2011.

On Wednesday, states administered by the BJP took a tough stand against the constitutional amendment to introduce GST proposed by the Centre, and said they would need more time to respond to the draft sent late last week. In addition, they said the Centres draft, despite compromises, was not acceptable to them as it undermined the states fiscal autonomy.

We do not support the constitutional amendment in its present form and scope as proposed in the revised draft, according to the text of the speech by B.S. Yeddyurappa, Karnatakas chief minister.

Addressing states representatives on GST, Union finance minister Pranab Mukherjee said: The wisdom lies in moving ahead with the constitutional amendment without any further delay as a preparatory step for the introduction of GST. Mukherjee assured the states one more draft would be prepared to address concerns expressed on Wednesday.

According to West Bengal chief minister Asim Dasgupta, who heads the states body discussing GST, there is a difference of opinion among states on the latest draft of constitutional amendments. Some of the states have asked for another months time to respond to the latest draft, he said.

The current stand-off between the ruling Congress and BJP-administered states has come in the wake of two significant compromises made by Mukherjee since July to offset the fears of the states and get their support for GST.

Gujarat finance minister Saurabh Patel, who has supported the idea of GST, reportedly told Mukherjee in a closed-door meeting on Wednesday that the state would send a written note to the Union finance ministry, and if the Union government agreed to consider this, it would come on board.

Tamil Nadu, administered by the Dravida Munnetra Kazhagam, a Congress ally, also vehemently opposed the immediate introduction of GST. According to a government official familiar with the developments, Tamil Nadu chief minister M. Karunanidhi wrote to Mukherjee last month, urging him to put off a decision on GST.

Mukherjee diluted his stand on the draft constitutional amendment required for implementing GST as the states, in their previous meeting on 4 August, strongly opposed such a move. The main changes proposed in the draft by the Centre are that the Union finance ministers veto power in the GST council should be replaced by a consensus decision. If a consensus eludes the council, then the finance ministers proposal would not be binding.

Further, state finance ministers would, by rotation, serve as vice-chairpersons of the GST council. Similarly, the Centre accepted the proposal of the states to exclude the dispute settlement mechanism from the proposed constitutional amendment.

The Union government has also offered to delete the five principles, which were to serve as markers for the GST council as the states felt the principles were ideological statements rather than principles.

In July, Mukherjee had backtracked on the Centres original stand of designing a simple tax architecture, which would remove the discretionary power of the executive and eliminate space for politicians to use tax as a tool of patronage.

Mukherjees compromise formula on architecture envisaged two separate rates for goods and another rate for services in the first year (2011-12).

Subsequently, over the next two years, depending on tax collections, the tax rates will be both lowered and compressed to one rate: 16%.

The idea behind the GST talks was to create a common market where costs would be lowered by allowing companies to offset tax paid on inputs and consumers would, unlike today, know the indirect tax rates.

 
 
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