The BJP-ruled Madhya Pradesh and Gujarat have opposed the constitutional changes required for the rollout of goods and services tax from April next, threatening to upset finance minister Pranab Mukherjees calculations to muster two-thirds support for the crucial indirect tax reform in both the houses of Parliament.
Other non-Congress states are also likely to oppose the structure of the goods and services tax (GST) in its proposed form. The government will need the support of a large Opposition party or block to garner two-thirds majority in Parliament. The changes also need to be ratified by at least 15 state assemblies.
Prima facie the proposed changes are not acceptable to us as they end states autonomy and are against the spirit of parliamentary democracy, says Raghavji, finance minister of Madhya Pradesh.
We are sending a letter to the Centre seeking more time to examine the constitutional amendments in detail, he said.
The empowered group of state finance ministers will meet on August 4 to discuss the constitutional changes proposed by the Centre at its July 21 meeting. State finance ministers will meet the Union finance minister after the meeting to convey to him the decision of the panel.
The August 4 meeting is crucial for the governments plans to introduce the new tax regime from the next fiscal year. If the amendment bill is not introduced in the ongoing monsoon session of Parliament, GST rollout could be delayed.
Currently, the Centre can impose tax on goods at the factory gate and services while states can impose tax at the retail level on goods.
States do not have the power to tax services. The proposed single tax will, therefore, require constitutional changes to allow Parliament and state assemblies to impose tax on the same items.
The amendments seek to create a joint council of all state finance ministers with Union finance minister as its chairman. It is also proposed that the Union finance minister will have the power to veto any proposal for a change in the structure or rate of GST.
This arrangement is not palatable to many states, but it is only the Opposition-ruled that have come out against it. The Centre, by this amendment, has completely taken away the power to tax from states. We did not expect this. It is like cutting both your hands and giving them to the Centre, Gujarat finance minister Saurabhbhai Patel told ET.
This kind of opposition can cripple GST rollout as constitutional changes are not possible without a broad political consensus, a fact the Opposition is well aware of. The Centre can go ahead and introduce the bill, but it will have to make changes to get all parties on board, says Raghavji, revealing his hard stance on the issue.
The Union government is keen to implement the GST from April 1, 2011, a year behind schedule, but is finding it difficult to convince the states despite making huge concessions.
The Left-ruled Kerala has also sought changes in the suggested joint council to administer the GST. First it should have a vice-chairman and second the Union finance minister cannot have a veto power over two-thirds majority in the council.
On some items, states should have the flexibility change rates, says Kerala finance minister Thomas Issac. The opposition comes despite an impassioned plea from Mr Mukherjee to state finance ministers and political parties to facilitate the tax. At the last meeting of the empowered group of state finance ministers, the Union finance minister assured the states that he will compensate them fully for any losses due to the new tax regime.
The Centre has also agreed to dual rate levy with a different rate for services under GST to accommodate states concerns.
He has also has tried to address the concerns that the states could lose their autonomy saying that even the Centre was giving up its power to raise tax rates.
Tax experts say the GST structure should not be made complex even if it means some changes in relative powers of the Centre and states.
Ideally, GST and fiscal autonomy are not mutually exclusive. However, treatment of inter-state supplies in a complex economy like India requires a simple and uniform rate, said Bipin Sapra, partner at consulting firm Ernst & Young.
The GST is countrys most ambitious indirect tax reform that would replace existing state and central taxes such as excise duty, service tax, and value-added tax and purchase tax by a single levy to create a seamless pan-India market.
The new levy will also bring down the incidence of total indirect taxes on goods and services as it would provide for set off of tax paid on a wider set of inputs including services.