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GST: Centre considers Gujarat model to win states' support
September, 12th 2014

The Centre on Thursday met states to consider the goods and services tax (GST) model proposed by the Gujarat government, as it tries to address their concerns on loss of revenue in the new tax regime and bridge trust deficit. Consuming states, however, opposed the proposal and it might be diluted if the Centre was to accept it.

"We met to discuss the proposal of the Gujarat government for sustaining revenue in GST," said an official after a meeting of the sub-committee of the empowered committee of state finance ministers.

After opposing it initially, Gujarat has now extended its support to GST with a rider that the Centre compensate it for any possible losses under the new system. The state proposed that exporting states should be permitted to retain two per cent of Integrated GST or IGST, the tax on inter-state movement of goods to be levied by the Centre. It will replace Central Sales Tax levied at present.

However, finance ministry officials opposed the idea and so did consuming states such as West Bengal and Bihar. The proposal got the backing of other producing states such as Haryana, Tamil Nadu and Andhra Pradesh. States are now negotiating whether the rate can be lowered to one per cent with a sunset clause.

"There were few takers for this model because if the Centre gives IGST to manufacturing states from its CGST kitty, the overall compensation for GST would come down. With the shrinking of divisible pool, BIMARU (Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh) states are going to lose," said another official.

Gujarat's argument is that the destination principle of GST gives no incentive to producing states to promote the manufacturing sector. Though the Centre has agreed to compensate states for any losses in the GST regime, Gujarat argued "it would be only for five years, while this would be a permanent loss".

Though the United Progressive Alliance government had rejected Gujarat's earlier proposal to let states collect both CGST and SGST and then transfer to the Centre its component, Thursday's meeting between officials of the finance ministry and states signals that the National Democratic Alliance government might be open to the suggestion.

The finance ministry has been trying to evolve a consensus on the Constitution amendment Bill for the rollout of GST. Among the contentious issues was states' demand for a provision in the Constitution to compensate them for any losses they made under the proposed indirect tax regime. The ministry is now considering another legal framework that will ensure the Constitution does not have to be amended for this purpose, and at the same time, even states' trust does not erode.

To resolve another nagging issue - of petroleum products, which states want constitutionally kept outside the GST ambit as these comprise 26 per cent of their revenues - the Centre is likely to include these products in the new regime, but taxing these at the rate of zero per cent. States could continue to levy sales tax or value-added tax on these, while the Centre would retain its right to impose excise duty.

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