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GST Council will need to correct existing distortions in VAT regime

September, 19th 2016
The challenge before the Goods and Services Tax Council, as it prepares to hold its first meeting in the next few days, is not only to decide on a tax rate, but also correct some of the existing distortions in the implementation of the value added tax regime. A member of the Empowered Group of State Finance Ministers that was looking into GST told BusinessLine, “Micro issues too will need to be addressed in earnest. Concerns raised by small-medium enterprises as well as other industry players on the exemptions and compensations need to be sorted out, as the government is working on a tight timeline (target of rolling out GST from April 1, 2017).” Address issues “Having a practical rate is a greater challenge. The States will anyway be compensated for five years, it is the Centre which has to pay for the compensation,” said Sushil Kumar Modi, senior BJP leader, who was Bihar’s Finance Minister and was heading the Empowered Committee from 2011 till June 2013. Another aspect of higher rate would be impact on prices which create an adverse consumer mindset and hamper buy-in, said industry body CII. The Council will also need to address the issue of exemptions. Various States have formulated different schemes for incentivising industrialisation in their areas – exemptions from VAT/CST payment for a particular period, deferral payment or refund, among others -- how will the transition take place under GST, it said. Speedy action The Council, led by the Finance Minister and representatives from the States, will now have to do micro management and number crunching, a person closely associated with the process said. The Revenue Secretary Hasmukh Adhia, had recently said, “...I have personally written to State governments to nominate one Minister to the GST Council. We have set a time limit of two months so that by November 22, the Council can discuss and take a final decision on all aspects of the tax.” While the decision on the fate of Empowered Committee of State Finance Ministers itself is yet to be taken, a member of the Committee said that “the Committee is registered under the Societies Registration Act, so if it has to be dissolved a decision will have to be taken based on the legal framework.” Panel’s relevance Earlier, it was presumed that once the GST Council is constituted the Empowered Committee will be dissolved, but no decision was taken. While a section within the government feels that the Committee has no relevance now, the Committee in its last meeting did discuss whether it should continue as a body. “There are issues beyond GST like inter-state issues which the Committee can discuss.” “The Committee was basically constituted for implementation of Value Added Tax regime…till GST is not fully implemented and the existing distortions like VAT reimbursement and so on, not resolved, it may continue for another six months or so. But, after constitution of the Council it will lose its relevance,” Modi said.