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GST dream one step closer to reality; empowered panel of state FMs & Centre agree on 'place of supply' rules
November, 12th 2014

The government's bid to implement the goods & services tax (GST) as early as possible got a significant boost with the empowered committee of state finance ministers endorsing the so-called 'place of supply' rules that form the backbone of the new regime that will replace a plethora of levies, create a common market and likely give GDP growth a lift of up to two percentage points. The states are also confident GST will be in place by April 1, 2016, six years after it was originally scheduled to take effect.

The place of supply rules decide where goods or services will be taxed, fixing a crucial element of the levy that has gained in importance because of the surge in ecommerce and electronic delivery of services. Meanwhile, the Centre is preparing the ground for a national common market commission that will mesh with GST to create a unified area without interstate barriers to trade. However, both the Centre and the states continue to differ on the threshold for the levy with the first wanting it to be raised to Rs 25 lakh while the latter prefers it at Rs 10 lakh.

The Centre has assured the states that they won't suffer any revenue loss on account of subsuming petroleum product and entry taxes within the ambit of GST, promising to meet an important concern of states that are opposed to these duties being included in the levy that was to have been rolled out in April 2010.

"The empowered committee has given in-principle clearance to place of supply rules... This is a key takeaway from today's meeting," a senior government official, aware of the panel's deliberations on Tuesday, told ET.

Tax experts see finalisation of these rules as key to GST. "Place of supply rules are fundamental in determining the state where a service is provided and state GST or integrated GST is required to be paid," said Bipin Sapra, partner, EY. "These are extremely crucial to the basic structure of GST." Place of supply and consumption will determine the tax-recipient state and consuming state and have implications for their revenue.

"Place of supply rules are very critical for GST to run effectively. This is more so in the context of services as determining the state of consumption would be challenging, particularly where the services are not provided from an identified fixed place, such as telecom and transportation," said Pratik Jain, partner, KPMG in India. Jain pointed out that most of the disputes on value added tax in the European Union centre around place of supply rules.

Prime Minister Narendra Modi has identified GST as one of the most important items on the government's crowded reforms agenda and progress on the talks is being closely monitored.

The government is expected to finalise the draft of the constitutional amendment Bill that will allow the Centre to tax goods at retail level and states to tax services in a few days. Finance Minister Arun Jaitley has already indicated the Centre is in the last stage of finalising the Bill draft, approval of which is an essential step in the process. "If all goes well and the constitutional amendment Bill is carried in Parliament by both Houses, I think the 2016 target date is achievable," said GST Empowered Committee Chairman Abdul Rahim Rather.

The empowered panel did not agree to the Centre's demand for a higher threshold for taxing goods and services.

"In September, the Centre wrote to us suggesting that this decision of the empowered committee should be reviewed. The Centre suggested that the limit should beRs25 lakh. Even if it is not Rs25 lakh, the Rs10 lakh limit should be increased," Rather said, adding that the committee wants to stick to the agreed Rs 10 lakh threshold. However, he said the final call on threshold could be taken by the GST Council proposed to be created in the constitution amendment Bill.

GST will subsume central indirect taxes such as excise duty and service tax at the central level and value added tax at the state level besides other local levies such as octroi and entry tax. Though states are reluctant to include entry tax within GST, the Centre is now attempting to persuade them by offering a revenue compensation mechanism. The GST Constitutional Amendment Bill, introduced in the Lok Sabha in 2011, has lapsed and the government has to come up with fresh legislation.

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