GST: Centre's task easier with poll shift

Dated 22nd June, 2014

Arun Jaitley might find it easier to evolve a consensus on the proposed (GST) than his predecessors in the earlier government, as the opposition to the indirect tax reform is now more on merits and less due to politics.

State governments have formed common ground to press two main demands — not subsuming entry tax into a GST and excluding petroleum and alcohol from its ambit.

Officials say with a Bharatiya Janata Party-led government at the Centre, with former Gujarat chief minister Narendra Modi as Prime Minister, the government is confident of bringing on board both Madhya Pradesh and Gujarat, the two earlier resisters and ruled by the same party. The BJP-ruled states also seem to have softened their stance. In addition, the Centre is aware that the common concerns of the states will have to be addressed to make GST a reality.

“We are not opposed to GST. We are a manufacturing state, putting a lot of money in infrastructure. States are compromising on autonomy (for a GST) but our revenue should be protected. We have given a proposal to the Centre. I’m hopeful once the Budget session (of Parliament) is over, the Union finance minister would address the issue,” Gujarat Finance Minister Saurabh Patel told Business Standard.

“Earlier there was a trust deficit,” says former Central Board of Excise and Customs Chairman Sumit Dutt Majumder, who recently authored a book on GST in India. That gap isn’t there now. “Now, the discussions will be on merit and the Centre should be able to bring the states on board,” said Majumder. “It will take two years to roll out a GST. The information technology platform, GSTN, has just been set up. Without a strong technology system, it is impossible to administer GST.”

Assam, West Bengal, Kerala, Rajasthan, Tamil Nadu and Karnataka are primarily against inclusion of petroleum in GST as it constitutes about 26 per cent of their revenue. Beside, it is easy to administer, due to the limited number of entities. The Centre’s view is that petroleum is a major input for other industries and a cascading of taxes would increase their production cost and disrupt the audit trail, leading to revenue leakages. It has proposed states can continue it as an additional levy under GST.

“Entry tax, petroleum and alcohol are the only pending issues. There has to be a give and take from both sides to come to a meeting point,” said Revenue Secretary Shaktikanta Das. He added the Centre wants a complete solution, instead of starting with a central GST as suggested in the Economic Survey.

Some major states such as Maharashtra, Karnataka, Rajasthan, Chhattisgarh and West Bengal want entry tax (imposed on goods entering a local area) in lieu of octroi to continue. The Empowered Committee of state finance ministers has taken the same view. The Centre wants to subsume all forms of entry tax in a GST, to remove an impediment in free flow of goods; it has the backing of a Parliament standing committee. It has suggested states can levy an additional tax within the GST band.

The opposition to GST emanated from two broad concerns of the states — loss of revenue and autonomy. Gujarat has been contending that as GST is a destination-based tax it would mainly benefit consuming states such as Bihar and West Bengal. The earlier government assured compensation if a state had losses after switching to GST. Gujarat was not convinced.

Madhya Pradesh opposed GST, arguing the Centre’s model conflicted with the federal structure of the Constitution. The previous government at the Centre had, thus, agreed to a floor rate, with a band.

The opposition to GST emanated from two broad concerns of the states — loss of revenue and autonomy. Gujarat has been contending that as GST is a destination-based tax it would mainly benefit consuming states such as Bihar and West Bengal. The earlier government assured compensation if a state had losses after switching to GST. Gujarat was not convinced.

Madhya Pradesh opposed GST, arguing the Centre’s model conflicted with the federal structure of the Constitution. The previous government at the Centre had, thus, agreed to a floor rate, with a band.

Then, there is compensation to the states for reduction in Central Sales Tax— levied by the Centre on inter-state movement of goods but collected by states. Jaitley has told states he would compensate their losses of about Rs 30,000 crore over a three-year period. To avoid dual control of two authorities on small traders, states want that the administrative control of traders with annual turnover of up to Rs 1.5 crore should only be with the states. The Central Board of Excise and Customs is against the proposal but the Centre might finally relent on the issue. The government is aiming to get both the Constitution Amendment Bill and the GST Bill passed by Parliament and state assemblies this year, so that GST can be introduced at the earliest.

"It will take two years to rollout GST. It platform GSTN has just been set up. Without a strong technology system t is impossible to administer GST," says Majumder.