GST movement goes further but fails to get required support from states

Dated 21st August, 2014

Despite the Modi government’s readiness to address some of the concerns of states over the proposed goods and services tax (GST), consensus on the contentious issues continues to be elusive.

The empowered committee of state finance ministers that met here on Wednesday agreed to adopt a turnover threshold of Rs. 10 lakh for traders to register for GST but has demanded audit and enforcement powers over small traders who would be exempt from dual controls. This means in the case of traders with a turnover between Rs.10 lakh and Rs.1.5 crore, the states would not only have the powers to collect the taxes but also to enforce compliance.

Currently, the state value-added tax applies to traders with a turnover above Rs.10 lakh in the case of most states, whereas some keep the level lower at Rs.5 lakh.

Also, at Wednesday’s meeting, the state finance ministers reiterated that petroleum products must be excluded from the purview of the proposed comprehensive indirect tax by a constitutional provision.

The Centre has long argued that even though these products — a major source of revenue for both itself and the states — can be kept out from GST in the initial years, providing for such exclusion in the Constitution would be unwise given the tedious process for an amendment to the principal statute.

The states also stuck to their demand for a compensation mechanism where both parties have equal say and virtually rejected the Centre’s proposal that the matter be vested with a proposed GST Council with representations from both sides.

For businesses with a turnover over Rs.1.5 crore, the tax will be collected and enforced by the Centre as well as state governments — the former will be in charge of the central GST (C-GST) and states, the state GST (S-GST).

The unanimity among states on minimum turnover threshold to impose GST would, however, pave the way for talks on the revenue neutral rate for the GST, comprising C-GST and S-GST components, as the base of the tax is now defined.

Financial Express had earlier reported that the Modi government, eager to bring the tax reform that is expected to yield substantial economic dividends and stamp out chunks of the black economy, was considering giving a financial guarantee to all 29 states against any revenue losses from embracing GST. Besides, it is expediting the release of the compensation for past losses on the central sales tax (CST) front, pegged at Rs.34,000 crore.

Jammu and Kashmir finance minister Abdul Rahim Rather, chairman of the empowered committee of state finance ministers, told Financial Express: “States will not agree for anything short of keeping petroleum products out of GST through a provision in the Constitution.”

Rather said state finance ministers are awaiting the Centre’s response to the demands they had made on July 3. However, he added that the independent mechanism for making up for states’ revenue loss under GST could be for a limited period. “Every state is on board for an independent constitutional scheme for revenue loss under GST for five years. I don’t think there would be any revenue loss but this provision is meant to be precaution,” said Rather.

At Wednesday’s meeting, states dropped the earlier demand for a much higher threshold of Rs.25 lakh for GST, which would have excluded about two-thirds of the traders in India from the purview of GST. Rather said the threshold could be Rs.5 lakh in the case of special category states.

While BJP-ruled states are now on board for GST (Madhya Pradesh, which expressed some reservations recently, has since clarified its stand and lent support to GST), some other states continue to express dissenting views. For instance, Tamil Nadu CM J Jayalalithaa recently said that providing for an independent compensation mechanism in the Constitutional Amendment Bill was necessary.

States argued that mere administrative control over traders with a turnover up to Rs.1.5 crore could put them in a precarious situation where they are accountable for C-GST — the Union government’s component of GST — without any legal power to ensure compliance. Rather explained that legal powers would include powers for assessment, audit, enforcement and prosecution.

“We decided to recommend to the government of India that up to Rs.1.5 crore, it shall not interfere in assessments, audits and in other matters, which shall be left exclusively to states. But the Union government insisted that only administrative control can be given to states up to Rs.1.5 crore in respect of C-GST. So far as S-GST is concerned, legal control will anyway be with states,” said the minister. The finance ministry maintains that in case of any non-compliance of C-GST provisions, it would directly intervene in the matter.