Centre to give states Rs 25k cr to help push GST

Dated 7th August, 2014

Anxious to keep the promise that a pan-India goods and services tax (GST) would soon be a reality, the government is planning to take a couple of steps soon, accommodating states’ concerns over the proposed comprehensive indirect tax system that analysts and industry vouch for. Official sources told FE that the finance ministry is set to immediately release about Rs 25,000 crore to the states to make good their past losses on central sales tax (CST) revenue. North Block will also seek the law ministry’s consent to amend the Constitution to give “financial guarantee” to all 29 states against any revenue losses from embracing GST.

The states had pegged their unmet CST revenue losses until FY13 end at Rs 34,000 crore. The idea is to build consensus quickly on contentious issues through a process of give-and-take so that a Bill to amend the Constitution to facilitate a new tax regime could be tabled in the Lok Sabha in the winter session of Parliament, sources told FE.

The Centre’s move is despite some states continuing to be ambivalent towards GST for fear of “loss of their fiscal autonomy”. While the BJP-ruled states were among those that were chary of GST under the UPA regime, Madhya Pradesh, which is under BJP control, has lately written to the Centre expressing concerns over the need to give concurrent taxation powers to the Centre and states for introduction of the GST regime.

According to sources, in return for releasing compensation and for a constitutional mechanism to deal with “GST losses” of states, the central government expects state finance ministers to drop their demand for keeping petroleum and alcohol out of GST through a provision in the Constitution itself. Sushil Kumar Modi, former chairman of the empowered committee of state finance ministers, told FE that petroleum products should not be constitutionally barred from GST. He added that the GST Council proposed in the Constitutional Amendment Bill could decide when to subsume petroleum products in GST.

The Centre is willing to keep GST rate on these items at zero initially, but is against excluding them constitutionally, which will make it difficult to bring them under the ambit of GST in the future.

Only a small part of the Rs.9,300 crore approved by Parliament in the Union Budget for FY14 as CST compensation was released to states. For extra funds, the finance ministry can seek.