States may get power to tinker with ‘State GST’ rates

Dated 5th December, 2014

The Centre may allow States to unilaterally tinker with State-level Goods and Services Tax (State GST) rates as part of its efforts to build a consensus on the proposed dual-GST system in the country. In the GST architecture proposed during the UPA regime, the Centre was to decide on the rates in consultation with States.

The main issue was that all the States had to follow the rates and there was no room to unilaterally deviate from them. They had to go to the GST Council to change the rates.

India is looking to implement a dual-GST system, where the Centre will impose a Central GST (CGST) and the States will impose a State GST (SGST). Over 150 countries have implemented GST. The proposed flexibility for States to tinker with SGST rates could enable consensus on the GST implementation front, official sources said.

Indications are that States will be allowed to tinker with rates within a specified band. Giving the States flexibility to set rates will provide a “psychological boost” and may encourage them to move forward on dual GST implementation, informed sources said. The Centre is now looking at a revenue neutral rate (RNR) of 27 per cent. This is the rate when petroleum products are included within the GST ambit. The erstwhile UPA regime had talked of a RNR of 16 per cent.

Finance Minister Arun Jaitley is slated to meet the Empowered Committee of State Ministers in a bid to reassure the States and achieve progress in GST implementation, the biggest tax reform initiative ever undertaken by India.

Jaitley has said the Centre would take steps to introduce a Bill to amend the Constitution in the ongoing Winter Session of Parliament.

An amendment is needed as the Centre does not at present have the power to impose tax at the retail stage.

“The proposal to give States the power to tinker with the State GST rates is not an ideal solution. With this proposal, the Centre seems to be acceding to the demands of the States.

Otherwise, GST will never see the light of day. States are likely to be given this power and it may get reflected in the Constitution (amendment) Bill,” said Prashant Raizada, Partner-Indirect Tax, BDO India LLP, a professional services firm.

Consensus eludes the Centre and the States on the final GST architecture, with the latter raising several concerns on compensation, dispute redressal and inclusion of petroleum products within the GST ambit.

(This article is published in The Hindu Business Line on 5th Dec, 2014)