GST woes: States differ with Centre

Dated 28th December, 2014

In a sign that many states are still ambivalent about the proposed Goods and Services Tax (GST), some state finance ministers, who met Union finance minister Arun Jaitley on Friday, have pitched for changes in the GST design mooted by the Centre, including changes through the Constitutional Amendment Bill tabled in Parliament earlier this month.

Sources said Gujarat, Punjab and Assam put forward fresh demands to modify provisions in the Constitution (122nd Amendment) Bill, while Tamil Nadu strongly objected to the Centre going ahead with the Bill without reaching an agreement on the finer aspects of the new tax regime, such as the revenue neutral rate of taxation, ways of compensating states for revenue loss and determining the turnover threshold for GST to kick in.

States that are strong on manufacturing activities, food grain production and oil refining are concerned that the Centre’s taxation right would extend from factory gate to the final retail level under GST, while the right to tax services that states would get might not be sufficient to make up for any revenue loss they might have to suffer.

In the proposed system, both the Centre and states would levy tax on roughly the same base, consisting of almost all transactions of business above defined turnover levels and the final consumption.

In fact, Tamil Nadu CM O Panneerselvam said he would “strongly urge the Union government against hustling through the Constitution Amendment Bill hastily”, as it would have serious long-term implications for the fiscal autonomy and revenue position of states.

“We would rather suggest that the Union government should permit the empowered committee of state finance ministers to decide on these issues before the enactment of the Constitution Amendment Bill on GST,” Panneerselvam said at Friday’s meeting with Jaitley. He also demanded a ‘true consensus’ on the far-reaching tax reform that GST seeks to bring about.

GST came up for discussion when Jaitley consulted state chief ministers and finance ministers in the capital on the Union budget for 2015-16 he would present in February 2015.

Gujarat finance minister Saurabhbhai Patel proposed that the 1% additional tax that exporting states can charge on inter-state trade for two years after GST rollout should not be withdrawn after this period, as provided for in the Bill tabled in Lok Sabha.

Patel suggested that this tax, meant to provide a comfort level to states with a strong manufacturing base, should continue even after the initial two years “until decided otherwise” by the proposed powerful GST council in which decisions can be taken only by consensus.

Chief minister of Assam Tarun Gogoi demanded that revenue loss of north-eastern states due to GST rollout should be compensated for 10 years rather than five years, as is provided for in the Bill now. Gogoi buttressed his demand saying north-eastern states would not immediately benefit from GST, as manufacturing and service sectors were still nascent in the region. The state, which gets 2% central sales tax now on petroleum products exported from its Digboi and Numaligarh refineries to the rest of the country, would get to charge only 1% extra tax on such exports after GST rollout.

Punjab has demanded that the five year compensation for states’ revenue loss that has been guaranteed for in the Bill should be raised to at least 15 years, unless states are empowered to levy purchase tax or cess on wheat, paddy, sugarcane, cotton and milk.

The amendments proposed to the Constitution envisage subsuming of all such local taxes within GST and compensation for any revenue loss for five years. Punjab finance minister Parminder Singh Dhindsa informed Jaitley that the state would lose about R 6,800 crore when purchase tax on food grains, cess, surcharges, octroi and entry taxes levied in the state are subsumed into GST.

It was with great difficulty that Jaitley convinced states to agree on the final draft of the Bill in a late-night discussions, in which he emphasised that a faulty GST design with a lot of exclusions would not bring any benefit, while correcting it would be next to impossible. After the Bill’s introduction in Lok Sabha on December 19, states are now reiterating some of their unmet demands. This would mean a tough bargain between the Centre and states in the proposed GST Council while deciding on finer aspects of the new tax.

(This article is published in Financial Express on 28th Nov, 2014)