States set to reveal their mind on petroleum GST

Dated 10th December, 2014

Finance minister Arun Jaitley will meet state finance ministers on Thursday to discuss a draft Constitution Amendment Bill for the proposed goods and service tax (GST) that seeks to redefine the taxation rights of the union and state governments.

States have been opposing the idea of bringing petroleum products within GST as it would deny them the easiest way of mobilising extra revenue. As a middle path, the finance ministry has opted for allowing states to continue to levy existing state taxes on petroleum products while not Constitutionally excluding petroleum from the scope of GST. This means collecting zero GST from petroleum products in the initial years and it makes it easier to apply the new unified indirect tax on these items at a later date without having to amend the Constitution again.

At Thursday’s meeting of the Empowered Committee of state finance ministers here, the Centre’s proposal of zero rate of GST on petroleum product would be discussed. Many states are expected to voice their dissent at the meeting. Petroleum products account for about 30% of states’ tax receipts.

Experts said that zero rating of GST would mean both centre and states having to refund businesses the amount of input taxes that go into the production of petroleum products.

In the mean time, the finance ministry has said broad agreement has been achieved with the states on most of the issues concerning GST which is scheduled to be rolled out from April 1, 2016.

Minister of State for Finance Jayant Sinha assured states on Tuesday that they would be “insulated” from the impact of GST on their revenues and gradually the new tax regime will also cover petroleum and petroleum products.

“The tax rate under GST may be nominal or zero rated for the time being. This has been proposed to insulate the revenues of the States from the impact of GST, with the expectation that in due course, GST will be levied on petroleum and petroleum products,” Sinha said in a written reply to Rajya Sabha.

Finance Minister Arun Jaitly on Wednesday said that Rs 11,000 crore would be released to states this year towards compensating for their revenue loss on central sales tax, the rate of which has been gradually reduced.

In case of a consensus with states, the government will introduce the Constitution Amendment Bill to the Parliament, which may decide to refer it to the standing committee on Finance chaired by Veerappa Moily.

Once the Constitution is amended, the Centre needs to make a CGST law and an IGST law, while states need to ratify the Constitution amendment and pass state GST (SGST) laws. The GST rollout has missed several deadlines because of lack of consensus among states over certain crucial issues on the proposed new tax regime.

(This article is published in The Financial Express on 10th Dec, 2014)