Centre rejects Gujarat’s proposal of retaining 2% of integrated GST

Dated 9th October, 2014

The Centre has turned down Gujarat’s proposal to retain 2 per cent tax on inter-state movement of goods as and when Goods and Services Tax (GST) kicks in.

The reason for the rejection, according to an official close to the development who spoke to The Indian Express on condition of anonymity, is that it would “tantamount to collecting the Central Sales Tax in perpetuity”.

“It would not only distort the GST structure but also violate the Constitution,” the official said.

Under the Constitution, taxes on inter-state movement of goods and services fall under the purview of Parliament. If states are to be given this power, the Constitution would have to undergo another amendment in addition to that establishing the GST.

Gujarat is seeking 2 per cent of the integrated GST (IGST), which is levied on inter-state movement of goods and will replace the Central Sales Tax (CST), currently levied on inter-state sales.

In a meeting held on September 11 to discuss the modalities of IGST, the proposal was tabled before the Empowered Committee (EC) of state finance ministers. However, the EC is yet to take call on the matter, while states like Bihar are not in agreement with the proposal.

“The model was given in the last EC meeting. We will take it up in the next meeting and then we will see if the states are in agreement or not (on the model). We have not yet fixed the next meeting,” said EC chairman Abdul Rahim Rather told this newspaper.

The new regime is destination-based unlike the existing origin-based tax structure. In view of this, the manufacturing states including Gujarat and Tamil Nadu stand to lose out on revenue to destination states. The Centre has already assured that the loss on account of the switch-over would be compensated.

However, Saurabh Patel, Gujarat’s finance minister, said, “The manufacturing states are affected. The Centre has to see that a balance is struck. We have shown them the model and secretaries of most states have said that our model should be adopted. It is a win-win situation for every state. The main issue is that revenue of states is protected.”

According to the Centre’s proposal, IGST, which comprises Central GST and state GST, would be collected by the Centre so that the input credit chain is not disrupted. It will then be transferred to the destination state where the goods are eventually to be consumed.

The official quoted earlier said that if the Centre yields to the demand, it will lead to higher revenue-neutral rate (RNR), which will not benefit industry. “If the Centre compensates from its share, it will have to increase the rate to ensure that its revenues are not impacted adversely. The finance ministry is already struggling with a high RNR as items like alcohol and petroleum are being kept out. If the proposal is accepted, the rates would rise, defeating the very purpose of GST,” the official said.