Tax reforms: stage set for GST deal

January 28, 2013
2 mins read
Panel recommends states be allowed to time their entry; formula proposed for CST compensation

The recommendation, largely in line with the demand from states, would be subject to a final nod from finance minister P. Chidambaram. Photo: AFP
The recommendation, largely in line with the demand from states, would be subject to a final nod from finance minister P. Chidambaram. Photo: AFP

New Delhi: The centre and states are poised to strike a compromise that will pave the way for the roll-out of the legal framework for the single goods and services tax (GST) regime from the next fiscal year itself, said a person familiar with the developments who didn’t want to be identified.

If this happens, GST could be launched on 1 April 2014.

The breakthrough was achieved after an expert panel recommended the blueprint for a compromise in the design of GST and the hammering out of a compensation formula for central sales tax acceptable to states. The states will be allowed to time their entry, as was done during the introduction of the current value-added tax (VAT) regime.

The committee constituted by finance minister P. Chidambaram was made up of bureaucrats from the relevant ministries in the states and the centre.

The decks will be cleared if the states convey their formal assent at the end of the two-day session of the empowered committee of state finance ministers due to begin in Bhubaneswar from Monday. Of course, the finance minister too would have to give his assent for the deal to be formally clinched.

Regardless of this, the proposal will be a strong reform signal, especially to overseas investors, who had become edgy following a prolonged phase of policy paralysis that only ended in September.

The committee has also recommended that all goods including petroleum products be brought under GST with the exception of alcohol for human consumption, the same person disclosed.

The draft of the Constitution amendment Bill, currently under the consideration of the standing committee on finance, puts petroleum products and alcohol for human consumption outside the purview of GST.

The committee has, however, suggested that the states and the centre should be permitted to levy additional taxes over and above the GST rate on these items.

Chidambaram constituted two committees in November last year, with representatives from both the centre and states, to look into the issue of central sales tax compensation and the design of GST. The committees submitted their reports last week.

The empowered committee of state finance ministers, headed by Bihar’s deputy chief minister Sushil Kumar Modi, is to take up the two reports for discussion.

If these recommendations are accepted by the empowered committee of state finance ministers and approved by the centre, suitable amendments will be brought in the Constitution amendment Bill to incorporate the changes.

In a signal that the centre was equally keen on fast tracking GST, Chidambaram told investors on the first leg of his overseas roadshows that the government will seek to amend the Constitution in the monsoon session of Parliament and get it passed in the winter session.

The implementation of GST, a singular tax reform that will remove all barriers across states and economically unify the country, has been delayed due to differences between the centre and the states over its final design and the issue of Central Sales Tax (CST) compensation. CST is in the process of being phased out ahead of the introduction of GST.

There may be dissent over some aspects of GST’s design, but it’s not clear whether this will render a consensus impossible. While states such as Tamil Nadu and Kerala are opposed to the inclusion of products such as petrol under GST, Madhya Pradesh and Gujarat are resistant to the centre levying taxes on areas outside of manufacturing because they feel this will encroach on the states’ autonomy.

The Constitution amendment Bill empowers the centre to levy IGST (central GST plus state GST) on inter-state trade, which will be subsequently divided between the centre and the states.

“Madhya Pradesh and Gujarat are opposed to clause 246 (a) in the Constitution amendment Bill, which gives concurrent powers to the states and centre to levy GST. They feel that the centre should not be allowed to tax retail trade as it will impinge on their autonomy,

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