GST discussions iron out entry tax, but thorny issues remain

Written by Gireesh Chandra Prasad | New Delhi | Updated: Jul 24 2013, 19:02pm hrs
Even as the sticky Centre-state issues regarding the goods and services tax (GST) remains unresolved, the empowered committee of state finance ministers has decided to include entry taxes, which account for around 10% of states' revenues, in the proposed comprehensive indirect tax. All entry taxes levied by state legislatures that are not in the nature of octroi and the proceeds of which go to local bodies shall be subsumed into GST, Jammu and Kashmir finance minister Abdul Rahim Rather, who was elected as chairman of the panel on Monday, told FE.

That decision has resolved a major cause for dissent, as states like Madhya Pradesh, Maharashtra and Karnataka had opposed subsuming these levies in the GST.

Rather also promised efforts to bring dissenting states together for a grand deal on the new regime.

But he has an uphill task in resolving the differences on issues like the threshold where the tax would kick in, the relative influence of the Centre and states in the powerful GST Council and the confusion over the possible dual control on the trader, with both Centre and states taxing the same transaction.

Entry taxes are going to be subsumed, provided they are not in lieu of octroi. If entry tax is in lieu of octroi, then it will not be subsumed, Rather said. Entry taxes that are levied in lieu of octroi will continue to exist even after GST comes into force and the entities that levy them will keep getting that revenue, he added.

Experts said that about 10% of states revenue are from entry taxes, but quantifying it precisely is difficult considering the very litigious nature of this levy. Madhya Pradesh, for example, collects Rs 2,000 crore a year from entry taxes. Union finance minister P Chidambaram has already offered states the flexibility to add a small margin, say half a percentage point, to the state component of the revenue-neutral GST rate so that they can make up for any loss of revenue from subsuming entry taxes within GST.

Entry taxes and octroi are essentially the same tax but levied for different purposes. While entry tax collected by state governments is used for the welfare of trade and industry, octroi is levied to meet the financial needs of a local body, explained Prashant Deshpande, senior director at Deloitte in India. Traders get credit for the entry tax that they pay against their value added tax (VAT) liability on the sale of goods but not in the case of octroi, said Deshpande.

Sharing of tax revenue on inter-state trade, formulating the place of supply rules that would determine which state has claim over the tax on a certain transaction and the methodology for providing compensation for any loss of revenue to states are other contentious issues. Though the prominent view is that the GST would only boost revenue for both the Centre and states without pinching industry, states are still asking for a compensation system for the initial years.

Getting the Constitution (115th Amendment) Bill passed to enable the Centre and states to get into areas of taxation that have so far been their exclusive domain when the ruling UPA coalition does not have a two-thirds majority in Parliament is the biggest hurdle at the moment in making swift progress on the indirect tax reform. Rather said that if the ruling coalition gets enough support from the main opposition party to get the Bill passed, there is no reason why implementing GST would be delayed beyond 2014.

There is no final word yet on the threshold for bringing businesses under GST although a figure of Rs 25 lakh is being discussed. State finance ministers and the Centre are also yet to decide on the structure of GST and the revenue-neutral rate. There are some broad consensus, however, on not excluding petroleum products from GST in the Constitution Amendment Bill so that it is easier to include them in GST at a future date. Evolving a mechanism to share revenue on inter-state trade is also a big challenge for policymakers.

Some experts said keeping octroi out of GST may not be a good idea as it involves a lot of compliance requirement and policing, which at times appear as harassment to the taxpayer. I think all taxes should be subsumed into GST to make it meaningful, said Bipin Sapra, partner, indirect taxes, EY.