If the Centre accepts these recommendations (which seems unlikely), GST will have certain distortions in design, undermining its ability to boost the economy. A continuing discord between the Centre and states would put the GST implementation, already delayed inordinately, in limbo.
The empowered committee (EC) of state finance ministers, which met here to finalise its views on the Bill that redefines the taxation powers of the Union and state governments, decided to recommend to the central government changes in crucial provisions. These recommendations are mainly aimed at protecting states fiscal autonomy. Voting rights in the proposed GST Council, an advisory body, the states contend, should be dispersed enough to safeguard their fiscal independence.
Our country is essentially a federation. Nothing in the Bill should go against the spirit of cooperative federalism, Jammu and Kashmir finance minister Abdul Rahim Rather told reporters after the meeting.
States have unanimously decided that fuel and liquor should be kept out of GST. The EC has also decided to recommend to Chidambaram that the Bill should not have any provision for declared goods, on which states will have to levy a lower rate of tax than the standard rate, as in the case of value-added tax. The government of India should not have the power to provide for declared goods under GST, Rather said.
Earlier, the Centre had considered a proposal to allow states to levy a non-VATable tax on petroleum products over and above GST to get them on board for inclusion of these products in GST. The Centre reckons that keeping petroleum products outside GST would mar the regime, whose basic tenet is avoidance of cascading of taxes in B2B transactions.
The committee has also decided that entry taxes should not be subsumed into GST. This is a departure from the consensus arrived at on July 22 at a meeting in New Delhi.
Rather said that the final Bill should restore the clause in the original draft, which said that entry taxes, where it is levied in lieu of octroi, the proceeds of which go to local bodies, should not be subsumed in GST. Roughly 5% of states' revenue come from entry taxes, but quantifying it precisely is difficult considering the very disputable nature of this levy.
Rather said that compensation should be paid to states on their revenue loss after introducing GST. A provision should be made in the Constitution itself to have an independent mechanism to compensate states, he said. Introduction of GST is bound to reduce the revenue of some states by way of removing cascading of taxes and on account of its destination-based principle of taxation, as per which the consuming state would get revenues from inter-state trade.
Gujarats minister for planning and energy Saurabh Patel suggested that a part of the GST on interstate trade, say 2% out of the revenue-neutral rate of 20%, should immediately be credited to the exporting state and a similar proportion should be credited to the GST Council on the entire interstate trade in the country in a year, which could be devolved to states in proportion to their loss of revenue. Because of this modification, the IGST (integrated GST) input tax credit chain will not be affected as the importing dealer in the importing state gets full tax credit, he said.
A Union finance ministry official present at the meeting said that consultations with states on the Bill has now concluded and that the ministry will now start working on their recommendations to revise the Bill. However, it remains to be seen whether the government is able to introduce it in the winter session of Parliament beginning December 5.
The EC, however, has dropped its opposition to the decision-making mechanism in the proposed GST Council, where as per the current version of the Bill neither the Centre nor all the states can take a decision without the support of the other. The council requires every decision to be taken by a majority of not less than three-fourths of the weighted votes of the members present and voting. The central government will carry a weight of one-third and all states together will account for two-thirds.
With 50% of members constituting the quorum of the GST Council and the requirement of two-thirds majority, it will be impossible to take decisions without the support of states, the chairman of the EC said.