According to official sources, the Centre has seen merit in these states contention that GST would further erode their already weak revenue-raising potential.
A destination-based tax on consumption, GST is seen as favourable to states that consume goods and services the most.
The eight states comprising the northeast are Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Tripura and Sikkim.
Since these states are not big consumers of goods and services, they will not get any meaningful revenue from the proposed GST on inter-state trade (IGST), the proceeds of which are envisaged to go to the state that consumes goods and services under the new regime. IGST would replace the existing 2% central sales tax on inter-state movement of goods, which is an origin-based tax levied by the Union government and transferred to the producing state.
Sources said the central government may allow these states to be treated as one block in the GST regime so that they could devolve the IGST proceeds to the region among themselves in such a way that less populous states like Sikkim, which do not consume much goods or services, do get better proceeds.
These states could devise a formula for sharing IGST revenue among themselves, said an official. The government has a slew of policies to promote industrial development in the northeast, including tax holidays and assistance to infrastructure development.
Assam, for example, now gets the entire CST proceeds on outbound movement of its tea and its petroleum products from its refineries but will get only a minuscule fraction of IGST when it replaces CST since IGST proceeds would go to the state where these products are consumed, said sources privy to the discussions of the empowered committee of state finance ministers. State ministers will meet in Meghalaya next month, when these states are expected to make presentations on the issue.
These states also have support from Haryana, Gujarat and Maharashtra on the issue of losses from shifting to a destination-based tax on consumption. For instance, Haryana, which gets close to R5,000 crore by way of CST on inter-state movement of cars from the Maruti Suzuki plants in Gurgaon and Manesar, has demanded that it be allowed to retain about 20-30% of such revenue even after shifting to GST.
The state is willing to transfer only up to 70% of the tax on inter-state trade to the consuming states under GST. This demand, an official said, is inconsistent with the principle of GST.
If it is not a destination based tax on consumption, it is not GST, the official said.
Tax experts see no point in making compromises to the basic design of GST to suit the interests of states with strong manufacturing and service industries. GST, worldwide, remains as a tax on consumption, based on the destination principle. Any compromise on GSTs design will be detrimental to achieving the goal of a common market, said Harishanker Subramaniam, partner, indirect taxes, EY.
Globally, the principle of destination-based taxation is central to GST. States that have spent on infrastructure and have granted tax incentives to attract industry, however, find it hard to digest the fact that tax on inter-state trade would go to the consuming state.
North-eastern states have also pointed out to the central and other state governments that because of their abysmally low level of production of goods and services, receipts from the state component of GST that subsumes the current state-level value-added tax (VAT) will also be very low.
CST was lowered from 4% to 3% in 2007-08, and further to 2% in 2008-09 after the introduction of VAT.