Gujarat suggests innovative way out of GST deadlock

Written by Gireesh Chandra Prasad | Gireesh Chandra Prasad | New Delhi | Updated: Sep 12 2014, 14:11pm hrs
GSTThe Gujarat govt has come out with an innovative proposal to address the concerns of 'manufacturing states'.
In a sign of serious efforts by the Centre and states to iron out the differences over the design of the goods and services tax (GST), the Gujarat government has come out with an innovative proposal to address the concerns of manufacturing states that the proposed destination-based tax would deprive them of legitimate tax revenue.

At a meeting between finance ministry officials of the central government and representatives of states here on Thursday, additional chief secretary to the Gujarat government Hasmukh Adhia suggested that proceeds from 2 percentage points of the Centres GST levy on inter-state transactions be transferred to states that supplied the good or service. This would ensure that the key trait of GST as one that shifts taxes from investment and production to consumption wont be undermined as the collection would be purely based on consumption (purchase) and the arrangement of special transfer to the producing state would be solely independent of the way the tax is structured/administered.

A flawless GST would rather keep the tax on interstate trade or iGST, administered by the Centre, effectively notional with complete set-off facility even as it serves as an instrument for transfer of input credit from one state to another. Though this was considered initially, the idea of zero-rating iGST was later abandoned and it was decided that the iGST rate be kept the same as that of GST for intrastate trade.

The GST is proposed to have two (possibly equal) components central GST and state GST which will apply on the same base. While the GST rate (based on the principle of revenue neutrality) is yet to be determined, the combined rate is widely expected to be 16-20%.

Under the new indirect tax regime, iGST would, therefore, be levied on all taxable goods and services exported from a state, just like the central sales tax (CST) that is levied at present. The key difference would be that the state component of iGST would go to the importing state rather than the exporting one as is the case with CST (which is an origin-based tax).

This has made states like Gujarat, Maharashtra and Assam that have made infrastructure to woo investments in manufacturing and petroleum refining sectors to raise objections to the fundamental concept of destination-based taxation under GST.

As per the original concept, an importing state stands to get the state taxes on imported raw materials that are paid in the exporting state which are built into the value of an imported product. When the importer makes value addition on the product and further exports it, he pays iGST utilising the taxes already paid and the state needs to transfer the tax it received to the state importing the value-added product. The Centre gets its share of iGST. It is on this central component of the tax that Gujarat wants a 2 percentage point cut.

Experts said it remains to be seen how the central government would handle the demand. If the Union government decides to give proceeds from 2 percentage points of the interstate levy to states, it may merely be a cash compensation to states that do not affect the design of the new indirect tax system. However, if the Centre charges consumers an extra 2 percentage points of tax to pay to states, on which buyers do not get input tax credit, it may amount to continuation of the current CST, which the new regime aims to phase out, explained R Muralidharan, executive director, indirect tax, PwC.

The new tax system seeks to give the proceeds of interstate trade to importing states under the destination-based tax system, which would be compromised if CST in any form is continued. GST seeks to lower the tax incidence on products and services by giving credit on taxes already paid on raw materials and other services availed. States demand an automatic compensation mechanism to avoid delays in the Centre making payments.

Meanwhile, the Centre is also considering zero-rating of petroleum products, which it want to keep in the GST chain to ensure that the input tax credit system is not disturbed. Although states are keen that petroleum products, a major source of revenue for them, be kept out of GST through constitutional means, the Centre is unwilling to accept this proposal, given that such an exclusion would defy the purpose of the new indirect tax system, that is, avoidance of tax cascades. Even on Thursday, Tamil Nadu chief minister J Jayalalithaa pitched for exclusion of petroleum products from GST while she demanded that the states should be vested with the control of dealers having a turnover up to Rs 1.5 crore both for intrastate and interstate supply of goods and services.

Tax tangle

Issues agreed upon by Centre, states

* No dual control of traders upto R1.5 crore sales

* GST registration of traders with R10 lakh sales

* Exclusion of liquor from GST

Issues needing consensus

* Constitutional exclusion of petroleum products from GS

* Constitutional guarantee for GST compensation

* Decision on revenue-neutral rate of GST