State FMs ask, is this a good-for-states tax?

What is the status now?

After over a year of deliberations, states finally agreed upon a rate and model for the goods and services tax (GST). They also plan to set up a joint working group to speed up the work on legislative amendments for its rollout from April 1, 2010. Under the model, there will be three state level tax rates?a standard rate of 8% to 9%, a lower rate for essential commodities of 4% to 5% and a 1% special rate on precious metals.

But wasn?t GST supposed to have one single rate at the Centre and state level?

Yes, that was the original plan?to have a GST with a single rate for goods and services at the Centre and state level. But state governments, led by Madhya Pradesh, opposed the move as they felt that taxing essential commodities at a higher rate would draw flak from the public. So while states will tax services at a uniform rate, goods will be taxed at three rates. The Centre could follow a similar model, as Empowered Committee of state finance ministers? Chairman Asim Dasgupta indicated.

How will this be different from the Value Added Tax regime, which also has multiple tax rates?

The jury is still out on this, but tax experts say that it won?t be too different from the VAT system, which too has three rates of 12.5%, 4% and 0%. The rationale behind introducing GST was to streamline the indirect tax administration and make it more efficient. But the model finalised by state governments will lead to more confusion and inefficiency. What?s more, there?s also a possibility of greater litigation over categorisation of goods and services. The Union finance ministry was also keen that states stick to a single tax rate for goods and services, but finally this was the only way to get them all on board to meet the April 1, 2010 deadline.

Does this mean that GST will be introduced from next April?

Despite just six months left, it?s possible. The list of exempted items still has to be prepared and states also have to meet Union Finance Minister Pranab Mukherjee for a detailed discussion next month. The legislative amendments too will take a lot more time than the six months left right now.

But hasn?t the Empowered Committee set up a joint working group to speed up the Constitutional changes?

Yes, a joint working group with officials from the Centre and the states has been set up to ?to work out in a time bound manner a framework of Constitutional amendments and a framework of a model GST law? as Asim Dasgupta said. It will give in its recommendations within two months. But, that will still leave the Centre and the states with just two sessions to get them enacted?the winter session and the Budget session. More importantly, states that are opposing GST are threatening to stall the bills in the state legislature.

Which states are still opposing the introduction of GST?

States, per se are not opposed to the introduction of GST, just its date of implementation and the lack of adequate ground level preparedness. Some are worried about revenue losses under the new tax regime. The loss of fiscal autonomy has also been a major concern for some states. A major concern of states over a single tax rate for goods has now been addressed.

While all states have had reservations over the new tax regime, the BJP-ruled states led by Madhya Pradesh were the first to voice their opposition. Surprisingly, states ruled by key Congress allies like the Dravida Munnetra Kazhagam-ruled Tamil Nadu and now even a Congress ruled state?Haryana?have also joined the bandwagon. Tamil Nadu and now Madhya Pradesh have also questioned the authority of the Empowered Committee to decide a roadmap for GST.

Can GST be introduced like VAT, where all states initially did not join in?

Technically, yes it can still be introduced. The Central component of GST will still apply to the states which opt to stay out of the system. Instead of the state taxes under GST, VAT regime will continue.

So what will happen next?

The October 8 meeting of the Empowered Committee with Union finance minister Pranab Mukherjee will be crucial. It will be an opportunity to finalise the GST model and rates and also to give states a chance to air their concerns to the Centre. Mukherjee is keen to address problems that states foresee in ensuring that the tax comes into force from next April. He is also planning to visit states that are proving to be difficult and has also sought support from all political parties to ensure speedy passage of the legislative bills in the Parliament. But the actual process in the Parliament and state legislatures may take longer.