States may not lose entry tax revenue in GST regime

Written by Gireesh Chandra Prasad | Gireesh Chandra Prasad | New Delhi | Updated: Jun 27 2013, 11:11am hrs
To win over dissenting states on the proposed Goods and Service Tax (GST), finance minister P Chidambaram has agreed to let states to add to the revenue neutral GST rate (RNR) a small margin to offset revenue losses from subsuming entry taxes and octroi within the new unified indirect tax system.

The RNR, which will have two largely equal components (Centre and state) is yet to be determined, while a combined rate of 16-24% are under active consideration.

We offered states that they could add a small margin, say, half a percentage point, to the state component of the revenue neutral GST rate to compensate for losses from entry taxes. States could then transfer that amount to their municipal corporations, said a person informed about the Centre's preparations for GST. The idea is to bring on board states such as Madhya Pradesh and Maharashtra that fear losing revenue from taxing entry of goods into their territory. Madhya Pradesh for example, gets Rs 2,000 crore from entry taxes and does not favour subsuming it in GST.

Once entry taxes are subsumed into GST and are not part of the revenue neutral rate, it would not be a bad idea to make a small addition to the RN rate provided it stays within the band, said Prashant Deshpande, senior director at Deloitte in India.

Finance ministry is open to letting states the flexibility within a band about 10-15% over the state component of GST to address their revenue loss arising from removal of tax cascading. A final call on revenue neutral rate of GST will be taken by state finance ministers and the union government after New Delhi-based think tank NIPFP gives its recommendations.

The Centre's flexibility in accommodating states' revenue concerns indicate a sense of urgency in striking a give and take deal on one of the most complex tax reforms the country has undertaken.

Sources said that simultaneously, the Centre and states are roping in more members of the trading community to be part of TINXSYS, a centralised exchange of dealers from all states and union territories to sign up for online payment of taxes as well as for verification and use of input tax credit. Once the necessary IT infrastructure is built along state borders, goods transporters will be able to cross toll gates by flashing bar coded tax receipts at the electronic readers installed. This could help in avoiding long queues of trucks along borders, minimising inspector--tax payer interactions and reduce corruption and litigation, said another person involved in discussions on GST.

Finance ministry is at present preparing the Constitution (115th Amendment) Bill in consultation with a Parliamentary panel examining the 2011 version of the Bill that was introduced in Parliament. This would pave the way for making rules that would allow the Centre and states to enter in areas of taxation that are now exclusively reserved for each of them.