In a breakthrough that has cleared the long-gathered clouds over the goods and services tax (GST) and brightened the prospect of its roll-out from July 1 this year, the Centre and states on Monday resolved to share the entire GST assessee base — over 10 million at last count — without sacrificing the principle that no taxpayer will have to report to more than one authority.
At the ninth GST Council meeting here, the Centre made significant concessions to bring states, including the defiant ones, on board. The administrative division will be as follows: The states will administer 90% of the taxpayers, including service providers, with annual turnover up to R1.5 crore with scrutiny and audit powers and the balance 10% will be controlled by the Centre; taxpayers above that threshold turnover, including those who pay integrated (interstate/imports) GST, will be equally shared between the Centre and states. While this will lead to a significant shifting of the taxpayer base from the states to the Centre, states will gain hugely from the 50:50 division of the above-R1.5 crore taxpayer base, in terms of the revenue base to come under their domain. Businesses with a turnover above R1.5 crore contribute to over 95% of the revenue attributable to the taxes to subsumed in GST, while 93% of the service tax assessees and 85% of those registered for state VAT have a turnover below the threshold.
The Centre, while iterating that the power to levy and collect the integrated GST will be vested with it solely, agreed to make a special provisions in law to delegate the power to administer this tax to states in the same ratio for intrastate GST. While the power to administer IGST will be given to states, the Centre will have the prerogative to arbitrate the dispute between the states on revenue rights, based on the principles to be laid down, including the place of supply rules. Also, coastal states will continue to be allowed to levy tax on economic activity within 12 nautical miles of India’s territorial waters even though such waters are constitutionally the Union’s territory.
It must be noted that separation of administrative powers has nothing to do with the GST revenues the Centre and states will be entitled to.
The estimated GST tax base in 2015-16 was around R8.8 lakh crore and this was constituted by the Centre and states almost equally. If ones goes by the chief economic adviser’s report that suggested a revenue-neutral rate of 15-15.5% for GST, the revenue would be divided between the Centre and states in roughly 7:8 ratio. Of course, the states have also been assured of full compensation for the first five years after GST is introduced for any shortfall in revenue from what 14% annual growth from the 2015-16 base.
The Centre has so far resisted the states’ demand for exclusive control on taxpayers up to R1.5 crore turnover and insisted on a vertical split of the entire assessee base. Besides, the Centre also climbed down from its earlier stance that in the initial years of GST all service tax assessees, on whom states have no say right now, will be under it.
Finance minister Arun Jaitley, who said Monday’s meeting saw the council making significant headway on the contentious issues that have long impended the process for introducing the proposed destination-based tax on value addition. He said the council also discussed a time schedule for GST roll-out, as per which the three draft laws — on model GST, integrated GST and states’ compensation — will be firmed up and probably finalised by it as it meets next on February 18. Once the drafts are approved by the council, the model GST Bill will have to passed by Parliament and state assemblies and IGST and compensation Bills by Parliament.
In parallel, a committee of officials will finalise the fitment of the items into the rate slabs approved by the council earlier and the industry and trade will be sensitised to use the computer network GSTN for registration, tax payment and refunds. In November last year, the council had approved a four-tier rate structure of 5%, 12%, 18% and 28%, with lower rates for essential items and the highest for luxury and demerits goods namely pan masala, aerated drinks and luxury cars; besides, it also said the so-called demerit goods, perhaps including some consumer durables, would also attract an additional cess, which will be used to compensate the states for any revenue loss, along with the extant ones on tobacco and fossil fuels. The states’ compensation was earlier pegged at about R55,000 crore a year, some states like West Bengal now contend that the figure could be far higher and there is a dispute over how the extra funds have to be raised.
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While industry and tax experts welcomed Monday’s decisions by the GST Council, they are a bit worried about the lead time required by industry after all laws and rules are in place. The earlier plan was to bring in GST from April 1, 2017. Pratik Jain, partner and leader, indirect tax, PwC, said: “Finally the GST Council seems to have made a major breakthrough by agreeing on the contours of dual control issue. This is indeed a great news as the past few meetings of the council remained inconclusive. Further, with indication of revised implementation date of July 1, 2017, for GST, industry gets much needed clarity and some additional time for preparation for this huge reform. It appears that the government would be able to get the central GST laws passed by Parliament in the second half of Budget session.”
Krishan Arora, partner, Grant Thornton India, said: “With no concrete decision on the revised implementation date, industry players would now need to revisit their GST transition strategy with a backup plan for a few months rolling over beyond April 1, 2017, resulting in dual compliance. It could also pose certain additional challenges for many organised players with regard to their year-end activities including areas such as inventory planning, budgeting, working capital, etc, which were aligned to a timely GST roll-out.”
MS Mani, senior director, indirect tax, Deloitte Haskins & Sells, said: “Today’s developments in the GST Council meeting marks a watershed movement and indicates that major roadblocks in the GST arena have been successfully tackled. It is essential for business to get prepared for the rollout on July 1 as there is adequate time now provided by the government to enable businesses to prepare.”