The prospect of Parliament initiating constitutional changes for the launch of the Goods and Services Tax (GST) in its current session has been blighted since states are continuing with their opposition to some of the key proposals by the Centre on the design of the proposed comprehensive indirect tax.
Belying finance minister Arun Jaitley’s recent claim that an agreement with the states on most contentious issues was nigh, Empowered Committee of State Finance Ministers chairman Abdul Rahim Rather said after a meeting of the panel here on Thursday that the states can’t agree to a proposal by the Centre to include petroleum taxes in the GST. He added that the states were not happy either with the Centre’s proposal on how they would be compensated for any loss of revenue in the initial years of GST. The states have refused to tread even the middle path suggested by the Centre, which is to include petroleum taxes in GST and keep the rates nominal or even zero so that states can levy supplementary taxes sans input tax credit.
Rather who met Jaitley with a group of state finance ministers told reporters later that it was decided that a smaller panel of state finance ministers will discuss the contentious issues further and then with Jaitley again on Thursday night.
“We hope some solution will be found. We agree to the Constitution Amendment Bill in many respects, but not in toto.” Rather said. At the time of going to print, the discussions were still on, indicating the urgency with which the government wants to resolve the differences.
Earlier in the day, Rather had said, “The Central government shall have to respect the views of the states with regard to their demands in the interest of co-operative federalism.” He hinted that the states are united despite the political affiliations of the governments and added that they have unanimously decided to reiterate their demands.
For Jaitley, who sought to woo states by announcing in Parliament on Wednesday that a sum of R11,000 crore would be sanctioned immediately to the states to make good for the losses in their central sales tax (CST) revenue, the states’ obduracy was rather unexpected.
The Centre has already agreed to put its share of revenue from inter-state GST in the divisible pool, rather than solely in its own kitty. Sources said the Narendra Modi government, which is keen on pushing this crucial tax reform that could potentially add to the country’s economic expansion by reducing cascading of taxes, may accede to some more demands raised by the states.
Jaitley, who is likely to confabulate with the Prime Minister on this issue over the next few days, might even agree to keep petroleum goods outside the GST ambit, sources said.
These apart, the states want the GST compensation to be constitutionally guaranteed.
They say the facility to offset any losses they might suffer by embracing GST should last for five years after the new tax kicks in, whereas the Centre is talking about a period of three years.
Another demand is for exclusion of municipality taxes (also called octroi in some states), the proceeds of which go to local self governments.
How the Centre addresses these demands will be known in the coming days and this will determine whether the Constitutional Amendment Bill will be tabled in the current session of the House.
The inclusion of taxes on petroleum in the GST, the Centre as well as tax experts reckon, is needed for the new tax system to produce intended results like elimination of cascading of taxes and broadening of the tax base.
Petroleum and its byproducts are a major source of revenue for both the Centre and states — as much as 32.5% of their combined indirect tax revenue comes from this sector.
In the case of some states such as Madhya Pradesh, which collected 39% of its VAT/sales tax revenue from petroleum, oil and lubricants (POL) in 2012-13, and Gujarat (36%), the reliance on the sector for revenue is the highest, while Uttar Pradesh gets just around 20% of its VAT/sales tax revenue from POL.
Zero-rating, as was proposed by the Centre, was expected to come with the facility for states to continue to levy their own non-Vatable taxes outside the GST framework. The states’ worry is that if these products are included in GST, they will have to shell out input tax credit to petroleum-sector companies buying GST-paid goods.
Experts say there could be tax cascading at the intermediate goods stage if petroleum goods are excluded from GST as the output taxes could be absent in some cases.
However, there are studies that have vouched for exclusion of petroleum products from GST.
For instance, as per a paper by the National Institute of Public Finance and Policy (NFPIP), bringing these goods into the GST regime, without any other changes in the economy, would imply that GST has to be levied at higher rates for revenues to be protected.
“There is ground for separating out petroleum products for special treatment by keeping them out of the base for GST. GST reforms implemented alongside decontrolling product prices would provide an interesting opportunity to reform without worries about price rise,” said the study.