Option open: Doing away with extra 1% levy on manufacturing states for 2 years.
With the Centre indicating its willingness to reach out to the Opposition for the passage of the crucial Constitutional Amendment Bill needed to usher in the Goods and Services Tax, officials in the finance ministry are readying the blueprint on the grounds which can be ceded in order to accommodate the Opposition’s demands.
According to officials in the ministry, the most plausible change relates to doing away with the additional 1 per cent levy allowed to the manufacturing states for a period of two years. The Congress, in its eight-point dissent note to the select committee of the Rajya Sabha, had sought a removal of the proposal to levy an additional one per cent tax, terming it “market distorting”.
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“The Centre is open to the suggestion and this is likely to be the issue on which the centre may have to soften its stance. It was anyway a temporary provision provided for only two years and the centre has already assured that the states would be compensated fully for their losses for up to five years,” an official said.
The official added that the provision was included on the ground of demands made by manufacturing states including Gujarat, Maharashtra and Tamil Nadu. Since the proposed GST is a destination-based tax, states which were generating gains due to origin-based VAT, stand to lose.
To bring these states on board, the Constitution (122nd Amendment) Bill, 2014, had included a provision saying, “An additional tax on supply of goods, not exceeding one per cent, in the course of inter-state trade or commerce shall… be levied and collected by the Government of India for a period of two years or such other period as the GST Council may recommend, and such tax shall be assigned to the states in the manner provided in clause (2). The net proceeds of additional tax on supply of goods… be deemed to have been assigned to the states from where the supply originates”.
However, the levy has been hailed as distortionary in nature as it amounts to continuation of central sales tax for some states for two years, other states including Bihar and Uttar Pradesh had argued.
The Congress had also said that since the select committee had proposed 100 per cent compensation for a minimum of five years to states, the additional levy held no ground.
An official from Bihar said that the rate will create distortions in the market and the state had earlier too opposed the levy. “All states except a few have always been against the additional levy. If the centre wants, it can easily do away with it,” the official said.
The Congress had also sought definition of the word supply in the context of the additional levy “and since that can be done away with, the definition of supply would also not be needed”, another finance ministry official added.
However, the demand of capping the GST rate at 18 per cent and including it in the Constitutional amendment is unlikely to be yielded to. “There is no precedence for this. The earlier Bill had also ruled it out. This would mean that each time you want the rates changed, you will have to amend the Constitution which requires two-thirds majority of Parliament and ratification by 50 per cent states,” the official added. If the Bill does not get passed in the Winter session, the scheduled implementation of GST from April 1, 2016 will get delayed further.