With the issue over division of the 10 million indirect tax assessee base between the Centre and states for administrative purposes looking intractable even at the end of the eighth session of the Goods and Services Tax (GST) Council here on Tuesday, the proposed epochal tax reform, which has been on the anvil for over a decade now, will most likely be delayed to June-July 2017 or later. While this and the differences over the size of the compensation for states and the administration of integrated GST (IGST) reflected how demonetisation has rapidly dispelled the initial Centre-state bonhomie at the council, the heightened uncertainty has made the Centre’s task of making the estimates for the Union Budget 2017-18 even more daunting.
Union finance minister Arun Jaitley said that with the council approving the 11-chapter draft integrated GST law except one section, the two key unresolved issues related to “cross-empowerment” and definition of “territory” for the purpose of taxation powers. Terming both “complex issues”, he explained that under the Constitution, territorial waters up to 12 nautical miles into the sea are in the Union territory, although coastal states enjoyed “fishing rights” in these areas and they have also been levying sales tax/VAT on high-sea transactions. Saying this was not a political issue, the minister said a constitutionally and legally tenable solution to it would be found soon. The council will meet next on January 16 to discuss the two issues.
Jaitley said the Centre’s direct and indirect tax revenues in 2016-17 would be higher than budgeted (thanks also to the additional revenue measures in the excise arena and the spurt in personal tax collection from increased salaries to government staff), and sought to counter the views taken by some states that the note ban has
dented their revenues. A few states like West Bengal and Kerala argue that the compensation for states’ annual revenue loss due to GST, earlier estimated at about R55,000 crore a year, could be much higher
owing to demonetisation. Jaitley, however, said that on the contrary, many states like Punjab, Haryana and Assam have reported “increase in revenues” and added that “compensation is not linked to demonetisation”.
“We have asked states to furnish enough data so that the pattern can be studied,” he said.
However, analysts said with the likely slowdown in the economic growth for at least two quarters and the chances of the new income disclosure scheme PMGKY yielding lower revenues than expected, the Centre will have to struggle to keep consumption robust through sustained public spending.
The vexed issue of dual control — division of the assessee base and administrative powers between the Centre and states — was sidestepped in all previous sessions of the council as the divide looked unbridgeable. Many states remained firm on their stand that all dealers and service providers below Rs 1.5 crore annual turnover should be under the states’ exclusive control. The Centre has been advocating a vertical split of the assessee base and insisted that service providers should remain under its control till the states are trained in assessing them.
In fact, an agreement had earlier been reached that there won’t be dual control on any taxpayer; that is, each business will either report to the Centre or the respective state. But if IGST administration is to be left with the Centre (the law ministry recommended that the Centre should collect GSTs on not only imports but also interstate trade and distribute to the states in keeping with the principle that the revenue rights lie with the states where the consumption takes place), then dual control might become necessary in cases of businesses with interstate presence. On Monday, many industrial segments like telecom, railways, banking, insurance and aviation apprised the council of the need for their centralised registration for ease of compliance.
The bitterness that has crept into the council was also evident from West Bengal finance minister Amit Mitra walking out of a meeting called by Jaitley on the sidelines of the council to discuss the upcoming Union Budget. Jaitley later took a subtle dig at Mitra — who had claimed the states’ post-demonetisation revenue loss could inflate the GST compensation to Rs 90,000 crore — saying when he said that “states which have been governed well fared well (on the revenue front)”.
At its meeting on November 4, the GST Council had agreed on a four-slab structure — 5%, 12%, 18% and 28% — along with an additional cess on luxury and ‘sin’ goods to raise the funds for the Centre to compensate the states. The council is yet to finalise the list of items under each tax bracket, although a committee of officials has prepared a draft in this regard. With most items moving to the tax bracket closer to the rates they are currently subjected to, analysts said that the Centre might try to align the rates for may items in the coming Budget. The service tax rate, it looks certain, would move up from the current 15% as most services are likely to fall under 18% GST rate.
Experts pointed out that since the industry would require three to four months after all the relevant laws and rules are finalised to prepare itself for the GST, April 1 roll-out of the new tax looked highly unlikely at this juncture. There is a constitutional compulsion on the Centre and states to usher in GST before September 16, 2017, as after that the extant indirect taxes will become non-enforceable.