The Goods and Services Tax (GST) Council on Friday made “significant headway” in firming up the main draft that the central and state GST laws will be modelled on and drew the contours of the law for compensating states for any revenue loss. The council will meet next on January 3-4 with an agenda to vet the model GST and the compensation Bills for their legal correctness, and resolving the contentious issues of Integrated GST (IGST) administration and division of assessment powers between the Centre and states. Asked whether he was still sticking to the self-imposed April 1, 2017 deadline for GST rollout, finance minister Arun Jaitley said, “Our effort will be do it as quickly as possible,” but added that he wouldn’t want to “hasten the process”, as discussions were underway. Chances are that the GST, a comprehensive destination-based tax on value addition, would be ushered in in July, analysts felt. Meanwhile, demonetisation pangs have made many states including West Bengal and Tamil Nadu sceptical of the adequacy of the R52,000 crore/per annum compensation fund proposed earlier, and fresh confabulations have begun on how additional resources would be mobilised in case of a shortfall. While it was earlier decided by the council that states would get 100% compensation for revenue loss in the first five years after the GST rollout, a need is now being felt of compensation for a longer period. West Bengal finance minister Amit Mitra said with the note recall hitting them, the states might require R70,000-90,000 crore in 2017-18 to tide over their revenue losses.
The Centre has mooted that a provision be adopted, enabling it to impose additional levies on items of its choice to meet any contingency in the future from states requiring more funds to offset their revenue losses.
While this caused some states like Kerala to cry foul, a suggestion has come in the council that the prospect of the Centre getting unilateral authority to have surcharge/cess on more items/services than the four sin goods listed earlier could be avoided by careful drafting of the compensation law to the effect that the GST Council — where neither the Centre nor the states have a sway — will recommend how and where the extra levies could be imposed.
Also, with states generally not favouring cesses outside the GST framework to generate funds for compensation, some of them have suggested that a structured loan from multilateral agencies could be a better way to raise the extra resources. (States had grudgingly bought the cess-for-compensation formula after the Centre argued that hiking the GST rates on a number of items alternatively would be more onerous on the taxpayers, given that raising R100 for the Centre via GST would require tax worth R172 given the Finance Commission’s devolution formula). While it was earlier decided that the specified cess revenue (see chart) would be credited to the compensation fund created in public account and any amount remaining in the fund after fully offsetting the states’ revenue loss from levies attributable to GST would be devolved to the states, the idea now is to have a revolving fund. The compensation is to be computed on the states’ relevant revenue base in 2015-16 (of R4.42 lakh crore) and assuming a 14% annual growth.
Pratik Jain, partner and leader-indirect tax, PwC India, said: “The most contentious issue of ‘dual control’ or ‘cross empowerment’ is to be discussed in the next meeting. If there is an agreement on the issue, then GST laws can be passed in the budget session. However, now April 1, 2017 as the date of GST implementation is virtually ruled out, which I think is good news for both industry as well as the government.” The industry, analysts felt, would need three months time after legislation is passed, to prepare themselves for the rollout of the new tax.
The cross-empowerment issue is about how to divide the 10-million indirect tax assessee base between the Centre and states for administrative and audit purposes. 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 (this is what the law ministry recommended), then dual control might become necessary in cases of businesses with inter-state presence.
The states have so far stuck to their demand that taxpayers up to annual turnover of Rs 1.5 crore should be under their exclusive control. Keen to protect the local bureaucracy, they argue that they have the infrastructure deployment at the grassroots level and small taxpayers are familiar with local authorities. The central government, on the other hand, is not in favour of the demand as it wants a single-registration regime for ease to service taxpayers, believing firmly that the states have yet to acquire to competence to assess this segment of the taxpayers, 3 million at last count.
Businesses with a turnover above Rs 1.5 crore contribute 90% of the revenue (attributable to taxes to subsumed in GST), even as 93% of the service tax assessees and 85% of the VAT taxpayers have a turnover below that threshold. M S Mani, senior director–indirect tax, Deloitte Haskins & Sells LLP, said, “Trade and business will need at least 4 months lead time to get GST ready and hence it is essential that the next meeting on January 3-4 resolves all issues paving the way for the introduction of the legislation in Parliament in the budget session if a revised timeline of July 2017 is to be achieved.”