Maharashtra LBT a good move, need more clarity
Maharashtra chief minister Devendra Fadnavis has done well to, in the budget for FY16, scrap the controversial local body tax (LBT). This was introduced in April 2013 to replace Octroi in all municipal corporations except Mumbai—under what has been proposed, VAT rates will be hiked to compensate municipalities R6,875 crore. Since all such levies increase the cascading of taxes, removing them paves the way for a smoother goods and services tax (GST) across the country. Indeed, Maharashtra’s opposition to removal of LBT had been a big hindrance to the implementation of a smooth GST. The problem here is that the Constitutional Amendment Bill on GST, which subsumes all state-level taxes, makes no mention of Articles 243H and 243X of the Constitution which allow states to collect or authorise taxes on behalf of municipalities/panchayats; in which case, there is a danger other states could, at some point, levy fresh taxes in response to pressure from the municipalities/panchayats. This will cause GST rates to differ across states and will go against the basic spirit of GST. This needs to be clarified in the Bill to ensure there are no later complications in the GST process.
Allowing a 1% tax on inter-state supply of goods, done in the winter session of Parliament, was meant to placate industrial states like Maharashtra, Tamil Nadu and Gujarat who feared a loss of revenues due to GST, but seemed a worthwhile price to pay to bring a uniform GST structure; but this is so only if this tax is just a temporary measure. Industry’s fear is that while the tax has been introduced for 2 years, this can be extended depending upon the whims of the GST Council—and the Union finance minister does not have veto power in the proposed Council. Also, there is no clarity on whether this tax will also apply to inter-state transfers within the same company manufacturing, say, cement—if it is, this will pose a big problem for companies with manufacturing operations spread across borders.
A bigger worry, and that is why even meeting the April 1, 2016, deadline is irrelevant, is that there are still very big GST exemptions. Not including real estate under GST means that any GST paid on the cement, steel, electrical fittings, etc— which are used in the construction sector—will not get tax credits. Given the size of the construction sector, this means a substantial part of the taxes paid on various inputs will not be rebated. Similarly, with petroleum products outside the ambit of GST, all the taxes paid on goods and services used by refining companies will not be rebated. It is to be hoped the Centre will be able to convince the GST Council of the wisdom of eliminating all exclusions over a period of time.