Union finance minister (FM) Pranab Mukherjee on Friday
did not give in to pressure mounted by state
governments, setting the stage for tough negotiations
ahead of the introduction of a single goods and services
tax (GST).As a result, the two sides were not able to
announce a fresh date for the GST roll-out, which
originally was
supposed to be kicked off on 1 April. Stalemate:
Finance minister Pranab Mukherjee's compensation formula
for FY10 involved states absorbing Rs4,500 crore loss in
their books. Pankaj Nangia / BloombergBoth sides are
likely to meet again later this month, once the states
finalize a blueprint for GST that will include, among
other details, the desired tax rates. At present, the
states are opposing the 12% single GST proposed by the
task force of the 13th Finance Commisssion (TFC).
Mukherjee on Friday met with finance ministers of some
states to finalize the deadline to the transition to GST
and also resolve outstanding issues between the Centre
and the states on compensation for Central sales tax (CST).Mukherjee's
proposal to resolve the dispute on CST compensation
entailed states having to absorb some of the loss in
revenue on account of gradual reduction of the CST rate
from 4% to 2% as part of indirect tax reform.According
to the finance minister of a state present at the
meeting, but who did not want to be named, the situation
remains fluid. A satisfactory compensation package on
account of CST reduction was the key to bridging the
trust deficit between the Centre and the states, but
Mukherjee's proposal was inadequate, the minister
said.When merchandise manufactured in one state is sold
in another state, CST accrues to the state where the
manufacturing centre is located. Manufacturing states
have, in phases, reduced CST to the current level of 2%,
for which the Centre compensates them to offset tax
revenue foregone. CST would be scrapped in a GST regime.
GST is India's most ambitious indirect tax reform, which
seeks to stitch together a common market and reduce
costs to replace the current fragmented regime.Ahead of
Friday's meeting, the two critical issues that appeared
to adversely affect the roll-out of GST were the states'
growing distrust of the Central government on account of
unresolved CST compensation issues and differences over
the GST rate."We have a philosophy document, we don't
have a blueprint right now," said Rajiv Dimri, leader
(indirect tax practice) at consultancy firm BMR
Advisors, while reacting to the existing working paper
put out by the states. Mukherjee's CST compensation
formula for the ongoing fiscal involved the states
absorbing a total Rs4,500 crore loss in their books,
Asim Dasgupta, West Bengal's finance minister said. The
residual amount of revenue foregone by the states,
Rs9,500 crore, would be borne by the Centre.Mukherjee
also ruled out compensation to the states on CST in the
next fiscal year, Dasgupta said. Arriving at an
acceptable GST rate has been bogged down by differences
among the states and also between the states and other
entities such as the TFC task force on GST
architecture.The thumb rule is that the larger the
number of taxes subsumed in GST, the lower will be the
revenue neutral rate. The states have been reluctant to
subsume all taxes into GST as it would mean a loss of
power to unilaterally change some taxes.
