Fourth List may ring in GST  

In a radical move, the finance ministry is considering a Fourth List in the Constitution to take states on board and ensure the implementation of the Goods and Service Tax (GST) from April 1, 2011. The Fourth List would stand apart for the equal powers it would assign to the Centre and states with regard to levy and collection of GST on a common base as well the appropriation of its proceeds. Even the Concurrent List is devoid of this positive neutrality, as it allows the Centre’s view to prevail in case of a dispute.

The ministry has discussed the option of a Fourth List with the empowered committee of state finance ministers, a top government official told FE.

Currently, under Article 246 of the Constitution, all taxes and levies in India belong to either the Union List or the State List of matters, which include powers of taxation. There is also the Constitutional provision for a third list of taxation comprising areas on which both the Parliament and state legislature can make laws concurrently. But since the laws listed in Union and Concurrent Lists vest with the Centre, it has virtual supremacy.

The proposed Fourth List would put the states on an equal footing with the Centre as far as the GST jurisdiction is concerned, the source explained.

It may be noted that states have expressed apprehensions over GST taking away a chunk of their taxation powers even as they are by and large convinced of the ability of the multi-point tax on value-added to drastically reduce the cascading of taxes and maximise revenue. While the Centre and agencies like the 13th Finance Commission want GST to subsume almost all central and states taxes and levies, states are pitching for retaining some of the taxes outside the GST framework.

Tax experts also look at the Fourth List as a possible solution to this issue. “The Fourth List can be brought in by amending the Constitution to include the items which have to be taxed under GST. There would be a legal understanding between the Centre and the states that they would not levy those taxes which have already come under the Fourth List,” said Satya Poddar of Ernst & Young.

To address the states’ concerns, the Centre is also considering giving appropriate legal status to the GST Council which will include both states and the Centre. This proposal would be part of a revised GST draft to be ready by June.

“Once the Fourth List is there, the view that GST structure would defy the Constitution would no longer hold. Both the Centre and states would be on an equal footing with regard to charging levies,” a finance ministry official told FE. What is being planned is a dual GST with central and state components roughly on the same base of transactions.

Discussions for a Fourth List for GST have come at a time when a commission on Centre-state Relations headed by former chief justice Madan Mohan Punchhi has submitted its report to the home ministry. The Commission has discussed issues of Centre-State relations amid a sea-change that took place in the economy since the mid-eighties when a comprehensive review of Centre-state relations was last done.

The states have been suggesting a system that goes by a majority rule that could be anything between 50% and 75%. Giving constitutional and legal powers to the GST council remove the threat of any state not complying with the council’s decisions.

There are examples of federal polities dealing with issues of administration of GST/VAT systems. In Canada, the federal VAT council takes a view in case of an intention to raise the rates, while a rate cut needs no council endorsement. “The Fourth List could be in tune with fiscal federalism. However, if the states agree on a revenue-sharing formula, such a Constitutional amendment might not be required. Of course, to bring all the states to agree to a revenue sharing ratio is a huge task,” said Aseem Chawla, senior lawyer and partner, Amarchand Mangaldas. The Centre and the empowered committee of state finance ministers are currently discussing the tax base, threshold limit and whether to have single or dual rate of GST. A perfect GST would subsume most of the indirect taxes levied by the centre like excise and service tax and also those charged by states like VAT, stamp duty, octroi and purchase tax, besides minimizing exemptions. But states apparently want to retain some important levies outside GST.

Present discussions on GST have assumed importance as the government wants to meet the new deadline to bring in the indirect tax regime. Finance minister Pranab Mukherjee promised to bring GST by April 1, 2011 At the opening speech for consideration of Finance Bill, finance minister Pranab Mukherjee had said that the Centre was closely engaged with the empowered committee of state finance ministers in finalising the GST design. “Some of the states apprehend that they may lose some revenue in the initial years of the GST regime. The Centre is willing to provide compensation to the states for these initial years, provided there is agreement on the broad framework for a common threshold for goods and services between the Centre and the states; common exemption lists, mechanism to check deviations and acceptable level of overall GST rates,” Mukherjee said. The design and modalities of providing this compensation would be worked out in discussion with the state governments and the empowered committee, Mukherjee said.

Source: Financial Express, India, dated 03/05/2010