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The fear of losing
autonomy over levy of taxes has led to some states striking a tough stance
against the GST architecture suggested by the 13th Finance Commission (TFC).
Simultaneously, in recent budget presentations, some states have complicated the
indirect tax regime by adding layers to tax slabs and also raised taxes,
possibly with an eye on enhancing the extent of compensation they could claim on
account of revenue losses when they make the transition to GST.
Finance minister Pranab Mukherjee, in his Union Budget speech, hoped GST would
be rolled out by the beginning of fiscal 2012. The states are yet to finalize a
date on which they would meet next to discuss GST. “TFC’s report cannot be the
basis of any decision,” the finance minister in a state government, who did not
want to be named, said about the next round of negotiations. “We won’t even
consider it,” he added.
TFC had appointed a task force to suggest an architecture and tax rates for a
“flawless” GST. The task force suggested a push towards uniformity in tax
architecture, a single tax rate across the states and bringing in practically
all items, including petroleum products and real estate, into the GST tax base.
The task force also suggested a GST rate of 12%.
GST is an indirect tax system, which aims to create a common market in India by
harmonizing the tax structure across the states. Transition to GST is expected
to translate into lower prices and fewer distortions in the business
environment.
TFC, in its report, had pushed for the architecture suggested by its task force,
and added an incentive of a Rs50,000 crore fund to transition to that model. The
flip side of TFC’s recommendation was that the states would not be entitled to
the incentive if they adopted another model.
The task force’s recommendations have been viewed by some states as a ploy by
the Centre to rob them of their autonomy in taxation (Mint, 8 January). The
anger about the task force’s report appeared to linger. “Presently, there are
two festering issues,” said Satya Poddar, partner at Ernst and Young. “They are
uniformity versus autonomy and compensation to states.”
According to Poddar, if the aim is to create a common market, the most important
need would be to bring about uniformity in the architecture of the tax system.
Even if there are two rates for merchandise, it is critical to have uniformity
across the states on what is taxable and basic laws, he said.
“Posturing (today) is based on misinformation and inadequate analysis. It is
possible to narrow down differences,” Poddar said.
There’s a thin line between posturing and a sense of grievance.
Punjab, for instance, in July filed a lawsuit in the Supreme Court against the
Centre and some states such as Himachal Pradesh, which are beneficiaries of tax
concession aimed at incentivizing industries to move there.
Punjab’s complaint was that the incentives have diverted investment which would
have come into the state to some of its neighbours which were given concessions.
The indications from GST meetings so far have been that special tax concessions
would be phased out eventually. “In exasperation we filed this case. Punjab is
in a boxing ring with both hands tied,” Manpreet Badal, Punjab’s finance
minister, told Mint.
The lawsuit continues in the Supreme Court even as Punjab is under pressure from
other states and the Centre, during the course of GST negotiations, to subsume
purchase tax on foodgrains into GST.
Compensation to states for revenue losses on account of the transition to GST is
the other tricky issue which could dominate negotiations in the future as some
key states such as Karnataka, Maharashtra and Delhi have raised tax rates or
added to layers of taxation recently. “It is quite possible some of the rate
increases are designed to give them a better base for higher compensation,”
Poddar said.
Karnataka’s finance minister V.S. Acharya had a different take. The initial push
to raise base tax rates had come from the Centre, but it was not feasible for
the states to raise tax rates when the Centre cut indirect rates as a part of
the stimulus package, he said.
Recent developments have, at times, run counter to the overarching goal of GST
to lower rates and make the tax system simpler.
“The picture will be clear only in April,” the finance minister of another
state, who did not want to be named, said.
Source:
Livemint, India, dated
29/03/2010
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