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The
Centre’s proposal was included in a letter sent by Union
finance minister Pranab Mukherjee earlier this week.
Significantly, the minister’s proposal came around the
same time as the offer by the 13th Finance Commission on
Monday to compensate state governments in case they
suffer revenue losses in the transition period. GST is
one of the terms of reference of the mission.
Mukherjee is scheduled to chair a meeting of state
finance ministers on 27 October to resolve outstanding
issues and ensure GST’s implementation by the deadline
of 1 April.
GST, an attempt to stitch together a common market in
India, will replace a tangled web of national, state and
local taxes and is aimed as the culmination of a process
of indirect tax reforms that began in 1991. The levy is
ideally expected to help firms produce more efficiently
and give consumers more clarity about the taxes they pay
on goods and services.
As a part of confidence-building measures, Mukherjee
wrote to Asim Dasgupta, chairman of the empowered
committee of state finance ministers and also the
finance minister of West Bengal, that the Central
government was willing to consider a compensation
package for states suffering revenue losses under the
existing value-added tax (VAT) regime even though they
had not carried out the committed reforms.
“However, our calculation shows that continuing last
year’s compensation package without any change even in
2009-10, without the states imposing VAT on textile and
sugar and increasing their basic VAT rate from 4% to 5%,
will require the government of India to provide in the
budget an additional amount of Rs14,000 crore for
compensation to the states, which was not envisaged
earlier,” according to the letter, which was reviewed by
Mint.
Mukherjee wanted states to enhance the lower VAT rate
from the existing 4% to 5%, and bring sugar and textiles
into VAT.
His letter aimed to serve two purposes: explain the
Centre’s position on compensation and also to engage in
damage control after the state finance ministers took
offence at the tone of a finance ministry letter on 17
September that queried why the states should be
compensated when they had not undertaken their side of
the bargain.
According to a person familiar with the developments but
who didn’t want to be identified, the empowered
committee of state finance ministers at their meeting on
8 October, which had decided to come out with a
discussion paper on the GST structure, had in fact
sought an apology from the Union finance ministry.
The same person said members were “furious” and
threatened to walk out, even demanding dissolution of
the committee.
“The meeting could continue only after the officials”
apologized, the same person said.
Significantly, Mukherjee took note of this and said in
his letter to Dasgupta that he had “advised his
officials to be careful in future”.
The 17 September letter had conveyed to the states that
they were not entitled for VAT compensation because they
had neither raised the lower rate to 5% nor brought
sugar and textiles into VAT.
However, the Centre has some allies in its bid to
increase the scope of VAT by including sugar and
textiles.
In a 29 September letter addressed to Dasgupta, Gujarat
finance minister Saurabh Patel said: “It is important
that immediate steps are taken to bring this sector
(textiles) within the net of VAT.”
In addition to VAT compensation, the states are also
upset that the Centre has not transferred compensation
for a phased reduction of Central sales tax (CST) for
the previous fiscal year. Currently, CST stands at 2%.
Experts have welcomed the initiative.
“The removal of any impediment will certainly go a long
way in GST introduction,” Prashant Deshpande, senior
director at audit and consulting firm Deloitte, said.
Source
: Livemint, India, dated 15/10/2009 |
