Centre-state financial ties to change with GST     

The Constitutional amendment for the introduction of goods and services tax (GST) is likely to make more than a dozen changes in the articles relating to Centre-state financial relations, besides changing entries in the Central and state lists. The Constitutional amendment will be the basis for the new tax regime and will be followed by adoption of separate state and Central GST laws.

The last amendment to the Constitution dealing with a financial matter was in 2000, when the Centre was given the power to tax services. Senior officials told Business Standard the Ministry of Finance was in consultation with the law ministry on drafting of the amendment Bill.

Simultaneously, a joint working group, comprising officials of the central and state governments, is working on the amendment draft.

“The Ministry of Law and Justice has conveyed that the amendment will need to make 10-15 changes in various articles since changes in the lists are linked to these provisions. The law ministry is, therefore, trying to ensure the amendment does not make changes in the basic structure of the Constitution, which can be challenged in a court,” an official said.

A crucial issue being discussed is the wording of entries in the lists. Article 246 in Part 11 of the Constitution defines matters on which the Centre and states will have the authority to frame laws. These matters are enumerated in the Seventh Schedule under Union, state and concurrent lists. At present, the Centre is entitled to tax manufacturing of goods and services, while states can tax only sale of goods.

“While making changes, the power to tax goods and service cannot be placed in the concurrent list since, in that case, the central law will prevail over the state law. Central GST and state GST also cannot be explicitly listed in the respective lists since specific taxes are not mentioned in the lists,” an official said.

Experts see the Constitutional changes as being “technical in nature”. Satya Poddar, partner, Ernst & Young, said: “There may not be substantial hurdles in the passing of the Bill, assuming there will be a consensus on the broad design of GST. The Constitution was drafted more than 50 years ago when the state of the economy and taxation was different. Revisions should be made to the Constitution, compatible with modern reality.”

According to him, the current approach in lists is sectoral. For instance, in Canada, states have the power to tax within the state and the Centre has the power to tax anywhere. “Only restriction is territorial. There are no distinctions, like indirect and direct taxes,” he added.

Source : The Business Standard, India, dated 25/11/2009