States are making all efforts to meet the deadline

There are several contentious issues that need to be sorted out before we migrate to a goods and service tax (GST) regime. The most important issue on which a consensus is required is the revenue neutral rate of tax. Under the VAT system, there are four rates – 0%, 1%, 4% and 12.5%. 

No one has a problem with 0%, even though every state has its own exempt list. There is a consensus on what items should be there. There is no controversy about the 1% list either. The states get their revenues (about 70%) from items that are covered by the 12.5% rate and the rest from those covered by 4%. Given that, we need to decide what should be a revenue-neutral rate, which at the same time ensures that essential products do not become expensive. We also need to decide if there should be one rate or two, although a single rate is ideal. Hopefully, this exercise should be completed in a month or two. 

One of the main issues that need to be decided is the threshold limit for applying the tax. Under the state VAT regime, traders with turnover of Rs 5-10 lakh are exempt from tax, while under Cenvat the threshold is Rs 1.5 crore. 
At this juncture, I like to clarify that neither the BJP nor the BJP-ruled states are opposed to GST. There are no ideological issues on GST. It was understood by all that after VAT was implemented, GST would be the next logical step. All states have several concerns about implementing GST but they understand that they will gain under the new tax regime. The Centre must comprehensively address their concerns to ensure early implementation of GST. 

Firstly, no state will move to GST if they have to suffer loss of revenue. Therefore, the Centre must compensate for the losses they will suffer on migrating to GST. The roadmap for GST implementation prepared by the empowered committee of state finance ministers has suggested that states should be compensated for five years. States unfortunately had an unpleasant experience regarding compensation for gradual phase-out of central sales tax (CST). 

So states are apprehensive about leaving the decision on compensation for GST losses to the Centre. We would like the losses to be compensated through finance commission awards, and it should be paid on a monthly basis. 

Secondly, states are apprehensive about their fiscal autonomy (i.e., the power to levy taxes) being encroached upon when the GST is implemented, although the biggest advantage under GST regime is that they will have power to impose tax on services. Of course, for this a constitutional amendment is required. And that law is not in place as yet. 

Also, state tax officials need to be educated on service tax and trained to collect it fairly. Other key concerns include the preparedness of the IT infrastructure. The IT infrastructure for VAT is not complete. And work has not started on creating a national infrastructure for implementing GST. Without that, it will be very difficult to capture interstate transaction. That apart, the roadmap needs to be discussed with the industry and traders and made public. That process has not started as yet. 

Given our state of preparedness and the delay in scrapping CST, it seems it will not be very easy to implement GST by April 2010. States however are making all efforts to meet the deadline. 

Source : Economic Times - Gurgaon, Haryana, India,  dated 16/06/2009