States want full compensation for five years in place of the current provision in the Bill for 100% compensation for three years, 75% for the fourth year of GST implementation and 50% for the fifth.
Even as the Centre is struggling to overcome the legislative hurdles to meet the April 2016 deadline for rolling out the goods and services tax (GST), the states have come out with a fresh set of demands regarding the structure of the proposed tax as well as the transitory compensation arrangement.
State finance ministers, who on Wednesday reviewed the Constitution (122nd Amendment) Bill for GST, decided to ask for rights to tax tobacco over and above the GST rate and “full compensation” for five years for any revenue loss to states, as against the current progressively declining compensation, starting with full offsetting of the losses in the the first three years.
While a wide divergence of views have emerged among states on the proposed 1% origin-based tax on interstate supply of goods, the states have also upped the ante for keeping entry and purchase taxes outside the ambit of GST.
Chairman of the empowered committee of state finance ministers (EC) and finance minister of Kerala KM Mani told reporters that he would present states’ concerns on June 16 before the select panel of Rajya Sabha examining the Bill. Mani did not elaborate what what the EC would recommend, but did confirm that states had raised many concerns, especially regarding compensation of revenue loss once GST is implemented.
In the recently concluded budget session of Parliament, the Bill was passed by the Lok Sabha but was subsequently referred to a select panel of the Rajya Sabha as insisted to by the opposition parties.
“States welcomed the Bill, but have raised certain concerns. States want full compensation for five years in place of the current provision in the Bill for 100% compensation for three years, 75% for the fourth year of GST implementation and 50% for the fifth,” said Mani after a meeting of the EC.
Some states, he said, argued that if purchase tax is subsumed, the states concerned should be compensated for 15 years. Punjab has been consistently opposing subsuming of purchase tax in GST.
States are also seeking the right to levy extra tax on tobacco and tobacco products over and above the applicable GST rate as the Union government has retained such a right in the Bill, said Mani. The chairman also said that both the Centre and state governments are hoping to roll out GST from April 1, 2016, as planned.
Finance minister Arun Jaitley had earlier expressed hope that the Rajya Sabha panel would wholeheartedly support the indirect tax reform, which he said was a priority for the Modi government’s second year in office.
States also remained divided on the issue of levying 1% extra tax on interstate supply of goods as provided for in the Bill.
“Manufacturing states wanted the origin-based 1% tax on exports. But some states have expressed concerns on that. I cannot divulge what the EC would recommend to the Rajya Sabha panel on this issue, at this juncture,” Mani said. Chief economic adviser in the Union finance ministry Arvind Subramanian recently denounced the additional levy, saying that this not only impinged on the structure of GST but could also lead to imports being favoured against domestic goods.
Sources said that many members of the Rajya Sabha panel led by the BJP’s Bhupender Yadav were also of the view that the provision for 1% origin-based tax to be applied on interstate supply of products over and above the applicable GST rate was an ‘aberration’. Jaitley too wants the cascading impact of this levy, proposed at the behest of exporting states like Gujarat, to be mitigated.
Manufacturers say this extra 1% tax without any set-off facility, the proceeds of which go to exporting states, get added to the cost of products at subsequent points of sale leading to taxes on taxes on the same product at different state borders. Businesses call this a major obstacle in the creation of a single national market that the indirect tax reform seeks to establish.
An origin-based tax that affect the industry’s competitiveness is an aberration in GST. As a principle, it is the consuming state that receive proceeds of interstate sale under GST.
“The 1% additional charge is definitely not in the right spirit of GST,” said Kevin P D’sa, president, finance, Bajaj Auto. D’sa, however, said this was the price to be paid for the country to move to GST in an apparent reference to the tough bargain that took place between the Union and state governments before the Bill was finalised.
* Taxation rights on tobacco over and above GST rate
* Full GST compensation for five years
* Entry taxes, purchase tax not to be subsumed in GST
* EC chairman to meet Rajya Sabha select panel on June 16
* States divided on 1% origin-based tax on interstate trade
* NIPFP to give RNR report in one month