The Constitution (122nd Amendment) Bill, 2014, commonly referred to as the GST Bill, and now known as the Constitution (100th Amendment) Bill, 2015, cleared its first hurdle in the Lok Sabha with ease. The Bill is now due to be discussed and taken up for voting in the Rajya Sabha on Monday. Many regional parties have extended support to the landmark bill, yet it does not mean that all apprehensions of states have been addressed by the Union government. Two major concerns continue to rankle states as was apparent from the debate in Lok Sabha: loss of revenue and loss of fiscal autonomy.
Foremost among continuing worry is loss of revenues, despite assurances that all losses will be compensated. It is the manufacturing states that are more worried than the others. This is because value added tax, or VAT, the current taxation regime in states, is an origin-based tax while the good and services tax (GST) is a destination-based tax. In the origin-based tax system, tax is collected where the supplier of good is located while in the destination based system, tax in collected where the consumer of a product is located. Tamil Nadu, Maharashtra and Gujarat are among the more industrialised states and they fear big losses of revenues on movement of goods made in their states.
The Constitution amendment assures them compensation for losses suffered in the first five years, but some states want to be compensated for ten years. States have been assured 100 per cent compensation for losses suffered in the first three years and 75 per cent in the fourth year and 50 per cent in the fifth year. However, the finance ministry expects that all states will not need compensation for five years. Consuming states in particular may see their revenues increase with the implementation of GST.
To address the fears of revenue loss of manufacturing states, the union government has said additional tax of up to one per cent would be collected on inter-state trade of goods for two years or longer period if the centre-state body, the GST Council, so decides and be transferred to the states. This is in lieu of the central sales tax (CST) that stands abolished when GST is implement. Tamil Nadu, for instance, estimates its losses from scrapping CST will be Rs 3,500 crore annually. Currently, inter-state sales of goods attract two per cent CST.
Many states fear, and that’s a fear shared by businesses too, that this one per cent tax will have cascading effect on transactions, even though the union finance minister has assured them that it will not. They worry this tax will be levied every time a good travels from one state to another and therefore it will work out to more than one per cent. For instance, if a good travels through three states from the point of manufacturing to the point of consumption, going from one warehouse to another, each of the three states would levy the one per cent tax taking it to three per cent, and thus increase the cost in the supply chain.
The Centre estimates that the states are being over-anxious about revenue losses that would arise from transition to GST from the current VAT system. Finance ministry expects that revenues generated by states from taxing services will more than make up for losses they suffer when octroi and entry tax, entertainment tax, luxury tax and other state level taxes are subsumed by GST. Maharashtra, which is set to lose Rs 14,000 crore that it collects as octroi, is expected to gain from taxing services, according to finance minister Arun Jaitley.
Some states are also keen to tax tobacco. Although tobacco is within GST, the Centre has retained powers to levy additional excise duty of tobacco and tobacco products. States too want similar power to levy additional tax on tobacco and tobacco products to generate more resources for themselves. It may be noted that Centre has agreed that GST on petroleum crude and products will be held in abeyance till such date that the GST Council decides. Until then, states are free to levy VAT on sale of petroleum crude and products. The other big concern among states is the loss of fiscal autonomy. States will not be allowed to introduce any new tax at will, change the rate of tax or give exemptions to any class of goods or service provider. They are also not allowed to unilaterally levy cess or surcharge or increase tax rate to raise resource in the event of a natural calamity. Any change to tax rates will have to be within a narrow band prescribed by the GST Council. They also have to give up all the state level taxes they currently levy when GST comes into force. Any changes to the tax rate will need to be agreed to with three-fourth majority at the GST Council. While states together have weightage of two-third in any decision and Centre will retain the balance one-third. This effectively means that states together will not be able to act on their own or take any decision, consent of the Centre will be necessary. This is akin to giving the Centre veto power.
The Centre will hopefully assuage the concerns in the subordinate legislations that are need to give effect to GST and when the tax rates at the Centre and state are decided. Once the Constitution amendment is cleared by Rajya Sabha and the state assemblies, Parliament needs to pass a Central GST Act and the states a State GST Act. Also, an integrated GST Act to cover inter-state movement of goods need to be passed.