Centre and states make headway on GST by dropping 1% tax on inter-state supply of goods

27 Jul 2016 Evaluate

A meeting between Union Finance Minister Arun Jaitley and his counterparts from the states resulted in some headway on the long pending goods and service tax (GST), by reaching a broad consensus on dropping the proposed 1 per cent tax on inter-state supply of goods. There was also consensus on keeping a cap on rates outside the Constitution amendment Bill, broad principles on the tariffs and categorical wording on fully compensating states for five years, in case of loss. However, the disagreement between the Centre and states continued over administrative powers on assessment, scrutiny and adjudication of entities.

Chairman of the empowered committee of state finance minister and West Bengal Finance Minister, Amit Mitra said that an agreement was reached that the cap on the GST rates cannot be incorporated in the Constitution amendment Bill. As no tax rates are provided in the Constitution. It was discussed and the conclusion reached that the Union finance minister will communicate to other parties. However, states stood firm on their demand that there should be a threshold of Rs 1.5 crore of turnover a year for administrative powers on assessment, scrutiny and adjudication. Below this threshold, states should have complete control, while there should be a dual control of states and the Centre above this.

Mitra further stated that in the Constitution amendment Bill, the Centre had proposed 100 per cent compensation for first three years, 75 per cent and 50 per cent for the next two years. However, the Select Committee of the Rajya Sabha had recommended 100 per cent compensation for probable loss of revenue for five years. He said, the broad consensus put together is satisfactory to all political parties and all states. Besides, ‘foolproof’ wording for compensation to states has been worked out.

The Constitution amendment Bill, as passed by the Lok Sabha in May 2014, sought to impose additional levy of up to one per cent over and above the GST to help the manufacturing states such as Gujarat, Tamil Nadu and Maharashtra, since the new tax regime would be destination-based. Further, the issue of administrative powers would be dealt in the GST Bills, which would be introduced in Parliament only after the Constitution amendment Bill is passed. As such, there was a broad consensus on the provisions of the Constitution amendment Bill, which is of immediate priority. However, this sparked fears that the levy would lead to cascading, tax on tax, since it would not be a part of the GST chain. To balance the two sides, a select panel of the Rajya Sabha recommended dilution in the provision to limit it only to inter-state supply of goods for a consideration. This means that company-to-company transfers would be out of this tax.

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