GST: Central govt plans 3‑year compensation for states

Prime Min­is­ter Naren­dra Mod­i’s plan to roll out a Goods & Ser­vices Tax (GST) by April 2016 could hit anoth­er hur­dle, as the finance min­istry wants to com­pen­sate states for only three years. States, on the oth­er hand, have been demand­ing that the Cen­tre com­pen­sate them, for loss­es incurred on account of switch­ing to the pro­posed indi­rect tax regime, for five years. Also, the min­istry has ruled out mak­ing any pro­vi­sion for com­pen­sa­tion in the Con­sti­tu­tion amend­ment Bill; it may be pro­vid­ed for in the GST law.

The com­pen­sa­tion will be giv­en to states on the lines of a for­mu­la to be sug­gest­ed by the 14th Finance Com­mis­sion, which is like­ly to give its report lat­er this month. The pan­el was asked to give its rec­om­men­da­tions on GST’s impact on finances of the Cen­tre and states, besides a mech­a­nism for compensation. 

States had also asked the Cen­tre to make a pro­vi­sion for the com­pen­sa­tion in the Con­sti­tu­tion amend­ment Bill, but the finance min­istry is not ready to yield on this. The offi­cial explained that the Con­sti­tu­tion Bill could not have such a pro­vi­sion because as amend­ing it was not easy. An amend­ment to the Con­sti­tu­tion requires pas­sage of the Bill by a two-thirds major­i­ty in each house of Par­lia­ment, and rat­i­fi­ca­tion by at least half the state legislatures.

The Con­sti­tu­tion amend­ment Bill, which will pave the way for GST, is like­ly to be tabled in Par­lia­men­t’s win­ter ses­sion (but it will not have a com­pen­sa­tion provision).

A draft Cab­i­net note on the amend­ment Bill has been pre­pared and will be cir­cu­lat­ed for an inter-min­is­te­r­i­al con­sul­ta­tion after Finance Min­is­ter Arun Jait­ley has approved it.

“The fear over loss of rev­enue will remain for some time. It had hap­pened at the time of the val­ue-added tax (VAT) imple­men­ta­tion as well. But all states even­tu­al­ly gained from it. So, in my view, both the Cen­tre and states will gain from the broad-based struc­ture of GST,” said Sum­it Dutt Majumder, for­mer chair­man of the Cen­tral Board of Excise & Cus­toms and author of ‘GST in India’.

Majumder said putting a sun­set clause on the com­pen­sa­tion had no mean­ing. The Cen­tre could not say it would com­pen­sate for only three years even if some states made loss­es for longer.

“The Cen­tre is com­mit­ted to suit­ably com­pen­sat­ing states through a legal mech­a­nism. We are hope­ful of an ami­ca­ble res­o­lu­tion,” said anoth­er finance min­istry offi­cial who did not wish to be named. How­ev­er, some man­u­fac­tur­ing states like Gujarat, Maha­rash­tra and Tamil Nadu fear incur­ring loss­es in the pro­posed des­ti­na­tion-based tax. To allay their fears and to pro­tect their rev­enues, the Cen­tre is plan­ning to keep alco­hol out of the GST ambit, con­sti­tu­tion­al­ly. Accord­ing to a revised draft of the Con­sti­tu­tion amend­ment Bill, petro­le­um, though zero-rat­ed, will be under GST because it is an input prod­uct. GST, a val­ue-added tax, gives cred­it for tax­es paid on inputs. If petro­le­um is kept out, it will break the chain for input credits.

How­ev­er, since “alco­hol is pri­mar­i­ly a final prod­uct and states have rev­enue con­sid­er­a­tions, it can be kept out of GST”. Tobac­co, on which the Cen­tre levies excise duty, and entry tax in lieu of octroi, will also be sub­sumed in GST.

Among oth­er con­tentious issues were the GST coun­cil and the dis­pute-res­o­lu­tion author­i­ty pro­posed in the Con­sti­tu­tion amend­ment Bill of 2011. At var­i­ous meet­ings of the empow­ered com­mit­tee of state finance min­is­ters on GST, states opposed the author­i­ty and want­ed changes in com­po­si­tion of the coun­cil to decide GST rates, exemp­tions and thresh­old lim­its, among oth­er things.