States demanding a portion of the Centre’s revenue from GST on interstate trade

The Cen­tre is learnt to have turned down a key demand from min­er­al-rich, grain-pro­duc­ing and man­u­fac­tur­ing states that they must be giv­en a por­tion of the Centre’s rev­enue from GST on inter­state trade to off­set their per­ceived rev­enue loss to “con­sump­tion states” in the GST regime. It has also reject­ed a pro­pos­al from all states that the man­date of dis­pute res­o­lu­tion should not be giv­en to the pro­posed GST Coun­cil, which is meant to have a con­sti­tu­tion­al role. These demands were made by respec­tive states as a pre­con­di­tion for their adop­tion of the supe­ri­or tax sys­tem that would avoid cas­cad­ing of tax­es and reduce the mul­ti­plic­i­ty of indi­rect taxes.

FE had ear­li­er report­ed that states like Gujarat and Tamil Nadu that export goods to oth­er states demand­ed an upfront share of Centre’s rev­enue from inter­state trade. Their con­tention is that GST, being a des­ti­na­tion-based tax on con­sump­tion, shifts the tax base away from invest­ment and pro­duc­tion and hence could be detri­men­tal to their rev­enue inter­ests. Min­er­al-rich states like Odisha and those with big oil refin­ing capac­i­ties have also raised sim­i­lar concerns.

Sources privy to dis­cus­sions between cen­tral and state finance min­is­ters said that trans­fer­ring pro­ceeds from 2 per­cent­age points of the cen­tral government’s com­po­nent of GST on inter­state com­merce to the export­ing state would reduce the Centre’s rev­enue, unless the rev­enue-neu­tral rate (RNR) for it is raised.

The GST has two com­po­nents — cen­tral (CGST) and state (SGST) — that rough­ly apply on the same base.

While the com­bined RNR is yet to be deter­mined, it is wide­ly expect­ed to be between 16% and 20%. As per the cur­rent think­ing, GST on inter­state trans­ac­tions or IGST will be levied at the same rate as the com­bined RNR (ini­tial­ly, IGST was pro­posed to be zero-rat­ed). The state com­po­nent of IGST would go to the import­ing state, in con­trast to the present sys­tem of the export­ing state get­ting the pro­ceeds of the cen­tral sales tax on cross-bor­der commerce.

“Although the­o­ret­i­cal­ly it is pos­si­ble for the cen­tral tax rate on inter­state sales to be high­er than the state tax rate, it is gen­er­al­ly desir­able to have a com­mon rate for both. This would make the design and imple­men­ta­tion of IGST sim­ple,” said the source, who asked not to be named con­sid­er­ing the sen­si­tive nature of the talks. Cross-util­i­sa­tion of cred­it between cen­tral and state tax­es would be avail­able on inter­state transactions.

The finance min­istry has also tak­en a view that the man­date of the pro­posed GST Coun­cil to set­tle tax dis­putes between states and between states and the Cen­tre need not be tak­en away. States recent­ly object­ed to the idea of an exec­u­tive body of cen­tral and state min­is­ters hav­ing the final say on tax­a­tion, as it would be com­pro­mis­ing state leg­isla­tive assem­blies’ tax­a­tion and law­mak­ing powers.

The finance min­istry believes that a sim­i­lar give and take has been made when India joined the WTO for the larg­er goal of eco­nom­ic ben­e­fits although there was crit­i­cism of com­pro­mis­ing the state’s sov­er­eign­ty. “In the case of GST, we are talk­ing about mak­ing com­pro­mis­es with­in the coun­try for a com­mon eco­nom­ic goal,” said the official.

The min­istry recent­ly con­ced­ed to state finance min­is­ters demand for not levy­ing GST on petro­le­um prod­ucts in the ini­tial years of the new indi­rect tax regime expect­ed from 2016. It believes GST won’t be worth­while if too many adjust­ments on its design are made and it car­ries for­ward the very anom­alies it seeks to address. Export­ing states retain­ing a share of tax meant for the import­ing state amounts to retain­ing the present ori­gin based tax sys­tem on inter­state sales.

The gov­ern­ment is expect­ed to table in Par­lia­ment a revised the Con­sti­tu­tion (115th Amend­ment) Bill in the com­ing win­ter ses­sion of Par­lia­ment. The Bill seeks to rede­fine the tax­a­tion pow­ers of the Cen­tre and the states and lay the frame­work for cre­ation of a sin­gle mar­ket across the coun­try that is believed to add anoth­er 1.5 per­cent­age points to its eco­nom­ic growth rate.