FinMin finds states' GST proposals flawed

Says these are against the basic structure of the Constitution.

The Centre has not found favour with the idea of states to allow a differential rate of the proposed Goods and Services Tax (GST) in various states, as it might go against the fundamentals of the Constitution. The finance ministry is also against the states’ proposals of setting up a disputes settlement authority (DSA) outside the Constitution, continuation of the Central Sales Tax (CST) along with GST, and not giving veto to the Centre.

An official in the finance ministry said the suggestions were against the basic structure of the Constitution, and if implemented, could be challenged in the court. He said if the Centre conceded to the states’ demand of having fiscal autonomy to reduce or increase rate in their respective states, it would result in different IGST rates (inter-state GST), a combination of central GST and state GST.

“Since IGST will be a central levy, it will not be possible to have different rates because that will lead to violation of Article 14 of the Constitution, which provides the fundamental Right to Equality. The Supreme Court has said equality before law also includes taxation. So, the Centre cannot discriminate one tax-payer from another,” the official said on condition of anonymity.

Another option is to keep the IGST fixed, while allowing states to keep SGST flexible. But both the Centre and states are against it as this will affect the flow of trade in states levying SGST at a higher rate. Some states have cited the example of the European Union where GST is levied and collected in the destination country. The Centre has countered this point, saying that in the EU this system has given rise to ‘carousel fraud’, with the region thinking of shifting to origin-based tax after facing an annual loss of 3 billion euros.

“From the industry perspective, it is important that the states adopt a common SGST rate. A GST structure with different rates applying across states will make pricing difficult, and significantly complicate the operation of the IGST mechanism,” said Udayan Choksi, associate partner, Economic Law Practice.

On the empowered committee’s suggestion of setting up the DSA through GST legislation, the official said, it would not be legally possible because the GST Bill would be restricted to the Centre, while each state would have its own legislation on their respective SGST.