GST tussle: States want full compensation for 5 years

Consuming states raise objection to 1% tax for manufacturing peers; EC to present combined view to Rajya Sabha panel on June 16

Many states, half of which have to be on the side of the proposed constitutional amendment on a national goods and services tax (GST) to enable its roll-out from next April, demanded on Thursday its modification to ensure full compensation for five years in the event of a revenue loss due to the switch.

Besides, there were differences between states over the one per cent tax provided  in the Bill to help manufacturing states such as Maharashtra, Gujarat and Tamil Nadu. Also, some states raised the issue of subsuming the purchase tax into the proposed GST, and a tax on tobacco, K M Mani, head of the Empowered Committee (EC) of State Finance Ministers told  reporters here.

Some also demanded empowering of local bodies to tax  some  advertisements,  taken away by the  Bill,  sources said.

Despite all this,  Mani was hopeful that GST would still be on from April 2016, a point concurred by independent experts.  

He said he’d meet the Rajya Sabha panel examining the proposal on June 16 to present states' demands. Before that, the EC would try to formulate a view on differences between states on the one per cent tax for manufacturing ones, Mani said.

At present, the Bill provides for the tapering of compensation for revenue loss from the fourth year. For the first three, states would be given full compensation. This would reduce to 75 per cent in the fourth year and 50 per cent in the fifth year.

“States want full compensation for five years, not in this phased manner,” Mani said.

Before drafting of the Bill by the central government, states had pressed for inclusion of the compensation for five years in the Bill. The Centre had agreed to this demand but did not agree  to full compensation for the fourth and the fifth years.

States also want a change in the wording. The Bill says  “compensation may  extend to five  years”.  States want a change to “compensation  shall  extend  to five  years”, sources  said.

The Bill  needs assent  of at least 15 of the 29 states. The ruling National Democratic Alliance has 11 with it. However, every state would also have to prepare its own GST Bill in line with the Centre, to enable pan-India roll-out. So, a consensus is key.

Prashant Deshpande, senior director at Deloitte India, said: "More than states' demand, the more crucial issue is whether all bureacuratic and administriative systems like a GST Network would be in place by then."

The Centre's move to woo manufacturing states by providing for one per cent additional tax on inter-state sale of goods for two years has divided states. Consuming states want this tax dropped or its cascading effect be removed. Earlier, chief economic adviser Arvind Subramanian had also criticised the proposed levy, saying it would harm the 'Make in India' campaign.

Asked whether this demand would be put forward as the EC's view to the Rajya Sabha panel, Mani said the committee was yet to take a view.

Sources said along with the committee demand, specific states' demands could be given as annexures to the parliamentary panel.

A few states pressed for exclusion of purchase tax from GST. In case the Centre does not agree, they put a further ambitious demand to compensate them for 15 years. Purchase tax is levied by only a few, such as Punjab and Haryana.

Some other states wanted powers to levy additional sales tax over GST on tobacco and its products, Mani said. Sources said states demanded they get the power to decide the rate of this extra tax.

The constitutional bill has already been passed by the Lok Sabha. It was then introduced in the Rajya Sabha, but was referred to a panel. If the House passes it with modifications as recommended by the panel, the Lok Sabha will have to re-consider the bill with the changes.