Parliament panel might propose optional GST for states

States also proposed it earlier, but Centre turned down the proposal

Parliament’s standing committee on finance might propose making it optional for states to introduce the Goods and Services Tax (GST).  

The panel, which met today to consider its draft report on the Constitution (115th Amendment) Bill on the GST, feels states should be given enough fiscal space if the success of Value Added Tax (VAT) is to be replicated.

In its Bhubaneswar meeting in January, the Empowered Committee of State Finance Ministers suggested states get the option to stay out of GST at the time of its rollout or quit later if needed.

The argument given by then EC Chairman Sushil Modi (he was finance minister of Bihar) was that once GST was rolled out,  states would not find it sensible to stay out of it and quitting later won’t be easy either. VAT was also optional for states at the time of its introduction but gradually all states adopted it.

However, Finance Minister P Chidambaram turned down the proposal, as keeping some states out of GST would break the chain when goods were moved from a non-GST state to a GST state and vice versa.  

The standing committee, headed by the Bharatiya Janata Party’s  Yashwant Sinha (he’s also a former union finance minister), feels  Centre and states should arrive at a broad consensus on key issues regarding GST implementation before enactment of the Constitution Amendment Bill. It is surprised that there has been no finality in the views of the Union finance ministry itself on key areas of GST.

To address concerns of the states on revenue loss, the panel might recommend an automatic compensation mechanism, wherein a fund is created under the proposed GST Council. It also wants a study to evaluate the impact of GST on the revenue of states.

It could suggest a floor rate with a narrow band, decision by voting and not consensus in the GST Council, omitting the provision on setting up a Dispute Settlement Authority, subsuming entry tax in GST and giving powers to states to levy tax in the event of a natural calamity, among other things.

The report of the standing committee could be adopted in its next meeting and the finance ministry, after incorporating the panel’s views, would approach the cabinet to present the Bill in Parliament with the changes.