States agree not to change GST unilaterally

The Centre and the state governments have agreed not to unilaterally change the tax rate on goods and services, once the Goods and Services Tax (GST) is implemented from April 2010.

This is a major breakthrough since there will be a single tax applicable for any goods or services all across the country, except petroleum products. Any changes in the rate of tax, based on the agreement reached between the Centre and the states have to be approved by the Centre and the empowered committee of state finance ministers formed to sort out Centre-state issues on economic issues.

The central government to give effect for GST will bring in a constitutional amendment and this aspect will be incorporated, sources said.

“Rates of central GST and state GST once fixed through empowered committee will be binding on the Centre and state until it is amended through the same mechanism,” said the then finance minister P Chidambaram in a letter addressed to the empowered committee a few days before he moved to the home ministry.

This pre-condition is cited as the reason for breaking the impasse in agreeing on a GST roadmap. Earlier the centre was saying there would be one single GST that will be approved by Parliament. State finance ministers did not agree, saying that it took away their rights to levy tax.

As a compromise, the central government agreed to dual GST model - where both the centre and the states can levy tax on goods and services - but it wanted an assurance from the states that GST rates will not be tampered unilaterally.

Now any state that wants to change the rate of tax has to approach the empowered committee, which will evolve a consensus and get further consent from the Centre.

The Centre wanted this precondition to avoid a repeat of problems that arose in implementing the value added tax (VAT) in 2005. Though the states agreed to uniform tax rates for all products, there have been large deviations in petroleum, tobacco products and foodgrain, leading to distortions in the tax structure.

For example, the agreed tax rate under VAT for foodgrain is 4 per cent. But Delhi government does not tax and Punjab and Haryana tax at a lower than 4 per cent. Similarly, states agreed to uniform minimum rates but various local governments have levied taxes below that rate.

On Tuesday, the empowered committee of state finance ministers announced that a dual GST model has been accepted by both the states and the centre. There will be two components under this: central GST and state-level GST.