The proposed goods and services tax (GST) faced fresh challenges on Wednesday, as states demanded complete control over small traders in the new tax regime. They also stuck to their earlier demand of keeping the entry tax, petroleum and alcohol out of GST purview and making a provision in the Constitution Amendment Bill to compensate states for revenue loss after the new indirect tax system came into force.
Meanwhile, in what could be seen as the effect of the Lok Sabha elections, Bharatiya Janata Party (BJP) -ruled Madhya Pradesh and Gujarat, which had earlier derailed introduction of the indirect taxation regime, appeared to soften their stance. In contrast, Congress-ruled Haryana toughened its stance, while Tamil Nadu reiterated its concern over states' fiscal autonomy under GST.
"Unless the problem of dual control is resolved, it will be very difficult to implement GST. For traders with turnover of up to Rs 1.5 crore, the Centre should not interfere in assessments, audits and other matters. The Union government officials insisted on giving only administrative control to states, while states unanimously recommended that legal powers also be given," said Abdul Rahim Rather, finance minister of Jammu & Kashmir and chairman of the empowered committee of state finance ministers, after the meeting.
The committee, which met to discuss reports of its sub-committee on dual control, threshold and exemptions, managed to form a consensus with the Centre on the last two issues. It was decided the common threshold for levy of GST would be kept at Rs 10 lakh (Rs 5 lakh for special-category states), against Rs 25 lakh proposed by the sub-committee. They agreed to harmonise the exemption lists of states and the Centre which have 96 and 243 items, respectively.
The unity among states on some of the issues might force the Centre to relent to an extent. Officials said this might not be an ideal GST but would still be better to begin with.
"The Centre looks more flexible. Madhya Pradesh is not saying anything now and Gujarat has modulated its tone," an official from a state not ruled by either BJP or Congress told Business Standard. The official, who did not wish to be named, admitted Congress-ruled Haryana had hardened its stance, while Tamil Nadu had again voiced its concerns which "seemed more like posturing".
Madhya Pradesh, which had blocked GST under the Manmohan Singh-led United Progressive Alliance government over concerns of loss of autonomy and revenue, extended its full support to the proposed indirect tax regime.
"We were opposing GST earlier because our concerns were not addressed. But the Centre is addressing those in the revised draft of the Constitution Amendment Bill. The government has good intentions. We extend our support to GST," said Madhya Pradesh Finance Minister Jayant Malaiya, indicating a clear shift in the state's stance.
Asked about the specific demands of his state, Malaiya said liquor should be kept outside GST and fiscal autonomy of states should be protected by compensating for losses under the new tax regime.
Gujarat had earlier sought that states be permitted to retain two per cent of the state-level GST. On Wednesday, its finance minister Saurabh Patel said it was for the Centre to figure out how it could protect the revenues of states. "All I want to say is that the revenue of states should be protected by making provision in the Constitution," he said.
The Congress-ruled Haryana emerged one of the most vocal opponents in Wednesday's meeting. Tamil Nadu reiterated the demand raised by its chief minister J Jayalalithaa in a letter to the prime minister on fiscal autonomy of states.
"The Centre is infringing upon the fiscal autonomy of states and that is not acceptable to us. We get Rs 4,000-5,000 crore from purchase tax on foodgrain. If purchase tax is subsumed in GST, we will lose. So, there should be an in-built mechanism in the Bill to compensate us," said Haryana Excise & Taxation Minister Kiran Choudhry.
The contentious issue of central sales tax (CST) compensation was not discussed on Wednesday, as Jaitley had already told states he would clear the dues of Rs 34,000 crore over three years. CST is levied by the Centre on inter-state movement of goods but collected by states.