Reports indicate that the Goods and Services Tax Council on Saturday failed to arrive at a consensus on the issue of assessee jurisdiction between the Centre and the states. In other words, the Council has yet to reach a decision on how the Centre and states would divide the authority on implementing the new indirect tax regime. The Union minister said the next meeting on December 11-12 would focus on the completion of approval of the drafts, and take up cross empowerment law. The last few meetings held by the Council have been inconclusive as well.
Even as the ongoing row over the Modi government’s abrupt demonetisation of high denomination currencies brought in its trail simmering discontent among several State satraps particularly from West Bengal and Delhi, the revised draft laws have touched on raw nerves of the compensation issue. Most of them increasingly feel that their fiscal autonomy is being whittled down under the garb of cooperative federalism to stay dependent on the largesse of the Centre.
“The Centre and states had reached an understanding in the initial meetings of the council that the states will have sole control over assessees till Rs 1.5 crore turnover,” according to a report in Business Standard on Sunday. “Over this limit, both the Centre and states will have power in case of goods. In the case of services, the Centre will have sole power over assessees till the time state officials have enough skills to tax services. However, this understanding was broken later after some states argued that they also impose a tax on certain services, such as entertainment tax, and have powers over assessees in services as well. The division of administrative powers between the Centre and the states has been hanging in the balance since then. The Centre, on the other hand, is now pressing for cross empowerment for all assesses or those who would be scrutinised,” the report added.
For States disadvantaged by the advent of GST and looking for fair compensation, the revised draft laws unequivocally said the final compensation to States would be subject to CAG (Comptroller and Auditor General) vetting States’ claims of revenue loss. Even as quarterly payment of compensation to states is forecast, the Centre has also laid claim to any excess amount that might accrue to the GST Compensation Fund. The earlier proposal was to disburse such surplus solely among the States. These moves are not in the best interest of cooperative federalism the NDA government so grandly proclaimed to underpin.
Beyond the question of administrative controls, there are serious concerns over the rollout of GST from April 1, given the impact of demonetisation on the finances of state governments. Bengal Finance Minister Amit Mitra raised this issue a few days back in an interview to an Indian news channel. “We expected a huge destabilisation of the fiscal architecture of the country with GST. State taxes will fall significantly, and that is why we sought that the centre should compensate us for five years,” Mitra said in an interview to NDTV.
“We all supported GST under the premise that this would be the only destabilisation factor. We did not know that there will be a much bigger destabilisation in the form of demonetisation that will be let loose on the country.” Some have attributed Mitra’s opposition to the Trinamool Congress chief Mamata Banerjee’s staunch opposition to demonetization. This is a gross misreading of Mitra’s apprehensions. Unlike other opposition parties, the TMC has been one of the biggest supporters of GST Bill proposed by the current ruling dispensation at the Centre.
However, the introduction of demonetization has crippled key industries, particularly construction, textiles, transportation, hotels and small manufacturers. Consequently, tax collections from these sectors have also fallen. With the consequent loss of revenue for the states after the implementation of GST, the fears articulated by the Bengal finance do carry some weight. His contention is that the Centre must implement GST at a time when revenues accruing to the states do not decline significantly. Close on the heels of Mitra’s comments, Jaitley said earlier this week there was no question of going back on GST.
“I am here to clarify that GST will be implemented. I read some comments about demand for a reconsideration of GST. But if somebody goes through the constitutional amendments, he or she will understand there is no scope for such reconsideration,” said Jaitley. He went on to add that the existing tax system is valid only for another year. Reports indicate that the government hopes to clear supporting legislation for the reform in this session of parliament.
The GST envisaged by this council of central and state finance ministers empowered to administer the tax is a far cry from the One Indirect Tax, One Rate and One Registration motto articulated by the Centre. It has now become an indirect tax system with four levels (5 percent, 12 percent, 18 percent and 28 percent) and numerous exemptions. Economists have lamented the concessions ceded to state governments by the Centre.
In a recent column for Bloomberg, Mihir Sharma, a columnist on business affairs wrote: “It’s still possible that, over time, the government will realise its mistake and cut down the number of exemptions, the number of different rates and the amount of paperwork required. That will require India’s elected politicians, in both New Delhi and state capitals, to look carefully at the data, be nimble and ignore the protestations of their bureaucrats. The alternative is that the GST will simply not make enough of a difference to India’s absurdly complex tax system to shift the country’s growth trajectory. It would be -- as one economist put it -- a ‘name-changer, rather than a game-changer’."
Nonetheless, after nearly three decades in the wilderness, this government has almost managed to bring numerous stakeholders on board for a piece of legislation that is an improvement, if only marginally, on India’s notoriously complex indirect tax system. Progress is a slow burner.