Tax disbursal under GST regime still an issue with States

After spending nearly 16 long years to construct and pass a Constitution amendment bill facilitating goods and services tax (GST), state governments are yet to be fully convinced about the way the Centre would respond to their revenue claims once the bill is passed by Parliament and become a law in due course on successful completion of the remaining formalities, including required clearance by state legislatures. The subject has been deliberated upon by four national governments, both inside and outside Parliament. Leading the current concerns of the states on the tax disbursal mechanism is West Bengal’s present Finance Minister, Amit Mitra, an eminent economist who is also well versed in taxation laws and practices as a former director general of the Federation of Indian Commerce and Industry. Mitra is now the chairman of the Empowered Committee of State Finance Ministers.

As the GST Bill, passed earlier by majority BJP members and allies in Lok Sabha, is expected to be tabled in Rajya Sabha this week after protracted negotiations with opposition leaders, who form the majority in the upper house, an important concern still looms large over timely tax disbursal to states under the GST regime. Rightly, they want Union Finance Minister Arun Jaitley to assure the states that the GST collected would be promptly disbursed through a commonly acceptable mechanism and the revenue won’t find its way into the Consolidated Fund of India, from where disbursal to states could become difficult. Last month, Amit Mitra wrote to Jaitley stating that seamless transfer of state GST and integrated GST can’t take place unless a suitable amendment is made in the Constitution. Currently, all revenues of the Centre and states form part of Consolidated Fund of India and State Consolidated Funds and it can be withdrawn only through legislative approval.

Amit Mitra’s concern is highly relevant. It calls for a clarification from the Union Finance Minister. In fact, Jaitley should respond to the issue raised by the committee when the Constitution amendment bill, along with the recently approved amendments in the GST bill, comes up for discussion in Rajya Sabha. “We all know it is not easy to withdraw once money goes to Consolidated Fund of India…so the Constitution needs to be suitably amended,” said a state finance minister while another state finance minister had put it more bluntly saying “we want an assurance of a clear demarcation of funds.” States are clearly concerned. There should be no scope for ambiguity on disbursement of funds that largely belong to the states. Fund-starved state governments can’t function at the mercy of the Centre. The states are concerned about other issues as well. The GST could lead to price inflation, at least in initial years. The West Bengal finance minister as also several other state finance ministers decided that the tax rates should be based on two principles that protect both consumers and state revenues. Some of the states are said to be worried about the future of various cesses they currently collect through levies once the GST law is in place.

These concerns are genuine. The Union Finance Minister must respond to them in Rajya Sabha to ensure that states don’t raise any fresh hurdle to the necessary amendment of the Constitution after the bill is passed in Parliament. A lot of time has already been spent on turning the concept of GST into reality through the Vajpayee government, two UPA governments and now, once again, the BJP-led NDA government. 

The proposed GST must serve its purpose and not lead to a constant issue of conflict between states and the Centre. With luck, the GST Bill, officially known as The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014, proposing a national value-added tax, may be fully passed and implemented across the country from around the second half of 2017. Hopefully, it will usher in a new era of tax reform for the governments, both the Centre and state, industry, service providers and consumers as GST operates as a comprehensive indirect tax on the manufacture, sale, and consumption of goods and services throughout the country, replacing all government taxes. GST would be levied and collected at each stage of sale or purchase of goods or services based on the input tax credit method. The process allows GST-registered businesses to claim a tax credit to the value of GST they paid on the purchase of goods or services as part of their normal commercial activity.

Under GST, taxable goods and services are not differentiated from one another. They are taxed at a single rate in a supply chain till the goods or services reach the consumer. The administrative responsibility would generally rest with a single authority to levy a tax on goods and services. This is expected to boost domestic production, exports and help control import dumping. Exports would be zero-rated and imports would attract the same taxes as domestic goods and services adhering to the destination principle. Unfortunately, the Congress party, leading the two UPA combinations for 10 tears between 2004 and 2014, is primarily responsible for the delay in the introduction of GST that seeks to build a common national market by merging several central and state taxes bringing about a single tax regime to mitigate multi-tier taxation.

GST is expected to simplify tax collection and its enforcement. In the long term, consumers are expected to be the biggest beneficiary in terms of lower overall tax burden on goods, which is currently estimated at nearly 30 percent. IPA