States, Centre iron out differences over GST; rate cap not to be part of constitutional bill

 Making headway on the long- pending GST Bill, the Centre and States today agreed on the principle that the tax rate will be lower than the current levels even as the broad consensus emerged that the rate should not be part of the statute.

A meeting of the Empowered Committee of State Finance Ministers convened by Finance Minister Arun Jaitley also agreed to include in the Constitutional Amendment Bill the mechanism of compensating states for any loss of revenue in first five years of Goods and Service Tax (GST) subsuming all indirect tax levies including VAT. There was also broad agreement on the principle that the ordinary businessman and the common tax man will benefit from introduction of GST by way of lower tax rates while the states will not face any loss of revenue, West Bengal Finance Minister and the panel chairman Amit Mitra said after the meeting.

Consensus to keep the GST rate out of the Constitutional Amendment Bill

Also, there was "consensus to keep the GST rate out of the Constitutional Amendment Bill," he claimed. The government is keen to get the GST Bill approved during the current monsoon session of Parliament ending August 12 but is facing opposition from Congress which wants a low tax rate to be part of the Constitutional Amendment Bill while the one per cent additional tax in hands of states over and above the GST rate be scrapped.

"As you know that no tax rates are provided in the Constitution. It was discussed and conclusion reached that Union Finance Minister will communicate to other parties. He will explain it to them that it can't come in Constitutional Amendment but it can come in GST Bill or GST Act," Mitra said. The "broad consensus put together is satisfactory to all political parties and all states," he said adding "fool proof" wording for compensation to states has been worked out.

There are indications that the government may now bring the GST bill in Rajya Sabha next week instead of earlier plans of doing it this week. Mitra said while there was no talk on specific tax rate, it emerged at the meeting that the rate should be such that is lower than existing levels otherwise "there is no point of reform." The states, he said, were of the view that small businesses with turnover up to Rs 1.5 crore in a year should come under purview of only state governments and dual control of states and centre can be exercised over businesses larger than them. 

Once the Constitutional Amendment Bill is passed by Parliament by two-thirds majority, both the Houses will have to pass another bill to implement the GST. In the Bill, the Centre had proposed 100 per cent compensation for first three years, 75 per cent and 50 per cent for the next two years. However, the Select Committee of the Rajya Sabha has recommended 100 per cent compensation for probable loss of revenue for five years.

Today's meeting of the empowered committee was crucial as the Centre is looking to build consensus over the three demands of the Congress party, which included that Constitutional capping of GST rate.
"On the question of rate it was very important that wording has been worked out which first of all essentially means that the incidence of tax on commonman has to be significantly reduced. At the same time, the safeguard on the existing level of trends of revenue of the Union and States.

"...These are the two objectives that a broad framework of words have been worked out and we hope that all political parties will be in agreement," Mitra said. He said that today the effective rate of taxes is huge and consensus was there should be a reduction in the tax rate with GST implementation. On the Congress demand for scrapping of one per cent additional tax, Mitra said: "What has been absorbed in GST is known to you. So there is nothing for me to say".

1% additional tax to be scrapped? 

Jaitley had earlier indicated his openness in scrapping the 1 per cent additional tax after a panel headed by Chief Economic Advisor Arvind Subramanian favoured it. Congress ruled Karnataka, however, held on to its demand that GST rate should be mentioned in Constitutional amendment bill to safeguard the interest of tax payers. "GST taxation should be specifically brought in Constitutional amendment bill so that the tax payers are told what the rates would be," H C Mahadevappa, a minister in the Siddaramaiah government told reporters here.

Kerala Finance Minister Thomas Isaac said the GST revenue neutral rate (RNR) was discussed and general consensus has been to drop this concept of RNR in Constitutional amendment. "We will ensure a rate and structure which will reduce the effective tax burden on the common man. We know that effective rate on consumer products is about 30 per cent. It'll be considerably brought down. Rate cap will not be put in constitutional bill," Isaac said. He said there will be more meetings of the state finance ministers.

Briefing reporters about today's meeting, Mitra said it was a "very constructive" meeting attended by all major finance ministers. "I am happy to say that the wording which would guarantee five years of compensation was worked out. I cannot go into details of the wordings, I can only give you spirit of it. States are satisfied that in the constitutional amendment the wording (will be provided) by which states will be guaranteed five years of compensation if there is any loss of revenue," Mitra said.

Compensation for five years 

He said it is "very big development" and appropriate wording gives confidence to states that for five years if there is any loss of revenue, Centre will compensate. On the issue of dual control, state finance ministers have conveyed to Jaitley that small businesses with turnover of Rs 1.5 crore and below will be taxed only in the hands of state.

"Above Rs 1.5 crore a smooth consistent methodology has been worked out for both centre and state to be able to work together shoulder to shoulder with regard to revenue generation," he said. Himachal Pradesh Excise and Taxation Minister Prakash Chaudhary said that the state is in favour of dual control. Himachal is ready to implement GST but nitty-gritty has to be worked out, he added.

The Congress, which originally mooted GST in 2009 to replace all indirect taxes, has been demanding that the overall rate be capped at 18 per cent and scrapping of an additional 1 per cent tax designed to compensate manufacturing states that fear losing out on revenue. It also wants an independent mechanism to resolve disputes between states over revenue sharing.

GST would subsume all indirect taxes like excise, sales and service levies. In the new regime, there will be one Central GST or C-GST and State GST or S-GST. States levy sales tax or VAT on goods sold within their jurisdiction and get a Central Sales Tax (CST) on sales made outside their territories. This CST will no longer be available in the new regime and a 1 per cent additional tax was proposed to make up for that.

The GST Bill, which intends to convert 29 states into a single market through a new indirect tax regime, was earlier planned to be introduced from April 1 this year, but the deadline was missed as the legislation to roll it out remains in limbo in the Opposition-dominated Rajya Sabha. The government, which has agreed to a five-hour debate on the GST bill in the Rajya Sabha, is keen to get the law passed during the current Monsoon Session of Parliament that ends on August 12.