GOODS AND SERVICE TAX - RECENT DEVELOPMENTS

[Dr. Sanjiv Agarwal]

On Goods and Service Tax (GST) front, there is now some news to cheer about. The Empowered Committee of State Finance Ministers which met for two days on 28-29 January, 2013 cleared the major hurdles in introduction of GST. However, we are not still sure as to whether it could come in 2014 or even later. Now the onus is on the Parliament to quickly clear the Constitutional Amendment Bill, 2011 which is now almost two years old. The Centre and the states last week crossed one major hurdle in the way of Goods & Services Tax (GST) by agreeing to a compensation formula for the Central Sales Tax (CST).

A sub-committee of the Centre and states recommended 100 per cent compensation to states for a cut in CST from four per cent to two per cent for 2010-11, 75 per cent for 2011-12 and 50 per cent for 2012-13, respectively and as a result, Centre will now have to pay ? 34,000 crore as CST arrears to states.

The Central Government has now agreed to make changes to the Constitution Amendment Bill for GST. In a deviation from its earlier stand, it gave consent to a phased roll-out of GST like the Value Added Tax (VAT). This means that only willing states could embrace the new indirect tax system from the beginning.

States will have the flexibility to opt out of GS. Instead of its earlier proposal for a uniform GST rates across the country, the Union Government has also agreed to have a floor rate of taxation with a narrow band. Thus, GST rates could be in a range or a band to provide flexibility to states. There is also a broad consensus on GST design. States which don't want GST can opt out and a provision will be inserted in the Bill.

On the fillip side, however, there are certain concerns expressed by some states. Given the Indian federal structure, while the top most concern is of fiscal autonomy of the states, it is also feared that states may not be able to generate required funds for various developmental works. Further, there should not be dual authority for the same tax. Also in some states, there are peculiar local taxes such as purchase tax, mandi tax, infrastructure development cess, coal cess, mining cess or royalty etc. There is a need to have a clarity and consensus on whether such taxes be subsumed in GST. Ideally yes. Economically, states have an issue as every tax is going to be subsumed in GST and states may loose on account of such taxes. How centre and states are going to address this is still not certain. GST would become a dream tax only if it is a simple and comprehensive tax leaving no room for any confusion or bottleneck leading to any inconsistency.

GST : What Next

• Time to wrap up loose ends
• Not likely before 2014 LS elections
  • Constitutional Amendment Bill, 2011 - Report of Standing Committee likely in Budget session, passage by winter session 2013
  • GST rate - band may be introduced
  • Consensus required at Empowered Committee on GST to abolish small taxes
  • Agreement on CST Compensation
  • Agreement on dropping Dispute Settlement Body
  • GST may be introduced in phases. States to decide/opt out
  • Petroleum products to be under GST
  • Alcohol i.e. products to be outside GST
  • States will be empowered to raise rates in case of distress
  • Special vehicle created for GSTIN network
  • Dual control not likely - to be controlled by centre/states based on turnover
  • Composition scheme likely, besides threshold exemption
  • Agreement on common exempted goods, (96 in number)

In meeting of Empowered Committee of State Finance Ministers in February 2013, Finance Minister has mandated the Committee to get the draft on new GST law ready. The issue of CST compensation is also being addressed with suitable budgetary provisions. Since there is no firm date on introduction of GST, states want to have clarity on CST for 2013-14 and its compensation. The Empowered Committee has broadly agreed to amendments in the Constitution.

The Empowered Committee of State Finance Ministers in May, 2013 meeting agreed to have a common exempted list of over 90 goods - both for CGST and SGST under proposed GST regime. Presently there are 96 items in exempted goods category for Value Added Tax and Centre has 243 items exempted under Central Excise. Centre will, therefore, prune down these exemptions in phases. The Committee also agreed for limit of Rs. one crore and 0.5 per cent floor rate for the compounding scheme which allows a trader to pay minimum tax but not avail the tax credit. There is no agreement, yet on common threshold limit for traders to be registered as well as for dual control of traders. The sub-committee has recommended that under GST, a trader with a turnover upto ₹ 1.5 crore should be controlled by the State Government while those with a turnover above ₹ 1.5 crore may be controlled by both-states and the centre. www.taxmanagementindia.com

For GST network, a special purpose company has been incorporated to implement IT back bone of proposed GST. It will provide IT infrastructure and services to various stakeholders including the Union and State Government. It has been set as an as section 25 (not for profit) company under the Companies Act, 1956, non-government private limited company in which Government will retain strategic control.

Empowered Committee is preparing the ground for the GST Council so that as soon as the GST Bill is passed, it can be implemented without much loss of time. However, the efforts on GST may slow down now with Empowered Committee Chairman, Mr. Modi, resigning from the position after the breakup of two political parties recently.