A panel of state finance ministers on Tuesday failed to reach a consensus that would enable the government to get the Constitutional Amendment Bill for Goods and Services Tax (GST) passed in Rajya Sabha.
The crucial revenue neutral rate (RNR) of taxation as well as capping of the GST rate in the Bill did not find favour with many states during a meeting of the Empowered Committee of State Finance Ministers. An RNR of 15-15.5 per cent and a standard GST rate of 17-18 per cent was recommended by a committee headed by Chief Economic Advisor Arvind Subramanian.
“All states were of the view that the tax rates put forward by the Chief Economic Advisor are not acceptable. There was no consensus on what the rate should be. It can be 18 per cent or above that. That was the consensus,” Kerala Finance Minister Thomas Isaac told reporters after the meeting.
Isaac said that the rate should not hurt the common man and must remain beneficial for the revenue of states. “The general consensus was to drop this concept of RNR rate. We will ensure a rate and structure, which will reduce the effective tax burden on the common man…. also, this rate and structure will protect the existing revenues of the Union and the states,” he said.
“On the question of a rate, it was very important that a wording be worked out which essentially means that the incidence of tax on the common man has to be significantly reduced, at the same time, safeguarding the existing level of trends of revenue of the union and states,” said West Bengal Finance Minister Amit Mitra, who is the committee chairman.
On the matter of capping the GST rate, a key demand of the Congress Party, Mitra said there was “consensus to keep the GST rate out of the Constitutional Amendment Bill”.
“As you know, no tax rates are provided in the Constitution. It was discussed and a conclusion reached that the Union Finance Minister will communicate to other parties. He will explain it to them that it can’t come in a Constitutional amendment but in the GST Bill or GST Act,” Mitra said.
Congress-ruled states, however, stuck to their stand of putting a cap on the rate in the Constitutional amendment. Karnataka Minister H C Mahadevappa said, “GST taxation should be specifically brought in the Constitutional Amendment Bill so that taxpayers are told what the rates would be.”
The states, however, reached a broad consensus during the meeting on the other contentious issues of dual control and a dispute-resolution mechanism.
“There was always a standing issue on the question of dual control. The unanimous decision of state finance ministers conveyed to the Union Finance Minister was that Rs 1.5 crore and below will be under state (control)… states will be the only entities that will look after the small business of states. Above Rs 1.5 crore, a smooth consistent methodology has been worked out for both Centre and state to work together shoulder to shoulder with regard to revenue generation,” Mitra said.
The states also agreed on dispute resolution to be done by the GST Council, as opposed to the Congress demand of an independent mechanism.
On compensation to states, Mitra said, “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 wording. I can only give you the spirit of it that states are satisfied by the wording in the Constitutional amendment by which they will be guaranteed five years of compensation if there is any loss of revenue. This was a very big development. The appropriate wording… was clearly defined today,” he said.
Mitra also said that the states agreed to remove from the Constitutional amendment the proposed 1 per cent additional levy to be levied for inter-state trade of goods and aimed at helping manufacturing states.
The Constitutional Amendment Bill for GST is awaiting passage in the Upper House of Parliament, where the government does not have a majority. The Bill is expected to be tabled in the ongoing Monsoon Session. After passage in the Rajya Sabha, it needs to be ratified by 50 per cent of states.
In Tuesday’s meeting, Union Finance Minister Arun Jaitley is said to have appealed to all state finance ministers to ensure the passage of the GST Bill in Rajya Sabha, said an official who attended the meeting. The official added that the Finance Minister assured states that all their concerns will be taken care of after the passage of the Bill.
Touted as the country’s biggest indirect tax reform, the GST will subsume most Central and state levies including excise duty, service tax, value added tax and central sales tax, and could add as much as 2 percentage points to India’s gross domestic product.