On GST, Centre must reach out to states to settle differences

A lot will depend upon the outcome of the deliberations at the GST Council meetings scheduled for the first half of November.

Written by T M Thomas Isaac | Updated: November 3, 2016 8:08 pm
GST, GST bill, GST rate, GST revenue rate structure, GST rate, GSTN IT, GST system via secure GST system, GST Suvidha Providers, Goods and Services Tax Network, GST regime, GST and IT Service, GST and Financial Service, GST and IT services, latest news, India news, India Business news The logic of reducing the tax incidence on consumer durables and demerit goods to 26 per cent makes the GST severely regressive.  (File)

Will the GST era begin on April 1 2017? A lot will depend upon the outcome of the deliberations at the GST Council meetings scheduled for the first half of November. There are three crucial issues on which consensus has to be reached before we can take up the model law to be passed by the Parliament and state assemblies.

One, the GST rate structure. We are yet to start discussing the rates. We have moved away from the rather futile debate on the revenue neutral rate, the estimates of which range from 12 per cent to 24 per cent. Instead, now the approach is to start from an approximate structure of rates, say, 6 per cent, 12 per cent, 18 per cent and 26 per cent. All the existing commodities will be distributed to each of the above rates on the basis of the proximity of the existing combined burden of current Central and state taxes. This data will enable the estimation of potential tax revenue of the Centre and the state and the rates may be tweaked to arrive at a structure which would ensure revenue neutral receipts.

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The most controversial is the upper rate of 26 per cent. The commodities included in the higher bracket currently suffer 14.5 per cent VAT and it makes no sense to reduce the SGST to 13 per cent. Besides, these commodities suffer Central excise duty of 16 per cent and above; commodities such as SUVs attract excise rate as high as 34 per cent. There are other taxes currently subsumed under the GST such as octroi, entry tax, cesses and service tax. Besides, one has also got to account for the cascading impact of tax prevalent in the existing system.

The logic of reducing the tax incidence on consumer durables and demerit goods to 26 per cent makes the GST severely regressive. It may also be noted that around 200 commodities that suffer no Central excise currently but have only lower VAT rate of 5 per cent are proposed to be included in the lower bracket of 6 per cent. The present rate structure raises tax on necessities and reduces the tax on luxuries. The distributional impact of the proposed structure is not acceptable to the states.

The chief economic adviser’s report had recommended the demerit goods rate of 40 per cent. It should be reintroduced in the structure and the states should be given flexibility in determining the demerit goods. The attempt of Kerala to introduce a fat tax on a few branded food products had initiated widespread debate on the efficacy of the move. It will be a retrogressive step if the fat tax has to be given up with the introduction of the GST. Besides, the upper rate of 26 per cent must be raised to at least 30 per cent. It should enable us to reduce the tax rate on necessities so that the GST rate structure is rendered more progressive.

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How will the resources required for compensating the states be mobilised? The current thinking of the Central government is to impose a cess on tobacco, pan masala and some of the upper rated commodities such as aerated drinks. Now the secret is out. The upper rate has been pegged at a lower rate so that the Central government has the option to impose the cess as and when necessary — of course, with the concurrence of the GST Council. This is not acceptable to the states. They are being deprived of their legitimate revenue so that compensation can be mobilised by the Centre.

It may be remembered that when the VAT was introduced in 2005, the then Union finance minister, P. Chidambaram, had proposed an additional cess of 1 per cent on the VAT rate. It was not agreed to by the states. The Centre was forced to find a compensation amount from its other elastic sources.

The Centre today still has direct taxes, customs and income from the sale of assets like spectrum or borrowing from which it can easily draw the required resources. The only cess the states were willing to concede was the additional tax on tobacco and the clean environment cess on coal which the Centre was constitutionally entitled to impose. The estimated compensation was only Rs 50,000 crore of which over Rs 43,000 crore would be met by the above two taxes. It was only a matter of Rs 7,000 crore that stood in the way of a consensus at the GST Council.

Finally, there is the vexed question of the role of the states and the Centre in administering the GST. In the first GST Council, deliberations moved to an agreement where the services would be handled by the Centre, the GST on goods below Rs 1.5 crore turnover would be in the domain of the states and those above Rs 1.5 crore turnover concurrently by the state and the Union.

We had objected to composite dealers active on goods and services, the dealers in services in deemed goods such as works contract and the new service entrants being included to the Centre’s net. But, now all these conclusions has been thrown overboard by the new data that has been made available.

The raising of the threshold limit from Rs Rs 10 to Rs 20 crore has resulted in the removal of 33 lakh proportion of goods taxpayers from the state administration. Besides, the Centre is getting access to 12 lakh dealers from the VAT net. With services and IGST entirely with the Centre, the Central government`s 40,000 workforce gains more dealers than states with five times more workforce than the Centre. The so-called conclusion reached in the first Council meeting has been abandoned by all states.

If the Central government adopts a more flexible stand, it should be possible to thrash out the differences and move towards the target date for the implementation of the GST. States are gripped with the fear of losing their financial autonomy after deletion of entry 54 and 62 from the constitution.

That fear has to be assuaged by reinforcing the commitment on the part of the Centre by agreeing to the states’ request of a vertical split up of service tax administration so that goods and services up to Rs 1.5 crore would be in the domain of states and anything above would be administered simultaneously by the Centre and the states.

(This article first appeared in the print edition under the headline ‘Flexibly, on GST’)

The writer is minister of finance, Kerala

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First Published on: October 29, 2016 12:37 am
  1. K
    K SHESHU
    Oct 29, 2016 at 1:54 pm
    The financial necessities of states should be taken into account before implementing GST
    Reply
    1. A
      Anandan
      Oct 29, 2016 at 8:49 am
      States lost their autonomy over their finances.
      Reply
      1. A
        Antony
        Oct 29, 2016 at 10:41 pm
        First solve the garbage problem in trivandrum city before talking about big issues. you are the one who is opposing a centralized garbage plant which resulted in filthy streets and stray dogs. Apart from opposing anything good what else you can do? Let GST come and country have a uniform tax rate.
        Reply
        1. G
          gopal
          Oct 29, 2016 at 6:46 am
          Thomas Issac has no knowledge on basic finance. Last time he was Finance Minister in Kerala, he made a mess of the Kerala Economy and damaged the revenue collections adversely. This time also it is just few months since the governance and Kerala govt is already struggling now to pay ries to many state corporation employees. GST is beyong the scope and understanding of Thomas Issac, better he stays away from that.
          Reply
          1. V
            Vinu Koratty
            Oct 29, 2016 at 11:20 am
            Its the curse of Kerala that we tend to get brain dead, pseudo intellectual, Marxist loonies like Issac as our finance Minister...
            Reply
            1. V
              Vinu Koratty
              Oct 29, 2016 at 11:18 am
              Which part are you not clear about? That the brain dead marxists tried to ban the tractors? Or that intellectual pygmies who thing they are progressive conducted Bandh to ban Computers? That Issac is the only state finance minister who is stupid enough to start more public sector companies putting the future of our children in risk? No! I have no insight to show to people who act blind...
              Reply
              1. V
                Vinu Koratty
                Oct 29, 2016 at 4:19 am
                With such s like Issac as Finance Minister, Kerala will move away from Gods own Country to Devils on. These same Marxist ones opposed Tractors in Farmland and Computers. So much for an intellect.
                Reply
                1. J
                  Jay
                  Oct 29, 2016 at 11:10 am
                  An interview with a commie from a state that produces virtually nothing? That's like asking ISIS how to make the world terrorist free...lt;br/gt;lt;br/gt;These blokes know nothing beyond their failed ideology. They have a one-track agenda on how to maximize their own coffers without contributing a penny. Has he any ideas on how to take Kerala beyond the Western Union money transfer economy? How to make the state productive and contribute to the federal exchequer? When the Middle East explodes in sectarian and other violence the rest of India will be paying for the relocation and rehabilitation of 3 million Keralites who are now in the region and send back remittances home.
                  Reply
                  1. J
                    Jay
                    Oct 29, 2016 at 11:12 am
                    Ok, does Mr. Isaac?
                    Reply
                    1. K
                      Kirit
                      Oct 29, 2016 at 3:53 pm
                      I do believe GST idea is very good idea. Most Indian's mentanlity is not pay any kind of taxes and government loses lots of revenue because shopkeeprs do not collect salwes taxes or do not pay to government . GST will increase revenue for every state. It is lot easier to supervise 1 million people than 1.2 billions.
                      Reply
                      1. K
                        Kirit
                        Oct 29, 2016 at 3:57 pm
                        only corrupts believe that state stax is better than GSTt. Let me explain, GST will collect more income for states than s tax. Most people do not pay s tax in our country. It is lot easier to supervisor few people ttan biliion people to collect taxes. Get your head clear.
                        Reply
                        1. M
                          mtv
                          Oct 29, 2016 at 7:01 pm
                          Gulf money will dry up soon. The successive Govts. in Kerala has done nothing to provide jobs to Keralites. All well meaning entrepreneurs have ran away from the state due to militant and senseless trade unions supported by this terrible communists. UDF is corrupt to the core and LDF\'s only agenda is to grow the party for its leaders at the cost of development of the state. Now BJP also is showing their true color with their militant communalism. Keralites are at the mercy of gulf money. One day people will end up paying for the follies of these parties.
                          Reply
                          1. M
                            mtv
                            Oct 29, 2016 at 7:00 pm
                            It may not last long. Gulf money will dry up soon. The successive Govts. in Kerala has done nothing to provide jobs to Keralites. All well meaning entrepreneurs have ran away from the state due to militant and senseless trade unions supported by this terrible communists. UDF is corrupt to the core and LDF's only agenda is to grow the party for its leaders at the cost of development of the state. Now BJP also is showing their true color with their militant communalism. Keralites are at the mercy of gulf money. One day people will end up paying for the follies of these parties.
                            Reply
                            1. B
                              balasubramanian
                              Oct 29, 2016 at 8:59 am
                              FINANCIAL AUTONOMY TO STATES IS OK BUT WHENEVER THERE IS FLOODS OR DROUGHTS THE STATES DEMAND ADDITIONAL FUNDS FROM THE CENTRE. WHERE THE CENTRE WILL GET IT FROM
                              Reply
                              1. P
                                Pramod
                                Oct 29, 2016 at 5:31 am
                                Initially when GST was envisaged and debated, I had commented as under :"My objection is to the very idea of GST. If all taxes on goods and services are subsumed and rolled out in a singular uniform tax, what is going to happen? I will try to answer some probabilities: (1) Independent decision making is prohibited and subsuted by collective decision making. This entails risks of persistent disputes and conflicts within the GST council leading to economic impe, indecision and policy paralysis, a likelihood that cannot be discounted in a fractured polity dominated by regional interests. As of now, all states have readily consented to the GST provisions as their role and authority gets unduly enhanced and they get an unwarranted degree of veto power, while the role of the Union government gets partially and unfairly subsumed and diminished. (2) The FM’s role gets squeezed and he becomes subservient to the GST Council. (3) The concept of annual budget and process of adopting varying tax rates to various products and services gets nullified. What will FM do in his budget if a major part of his tax resources is to be decided by the GST Council? (4) Flexibility in changing tax rates to influence various segments of the economy is lost. We as a nation should not get too carried away by the fantasy of the notion that a singular and unified rate structure will benefit a diverse and disparate economic structure of our country. The idea is delusional and impractical and implementation is fraught with grave risks." Readers were shocked by these comments. One reader complained of verbal diarrhoea ! The Indian Express promptly removed these comments from their website. Now unfortunately, my apprehensions are proving right. The centre has ured the states of 14% annual growth in tax revenues, falling which compensation will be paid, which is estimated to cost Rs,50000 crore. How the Centre would raise these resources unless some flexibility is afforded to them? Alternatively, the Centre will have to raise direct taxes, custom duties or borrow or simply print money, which can lead to run away inflation. Money does not grow on trees and there are no free lunches. The complaining states should understand this fundamental truth.
                                Reply
                                1. R
                                  rajan Karunakaran
                                  Oct 29, 2016 at 3:23 pm
                                  Practical approach in terms of income generation to states and union is need of time .Let both states Union understand the problems of each other.
                                  Reply
                                  1. S
                                    Sawan
                                    Oct 29, 2016 at 6:08 pm
                                    Financial autonomy to states mean- Don't give anything to the states and do not take anything from the States either. All Taxes to be independently levied and all finances managed by the states themselves. In a Federal structure that is not possible. The Centre collects a lot, especially from the more developed ones and when necessary disburses it back to the states. Higher the GDP, the more the collection.
                                    Reply
                                    1. S
                                      Sawan
                                      Oct 29, 2016 at 6:09 pm
                                      He does not know anything. His leaders and his organisation says it is great and that is enough for these bhakts.
                                      Reply
                                      1. S
                                        SP
                                        Oct 29, 2016 at 4:54 pm
                                        GST is collected at the end and no tax till that time - what if it is not paid,
                                        Reply
                                        1. T
                                          Thomas George
                                          Oct 29, 2016 at 3:34 pm
                                          A lot of people seem to forget some basic facts. India is a union of states, with states controlling police, state finances, education, healthcare etc. The wisdom of the makers of the Consution understood that people in different parts of the country think differently and may have different priorities and values. Financial independence is a major part in maintaining the aforesaid independence of state policy. If the financial independence is lost, the Central Government will dictate all policy by dangling money in front of them.
                                          Reply
                                          1. T
                                            Thomas George
                                            Oct 29, 2016 at 3:43 pm
                                            It has nothing to do with GST. The Central Government has been doing it for 7 decades without GST, and with state's financial autonomy.
                                            Reply
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