Compensate states

Imposition of GST would mean end of states' power to impose certain taxes and their revenue may come down drastically.

Once again implementation of the Goods and Services Tax (GST) has got into rough weather at the recent meeting of the state finance ministers. The GST is a type of tax reform, which will help overcome multiplicity of indirect taxes. It is supposed that once GST is implemented, it will replace all other types of indirect taxes and state VAT, excise duty, service tax etc, will all cease to exist.

However, there are a number of unresolved issues between the states and the Centre, which have been coming in way of implementation of the GST. According to the Constitution, power to impose taxes is so divided between Centre and the states, that except intoxicants (wines) and toiletries, all other commodities are subject to imposition of excise duty by the Centre. States get their maximum revenue from state VAT (formerly known as state sales tax) and excise duty on intoxicants and toiletries. In this case, imposition of a uniform GST, subventing all taxes, necessitates convergence between the Centre and the states.

First step in the direction of imposition of GST is a Constitution amendment, as GST would change the whole structure of taxation. The Constitution amendment bill prepared by the Centre includes intoxicants and petroleum products in GST and by implication, states would lose the right to impose tax on them. States are objecting to this proposal. Centre’s contention is that states were earlier ready for this clause, which they are now declining to accept. Recently, a solution was nearly found. The committee of ministers opined that the amendment would include intoxicants and petroleum under GST which would be later excluded at the implementation stage.

Exclusion of these items altogether would make it difficult to implement the same as and when consensus is reached in this regard. However, now, states are not ready to accept this clause, as the power to decide about which tax to be in the list of items excluded in GST would be vested with the Union finance ministry. Since states may not trust that the finance ministry will do it, they want exclusion of these two groups of commodities in the statute book itself. Since a major portion of tax revenue of the states comes from state excise duty on wines etc and VAT on petroleum products, they do not want any tinkering with these sources of their revenue. Argument of the states is that they should not be deprived of their financial powers in the name of tax reforms.

Major argument in favour of GST is that due to multiplicity of indirect taxes, prices of the commodities go up more than proportionately. This happens because not only taxes are imposed at various levels, even the same tax is imposed at various stages.

Stages of production

For instance, if a commodity passes through various stages of production and transactions, before it actually reaches the final consumer, generally tax is imposed on the full value at every stage. Producers and the traders try to recover not only the amount of tax on consumer but much more than that. However, imposition of GST would mean end of states' power to impose certain taxes and their revenue may come down drastically, which perhaps would be difficult to compensate by their share in GST.

In the last more than a decade, service tax has emerged as a major source of income of the Centre. Not only that Centre has more and sure sources of revenue than the states, tax revenues of the Centre have been growing at a pace higher than that of the states. It is notable that at present taxation comprises of 17.2 per cent of GDP of which share of the states is 55 per cent, while that of Centre is 45. Between 2000-01 and 2012-13, tax revenue of states increased by 462 per cent, and that of centre increased by 565 per cent.

Till now, opposition to GST has been coming from only the opposition parties in general and BJP-ruled states in particular. However, important aspect of the latest objections is that it is coming equally from Congress-ruled states like Haryana and Assam. This is primarily because the states are now apprehending immediate loss of revenue. If GST is implemented according to present proposal a major part of their revenue coming from intoxicants and petroleum products would be eroded and their power to change the tax rate on these items would also be lost.

Though 13th Finance Commission has proposed a compensation of Rs 50,000 crore in lieu of the losses incurred by states arising out of implementation of GST, states' major complaint is that the compensation amount of Rs 9000 crore, as their dues for loss of withdrawal of Central Sales Tax, has not disbursed to the states till date. They are demanding immediate disbursal of this amount.

One can conclude that opposition to GST is not an opposition to a tax reform and this is not limited to a set of states. The GST, implementation of which was to be from April 2010 at the first instance, has frequently been postponed due to lack of consensus on one or the other aspect. Lack of trust of the states in the Centre is the major road block in this direction. States, already in financial crunch, are not ready to take any risk.

Constitutionally, Centre cannot compel states to adopt GST by citing benefits of the same. If Central government is really serious about GST, it must make unambiguous commitment on compensating states for all losses, whatsoever. Perhaps only then states may be prepared to adopt the same.

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