Centre hardens stance on GST, it’s up to states now

NEW DELHI: The Centre is unlikely to propose a fresh set of constitutional amendments to facilitate the goods and services tax, or GST, having already bent backwards enough to accommodate concerns of the states.

“We have already given up quite a bit and don’t see if we can offer anything more to states in the draft of constitutional amendment bill,” said a finance ministry official privy to discussions with states on this major tax reform.

This hardened stance of the Centre means the onus is on states to take the process forward at the October 29-30 meeting of the empowered committee of the state finance ministers, the body that is negotiating with the Centre, at Goa.

The Centre has attempted to accommodate the concerns and suggestions of states in the second draft of the constitutional amendment proposals, but has failed to get them on board so far.

The Centre dropped the contentious veto power to the finance minister in the proposed dispute settlement council in the first draft, but many states now want the idea of such a body to be dropped altogether . This is not acceptable to the finance ministry for the reason that it has agreed to states demand of a dual rate structure --goods are taxed at two rates, one concessional and other regular -- as opposed to a singe one suggested by the Centre.

This compromises the basic structure of the new tax and the finance ministry thinks it could undermine the stability of the overall tax structure. In such a situation , an effective dispute settlement mechanism is necessary for the smooth functioning of GST. “The dispute resolution mechanism would ensure the broad contours of GST regime are not breached by the Central or the states. Thus, would help to preserve the primary objective of GST, which is uniformity across states and central GST,” said Pratik Jain, executive director, KPMG.

The forthcoming meeting of the empowered committee is expected to discuss the models suggested by states and the second draft of constitutional amendments proposed by the Centre.

But with the hardening of stance on part of both the Centre and the states, which are unrelenting on the amendment bill, may make the GST rollout even in middle of the next year difficult.

The rollout of GST has already missed the April 1, 2010 deadline and the new proposed date is April 1, 2011. In a recent interview to ET Now, finance minster Pranab Mukherjee admitted that April 1 rollout looks difficult.

The Centre has already rejected the model of GST suggested by the states such as MP, Gujarat and West Bengal.
Incidentally, all the three states had supported the dual-rate GST structure and expeditious constitutional amendment in the discussion paper put out by the empowered panel.

The GST seeks to replace with a neat single levy indirect taxes, such as central excise duty and services tax and state taxes , including value-added tax, entry tax and purchase tax.

The proposed GST will have two components , one levied by the Centre and another by the states, implying that both will need to have concurrent powers to tax goods and service. Therefore, a facilitating constitutional amendment is needed to allow Parliament and state assemblies to tax the same items. At present , the Centre can impose taxes on goods at the factory gate and services while states can only tax goods at retail level. States do not have the power to levy tax on services.