The goods and services tax (GST) council that has been notified this week will be another important step towards cooperative federalism.
Earlier, states had no role in deciding central taxes, but now, under GST, the council will decide on the central GST rate and the state GST rate. It will have the important responsibility of not only protecting the state taxes but also protecting the central taxes as states will get 42% from the divisible central taxes pool as per the recommendations of the 14th Finance Commission.
The voting pattern of the council is also such that the states will play a major role with a two-third share, and though the central government with a one-third share has veto power; decisions will be taken by a three-fourth majority.
The GST council that will meet next week will have three main issues to confront.
Determining the tax rates will be one of the biggest issues facing the council as it will have to strike a balance between protecting its tax revenues while arriving at a rate that does not hurt the common man.
Besides the rates, dual administration or dual control will be one of the most contentious issues.
No industry will prefer that two tax authorities have jurisdiction over them. For big companies and industries, it may not be a problem as they are already dealing with many tax authorities. But this may not be the case for small traders. More than 7 million traders with an annual revenue threshold of less than Rs1.5 crore are exempt from levy of excise duty. So, they should not be asked to now deal with both the central and the state tax authorities in a GST era.
A situation should not arise where assessment, audit and raids are conducted by both the central government and the state government.
A big problem is also the bureaucracy. The Central Board of Excise and Customs does not want to give up control and that is not acceptable. In my view, states are more capable of dealing with small traders.
Another issue concerns exemptions. More than 300 items are exempt under excise laws, while around 99-100 items are exempt under value-added tax laws. There is a need to synchronize the lists.
Doing away with cesses and surcharges is also expected to be a part of the discussions. The central government gets around Rs1.5 trillion from cesses and surcharges, but this revenue is not distributed to the states as it is not part of the divisible pool. States have always preferred doing away with all such cesses and surcharges.
Technically speaking, the decisions of the GST council is not binding on any state and every state remains autonomous. But states that disagree with the GST council and choose to follow their own path will be the ultimate loser. In such cases, the chairman and the vice-chairman will play an important role to convince a state and address their concerns.
Sorting out all the issues will be important to finalize the legislation—the central GST law, the state GST law and the integrated GST law. Different committees comprising state and central government officials are working on this and I am confident that they will be able to sort out all the issues.
My confidence also stems from the fact that Arun Jaitley is at the helm of affairs. He has always reached out individually to states and tried to address their concerns.
The GST council has very little time to arrive at a consensus on all these issues.
The government plans to bring in GST from 1 April 2017 and supporting legislation in the upcoming winter session of Parliament. That leaves only around two months for the council to finalize all the issues. The GST council is fighting against time.
Sushil Kumar Modi is the former deputy chief minister of Bihar and the former chairman of the empowered committee of state finance ministers.