No political party or government can stop the implementation of the goods and services tax (GST) in India, Sushil Modi, chairman of the empowered committee of state finance ministers, told the country’s chambers of commerce on Friday but added that the tax reform could be delayed because of political uncertainties.
“A lot of work has gone into GST. GST’s time has come. It has to come irrespective of the political party in power,” Modi said.
Modi stressed that the passage of the constitutional amendment Bill in Parliament, which is required for the implementation of GST, and the timely payout of central sales tax compensation to states will be two crucial steps for GST’s implementation.
“The standing committee may submit its report in the next one month to Parliament. They may incorporate all the clauses on which the Central government and the state government(s) have agreed in the last few months,” he said. “In case issues remain, then the government can call an all-party meeting and sort out the issues.”
The passage of the constitutional amendment Bill will need a two-thirds majority to pass in both houses of Parliament. More than half of state legislatures also need to give their assent. Modi said states are unhappy that the Centre has still not released the Rs.9,000 crore set aside in this year’s budget toward compensation for the phasing out of central sales tax.
“States will incur heavy losses when GST comes in. The centre should formulate a mechanism to compensate them for the losses,” he said.
GST has been delayed as the Centre and the states haven’t been able to resolve their differences over aspects of its implementation. Prime Minister Manmohan Singh has said that it won’t happen in the remaining term of the government, which ends next year. This means that GST is likely to be rolled out only by 2015-16.
At a meeting with representatives of chambers of commerce, Modi sought industry’s help and responses to some of the unresolved issues in the design of GST. The meeting was attended by members of the Federation of Indian Chambers of Commerce and Industry (Ficci), the Confederation of Indian Industry (CII), the Associated Chambers of Commerce and Industry of India (Assocham) and the PHD Chamber of Commerce and Industry.
He asked the industry chambers to provide feedback on issues such as the model to be followed on taxing inter-state trade, the revenue-neutral rate or that at which there will be no revenue loss for states from GST, and the threshold level and exemption under GST.
Analysts at the meeting pointed out that if the governments does not increase the tax base or reduce the number of items that attract a lower tax rate, the potential revenue-neutral rate in GST could be quite high and politically unpalatable. Despite prolonged discussions, the government has been unable to arrive at a revenue-neutral rate. The government has tasked the National Institute of Public Finance and Policy to suggest a revenue neutral rate.
Industry representatives expressed concern about the possibility of states considering an alternative compensatory value added tax (CVAT) model to tax inter-state movement of goods instead of the integrated GST (IGST) model.
IGST involves central and state GST being levied on all inter-state transactions of goods and services. The state GST portion would then be divided among the states, depending on their entitlement, with the help of the GST network.
Under the CVAT model, industry will have to approach states for refunds instead of getting input tax credit on the state GST portion. But given that refunds are not always forthcoming on time, industry is opposed to this and has suggested that the Centre and states work on the existing IGST model and look for ways to improve it.
Sachin Menon, partner and national leader, indirect tax practice at KPMG, called the refund system retrograde. “It will take the sheen off GST as a new generation reform. It will increase the interface of the tax payer with the lower-level administration,” he said.
Given consumer sentiment about paying high taxes, Modi said the Centre and the states will work together to reduce the visibility of taxes or hide them in the overall price of goods or services. He sought the feedback of industry on ways to ensure that taxes were included in the final price of goods or service sold.