With the banknote crisis sharpening the political divide, the Centre and states on Sunday virtually refused to move an inch from their stated positions on the separation of administrative powers in the proposed Goods and Services Tax (GST) regime.
After marathon deliberations with state finance ministers, Union Finance Minister Arun Jaitley said “meeting remained incomplete and discussions will continue on November 25”. States alleged that the Centre, which wanted a vertical split of the near-10-million indirect tax assessee base, had only turned more adamant.
With a predictably acrimonious Parliament looking less likely than a few days ago to pass the central GST, integrated GST and compensation-for-states Bills, the Centre’s plan to roll out the comprehensive indirect tax, which will subsume excise, service tax and local levies, from April next year, is indeed threatened.
Kerala finance minister Thomas Isaac told FE: “We had a prolonged discussion from 10am to 3pm. A number of key states have the view that there must a combination of horizontal and vertical split of responsibility. We are discussing about number of dealers and how much (of the base) would be exclusively under the control of the state governments, and what would be a fair division of work between states and the Centre. We couldn’t reach an agreement.”
Isaac added: “The Centre wants a share of the small dealers, who have been exclusively serviced by the states except for the service providers. We fear that this will only create unnecessary problems.”
The political leadership has, however, given the bureaucrats a brief, and officials of both central and state governments will meet on Monday to work out a solution. At Sunday’s meeting, state FMs from West Bengal, UP, Tamil Nadu, Kerala and Uttarakhand have insisted on an exclusive control over small taxpayers, with annual revenue below R1.5 crore, for both goods and services.
They feel states have the infrastructure deployment at the grassroot level and small taxpayers are familiar with local authorities. The central government, on the other hand, is not in favour of the demand as it wants a single-registration regime for ease to service taxpayers.
Instead of horizontally splitting the taxpayers — those with R1.5-crore revenue with states and those above with Centre — it has proposed to divide the entire taxpayer base vertically wherein the taxpayers are divided between the Centre and the states in a fixed proportion. As a compromise, it is willing to give states an administrative power over 2/3rd of the taxpayer base if service tax continues to be administered by the Centre.
There are five options being discussed for the division of administrative powers : 1) a pure turnover-based division where taxpayers with turnover below R1.5 crore would be administered by the states and the larger ones by the Centre, however, this is not acceptable to states as bulk of the tax revenue comes from the second category; 2) below R1.5-crore revenue taxpayers with states and others under cross-empowerment (the Centre won’t agree on this as it is a skewed distribution; 3) the second option tweaked to keep all service taxpayers with the Centre (this option is put on the backburner as it was recognised to create jurisdictional problems for businesses which supply a substantial mix of goods and services; 4) cross-empowerment where every year both the Centre and states will decide who will audit whom on the basis of risk parameters; 5) a complete vertical division for three years, including for audit, with a Centre-state ratio of 4:6; with a mirror image approach favouring the Centre for over R1.5-crore revenue taxpayers.
At its last meeting, the GST Council had agreed on a four-slab structure – 5, 12, 18 and 28 percent — along with an additional cess on luxury and `sin’ goods, such as tobacco, to raise the funds for the Centre to compensate the states. The council is yet to take a call on the rate on precious metals, including gold, but sources say 3-4% rate is under active consideration.