A Budget proposal to disallow state undertakings from availing of income tax deduction on certain kinds of fee and royalty paid by them to their respective states will draw the ire of states.

The issue is set to be taken up by an empowered committee of state finance ministers.

“States will oppose it. We will take up the issue in the empowered committee,” Sushil Modi, deputy chief minister of Bihar and chairman of the empowered committee, told Business Standard. The date for the next meeting is yet to be decided.

Modi, who also holds the finance portfolio in the Bihar government, said his state would write to Union Finance Minister P Chidambaram, expressing its anguish over the issue.

Would the differences between the states and the Centre hit the progress on the Goods and Services Tax (GST) front? On this, Modi evaded a direct reply, saying progress on GST depended on various aspects.

Budget 2013-14 had proposed Section 40 of the Income Tax Act be amended so that any amount paid by way of privilege fee, licence fee, royalty, charge, etc, by a state government undertaking to a state wouldn’t be allowed as deduction while calculating the undertaking’s income.

Earlier, there were disagreements on income tax assessment of a few state government undertakings as to whether the amount charged by a state on its undertaking was deductible while calculating the income.

Modi said Budget 2013-14 didn’t disallow income tax deduction for the fee and royalty for central government undertakings. “We (states) will be affected. We take privilege fee and other kinds of fee. We oppose it,” he said.

In the past, states had expressed dissent over the Centre’s moves or proposals which, they said, encroached on their powers. They didn’t allow the central government to bring aviation turbine fuel (ATF) under the declared category list. If ATF was brought under the list, central sales tax (CST) on the item would be reduced to two per cent. Currently, the tax ranges between four per cent and 30 per cent.

Airline companies want states to rationalise the high tax on ATF, which accounts for 40 per cent of the total costs of airlines. However, the empowered committee of state finance ministers turned down the request.

A few years ago, when the Centre had brought liquefied petroleum gas (LPG) under the declared category list, states had protested. They had also asked the Centre to amend the CST Act to ensure the Centre didn’t have any power to restrict or limit their right to levy local taxes.

State finance ministers, under the aegis of the panel on value-added tax, are demanding the Centre provide full compensation for the revenue loss to states on account of the Budget proposal to include LPG in the list of declared goods under the CST Act.

When the Centre had sought the empowered committee’s views on a proposal to bring natural gas and re-gassified liquefied natural gas under the declared goods category, states had turned this down.