The Union Finance Minister in his Budget speech for the year 2007-08 had declared that Goods and Services Tax (GST) would be introduced in 2010. Three years have already elapsed, and no one can say when GST will be introduced.

A Constitutional Amendment Bill for GST was introduced in Parliament in 2011 and it was referred to the Joint Parliamentary Committee (JPC) on Finance. The JPC is yet to submit its report. The Bill has certain provisions which, the States apprehend, would compromise their fiscal autonomy. The Bill needs two-third members present and voting in both Houses of Parliament in its favour and requires ratification by half of the States to become law.  UPA Government has no required strength in both Houses and in States to get the Bill adopted. The imbroglio continues.

Most of the States do not agree with the Centre on the following points. The Bill for GST envisages constitution of a GST Council.  The council would be formed with the Union Finance Minister as its chairman and the States’ Finance Ministers as members. The GST Council is proposed to decide rates of tax and taxes to be subsumed in GST, see smooth implementation of GST, etc. If any State or the Centre has deviated from the decisions and, as a result, a State or the Centre has incurred loss, the Centre or the aggrieved State can move to a GST Dispute Settlement Authority proposed to be created. The decisions of this authority shall be binding on the Centre and the States. An aggrieved State or the Centre on the decision of the Dispute Settlement Authority can appeal in the Supreme Court. The States are opposed to creation of the authority. The States believe, and justifiably so, that the authority, would come in conflict with their legislative powers and functions and greatly compromise their autonomy.

The States also want flexibility with regard to the rates of tax to be decided by the GST Council. The States are of the view that the rate of tax under GST to be decided by the council should be treated as floor rate with a band of 2-3 per cent so that a State cannot lower the decided rate but increase within the band to mobilise additional revenue to meet the exigencies like natural calamities. Another point of dispute is an entry tax as formulated in the Constitution Amendment Bill. Entry 52 of State’s list is worded as “taxes on the entry of goods into a local area for consumption or sale therein to the extent levied and collected by a panchayat or a municipality.” If the Bill is passed, panchayat or municipality shall be empowered to levy tax on commodities that would bring back octroi. In most of the States, octroi was abolished as it was a hurdle in the free flow of trade inside the State and created hassles and harassments to the traders in every check-post of the municipality or NAC (Notified Area Council). If the present formulation of Entry 52 remains, it will bring back hassles and harassments and will be a retrograde step. The Empowered Committee of State Finance Ministers coordinating among the States and the Centre for smooth implementation of GST has decided that entry tax in lieu of octroi should not be subsumed in GST.

Another irritant is the issue of CST (Central Sales Tax) compensation.  The CST is an origin-based tax not compatible with GST, which is a destination-based tax. The CST is collected by the producing State when there is inter-State sale of goods. Since tax paid to a producing/originating State is not given credit in the importing State, the CST paid gets embedded in the cost price. When the goods are sold in the importing State, tax is again collected on the CST paid as part of the cost price; thus there is tax on tax causing cascading of prices. One of the objectives of GST is to eliminate cascading and make the goods competitive. GST is a destination type tax where tax goes to the State where goods are consumed. Hence, it was decided to gradually phase out the CST from 2007 from 4 per cent to zero by 2010 and then GST would be introduced. The Centre had agreed to compensate for the loss on account of CST reduction. Accordingly, the CST was reduced from 4 per cent to 3 per cent from April 2007 and from 3 per cent to 2 per cent from June 2008. But the Centre did not pay compensation fully and declared it would not compensate after 2010-11. The implied reason for such a decision by the Centre was that it did not have enough funds.

Secondly, GST could not be implemented as decided earlier in 2010. The Centre’s decision of backing out on compensating the States caused a trust deficit. The States believe that they are not responsible for the delay in implementation of GST. The points of disagreement are not sorted out by the Centre. The Empowered Committee of State Finance Ministers had constituted two committees, one to look into the GST design and the other to recommend on CST compensation. The committee on GST design has recommended that there is no need for GST Dispute Settlement Authority; the States should be given power to increase tax within a band of 2-3 per cent and entry tax in lieu of octroi as decided earlier in Empowered Committee should not be subsumed in GST. Accordingly, entry 52 of State’s list should be amended. The committee on CST compensation has recommended that the Centre compensate 100 per cent of the State’s claim for the year 2010-11, 75 per cent of the claim for 2011-12 and 50 per cent for 2012-13. Then, the position of compensation should be reviewed and decisions should be taken for the years after 2013 if GST could not be implemented by then.

The Empowered Committee of States Finance Ministers at its meeting on January 28 and 29, 2013 in Bhubaneswar approved the recommendations of the committees. Now, the ball is in Centre’s court to take a decision.

GST will bring in transparency in administration, simplify the procedure and create an environment for growth of industry and economy. Economists are of the view that GST will help growth of GDP by 1.5 per cent. GST is working smoothly and successfully in the European Union (EU). The EU has 27 sovereign countries. If GST works well in the EU with so many sovereign countries, why cannot it work in India, one country with one Constitution? Political leaders should think above party lines and sort out the problems for smooth implementation of GST.