To expedite GST roll-out, finance minister may blink

The key elements of the architecture that need to be finalized are the revenue-neutral rate that will ensure no loss of tax revenue and the threshold at which the GST levy will kick in.

“The finance minister has asked officials to finalize the GST design by May-end after receiving feedback from states after their meeting in Mussoorie. If issues remain even after the May meeting, the finance minister has said that he will resolve the issue,” said a finance ministry official, who did not want to be identified. “He is keen to push GST in the current tenure of the government.”

To a large extent, this will depend on the next meeting of the empowered committee of state finance ministers scheduled for 10-11 May in Mussoorie, Uttarakhand. An additional imponderable that has emerged is whether the group of finance ministers will lose its chairman, Sushil Kumar Modi, the finance minister of Bihar and a Bharatiya Janata Party (BJP) leader, over a row with coalition partner Janata Dal (United).

Once the architecture is in place, the government will be in a position to move the revised Constitution amendment Bill in the monsoon session of Parliament, a step that needs to be taken before GST can be implemented. The sense of urgency in the Congress-led United Progressive Alliance may also have been prompted by fears that rapidly altering political equations could force a general election earlier than the May 2014 schedule.

The same official disclosed that the finance minister is likely to give in to demands of states on the issue of dual control—only state-level GST will be levied on small traders. The states were worried that small traders may have to interact with both Union and state government officials, leading to higher compliance costs.

GST, a tax reform that seeks to create one common market for all goods and services in India, has been long delayed due to differences between the Centre and states over its design and issue of central sales tax (CST) compensation.

The meeting of the empowered committee of state finance ministers in Bhubaneswar in January saw the two sides ending their deadlock. The Centre accepted most of the demands of the states, including those on CST and a staggered entry into the GST regime, as it did when the country moved to a value-added tax (VAT) regime. It also dropped the proposal to set up a dispute resolution panel and agreed to states levying rates in a narrow band rather than a single uniform rate.

On the remaining disputes, three committees comprising Union and state government officials have been constituted. The committees will give recommendations on a revenue-neutral rate, a tax rate that will ensure that there is no loss in revenue during the transition to GST. They will also decide on a threshold revenue limit beyond which traders will have to pay GST, the issue of dual control, and technicalities regarding how and who will levy GST on inter-state movement of goods.

The report of the panels will be discussed at the next meeting of the empowered committee of state finance ministers in Mussoorie.

The committees are still deliberating on the revenue-neutral rate and the threshold with various combinations being discussed, said another finance ministry official.

The National Institute of Public Finance and Policy had recommended a revenue-neutral rate of 16% (8% state GST, or SGST, and 8% central GST, or CGST) with a threshold of Rs.1.5 crore for goods and Rs.25 lakh for services.

GST will subsume most of the indirect taxes at the central and state levels such as excise duty, service tax and VAT. It will see the Centre levying a uniform CGST rate and the states being allowed to levy different SGST rates in a narrow band. On the inter-state movement of goods, integrated GST (CGST plus SGST) will be levied and collected by the Centre, with the states getting their share.

Any disputes will now be decided by a mechanism formulated by the proposed GST council, having representatives from states and chaired by the Union finance minister, instead of the dispute resolution authority proposed earlier.

“In the last two-three months, there are a lot of positive developments around GST and convergence of the states and the Centre on many issues,” said Pratik Jain, a partner at KPMG.

“However, even if the government is able to get the Constitution amendment Bill passed in the monsoon or the winter session of Parliament, GST may be implemented only from 1 April 2015. This is because many things still remain to be done. The drafting of the model legislation has to be done. Industry will also have to be consulted before finalizing the legislation,” he added.