Divided over unified tax, Centre cannot appease the states

BY SANDEEP BHUSHAN

ILLUSTRATION: TANMAYA

FINANCE MINISTER Pranab Mukherjee’s ambitious plans to roll out a new goods and services tax (GST) dispensation by April 2011, which attempts to unify the indirect taxes mechanism across the country, could be derailed. The reason: only eight out of 28 state finance ministers attended the meeting on GST on 5 December, with those from states ruled by the BJP — as well as a few from non-BJP ones — staying away. “I don’t think the government will be able to meet the April 2011 deadline,” says Yashwant Sinha, BJP veteran and finance minister in the Vajpayee government.

The meeting concluded with the state governments seeking the immediate release of 60 percent of the central sales tax. The states estimate they would lose revenue to the tune of Rs. 20,000 crore this fiscal on account of the 2 percent point cut in central sales tax. “The basic issue remains curtailment of the taxation powers of the state. Sales tax is the biggest money-spinner for state governments. This will be taken away. It will become a central power,” says Sinha.

The proposed constitutional amendment being pushed by the Centre entails the creation of a GST council and a dispute settlement mechanism, both of which are being viewed with suspicion by BJP-ruled states. Under the amendment, the GST council will be headed by the Union finance minister. “This will give the Centre overriding powers. State governments are not comfortable with this amendment,” explains Sinha.

The Centre tried to rectify this by proposing that changes to the GST could be made only if there was a complete consensus between the Centre and the states. But even this has not found favour with the BJP. According to Sinha, there’s a “very clear trust deficit” between the Centre and states, especially on the issue of sharing of taxes. It’s not that the Union government has not tried to allay the states’ fears. In July, Mukherjee had proposed a three-tiered rate structure for GST — 20 percent levy on goods, 16 percent on services and 12 percent on essential items. He had also said the Centre would compensate any loss the states incurred under the GST regime, even beyond the Rs. 50,000 crore recommended by the Finance Commission.

But BJP-ruled Madhya Pradesh rejected the initiative at the very next meeting in September. The state’s finance minister suggested an alternative GST model under which states would be empowered to levy service tax, in addition to the continuation of the value-added tax or VAT regime. However, while this found support among other BJP-ruled states, it found few takers outside the BJP fold.

An alternative model was suggested by West Bengal Finance Minister Asim Dasgupta, chairman of the empowered group representing finance ministers of all states, under which states were to be allowed to impose service tax without a constitutional amendment. Besides the mistrust between the Centre and the states, Sinha says there was also “neither clarity nor unanimity” as to how fiscal compensation for states losing out on revenue under GST would be calculated to everybody’s satisfaction. He also feared the proposed constitutional changes gave too much power to the Finance Commission over allocation of revenue to the states.

At present, the Centre can impose tax on goods at the factory gate and services, while states can tax goods only at the retail level and do not have the power to levy tax on services. Sinha says BJP-governed states were unhappy over this. Interestingly, the situation has come to such a pass thanks to the marked decentralisation of power, which has empowered state governments resulting in their political and economic assertion. Subsequently, there is a clamour for more fiscal autonomy, not only from the BJP-ruled states but also from regional parties like the CPM, in power in West Bengal and Tripura.

letters@tehelka.com