WITH the passage of the constitutional amendment, it was taken for granted that there would be no further hurdles to the smooth introduction of Goods and Service Tax (GST) from the beginning of the next financial year. The Central GST (CGST) and Integrated GST (IGST) bills were to be introduced as money bills and passed in Lok Sabha during the winter session of the parliament. Thereafter the states are to pass the State GST (SGST) bills in their respective legislatures during their budget sessions. And that would have cleared the deck for GST in the country from April 1. However, the parliament session has concluded without taking up the GST bill and it is uncertain when the bill will be ready for the consideration of the parliament.
The GST Council, the body of the states and the centre headed by the union finance minister failed to reach an agreement on the model GST Law. So far, six GST Council meetings have been held within the span of two-three months to meet the deadline. The initial meetings of the council were marked by a rare spirit of co-operative federalism and consensus approach, more because the states were willing to compromise. Further, there was no unanimity among the states regarding issues like the rate structure on which they were divided politically and ideologically. However, on the issue of how the new tax was to be administered and the division of authority between the centre and states there was a near unanimity among the states that they should have a higher say. The centre, on the other hand, was maneuvering for a decisive upper hand for its machinery. But, the states that had been disempowered by the constitutional amendment of even a pretence of tax autonomy were not in a mood to compromise. Three consecutive meeting of the GST Council could not reach an agreement. The deadlock in the GST Council regarding administration of GST has disrupted the carefully calibrated time table. It is highly unlikely that the new tax regime will be ushered in on April 1.
THE DUAL CONTROL CGST AND SGST
The following major central and state taxes such as Central Excise, Service Tax, Special Additional Duty on Customs, Central Sales Tax, VAT, Luxury Tax, Entry Tax and various cesses and surcharges are subsumed under GST. When the above taxes are subsumed, a tax payer will be subject to multi-agency inspections by central authority as well as state authorities. There are more than 63 lakh VAT dealers in the country spread over all the states and four lakh Central Excise Tax payers and 26 lakh Service Tax payers. For the purpose of GST, the total number of above tax payers will come under the administrative control of central and state governments. Currently, majority of these dealers report to state tax administration. With GST it means both central and state authorities will have the power to examine the details of dealers such as registration, audit, inspection, assessment, scrutiny, refunds and enforcement activities. If both the authorities are to visit above tax payers for the different purposes what have been narrated above, the dealers will undergo harassment and create confusion. The state governments are more familiar with the smaller dealers. And also they would have to face the brunt of resentment created by the multitude of changes that is inevitable when the new tax is introduced.
Therefore, the states suggested that all the dealers whose annual turnover is less than Rs 1.5 crore to be placed under the administrative control of state authorities. As for dealers above turnover of Rs 1.5 crore, it was suggested that they would be vertically split between the central and state tax administrations, with suitable provisions in the law for cross-empowering central and state authorities to assess both the taxes. This will enable and ensure that no two authorities will go and examine the same dealer. Such a division of responsibility would ensure a distribution of dealers between the state and the centre roughly in proportion to their respective tax administrative staff. Further, it was also argued that dealers below threshold of Rs 1.5 crores hardly contributed to 15 percent of the total tax revenue. This is not acceptable to the centre who currently is arguing for total vertical division of the dealers irrespective of size.
CENTRE’S CLAIM FOR IGST
Another bone of contention between centre and state is the IGST (Integrated Goods and Service Tax) levied on interstate transactions in GST regime. As of now, CST (Central Sales Tax) is a Central Act enacted by the parliament, administered and appropriated by the concerned state governments. CST is a classic example of how a true federal law should work in the country. With the subsumation of all taxes under GST including CST, a new system will get into operation which will be called as IGST for administering interstate transactions. Both the exporting and importing states should have a clear knowledge of the movement of goods and the tax levied and collected since the tax moves with the goods. The present draft model law prepared by government of India keeps the state governments out of IGST administration. One cannot understand such a unilateral approach on the part of government of India, as it will lead to imbalance in the federal set-up. Till this time, CST is administered by the states. With change in nomenclature, government of India plans to jettison the states into deep sea, which is not acceptable to the states.
Further, hitherto the states have been levying local VAT on the transactions that take place within 12 nautical miles between its coastline. Now the central government has intended to usurp these transactions as IGST, which will be appropriated by the centre. For this purpose, they intend to bring in a definition of the “state” as not including the territorial waters adjacent to its coast. This infringes upon the rights of the states which cannot be accepted.
Yet another new issue raised by the centre very recently, has been the service tax on land transfers. This has been the domain of Stamp Duty imposed by states and left outside the scope of constitutional amendment. It is felt that, centre is raking up new issues as bargaining chips to force the state governments to accept its position of vertical split of the entire dealer base irrespective of size.
THE STAND OFF
As the debate in the council dragged on, the BJP states have inclined to side with the central government. But, the constitutional arrangements of the council is such that, it requires 75 percent of the votes for a decision to be taken in the council in the case of a voting. The central government has one third the votes and therefore can veto any decision even if proposed unanimously by the states. But it cannot by itself force a decision without the support of at least 19 of the 31 states and union territories. So far, there has not been any single instance of voting in the council which has continued the tradition set by the erstwhile Empowered Committee of State Finance Ministers for implementation of the VAT. The spirit of the give and take that characterised the early meetings has disappeared in the strife created by the demonetisation.
The demonetisation is having a devastating impact on the normal functioning of the economy and society and has sharply undermined the revenues of the state governments. Despite the tall talk of co-operative federalism, the union government has not considered it necessary to convene a conference of chief ministers or finance ministers to discuss demonetisation. In fact, Prime Minister Modi could not find time to give an appointment to Kerala chief minister on this issue. Instead, it has in a most cavalier fashion proceeded to destroy the co-operative credit structure over which states continue to have control, in violation of the assurances given to the state finance ministers. The situation has generated a trust deficit contributing to derailing of the rollout of the GST.