It is now certain that GST cannot be implemented in the year 2016. The Constitution Amendment Bill for GST is still pending in the Rajya Sabha. The NDA lacks the requisite number to pass through it, and the Congress seems to be in no mood to bail it out.
GST is, perhaps, the most discussed Bill since independence. Former Finance Minister P Chidambaram had announced in his Budget speech of 2006-07 to bring in GST in 2010, and since then GST and the Bill have been discussed in the Empowered Committee (EC) of State Finance Ministers. The deadline has seen many slippages. The EC consists of Finance Ministers of all the States, Finance Secretaries/Commissioners of all the States and also senior officers of Government of India. The EC has been debating and discussing it for more than ten years, and still it is hung in balance.
Whatever might have been their hidden reasons, the Congress has stated to oppose the Bill on the following three grounds: (1) There should not be an additional tax of one per cent proposed in the Bill to be collected on inter-State transactions to be retained by the producing State, (2) The tax rate should not be more than 18 per cent and (3) There is no mechanism like the GST Dispute Settlement Authority to resolve the issues raised between States and State(s) and Centre.
GST is a destination based taxation system; the State where the goods or services are consumed gets the tax, not the State where the goods are produced and sold or despatched. For example, goods worth Rs1,000 purchased on payment of tax of Rs100, if sold to other State at Rs1,200, no tax on Rs1,200 shall be levied, and on the other hand, the dealer selling the goods to other State shall get credit of Rs100 he has paid on purchases.
When the goods thus brought into the other State are sold inside that State, tax is levied and appropriated by that State. Some of the manufacturing States like Gujarat, Tamil Nadu are opposed to this principle.
They are of the view that the State invests in infrastructure and provides incentives to attract investment and also suffers pollution, but they will not get the tax when the products are sold to other States. So as a compromise, one per cent non creditable tax is proposed in the Constitution Bill which will be collected on sale of goods to other States and go to the Stateof production.
This collection of non refundable tax is against principle of GST. Since credit is not allowed, it gets embedded in the cost price and when the goods are further sold tax will be also collected on the tax element as part of the cost price, thus causing cascading. Further, non credits of tax will induce the dealers to resort to unfair means to avoid payment of the tax. However, this provision in the Constitution Amendment Bill is for two years or further, if GST Council recommends.
The second point the Congress insists on is capping on the tax rate under GST at 18 per cent. Presently, Excise Duty is levied on manufacturing of goods, CST is collected on sale of goods to other State, Entry Tax is collected on entry of goods into the local area for sale, use and consumption therein and VAT is collected on sale of goods inside the State. The rate of excise duty is 12.5 per cent, CST 2 per cent, Entry Tax 1 or 2 per cent depending upon the goods and VAT 5 per ent or 14.5 per cent. A customer when buys the goods pays more than 30 per cent towards taxes. All these duties/taxes shall be subsumed in GST and there will be one rate. Revenue Neutral Rate (RNR) under GST is being determined so that the State or the Centre will not lose revenue on account of introduction of GST. Presently, the State does not have the power to tax services and the Centre does not have the power to tax trading of goods. Under GST the Centre shall have the power to tax on trading of goods and the States have the power to tax services.
Though at present, the goods contain more than 30 per cent of tax, when a consumer buys, the VAT collected i.e only 14.5 per cent is visible on the bill, the remaining gets hidden. But under GST, the tax collected will be visible, which will be around 20-24 per cent. That is much less than what is being paid now. Congress's obstinacy on capping at 18 per cent is not justifiable.
The Congress's third objection is the lack of GST Dispute Settlement mechanism in the GST Bill. Empowered Committee (EC) of State Finance Ministers was constituted to monitor and coordinate among the States for smooth implementation of VAT. The EC had decided uniform tax rates to be adopted by the States and it was also decided that the decided rates should be floor rates. Though the Ministers of all the States are members of the EC and the decisions were taken with consensus, most of the States have deviated. The EC is a recommending body and if a State deviates to the detriment of its neighbouring States, the EC has no power to enforce its decision.
In the Constitution Amendment Bill (115th) introduced by the UPA Government, there was a provision for GST Dispute Settlement Authority.
If the decision of the GST Council is violated by a State or there is any conflict between two States or between State(s) and the Centre, the matter would be referred to the GST Dispute Settlement Authority and the decision of the Authority would be binding on the States and the Centre. This provision was opposed by many States on the ground that a decision taken by a State is a decision of its legislature and it is not proper that the decision should be negated by another Authority.
The Joint Parliamentary Committee on Finance also recommended against such Authority. Hence, it was dropped in the 122nd Constitutional Amendment Bill. Instead, a provision was inserted in Article 278A that the GST Council will evolve the modalities to resolve such issues and enforceits decision.
As it transpires the BJP- led NDA Government is prepared for negotiation with the Opposition parties, including Congress, to pass the Bill. If the Bill is passed, GST will be implemented not in 2016, but maybe, in 2017 as a lot of preparations are required for implementation after the Bill is passed by the Parliament and Presidential assent is obtained.
(The writer is a Joint Commissioner of Commercial Taxes, Odisha. Views are his own).