India’s biggest tax reform initiative — Goods and Services Tax (GST) — has entered the final leg of implementation with the government planning to announce a roadmap to roll out the new indirect tax regime by April 2016.
The Centre and states are believed to have agreed on a broad consensus on the issue of revenue losses with a Rs. 35,000-crore compensation plan spread over three years for reimbursing states after phasing out the central sales tax (CST), sources said.
The government has gradually brought down the level of central sales tax (CST) — a proportion of which go to the states — over the last few years from 4% to 2% as a precursor to rolling out GST.
As an interim measures, the government has also periodically compensated states for revenue losses.
The Central government had disbursed Rs. 6,000 crore in 2011 and another Rs. 9,000 crore had been provided for in 2013, but the states have been claiming compensation for 2011-12, 2012-13, and now 2013-14.
The first tranche — Rs. 14,000 crore — of the CST compensation plan is likely to be paid in 2014-15, with the balance over the next two years, sources said.
If adopted, GST can alter tax administration by giving a one-shot solution to a welter of levies such as excise, value added tax and octroi and stitch together a common national market.
Under the system, the Centre and states will tax goods and services in identical rates. For instance, if 20% is the agreed rate on a certain good, the Centre and states will collect 10% each.
The Centre plans to introduce the Constitution Amendment Bill in the Winter Session of Parliament in December. States also want an independent compensation mechanism to be incorporated in the Constitution Amendment Bill and are also seeking for petroleum and liquor to be kept outside the ambit of GST.
Tamil Nadu chief minister J Jayalalithaa on Thursday wrote to finance minister Arun Jaitley on this. “The proposal to bring petro products under GST is another area of concern, which would seriously diminish the limited revenue resources of the states,” Jayalalithaa said.
GST’s implementation has faced political hurdles since state governments feel it would rob them of discretionary fiscal powers and affect earnings.
Maharashtra, for example, earns more than Rs. 13,000 crore annually from octroi.
Gujarat, on the other hand, a highly industrialised state, earns about Rs. 5,000 crore from its share from the CST.
Each of these states fear that they will lose these revenues once these levies get subsumed under GST.
The Centre is hoping that a robust country-wide IT network and infrastructure to make the implementation seamless across state boundaries will be ready by April 2016.