A Parliamentary panel is understood to be in favour of compensating states for at least five years, to offset any potential revenue loss after the roll out of the Goods and Services Tax (GST), which aims to make the country a unified market. The panel is also understood to have recommended keeping the GST rates moderate to ensure that the new tax system is not inflationary.
The Constitution Amendment Bill to roll out GST was passed in the Lok Sabha in May, but was referred to the Rajya Sabha select committee on Opposition demand.
The new system, if implemented, will dramatically alter the country’s tax administration by replacing a string of central and local levies such as excise, value-added tax and octroi with a single unified tax.
Since GST is a “destination based” and is levied at the place where goods and services are consumed, there was a fear that his could potentially give more revenues to consuming states such as UP, Kerala and West Bengal compared to producing or industrialised states such as Maharashtra, Gujarat or Tamil Nadu.
The government has offered to compensate states fully for the first three years, 75 % of revenue loss in the fourth year and up to 50% in the fifth year.
The Bill passed in the Lok Sabha provided for an additional tax of 1% above the GST for a maximum period of two years to compensate any revenue loss to “producing” states.
Sources said that the Rajya Sabha panel has said that the provision of the 1% additional tax in its current form could lead to a “cascading effect”.
The panel, it is understood, has suggested that the 1% entry tax should be made applicable only in the case of inter-state supply of goods. This means that this additional tax will not be applicable for intra-company movement of goods across states.
The select committee’s Congress members, who are understood have written a dissent note on the panel’s report, wants the GST rate capped at 18% and specified in the bill itself and removal of the “entry tax” of 1%.
It also wants tobacco and electricity surcharge kept within the GST, a move that will deprive the states of extra taxes from two major revenue sources. The report will likely be tabled in Parliament over the next few days.
Finance minister Arun Jaitley had said the new rate will be much lower than 27% that states are said to have been pushing for.