GST update

State finance ministers have pressed for lowering the threshold limit to Rs.10 lakh for imposing goods and service tax (GST) on entities and asked the Centre to specify GST compensation structure for five years in the Constitutional Amendment Bill. The Empowered Committee of state finance ministers, which met to deliberate on various issues connected with GST rollout, regretted that it has yet to hear the response of Centre on the structure of the new tax regime proposed by it. “So far as shape of GST is concerned, we have made recommendation to Central government after the last meeting. Government has not responded yet,“ Empowered Committee chairman Abdul Rahim Rather told reporters.
The state FMs had proposed to keep products such as petroleum, tobacco and alcohol out of GST ambit and had demanded that the exemption list be included in the Constitutional Amendment Bill.

India's ambitious plans to reform the indirect tax regime through a goods and services tax (GST) took a few significant steps forward with the Centre and states agreeing on the details of its structure. GST seeks to replace a multitude of indirect taxes with one, removing barriers to movement of goods and services across state boundaries and turning the country into a single market. This would improve efficiency, reduce delays and bump up the GDP by 1-2%.The tax, which was to have been rolled out from FY11, is stuck because the Centre has not been able to convince states that they'll be adequately compensated for revenue they lose as levies imposed are scrapped. On Wednesday, the empowered committee of state finance ministers decided the threshold for the levy of the tax. “It was decided that Rs.10 lakh in respect of general category of states and Rs.5 lakh for special category and north` eastern states,“ Jammu and Kashmir finance minister Abdul Rahim Rather, who heads the empowered committee on GST, told reporters after a meeting of the panel on Wednesday.
This means GST will be levied on all retailers and service providers with a turnover of more than Rs.10 lakh in general category states and Rs.5 lakh in special category states. This removes a key stumbling block in the finalisation of the GST structure and is expected to speed up the talks on implementation of the tax reform, though significant differences still persist. GST will replace service tax, excise, state value added tax and a number of other local levies. The new government has already signaled its intent to take GST forward and has said it will address all concerns of the states.
The levy will have two components -central GST and state GST. There are differences between the Centre and states over control of central GST.States want to have legal control of central GST up to a limit of Rs.1.5 crore. But the Centre is only willing to give up administrative control. Above the Rs.1.5crore limit, dual control is prescribed, on which there are no differences.
“The discussions on letting the state governments take administrative responsibility for those having turnover up to Rs 1.5 crore would provide relief to millions of small businesses that were concerned about having to deal with multiple authorities under GST,“ Jain said. Both sides are expected to finalise these issues soon. A panel appointed by the empowered committee with representation from the Centre and states has been tasked to iron out these issues.
The empowered committee also decided on harmonisation of exempted items under current tax regimes at the Centre and states. As many as 245 items have excise exemption, while only 96 are exempted from state VAT.
Rather said it may be difficult to immediately harmonise the list but both sides have to work in that direction.There was still no consensus on petroleum, which states want to keep out of the GST. The Centre wants petroleum to be included within the GST framework. It has suggested that states can levy additional state VAT besides GST but states are not keen.On the constitutional amendment required for GST, Rather said he was hopeful that it would be introduced in the winter session of Parliament. The amendment will give rights to the Centre to tax goods at retail level and states to tax services. States, however, want compensation for any revenue loss that they may incur to be incorporated in the bill. Tamil Nadu chief minister J Jayalalithaa had written to the Centre recently saying that the existing bill was unacceptable to the state.Rather said Tamil Nadu's concerns are likely to be met through an effective compensation mechanism.
This was the first meeting of the empowered committee after the presentation of the budget by the new Narendra Modi-led government and was being keenly watched for positive signals.“The debate whether to introduce GST must now come to an end. We have discussed the issue for the past many years,“ Union finance minister Arun Jaitley had said in his July 10 budget speech.The opposition to the tax stemmed largely from BJP-ruled states such as Gujarat and Madhya Pradesh. As a precursor to GST, the Centre and states had agreed to phase out central sales tax (CST) -collected by the Centre and distributed among states -from April 2007 over three years. Consequently, the CST rate was reduced to 3% and then to 2%. Rather said states are expecting to hear from the Centre on compensation for the phasing out of CST. He said the compensation due to states for 2010-11 is pegged at Rs.13,000 crore while it is yet to be calculated for 2011-12 and 2012-13.

The government is set to start a major initiative to get states on board to launch the good & services tax (GST) with finance minister Arun Jaitley expected to initiate a dialogue to iron out issues blocking the country’s most ambitious indirect tax reform. The move comes as the finance ministry is readying details of the compensation formula. Government officials said there are three key areas where states and the Centre have divergent views.
The states are keen to retain entry taxes while the finance ministry opposes it. Similarly, the Centre wants alcohol and petroleum products within the ambit of GST. The third area of disagreement is the demand from states that the Constitutional amendment should clearly spell out the compensation mechanism. The officials said apart from discussions at the empowered committee level, revenue secretary Shaktikanta Das has also met officials from some of the states to look at ways to narrow the differences.
Jaitley is expected to hold political-level consultations as the Centre is keen to launch GST since it doesn’t want to postpone the decision to 2016 when the pay commission’s recommendations are expected to be ready, making it difficult to find the resources. Discussions are on to find the resources from within the tax measures to fund compensation to states, without putting a burden on the Union government. “The compensation mechanism will be worked out soon. The finance ministry is working on the funding sources, method of compensation and the governance structure,” said a state government official, familiar with the discussion.
The empowered committee of state finance ministers, which met on Wednesday in the Capital, had managed to evolve consensus on a handful of issues but differences remain on a number of areas. On Wednesday, the empowered committee agreed to lower the threshold for imposing the tax to Rs.10 lakh from the earlier Rs. 25 lakh and wants the Union government to spell out the compensation details in the Constitution Amendment Bill. Differences exist on the states’ demand to collect taxes on businesses with a turnover of Rs. 1.5 crore.
“On most issues we are confident of a consensus,” said a government official, signaling the government’s intention to move ahead with the crucial reform. The finance ministry is also holding dialogue with state government officials to narrow the differences. States want petroleum products and alcohol to be kept out of the GST mechanism.