States reject Centre’s Goods & Services Tax Bill

The States have rejected the draft Bill for the Goods and Services Tax (GST), dealing a major blow to the Centre’s resolve to roll it out at the earliest.

At a meeting of the Empowered Committee of State Finance Ministers, the States opposed the draft Bill and its proposal to extend the GST to petroleum goods and entry tax.

Areas of conflict:

• Consensus eludes the Centre and the States on the three main issues of compensation, petrol tax and entry tax.

Demands by the States:

• The GST will subsume all excise and service taxes. The States want compensation from the Centre for the revenues they will lose over five years from the shift to the GST regime.
• They want a clause on the compensation to be inserted into the Bill. The Centre’s proposed draft does not have such a provision at present.

The Union government has agreed that its share of the revenue from the GST would go to the pool of tax revenues devolved to the States.

GST:The goods and services tax (GST) is a comprehensive value-added tax (VAT) on goods and services. It is an indirect tax levy on manufacture, sale and consumption of goods as well as services at a national level.

GST is essentially a tax on value addition, and there is seamless transfer of input tax credit across the value chain.

Under GST, the taxation burden will be divided equitably between manufacturing and services, through a lower tax rate by increasing the tax base and minimizing exemptions. Currently, a manufacturer needs to pay tax when a finished product moves out from a factory, and it is again taxed at the retail outlet when sold.

Benefits:

• GST will be is levied only at the destination point, and not at various points (from manufacturing to retail outlets).
• It is estimated that India will gain $15 billion a year by implementing the Goods and Services Tax as it would promote exports, raise employment and boost growth.
• It is expected to help build a transparent and corruption-free tax administration.
• In the GST system, both Central and State taxes will be collected at the point of sale. Both components (the Central and State GST) will be charged on the manufacturing cost. This will benefit individuals as prices are likely to come down. Lower prices will lead to more consumption, thereby helping companies.
• It is also expected that introduction of GST will foster a common or seamless Indian market and contribute significantly to the growth of the economy.
• GST will broaden the tax base, and result in better tax compliance due to a robust IT infrastructure. Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an in-built mechanism in the design of GST that would incentivize tax compliance by traders.

 CASCADING EFFECT OF TAX

GST around the world:

France was the first country to introduce this system in 1954. Today, it has spread to over 140 countries.

Then, why are the states opposing?

Some States fear that if the uniform tax rate is lower than their existing rates, it will hit their revenues.