If the softening of the stance of BJP states like Gujarat and Madhya Pradesh suggested the NDA government would be able to get states to come on board the Goods and Service Tax (GST) framework, the empowered committee of state finance ministers has gone and thrown in another wrench in the works. Not surprisingly, the states didn’t agree to the central government proposal to fix the GST threshold at R25 lakh and stuck to their current VAT levels of R10 lakh. Were the limit to be raised, and GST levied only on firms that had a turnover of over R25 lakh a year, the states argued they stood to lose over 60% of their taxable base, though the revenue loss is estimated at a mere 2-3%. What was more problematic, however, was the states’ argument against dual control of the tax base. What has been proposed is that the states administer the tax base of firms with a turnover of R10 lakh to R1.5 crore, and the Centre administer those firms with a higher turnover—in both cases, the Centre and the states will get their share of the GST. The Centre’s proposal is that both it and the states administer the same tax base which, given the returns are being filed electronically, is not something that is cumbersome or time-consuming. While giving the states administrative control of those firms with a turnover of under R1.5 crore seems simple, and something the Centre should accept, the problem is there is no provision in the Constitution that allows the Centre to give up its right to audit taxpayers—which is what the states want.
States are being equally obstinate in asking to keep out petroleum and tobacco from the GST, and to insist on including this in the Constitutional Amendment Bill—the more the exemptions, the less perfect the GST chain. Indeed, the Centre’s proposal that a low rate of GST be put on these goods is a fair one since states are free to add a
sin-tax on these commodities to equal the current VAT rates—the only caveat will be that only the basic rate can be set off as an input credit. The GST Council, currently a sticking point, is relatively easier to deal with since the Centre should be able to live with making its resolutions recommendatory, not mandatory.