REASONS FOR CONFLICTS BETWEEN CENTRE AND STATES

GST Update 11.01.2016

GST DAILY DOSE OF UPDATION:-

REASONS FOR CONFLICTS BETWEEN CENTRE AND STATES:-

The implementation of the most awaited GST law is being delayed for mainly two reasons. First is the opposition from the Congress Party regarding three issues, i.e., Abolition of proposal to levy 1% additional tax, incorporation of GST rate in constitution itself and creation of Dispute Resolution Mechanism. Second reason for delayed implementation of GST is the conflicts between Centre and States on certain key issues. The first reason has already been discussed in our earlier update and the second reason is the subject matter of discussion of this update.

The first and foremost reason for lack of consensus between the Centre and States was the compensation to be given to the States during the loss of revenue in the initial years of implementation of GST. There has been a huge dispute as regards the compensation to be received by different States as GST is consumption based taxation. As it is known that India comprising of different States out of which some States significantly contribute to the manufacturing activities whereas some states are consuming states. Consequently, manufacturing states will lose significantly during the initial years of implementation of GST. Moreover, the period during which compensation will be given to the States is also a crucial factor for determination as after implementation of GST, the consuming states will earn at higher rate while manufacturing states will lose revenue at higher rate. Consequently, proper equilibrium needs to be maintained. Finally, in order to achieve consensus, it has been proposed to compensate states for a period of 5 years wherein 100% compensation will be for first 3 years, 75% in the fourth year and 50% for the fifth year of implementation of GST. But states still doubt the timely compensation from centre as centre has not given promised CST compensation to states till date.

The second reason of dispute for lack of consensus was exclusion of certain items from the purview of GST law for certain specified period of time like Petroleum, High Speed Diesel, Natural Gas, Aviation Turbine Fuel and alcohol for human consumption. It is being demanded from States that only states should have power to levy taxes on these items except in case of imports and inter state trade. The tax from these items is major source of revenue for the states and they do not want to forgo the same.

Another reason for conflict between Centre and States was the fixation of threshold limit. While the Centre wants the exemption limit to be Rs. 25 Lakhs, the States are not agreeing for higher threshold limit and support lower threshold limit of Rs. 10 Lakhs. According to the Centre, the contribution of small traders to tax revenue is minimum and insignificant and so the threshold limit should be reasonable keeping into mind the fact that the GST regime will subsume excise duty also which has current threshold limit of Rs. 1.5 Crores. However, with a view to reach consensus with the implementation of GST regime, for the time being it was decided that the threshold limit will be determined by the GST Council.

Still another dispute is about the adjudication and appellate authorities to be appointed for the GST. These authorities will come from state or from the centre. While GST has two type of taxes i.e. CGST and SGST and they will be handled by Centre as well as by state. Hence, the field formation of both centre and state will be looking after the same. But smooth implementation of GST require that there should be common adjudication and appellate authorities. But Centre want that these officers should come from centre but the state does not want to lose their power. But to avoid conflict, this matter will be decided later on and centre wants that the constitutional amendment bill is passed at the moment.

Another dispute is about the rate of tax is to be levied on GST. The states wants it to be higher side so that there is no loss to them. But the centre wants that it should be normal so that it does not add to inflation. They were agreeing around 22% but the opposition congress party want it should not go beyond 18% . This restriction should be placed in constitutional bill itself. But the ruling BJP party does not agree to it. But after the promise of compensation of loss of revenue to states, the state will also agree to the same. But the manufacturing state has demanded additional 1% non cenvatable tax so that there loss is minimum. The centre is also agreeing to the same but the opposition party is not agreeing the same. The centre wants that the matter will be resolved by GST council.

The above reasons for conflicts are sought to be temporarily resolved in order to initiate the process of implementation of GST regime so that a new beginning of unified taxation can be made.

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GST Update 11.01.2016

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