Demonetisation : A new road block for GST

The Indirect Tax Regime Goods and Service Tax (GST) has run into a new wall now – Demonetisation.

Though it is not yet clear as to how far it will impact the ongoing discussion between the Centre and the states in the GST Council, there are clear hints of opposition from certain states on this issue.

During the meeting of the fifth GST Council on Saturday, some state finance ministers raised the demonetisation issue and the fiscal situation arising due to it in the states. “State finance ministers wanted to have a discussion on demonetisation and fiscal situation in the states, but it doesn’t fall under the jurisdiction of GST Council,” said Finance Minister Arun Jaitley after the meeting.

Aiming to take the main opposition space, Trinamool Congress chief and West Bengal Chief Minister Mamata Banerjeeis leading the charge by raking the issue of demonetisation, which may become a hurdle in the passage of GST. The other states sharing a similar view may join her.

After the demonetisation move, West Bengal Finance Minister Amit Mitra had said that the GST would be difficult to implement from April 2017. He had said the abrupt banning of Rs 500 and Rs 1000 notes created an economic slowdown and states were losing more money sooner than planned. His indication was a clear indication and in sync with the TMC chief that GST implementation target was untenable at this juncture and stands on a sticky wicket.

Incidentally, Mitra, former secretary general of Ficci and an economist had played an instrumental role as the chief of the Empowered Committee of State Finance Ministers on GST in drawing a consensus of the states to support GST earlier.

Mamata is hell bent on opposing the GST on the ground of demonetisation, as she had demanded revoking of currency note ban.

GST — probably the single largest tax reform in India post-economic liberalization in 1991 — is a transition from a production-based indirect taxation to a system of taxation which happens at the point of consumption and has been in the making for more than a decade and a half. Considered as a game-changer, GST will significantly restructure the power to tax between Union and State governments and also substantially expand tax-base and revenue.

Though it was first discussed during the Atal Behari Vajpayee government in 2000, the intention to implement it was announced by former FM P Chidambaram during his Budget speech in 2006.

The Congress party in-principle has supported the Bill, but has always insisted on capping the revenue-neutral rate at 18 percent.

The Centre estimates total compensation to states for losses arising out of transition to GST to the tune of Rs 50,000 crore in the first year. This will be met through a fund — Rs 26,000 crore from a corpus generated by the levy of the clean environment cess on coal and Rs 24,000 crore from cess levied on demerit goods (tobacco, pan masala etc) and luxury items (cars etc).
The cess on demerit goods is another area of concern for the states, as some of them think that they would be at the receiving end in the deal. The apprehension is that the revenue earned from the cess will go to central corpus.

Moving a step ahead from yesterday, a consensus was achieved on nine laws in the Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST) during the GST Council meeting on Saturday.

However, the Centre and the states couldn’t reach a consensus on the contentious issues of cross empowerment and dual control to divide the administrative, auditing and assessing powers between the two governments under the proposed nation-wide GST, as it continued to be critical.

“Cross empowerment is a critical situation and will take some more time. I want to keep my fingers crossed on whether we are close to resolution. Our effort will always be to implement GST earliest on 1 April but if not, the last date is 16 September, which is constitutional compulsion,” said Finance Minister Arun Jaitley after the GST meeting.
Kerala’s Finance Minister Thomas Isaac, who had earlier distanced himself from the Congress’s demand of 18 percent cap after the state finance ministers’ meeting with Jaitley in June and supported Centre’s GST move, today said if the government is rigid on cross empowerment issue, passage of GST would be difficult.

“There is no consensus regarding the cross empowerment model. Therefore, the GST laws could not be completed. No compensation law is taken up, but formula has been arrived at. We’ll again discuss it in the next meeting,” Isaac said after the meeting.

First Post, 04 December 2016

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By | 2017-04-06T10:48:44+00:00 December 5th, 2016|GST News|

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