Differences surfaced between the Centre and states on some crucial issues during the GST Council meeting here on Friday.

Differences surfaced between the Centre and states on some crucial issues during the GST Council meeting here on Friday. While the Centre proposed that states must share the revenue impact of keeping area-based excise sops for the residual period of their tenure, the latter refused to oblige. The states also expressed reservations over the Centre’s plan to keep all 11 lakh existing service tax assessees under its administrative control in the goods and services tax regime.

The council, however, resolved that all investment-linked indirect tax sops will take the form of refunds — rather than exemptions — for whatever residual periods they need to be retained in the GST regime for units set up on the promise of these sops being available for fixed periods. These incentives will be available to late entrants (those who joined in 2009/10) by 2020/2021.

The council, a powerful forum of the Centre and states, adopted the principle that during the phase of grandfathering of the tax reliefs given by them, the beneficiary businesses will have to pay the taxes and then get refunds. The idea is that the GST chain — the continuity of which is necessary to ensure that cascading of taxes does not take place — is not broken.

Significantly, finance minister Arun Jaitley, who is also chairman the council, suggested that since states are anyway transferred 42% of the Centre’s tax revenue from the divisible pool as per the Finance Commission mandate, in the GST regime — where states get to tax manufacturing and services directly — they will have to share the cost of retaining the Centre’s area-based excise sops during the grandfathering phase.

Revenue secretary Hasmukh Adhia later explained to FE: “State governments are giving their own VAT exemptions. Under GST, excise duty will be no more, so if the central government wants to grandfather (area-based excise sops), it will have to take (the hit) on its kitty, from where only 42% has to be shared with states. So the central government is handicapped and it is a question of forgoing Rs 20,000 crore every year. Now, can we load incentive of an industry in a particular state on taxpayers of other states? It is not a feasible idea. So we can give reimbursement of only what we are getting. So the central government would like to grandfather but subject to the condition that would need to reimburse only 58%.”

In fact, the council’s resolve to convert all investment-linked tax incentives to refunds is the logical extension of a practice already followed by many states (VAT relief as post-payment cash grants) and by the Centre in the case of some states getting area-based excise sops.

Friday’s council meeting also saw endorsement of the draft rules on registration, payment, returns and refunds issued recently. “With regard to service tax assessments in the new dispensation, there was a long discussion on the interpretation on the decision taken in the last meeting and that discussion consumed a lot of time today. That discussion was inconclusive and therefore it will continue in the next meeting on October 18,” Jaitley said. The idea is to finalise the GST rates and the GST draft laws by November 21, he said. Once the GST laws are passed by Parliament and state assemblies, the rules could be notified immediately, he said.

Area-based excise duty exemptions, available to manufacturing units in the northeastern states as well as the hill states of Uttarakhand, Himachal Pradesh and Jammu and Kashmir, cost the exchequer over Rs 19,000 crore in FY16. At present, about 270 items are exempt from central excise duty and another 150-odd goods are taxed at concessional rates. The revenue forgone on these sops was estimated at Rs 2.25 lakh crore in FY16.