Both sides agree to a compensation formula wherein the centre expressed its willingness to absorb any revenue losses accruing to the state

The second day of the meeting of the GST Council saw both sides agree to the compensation formula. Photo: PTI

The centre and states on Friday came within a step of reaching the consensus required to roll out the goods and services tax (GST).

The second day of the GST council meeting, chaired by finance minister Arun Jaitley, saw both sides agree to a compensation formula wherein the centre expressed its willingness to absorb any revenue losses accruing to the states on account of transition to the new indirect tax regime.

Similarly, the states met the Union government halfway by agreeing to a proposal to explore alternative sources of receipts, besides the cess on so-called demerit goods including tobacco, pan masala and aerated drinks, to fund the compensation package.

The GST compensation bill, which was cleared on Friday, will provide legal backing to the centre’s promise to compensate states if their revenue growth rate were to fall below 14% in the first five years of GST. The base year for calculating the revenue is 2015-16.

The compromise sets the context for the next meeting of the GST council, on 3-4 January, to discuss the final agenda item: sharing of administrative powers between the centre and states to govern GST. It has been a source of discord between the two, with the states even claiming it could be a deal-breaker in implementing the singular piece of tax reform.

The finance minister did not commit himself to any timeline for implementing GST.

“Our effort is to do it as quickly as possible. We are making reasonable headway (in that direction),” he said. The centre had earlier targeted 1 April 2017 as the date to bring GST into force.

Some states such as West Bengal, Kerala and Tamil Nadu are also demanding exclusive control over all traders who have an annual revenue threshold of less than Rs1.5 crore. The centre is unwilling to concede this, saying it will leave a very small pool of traders under its control.

The Union government favours dividing traders in a fixed proportion between the centre and the states, irrespective of the threshold.

“The thought behind dual control is that both have an assessing machinery and we have not reached that stage where we have a federal bureaucracy. There is one law but two bureaucracies. The issue will be resolved through a deliberative process,” said Jaitley.

The GST council also cleared the remaining clauses in the central GST and state GST draft bills. The revised draft bills, after a legal vetting, will again be placed before the GST council at its next meeting, after which they will be taken up by Parliament and state assemblies.

Some states continue to harbour reservations about the centre charging a cess to fund the compensation.

Yanamala Ramakrishnudu, the Andhra Pradesh minister of finance and planning, indicated as much.

“He (Ramakrishnudu) referred to the assurance given by the Union finance minister during the Empowered Committee meeting held on 14-06-2016 at Kolkata that the central government is committed to compensate the states for loss of revenue on account of implementation of GST. He stressed that the compensation must be given from the Consolidated Fund of India only,” a statement from his office said.

To this, Jaitley said, “There was one clause regarding source of compensation fund which will be redrafted and placed before the GST council”.

Pratik Jain, partner and leader, indirect tax, at PwC India, said the 1 April date of GST implementation is likely to be missed given the lack of sufficient time.

“The most contentious issue of ‘dual control’ or ‘cross empowerment’ is to be discussed in the next meeting in early January. If there is an agreement on the issue, then GST laws can be passed in the budget session. However, now 1 April 2017 as the date of GST implementation is virtually ruled out, which I think is good news for both industry as well as the government,” he added.