Continued lack of consensus at next meeting could cast shadow on GST rollout by April 1

Most issues related to the proposed Goods and Services Tax (GST) taken up by the GST Council have been resolved. But administrative control over assessees has become a prickly matter, dividing the Centre and states.

Even an informal meeting between Finance Minister Arun Jaitley and state finance ministers failed to resolve the matter on Sunday, five days ahead of when the GST Council is slated to take up the issue.

While the states and central finance officials are set to meet on Monday, the lack of consensus has the potential to cast a shadow on the planned GST rollout by April 1, 2017.

States, including West Bengal, Uttar Pradesh and Tamil Nadu, also took the opportunity to raise the issue of demonetisation and its impact on their treasuries with the finance minister.

After Sunday’s three-hour meeting, Jaitley said: “The meeting has remained incomplete. Discussions will continue on November 25.”

Trinamool Congress-ruled West Bengal remained a hurdle in building a consensus on the issue. The Trinamool had made implementation of GST a part of its manifesto for the Assembly polls, which it won earlier this year. However, the Assembly has not ratified the constitutional amendment Bill.

But there are practical difficulties as well. Entry-level taxes imposed by the Centre and the state have not been resolved. Who will collect these taxes? If the state ceases to collect these, how will the compensation mechanism work? West Bengal asked these questions. The state also objected to the Centre’s close monitoring of fund usage in social development schemes, calling it a “serious infringement” of the federal structure.

Kerala and Tamil Nadu are also citing jurisdictional issues and two sets of tax collection agencies as their objections. The objections of these three states suggests that the rollout of GST will miss its deadline.

In initial meetings of the GST Council in October, the issue was stated to be resolved amicably between the Centre and states. According to that agreement, the states were to have sole control in matters of sending notices, scrutinising and auditing accounts of assessees if their annual turnover was up to Rs 1.5 crore in case of goods. Over this threshold, both the Centre and states were to have control, but they were to avoid dual control over the same assessee.

In case of services, it was agreed the Centre would have sole control over assessees in case of service tax till the time state officials get enough skills to monitor this levy. Under the current tax system, only Centre can impose service tax, at least most of them.

However, this agreement, technically called horizontal model, broke down later even before the minutes of the agreement could be written. States argued that they also levy some service taxes such as entertainment tax. As such, they should be given power to monitor these.

The Centre then proposed a vertical model under which both the Centre and states will have control over assessees in goods and services, but would avoid dual control. The Centre was willing to give more number of assesses — two-thirds — to states. This was not agreed to by many states.

As the GST Council meeting could not break the deadlock, an informal meeting was convened by Jaitley. Most bureaucrats were not part of the meeting. However, this meeting could not resolve the issue.

Any disagreement at the next meet could derail the rollout of the GST from the targeted April 1, 2017. Jaitley had earlier this month stated that the GST has to be rolled out by September 16, 2017, before the validity of the constitutional amendment brought in by Centre and ratified by states expired.

On Sunday, West Bengal, Kerala, Uttarakhand, Uttar Pradesh and Tamil Nadu insisted on exclusive control over taxpayers earning less than Rs 1.5 crore in annual revenue, for both goods and services.

Uttarakhand Finance Minister Indira Hridayesh said: “The Centre is agreeable on goods, but is not yielding on services. States are looking at their interest to safeguard their revenue. The Centre will have to yield to states to get the CGST and IGST Bills passed. A middle ground on the issue has to be worked out politically.”

Kerala Finance Minister Thomas Issac said his state was unwilling to compromise as it had virtually given up its taxation rights.

At present, the estimated indirect taxpayer base, including value-added tax, service tax and excise, is around 10 million, of which around 0.4 million are common to the centre and the states. This leaves around 9.6 million tax payers of which around 6.6 million are value-added tax assessees, 2.6 million are active service tax assessees and around 0.4 million assesses are registered under excise.

The next GST Council meeting, on November 25, will also work to finalise four supplementary Bills dealing with CGST, SGST, IGST and the compensation law.