A major hurdle seems to have been removed from the way of the much-awaited Goods & Services Tax (GST), meant to replace a confusing and abuse-prone plethora of central and local taxes, as state finance ministers have dropped the issue of compensation in lieu of a reduction in the central sales tax from the agenda of their upcoming meeting on the issue.
The GST Bill needs a Constitutional amendment, which means it has to be passed by a two-thirds majority in both houses of parliament and by the legislatures of half of the 29 states.
The new Bharatiya Janata Party government has clearly decided to endorse and push forward the GST proposal introduced by the previous UPA government. Finance minister Arun Jaitley had told the states earlier that their concerns over its design and issues related to compensation for revenue lost on account of GST and phasing out the central sales tax (CST) regime would be addressed.
CST was one of the major roadblocks for a GST, which was originally scheduled to come into effect from 1 April, 2010.
The CST is levied by the centre on inter-state movement of goods but collected by the states. The issue of compensation arose because the centre proposed to cut CST from four per cent to 2 per cent in phases since state-level value added tax (VAT) was introduced from 1 April, 2005.
By subsuming most indirect taxes levied by the centre and the states such as excise, service tax, VAT and sales tax, GST proposes to facilitate a common market across the country, leading to economies of scale and reducing inflation through an efficient supply chain.
The previous UPA government had introduced a bill in Parliament proposing a GST council and a dispute resolution panel for fixing the rate of the new tax for both states and the centre. However, the bill faced stiff opposition from the states, including BJP-ruled ones like Gujarat and Madhya Pradesh.
''States are likely to lose substantial revenues in the new regime," Madhya Pradesh chief minister Shivraj Chouhan wrote in a letter to Jaitley, adding that states' experience in receiving compensation for CST losses in the past was not very satisfactory.
"Unfortunately, article 268A has not been operationalised in the last 10 years. Kindly operationalise the Constitution (88th Amendment) Act and fulfill the promise made during the previous NDA regime till we have the required IT infrastructure to effectively deal with the complexities in the proposed GST regime," he wrote.
"Some states have been apprehensive about surrendering their taxation jurisdiction, others want to be adequately compensated. I do hope we are able to find a solution in the course of this year and approve the legislative scheme, which enables the introduction of GST," Jaitley had said in his maiden budget speech in the Lok Sabha last month.