DIVERSION WOULD NOT SOLVE THE PURPOSE

Once again some ray of hope is coming from the clouds of differences between the Centre and the States that might clear the future of the Goods and the Services Tax as finally the Empowered Committee of State Finance Ministers  are going to meet once again to solve the puzzle of GST.

The Finance Ministry has made its part clear that “Consensus” is the only thing now which will take forward the process of the introduction of the Goods and Services Tax and that too is looking far away from the reach of the Government if we looks at the agenda of the upcoming meeting.

The upcoming meeting of the Empowered Committee of State Finance Ministers which is scheduled to take place on Dec6, 2010 has dropped the most quarrelsome issue of Constitutional Amendment. Instead, the structure of the proposed Goods and Services Tax would be discussed. Moreover, the issue of compensation to States due to reduction in Central Sales Tax will also be taken up by the Empowered Committee. The basic idea behind dropping this quarrelsome issue from the agenda is to break the unresolved conflict on the Goods and Services tax as the issue of a Constitutional Amendment had prevented the further progress on the GST several times earlier. Constitutional Amendment Bill is required to give powers to states to levy Service Tax and the Centre to impose tax beyond the production stage. Currently, the Centre can impose tax on goods at the factory gate and services while states can impose tax at the retail level on goods.

The Centre has framed a draft Constitution Amendment Bill for the roll out of the Goods and Services Tax. The first draft on the Constitution Amendment Bill was rejected by the Empowered Committee of the State Finance Ministers because it proposed to give Veto Power to the Union Finance Minister on the State taxation issues. However, the revised draft from the Finance Ministry drops the main issue of giving Veto Power to the Union finance Minister and said that the Council could take a decision only when there is a Consensus. But the BJP-ruled States along with some of the allies of the UPA, have been opposing the revised draft of the Constitutional Amendment Bill on GST. They are favouring the phased approach for amending the Constitution. In the phased approach, the main focus is on allowing the Centre and the States to share their tax base and for this only initial amendments will be made to the Constitution. However, the two main pillars of the Goods and the Services Tax i.e. GST Council and the Dispute Settlement Authority will be kept outside the Constitution to start with and if required, both could be given a Green signal with Constitutional Amendment at a later stage.

On the issue of Dispute Settlement Body, the States are demanding that they should be individually allowed to make laws on the creation of such a body, instead of the Centre setting it up through an amendment to the Constitution. The States are basically looking to protect their fiscal autonomy which they think will get affected in the new tax regime.

However, the Finance Ministry makes it clear that the roll out of the Goods and Services Tax could not take place without Constitutional Amendments. So by just dropping the issue of Constitutional Amendment from the agenda of the upcoming meeting would not solve the purpose anyways as it would again come up as a major area of difference between the Centre and States. Hence, further delay of new sensation in the areas of indirect taxes is possible, as the way ahead even after the Constitutional Amendment is achieved would be  full of challenges for the Government.