States threaten to spoil GST party by hiking VAT

Absence of consensus could delay introduction on April 1

Efforts for a political co­n­sensus on the goods and services tax (GST) seem to have suffered a setback after states increased value added tax (VAT) rates beyond 12.5 per cent in their budgets.

The development could delay the introduction of GST slated for April 1 next year, the revised deadline set by finance minister Pranab Mukherjee.

Several states, including Andhra Pradesh, Gujarat, Rajasthan and Uttar Pradesh, have increased their VAT rates to between 14 and 15 per cent from 12.5 per cent, undermining Mukherjee’s discussions with state finance ministers to forge a consensus.

“After we met Mukherjee in January, some states have moved away from the proposed 12.5 per cent GST,” said the finance minister of a state.

Since then, no attempts have been made to break the deadlock on revenue neutral rates or the GST format.

Andhra Pradesh swi­tched to 14.5 per cent VAT rate on January 15. Karnataka, Jammu and Kashmir changed to 13.5 per cent on April 1. Rajasthan began imposing VAT at 14 per cent on July 8 last year. These rates are much higher than the 12 per cent GST recommended by the 13th finance commission.

The Vijay Kelkar-headed commission in its report at the end of last year recommended a 12 per cent GST. 

This was to be apportioned between the centre and states at seven per cent and five per cent, respectively. Revenue secretary Sunil Mitra had indicated last month that the combined rate would be much higher than 12 per cent.

“Such variation in rates among states is a matter of concern,” said Amit Mitra, secretary- general of Ficci. “Consensus-building will once again have to be worked upon and stronger efforts will have to be made by the chairman of the empowered committee of state finance ministers, Asim Dasgupta, and his counterparts. If this continues to be a problem, it will certainly threaten the deadline,” added Mitra.

Indirect tax experts say states may have resorted to higher rates with two objectives in mind. On the one hand, they may be trying to limit the possible loss in revenue once GST is introduced. On the other, they may continue to pitch for a higher tax rate.

“If 16 per cent GST is agreed upon, then the states get eight per cent. States may be thinking of short-term recovery of revenue, as the GST will be a binding agreement,” said the indirect tax leader at PricewaterhouseCoopers, R Muralidharan. “It may also be that states are making out a case for a higher rate,” he said.

“If the major parameter, that is, the rate, is decided upon by May or June-end, GST will roll out on time. The government will take five to six months for putting in place the constitutional amendment. If it goes beyond that, there wouldn’t be sufficient time,” he said.

Pratik Jain, executive director at KPMG, said the empowered committee had approved an increase from four per cent to five per cent by states at lower end of VAT. A few states had also increased the rates to cushion the impact of the sixth pay commission.

An agreement on a revenue-neutral rate among states would be the focal point at the empowered committee meeting expected to take place in a couple of weeks, said Jain.

“The government’s compensation is not going to be based on one year’s performance, but will be an average of three to five years. So, greater the revenue performance, the more compensation they will be eligible for,” said another expert.

The Kelkar commission had described GST as the last-mile indirect taxes reforms initiated in1986. In its report, the commission said, “Consequent to this approach, the country has undoubtedly lost out on potentially higher economic growth, higher real wage rates, fiscal consolidation and consumer welfare.”

Meanwhile, efforts are on to set up a standing council on GST with Mukherjee as its head. It will have 10 member states, by rotation, to sort out any issues. Any request for a change will be routed through this council.

Financial Chronicle, New Delhi, 26-04-2010.