The empowered committee of state finance ministers is likely to discuss contentious issues like dual control over small traders and the tax rate under the goods and services tax (GST) where consensus between the centre and the states is still elusive, at a meeting next week in New Delhi.
The meeting comes at a time when the National Democratic Alliance government is making its most determined effort yet to get the constitutional amendment bill necessary for GST’s implementation passed in the Rajya Sabha in the ongoing session of Parliament.
“State finance ministers will be meeting in New Delhi on 26 July,” said a government official, who did not wish to be identified.
A consensus over the revenue-neutral rate or the tax rate at which there will be no revenue loss to the states under a GST regime has remained elusive after states expressed concern over the wide divergence in the revenue-neutral rate proposed by the government panel led by chief economic advisor Arvind Subramanian and the report commissioned by states and submitted by New Delhi-based think tank National Institute of Public Finance and Policy (NIPFP).
While the rates proposed by the Subramanian panel are below 18%, those proposed by NIPFP are above 26%.
In the last meeting of the states in Kolkata in June, state finance ministers had pointed out that a very low tax rate may cause revenue loss to them.
“There is a huge difference between the two. If the rate is too high, it would be very bad for business and if the rate is too low, it would be very bad for the states as deficits would increase. So we have to find an appropriate RNR (revenue-neutral rate),” West Bengal finance minister Amit Mitra had said.
He had added that in the next meeting, Subramanian will make a detailed presentation on the possible revenue-neutral rate calculations.
Another issue is that of dual control or administrative rights sought by both the central and the state governments over small traders.
Though the centre has agreed to let states administer taxes up to a revenue threshold of Rs.1.5 crore, the details are yet to be worked out.
GST aims to set up a common national market by removing all barriers across states and ensure seamless movement of goods. The centre is hoping to implement this ambitious tax reform by 1 April 2017, but it will be contingent on the passage of the 122nd constitution amendment bill in the monsoon session.
R. Muralidharan, senior director at Deloitte, said it is imperative that the revenue-neutral rate gets decided at the earliest.
“RNR is a key decision that remains to be made. A high tax rate could lead to inflation and will not be good for businesses. It is necessary that the rates are low. Any rate above 20% will lead to inflation,” he said.
“Ultimately, the rate is a function of many things—the quantum of exemptions and the goods classification under different tax rates,” he added.
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