The GST Council on Saturday approved a law to compensate states for any loss of revenue from implementation of the new national sales tax but deferred approval for enabling laws to next meeting. At its 10th meeting held at Udaipur, the council also resolved to make some clarificatory changes in the model GST Bill — which will be replicated as the central and state GST bills — with a view to amplifying their legal tenability.
The model GST and integrated GST drafts and legal language of a half-a-dozen provisions of the Central GST (C-GST), Integrated GST (I-GST) and State GST (S- GST) laws held up approval but Finance Minister Arun Jaitley expressed hope to get them approved in the next session to be held in New Delhi on March 4-5. The Centre is hoping to introduce all the three crucial bills in Parliament in the second half of the Budget session, which will commence on March 9.
The Council will also get down to fixing rates of taxes for different goods and services by fitting them into the four approved slabs of 5, 12, 18 and 28%, he said.
The Centre has set a July 1 deadline for ushering in the GST regime, Parliament needs to pass the three bills and the state assemblies will have to approve the state GST bills. The fitment of items under the four-tier (5%, 12%, 18% and 28%) rate structure, in keeping with the principles of revenue neutrality (for the government) and ensuring minimal inflationary impact, is a key challenge too.
Compensation Bill Passed at Udaipur
- As per the compensation Bill cleared by the council on Saturday, the states will be given full compensation for the first five years for any shortfall in revenue from what 14% annual growth from the 2015-16 base would have otherwise yielded.
- The compensation will be funded via a clutch of cesses, including the extent clean energy cess and the impost on tobacco. While some states like West Bengal had earlier said that the compensation requirement could turn out to be much higher than R50,000 crore estimated earlier due to the negative impact of demonetisation on state finances, analysts said states have actually nothing to worry in this regard as the compensation is being computed on the 2015-16 revenue base and assuming 14% annual growth.
- The proposed division of powers will lead to a significant shifting of the taxpayer base from the states to the Centre, states will gain hugely from the 50:50 division of the above-R1.5 crore taxpayer base, in terms of the taxpayer base to be under their control.
- Businesses with a turnover above R1.5 crore contribute to over 95% of the revenue attributable to the taxes to subsumed in GST, while 93% of the service tax assessees and 85% of those registered for state VAT have a turnover below the threshold.
- The council discussed the composition scheme that allows a registered trader up to pay tax at a fixed rate (likely 1%) on turnover and avoid any further scrutiny by the taxman, as far as local (intrastate) sales up to a threshold are concerned. Those who opt for the scheme, would not be eligible for input tax credit, a reason why not all manufacturers and service providers might not find it attractive, analysts said.
The Council gave its suggestions to the legal sub- committee, comprising officers of the Centre and states who are drafting the model laws, on issues like composition of appeal at tribunal to adjudicate on disputes, delegation of powers and exemptions during transition phase. Other issues included taxation of services and VAT in work contracts, composition limit and definition of agriculture. “After incorporating these clarifications, on March 4-5 meeting in Delhi, these laws will be cleared,” Jaitley said.
GST, which will replace a plethora of central and state taxes, is a consumption based tax levied on sale, manufacture and consumption on goods and services at a national level. Under it, C-GST will be levied by the Centre, S-GST by states and I-GST on inter-state supply of goods and services. Different indirect taxes of central excise duty, central sales tax CST and service tax are to be merged with C-GST while S-GST will subsume state sales tax, VAT, luxury tax and entertainment tax.
There was expectation that the GST Council will approve the C-GST, S-GST and I-GST laws to enable the new indirect tax regime to roll out from July 1 but while there was a broad agreement, legal language of some clauses held up the approval, Jaitley said.