Council approves GST Compensation Law to save states from loss of revenue

Making some headway, 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.

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 meeting on March 4-5 so as to take them to Parliament in the second half of the Budget session next month.

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.

Jaitley said the GST Compensation Law that provides for compensating states that incur losses because of implementation of the Goods and Service Tax (GST) in first five years was approved by the Council on Saturday. "It will not come before the Council anymore and will be taken to the Cabinet for approval and will make efforts to pass it in the second leg of Budget session (beginning March 9)," he said.

The Finance Minister also hoped to get the C-GST and I-GST laws approved in the month-long session. S-GST law, after approval of the Council, will need to be passed by each state legislature. "During the legal drafting of the C-GST and S-GST and I-GST laws certain contentious issues came to the fore and it was necessary to place all the issues before the Council again to take specific directions," he 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.

"Compensation law final draft has been approved. For the rest of the laws, clarifications have been given on some of the questions raised during legal drafting. On March 4-5, the Council will hopefully approve the legally better draft of model GST law and in Parliament session beginning March 9 we will introduce these laws to pass them. Simultaneously, S-GST laws will go to legislative bodies of the states. That will also be discussed in March 4-5 meeting," the FM said.

He further said that issues regarding I-GST law have also been sorted out. "In the legislative drafting, we have moved ahead and if the remaining provisions are approved in March 4 -5 meeting, then we can pass it in the next Parliament session."

The next step of putting commodities and services in tax slab will be taken up. An array of 53 clauses have been approved, according to officials. Jaitley said, "Simultaneously after March 4-5, our officers will then start fitting each commodities into the slabs and we will require one major meeting after March 4-5 to give approval to those specific items in relation to each of the slabs."

Asked about the GST Council being against giving powers to official auditor CAG to seek additional information for its audit of revenue, Jaitley said the Comptroller and Auditor General (CAG) is already empowered under the CAG Act to call for any information from the government in relation to public finances.

"That is the power which the CAG already has under the CAG Act. Under a taxation law, it need not be separately given. There was a suggestion which had come forward, but the members felt that since this power is already there in CAG Act (and that) the Income Tax Act (does not provide) has no separate power then why should the indirect tax law have a separate power," he said.

The GST Council, headed by Jaitley and comprising of representatives of all states, held its first of the 10 meetings so far outside the national capital.

He said the critical anti-profiteering clause in the draft law to ensure that the benefit of lower taxes gets shared with consumers was not discussed in Saturday's meeting. Kerala Finance Minister Thomas Isaac said most of the time of the Council was invested over administration of powers over assesses between Centre and the state as the central bureaucracy was feeling left out and wanted a greater share.

Officials said only minor legal vetting of the draft laws is left which after getting the language legally right will be circulated to states by March 1.

Also, a separate UT-GST law, on lines of S-GST, needs to be enacted for Union Territories. Union territories will have a separate law which will be replica of S-GST law. "So there will be three laws C-GST law, S-GST law and UT-GST law, a finance ministry official said.

Delhi Deputy Chief Minister Manish Sisodia said that compensation law has been cleared and certain provisions of C-GST and S-GST which was approved by the law ministry have been cleared. The remaining will be cleared in the next meeting, he said, adding the anti-profiteering issue could not be discussed on Saturday.

"If post demonetization I have a concern of revenue loss, then there is also an assurance that base year (to be taken for calculating the revenue loss) is before demonetization and we will get compensation based on 14% revenue growth," he said.

Kerala Finance Minister Thomas Isaac said there is an option for continuing cess after 5 years also. "If the compensation amount is more than Rs 55,000 then cess will be continued for the sixth year." "Fitment of commodities will be decided at the GST meeting which will probably happen in Srinagar in the later half of the month. Also the rules have to be framed," he said.

On the rollout timeline, he said, "We fully believe that the July 1 deadline is fully doable. By next meeting, the language issues of the the model legislations should be cleared." Haryana Finance Minister Capt Abhimanyu said, "Our concerns regarding the definition of agriculture and agriculturist have been addressed after today's meeting." Andhra Pradesh Finance Minister Yanamala Ramakrishnudu said the GST Council in the 10th Meeting discussed the draft model GST law provisions and draft Compensation law which are vetted by the law ministry.

"Among other things, the issue of taxation powers of the states in the territorial water within the 12 nautical miles came up for discussion," a statement issued by the state government quoted him as saying.

He said the proposal to treat territorial waters as the territory of Union of India and to delegate the powers to states to collect tax by the central Government is not the correct way to draft it, particularly when the High Court already decided in favour of states and matter is pending in the Supreme Court. "The correct thing is to treat the territorial waters as the territory of state and to allocate powers to states not just to collect but also to levy, collect and appropriate to the states. The chairman agreed to refer to Law Committee to examine it," he added.

On the issue of cross empowerment to state officers under I-GST Act, the proposal to exclude state authorities to adjudicate cases if any issue relates to import or export of goods or services are involved is also contested. "The state authorities have been administering CST Act 1956 and assessing the genuineness of exports as it involves refund of taxes paid at input stage. Similarly, under IGS Act also, the state authorities have to be empowered to ascertain the genuineness of Export transactions as it involves huge amounts of refund of taxes paid at the earlier stages. The Chairman, GST Council agreed to refer it to Law committee and to take decision in the next meeting," the statement added.