GST: Arun Jaitley claims states' support but several key issues still unresolved

India is moving closer to becoming one big market with Goods and Services Tax (GST), the biggest tax reform of the country, inching towards reality.

The law promises to roll several state-level levies into one, in all possibility by April 1, 2017, and offer clarity to foreign investors who are mired in a web of tax laws of the country.

To ensure the smooth passage of GST, the government seems to have conceded to one of the key demands of the industry and the opposition regarding the removal of an additional 1% on inter-state movement of goods. On Tuesday, the government released the draft central GST and integrated GST laws in public domain, soon after the Empowered Committee of Finance Ministers on GST met in Kolkata to thrash out differences.

Now, all eyes are on the Monsoon session of the Parliament. "The long-awaited GST Constitutional Amendment Bill is likely to be passed, paving the way for implementation of the GST regime in India in April 2017," said Mahesh Jaising, partner of BMR & Associates LLP.

Harishanker Subramaniam, national leader – indirect tax, EY, however, refused to hazard a guess. "The FM's statement that virtually all states support the idea of GST with Tamil Nadu expressing some reservations augurs well for an early consensus and roll out," he said, adding that it would be however too early to comment on the impact on consumers.

While the government managed to bring the tax reform back on its top agenda, the Empowered Committee of State Finance Ministers failed to arrive at a consensus on two issues – dual control over management of GST between the Centre and the state over the threshold sales turnover level of Rs 1.5 crore, and fixation on the Revenue Neutral Rate (RNR).

"A large part of today's discussions centred around how dual management should be controlled and that it shouldn't lead to any conflict and that it should be managed harmoniously between Centre and states. That procedure should be clearly streamlined," Jaitley said after the meeting.

The other issue is what would be the revenue neutral rate. RNR is nothing but the tax rate which seeks to achieve and garner similar revenue under the newly implemented tax structure because the primary objective for implementation of GST is not mobilisation of additional resources but reforming of the prevalent tax structure in India.

While the advisor to the FM has suggested a rate of 17.5%, the National Institute of Public Finance and Policy has come out with a much higher rate of 26.5%.

"There is huge difference between the two and we have to fix an optimal rate," Amit Mitra, Bengal FM and chairman of the committee, said.

"No political parties have the guts to keep it very high. It will be inflationary," said a Mumbai-based tax expert.

In the next meeting of the FMs, to be chaired by Mitra, there would be a presentation by the chief economic advisor and the institute on what would be the RNR rate.

"We will try to fix the next meeting in the second week of July by when the two issues are deliberated by the committee," Mitra said.

The draft laws, unveiled on Tuesday, state that a uniform tax will apply to all intra-state supplies of goods and services at the rates to be specified later. While tax will be applicable to the provider of goods and services, in certain cases to be specified later, it will also be liable to the person or entity receiving the goods and services.

The major differences were regarding the inclusion of the GST rate (agreed around 18%) in the constitution, and to do away with the inter-state levies and constitute an independent dispute resolution mechanism. Another major point of difference has been on capping GST in the Bill.

With all states agreeing on no-cap on GST, the opposition by the Congress, the original architect of the proposed tax regime, has been diluted.

Experts believe that the passage of GST can push the economic growth by 1.5-2% in the long run.

On Tuesday, finance minister Arun Jaitley met finance ministers of various states in Kolkata. The meeting was attended by 22 state finance ministers, along with several state and central officials.

A visibly happy Jaitley said, "While every state is in support of GST, Tamil Nadu has expressed reservation on its present form."

"Tamil Nadu has said they have reservations, but they have suggested how it is implementable," said Jaitley, adding that every other state has supported the idea of GST.

He also said that there was complete consensus among states that there would be no constitutional cap on rates of taxation. A cap on rate to be included in the Constitution Amendment Bill, which is stuck in Rajya Sabha, has been one of the main demands of the Congress.

Two issues that were widely discussed in the meeting on Tuesday were the calculation of the revenue neutral rate and the management of taxation structure in the perspective of the dual control of the Centre and state.

MS Mani, senior director – indirect tax, Deloitte, said the 190-page document, which comprehensively covers all the provisions, signified the resolve of the government to move forth on GST.

"They seem to be very strongly committed to introducing the GST in Rajya Sabha in the Monsoon session," he said.

According to him, the government for the first time had a separate provision for ecommerce and job work. The model law for the proposed unified levy provides for tax collection at source (TCS) system for ecommerce companies. Here, any payment made to supplier would be subject to TCS at the notified rate.

According to Pratik Jain, leader - indirect tax, PwC India, this will mean significant compliance burden on ecommerce companies as many of them deal with thousands of vendors. "Further, this may lead to refund situation for many suppliers who operate on thin margin. In addition, the ecommerce companies will need to file a statement providing details of all supplies made through ecommerce platform," said Jain.

"They will have to find a political way of resolving it (GST rate cap in the constitution) because that is not a tax issue. It is more of a political issue. It has nothing to do with tax because none of the other taxes have rate in the Constitution, whether it is the Income Tax Act or Excise Act or Customs Act. They have nothing to do with the Constitution of India," said Mani.

According to him, the Constitution should give the power to levy the tax, it can't tell how much should the tax be. That, he said, had to be decided by the executive from time to time.

(With inputs from Sumit Moitra in Kolkata)