GST Council Takes Up Tax On High Seas, Higher Compensation Post Demonetisation
Some states demand more compensation for GST implementation from the Centre.
The contentious dual control issue was not raised on Tuesday, the first day of the eighth GST Council meeting, even as several provisions of the Integrated Goods and Services Tax platform were discussed.
“Dual control was not discussed, a lot of provisions of IGST were discussed. There is near consensus on IGST provisions, but the major issue of cross-empowerment will be discussed tomorrow (Wednesday),” said Manish Sisodia, deputy chief minister of Delhi.
Six ministries, including those in charge of commerce, telecommunications, banking and insurance, made presentations requesting special treatment and single registration on the GST platform, Kerala Finance Minister Thomas Isaac said.
Tax On High Seas
The Council also took up the demand of coastal states that GST be levied on trade of goods within 12 nautical miles offshore.
“Right now Gujarat, Karnataka, Kerala, Odisha, Maharashtra, West Bengal and many states are charging VAT or sales tax within 12 nautical miles (offshore). For example, when a ship is loaded with oil or products, the tax on that is charged by the states… Some states earn Rs 600 crore and Gujarat has Rs 1,200 crore of taxes coming from this source,” West Bengal Finance Minister Amit Mitra said.
Union Finance Minister Arun Jaitley has suggested seeking legal opinion from the law ministry if a constitutional issue arises, Mitra added.
“All coastal states, irrespective of parties, said we must have 12 nautical miles within the state jurisdiction, whereas the draft IGST law was looking at having taxation rights with the Centre," Mitra told reporters.
Dual Control To Be Discussed On Day 2
Cross-empowerment between states and the Centre will be discussed on Wednesday.
States like West Bengal, Uttar Pradesh, Tamil Nadu and Kerala have insisted on exclusive control over small tax payers whose annual revenue is less than Rs 1.5 crore for both goods and services. The Centre seeks division of assessees in a fixed proportion between the state and central tax authorities.
“The only issue that GST is hinging on is the cross-empowerment – as to who will collect from which section of assessees,” Tamil Nadu Education Minister K Pandiarajan told BloombergQuint.
Any delay in consensus on the issue means the Centre has all but missed the deadline to roll out GST by April 1, 2017 as it wasn’t able to table the bills in the winter session of Parliament. The finance minister is, however, hopeful of implementing the new indirect tax regime by April as the option of tabling these bills, by calling a special session or in the Budget session, is still available.
Isaac said that the Centre’s April 1 rollout deadline is “definitely not possible”. Unless there is a consensus on dual control in Wednesday’s meeting, it will be unlikely to see the GST getting implemented by April, Pandiarajan added.
More Items Under Cess?
The other hurdle in the implementation of GST is the demand by some states that the compensation to states be revisited in the wake of the demonetisation of high-value currency notes, as the states fear a 30-40 percent hit in tax revenues. The Kerala finance minister said the revenue loss incurred by states would be higher than the anticipated Rs 55,000 crore.
The GST Council had earlier decided to impose a cess on luxury items like high-end cars and demerit goods including tobacco, pan masala and aerated drinks, over and above the highest tax slab of 28 percent, to fund the Rs 55,000 crore compensation needed to pay the states to make up for their tax collection shortfall. This formula though was approved before the government's demonetisation exercise.
“Earlier, the Council had decided on four commodities for levying cess. Now, it has been decided that it would be as notified by Council and at the end of the fifth year… it would be merged with the GST rate or divided between the Centre and states as the Council decides," Isaac said.
Pandiarajan added, “Some states believe that demonetisation will lead to long-term impairment of revenue, (and) then the compensation is likely to be higher”.
Compensation will not only be funded by the cess, but can also include a loan from a multilateral institution, he said.
“The way the compensation formula has been designed, it guarantees the state (for any losses incurred after the implementation of GST) a revenue growth of 14 percent from the base year. Under this system, any time there’s a drop in GDP for any reason, it automatically leads to increase in compensation payments,” Satya Poddar, tax partner of policy advisory group at EY, said.
What remains to be seen is whether this will be done by increasing the cess rate on demerit and luxury goods or by levying a cess on additional items. The government should “broad base the cess” as levying it on just four commodities will not yield adequate revenue to meet the compensation required, Poddar said.
