Kerala Finance Minister Thomas Isaac in conversation with Arun Jaitley, Minister of Finance, Government of India. (Image: Thomas Isaac’s Facebook page)

Kerala Says It Will “Never Agree” To A Vertical Split Of GST Administration

The fourth GST Council meeting ended in a deadlock over the critical issue of tax administration. The Centre proposed a vertical split of all assessees between the Centre and the states. Many states, such as Kerala, prefer a horizontal split, in which assessees (dealers) below a certain revenue threshold are administered by states and the rest by the Centre.

The Kerala Finance Minister Thomas Isaac says his state will never agree to a vertical split. In this interview with BloombergQuint’s Menaka Doshi he refers to the Centre’s position as “intransient” and “disheartening”.

Centre Prefers Vertical Division

Could you explain the current stand-off?

The first GST Council meeting had decided that as far as the goods are concerned dealers with a turnover of below Rs 1.5 crore will be administered by the states, and above those with a turnover of above Rs 1.5 crores there will be a kind of dual control. States wanted to extend the same principal to services. But now their (Centre) preferred option is a ‘vertical division’, from top to bottom, of all dealers

How would this ‘vertical division’ work?

First of all, ultimately some employee has to administer the tax, so therefore, I think one has to consider what is the strength of the government employees under the states and the Centre, doing tax administration.

Now this is roughly about 75:25 or 80:20 percent. The proportion of central employees is less than 25 percent. The states are around 80 percent. Therefore the horizontal division of dealers, on the threshold of Rs 1.5 crore turnover, would work, as 80 percent of dealers are below this limit and would be administered by states. The present division (horizontal) would be in proportion to the relative staff strength.

Now Centre wants a vertical division, which means, both the Centre and states, without any ceiling, would deal with all the dealers. Say, if all the dealers are numbered, every ‘odd’ dealer can be with the Centre and ‘even’ with the state. So both Centre and states would have an equal chance of administering dealers from the highest bracket to the lowest bracket

States object to this because there is no central government bureaucracy at the bottom and we don’t want them to be present here. It would be not in the federal principles that operate today. This would mean an unnecessary expansion of the central workforce and therefore we are against the vertical division.

One of the instances of a difficulty presented by a horizontal split of administrative powers is - if I were a dealer today with a revenue of under Rs 1.5 crore, I would come under a state’s administration, next year if my turnover increases I would go under the Centre’s administration and then if I don’t do well the year after, I would have to go back to the state’s administration. This was one of the concerns regarding the earlier proposal. Would you say that the proposal to split vertically, despite the concerns you have about that proposal, would negate the fears on this count.

No, it will worsen it. There are only a marginal number of traders that would be moving up and down. But in a vertical split, that too on a sample basis, today you are with the state government and then Centre,  the dealers would be rotating.

Are you suggesting that in a vertical split, there would be no permanency of which dealer will be administered by which power. That there would be continuous movement?

Absolutely. There infact the original proposal is to have a risk-weighted assessment and then divide it between the Centre and states for a period of 2-3 years, whenever it is changed.

Kerala Will Never Agree To A Vertical Division

What is the way ahead now?

Look at the way decisions have been made. The states giving up the rights to tax which is not a small thing. Or the rate structure, which has ideological connotations...many of these issues were settled on a spirit of give and take. And this comes to an organisational matter. The Centre has adopted an intransient attitude. It’s a kind of capture by the central bureaucracy. I think it is very unfortunate. None of us thought this would come to such an impasse. It’s a kind of stone-walling by the central government. There is no question of many states, like Kerala, ever changing their position.

Is your opinion echoed by the representatives of other states in the GST council?

Today 12 or 13 states spoke in favour - West Bengal, Uttar Pradesh, Jharkhand and Bihar...many of the major states supported this position. I don’t know why the Government of India has to make this an issue of prestige, when settlement could be reached. It is really disheartening.

Will it go to a vote within the GST Council?

I hope it doesn’t come to that. By voting everybody loses.