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Centre-state stalemate over GST jurisdiction continues

Stalemate between the Centre and states over administrative control under the proposed goods and services tax (GST) regime continued today with an informal meet called by Finance Minister Arun Jaitley failing to break the deadlock.

Mr. Jaitley’s informal meeting with state finance ministers failed to arrive at a common ground on how Centre and states will control assessees under the new regime that will subsume an array of taxes like excise duty and service tax as well as VAT, multiple ministers participating in the meeting said.

With states unrelenting on their position of being given right to control all assessees with up to Rs 1.5 crore annual turnover, it was decided that officials will meet again tomorrow before the meeting of the all powerful GST Council on November 25.

“The meeting has remained incomplete. Discussions will continue on November 25,” Finance Minister Arun Jaitley told reporters after the over three hour long meeting.

The issue has remained a contentious one during the previous two GST Council meetings and any disagreement at the next meet holds potential of derailing rollout of the GST from the targeted April 1, 2017.

Mr. Jaitley had earlier this month stated that the proposed GST needs to be rolled out by September 16, 2017 before the validity of the Constitutional Amendment brought in by Centre and ratified by states expires.

States like West Bengal, Kerala, Uttarakhand, Uttar Pradesh and Tamil Nadu have insisted on exclusive control over small taxpayers, who earn less than Rs 1.5 crore in annual revenue, for both goods and services.

Uttarakhand Finance Minister Indira Hridayesh said states demanded exclusive control for both goods and service tax assessees of Rs 1.5 crore and below.

“Centre is agreeable on goods, but is not yielding on services. States are looking at their interest to safeguard their revenue. Centre will have to yield to states to get the CGST and IGST bills passed. A middle ground on the issue has to be worked out politically,” she said.

Kerala Finance Minister Thomas Issac said it is a stalemate and his state is unwilling to compromise as it has virtually given up its taxation rights.

Today’s informal meeting was held sans civil servants to arrive at a political solution.

According to sources, many states including West Bengal, Uttar Pradesh, Kerala, Rajasthan, Odisha and Uttarakhand, said that small taxpayers cannot be harassed by dual control.

Rajasthan Urban Development Minister R Shekhawat said Centre and states are working on different permutations and combinations.

Mr. Isaac said Centre prefers to have a vertical split of all dealers for assessment under GST. “They are taking a rigid stand but I hope good sense will prevail at the Centre,” he said.

The GST Council was earlier discussing five proposals for deciding on jurisdiction, but in the last meeting on November 4, arrived at two options — horizontal division and vertical division.

‘Horizontal Division’ would mean taxpayers would be divided both for administrative and audit purposes based on a cut off turnover. Those with a turnover over Rs 1.5 crore would be administered both by the Centre and states, while those with below Rs 1.5 crore would be administered solely by the state.

‘Vertical Division’, based on ratios, assigns taxpayers to a tax administration, Centre or state, for a period of 3 years for all purposes including audit. Taxpayers could be divided in a ratio which would balance the interest of the Centre and the states, both with respect to revenue and spread of numbers.

States feel they have infrastructure deployment at grassroot level and small taxpayers are familiar with state authorities.

Centre, on the other hand is unagreeable to the states’ demand of exclusive control over small entities which earn less than Rs 1.5 crore in annual revenue, as it wants single registration mechanism for ease to service taxpayers.

Instead of horizontally splitting the taxpayers, it has proposed to divide entire taxpayer base vertically.

As a compromise, it is willing to give states administrative power over 2/3rd of taxpayer base, with service tax continuing to be administered by Centre.

At present, the estimated total indirect taxpayer base, including value-added tax, service tax and excise, is around 10 million, of which around 0.4 million are common to the Centre and the states.

This leaves around 9.6 million taxpayers, of which around 6.6 million are value-added tax assessees, 2.6 million are active service tax assessees and around 0.4 million registered under excise.

Under the new system, the states and the Centre will collect identical rates of taxes on goods and services. For instance, if 18 percent is the GST rate on a good across the country, the states and the Centre will get 9 percent each, called the CGST and SGST rates.

The Centre will also levy and collect the Integrated Goods and Services Tax (IGST) on all inter-state supply of goods and services.

The IGST mechanism has been designed to ensure seamless flow of input tax credit from one state to another.

The dual control issue, which was deadlocked in the third and fourth GST Council meetings, has risen because multiple taxes levied by the Centre and the states at present will now be integrated into one tax under the GST regime, which is aimed at removing inter-state barriers to trade and integrating India into one common market.

The next GST Council meeting on November 25 will work to finalise four supplementary bills dealing with CGST, SGST, IGST and the compensation law.

At its last meeting, the Council agreed on a four-slab structure — 5, 12, 18 and 28 per cent — along with a cess on luxury and ‘sin’ goods such as tobacco.

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