It has the potential to increase the country’s GDP by $500 billion and exports by up to 15 per cent.

India’s hugely complicated tax system, with multiple taxes and overlapping jurisdictions, hurts investors and households alike, contributing to the economy’s uncompetitiveness.

Reforming this complex system has been a Herculean task for an army of tax administrators, fiscal experts and state finance ministers.

Raja Jesudoss Chelliah was the father of tax reforms in India. He conceptualised the reform framework and was part of the committee on financial sector reforms, chaired by M Narasimham, whose reports ushered in dramatic changes in the tax system and, subsequently, in Centre-State financial relations. These paved the way for liberalisation.

Hardly anyone in the country has done as much for the cause of public finance research and reform. His contribution to the design and implementation of tax reforms is particularly notable.

In his 1993 report laying a roadmap for reducing import duties, Chelliah suggested a study of central excise duties.

The late Amaresh Bagchi, director, National Institute of Public Finance & Policy, was tasked with this study, including a possible GST.

He initially thought India could develop a dual-GST model like Canada, but changed his view after academics helped him see this would make the Centre too strong.

International experts also pointed out that a GST was too ambitious a reform for India because of a culture of non-compliance, bad tax administration, poor technology and a large unorganised sector.

As a result, many of the concerns being raised today on the financial autonomy of states — their right and ability to levy taxes — were first raised by Bagchi.

He felt states needed autonomy and should not be dependent on handouts from the Centre. He ultimately did not suggest a dual-GST for India, but only a reform of state taxes.

Parthasarathi Shome, who was adviser to then finance minister P Chidambaram, had good chemistry with Asim Dasgupta, chairman of the empowered committee of state finance ministers, which implemented VAT and will oversee GST.

They had mutual respect for each other, and understood the technical aspects of VAT. He produced an outstanding white paper on GST in April 2008, which received the endorsement of states, says Satya Poddar, partner, Ernst & Young.

That paper outlined a GST model, which dovetailed neatly with the GST model recommended by a task force constituted by 13th Finance Commission chairman Vijay Kelkar.

Unfortunately, Shome’s paper was never made public. He quit in 2008, after being passed over for the post of Union revenue secretary. If he had been selected, he would have been the first fiscal policy expert in that position.

Kelkar’s paper was his second recommendation on the introduction of GST. The first was in a report on implementation of the Fiscal Responsibility & Budget Management Act, 2003.

He constituted a task force that used Amaresh Bagchi’s paper to prepare a detailed report on how GST could be implemented. “Kelkar felt his job was done and that he didn’t have to convince the empowered committee. He focused on producing a detailed white paper and put his weight behind it,” says an expert.

The task force was headed by Arvind Modi, an IRS officer from the direct tax group. He used the income-tax database of 34 lakh (3.4 million) corporate tax returns and quantified a revenue-neutral GST rate of 12 per cent (7 per cent for states and 5 per cent for Centre) that would replace taxes like VAT, central sales tax, entry tax, stamp duty, and electricity duty.

When Dasgupta saw those numbers, he was elated. He is believed to have said that if the numbers were valid, he would go to the prime minister and announce introduction of GST.

This was a week before Manmohan Singh had heart surgery and for some reason the meeting never took place. States felt the rates were too low and asked National Institute of Public Finance & Policy Director Govind Rao to validate them. He came up with estimates that were double or triple the proposed rate.

Dasgupta may have failed to lift West Bengal’s finances, but when it comes to forging a consensus, the nation keeps turning to West Bengal’s finance minister.

As the head of the empowered committee, Dasgupta’s job is to forge 35 states and Union into a consistent viewpoint, irrespective of their political considerations.

The Centre was so happy with the implementation of VAT, that Chidambaram lost no time in announcing a GST, and requested the same committee that had implemented VAT to oversee GST.

Dasgupta has covered significant ground on GST thanks to his stature and a voice that is heard and acknowledged. He also enjoys a good equation with Finance Minister Pranab Mukherjee; they have known each other since the 1970s.

The team of central government officials closely associated with the GST is headed by revenue secretary Sunil Mitra, supported by key officials from revenue headquarters and Central Board of Excise & Customs (CBEC).

Those from revenue headquarters include additional secretary Jose Cyriac, joint secretary A K Srivastava, and director Shikhar Agarwal. They are working on how state taxes like stamp duty can be subsumed by GST.

This group is supported by six key officials at CBEC, including chairman V Shridhar, member (Central Excise) S Datt Majumdar, member (computerisation) Y G Parande, joint secretaries at CBEC’s tax research unit, Vivek Johri and Gautam Bhattacharya, and Excise Commissioner Ajay Jain.

It has also set up a team under retired D G Gautam Ray to draft the procedures and legislation in tandem with VAT commissioners.

Three or four state commissioners are among the more active and head sub-working groups of the empowered committee.

These include Sanjay Bhatia (Maharashtra), Y P Gupta (Gujarat), H K Dwivedi (West Bengal) and Rajiv Ranjan (Tamil Nadu). Bhatia, for instance, heads the sub-committee on taxation of services. Many of the other commissioners are members of two other sub-groups, which include Johri and Bhattacharya.

Opposition from states was led by Madhya Pradesh and its finance minister, Raghavji. But many believe the man behind Raghavji is A P Shrivastava, principal secretary, commercial taxes, Madhya Pradesh.

In May 2009, when the Kelkar report was given to states, Shrivastava began talking with Sumit Bose, an Indian Revenue Service officer from the MP cadre, who was then the secretary, 13th Finance Commission.

“Shrivastava became active and formed a view that GST is a bad tax. He has had a significant impact on Raghavji in opposing GST,” says an observer.

They kept asking what the benefit of GST would be for states. When the constitutional amendment Bill was tabled, MP said it would undermine the states’ fiscal autonomy.

Starting with Madhya Pradesh, all the states ruled by the Bharatiya Janata Party have joined the opposition: Gujarat, Chhattisgarh and Karnataka. They are led by Gujarat FM Saurabh Patel and Raghavji. They say GST is discriminatory, anti-poor and that producing states will be losers.

“The opposition is more political than anything else, at least in Gujarat. Chhattisgarh and Madhya Pradesh may have genuine concerns,” says Pratik Jain, partner & executive director at audit and tax firm KPMG.

Even with all the compromises and exhortations from the Finance Minister, there is a situation in regard to GST which has all the elements of a cul de sac. The more the FM concedes, the more demands are coming for concessions from the States.

They basically ask for more power to themselves to alter the duties. Also they would like to change procedures at their will which is clear from their not agreeing on the formality of dispute resolving system. The veto power of the centre has been given up but that has not resolved the disputes.

There does not seem to be any possibility of adhering to the targeted date of April 2011.The States are used to enjoying the right to change rates of sales tax since the inception of the Constitution. There is no doubt that there is an element of politics which seeps in the decision making process. In such a situation of Constitutional deadlock there cannot be any workable IGST. Unless all the States charge the same SGST, the system of IGST cannot work. Another issue is regarding the continuation of CST (Central Sales Tax). There is issue also about whether GST will include taxes on petrol, diesel, alcohol, electricity and octroi.

This impasse can be solved if we do the GST in the way in which I have proposed below.

All Central indirect taxes (not customs) are to be combined and separately all the State taxes are to be combined. Central Excise (along with some similar taxes) and Service Tax are to be combined at the Central level to make it Central GST. At the State level it will be the sale tax (present VAT) and some existing State taxes. To elaborate, all indirect taxes on the supply of goods and services would need to be subsumed into the GST at the central and state level separately.

From the Government of India side Central Excise, additional excise duties, service tax, additional customs duty (CVD) and all cess and surcharges (other than educational cess) will be subsumed into the Central GST. The State GST will subsume the existing VAT, stamp duty, vehicle tax, taxes on goods and passengers, tax on electricity, entertainment tax, entry tax, luxury tax, taxes on lotteries, betting and gambling, pur-chase tax as well as all State cess and surcharges. State GST shall not contain service tax which are now being levied by the Centre.

The Centre will distribute the proceeds from service tax to the States as now. However, since the State VAT will also combine taxes on lotteries and entertainment, which are service taxes, it can very well be called State GST. According to me this is the best and easiest solution since only minor Constitutional change will be necessary. Just for combining Central Excise and Service tax, etc at the Centre and the other taxes at the State level, there will be need for Constitutional change but it is only minor name — changing exercise.

And no serious objection can come from the States. At the central level it will be a manufacturing GST which will end at the factory gate but service tax GST will go up to retail stage. However since the State GST will go up to retail stage, all stages are covered. The main advantage will be the amalgamation which will lead to the emergence of quite a simple tax if one rate is maintained. There can be an inter State credit of input duty by following the Cenvat method now being followed by the Centre.

This will not bring about any confrontation between the Centre and the States either in relation to veto power or in relation to changing rates of duty. CST can be abolished by the Centre because it is a Central law. Compensation will be given. The States and the Centre will be left to themselves to manage their taxes. It will be a GST at the same time — a dual GST and not a duel GST. Creating a Centre-State — combined GST as is now being done is like sowing the seed of a perennial political pot-boiler.

How GST will work in Our Country?

In India the states and Centre are agree on “Dual GST” in which a single transaction of sale of Goods will be taxed both by the state and centre.  Let us try to understand this with the help of an example:-

Illustration under proposed GST

X of Mumbai has purchased some Goods worth Rs. 80000.00 from a trader for resale. Suppose the Rate of is 10% under SGST and CGST hence he has paid Rs.8000.00 as SGST and Rs.8000.00 as CGST.

X sells these goods for Rs.  100000.00 to Y of the Pune of the same state then X will charge Rs. 10000.00 from Y as State Goods and Service Tax and Rs.10000.00 as Central Goods and service Tax.

At the time of payment of tax X will deduct SGST paid on his purchases from the SGST payable by him and also deduct the CGST paid by him on his purchases from the CGST payable by him hence he will deposit Rs.2000.00 as SGST to state exchequer and Rs. 2000.00 to central exchequer.

Now if Y again sells the same goods at Rs. 1, 10,000.00 to Z (Consumer) of same state then again he will charge Rs.11000.00 as SGST and Rs.11000.00 as CGST. Since he has paid Rs. 10000.00 each under SGST and CGST on his purchases hence he will deposit Rs. 1000.00 as SGST and another Rs. 1000.00 as CGST.

Now see how much Tax is deposited as SGST:- 

See SGST as deposited from various point is Rs. 11000.00 which is equal to the tax paid by the consumer on his purchases i.e. Z the consumer has purchased the Goods for Rs. 1,10,000.00 by paying the Tax of Rs. 11000.00 as explained above.

The same calculation can be made for CGST.

Following points are clear from above:-

Further Same type of treatment will be given for provision of services and set off of  tax paid  for services used for selling or manufacturing of goods and tax paid on goods used while providing the services are also allowed.

Note: We will take another point for discussion in our next issue in a day or two.

     CA Sudhir Halakhandi

Join the forum discussion on this post

The United Progressive Alliance (UPA) government’s effort to introduce the Goods and Services Tax (GST) looks uncertain, as the Bharatiya Janata Party (BJP) led National Democratic Alliance is likely to continue with its opposition towards the GST Bill.

Even as the BJP agreed to allow the government go ahead with the Civil Nuclear Liability Bill, sources in the BJP camp said the party wanted to act “tough” on the GST issue.

A meeting of the finance ministers of the BJP-ruled states took place this evening at the residence of veteran BJP leader L K Advani. The mood of the meeting was against allowing the government to accept the GST Bill. Just as the BJP had resisted the introduction of the value added tax initially, it will oppose the introduction of GST from April 1, 2011.

Madhya Pradesh and Uttarakhand - both ruled by the BJP - are likely to take the lead to cultivate support of various finance ministers on GST at the state finance ministers’ meeting to be organised in New Delhi. It will try to lobby against the central government’s proposals, provisions and calculations on GST with Uttar Pradesh and Tamil Nadu, as both states hold the key in passage of the Bill, to be introduced in Parliament.

Earlier this month, speeches (copies are available with Business Standard) of Uttar Pradesh Commercial Tax Minister Nakul Dubey, Tamil Nadu Finance Minister K Anbazhagan, Karnataka Chief Minister B S Yeddyurappa, Gujarat Finance Minister Saurabh Patel and Chhattisgarh Commercial Tax Minister Amar Agrawal strongly opposed the GST, as its proposal strips states of financial independence and Constitutional power to impose taxes.

“Raghavji (Madhya Pradesh finance minister) is opposing the nature of the GST as proposed by the central government; it is anti-constitutional and in meeting, he will strongly oppose it in its present form,” a source in the Madhya Pradesh government.

“The revenue losses calculated by the state government will touch ’2,217 crore by 2011-12 at 16 per cent GST as proposed by the Centre. The growth in service tax was 15.99 per cent during 1999-2000 which has now slipped to (-)16.74 per cent. It is an impractical approach on the part of the Centre to impose GST,” he said.

Raghavji had opposed the GST by contesting the calculations on tax rate growth and its nature. On August 4, the Gujarat finance minister had said, “We feel that concurrent powers for the Centre and states to legislate on goods and services would confuse matters further and nowhere has it been made explicit that whose writ would prevail in case of conflict.”

Similarly, Anbazhagan said: “Tamil Nadu will not lag behind in implementing beneficial tax reforms. We feel that the objectives of GST can be achieved without altering the basic structure of the Constitution by enacting separate legislation by each state in line with the national model. Thus, while we broadly support a transition to GST, we will not compromise on the autonomy of the states or basic Constitution framework.”

As the government has failed to reach a consensus on goods and service tax (GST) some more BJP ruled states have joined the bandwagon. States like UP and Tamil Nadu are opposing the GST draft amendment..

Asim Dasgupta, chairman of the Empowered Committee of State Finance Ministers has said that states have sought for one month for GST constitutional amendment.

However the Finance Minister Pranab Mukherjee is sticking to the earlier deadline of April 1, 2011 for implementing GST. Mukherjee is going to take up GST-related compensation issues.

The meeting of Empowered Committee of State Finance Ministers is still underway.

Most of the Congress-ruled states are in favour of the GST. However the government can not impose it as some of the BJP-ruled states are still opposing.

In the revised draft sent to states last week, the Centre has agreed to keep entertainment tax and entry tax levied by local bodies out of the GST purview. It has also diluted its stand on the GST Council, Disputes Settlement Authority (DSA) and veto power to the Union finance minister.

The move may yield results, as most states are likely to agree to the revised draft during a meeting of the Empowered Committee (EC) of State Finance Ministers. Apart from the changes, an appeal by Mukherjee to all political parties and states to support GST may help build a consensus.

“Broadly, it (the revised Bill) is acceptable. Changes are in the direction we had suggested. We will also consult other Left parties on the issue,” said Kerala’s finance minister, Thomas Isaac.

Madhya Pradesh’s Raghavji, the most vocal critic among state FMs of the proposed regime, said he would want some clarifications on the Bill before consenting.

According to the new Bill, officials said, the Centre will seek a parliamentary nod for establishing a Disputes Settlement Authority, which was earlier proposed to be set up under the Constitution. The DSA will have a chairman approved by the Supreme Court and two eminent people as members.

The Bill provides that if a state deviates from the agreed rates and in the process impacts trade in another state, the GST Council would be able to direct the offending state to compensate the affected state. The Council’s decision can be challenged only in the Supreme Court, an official said.

THE WAY AHEAD

• Entertainment and entry tax levied by local bodies out of GST regime
• FM will have no veto in Council, decisions by consensus
• GST Council to be recommendatory body
• Dispute Settlement Authority to be dealt with by separate law

In the revised Bill, the Centre has also agreed to the states’ demand for no exclusive veto power to the Union finance minister. It has now said all decisions will be taken after a consensus among all states and the Centre is reached. Raghavji said a clarification was needed on what “a consensus” would mean.

During the past fortnight, Mukherjee held two rounds of meetings with EC chairman Asim Dasgupta, finance minister of West Bengal. He also spoke with Sushma Swaraj, Leader of the Opposition in the Lok Sabha, to convince Bharatiya Janata Party-ruled states. The BJP and the Left parties had vehemently opposed the GST Constitutional Amendment Bill during the earlier EC meeting on August 4.

The study also found that industry Representatives feel that the single unified tax structure would help in consolidation of business.

“Eighty eight per cent of the survey respondents prefer having a single national GST enactment, both for Centre and the states,” the ‘Report on Goods and Services Tax Survey: Industry expectations and perceptions’ said.

The study was based on response from over 200 senior executives of top companies in diverse fields like auto, FMCG, power and energy, real estate, IT, pharmaceuticals and financial services. “…most of the respondents had presence on a pan-India basis and they expect GST to be a unifying fiscal legislation across the national market,” the survey added.

The government plans to roll out the GST from April 1, next year. All central and state taxes like excise, VAT and service tax will be rolled into GST, once the new regime comes into effect.

The revenue from GST will be shared equally between the centre and states. The central government had last month proposed a three-rate structure for GST under which goods will attract 20 per cent levy, services 16 per cent and essential items a concessional 12 per cent.

The CII-KPMG study also found that 44 per cent of the executives felt that the GST could be an opportunity to consolidate their business operations as the proposed changes in the indirect tax structure would transform India into a national market. “…84 per cent of the survey respondents feel that GST would have a positive impact on the profitability of the business as there would be seamless flow of input tax credit with no or very limited cascading of taxes,” CII-KPMG said.

The survey found that industry representatives feel any upward revision of service tax due to implementation of GST would have a “moderate to high” impact. “They (industry representatives) are realistic enough to know that the cumulative standard rate of GST may not be less than 14 to 16 per cent.

But nevertheless they would much prefer the tax to be collected at a single rate for both goods and services,” it said. Close to 70 per cent of the survey respondents said it would take them 3-4 months in reconfiguring their IT systems to bring their business in tune with the proposed new tax regime.

The Indian Cellular Association (ICA), the apex body representing the mobile handset industry, has opposed the introduction of the proposed GST rates of 12 per cent and 20 per cent in 2011-12.

The industry association said that the Government should declare mobile phones as a product of national importance and impose a flat GST of only 4 per cent.

ICA said that high tax rate will ensure resurgence of the grey market and import of cheap Chinese handsets which will threaten the very existence of the telecom handset manufacturing industry in India.

Mr Pankaj Mohindroo, President, ICA, said, “Today, the mobile phone industry covers half the population of India and the aim of the industry is to provide affordable mobile phones to each and every citizen of the country. At this juncture and considering the more than expected revenues generated from sale of 3G and BWA spectrum, it is critical that the Government keep taxes moderate for mobile phones to allow the bottom of the pyramid to adopt mobility. The industry on its part has already done a lot to make the purchase of mobile phones affordable and accessible with prices dropping 10 per cent every year.”

“The mobile phone should be considered goods of national importance as it helps accelerate economic and social development in the country. According to an ICRIER study, States with 10 per cent higher mobile penetration would enjoy an annual average growth rate 1.2 per cent higher than those with lower tele-density,” added Mr Mohindroo.

ICA said a 12 per cent tax rate is not sustainable because countries such as Dubai and Singapore have low tax rates on handsets and it takes only Rs 50 to bring a mobile handset into India through the smuggled route. According to a KPMG report, India’s share of global handset manufacturing stands at 11 per cent, up from nil, six years ago.

States opposed a draft bill to amend the Constitution, a measure proposed by the Centre for rolling out goods and services tax, in its present form as it provides veto power to the Union Finance Minister in matters relating to state subjects.

The Opposition came on a day when the Union Finance Minister Pranab Mukherjee  sought states’ cooperation in introducing the new indirect tax system from next fiscal.

“This proposed draft Constitutional amendment bill related to GST in its present form is not acceptable to the states,” Asim Dasgupta, chairman of the Empow

The government is likely to settle for a simple regime to administer the proposed goods and services tax that is in line with the low rates and easy procedures approach followed in the case of income tax, which has helped increase compliance.

The mandatory annual audit that gives nightmares to the industry may be replaced by a selective scrutiny in the case of large taxpayers.

However, such tax payers will have to get their accounts audited by certified chartered or cost accountants, as per the architecture of the new indirect taxes regime that is currently being discussed.

The empowered committee of state finance ministers will meet on August 4 to build a consensus on the GST structure, though there are indications that many states are opposed to the constitutional changes suggested by the Centre.

If the Centre is not able to build a consensus and move an appropriate bill in the current session of Parliament, the GST could miss its already delayed rollout date of April 1, 2011. In the new GST regime, like the random scrutiny of income tax returns, the tax department will take up a few cases for departmental audit based on a scrutiny of the audit reports, a government official said.

The selection for scrutiny could also be based on intelligence available in the electronic databases, akin to the computer-assisted scrutiny in income tax.

“The move will give a big relief to industry. But the risk parameters will have to be designed properly in line with specifics of various industries to make the selection process efficient,” says Pratik Jain, partner, KPMG.

Intelligence from all quarters—state tax departments and central tax departments, including income tax—would be pooled in to make the selection of cases for audits more intelligent and sharper under the GST. The threshold for such audits has not been decided, but it is likely to be high enough to leave out a large percentage of those required to deduct or pay indirect taxes.

Those below the threshold will have to file GST returns on a voluntary basis and may face random scrutiny. The lenient treatment is expected to help increase compliance and increase tax collections, the official said.

The statutory audit will, however, be very comprehensive and focused and not only compliance with the legal requirements but be designed to keep a check on the areas of misuse.

The format of these audit reports will be prepared by the Central Board of Excise and Customs and its state government counterparts in consultation with the Institute of Chartered Accountants of India, Institute of Costs & Works Accounts of India and Institute of Company Secretaries of India.

The GST, the major tax reform proposed by the United Progressive Alliance government aims to create a common Indian market. It will replace excise duty, additional customs duty and service tax at the Centre and VAT, entry tax, luxury tax, entertainment tax, tax on lottery and betting at the States’ level. The GST is a consumption tax under which both manufacturers and service providers will have the right to offset state taxes paid on inputs sourced from another state.

The Centre sought cooperation of the Opposition in Parliament and states for

“The bill (for constitutional amendments) has to be introduced in this session, has to be examined by the Standing Committee, it has to be ratified by 15 states. Otherwise, there will be another delay… I seek cooperation of the entire House,” he said replying to the discussion on a Motion on Inflationary pressure on the economy in Lok Sabha.

He said the empowered committee of state Finance Ministers are meeting on GST.

“The empowered committee of state FMs, they are meeting… If we can do that not only petroleum products, but also the entire range of products that can be covered will be under (the new tax) mechanism and it will be a win-win game,” he said.

He added that the levies on petroleum products account for 34 per cent of states’ revenues.

“Petroleum sector is an important revenue yielding measure, 34 per cent of the states’ revenues comes from petroleum products. In 2009-10, Rs 72,000 crore was raised by states. I know petroleum prices should be rationalised, but how can we do it?,” he said, suggesting that GST would help bring down volatility in prices of petrol in domestic markets.

Mukherjee also sought the Opposition’s cooperation for including even petrol in GST.

However, the discussion so far on GST between the Centre and states have excluded petroleum products from the purview of new indirect tax regime.

State finance ministers are meeting here to discuss the Centre’s proposal of a 3-rate structure for roll out of GST from April 1, 2011, which would subsume various indirect taxes.

They will also discuss the constitutional amendments required to roll out this new indirect tax regime, which will replace the excise duty and service tax at the Central level and value-added tax at the state level, besides the cess, surcharges and local taxes.

He asked for collective effort of the Opposition to help him bring the constitutional amendments, reminding that the BJP in its own manifesto in the last Lok Sabha elections had promised to roll out GST.

“If we can do it (introduce GST) then the entire spectrum of services tax, excise and VAT will be brought under the constitutional mechanism. We shall have to do it collectively.”

Last month, Finance Minister Pranab Mukherjee proposed a three-rate structure for GST- 20 per cent for goods, 12 per cent for essential goods and 16 per cent for services.

States and the Centre are proposed to equally tax the common base of goods and services.

States ruled by non-Congress governments could raise hurdles for introduction of the Goods and Services Tax (GST) from next April. During the meeting of the Empowered Group of State Finance Ministers tomorrow, most of these states have decided to oppose the draft of the Constitutional amendment, which seeks to provide veto power to the Union finance minister for the proposed tax regime.

This may hamper the government’s plan to introduce the Constitutional amendment in the ongoing monsoon session of Parliament, which in turn could delay the rollout of GST. Finance Minister Pranab Mukherjee had asked officials in his ministry to finalise the draft by August 20 so that it could be in Parliament before the session concluded on August 27, said a finance ministry official.

While Madhya Pradesh has made its opposition over losing fiscal autonomy known, states such as Gujarat that had earlier supported the GST regime are also raising the red flag now. Sources said most states wanted some modifications in the draft prepared by the Centre, while BJP-ruled states want some “tougher changes”.

“The draft has been made in a manner that the states are left with no powers. We will share the details in the meeting tomorrow,” said Gujarat Finance Minister Saurabh Patel.

When contacted, Kerala Finance Minister Thomas Isaac said: “We cannot agree to this draft. We cannot allow veto power to the Centre. (Moreover) the council should have a vice-chairman from the states on a rotation basis.”

A fortnight ago, Madhya Pradesh Finance Minister Raghavji was the lone dissenter during the meeting of empowered committee with Mukherjee.

When contacted today, Raghavji said: “States should be given full freedom to increase or lower rates as and when they want. The Union finance minister can be an executive head of the committee but cannot enjoy veto powers.” He added the Centre should provide at least one more month for states to provide a detailed response to the legal changes proposed by the Centre.

Discussions on the draft Constitutional amendment and compensation to states for losses on account of the Central Sales Tax (CST) during 2010-11 are the main items on the agenda for Wednesday’s meeting. However, GST rates suggested by the finance minister in the last meeting with empowered committee are not on the agenda at the moment. The Centre had suggested 8 per cent rate of taxation on services and 6 per cent and 10 per cent for concessional goods and standard goods, respectively.

In the first batch of supplementary demand for grants moved today, Mukherjee has sought parliamentary approval for an additional spending of Rs 1,000 crore for CST-related compensation.

The progress made by the Centre on GST in the last few weeks has seen more states becoming active in the meetings of the empowered committee. The last meeting on July 21 saw a “never before” attendance from the states, and this time “a bigger” gathering is expected. Many states plan to come with a full delegation, with two ministers and some officials representing the state.

Loose ends across the Value-added Tax (VAT) system had led to tax evasion in states and such deficiencies should be avoided while introducing the Goods and Services Tax (GST), said a recently-released study by the Comptroller and Auditor General of India (CAG).

The performance audit, conducted in 23 states for the post-VAT period between April 2005 and March 2009, found shortcomings in the automation process, scrutiny of returns and tax audits, input tax credit mechanism, cross verification, incentive schemes and monitoring post implementation.

The report recommended a road map for the resolution of issues from the legacy system be drawn up before switching to GST. Low percentage of scrutiny of returns left enough scope for leakage of revenue in the VAT system, with one in every two dealers trying to evade tax across the states. Even though the VAT system allowed input tax credit on the basis of documentation of tax invoice, states allowed it without checks.

CAG suggested e-filing of returns be made mandatory in GST and taxpayers must provide basic data for scrutiny to establish the trail of transactions leading to input tax credit. Timeframe for scrutiny of tax returns should also be specified, and the periodicity of filing the returns must be fixed in line with the turnover of the dealer to reduce burden on tax officers and ease monitoring on dealers, it said.

“Further appropriate measures need to be taken for building capacity of the staff, standardisation of the department manuals and minimising the discretion in penalty clauses,” the report said.

As there was no mechanism at the Central government level to oversee the progress on VAT in states, some manufacturers did not reduce the maximum retail price of goods despite sharp decline in the rate of tax and illegally retained a benefit of Rs 40 crore instead of passing it on to the customers.

The study found tax evasion of Rs 873 crore from 2,614 returns in 15 states. Besides, seven dealers in a state were granted tax exemption of Rs 1,026 crore on turnover of Rs 25,650 crore from sale of tax-paid goods, without any documentation. An inadmissible input tax credit of Rs 829 crore in 53,170 cases was allowed in 16 states. The audit also revealed 201 cases of submission of fake or invalid declaration forms, leading to tax evasion of over Rs 16 crore in four states.

The proposed three-tier Goods and Services Tax (GST) structure unveiled by Finance Minister Pranab Mukherjee will increase the tax burden on the common man, say experts.

“There could be some reduction in the cascading effect, but overall, tax burden would go up for common man,” Ernst & Young Tax Partner Bipin Sapra said.

Finance Minister Pranab Mukherjee proposed a structure for the GST — which will simplify the indirect tax regime — under which goods will attract 20 per cent levy, services 16 per cent and essential items a concessional 12 per cent.

“If the manufacturers pass on their benefits to consumers, then only their tax burden would reduce,” opined BMR Advisors Partner Indirect Tax Practice Rajeev Dimri.

The chambers, however, are divided over the impact of GST on industry. While the Confederation of Indian Industry (CII) and Assocham have welcomed the announcement, FICCI expressed its reservations.

“This structure will not serve the purpose (of GST)… the rates are on the very, very high side,” FICCI said.

CII Director General Chandrajit Banerjee, however, said, “There is a consensus between the Centre and the Empowered Committee on the design of GST. This would pave way for introduction of GST from April, 2011, which industry is very keen for and we see this as a very positive move.”

The proposal, according to Assocham, “is most equitable distribution of GST, which industry will have to accept and adjust after implementation of the new indirect tax regime.”

The proposal, opined Sachin Menon, Head Indirect Tax, KPMG, “will not result in much gain for manufacturing. Ideally, the service and goods tax rate should have been the same.”

Mukherjee proposed these rates to the state finance ministers at a meeting in New Delhi to evolve consensus over GST that is planned to be implemented from April 1, next year.

All central and state taxes like excise, VAT and service tax will be rolled into GST, once the new regime comes into effect.

The revenue from GST will be shared equally between the centre and states, implying that out of 20 per cent tax proposed for goods, 10 per cent each would go to the centre and the state concerned.

Similarly, in case of services, the revenues would be equally shared between the centre and the state.

Besides the maximum rate of 20 per cent, Mukherjee has also proposed a lower rate of 12 per cent for essential items. This too will be shared equally between the centre and states at 6 per cent each.

While elaborating on the dual rate structure for goods, Mukherjee said, “The peak effective rate will be about 15 per cent which will be quite acceptable to the trade and industry.”

The government plans to keep the central good and services tax (GST) concessional rate for goods at 6 per cent in 2011/12, Finance minister Pranab Mukherjee said in a speech.

The GST, India’s most ambitious tax reform, was to have been implemented from April 1, but disagreements with states meant the federal government could not meet that deadline.

The government hopes to introduce a legislation to usher in GST during the parliament session that begins, officials have said.

Goods and service tax (GST) rate is likely to be lower than stated. It is learnt that the GST rate will be lower due to removal of cascading effect.

In the Empowered Committee of state Finance Minister’s meeting, the Centre suggested 6% concessional GST rate. It had also recommended 10% standard rate for goods and 8% service tax.

However there is no consensus yet if petrol and alcohol will be included in the GST ambit, add sources. States have been pressurising to put both petrol and alcohol out of the GST net.

The constitutional amendment for GST will be presented to states in the meeting with Finance Minister Pranab Mukherjee.

FM reached out to the BJP and met its top leadership over lunch to discuss GST. The finance ministers of the National Democratic Alliance (NDA) ruled states discussed its stance on GST.