Centre, States break deadlock on GST; Bill in current session

New Delhi: In a last minute compromise deal, the Centre on Monday night decided to keep petroleum out of Goods and Services Tax (GST) in return for states agreeing to entry tax being subsumed in the new tax regime proposed from April 2016.

On the issue of compensation to states for revenue loss because of subsuming of all indirect taxes in the GST, the Finance Ministry will seek legal opinion on how it can be accommodated in the Constitution Amendment Bill that it wants to bring in the current session of Parliament.

Compromise was reached after an over hour-long meeting between Finance Minister Arun Jaitley and finance ministers of seven states - Punjab, Haryana, Gujarat, Tamil Nadu, Maharashtra, Karnataka, and Jammu and Kashmir.

Concerns of other states have already been addressed.

It was agreed on Monday that petroleum goods would be kept out of the Goods and Services Tax (GST) Bill for initial few years and a decision to include in the new tax regime would be taken later, sources said.

”The matter (GST) was discussed elaborately. The discussions are moving in a positive direction,” Empowered Committee Chairman Abdul Rahim Rather told reporters after the meeting.

Talks between the Centre and the states over GST framework were deadlocked last week over entry tax and VAT on petroleum products being included in the GST regime.

States, which earn over 50 per cent of their revenue from taxes on petrol and other petro products, wanted it to be out of GST so they could continue with levying different tax rates on these products.

States wanted the compensation to be included in the Constitution Amendment Bill in the three rounds of talks that were held last week.

Earlier in the day, Minister of State of Finance Jayant Sinha had said the government expects to table the Bill in the current session.

The GST has been hanging in balance for about seven years now as states are concerned about their revenue losses on introduction of the new tax regime.
Sources said that the Finance Ministry will seek opinion of the Law Ministry to work out a mechanism for including the compensation in the Constitution Amendment Bill.

“The Centre has agreed to fully compensate the states for three years after GST roll out and the structure will be included in the Bill. Thereafter for the next two years there will be part compensation,” a source said.

As regards entry tax, the source added that it would be subsumed in the GST.

The breaking of the stalemate would pave way for introduction of the GST Constitution Amendment Bill in the current session of Parliament. The Cabinet has to first ratify the Bill.

As regards the compensation for phasing out of Central Sales Tax (CST), Jaitley has already announced releasing Rs 11,000 crore to states for revenue loss till fiscal year 2010-11.

Clearance of CST compensation arrears has been a bone of contention between Centre and states.

CST, a tax imposed on the inter-state movement of goods, was reduced from 4 per cent to 3 per cent in 2007-08 and further to 2 per cent in 2008-09 after the introduction of value added tax (VAT). The Centre had then promised the states that it would bear losses due to reduction of CST.

As part of the GST rollout, the CST is being phased out and has been reduced to two per cent from the earlier 4 per cent. The Centre collects CST and distributes it among states.

The GST rollout has missed several deadlines because of lack of consensus among states over certain crucial issues on the proposed new tax regime.