GST: Why states are giving the centre a hard time

Why is the goods and services tax (GST) being repeatedly delayed?

If you go by what the central government says, state governments are to be blamed for holding back implementation of the highly-debated tax.

GST, when introduced, will replace a multiplicity of taxes at the central and state levels on goods and services - excise, service tax, value-added tax, entry tax, purchase tax - with one single consolidated tax (i.e. GST).

[caption id=“attachment_251393” align=“alignleft” width=“380” caption=“If you go by what the central government says, state governments are to be blamed for holding back implementation of the highly-debated tax. Reuters”]  [/caption]

The states are understandably wary, since it will reduce their taxation powers, and they don’t know if they will gain or lose by agreeing to GST. Unfortunately, thecentral government isn’t doing much to ease that wariness.

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The ongoing battle over central sales tax compensation highlights why progress over overhauling the tax regime has been so slow.

Currently, CST is imposed and collected by the central government and then passed on to state governments. Over the past few years, the central sales tax has been slowly reduced to 2 percent from 4 percent as part of a plan to phase it out and introduce GST.

Of course, the deal was that the centre would compensate states for their loss in revenues in the meantime.The central government had earlier pledged to implement GST from the financial year starting 1 April, 2011. The deadline was then changed to 2012. The Union Budget for 2012, however, refrained from making any commitment on implementation.

Exacerbating matters is the fact that compensation to states has lagged. For2010-2011, the states demanded compensation of Rs 19,060 crore; the Centre handed out about Rs 6,400 crore. Given the delay in GST’s introduction, states have also demanded compensation for 2011-2012. But in the Union Budget, the finance ministry only made a provision of just Rs 300 crore.

“CST (Central Sales Tax) compensation is being taken as an excuse by the states (to delay GST). The government cannot keep on paying the compensation endlessly if the states don’t come on board for GST,” R S Gujral, secretary, finance, was quoted as saying in_Business Standard_.

That’s the problem though. If states don’t get adequately compensated under the current regime, what guarantee is there that everything will be hunky-dory in the new one?

In addition, the central government has also not given any assurances that states will not lose revenues under the new GST regime. There are also no assurances that if there are any losses, they (states) will be adequately compensated by the centre.

Given the current unsatisfactory situation right now, it’s little wonder that states are hesitant about embracing GST.

Given the resistance of states and the weakened position of the UPA at the centre, it’s very likely that GST might not be introduced before the general elections in 2014, another report in Business Standard said.

Add it to the other reform measures put on ‘indefinite’ hold.