The Union Finance Minister Shri Pranab Mukherjee had a meeting with the Empowered Committee of State Finance Ministers to finalize the draft Constitutional Amendments on Goods and Services Tax, here today. Addressing the meeting, the Finance Minister emphasized that the primacy of the Legislature in the area of taxation is supreme and inalienable and that the proposed draft on GST did not seek to disturb or alter this in any manner. Highlighting the importance of the GST Council, Shri Mukherjee said that the collective wisdom of the Council would be a valuable resource in benchmarking rates, exemptions, thresholds and other key parameters for both the Centre and the States. Even if its decisions are not binding, they would be useful as guiding principles which could be ignored or violated only in very grave or exceptional circumstances. Regarding States' concerns about the subsumation of taxes such as entry tax and entertainment tax levied and collected by local bodies, the Finance Minister assured that the Joint Working Group set up to draft the Constitutional Amendments will take care of these issues while preparing the third revised draft.

Following is the text of Finance Minister's speech delivered at the meeting:

"Let me begin by extending a warm welcome to all of you to this meeting convened to give a shape and form to the Goods and Services Tax. Although the list of things required to be done for the introduction of GST is long, the priority for now is the finalization of draft Constitutional amendments so that the Amendment Bill may be introduced in Parliament during the ongoing monsoon session. This is critical for meeting the April 2011 deadline.

During our last meeting on the 21st of July, 2010 I had shared with you the first draft of the Constitutional Amendment required for the introduction of GST which was prepared by the officials based on discussions in the Joint Working Group. I have been informed that the Empowered Committee held intense discussions on this draft in its meeting on the 4th of August, 2010. Similarly, the second revised draft has been discussed at length in the meeting of the Empowered Committee held this morning. My team has apprised me of the views expressed by the States in these meetings. I am aware, therefore, of the apprehensions that most of you have voiced regarding the proposed amendments.

Based on feedback I received, it seems that your deepest concern has been the perceived sacrifice of fiscal autonomy owing to two provisions in this draft - one, the role of the GST Council and two, the so-called 'veto' power assigned to the Union Finance Minister as the Chairperson of the Council. The concerns about the role of the GST Council stem from the fact that it was called upon to "determine" the rates of tax, exemptions and threshold limits etc. and its decisions were to be "binding" on both Governments. It was the perception of some of you that the proposal has the effect of granting primacy to the Council over the Legislature. I would like to emphasize that in a Parliamentary democracy such as ours this can never be the case. Article 265 of the Constitution clearly states that "no tax can be levied or collected except by authority of law." Thus, the primacy of the Legislature in the area of taxation is supreme and inalienable and the proposed draft did not seek to disturb or alter this in any manner.

As for the sharing of power between the Centre and the States in the functioning of the GST Council, it has been our primary concern not to lose sight of the fact that Indian economy still suffers from acute regional imbalances where the revenue-raising potential of all the States are not similar. It was perhaps in recognition of this fact that our Constitution makers erected a federal structure that leans in favour of the Centre at least in the area of fiscal relations. It was in this background that the scheme of functioning of the GST Council in the proposed draft envisaged a slightly larger role for the Centre vis-a-vis the States.

The "binding" nature of GST Council decisions has also drawn comment from the perspective of loss of autonomy. Although the loss of autonomy was clearly bilateral and mutual, the problem we are faced with is a difficult one. On the one hand, we wish to put in place a system where adherence to the commonly accepted structure of rates, exemption etc. would be the norm, yet we do not wish to be fettered in our actions. Recognising this dichotomy, it has been proposed in the revised draft that the decisions of the GST Council would be "recommendations" to the Union and the States. Since these decisions would be taken by "consensus", it is for us to respect them and develop a healthy convention of abiding by them, as is the case with several other Constitutionally mandated bodies.

You would agree that in order to operate a dual GST of the type proposed by the Empowered Committee, there is a fundamental need for a forum where the Centre and all the States can discuss and jointly decide upon critical parameters. The GST Council is precisely such a forum. The collective wisdom of the Council would be a valuable resource in benchmarking rates, exemptions, thresholds and other key parameters for both the Centre and the States. Even if its decisions are not binding, they would be useful as guiding principles which we would choose to ignore or violate only in very grave or exceptional circumstances. In this context, I am grateful that in this morning's deliberations, most of you appreciated the changes made in the second revised draft.

I have been informed about your views on establishing the GST Dispute Settlement Authority. It is our considered view that in the amendment, there should be a provision for setting up an independent and autonomous forum to resolve disputes which may arise due to rate variations which may violate the harmonized structure of GST. With your rich experience in the introduction and implementation of VAT, a moment's reflection would convince you of the need for such a mechanism. I recognize that this is uncharted territory for all of us. But that should not make us oblivious of its genuine need.

Apart from these substantive issues, some of the States have expressed concerns about the subsumation of taxes such as entry tax and entertainment or amusement tax levied and collected by local bodies. I am sure, the Joint Working Group set up to draft the Constitutional Amendments will be able to take care of most of these issues when they prepare the third revised draft.

I learn that during this morning's discussions, some State Finance Ministers expressed reservations on the introduction of GST by April 2011 and advised a further postponement. Here, I will like to stress the urgency of bringing to culmination an effort which started four years ago. As I had mentioned in my last meeting with you, we must make all efforts to meet the timelines we have set for ourselves. It must be appreciated that the Constitutional Amendment is only an enabling provision. It does not prohibit us from continuing our dialogue on rates, exemptions and other issues related to GST. Both the activities can go on parallely. The wisdom lies in moving ahead with the Constitutional Amendment without any further delay as a preparatory step for the introduction of GST. I have great faith in the collective wisdom of the Empowered Committee and am confident that as we move parallely on Constitutional Amendment, development of IT infrastructure and finalization of architecture of rates, exemptions and thresholds, we will be able to honour the commitment we have made to the nation.

I would also like to take this opportunity to inform you that the Empowered Group on IT Infrastructure has already started the work to put in place a common portal for GST and it has also been decided that the proposed Special Purpose Vehicle for IT would be incubated in the National Securities Depository Limited (NSDL). This would fast-track the development of IT infrastructure.
 

Now we come to the issue of CST compensation. You may kindly recall that the policy intent for the introduction of GST was announced by the Union Finance Minister in his Budget Speech in February 2006. As a step forward, the Union Cabinet approved the roadmap for the phase out of CST in February 2007 on the basis of the agreement reached between Government of India and Empowered Committee of the Finance Ministers of the States. The Union Government agreed to reduce the CST, which comes under the Union List, from 4% in March 2007 to 0% by April 2010. It was also agreed that States will increase the basic VAT rate from 4% in 2007 to 5% in 2008 and further to 6% by April 2010 and introduce VAT on Tobacco, Textiles and Sugar. Last year, i.e. 2009-10, even though the States had not introduced VAT on textiles nor increased the basic VAT rate from 4% to 5% as had been agreed upon between the Centre and the States in 2007, I agreed to pay the full compensation as per the old formula. Although it is expected to cost the Government of India around ₹ 14,900/- crore in 2009-10, I agreed to this in the interest of an early movement towards the GST regime. Unfortunately, for various reasons, we were not able to introduce GST from April, 2010. However, I did not give up hope and as a result of the hard work put in by the Empowered Committee, a broad consensus emerged on the introduction of GST by 1st April 2011. In this background, I agreed to pay the compensation for one extra year i.e. 2010-11. On 5th August 2010, we have received a communication from the Empowered Committee requesting for compensation for CST on the basis of the existing formula as also to ensure that no double deduction on account of Form D is made.

At this stage, I will only like to highlight the main difference between the last year and the current year which is, while the States had not increased the basic VAT rate from 4% to 5% last year, the EC has taken a decision to do so from the current year. It is only fair that the additional revenue accruing to the States on account of this increase in basic VAT rate from 4% to 5% may also be taken into consideration while reckoning the compensation of CST due from the Centre to the States, as had been agreed to by the EC in 2007. I have asked my officers to call an early meeting of Joint Working Group and complete the consultation process.

As regards pending CST compensation claims, I understand that most of the additional amount due on account of the decision to fully compensate the States has been released to all States. It is further noticed that most of these releases for 2009-10 are provisional, in the absence of the AG certified figures. I would urge all States to submit the AG certificates at the earliest and make the full claim. It is further noticed that some of the States have still not made the full claims for 2009-10. They may also like to do so."