States question 12% GST rate

The empowered committee of state finance ministers has virtually trashed the Thirteenth Finance Commission taskforce's Goods and Services Tax report. They question the methodology applied by the committee to arrive at the 12 percent revenue neutral rate.

"The states have expressed reservations on the methodology and the approach of the taskforce. It (the rate suggested by the taskforce) does not tally with the estimates made by the government, the National Institute of Public Finance and Policy, and the states. We will like them to review the methodology," said Committee Chairperson and West Bengal Finance Minister Asim Dasgupta. This brings out the divide between the tax experts and the political class on the GST structure. 

Given the estimate of the base and the level of central taxes which are intended to be subsumed in GST, the taskforce headed by former finance ministry joint secretary Arbind Modi had suggested a single rate of five per cent for the central GST and seven per cent for states -- totally 12 percent -- in its report last month.

The committee, which met on Thursday is likely to announce on Friday a new date for the rollout of the new tax regime. Dasgupta said there would be a discussion on the date for the introduction of GST at the empowered committee's meeting on Friday. So far, Dasgupta has maintained that the states and the government are working towards introducing it on its scheduled date of April 1, 2010.

"Today we concentrated on what should be the revenue neutral rate for states. We are trying to reach a consensus. Tomorrow we will discuss the date for the tax rollout. We will meet Finance Minister Pranab Mukherjee to discuss the compensation requirement of the states," Dasgupta added.

He did not comment on whether GST would be delayed.

Meanwhile, state finance ministers that Business Standard spoke to said there were differences among the states on issues, including the revenue neutral rate, list of exemptions and the actual assessee base. "Many states have given their views on the rate. No decision has been taken," said a state finance minister.

A finance ministry official said the empowered group had questioned the methodology of the taskforce, and not the rate so much, because the empowered committee itself was divided on the revenue neutral rate. It was not possible for the committee to challenge the rate because the tax base could not be decided without knowing the exemption list, he added.

Satya Poddar, tax partner, Ernst & Young, said the methodology used by the taskforce was robust as their revenue neutral rate was an average of five methods. "They have used the truncated database of two lakh corporate taxpayers, which does not include the unorganised sector. They have also spoken to Parthsarthy Shome, CSO, and other experts. So, it is the most reliable database. The taskforce has spent almost a year to ensure that its results are valid. The empowered committee has not yet developed an alternative," he added.