Establish Independent compensation mechanism for GST, Jayalalithaa reiterates

Chief Minister Jayalalithaa has reiterated her suggestion of providing for an independent compensation mechanism in the Constitutional Amendment Bill on the proposed Goods and Services Tax (GST) to safeguard the interests of manufacturing States like Tamil Nadu that would stand to incur substantial revenue losses in the event of GST implementation.

She also renewed her call for a broad consensus on “key and contentious issues” such as dual rate bands, taxation threshold, Integrated GST Model, commodities to be excluded from GST, clarity on dual administrative control, compensation period and methodology before taking up the Bill.

Referring to the circulation of a revised draft Constitutional Amendment Bill to States in June, the Chief Minister, in her letter to Prime Minister Narendra Modi, said there was no assurance of a permanent compensation mechanism in the draft Bill. The State’s earlier experience with the Centre’s compensation mechanism both for the introduction of VAT and the reduction of Central Sales Tax had been far from satisfactory. “Hence, it is imperative that an independent compensation mechanism for revenue losses suffered by the States should be enshrined in the Constitution itself and not reduced to an instrument of Union policy which may change from time to time.”

Raising the issue of fiscal autonomy, she said the proposed GST council with the functions assigned to it would override the supremacy of the legislature – both at the Centre and in the States in taxation matters. “This is unacceptable to Tamil Nadu,” Ms Jayalalithaa said.

The Bill did not include enabling provisions for States to levy higher taxes on tobacco and tobacco products, similar to what had been permitted for the Centre.

Repeating her position that petroleum and petroleum products should be kept outside the purview of GST, she pointed out that the proposed system of a dual levy of GST and an additional tax was also not acceptable to the State. This was because a portion of the tax on petroleum products would still be eligible for input tax credit (ITC). Bringing these products under the ambit of GST would entail huge revenue loss to the States as ITC would have to be provided.

Informing Mr Modi that oil marketing companies/refineries were eligible to avail themselves of ITC to the extent of tax paid on purchase of crude petroleum from ONGC on the sale of eligible products like lubricants and commercial LPG, Ms Jayalalithaa said other petroleum products were non-VAT goods and hence not eligible for ITC. Making all petroleum products VAT goods, “in order to reduce the subsidy burden of the Government of India,” would result in a drastic fall in State revenue. “It is also a precursor to including all petroleum products under GST and hence, this proposal is unacceptable to Tamil Nadu,” the Chief Minister said.

She called for a “simpler structure of completely delegating the levy, collection and appropriation of the substitutes for VAT, Central Excise Duty and Service Tax within a State to the State machinery” with the Central machinery focusing on inter-State taxation. This would also ensure that the original Constitutional design of fiscal federalism of leaving the States in complete control of at least one sizeable source of revenue was preserved.