The States have asked Finance Minister Arun Jaitley to ensure that tax they collect and the inter-State transactions under the proposed GST regime does not find its way into the Consolidated Fund of India, from where disbursal to States might become difficult.

At a crucial meeting with Jaitley and his team of officials on Tuesday, the Empowered Committee of State Finance Ministers had pressed for a mechanism that would obviate the need to dip into the Consolidated Fund of India, or lead to Centre-State disputes, sources told BusinessLine.

West Bengal Finance Minister and Chairman of the Empowered Committee, Amit Mitra, on July 11 wrote to Jaitley stating that seamless transfer of State GST and Integrated GST cannot happen unless suitable amendment is made in Constitution. At present, all revenues of centre and states form part of Consolidated Fund of India and State Consolidated Funds and it can be withdrawn only through legislative approval.

The Union Finance Minister could respond to it when the Constitution Amendment Bill, along with the recently approved amendments, comes up for discussion in Rajya Sabha

“We all know it is not easy to withdraw once money goes to Consolidated Fund of India…so the Constitution needs to be suitably amended,” said a State Finance Minister.

“We want an assurance of a clear demarcation of funds,” said another State Finance Minister.

However, experts have rebuffed the fears, but say they may have risen from issues of compensation on Central Sales Tax between the Centre and States. “The concern is unfounded as IGST funds will go to the clearing house for transmission to respective states,” said Mahesh Purohit, Director, Foundation for Public Economics and Policy Research.

As regards concerns on GST being inflationary in nature, Amit Mitra told BusinessLine it was raised at the State Finance Ministers meeting and that is why it was decided that the tax rates will be decided based on two principles – it should not adversely impact the consumers and should protect the revenues of the state.

A government official said “any new regime is bound to have inflationary impact initially but the government is well aware of the implications and is already preparing grounds to avoid it. This is an argument which even Congress is putting across.”

Besides, the proposed GST Council is expected to resolve many such issues including the tax rates. Clarity on what will happen to the various cesses that are being currently levied is expected only once the GST law is in place.

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