The Central Government should provide an independent, permanent compensation mechanism for revenue losses that State Governments will face under the proposed Goods and Services Tax, said the Chief Minister J Jayalalithaa in a letter to the Prime Minister, Narendra Modi.
The GST Amendment Bill should contain such a provision `enshrined in the Constitution itself and not reduced to an instrument of Union policy which may change from time to time’, she said, according to an official press release of the letter.
The demand is based on the State’s experience with the Centre’s compensation mechanism on VAT and the reduction of Central Sales Tax which “does not inspire confidence that a fair, hassle-free and workable compensation mechanism can be devised and implemented,” she said.
Jayalalithaa said it would be simpler to delegate levy, collection and appropriation of the substitutes for VAT, Central Excise Duty and Service Tax to the State machinery with the Centre focusing on inter-State taxation.
The Centre should address state government concerns before moving to the new tax regime. Issues such as dual rate bands, taxation threshold, inter state GST, commodities outside GST, dual administrative control and compensation should be sorted out between states and with the Centre before the Constitutional Amendment Bill on GST becomes a law.
The sub-committees constituted by the Empowered Committee of State Finance Ministers on issues including revenue neutral rates for State GST and Central GST and place of supply rules are yet to submit their final reports.
The primary concern regarding GST is that it cuts into the fiscal autonomy of states and results in revenue loss to manufacturing and net exporting states like Tamil Nadu. It is unacceptable that the GST Council envisaged will override the Legislatures in taxation, she said.
The Bill also does not allow states levy higher taxes on tobacco and tobacco products. States should be allowed to continue to levy tax on tobacco as the products pose a public health hazard.
Petroleum and petrol products should be kept outside the purview of GST, she said.
In the revised draft amendment States are allowed to levy additional taxes on petroleum products. However, this dual levy of GST and an additional tax is not acceptable as a portion of the tax on petroleum products would still be eligible for input tax credit which will be a revenue loss to the State.
While the Petroleum Ministry says state-specific costs such as levy entry tax, octroi, and restrictions on availing Input Tax Credit on crude oil and other petroleum products are irrecoverable and are passed on to the consumers in the State. Oil companies are asking for abolition of such irrecoverable dues to enable them to reduce “under-recoveries” without hiking prices.
Tamil Nadu does not levy any of these state-specific taxes. Also, the size of such levies by state governments is not as large as it is made out to be, she said.