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Govt needs a political solution to pass GST Bill: Experts

In a huge setback for the most ambitious tax reform, the Goods and Services Tax (GST) Bill may not get a go through in this session of Parliament as the stand-off between states and Centre on key issues pertaining to the Bill do not seem to be getting resolved.

Satya Poddar, Partner – Tax & Regulatory Services at EY, says the development has come as a surprise and “puts us back to where we were before the elections”.

Sachin Menon, COO Tax & Head of Indirect Tax, KPMG in India, feels GST is reality that will come but the timeline is yet to be seen.

Below is the transcript of Satya Poddar and Sachin Menon’s interview with CNBC-TV18’s Menaka Doshi and Senthil Chengalvarayan.

Menaka: A quick comment from you on what you make of the fact that we keep getting stuck at the same places – petroleum, alcohol, entry tax, these are the same issues of difference of opinion between the centre and the states?

Poddar: The announcement is absolutely stunning. We were back to where we were before the elections and it looks like the government hasn’t made an inch of progress in resolving the dispute and this is all the more surprising because even till yesterday Jayant Sinha was making the announcement in the newspapers saying that they have resolved all of the issues. However based on today’s announcement by the empowered committee chair this doesn’t appear to be the case at all.

Menaka: Why are you surprised because the standoff on petroleum especially or even on alcohol today in the newspapers, the spirits lobby has put out a half page ad pleading the states to agree to allow alcohol to be included in the constitutional amendment bill. These are all same points of difference that have existed for several months now?

Poddar: Alcohol I understand. However you were given to believe by the centre that they have reached a compromise with the states to zero rate petroleum products. Petroleum will be inside the GST but will be zero rated at the beginning and only over time they will be taxing it. 

I understand that even entry tax was to be fully subsumed because the Maharashtra government is having all kinds of difficulties and number of dealers from Maharashtra state went and met the finance minister Jaitley and they pleaded that the entry tax be discontinued after GST commences. I don’t know why those issues have resurfaced again.

Indications I have is that the main opposition is coming from the state of Gujarat which is stunning because we were hoping that Prime Minister Modi taking the control at the centre Gujarat will be little more conciliatory.

However the demands that have come in are perhaps coming from Gujarat. Gujarat is making all these demands not because they make any economic sense but simply as a negotiating ploy with the centre. Gujarat collects about Rs 8000 crore from the centre sales tax which is collected in a producing state and they are afraid that the GST will not adequately compensate them for the loss of this CST revenue. That is why they are demanding that the revenue guarantee given by the centre for any loss in the revenues be of 5 year period, centre has offered only three years of compensation.

On top of that the reason they want petroleum to be outside is because Gujarat is collecting lot of cash on natural gas exports to other states which go into fertiliser production. Under the GST regime there are significant doubts that the state will be able to continue to levy the tax on production inputs like natural gas going into fertilisers and Gujarat doesn’t want to give it up no matter how irrational that tax is on natural gas.

Menaka: What are you picking up in terms of whether we are likely to make any progress or whether this winter session is definitely not going to see the passage of the Constitutional Amendment Bill?

Menon: The issues which were discussed now by Satya were there for long time. The states which are in a better position in terms of the current tax regime, where they have enough taxes through industrial sales etc they are the people who are actually having concerns or reservation about GST.

Menaka: The point is that these reservations were not new, they are age old. This issue about petroleum, alcohol, entry tax all are age old. If we haven’t been able to resolve them so far, if the centre is not willing to give in to the states demands justifiably so then what does this mean for how quickly we can get GST onboard?

Menon: GST is a reality which is going to come. The only question is whether it will happen now or little later. The point is that most of the issues are getting resolved. There is no inch of progress I won’t agree to Satya’s statement. There is progress. There are states which are having reservations. Especially Gujarat being a state which has spent a lot of money on incentives and attracting investment thinking that that would bring in revenue in terms of industrial sales tax etc are really jittery which we can understand.

As far as these issues are concerned may be at best this could be some way of negotiating a better deal for the state.

Menaka: Are you saying that it seems like this winter session at least we will not see the passage of the constitutional amendment bill? Do you think it will pass through this session?

Menon: I hope so. 

Menaka: Do you think at this point in time based on the developments that you think that this will pass this session? If not will we make the deadline of 2016?

Poddar: The thing that is unknown today is whether the centre is prepared to table the bill without agreement of the empowered committee. My own feeling is that’s a political call the government has to make in the next few days. If they do decide to table the bill without empowered committee consensus then I am pretty certain that the bill will pass because government will table the bill only if they are confident they can get the majority in the two houses to pass the bill.

My own feeling is that this impasse that has been created by the empowered committee will not have a technical solution of the type that the government has been trying for the past few days. It has to be a political solution. Prime Minister Modi himself has to intervene in the discussion and he has to put pressure on his own former state Gujarat to shut up and go along with the GST. I think soon after Modi came to the centre Gujarat had softened its opposition in public comment. I have a feeling that softening is an indication that Narendra Modi will be able to bide consensus of the states and most importantly Gujarat.

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