New Delhi, December 11, 2014 (IANS)

In a setback to the government’s efforts to reform the indirect tax system, states Thursday rejected the draft Goods and Services Tax (GST) Bill, saying it does not address their concerns on the issues of compensation, entry tax and the tax on petroleum products.

“There is no consensus between the Centre and states on three things – the compensation issue, petrol tax and entry tax. The Empowered Committee is not supporting the bill without these three things,” the Empowered Committee of State Finance Ministers chairman Abdul Rahim Rather said after a meeting here of the state finance ministers.

The proposed constitutional amendment bill also does not provide for giving states compensation against any possible loss of revenue after the GST regime is implemented for five years in line with what the states have been asking for, the finance minister of Jammu and Kashmir added.

“The government hasn’t agreed to our recommendations made last time, except one recommendation. We had said that the share of the union government in GST should go to the divisible pool and should be devolved among states, which has been agreed to by the Centre,” Rather said.

The Empowered Committee is to meet with the Jaitley later Thursday, Rather added.

The Empowered Committee of State Finance Ministers on the Goods and Services Tax (GST) Tuesday expressed the hope that the tax regime could be implemented by the proposed date – April 1, 2016 – notwithstanding their differences with the Centre over some key provisions.

After their meeting here, committee chairman Rather said the Centre had written to the committee suggesting that the threshold annual turnover for levying GST should be increased to Rs.25 lakh (Rs.2.5 million) from Rs.10 lakh (Rs.1 million).

The committee in August resolved to lower the threshold limit for imposing GST on companies from a turnover of Rs.25 lakh to Rs.10 lakh. As per their recommendation, GST would not be imposed on businesses with an annual turnover of less than Rs.10 lakh.

Currently, the threshold for Value Added Tax (VAT) is Rs.10 lakh in most states.

The empowered group also asked that states be given the legal powers to collect tax from businesses with annual turnover of up to Rs.1.5 crore (Rs.15 million).

“In September, the Centre wrote to us suggesting that this decision of the Empowered Committee should be reviewed. The Centre suggested that the limit should be Rs.25 lakh. Even if it is not Rs.25 lakh, the Rs.10 lakh limit should be increased,” Rather said.

“But finally the committee took a decision that they will go by the decision that is already taken, that is Rs.10 lakh,” he added.

Rather also said the final call on the threshold figure will be decided by the GST Council.

States also want petroleum, alcohol and tobacco to be kept out of the purview of the GST.

Finance Minister Jaitley Wednesday said the states will receive Rs.11,000 crore this fiscal towards partial compensation for their revenue loss from the phasing out of Central Sales Tax (CST).

Observing that there has been a “trust deficit” with the states on this count, delaying the proposed rollout of the GST, Jaitley told the Lok Sabha that “I stand by my commitment made to the states in July this year. We will pay Rs.11,000 crore this year itself”.

There has been broad agreement with the states on most issues related to GST, he added.

Jaitley earlier said he has already assured states that he would clear their compensation dues of about Rs.34,000 crore ($5.5 billion) over a three-year period. The amount promised Wednesday is about a third of the outstanding CST compensation dues.

The previous United Progressive Alliance (UPA) government had in 2011 introduced a Constitution Amendment Bill in the Lok Sabha towards the introduction of the GST. States sought a five-year compensation package and asked for its inclusion in the bill.

States like Gujarat, Madhya Pradesh and Uttar Pradesh, which were earlier standing in the way of GST, have now said they are not opposed to it as long as their concerns are addressed.

Jaitley has assured parliament that the government will seek to move the amendments this year itself, besides already assuring states that he would clear their compensation dues of about Rs.34,000 crore ($5.5 billion) over a three-year period.

CST was one of the major roadblocks for a GST, which was originally scheduled to come into effect from April 1, 2010.

While CST is levied by the Centre on inter-state movement of goods and collected by states, the issue of compensation arose because the central government cut the CST from 4 percent to 2 percent in phases, after state-level VAT was introduced from April 1, 2005.

On the vexed issue of dual control of traders by both the central and state governments, the demand was for legal powers to collect tax from businesses with an annual turnover of up to Rs.1.5 crore.

Those below the turnover threshold of Rs.1.5 crore would pay their taxes to states, which would subsequently pass on to the central exchequer.

Seen as a key to facilitating industrial growth and improving the business climate in the country, the GST bill needs to be passed by a two-thirds majority in both houses of parliament and by the legislatures of half of the 29 states to become law.

By subsuming most indirect taxes levied by the central and state governments such as excise duty, service tax, VAT and sales tax, GST proposes to facilitate a common market across the country, leading to economies of scale and reducing inflation through an efficient supply chain.

Full implementation of GST could lift India’s gross domestic product (GDP) growth by 0.9-1.7 percentage points, according to a study by the National Council of Applied Economic Research (NCAER).