Vol 3 | Issue 3 | July 2016

GST - STATE’S PERSPECTIVE
Prof. Arun Kumar Agarwal*
The Goods and Service Tax or GST is a system of taxation where
there is a single tax for goods as well as services. GST is a consumption
based tax/levy which is applicable on goods and services at the place
where final/actual consumption happens.GST is collected on valueadded
goods and services at each stage of sale or purchase in the
supply chain. GST paid on the procurement of goods and services
can be set off against that payable on the supply of goods or services. The manufacturer or
wholesaler or retailer will pay the applicable GST rate but will claim back through tax credit
mechanism until the final stage of sale to the end consumer is reached.
Worries or concerns for states
1. The foremost worry for states is the loss of revenues, which is perceived to arise from two
factors. First, it is the manufacturing states that are more worried than the others because
value added tax, or VAT, the current taxation regime in states, is an origin-based tax while the
good and services tax (GST) is a destination-based tax. In the origin-based tax system, tax is
collected where the supplier of good is located while in the destination based system, tax in
collected where the consumer of a product is located. Tamil Nadu, Maharashtra and Gujarat
are among the more industrialized states and they fear big losses of revenues on movement
of goods made in their states.Secondly, loss of revenue may arise from GST replacing the
plethora of state taxes as they exist today.
2. Risk of Loss of fiscal autonomy. States will not be allowed to introduce any new tax at will,
change the rate of tax or give exemptions to any class of goods or service provider. They will
also not be allowed to unilaterally levy cess or surcharge or increase tax rate to raise resource
in the event of a natural calamity. Any change to tax rates will have to be within a narrow
band prescribed by the GST Council. Any changes to the tax rate will need to be agreed to
with three-fourth majority at the GST Council. While states together have weightage of twothird
in any decision and Centre will retain the balance one-third. This effectively means
that states together will not be able to act on their own or take any decision, consent of the
Centre will be necessary. This is akin to giving the Centre veto power.
Assurances from the Central Government
a. Compensation for losses suffered in the first five years: States have been assured 100 per cent
compensation for losses suffered in the first three years and 75 per cent in the fourth year and
50 per cent in the fifth year. However, the finance ministry expects that all states will not need
compensation for five years. Consuming states in particular may see their revenues increase with
the implementation of GST.
b. Further, to address the fears of revenue loss of manufacturing states, the union government has
said additional tax of up to one per cent would be collected on inter-state trade of goods for two
years or longer period if the centre-state body, the GST Council, so decides and be transferred
to the states. This is in lieu of the central sales tax (CST) that stands abolished when GST is
implemented. Tamil Nadu, for instance, estimates its losses from scrapping CST will be Rs 3,500
crore annually.
c. The Finance ministry expects that revenues generated by states from taxing services will more
than make up for losses they suffer when octroi and entry tax, entertainment tax, luxury tax and
other state level taxes are withdrawn and that the concerns of the States are too premature..
*Prof. Arun Kumar Agarwal is an Adjunct Faculty in the area of Finance at IBS Gurgaon
Vol. 3 | Issue 3 | JULY 2016 | SAMVAAD 3