India’s Demonetization Threatens GST Legislative Timetable

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By Siri Bulusu

Nov. 21 — India’s central and state governments are struggling to juggle demonetization issues and reach consensus regarding administrative control under the new goods and services tax regime, with just four weeks left in the current session of parliament for timely passage of related GST bills.

Both central and state government representatives have cited taxpayer convenience as a reason for overseeing administration of GST. The central government maintains that a single administrator would simplify implementation of the GST network, and states argue that small businesses have become accustomed to dealing with state tax authorities.

The dispute itself “is actually causing uncertainty and inconvenience to tax payers,” said Sachin Menon, head of indirect tax for KPMG India, in an e-mail to Bloomberg BNA. Under the constitutional amendment permitting the GST, existing means for the central and state governments to collect taxes would expire Sept. 16, 2017.

“Neither the state nor the center has an option not to come to a settlement because on 15th September 2017, there will be no indirect tax law in India to dispute,” Menon said.

The standoff between the central government and state representatives puts pressure on the central government’s promise to implement the new tax regime by April 1 of next year.

“All the efforts right now of the parliament is to take care of the demonetization announcement,” Kuntal Dave, proprietor of Mumbai-based Nanubhai Desai and Co., told Bloomberg BNA Nov. 21.

He added that the center “won’t want to have any definitive discussions on GST while trying to safeguard their political holding over the demonetization scheme.”

Expectations for April Roll-Out

The central government wouldn’t want political negotiations over demonetization to “upset political parties” or cause it to lose footing over the GST consensus reached by most political parties, who still anticipate the pan-India tax regime to roll out according to plan in April, Dave said.

“It doesn’t look like any discussion or progress can happen on the floor or GST council until things stabilize,” Dave said. The GST council is the group of federal and state officials that must decide and approve details of how the administrative powers will be divided between center and state governments before the GST bills can be presented to the parliament for a vote.

“There is no consensus on how the powers should be divided between center and state government,” Thomas Isaac, the Kerala minister for finance, told Bloomberg BNA Nov. 21.

“This is not about politics, it’s about protecting jobs,” he added.

Central Control

Under the current proposal before the GST council, states would oversee taxes paid by businesses that earn less than 15 million rupees ($219,790) per year. Isaac predicted that description would apply to 85 percent of all taxpayers.

The stalemate comes because the center will agree to the states’ condition on the sale of goods tax only if they agree to give full control to the center over all service tax.

“Every state is in agreement that the center should not be given full control over service tax,” Isaac said, adding that the ruling Bharatiya Janata Party states “may not publicly oppose the center, but every state is on one side on that issue.”

The GST council is scheduled to meet for a third time Nov. 25 to continue the debate over administration and finalize the details of the tax rate structure.

Prohibiting Productive Debate

Some sources said the demonetization scheme has taken precedence over the goods and services tax bills, saying opposition parties are “making noise” and prohibiting productive debate on passage of the three GST bills on the agenda for the winter session.

“At the end of the day, the opposition also wants the GST bills to be passed, but they’re letting it be known they are not in favor of the currency ban,” Alok Patnia, founder and chief executive officer of pan-India tax law firm Taxmantra, told Bloomberg BNA Nov. 18.

He said the demonetization of 500 and 1,000 rupee notes has caused an uproar among the opposition parties, who have blocked any GST debate in the past week.

“If GST doesn’t get passed in this session, then it will become difficult to meet the April 1 implementation deadline,” he added.

Other tax experts agreed that the demonetization scheme presented an opportunity to delay consensus on GST and are skeptical the government will be able to meet the April 1 deadline.

Three GST bills await approval by the parliament during the current session:

  •  the Central Goods and Services Tax Bill, 2016, which is proposing legislation on taxes levied on goods and services sold within a state;
  •  the Integrated Goods and Services Tax Bill, 2016, which concerns legislation on taxes levied on goods and services sold across state borders; and
  •  the Goods and Services Tax (Compensation for Loss of Revenue) Bill, 2016, which sets out legislation on compensation to states for loss of tax revenue for five years following implementation of GST.

 

To contact the reporter on this story: Siri Bulusu in New Delhi at correspondent@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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