State governments stuck to their demands of higher threshold for central Goods and Services Tax and keeping local body taxes and electricity duty out of it, threatening the total implementation of what is touted as the biggest tax reform since independence.

The states are demanding dual rate of state-GST to safe-guard their interests, but opposed by the central government which favours a single rate structure for ease. These demands were part of the reply sent by the empowered committee of the state finance ministers in response to a discussion paper.

The stand-off casts a shadow over the implementation of GST which FM Pranab Mukherjee is aiming for by April, 2011. “A uniform threshold will not be acceptable to small scale industries, that are tax exempt currently and small traders,” said Thomas Issac, Kerala Finance Minister.

“Small traders have apprehensions about dealing with two administrations, filling returns. There are practical problems and a solution will have to be found through discussions. But, its not an issue that will break the discussions.”

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The government has been negotiating with the states to implement the GST as it attempts to do away with the anomalies prevailing in the current structure where goods and various services are taxed more than once by state and Central government agencies. It is an attempt to create a seamless pan-India market. To avoid the “tax-on-tax”, states are seeking more and concessions from the central government as the implementation cut their revenues. The tax which was supposed to take effect April, 2010, is delayed due to disputes.

Acceptance of dual rate structure nullifies the very reason behind the GST as it not only complicates the tax structure, but also pushes up the taxation rate.

The Centre promised to compensate states in full for any revenue loss that they may incur due the new tax.

States were positive and inclined to take forward the indirect tax reform after centre’s promise for a robust compensation at the last meeting of the empowered committee of state finance ministers. States have also rejected the proposal of a uniform threshold of Rs 10 lakh annual turnover and reitereated the earlier demand of Rs 1.5 crore which may be unacceptable not just on the issue of revenue loss but also on simplicity.

The Centre’s views on subsuming electricity duty, octroi and taxes imposed by local bodies is also not acceptable to states. Keeping large number state levies out of GST will not only push up the revenue neutral rate but also distort the tax structure.

The new tax, it is proposed, will replace excise duty and service tax at the Centre and VAT and local taxes at the states’ level.

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