On the brighter side, both the Centre and the states agree that GST should be introduced. All the parties concerned do recognise the fact that the introduction of GST would be another important reform after the introduction of dual-VAT in India.
Its introduction would help remove the cascading effects of two VATs and the service tax. In fact, cascading under GST would be almost absent. Presently, cascading occurs under the Central VAT (CENVAT) due to the non-taxation of transactions beyond manufacture and the large exempt sectors under both CENVAT and state-VAT, which are not allowed to claim any input credit for the taxes paid.
The introduction of destination-based Integrated GST (IGST) in place of CST does not entail any tax-exporting to the importing states. Therefore, it will not lead to an increase in the cost of production. Under the GST, all inputs (including capital goods) will be given set-offs. Also, exports would be zero-rated.
The GST would also usher in competitive efficiency in business. It will not generate definitional issues and valuation problems which have led to litigation under the present CENVAT system. In addition, taxation at the retail level instead of at the manufacturing level provides for a broader tax base leading to a neutral and efficient tax system.
The GST also has an advantage over the present system of taxation as services under GST would be taxed both by the Centre and the states and this helps to broaden the tax base.
Also, the effective tax rate will be the same for all commodities; it will not vary from product to product. Unlike rates in the present system, the effective rates will not vary when the statutory rate is uniform. It would place Indian manufacturers at an advantage in the international market.
However, the exclusion of some of the taxes from the GST-base, as raised by the EC in its recent meeting, needs serious consideration.
First, the issue of exclusion of state excise duty (SED) is important as it contributes to a large share of the states own tax revenues. It yielded about 13% of states own tax revenues in 2012-13. Second, SED falls in the category of sumptuary excises. Also, the Indian Constitution assigns a special role to the states for prohibition through this tax. The Taxation Enquiry Commission has gone on record to point out that the settled policy of state excise is to minimise temptation to use alcohol to those who do not drink and to discourage excess among those who do, and to a furtherance of this policy, all considerations of revenue must be absolutely subordinated (Report of Taxation Enquiry Commission, GoI, 1954, p 130). It is, therefore, advisable to leave this tax out of GST even at the cost of having a less perfect GST. The Centre should, therefore, agree to exclude this tax from the base of the GST.
The second issue relates to exclusion of petroleum crude and its products which contribute about a third of the revenue from sales tax to the states exchequers. The issue has been deliberated upon by a sub-committee of officials set up by the EC. At this juncture, there is a need to make the states agree that it would be to their advantage to not exclude petroleum products from GST. Excluding these items from the definition and coverage of GST in the Constitutional Amendment Bill will not provide any flexibility to levy GST on these items even in the future if the states and the Centre desire to do so. This would require another Constitutional Amendment Bill to enable the levying of GST on these items. Considering future needs, it would be prudent not to confine the scope of the tax under the framework set by the Constitution. What is to be taxed or not taxed or what should be the coverage of the GSTthese matters should be left to the Empowered Committee or to the proposed GST Council. The Constitution should demarcate the broad areas of taxing powers as has been the case with sales tax and union excise duty in the past. However, this would have to go hand in hand with an undertaking from the Centre that the GST would not be levied on these items unless the same is cleared by the EC or the GST Council.
Here, it is important to note that the economic rationale of exclusion of these commodities from the purview of GST is solely based on revenue considerations. No other aspect of tax policy or tax administration has been taken into consideration while excluding petroleum products from the purview of GST.
The long-term perspective of a rational tax policy for GST, however, shows that at present, these taxes constitute more than half of the retail prices of motor fuel. In a scenario where motor fuel prices are deregulated, the taxation policy will have to be flexible and linked to the global crude oil prices to ensure that prices are held stable and that the pressure exerted on the economy during the increasing price trends is absorbed.
Further, the trend of taxation of motor fuel around the world suggests that these items should not be used merely for raising resources. These items must be taxed according to the principle of green taxes. Therefore, the trend across the globe is to bring these items under GST and then levy additional taxes on these items according to the quantum of pollution emitted by the vehicles.
It is, therefore, important that the policy decision of whether petroleum products should be taxed under GST or subjected to supplementary taxes along with GST or kept completely out of GST (subjected to sales tax or union excise duties) should not be confined to the constraints laid down by the Constitution. The states and the Centre should be free to levy GST as and when the need arises. Failing this, if the states later want to go in for a levy of GST on these items they will have to wait for a Constitutional Amendment Bill. It would be prudent to leave the authority to exclude or include these items entirely to the Empowered Committee or the GST Council. Also, the tax on these items must be based on the principles of road user taxes or fuel-taxes.
The author is former member secretary of the empowered committee of state finance ministers for the introduction of VAT and currently director, Foundation for Public Economics and Policy Research, New Delhi