With most states opposing the government’s suggestion to bring petroleum and potable alcohol within the ambit of the goods and services tax (GST)—others opposed the subsuming of octroi and entry taxes—it is clear the GST Bill is dead in the water. In any case, even if you dismiss the vexing issue of dual control and introducing a common threshold for GST which would bring in lakhs of small businessmen into the GST net—while the Centre taxes 10 lakh firms for excise/services, the states have 50 lakh traders under their VAT net—the more immediate problem is the Centre does not have the necessary majority in Parliament to push through the required Constitutional Amendment Bill. In which case, with states not convinced they will benefit from the GST—the exporting states fear losses on account of the central sales tax (CST) withdrawal, others have high octroi/entry taxes they want to protect—the ball is now with the 14th Finance Commission. Since a third of all revenues of state governments are by way of their share in central taxes, a higher devolution share would likely take care of the financial concerns of various states. It has to be borne in mind that, in the current form, the GST benefits will be severely curtailed. The revenue-neutral-rate calculated by the Kelkar committee projected a significant cut in tax rates, but this was dependent upon all goods and services being part of the common taxation pool—the more the exemptions, like petrol and alcohol, the lesser the benefits of a GST.
While the move towards GST will now be completed by the next government, the Centre still has a lot of work to do in cleaning up the tax administration, something it has tasked Parthasarathi Shome with. After rising from 9.91% of GDP in 1990-91 in the first flush of tax reforms, central tax-to-GDP rose to 11.86% in FY08 (total central and state tax-to-GDP rose to 17.5%) but then fell to 10.3% in FY13. After the initial success due to which direct taxes crossed indirect ones by FY08, tax buoyancy has been lower, largely due to little attempt to clean up R5.29 lakh crore of direct and indirect tax exemptions—customs duties-to-imports fell from 8.1% in FY11 to 6.1% in FY13; service taxes have remained flat at around 2% of service sector GDP for the last four years despite, now, all services being in the taxable list apart from a small