Though the final contours of the goods and services tax (GST) are yet to be finalised, the government achieved a major breakthrough on Monday when the Centre finally agreed to compensate the states for any potential losses in phasing out central sales tax (CST) in the run up to the GST implementation. As per the plan, the Centre will put aside an amount of R34,000 crore for this over a period of three years. Once the GST is in place, and has stabilised, according to estimates, the average tax rates could be cut by 2-3 percentage points, representing a huge saving for all concerned. How much the rate can be cut depends on how much the centralised information network (GST Network) is able to capture all transactions to eliminate tax evasion, as well as on how much of the tax base is kept out of GST—right now, petroleum products are to be kept outside its purview. The more transactions are brought under GST, the greater the tax buoyancy and therefore the larger the reduction in overall tax rates.
But even in a truncated form, GST is a game changer. Just the agreement on approving a negative list of services for taxation has, for instance, increased the service tax base by 30-40%. Given that the government had followed this same principle of compensating states for losses very successfully while implementing VAT, what’s not clear is why the finance ministry, under the previous finance minister, chose to restrict the CST compensation. But that’s in the past, the important thing is that a major tax reform, the biggest since the Raja Chelliah ones, is well on its way.