Since the advent of P Chidambaram as finance minister, we have seen the Centre address contentious issues with the states in a more pragmatic manner. The initial interactions with the chairman of the empowered committee of finance ministers and its members, followed by the formation of two sub-committees for addressing concerns around central sales tax (CST) compensation, design, coverage, rates and aspects of Constitution Amendment Bill have borne fruit.
The last two days have brought further clarity on the GST road map with the empowered committee debating the suggestions of the sub-committees on CST compensation and GST design and coming to a consensus on these contentious issues. It?s indeed an important milestone and augurs well for the progress of GST, a major tax reform which can be catalyst for growth and competitiveness of the Indian industry, in these times of economic slowdown.
The consensus that has emerged on GST structure, rates and base are the facts we need to ponder on as these clearly impact the final design of GST when rolled out. First and foremost the Centre has given in to the demand of the states by deviating from a single uniform GST rate to a more acceptable floor rate with a narrow band, more on the lines of the European Union. Well, while this may not be the most desirable, it?s definitely pragmatic, considering the demand of the states and the ground realities. How these floor rates emerge within states on categories of goods and its consistency is something we have to wait and watch for the common market concept to work. We have witnessed the value added tax (VAT) experience, and over the years we have seen several deviations in many states, which is a cause of concern.
The revenue-neutral rate is an area where still some work and consensus is required and a panel will be looking into this to address the concerns of the states of any potential revenue losses in transition. This discussion on the revenue neutral is important as that would decide the GST rate, which is also linked to the base. The news on the exclusion of petroleum products from the Constitution Amendment Bill, is really a welcome step, and now it?s up to the states to come to a decision on having this key sector within the GST, which would be most prudent and also expand coverage.
Though the flexibility to states to become part of the GST in a phased rollout sounds pragmatic, considering the political situation and opposition from some states, it does not augur well for industry. A partial GST rollout as we have seen during VAT days is a nightmare for industry from operations perspective and the very concept of common market. In the event of a phased rollout, a lot of thought is needed on how to handle transactions between the states within GST and those outside. We still hope that better sense prevails among the polity and we have a complete GST roll out. Countries like Canada have implemented such models and have succeeded but in an Indian context it will be onerous to say the least.
CST compensation consensus is important from the states? perspective as this was a major roadblock for the progress of GST. However, considering the precarious fiscal situation, one wonders how the Centre would compensate R34,000 crore in the near term. The removal of dispute settlement from the Constitution Amendment Bill and its move to GST council is another step where the Centre has shown maturity to address the concerns of the states.
With the deadlock broken, as a way forward, three panels comprising of both state and central officials have been given the task of looking into various issues. First on integrated GST for inter-state transactions and tax on imports and place of supply rules ? things that are very important for smooth credit flow and taxing jurisdiction. Second, to advice on revenue-neutral rate which is imperative for a perspective on a base GST rate. Third, to examine modalities of control to ensure ease of compliance, with avoidance of multiple authorities important to bring down transactions costs. Another key issue will be to decide thresholds for the central GST, whether they will be aligned to state GST levels or otherwise. The panels are expected to revert within three months further indicating the urgency in the minds of the law makers.
Overall, this is a welcome and positive development for the GST road map though there is still a lack of clarity as to when the actual implementation may happen. Reports suggest that the Constitution Amendment Bill with these changes is expected to be presented in the Parliament during the Budget session, which would definitely be a big first step. There is lot of ground work that would be needed from the Centre and states on drafting of laws, rules and their passage in Parliament and state Assemblies, so a timeline for implementation is difficult to predict at this stage. A fair expectation is that this government may have cleared the decks for GST implementation after the 2014 elections. We will see the rollout of GST in the near future, albeit not an ideal one, considering our federal polity.
The author is partner & national leader, indirect tax, Ernst & Young. Views expressed are personal