Indian trade and industry have high hopes on the proposed Goods and Services Tax (GST). This reform is being perceived as a panacea for all ills of today?s indirect taxes. Finance minister Arun Jaitley, in his Budget speech, explicitly committed to sort out the issues related to GST during the current year, assuring a fair deal to the states. But there is some disappointment as no time-lines were set for the introduction of GST. Obviously, the Centre cannot take unilateral decisions in the matter since it requires equal involvement from each state.
Former finance minister P Chidambaram, while presenting the FY14 Budget, had stated that he had first mentioned the GST in the FY08 Budget. At that time, it was thought that GST could be brought into effect from April 1, 2010. However, that was not to be, although all states swear by the benefits of GST. The benefits of GST are too clich?d to be repeated; there is unanimity among all stakeholders that GST will be far superior to the multitude of central and state taxes on the production and distribution of goods and services.
What makes a good reform great is the manner of its implementation and design. If the authorities design a lacklustre GST, they are missing a massive opportunity. Unfortunately, the information now available points exactly to this although there is hope that the new government would inject some fresh ideas into the collective thought of the Empowered Committee of state finance ministers (EC).
The three main stakeholders in GST are the central and state governments, industry and the public. For the governments, the primary concerns should be revenue and the ease of administration. For the public, the tax rates and the costs of governance and compliance are crucial. For industry, GST?s structure has direct consequences as it is entrusted with the collection and remittance of the tax and is answerable to the tax administrators. In the World Bank?s index of the ease of doing business, one component is the ease of paying taxes, on which India ranks 158th. So, GST must ensure a simple, transparent and investor-friendly system in which the genuine assessees encounter no hassles.
?The broad contour of the GST model is that it will be a dual GST comprising of a Central GST and a State GST. The Centre and the States will each legislate, levy and administer the Central GST and the State GST respectively? (then Finance Minister Pranab Mukherjee, Budget Speech, July 2009). Dual GST implies that the manufacturer, trader or service provider collects two taxes and remits them to two governments. This further implies that he has to deal with inspectors from two tax regimes. Service tax has been entirely a central tax; now, the states also will start collecting. Value Added Tax (VAT), so far administered by the states, will now be subject to dual control. One GST can have input tax credit only in respect of that GST. The exemption limits are proposed to be different, the styles of administration will vary and the assessees will have a huge burden of compliance. Why a dual GST with double the cost of administering a single GST? The sole justification for a dual GST is ?fiscal federalism enshrined in the Constitution?. This is a political statement, the connotation being that the ministers and bureaucrats are apprehensive about loss of some of their powers. Why not an autonomous GST Council, with improvements on what was already provided for in the 115th Constitution Amendment Bill, 2011, for administering a single GST? Of course, the Bill needs review as no Council can function if all decisions are to be by consensus, as provided in the Bill.
One ostensible reason for proposing a dual GST is the existence of massive administrative machineries in the Centre and the states for the administration of the taxes covered and the difficulties in integrating the services. The Indian Revenue Service (Customs & Central Excise) has more than 2,000 officers. Majority of them are highly qualified and extremely competent professionals who can lead a change. The state tax departments generally have a few officers from India?s top civil service, the Indian Administrative Service (IAS), to provide the administrative leadership; the rest belong to the state services at various levels. In this background, it is definitely possible to design the GST Council as a unified administrative formation in which the right talents can be deployed in appropriate positions. Or, there could be geographical allocation of responsibilities, with the central officers put in charge of the metros and the state officers of other places. Or there could be functional differentiation, with the central officers put in charge of policy, planning, administration, vigilance, intelligence, investigation, interstate trade, technology and even appeals and dispute resolution. The officials can be on secondment to the GST Council. This Council could have state-level executive committees headed by the state finance ministers. An integrated GST Council, managed jointly by the Centre and the states, can manage a single-GST regime.
The central sales tax (CST) is an anachronism. When the world is moving towards reduction of trade barriers, India still retains the tax on interstate trade. CST, an origin-based tax, is inconsistent with a destination-based tax like VAT which provides input tax credit. CST, at 4%, was reduced by 1% each in 2007 and 2008, but the goal of zero-rate was not achieved. CST gets abolished if GST takes effect; but will the check-posts too disappear to facilitate a national market? There has been no assurance that physical inspections at state borders will stop even when interstate trade is brought under an integrated GST and monitored through an electronic network. Even the Thirteenth Finance Commission, which conducted comprehensive studies on GST, has unfortunately endorsed the continuation of check-posts.
Another issue is whether all taxes, cesses and surcharges on goods and services would be subsumed into GST. There have been reports that some states are keen on retaining taxes like purchase tax, octroi, etc. The ideal GST is one which would encompass all taxes on goods and services.
There is considerable diversity of views on the exclusion of certain commodities?specifically alcohol, tobacco and petroleum?from GST?s purview. Alcohol and tobacco are now subject to special high rates of tax and, logically, no government would want to make them cheap for the consumer. However, these commodities could be brought under GST with input credit, etc, and a supplementary tax can be levied on them through an appropriate law. Similarly, the negative list for service tax also needs to be pruned. The principle should be to keep exemptions as few as possible.
The number of tax rates also has a bearing on the ease of compliance. There are arguments for prescribing low rates for high value items like bullion and precious stones. Similarly, there are arguments in favour of low rates for commodities of mass consumption like foodgrains. A desirable formulation is one in which the rates are the same for all commodities, with unavoidable exceptions. And this rate should be revenue-neutral to start with; revenue increase will automatically happen with the reform itself.
The EC has done impressive work in the past. The states did implement the big reform of replacing sales tax with VAT, although it took several years of deliberations and almost three years from April 1, 2005, for full implementation. The transition was a commendable achievement. GST is a much bigger challenge because of the multiple integrations involved?state taxes and central taxes, taxes on goods and those on services, etc. The finance ministers who have to formulate GST come from seventeen different political parties! Jaitley and the EC Chairman Abdul Rahim Rather have a challenging task ahead, but it is a great opportunity for the ministers and the parties to offer to the people of India a progressive tax reform.
The author is former shipping secretary, Government of India
k.mohandas@gmail.com
