FE Editorial: Holding ground

Written by The Financial Express | Updated: Jan 28 2010, 02:45am hrs
If India is to meet its April 1 date with a goods and services tax (GST) system that will genuinely transform the country into a single market, it will take a really targeted intervention from the Centrea strong contention on the part of the PM or the FM, for example. On Monday, the Centre inched in this direction by making public its department of revenues formal response to the empowered group of state finance ministers discussion paper on GST. A third report thats on the table is the one authored by the 13th Finance Commissions GST taskforce. The Centres position as presented in the new report appears to have more in common with the commissions technical paper than with the states case. The Centre is calling for a single rate for taxing goods and services at both the central and state level. This must be the final goal of the GST regime. A dual-slab regimesuch as the states have recommendedwould only leave the door wide open to lobbying and rent-seeking, which are precisely the behaviours that are in desperate need of reform. The Centre has also disagreed with the states by pitching for including petroleum products and alcohol in the GST ambit. Again, doing otherwise would raise possibilities of misuse. But the big disagreement between the commission and the states reports was over the appropriately revenue-neutral rate. The former recommended a 12% rate with 7% for the states and 5% for the Centre. The latter demanded a bigger piece of the pie, even though a low uniform rate that would capture most of the supply chains was a basic raison dtre for embarking on the GST adventure. But on this key issue the department of revenues response published on the finance ministrys Web site is silent.

These columns have been arguing that one thing worse than delaying GST implementation is the implementation of a flawed GST, whether by dual-rate structures or by way of high ones. The states have their reasons to want dual rates or higher ratessome states fear that they will lose revenue as indirect taxes move from being levied at the factory gate to the point of consumption. Obviously states that have higher consumption will gain more. Here, the Centre must offer a one-time sop to states to win them over in favour of a flawless GST, some version of a grand bargain, either by offering compensation to states that actually lose revenues or allowing a marginal rate increase to, say, 13%.