GST: cut the clutter with task force report

The Centre must be more pro-active in ensuring that the proposed goods and services tax (GST) maximally captures the supply chains and is levied only on pure value added. A structurally sound GST would be the biggest stimulus to the economy.

In designing the GST structure, the Centre should rely heavily on the lucid report of the 13th Finance Commission task force.

The state governments, in their anxiety to retain turfs, are indecisive on the design of GST. Finance minister Pranab Mukherjee must use the sharp tool of the task force report to cut through the clutter.

For India?s federal GST to be a high-utility tax reform, it should have a very broad base, subsume most central and state taxes and levies and be extremely stingy about exemptions.

Exports should be zero-rated and inter-state transactions too must effectively have this benefit. In short, the system should militate against cascading of taxes in B2B transactions.

The task force report has meticulously adhered to this principle. Its proposals are not merely ideal, they are doable, too. What?s required is the political will.

The empowered committee (EC) of state finance ministers says the tax force used a wrong methodology to estimate the combined GST rate at 12% (7% for states, 5% for states), but refuses to spell out the specific problems with the approach. This prevarication would not help a tax reform that has wide support.

The National Institute of Public Finance & Policy reportedly believes the task force erred on its estimate of the GST base, which is Rs 31,25,325 crore.

This estimate is the simple average of five different estimates based on various standard approaches. Of the five estimates, two were done by the task force and one of these puts the GST base at Rs 37,43,077 crore. Even if one takes the lowest of the five estimates, which is Rs 27,92,809 crore, the revenue neutral rate (RNR) for states (6%) would not vary beyond a percentage point or so, which exactly is the prescribed state GST rate. So, what is the fuss about?

A consumption-type GST can produce huge economic gains, provided the incidence of tax falls only on the final consumption and businesses are unburdened. There are fabulous examples of GST?s rich dividends from across the globe–Australia, New Zealand, Canada and Singapore being the most noted ones. These countries had chosen not to digress from the basic principles of this comprehensive, destination-based tax on consumption. In contrast, the VAT system in the 27-country EU that allows 10% space to each jurisdiction to opt for their specific rates, has almost been a disaster, and there is already a move to restructure it. India can learn from the global experience on this front—163 countries will have VAT/GST by 2012.

In fact, task force?s RNR is 11%—5% for Centre and 6% for states—but it munificently says the states can have a rate 16% higher than the estimated RNR (which would translate into some Rs 30,000 crore), besides a five-year Rs 30,000-crore compensation package. It also recommends that by retaining stamp duty in the first year of GST, states can raise another Rs 39,000 crore. Task force has obviously adopted the best available practices for its estimates. States have no reason to denounce the estimates, other than an irrational fear of loss of autonomy. In fact, if stamp duty, electricity duty etc were kept outside the GST ambit, the states? RNR would have come down to around 5%.

An ideal GST would also lead to revenue gains from higher compliance and GDP growth, for the Centre and states. As corporate profits rise, so would corporate tax collections, again benefitting the Centre and states. In that sense, RNR could be even lower than the task force estimate.

Globally, the average GST/VAT rate is around 16.4%. The average rate in Asia-Pacific is 9.88% and Canada and Nigeria have the lowest rate of 5%. If India?s RNR is around 12%, it means a huge comparative advantage.

The task force wants all businesses with an annual turnover of Rs 10 lakh and above to be under the GST net. It also proposes inclusion of almost all central and state (indirect tax) levies, excluding the basic customs duty that represents the import tariff.

The EC has not come out with any rates so far, although its discussion paper in November proposed a standard rate and a lower rate of merit (essential) goods for state GST. It also pitched for many exemptions and hinted at a separate rate for services.

The states also want to keep many imposts, including stamp duties, electricity tax and the tax on petroleum and alcohol outside the GST. The EC discussion paper says while the Centre would retain the threshold for goods at the current level of Rs 1.5 crore for central GST, states can have a much lower threshold of Rs 10 lakh for both goods and services.

But the EC stand is contrary to the two basic tenets of a meaningful federal GST viz. a common and identical base for both central and state levies and the notion of GST being a transaction tax, rather than a tax on specific goods/services. If GST is structured in this manner, it would be a far cry from the ideal model. In fact, the structure proposed by states would not be significantly better than current system of unlinked Cenvat and VAT chains, and sundry levies outside both the chains.