GST: decisive policy action needed

Written by Satya Poddar | Updated: Feb 11 2010, 07:03am hrs
The confession by Asim Dasgupta, chairman, empowered committee of state finance ministers (EC), that GST cannot be implemented from April 1, 2010, must have been as much a disappointment for him as for the rest of the country.

The renowned economics guru knows well the importance of GST and the fillip it would provide to the Indian economy.

Its impact would surpass that of any other fiscal stimulus. It would free the economy from the shackles of archaic tax system filled with economic distortions, which undermine productivity and economic growth. The simple and rational structure of the tax would reduce costs of tax compliance and boost government revenues a win-win situation for taxpayers and the Centre and states.

GST reforms would catapult India to an even higher growth trajectory of 9-10%. Not surprisingly, China has also decided to implement GST and has already initiated drafting of the legislation.

For any reform of this nature and enormity, there are bound to be many hurdles and setbacks. It requires patience and perseverance. A little delay in its implementation should not be a concern, as long as there is no faltering on political commitment for a flawless GST.

There is speculation that the delay is caused by significant dissension among the Centre and states on various aspects of GST, including tax design, rates and exemptions, and its impact on revenues and fiscal autonomy of the states. These are indeed fundamental issues and it would be unrealistic to expect the central and state governments to have an instant common view.

The discussions that have taken place on these issues are more in the nature of a dialogue, rather than a fundamental disagreement. Dasgupta has done an outstanding job in building consensus among the states and mobilising their support for GST reforms.

All countries have faced controversy and political opposition in implementation of GST. India has been an exception so far. GST has been supported by all political parties, and the taxpayer resistance virtually nil. In fact, GST has been welcomed and eagerly awaited by India Inc.

Even among the states, the key concern has been the impact on their revenues. No government is prepared to embrace a reform if it means a loss in revenues. It is refreshing, however, to hear Punjab finance minister Manpreet Singh Badal in an interview said what is good for the country is good for Punjab, and that Punjab would not hold back implementation of GST, even if it means some loss in its revenues.

The root cause of the delay is thus not dissension among the governments, but simply lack of the machinery for its implementation. It is unfortunate that even after four years of its announcement, the governments have not assembled a team of officials who could prepare a road map for GST and take the necessary steps for commencing the journey. There is not a single individual so far who has been designated to work full time on GST implementation. Given the enormity of the task, one would expect a team of 50 plus officials to be working full time at this stage of GST development.

Much of the work that has been done on GST design so far has been done by tax commissioners and finance/ revenue secretaries who participate in the EC meetings. They already have their portfolio of regular duties. It is unrealistic to expect them to have the energy or time for research and analysis and to formulate informed views on GST design issues.

The EC meets periodically once every few weeks. There is no continuity of discussion from one meeting to the next. Even officials can change from one meeting to the next. The joint ownership of the GST by the central and state governments has made it an orphan. Neither the states nor the Centre feel empowered to take the initiative of creating the machinery for nursing this baby.

The Centre has looked to the EC to develop a programme for GST design and implementation. However, the experience of states is limited to taxation of goods. They are ill-equipped to deal with complex issues that arise in taxation of services, real property, exports and imports, and inter-state trade. On such issues, there is clearly need for leadership from the Centre.

The Centre has to play the lead role in creating a GST secretariat, staffed by able officials from both levels of government, and outside experts with requisite experience and skills. There should be an empowered group of finance ministers (comprising the Union finance minister and selected state ministers) to provide guidance on fundamental design and political issues. The secretariat should be mandated to develop the GST road map, for its implementation no later than April 1, 2011. It should develop a common information base for the Centre and states on matters such as the tax base, revenue-neutral rates, impact of exemptions, and international best practices for the treatment of various sectors and industries, and the constitutional framework for enactment of the tax. It should solicit views of the industry and the public at large, and present its analysis and options to the empowered group for final decisions.

Without such enabling machinery, GST would remain a distant dream. We would be standing still, ever watching the road ahead.

The writer is tax partner, E & Y. Views expressed are personal