Let Centre vacate GST altogether

Written by Satya Poddar | Updated: Dec 3 2007, 04:15am hrs
The choice between a dual and single national GST entails political, economic, as well as administrative considerations. From an economic perspective, the GST (whether dual or single) should be levied at a uniform rate on a comprehensive base. To limit the application of tax to final consumption, there should be full crediting of taxes on plant, machinery and equipment, raw materials, and other business inputs. Moreover, the tax should be administered either by one authority or, if there are two or more authorities, through proper coordination and harmonisation among them.

If these conditions are met, then political considerations would dictate that the tax be levied in the form of a dual GST. The Centre and states would each enact legislation for the tax, and be accountable to their citizens for taxes collected. The legislation would be common in most respects, with the exception of tax rates.

Is this ideal technically feasible and politically attainable in India If not, is dual GST still the best option for India The only example of this model is Canada, where the tax is levied in a dual form in four of the ten provinces as political differences have stood in the way of its adoption by the other six provinces. It would likely meet the same fate in India where political differences between the Centre and states are more pronounced, and Centre-state coordination in tax administration is virtually non-existent.

Under the circumstances, the best should not become the enemy of the good. Consideration should be given to other options that still amount to a substantial reform, though not comprehensive. Forces that stand in the way of an ideal dual GST would also preclude a single national GST, replacing both the central excises and the state Vats. The next best option would then be a national GST replacing state Vats alone, leaving central excises outside the ambit of GST, at least for the time being.

Converting state Vats into a GST would involve a number of steps that would include extending the base of the current state taxes to goods, services, and real property; elimination/consolidation of supplementary state taxes such as purchase tax, and entry tax; developing rules for the taxation of inter-state services, such as telecom and transportation; developing a system for tracking inter-state sales; and simplifying tax forms and administrative procedures.

The revenue-neutral rate under this national GST could be in the range of 7%. At this rate, the tax could be extended to most goods and services, eliminating classification disputes and simplifying compliance.

One major roadblock to dual GST is the level of the combined Centre-state tax rate, which has been suggested at 20%. Imposition of tax to hitherto exempt goods and services at this rate would result in a major redistribution of tax burden and encounter significant political resistance. Such concerns would be minimised under a state-only GST at 7%.

The GST would be enacted and administered by the states individually, much like the current Vat, but within a new and improved framework for the treatment of inter-state supplies of goods and services. The tax legislation and administration should be harmonised across states. Such harmonisation has already occurred to some extent with the introduction of Vat, but can be further enhanced under the GST. CenVat would continue to be levied by the Centre at the manufacturing level for the time being. It could be converted into a separate central GST at a later stage.

Better still, the Centre could vacate this tax field altogether (with the exception of excise on select items) and transfer the tax entirely to the states. CenVat could then be replaced by an enhanced rate for state GST. The resulting revenue loss to the Centre can be offset by eliminating/adjusting the revenue transfers currently being made by the Centre to the states under the Finance Commission proposals.

The writer is a partner, Ernst & Young