In a little less than 11 months, the country?s most significant tax reform in recent years?the goods and services tax (GST)?is scheduled to be introduced. GST, which subsumes service tax, central excise duty, state value added tax and other state level dues and taxes, is a multi-stage consumption tax.
GST?s appeal lies in that it will simplify, harmonise and lower the burden of many levies on the manufacturing process while simultaneously making tax administration more effective and revenue collections more buoyant. Not surprisingly, it is being eagerly awaited and widely supported by all stakeholders?the Centre, the states as well as the domestic industry.
The introduction of the proposed tax seems to be a foregone conclusion. Both Congress and BJP, the chief contenders to form the government at the Centre, once election results are announced on May 16, have promised that the deadline for introducing the tax?April 1, 2010?will be met.
But given that it took over a decade for value added tax to be introduced all over the country, the unsaid question in everyone?s mind is whether the introduction and implementation of a national level GST would court the same controversies and take the same course as its forerunner?the VAT.
This time around, after their experience with rolling out a national level VAT regime, both the Centre and the states are wiser, for sure. For instance, it has only taken three years (since 2006 when former finance minister P Chidambaram announced his intention to introduce a national GST), for the Union finance ministry and the Empowered Committee of State Finance Ministers to agree on a model for the tax.
In fact, a day before demitting office on November 29 last year, Chidambaram gave his stamp of approval to the GST roadmap prepared by the Empowered Committee. Under the plan, a dual GST, at both the Centre and the state level will be introduced. States have given a critical concession? they will levy the tax at a uniform rate and will enact a binding legislation that will prevent them from changing the rate on their own. The last few years have also seen a gradual tweaking the rates of central excise duty and service tax in order to converge them for the GST.
So far, so good. But post-elections will start the crucial time when actual tax rates will have to be worked out and the indications are not too soothing. State governments have said GST should be levied at not less than 20% and are unwilling to cut rates, as it will cause revenue losses to them. Meanwhile, though the Union finance ministry is at present non-committal on the rate structure, a study by the Thirteenth Finance Commission has revealed that a 16% GST rate would be revenue neutral and optimal. The BJP too has promised that GST would be levied at rates between 14-16%.
The actual working out of the rates will take some hard bargaining between the Centre and the states. Remember, it took them a good four years to thrash out VAT rates. While it was in 1999 that the floor rate for the tax was first decided, actual negotiations began in 2001-02 and it was only in 2003 that the tax regime kicked off with Haryana introducing VAT in April that year.
There are also other issues dogging the successful and timely introduction of GST. Under the regime, the Centre will transfer its right to tax services to the states. It has been two years since the Union finance ministry agreed to give states the right to tax 44 new services?including private educational institutions, unaided health institutions and hospitals, amusement parks and rotaries?and transfer the right to tax 33 existing services as part of the compensation package for the phase-out of central sales tax. But a law to this effect is yet to be enacted.
Another key issue that is likely to crop up is about the points of the collection of the proposed tax. While the Centre and the states will both levy the tax, it will only be collected at a single point. The Empowered Committee?s report has left this ambiguous and its modalities are yet to be finalised. It is but obvious that neither the Centre nor the states would be keen to give up this lucrative and powerful right to collect the tax and it is expected to rake up a lot of controversy.
Plus, an unforeseen problem has cropped up in the form of the economic downturn. At a time when tax revenues are already falling and economic growth is slowing down, many believe that a complete overhaul of the country?s indirect tax regime can wait for a while longer.
No doubt then that the next 11 months will prove to be crucial?not only will the nuances of GST be worked out in the period, but it will also be a period of interesting Centre-state relations as the two try resolve their numerous differences to ensure that the tax is introduced on time.