Why not unite central excise and service tax first?
While the government continues to hold out hope on GST by now talking of advancing the Winter session of Parliament so that the Constitutional Amendment Bill can be passed, that seems a dim hope given the escalating war of words between prime minister Narendra Modi and Congress president Sonia Gandhi. In any case, even after the government accepted most of the Rajya Sabha select committee’s recommendations, the Congress continued to be obstructionist. Since, the government accepted the recommendation to compensate states fully for any loss in taxes for the first 5 years, it could very easily have accepted the the Congress’ recommendation that the 1% additional tax on inter-state sales be dropped—the tax was put at the behest of the producing states who feared a loss of revenue with the CST being phased out, but they were going to be fully compensated anyway. If the Congress still had doubts about whether the government would indeed scrap the 1% tax, it just needed to engage with the government in the manner both the finance minister and the prime minister—and various others—kept urging at every forum.
If the Congress continues to be obstructionist, and the BJP is not able to guarantee the Bill’s passage in even the Winter session—the finance minister has repeatedly said, though, that apart from the Congress, every other party is on board—what is the way forward? FE columnist, and Member of the 14th Finance Commission, M Govinda Rao had, in fact, suggested a way out as far back as 2001, although in a different context. As head of the expert group on taxation of services, Rao’s view was that the central excise duties needed to be merged with the service tax—in other words, have a Central GST at the manufacturing/services stage to begin with. More important, this does not require any majority in Parliament to pass a Constitutional amendment Bill, it can simply be done in the Finance Bill next February—indeed, along with former RBI Governor C Rangarajan, Rao has suggested this as a way out of the current impasse.
The immediate challenge will be to deal with the threshold level of taxation. In the case of excise duty, for instance, firms with a turnover of under R1.5 crore do not come under the purview of taxation; in the case of the services sector, the figure is a much lower R10 lakh. So, perhaps a medium of R80 lakh could be the threshold. The exact figure will depend upon the relative taxes collected from firms at various turnover levels, and the estimates of tax losses and gains. What needs to be kept in mind is that, even when the GST comes into being, this exercise will have to be done anyway—doing this for the Centre right now will, in a sense, serve as a template for the final GST. Similarly, apart from allowing tax credits for manufacturing to be set off against services and vice versa—which happens even today—what the government will need to do is to come up with a merit and a normal excise duty, and to try and migrate most production to the normal excise rate. Once again, this is an exercise that will need to be done when the GST comes into being. Indeed, to call the Congress party’s bluff, the finance minister would do well to announce that he plans to introduce a unilateral GST at the central level since that is also a big tax reform—but if the nation wants the larger reform of GST across both Centre and states and which will subsume VAT and other local taxes, and the bump in GDP that this will entail, this cannot happen unless the Congress party gives up its blackmail tactics. The political fallout of such an announcement promises to be interesting.