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Still searching for GST

Still searching for GST
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Still Searching for GST. While there has never been any disagreement between the central and state governments on the benefits of a comprehensive...

Introduction of the GST Bill in Parliament does not mean all the contentious issues have been sorted out

­­While there has never been any disagreement between the central and state governments on the benefits of a comprehensive Goods and Services Tax (GST) to replace the complex indirect tax system currently in operation, differences on a number of issues have meant that a proposal announced in the 2007-08 Budget has taken more than seven years to fructify into another legislative bill on GST. The introduction of the Constitution (122nd Amendment) Bill, 2014 in the Lok Sabha in the winter session to facilitate introduction of the GST regime from 1 April 2016 indicates some progress.

But given past experience, one is uncertain about what could finally happen to the bill, especially because there remains an ambivalence on a number of contentious issues, including the all important one of the rate of the new tax.

The 2014 bill visualises a dual GST that would be levied both by the centre and the states on an overlapping tax base. It provides simultaneous power to union and state legislatures to legislate on the GST.

The Centre would levy a Central Goods and Services Tax (CGST), the states a State Goods and Services Tax (SGST), and the Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all interstate supply of goods and services, and distribute the IGST proceeds among the states.

All goods and services other than alcohol (for human consumption) are to be under the GST. A uniform rate across the country appeals to trade and industry.

However, the question is if such harmonisation should be at the cost of fiscal autonomy. If the need to develop a common market dictates such a harmonisation, what is the extent of autonomy that a state should agree to surrender when deciding on the extent of variation in a narrow band? A state’s ability to levy a tax should mean the ability to fix the tax rate as well.

It needs to be noted that tax harmonisation does not only mean harmonisation of rates but harmonisation of many other processes within the tax system to facilitate easy tax compliance by business and industry. A uniform rate is no guarantee of creation of a common market, if the tax compliance processes remain very complex and different across states.

A huge compromise in the design of the GST is the proposal to impose a “non-VATable” additional tax of not more than 1% on the supply of goods in the course of inter-state trade. This tax is to be collected for a period not exceeding two years, or for longer as recommended by the GST Council. This essentially means the current origin-based distortionary Central Sales Tax (CST) system will continue in the initial years of GST if not abolished after two years, resulting in significant tax exportation from the richer producing states to the poorer consuming states. In the event of revenue loss to the states – a contentious issue on which the states have stalled agreement on the GST so far – it has been proposed that the central government will provide compensation for up to five years, with the compensation on a tapering basis, 100% for the first three years, 75% in the fourth year and 50% in the fifth year.

The architecture of GST as it now stands is definitely not ideal. It is a compromise to accommodate the conflicting interests of the states and the union. Although the most significant aspect of the GST Bill is the inclusion of petroleum products under the purview of the tax at a future date, a non-VATable CST levy of 1% is another compromise on the application of a destination-based principle and continues the element of the cascading effect of indirect taxation in place.

All said and done, the speedy implementation of GST calls for a resolution of the most contentious and critical issue of the rates at which CGST and SGST are to be applied. The “flawless GST” proposed by the Thirteenth Finance Commission recommended an abysmally low combined 12% GST rate. Given much higher current rates of indirect taxation, it is certainly not possible to have a GST of 12%.

Rigorous independent studies have shown that a combined GST that will minimise revenue loss initially to the states (and thereby reduce the compensation that the Centre will have to pay) must be around 20%. (http://www.epw.in/)

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