GST should treat like Center State issue not like ordinary economic efficiency issue

Dated 27th September, 2014

With the setting up of Goods and Services Tax (GST) cell headed by a joint secretary level officer and Prime Minister's Modi's directive to rollout GST by April 2016 shows the government resolve to rollout the new tax regime in a time bound manner However the only way to untie the GST implementation that has been hanging fire since first announcement in Union Budget 2007 08 is to treat it as a federal issue (centre state rather than just as an economic efficiency issue according to Dr Sunil Gupta Sunil Ram Co Chartered Accountants and Director of Punjab National Bank).

The new GST Cell has officers from the Central Board of Excise and Customs and will be the secretariat for the empowered committee of state finance minister and it will pilot the key bills through Parliament and monitor their subsequent progress through state legislatures. "Mr Modi has reportedly advised the Finance Ministry to ensure that all the elements are in place before making the announcement for a nationwide rollout of the tax. When implemented GST will replace all the domestic taxes on production and sale of goods and services. While the Finance Ministry is in favor of a single rate of tax in the bill it has conceded to the demand by the states for a band within which their levies would flourish. Currently a rate of 12.20% is suggested as tax band and this is reasonable for growth Dr Sunil Gupta said. "GST thus has two clear beneficiaries business and central government and one possible loser the states. I say possible loser because some states will gain from GST and others lose. States as a whole may not lose but as long as there are some losers one can hardly blame states for fearing a post GST world. The Confederation of All India Traders which has most retailers under its umbrella has argued for a single rate. Meanwhile representatives of major industrial houses have stepped up their lobbying with the Centre in a bid to make GST a reality. States are demanding different rates of GST. Now irrespective of such diverse demands of stakeholders the actual rollout of the GST will be the single most economic reform in our country."

Implementation of GST may not be easy in view of the many glitches and diverse challenges that are likely to crop up right from the beginning. Some of the expected challenges are as follows according to Dr Sunil Gupta: The federal character of the Constitution of India gives autonomy to states to raise their own revenues. Accordingly our Constitution gives powers to the Union and the states to levy and collect taxes as per Union State and Concurrent List. So one of the major challenges to the introduction of GST is the apprehension of states that the federal system would get diluted. As such implementing the proposed GST legislation across the country will require a Constitutional Amendment via voting in both houses of Parliament plus the support of 15 of the 29 state governments. GST has to be implemented simultaneously by the central and state governments. While doing so the central government would only be able to offer the proverbial carrot but cannot weld the stick as it doesn’t have the constitutional authority to impose such ideas on the states. In this scenario some states may express stiff opposition to GST fearing loss of autonomy. So the Centre would be at the mercy of the state governments with regard to this decision. And striving to arrive at a consensus among all the 29 states having different political parties with their own ideologies and agendas won’t be an easy task. Under GST taxes would be levied on the basis of the Destination Principle which means goods and services would be taxed where they are finally sold or rendered.

As such many state governments have a fear that they may lose revenue or may have to forgo some portion of the tax they may otherwise be entitled to. Though the central government has put forward a tax revenue sharing program some States are yet not fully convinced of its feasibility. In the initial stages of its implementation the Indian economy is likely to witness high inflation rates and product prices may go up. The central and state governments may also have to incur unanticipated administrative costs thereby pushing up tax collection costs. There are also concerns that the tax burden on the low income group may go up. Furthermore the industries would also need some handholding to understand GST mechanism and to be able to follow them faithfully.

Finally implementation of GST may not be easy to begin with given the migration to a new and untested information technology (IT) system. Even more difficult would be tackling the complex taxes and integrating them into the new model. For example CENVAT conversion to an input tax credit mechanism could be complicated and excise duties exemptions conversion of specific tariffs into ad valorem duties etc would add further layers to the task. So one of the biggest challenges in the run up to the GST is setting up of a national IT framework that can act as a clearing house for the taxation of interstate movement of goods.