The first part of a six-part series on GST
Fiscal autonomy of the states versus harmonisation continues to be a challenge that the government is endeavouring to resolve to keep its promise of a Goods and Services Tax (GST) implementation with effect from April 2011.
The key fulcrum of the proposed GST is the harmonisation of the Centre and state taxes to remove current distortions and achieve a common market. The finance minister’s recent statement in Parliament to the effect that the Centre would be willing to provide compensation for loss of revenue to the states in the initial years of the GST regime, provided they agreed to a common threshold, common exemption list and a mechanism to check deviations, is clearly indicative of the Centre’s intent to have a harmonised GST design. However, the states view this harmony as a constraint on their taxation powers and want to retain some degree of control to achieve their social and economic policy objectives.
A Constitutional amendment is a prerequisite to introduction of GST and the government is considering various options to deal with the issue. In this context, the Thirteenth Finance Commission (TFC) has suggested the possibility of levying the model (harmonised) GST pursuant to a tax agreement among the Centre and the states akin to the erstwhile Article 278 of the Constitution. The power of the states and the Union to make laws to impose the tax shall be subject to the terms of this agreement.
As an alternative, consideration is being given to amending the Constitution to bring in a Fourth List, which would grant concurrent powers to the Centre and the states for levy and collection of GST. The Fourth List would include the items to be taxed under GST and would be backed by suitable restriction on the Centre and the states to levy the taxes to be subsumed under GST.
The main difficulty with both these options is that they do constrain the autonomy of the states to levy indirect taxes.
One way to break the impasse and build consensus could be to have a harmonised GST, with flexibility allowed to states to levy certain supplementary taxes — for instance, supplementary excise on tobacco, petroleum, or any other products — to achieve their socio-economic objectives. The Council of Finance Ministers, the constitutional body suggested by TFC, would be entrusted with the responsibility of deciding any change in the initial design of GST. This Council could also be the filter for evaluating supplementary levies the states may wish to impose. The criteria for evaluation would include whether the levy was compatible with the Indian common market and whether it would have any collateral impact on the design of GST. This mechanism is a notable feature of the federal-provincial tax collection agreements in Canada and has worked well.
A ‘flawless’ GST does not envision such leeway. However, if the flexibility of levying supplementary taxes provides the requisite comfort to the states and achieves the delicate balancing of interests, the resultant economic benefits would be worth the tweak in the ideal design.
The author is partner, Ernst & Young. Views expressed are personal.