This article assesses the current state of play in regard to the dual GST that is scheduled for implementation next year and highlights some of the key unfinished tasks in that regard.
While piloting the Finance Bill 2010 for consideration in the Lok Sabha late last week, the Finance Minister reiterated the Government’s resolve to introduce the GST from 1st April 2011. The relevant portion of the Finance Minister's speech is reproduced below:-
“I have indicated my intent to introduce GST in the country with effect from April 1, 2011. Centre is closely engaged with the Empowered Committee of the State Finance Ministers in finalising the GST design. Some of the states apprehend that they may lose revenue in the initial years of the GST regime. Centre is willing to provide compensation to the States for these initial years, provided there is agreement on the broad framework for a common threshold for Goods and Services between the Centre and the states; common exemption lists between the Centre and the states; mechanism to check deviations and acceptable level of overall GST rates. The design and modalities of providing this compensation would be worked out in discussion with the States and the Empowered Committee.”
As can be seen, the speech does reiterate the clear intent of the Central Government to introduce the fundamental tax reform measure of the GST with effect from 1st April 2011. This by itself is very welcome since there has been a fair amount of debate recently as to whether the Government is firm in its resolve to meet this deadline. The reiteration should therefore reassure several stakeholders, including business, as to the seriousness of all the key players in that regard. The other takeaway from the speech is with regard to the fact that there is an assurance from the Centre that States would be compensated for possible revenue losses in the initial years of the GST regime provided there is agreement with regard to the broad framework of the GST and some of the specific elements in that regard, as referred to in the extracted portion of the speech above. It would therefore be fair to say that the speech is significant both for the reiteration of the timeline as also for setting out the unfinished business regarding the GST.
Before we look at the above elements that need to be addressed, it must be noted that the Centre already appears to have finalised and forwarded to the Supreme Court, through a Presidential reference, a set of questions on which it has requested an appropriate response as regards the manner in which the Constitution of India ought to be amended, in order to usher in the dual GST which, as is now well known, will comprise both a Federal or Central GST on all goods and services as also a parallel State GST on the same. The reason for the Presidential reference is because of the fact that there is no one right way to amend the Constitution and since there are several options available in that regard, it is only appropriate for the Supreme Court to opine on how these amendments may be most efficaciously carried out, keeping in view the federal polity of the country. Now, it can be easily appreciated that this reference to the Supreme Court could potentially impact the timeline for the introduction of the GST. It is however possible for the Court to answer the reference in time for Parliament to thereafter debate and carry through the amendments, in the manner suggested, in the monsoon session that will be convened in the second half of the year. Thereafter, the individual State assemblies would need to pass these amendments as well. It is probably therefore correct to suggest that if the GST is to come about by April 2011, the Constitutional amendments must necessarily be effected in the aforesaid timeframe. This is key to the whole process.
Coming now to certain other key tasks, it is worthwhile noting that there is no agreement as yet with regard to several basic design elements of the GST. Indeed, while the First Discussion Paper on the GST has been put out by the Empowered Committee, there has been no consensus and agreement on some key design elements envisaged thereunder. Further, the comments and responses put out by the Centre in relation to the above Paper suggest a significant divergence of views between the two key players i.e. the Centre and the States. In addition, the Thirteenth Finance Commission has, while accepting the recommendations of its own task force on the GST, incorporated a specific chapter on the GST in its latest report published recently and it is seen that the views of the Finance Commission and the Centre appear similar on the key design elements. Hence, it is today the position that while the Centre and the Finance Commission visualise the GST in a particular fashion, the states see it in materially different terms. The differences relate to the following:
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Several of these elements are referred to in the Finance Minister’ speech. As can be seen, these elements are the basic building blocks of the GST and indeed the test of a good GST is how these design elements have been appropriately addressed. The challenge is therefore in arriving at common ground and in agreeing on what the relevant GST rates might ideally be and for the other elements to be fashioned around those agreed rates. Early agreement on these matters is hence critical and the envisaged mechanism is for the Finance Minister and his team and the EC to carry out extensive consultations and strive for resolution in a few months from now. It is only then that we would meet our tryst with the April 1 deadline. The next few months will hence prove decisive.
The Author is Leader Indirect Tax Practice PricewaterhouseCoopers Email: pwctls.nd@in.pwc.com
(Supported by Rahul Renavikar)