Who in the central government should be taking the final responsibility for implementing the proposed Goods and Services Tax (GST)? Most people would logically assume it is Finance Minister Pranab Mukherjee, who promised in his last Budget speech that GST would be in place from April 2010.
But ask anyone from industry or the tax experts advising the finance ministry on implementing GST, you are likely to get a slightly different answer. According to some of them at least, the finance minister may be responsible to Parliament to fulfil his promise on GST, but he has virtually no real control over the timetable for implementing the new taxation system.
Indeed, Mukherjee has been qualifying all his responses to GST with the statement that places the burden of delivering the new “fiscal baby” on the chairman of the empowered committee, Asim Dasgupta, who is also the finance minister of West Bengal. In other words, if Dasgupta fails to forge a political consensus among all the states on GST — and there are a couple of states that continue to toe a tough and intransigent line on the new taxation regime, Mukherjee may well take the convenient route of postponing the date of implementing GST beyond April next year.
Complicating the GST road map further are Dasgupta’s political worries. The equations between the central government and the Buddhadeb Bhattacharjee government in West Bengal are no longer as cosy as they used to be, thanks largely to the strained relationship between the Communist Party of India-Marxist and the United Progressive Alliance government at the Centre. Dasgupta also has to worry about his own party’s electoral fortunes that would be put to test in about a year and a half from now.
To pin all one’s hopes on Dasgupta to deliver the new fiscal baby may not therefore be a sign of either pragmatism or prudence. Politically also, the prospects of GST may become a little dim, if the window of opportunity offered till the end of 2010 (there are no assembly elections till then) is not used to push such fiscal reforms through by April 2010. Yes, the GST system can start even in the middle of a fiscal year, but there will be complications that may only harden the stance of those who are opposed to it.
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Within the finance ministry, only a few officials have the experience and the necessary domain knowledge for putting in place as complex a taxation system as GST. Tax experts privately admit that the last finance ministry man who knew GST was Parthasarathi Shome, advisor to Palaniappan Chidambaram, when he was the finance minister. Revenue Secretary PV Bhide is a career bureaucrat and not a taxation expert. Apart from him, only a few senior officers in the revenue department have the requisite knowledge of GST.
If an expert committee has recommended that the revenue-neutral rate for GST could be closer to 11-12 per cent, there is no meaningful debate on the number. Instead, bureaucrats are busy debunking that number though it is based on a survey. Yet, if the revenue-neutral tax rate for GST is 11-12 per cent, it could be a winner right from the start as governments could then package GST as a measure that effectively brings down the incidence of indirect taxation, although the new system would mean a wider coverage of new areas under the tax net. If one takes into account the Finance Commission’s assurance that all revenue losses to be suffered by the states on account of GST would be compensated by the Centre for the next five years, there is no reason why the new GST rate should not be somewhere between 11 and 15 per cent, according to tax experts.
This could also be a good argument for enforcing a single-rate GST, a proposal that has been given a quiet burial on the ground that governments should retain the discretion of placing some items under a low band of tax rates and subjecting other items to a higher duty. It is not often realised that a single-rate GST, with no exemptions, will have such a far-reaching beneficial impact on the economy and its efficiency that the apparent advantages of two rates of GST would be more than neutralised. In any case, the spirit of GST is to eliminate discretion at all levels.
In contrast, countries that have benefited from switching over to GST (notable among them are New Zealand and Canada), managed the transition largely because they had a political leadership, which gave unequivocal support to the new taxation system and put in place a large autonomous body in charge of planning and implementing it over a stipulated time frame. In India, neither the committee nor the finance ministry has any team in place to plan and manage the transition. China, which has just begun talks on moving over to GST, is already busy putting in place a strong team of experts and technocrats.
Is it then time to entrust the final responsibility of GST to an empowered team of tax experts and professionals? Or should the 13th Finance Commission be the appropriate body for that?