That the government is finally moving forward on the goods and services tax, or GST, is important and welcome news. It has been reported that the Centre has chosen to try and meet some of the states’ crucial demands on their fiscal independence and diluted the GST proposals accordingly. It is possible that the watered down version of the GST will be implemented soon after the 2014 general elections. This means, politically, that the Congress-led United Progressive Alliance (UPA) may not be given sole credit for this reform — something that will have played on the minds of the chief ministers, especially from the Opposition Bharatiya Janata Party, who were originally blocking the move.
The Centre has reportedly agreed, instead of fixing a uniform GST rate across the country, to set a floor rate for the tax, with a narrow band within which states will retain their right to control local taxes. The principle of fiscal federalism has been respected to the degree that states will be allowed to opt out later, if they so desire. Most importantly, as had happened with the introduction of the state value-added tax, the roll-out of the GST will be in a phased manner. States eager to enter the GST framework can do so immediately; once a demonstration effect is established, others will no doubt join. This was a crucial innovation to the GST framework that should have been applied much earlier. If it had, it would have speeded up the negotiations considerably.
The GST is not a magic bullet for enhancing government revenue. However, the point behind the GST remains that it is supposed to ease compliance and transparency. If so, then coverage will increase and evasion will decline. States will also be able to tax services, bringing India’s tax system into the 21st century. Questions, however, still remain. First, has the UPA, known to be dilatory and inefficient when it comes to administrative reform, moved quickly enough to build the backbone required to make GST payments easy and transparent? This cannot be allowed to wait for a full political consensus to form. Second, is whatever agreement the Centre has hammered out with states robust enough, leaving enough on the table for both parties – New Delhi and state capitals – to feel that they can go ahead with it, even if the political discourse turns even more fraught as general elections draw closer? While the final implementation might be left till after the 2014 elections, the new framework should already be ready, in principle and in effect, by then. Finally, the biggest question of all will still remain open. Are the compromises that the Centre has finally made to freshly empowered and emboldened state governments so deep and wide that the GST itself loses much of its meaning, and its power? An answer to that question will have to wait until the tax goes into effect.
Till that point, it is worth mentioning that the design of the GST has been too long delayed and, as with some other recent acts of the UPA government, should have been put into place a long time ago. The contours of any agreement were well known for some time — state governments would not have unilaterally given up all power over taxation, nor does the UPA have the political strength to force them to do so. The UPA must now move forward to make the transition to the new tax scheme clearer and easy for state administrations to adopt.