The first Discussion Paper on Goods and Services Tax (GST) in India put out by the Empowered Committee of State Finance Ministers (EC) must be welcomed. It reiterates the commitment to evolve GST. Even more important, it helps initiate a discussion on the new tax regime with various stakeholders. It also traverses some distance in clarifying the design and implementation aspects of the new tax regime. Despite these reasons, the reaction to the Paper has been muted. The reasons for this must be found in the fact that there is not much in the Paper that is not already known, and it does not go far enough in clarifying many issues not known. Nevertheless, the initiative is important and the interaction of stakeholders with the EC, hopefully, will gain momentum as various issues get clarified.
The Paper lays down the basic features of the GST structure and implementation. There will be dual GST, one at the Centre (CGST) and another at the state level (SGST); each taxpayer will be given a standardised PAN-linked identification number; there will be multiple statutes and separate tax administrations, though attempts will be made to harmonise the definitions, classifications and procedures. While the CGST will have a turnover threshold of Rs 1.5 crore, it will be Rs 10 lakh for SGST, but small businesses can pay a simplified tax at 0.5 per cent of turnover and only those with turnover above Rs 50 lakh will become a part of the SGST chain unless smaller dealers volunteer to be a part. The Paper gives the list of taxes subsumed under CGST and those under SGST. In the case of the latter, entry tax in lieu of octroi will continue to be levied separately and so will be stamp and registration fees. In the case of purchase tax, the decision is that the Centre should give adequate and continuing compensation if this has to become a part of SGST. As regards sumptuary items, alcoholic beverages will be kept out of GST, but states can levy separate sales taxes and excises on them; in the case of tobacco products, states can levy GST, but the Centre will levy the sin tax. Motor spirit and high-speed diesel will be kept out of SGST but will continue to be taxed as at present with a floor rate.
Besides a list of exempted goods, SGST will be levied at two rates — a lower rate on necessary items and a higher general rate, and a similar rate structure for CGST is recommended, but the rates are yet to be finalised. The most important clarification is in dealing with inter-state transactions. The IGST model ensures that the input tax of SGST will be transferred by the exporting state to the importing state, and the SGST portion of the IGST paid to the central agency by the exporter will be credited to the importing state by the agency. Thus, the importing dealer can fully credit the tax paid at earlier stage, the tax becomes fully destination-based and seamless trading throughout the country ensures a common market.
Unfortunately, international experience does not offer much guidance as most GST systems are centralised in terms of levy and collection with the exception of Brazil and Canada. The Brazilian experience is not worth emulating and Canada has four different systems. In any case, each country has to design its own tax policy, keeping its political and socio-economic conditions in view. But, surely, it is important to get the fundamentals right. From this perspective, there are a few issues of concern. First is the decision to levy the tax at two rates. It is of little comfort to say that there are countries levying the tax at multiple rates. This will lead to classification disputes. Levying different rates of taxation may not serve the cause of equity, for it is difficult to make a priori judgment relating to the ultimate payer. Furthermore, when the total impact of the tax is considered, if the measure leads to lower economic activity and lower employment, it may hurt rather than help the cause of equity. Thus, while the ultimate redistributive impact of the measure is uncertain, it will increase administration, compliance as well as economic costs. Second, in the prevailing state VAT system, distinction is made between inputs and outputs and the former is taxed at a lower rate. Since under VAT and GST, input tax is in any case credited against the tax payable on the outputs, the differential rate only reduces tax compliance and, hopefully, in the new system this will be avoided. Third, from efficiency point of view, it is helpful to subsume all consumption taxes, including entry tax and octroi, and levy an additional 1 per cent GST and distribute the money to local bodies as Gujarat has done.
Considering the fact that there have been considerable deliberations since the announcement to levy GST was made in 2006-07, the Paper falls considerably short of expectations. A critical prerequisite for GST is the creation of a central agency to function as a clearing house and much remains to be done to create the IGST mechanism and the information system. Both the Centre and states have to extend service tax to all services, and in respect of those having inter-state scope, the states need to negotiate and settle the revenue accrual mechanism. Settling the GST rates is another major challenge and surely the central government will have to provide the comfort of insurance against revenue loss. Creating a mechanism to monitor implementation and thereafter providing the mechanism to negotiate and settle disputes is another area to work on. It is hard to tax areas like housing and the financial sector, and determining their base has to be done carefully. Administrative reorganisation and capacity-building for tax administrations are equally important and these are yet to begin. It is also necessary to prepare publicity material relating to complex issues and also work out the details of transition.
The Paper is a good beginning, but the challenge of implementing GST in India is formidable and much work remains to be done in the coming months. Hopefully, the stakeholders will take the opportunity to interact proactively to get the fundamentals of the GST design right to evolve a broad-based and more efficient consumption tax system.
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The author is the Director of National Institute of Public Finance and Policy. Views are personal