The release of the first discussion paper on the introduction of a goods and services tax (GST) is a welcome relief in that the country is now a step closer to the much-needed reform in its indirect tax regime. The 57-page document, produced by the empowered committee of state finance ministers and made public on Tuesday, however, leaves no one in doubt that the government will not be able to meet its target of rolling out GST from April 2010. Several legislative hurdles, at the Centre and in states, have to be cleared and a consensus on the key features of the new taxation system is yet to be reached among all the state finance ministers. For the finance ministry and the empowered committee, therefore, the task of putting in place a GST system has just begun. The tougher part of the battle lies ahead. Several state finance ministers are yet to be convinced that while they lose their discretionary power of taxation under GST, the benefits to industry, trade and consumers will be so large that the economy will get an overall boost to give them more revenue in spite of a lower and uniform rate of taxation under the new system. They are, though, assured that for about five years after the introduction of GST, they will be compensated for the revenue losses likely to arise out of the new taxation system, a similar incentive that encouraged them to switch over to the value-added tax system in 2005.
Admittedly, the pace at which the committee has worked so far has been tardy. It was in 2007 that the government announced its intention to roll out GST from April 2010. Over 30 months later, all we have is the committee’s first discussion paper on the subject. Nevertheless, the discussion paper serves a useful purpose by outlining the broad contours of a dual taxation system, in which the central GST will subsume among other things the central excise duty, additional excise duties, service tax, surcharges and cesses, while the state GST will replace value added tax, entertainment tax, luxury tax, state cesses and surcharges. Note that the committee has already made a political compromise by excluding octroi from the purview of the state GST, a move that might dilute the beneficial impact of the new taxation system and, worse, may set an unhealthy precedent for even more exclusions and exemptions. The committee’s proposal that the new taxation policy will have a two-rate structure — a lower rate for necessary items and a standard rate for general goods — is in itself a deviation from the standard GST regime. Indeed, a scrutiny of the discussion paper reveals that the proposed GST will in effect have four tax rates, including a special rate for precious metals and a zero rate for exempted items. With multiple rates of taxation and several exempted categories of products and services, administering the new system will be fraught with many problems and complexities resulting in classification disputes, defeating thereby one of the major goals that the GST regime seeks to achieve. Not surprisingly, therefore, the standard GST rate for the Centre and the states could go up to 16-18 per cent, largely to compensate for the revenue losses arising out of exemptions and lower rates. The committee and the state finance ministers would do well to ponder over the advantages of a lower standard rate with the least number of exemptions. Politically, too, a lower rate will ensure easier acceptability of the new system.