Sukumar Mukhopadhyay: One national GST is a bad idea

A combined GST does not exist in any federal country, except Australia.

Vague statements have their own advantages. When politicians make them, they serve the purpose of generating a debate on the subject from which, at a later stage, a view can be formed. The finance minister's Budget (2006) speech indicated that there is "a large consensus that the country should move towards a national level goods and services tax (GST) that should be shared between the Centre and the states" and the target date is April 2010. This statement has not given a road map but has initiated the debate on national GST. Some elaboration on the issue has expectedly come from official sources. A national GST has to proceed along the following sequence:

A. Making a central level GST by combining cenvat and service tax (central GST)

B. Making a state-level GST by combining VAT and service tax (state GST)

C. Combining (enmeshing) the two. (national GST)

My view is that steps A and B are the best; C will be a disaster. It is neither desirable nor practicable. We must stop after steps A and B. We do not need C.

Let's looks at step A first. It is the easiest thing to do and we are heading towards it steadily. The march is on since 1986, when we started with modvat for goods, enlarged it to other goods year to year, extended it to include capital goods in 1994, introduced service tax in 1994, extended goods and services to cover almost all goods and services, and introduced cross credit of input tax for service and goods. The tax rate for service tax has moved from 5 to 10 to 12 and may go to 14 in 2007. In 2008, it can be 16. All that needs to be done is to make cross credit rules more comprehensive and simple, reduce exemptions drastically , have a flat tax in central excise and gradually remove all internal hitches.

B can be achieved in the following way. We already have VAT in most states. Those eight that have not implemented VAT may have to be persuaded to join, and the process is already on. Thereafter, it is necessary to bring under VAT those few commodities that have been still left out. The CST has to be brought down to nil. Inter-state credit of input duty will have to be introduced. Next comes integration with service tax, which now can only be levied by the Centre but collected by both the centre and states. At present, Article 92C of the Constitution limits the power of levying service tax to the Union. This Article needs to be amended to extend the power of levy to the states, too. But an easier way is for the centre to levy the tax and allow it to be collected by the states. The list of service taxes, however, has to be worked out between the Centre and the states. Care has to be seen to ensure that the services are of the nature that have no inter-state ramifications. Also, it should be ensured that the same service is not taxed both by the Centre and the states. Next comes cross-credit of input tax paid on goods and services. I would say, however, that the state GST should remain at state VAT. Combining service tax with VAT at the state level is fraught with innumerable problems.

However, combining A and B is neither desirable nor practicable. Those who are batting for a combined GST must prove how a combined GST is better than two parallel GSTs. So far, no one has done that. Those who are writing in favour of it in India seem to be more enamoured of the concept of a combined GST than logically clear about it. My arguments against the combined GST are the following:

Revenue: total collection of revenue will remain the same.

Constitution: The Constitution does not permit the Centre to charge sales tax. If the Constitution is amended to allow Centre to charge sale tax, it will completely ruin the fiscal federalism, which is the corner stone of Indian polity.

Changing the Constitution on the above lines will be resisted by the states, which are ruled by different parties. Even the introduction of VAT has become politicised. Such a fundamental change will invariably be opposed stubbornly by many states.

Even if a solitary state goes to the Supreme Court on the grounds that such an amendment will change the "fundamental structure" of the Constitution, it is likely to succeed. In any case, a clear decision will take several years.

A combined GST does not exist in any federal country, except in Australia, which is certainly not an example to follow. It is not there even in Canada, where the sales taxes are still collected by the states. Quebec has it own Quebec State Tax (QST) collected by itself and even the Central GST is collected by Quebec. In Brazil, the federal VAT and state VAT run parallel with different tax bases. Other countries, where there is a combined GST, are unitary States and not federal.

Administratively, too, it will be a nightmare. It will involve merging all Central and states departments' officials in the tax department belonging to different services with different positions. It will be unthinkably complicated, impossible to implement and highly litigated.

To ascertain how big the "large consensus" (para 155 of Speech) is, the FM should publicly declare what steps will be taken for national GST. Let there be a national debate at different levels involving all the states, economists working in the government and outside, present tax officials, past tax officials, media, chambers of commerce and industry and so on. The opinions given directly to the government should be made public. Only then shall we know if there is a consensus or not.