The evolution from VAT to GST is theoretically a desirable progress and the industry welcomed it like never before hoping that it would be a comprehensive and a seamless GST fostering development of a National Common Market, minimization of compliance cost and uniformity of exemptions across all jurisdictions. That hope is going to be belied by the structure of GST that has now been proposed in the Constitution Amendment Bill 2011. Quite clearly the federal structure and the States' resistance to part with any fiscal power have weighed much more than the considerations of global best practices. While the Central Government is not oblivious to the defects in the proposed system, it has not been successful in persuading the Empowered Committee of State Finance Ministers to look beyond their immediate self interest. There are three major concerns which are discussed below.
The Bill proposes introduction of a new Article 246A empowering the Parliament and the State Legislature to levy GST on goods and services excluding the petroleum products, alcohol, tobacco and tobacco products. A large chunk of the economic activity goes out of GST. This sector would receive duty paid inputs, both goods and services, on which the credit of duty paid will not be allowed. This will lead to cascading. More over the issue is not just one of taxation of these products but also of having a comprehensive GST. The system itself will be muddled if part of the old system continues with the new system. The beauty of GST was its comprehensiveness. If that is not achieved, then much of the sense in having GST is lost.
The States have possibly not agreed to include this sector for the fear of loss of revenue but overall picture could be kept in view and the rate of tax adjusted accordingly. One suspects that the actual reason for the exclusion of these sectors has more to do with the anxiety of the States about possible dilution of their fiscal autonomy.
The second issue is about the continuation of other taxes such as electricity duty, entry tax and octroi. There is no justification for electricity duty to continue. Regarding local and municipal taxes there is also equally no reason to continue. The States can share some of their revenue collection with the local and municipal bodies rather than allowing them to create all round nuisance in the shape of blockade for vehicular traffic and other activities.
The third issue is about the creation of the GST Council consisting of the Finance Minister of the Centre and the States.
The Council shall recommend to the Union and the States on the taxes to be subsumed in the GST, rate of tax, threshold and any other important matter. The goal is to achieve the development of a harmonized national market for goods and services and a harmonized structure of tax.
Issues will be decided by the consensus which means unanimity. This will make it extremely difficult to reach a decision as a single dissenter can derail the process. So majority should be substituted for unanimity.
There are other issues regarding different rates of duty and divergent threshold but these are not part of this Bill.
What is quite disconcerting is that the industry and the trade have not been consulted before deciding on such an epoch making tax system.
The industry and trade have always been asking for a seamless and comprehensive GST. What they are being given is only a half product and not the real thing. However the Bill will go to the Standing Committee of the Parliament when there will be an opportunity for consulting the industry and the trade.
I also hope that the experts on the subject are also consulted and decisions are not taken in a hurry and predominantly on political considerations. The touch stone of the success of a tax lies in working out the impact on revenue, on the tax payers in respect of their business decisions, resource allocation, refund etc and also on the efficacy zero rating of exports. Once the defective GST is implemented, the GST Council will be all powerful and the Union Finance Minister will be cornered. So this is the time to work out a proper approach.
E-mail: smukher2000@yahoo.com
