If a dual GST is the only one that is acceptable to the states, tax rates will have to be harmonised to prevent leakages by diverting sales to low-tax jurisdictions.
Sukumar Mukhopadhyay
Former Member, Central Board of Excise & Customs
‘A dual GST is the best solution for a country like India and, in any case, it is a myth that it will deliver lower revenues than a unified GST’
Though the government hasn’t made any official announcement as yet, there seems to be a general acceptance that a dual Goods and Service Tax (GST) is better than a single one. Given a choice between single and dual GST, I would go for the dual GST. We have to keep in mind that India is a federal country with disparate states. Comparing it with Australia or Canada does not make much sense.
What does single GST entail? It means that central excise duty, service tax and sales tax will be merged together and collected as one single tax. It has been argued that this will increase revenue and create a common market. Nothing can be further from the truth. Such a proposal is neither economically desirable nor administratively practical. The reason are given below:
- The Constitution does not permit the Centre to charge sales tax. Nor does the Constitution permit the states to charge central excise duty and service tax. If the Constitution is amended to combine all three taxes in one list, (the Union List or the State List or the Concurrent List), it will mean that the present federal structure will have to be fundamentally changed.
If it goes to the Union List, the Centre will levy everything. The states are unlikely to agree to that. If it goes to the State List, the Centre will not agree to such a loss of fiscal power. If it goes to the the Concurrent List, there will be complete chaos as no one can control the power of states to increase rates depending uopn their whims and fancies.
In any case, it will completely upset the present concept of fiscal federalism, which is the cornerstone of Indian polity. It is an accepted constitutional position that the ‘fundamental structure’ of the Constitution cannot be changed by an amendment of the Constitution. Besides, a clear decision will take several years.
- Except for Australia, which is not really comparable to India, a unified GST doesn’t exist in any federal structure. Other countries which have a combined GST are unitary states. Canada has single federal GST but it also has a states’ sales tax that actually makes it dual. Brazil is not an example of single GST either.
- Who will collect the GST will be a highly-contested issue. The states will not allow the Centre to collect and distribute the taxes. If the tax collection services of the Centre and the states are merged, as will happen in case there is single/unified tax, litigation will go on for decades and the system will not function properly.
- The total collection of revenue will remain the same under both a single/unified GST and a dual one. It is a myth that revenue will increase under a single/unified GST. Revenues increase only if the tax base is widened and not when two existing bases are merged.
Dual GST will be the most practical system for federal India. Since the Centre already levies Cenvat and a service tax, a Central GST can work very well, though some more harmonisation can take place. Similarly the state GST can function well with some improvements in introducing symmetry.
If one adopts a pragmatic approach and doesn’t get enamoured by pure theory, one has no option but to accept the dual GST. A single/unified GST is a singularly bad idea
Satya Poddar
Tax Partner, Policy Advisory Group, Ernst & Young, India
‘A single GST would be the best for India, but if a dual GST has to be adopted, it must have all the essential elements of a unified GST’
A single/unified GST, with revenue-sharing between the Centre and the states would, without a doubt, be ideal for India. If levied on a comprehensive base at a single rate, it would rid the system of virtually all economic distortions and classification disputes.
Replacing 36 taxing statutes (of the Centre and 35 states and union territories) with only one would lead to a substantial reduction in compliance costs and free up resources for other more productive pursuits. It would make common market for India a reality. Goods and services would move freely within India with no checkpoint, internal-tax frontiers or other barriers to trade.
Indeed, such political economy compromises have been adopted by China and Australia. China moved to a centralised VAT while sharing revenues with the provinces — ensuring that provinces got as much revenues as under the prior arrangements, plus a share of the increment. In Australia, the GST is a single national levy and all the GST revenues collected by the Centre are returned to the states.
The Harmonised Sales Tax (HST) adopted by three provinces in Canada (Newfoundland, New Brunswick, and Nova Scotia) is also in essence a unified GST. It is a tax with one rate, one base, and one set of rules.
States in India are unlikely to favour such a compromise, as has already been revealed in their preference for the dual GST. The political pundits would argue that a single/unified GST would severally constrain the fiscal autonomy of the States, which is so crucial to the federal structure of our Constitution. It goes without saying that the power to govern and to raise revenues go together.
But, fiscal autonomy does not preclude the Centre and the states to voluntarily agree to harmonise their tax systems to minimise economic distortions and simplify compliance and enforcement.
A single/unified GST would entail complete harmonisation tax rates, base and administration. The first two elements could be viewed as important levers on which the states would want to have some degree of control to achieve their policy objectives. However, international experience suggests that making changes to the GST base is not a suitable instrument for social and economic policy. While there are intense debates on the tax base at the time the tax is introduced, changes in the base have been infrequent once the tax is enacted. This has especially been the case where the tax was initially levied on a broad and comprehensive base.
The Indian experience with inter-state variation in tax rates has also not been encouraging. Even minor variations lead to leakages in the form of diversion of sales to low-rate jurisdictions. For example, year 2005 witnessed a substantial diversion of gold and silver sales to Rajasthan where the VAT rate was set at 0.25 per cent compared to 1.0 per cent elsewhere.
Such variations would prove to be even more problematic in taxation of services such as inter-state telecommunication, transportation, credit cards, banking and insurance. There is no unique place of consumption of such services, and any inter-state variation in tax rates would encourage manoeuvring to minimise the tax.
Thus, harmonisation of both tax base and rates should be the ultimate goal of GST reform. A single/unified GST would assure this outcome. The dual GST could also take us there, provided it has all the essential elements of a unified GST.
