The government’s decision to seek Supreme Court opinion on the proposed Constitutional amendments to facilitate introduction of the goods and services tax (GST) will help it overcome legislative hurdles to what is arguably the most ambitious revamp of India’s indirect taxes regime since reforms began in 1991. A Presidential reference to the Supreme Court will undoubtedly reduce the scope for any further litigation on the issue. This also pre-empts any action that some state governments may have planned to approach the Supreme Court to pre-empt the Centre’s move on GST on the grounds that the new regime would adversely affect their finances by curbing their flexibility in raising tax revenues. A ruling from the apex court on what is good in law will eliminate such delays in the roll-out of GST. The downside risk, however, is that the Supreme Court may take six months to a year before coming out with an opinion on the questions raised. If the finance ministry is serious about meeting its second deadline for rolling out GST by April 2011 (the first one of April 2010 having already been missed), it should seek concerted action from the law ministry as well to ensure that the apex court comes out with its opinion well before six months.
Legislative hurdles, however, are only one of the many challenges the finance ministry faces in rolling out GST. There is, therefore, need for concurrent planning on various fronts, instead of remaining content with sequential planning that is often a recipe for inordinate delays. Much before the Supreme Court furnishes its verdict on whether placing GST on the Concurrent List (which would give the Centre an edge over the states in matters of dispute) is better than an agreement between the Centre and the states (as recommended by the 13th Finance Commission), the finance ministry has to initiate several steps on several fronts to make GST a reality before April 2011. While manpower planning and strengthening of the information technology platform used by the tax collecting agencies are important imperatives, the most contentious of the upcoming challenges, of course, pertains to agreeing on a minimum of two rates of taxation: a lower rate for essential items and a standard rate for general goods, although this in itself is a deviation from the standard GST regime. Indeed, the proposed two-rate structure already envisages two additional rates: a zero rate for exempted goods and a special rate for precious metals. The fewer the rates, the better are the chances of keeping the standard rate for GST closer to 12 per cent. And the lower the standard rate, the easier it will be for the political leadership to make the new tax system acceptable to the people with virtually no pain of any additional tax burden on them. Another contentious issue that the Centre and the states must quickly resolve before the Supreme Court comes out with its opinion is the GST exemption limit for companies. There can be no dispute that for a successful GST roll-out, the exemption limit will have to be uniform for both the states and the Centre. While many states still insist that the exemption limit should be Rs 1.5 crore turnover for companies, the Centre wants that limit to be Rs 10 lakh. The economic logic of GST suggests that with a lower exemption limit, the coverage will be larger, providing the benefit of duty set-off to more entities, thereby further reducing the standard GST rate.
