Seldom has the Indian monsoon been so awaited as this one, not just for the bountiful rains but for a successful parliamentary session that would see the approval of the constitutional amendment required for the most significant, game-changer indirect tax reform in India. The implementation of the GST will indeed be a landmark reform. It will be a reflection of renewed Centre-state relations and strengthening of the chord of federalism that focuses on cooperation as against self-interests.
The GST will be a “game-changer” as both the Centre and the state governments will sacrifice their fiscal autonomy in favour of the new tax. The giving up of the fiscal powers is unprecedented and reflects that the modern economy of today calls for increasing cooperation among the economic players for the common good, as against focusing on individual gains. The collective action is significant and the need of the hour, given that increasingly the transactions are becoming global in nature and not confined to the boundaries of the states.
GST is also a “grand bargain” in that while the States will get the power to tax services, the Centre will be able to levy taxes beyond the manufacturing point, across the full supply chain. At the same time, the tax provisions that restricted inter-state movement of goods within the country will now be dispensed with. These provisions are absolutely fundamental to modernising the tax system and making it simple and efficient. The current taxation system provides truncated powers to the Centre and the states and is not in tune with the modern businesses and the complex supply chains. The patchwork of taxes has led to Balkanisation of the common market and fragmentation of the supply chains. In today’s environment, one cannot apply tax to goods and services without extending it to the full supply chain. GST will be supply-chain neutral and will obviate the need for bundling or unbundling of goods and services for taxation purposes.
The states’ greatest apprehension has been loss of fiscal autonomy. Their concerns are understandable and the Constitution provides many safe guards to preserve their autonomy. First, the Constitution carves out big chunks of the economy, such as petroleum, alcohol, electricity, and real estate out of the GST base. The states will have full autonomy in taxation of these sectors. Second, the states’ demand for flexibility in setting the tax rates within a narrow band has also been accepted. Third, even the procedures outlined under the model GST law have been in accordance with what the States desired. Fourth, and most importantly, the GST has been defined under the Constitution (Amendment) Bill as “any” tax on supply of goods and services. By definition, both the governments are empowered to levy the tax in any way they consider appropriate. Further, the GST Council recommendations are not binding on the governments, giving the leeway to the States to choose any design they deem appropriate. If they deviate from the recommendations of the Council, the role of the dispute resolution mechanism will become very significant. It will act as a forum for addressing the disputes in a cooperative manner.
The GST requires a delicate balancing of the objectives of fiscal autonomy versus harmonisation or integration of plethora of taxes into one tax for one India. There will be many bumps along the way to the actual implementation of this landmark reform. Still, with continuing statesmanship of PM Narendra Modi, this model of cooperative federalism will prove to be a win-win proposition for the governments, the industry, and the Indian economy. The industry and consumers are anxiously awaiting this good and simple tax, which they would love (not dread) to pay.
The author is a tax policy advisor at EY
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
