:: Paranjoy Guha Thakurta

Goods & services tax needs streamlining

Paranjoy Guha Thakurta

Sept.21 : Until a few years ago, there was a huge amount of opposition from different states to the implementation of a value-added taxation (VAT) system on goods to replace the inefficient and corruption-prone cascading-type taxation system. Now that almost all the states in the country have moved towards VAT, there is a realisation that the new system is not just better than the old one, but also that the expected fall in revenue collections was only a temporary phenomenon that would be compensated for by the Central government. Despite the experience of the past, there is once again considerable apprehension about having a single goods and services tax (GST) rate or, at best, just a few rates.

In his budget speech delivered on July 6, Union finance minister Pranab Mukherjee said his ministry would play a "catalytic role to facilitate the introduction of GST by April 1, 2010, after due consultation with all stakeholders". He said the broad contour of the GST model is that there would be two GSTs, one for the Centre and the other for states, which would be separately legislated by the Union government and state governments before the new tax would be levied and administered. Mr Mukherjee complimented the Empowered Committee of State Finance Ministers led by the West Bengal finance minister Dr Asim Dasgupta for "their untiring efforts" in preparing the roadmap and design of the GST "in keeping with the principles of fiscal federalism enshrined in the Constitution".

On September 16, after a meeting of the committee, Dr Dasgupta said a broad consensus had been arrived at on having three rates of state GST. He added that over the next two months, working groups of officials would draft a model GST law and suggest changes that need to be made in the Constitution of India. The committee is scheduled to meet the finance minister on October 8.

Though Dr Dasgupta did not specify the likely GST rates, it was reported that the first rate would be a "standard" or a "regular" rate, between eight per cent and nine per cent, the second rate would be lower, at 4-5 per cent for articles of "mass consumption" that would be selected by the states, while the third rate would be a one per cent tax rate applicable to precious metals like gold and silver. States and Union Territories are expected to be given flexibility to grant special benefits to "goods of local importance".

There appears to be a certain convergence on taxation of transactions involving interstate movement of goods and services, although details of the mechanism are yet to be announced. Wealthier states like Maharashtra could have conflicts of interest with relatively poorer neighbouring states like Madhya Pradesh, while there could be disputes on how to tax the sale of easily transportable products such as prepaid mobile phone cards and packaged software.

While the general commitment to meet the deadline of April 1, 2010, has been reaffirmed despite reservations from states such as Madhya Pradesh, Tamil Nadu, Rajasthan and Chhattisgarh, there are still a number of contentious issues that need to be resolved. Former finance minister Yashwant Sinha, who was present at a meeting of finance ministers of Bharatiya Janata Party-ruled states, said there were doubts about revenue losses and whether the new tax would increase prices of essential goods. A consensus is yet to be reached on whether GST would be exempt on foodgrain or levied at a low rate.

As BMR Advisors, a firm of tax consultants, has pointed out, while the GST structure has been described as a "two-rate" structure, it appears that multiplicity of rates would continue. The seven rates that can be identified at this juncture are:

A nil rate for "exempted" goods,

A special rate for precious metals,

A low rate for essential commodities,

A standard rate,

A rate for goods of local importance,

special rates for tobacco, alcohol and petroleum products (and it is not clear whether GST will be applicable on such goods), and

rates for services which are yet to be classified and announced.

This is, indeed, a far cry from a single rate system for GST that was originally envisaged, although the Central GST is expected to be a single tax rate of tax (around eight per cent). Since Central Sales Tax is an origin-based, non-rebatable tax, it is incongruent with a VAT system and has to be phased out. The critical issue in this context is that of compensating states for resultant revenue losses - till the end of March, claims worth more than Rs 5,000 crores had been received and over four-fifths the amount had been released.

Thirty-three of the 28 states and seven Union Territories in the country have implemented VAT so far, and over the last three years total revenues have gone up by proportions varying between 20-24 per cent each year. Despite the improvements made in the tax regime, the system remains complex because of policies, conditional and unconditional exemptions as well as on account of multiplicity of rates. The finance ministry's Economic Survey released on July 7 pointed out: "…GST would facilitate greater vertical equity in fiscal federalism, reduce cascading nature of commodity taxes and through shift to value addition as the basis for assessment, unify the market for goods and services".

We are still some distance away from clearing up the tangled maze of Central, state and local taxes that are irrational and provide considerable discretionary scope for corrupt practices. Moreover, the existing convoluted tax regime hinders the unification of the Indian market. Whenever there is talk of economic reform, there is little mention of a boring and convoluted topic such as the goods and services tax. But this is arguably the single biggest economic reform initiative that needs urgent implementation.

Paranjoy Guha Thakurta is an educator and commentator