The Goods and Services Tax (GST) has been pegged as the most radical tax reform in India. It is estimated that the introduction of GST would contribute to the Gross Domestic Product anywhere between 0.9 and 1.7 per cent. However this will only be possible if the reform is carried out on the basis of principles of simplicity, equity and minimal exceptions or distortions.
The GST was proposed to be rolled out by April 2010 but has missed several deadlines since then. This was primarily due to the inability of the Centre and state governments to arrive at a consensus regarding different issues.
While the precise impact of GST would depend upon the final shape the legislation takes, the official documents released so far have already thrown up a plethora of concerns that can significantly impact the design and framework of the GST. These are discussed below:
The Dispute Settlement Authority (DSA) was proposed to be set up for adjudicating matters referred to it by a state or the Centre. These could pertain to deviation from the recommendation of the GST Council, as there could be instances of disputes between Centre and state, or between two states regarding status of a transaction.
The Parliamentary Standing Committee had earlier opined that the provision of GST settlement authority should be omitted as it would have the effect of overriding the supremacy of Parliament and the state legislatures. It was suggested that the GST Council should be empowered to decide about the modalities to resolve disputes arising out of its recommendations.
The decisions of the GST Council were thus to be taken on the basis of consensus. However, keeping in view the diversity in socio-economic interests of the states, achieving such a consensus seemed difficult. The Committee, therefore, recommended voting instead of consensus to resolve disputes arising out of the recommendations made by the GST Council.
It seems likely that in the absence of a separate resolution mechanism to handle such disputes, the course of normal judicial process will be followed. This can, in turn, result in a prolonged resolution process and swell the already existing pendency in courts of law.
Inclusion of petroleum products and alcohol under the ambit of GST has been a matter of intense deliberation since the inception of discussions around the proposed GST framework. The States have cited several reasons against their inclusion under GST, the most important being the fact that these products are heavily taxed currently, and are major source of revenue for the states. Therefore, the states would stand to lose substantially if these products are brought under GST.
But the Centre has been in favour of inclusion of both petroleum products and alcohol under GST. The Parliamentary Standing Committee report submitted to the Centre in August 2013 also states that these should not be constitutionally debarred from the ambit of GST. This view also finds unequivocal support from all leading trade bodies and industry in general.
However, with the recent reiteration by the Empowered Committee of state finance ministers that these should not come within the ambit of GST, it appears that the existing taxes on these products should continue to be made applicable even under the GST regime.
However, a parallel tax regime on these products would substantially defeat the purpose of the GST framework of rationalizing the overall indirect tax structure for India. While there would not be any GST on these products, the inputs (raw material, capital equipment, labour etc) would continue to suffer.
The existing indirect taxes like excise, VAT, service tax, entry tax etc. would continue and the said sectors will have to deal with complexities surrounding dual taxation and ineligibility to claim input tax credits, among others.
This, however, does not mean that the concerns of states about potential impact on revenues are completely unfounded. These can largely be addressed by having a higher rate of GST on these products or taking a recourse to additional non-credible levies, as suggested by the Standing Committee and the task force constituted by the 13th Finance Commission.
This would be in line with international practice in several countries like Australia, Canada, Singapore and Brazil. Specific rules could be made to ensure that concerns such as potential misuse of GST credits are adequately addressed.
For instance, it could be provided that credit would only be available to industrial customers and not to individuals or specified categories of users. An effective compensation mechanism for states who suffer revenue loss will also go a long way in persuading the states to move in this direction. Despite the debate, it is imperative that there are no constitutional restrictions to include these products under the GST. Exclusion of these products from GST is certainly not desirable and clearly requires a rethink.
Fiscal autonomy of the states versusharmonization continues to be a challenge that the government is endeavoring to resolve in order to keep its promise of rolling out the GST. Several states are opposed to the shift in the balance of fiscal power between the Centre and the states that the proposed GST regime is likely to cause.
The GST would subsume most of indirect taxes like excise duty and service tax at the central level and VAT on the state front, besides local levies. Hence, states are of the view that the implementation of GST regime in its present form would infringe upon the taxation powers of the state and undermine a state’s financial autonomy
The key fulcrum of the proposed GST is the harmonization of the Centre and state taxes to remove current distortions and achieve a common market. Under the present regime, the tax-base of the Centre is not available to the states and vice-versa. But the implementation of GST will help widen up the tax-base of both the Centre and the states.
In order to remove the apprehensions of the states about the erosion of their autonomy, the Centre must play a proactive role in maintaining a fine balance between the imperatives of a common market with a unified tax structure vis-a-vis the fiscal requirements of the states.
No economic reforms can take place smoothly if the political realities that surround them are not in sync. It is imperative for the government to address such challenges upfront in order to make this landmark reform holistic and rational in all avenues.
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