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GST must be ushered in soon; no need to aim for a perfect tax right now
October, 04th 2012

Everybody loves goods and service tax (GST). It is designed to facilitate seamless flow of goods and services through different taxation points. There will be optimum contact with taxmen and minimal cascading adding effect of taxing the taxes. GST will subsume many existing central and state taxes. There will be two streams of GST: the central GST and the state GST, to be collected by the Centre and states, respectively.

With uniformity and certainty in mind, the two tax administrations at the Centre and states will have commonality of law, procedure and dispute resolution mechanisms. Due to a substantially-higher tax base, the GST rate is expected to be much less than what a consumer pays now in the form of different central and state taxes.

In brief, GST would bring down prices of goods and services. Why then is this much-loved tax not coming? The reasons are not many.

In view of the existing Union List, State List and Concurrent List of the Constitution, the first imperative is the amendment of Constitution empowering both the Centre and states to levy and collect GST. The Centre has placed an amendment Bill in Parliament. It has three clauses.

The first one relates to the aforesaid empowerment of the Centre and states. The second clause envisages creation of the GST Council with all the state finance ministers and the minister of state for finance as members. The council is to be chaired by the Union finance minister. Neither the Centre nor any of the states would deviate from the GST structure and GST rate without consensus amongst all members of the GST Council.

The third clause proposes setting up of a dispute settlement body for resolution of disputes among the states, and between the Centre and states, if the agreed GST norms are violated.

While there is no controversy on the first clause regarding empowerment, some states have protested against the second and third clauses on the ground of interference with the fiscal autonomy of the states. They argue that once accepted, they would lose the power of varying the GST rates and of taking a particular item out of GST in the event of substantial revenue loss. They also cite their dissatisfaction with the Centre on inadequate compensation for revenue loss on gradual reduction of the central sales tax.

The amendment Bill is now under examination of the Parliamentary Standing Committee on Finance that is expected to place its report in the winter session. The Centre must utilise this interlude to engage with the states to find a compromise formula. First, with the concept of consensus in the GST Council, even a single state can undo what all others would like to do.

Claims of certain states for replacing the requirement of consensus with that of two-third majority of the states would also not work since the Centre would have only two votes, and the supremacy of the Centre on fiscal matters, otherwise enshrined in the Constitution, cannot be undermined.

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