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Good & Service Tax : Get states on board
November, 11th 2009

It is welcome that the first formal document to herald an efficient system of indirect taxes harmonising the interests of producers, consumers and the government, both at the Centre and in the states, has finally been released. It is, however, the first such document, indicating that more might follow.

The White Paper comes just five months before the proposed deadline for commencement of GST: April 1, 2010. The constitutional amendment and changes to tax laws that are required to implement the tax are unlikely to be completed before that deadline.

Further, as an article on the edit page in this edition points out, huge gaps remain in the White Paper, particularly on the taxation of services whose provision span several states.

It is important that all loose ends be tied up, to mobilise the wholehearted support of the states to the project. It is welcome that the Empowered Committee of State Finance Ministers has released the White Paper, and not the Centre. This gives the states greater ownership of the proposed tax. Without their cooperation, the proposed changes cannot take place.

Major gaps in the tax chain have been created to win over their support: neither petroleum fuels nor liquor will come under GST and thus bear a low rate of tax. Both kinds of goods will continue to be taxed as they are at present. GST can boost indirect tax revenues, with its in-built incentives to stop avoidance, obviously enough.

It can also boost direct tax revenues, provided the direct and indirect tax authorities share their databases.

If a company pays so much of central GST, it cannot show a disproportionate level of income. As taxation brings larger and larger areas of value creation in the economy under its scope, the rate of tax can be lowered, both when the common tax base of GDP is taxed, whether as income or as goods and services consumed.

So, ideally, no exemptions should be allowed. If the cause of simplicity of implementation calls for exemption of activity below a threshold, that threshold should be kept low. This would raise some compliance costs for small operators, producers as well as traders. Governments should help them with these costs, rather than make them an excuse for widening the scope of exemption.

Implementing GST would call for considerable political will. Transporters, for example, have routinely resisted all attempts to tax their services. Partisan one-upmanship might persuade Opposition parties to champion such resistance. The government and its leaders should call all-party meetings and build consensus among them on GST.

And to help parties make up their mind, the government should educate the public and appeal for their support, to help modernise the economys system of taxation and speed up economic growth.

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