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GST will be a major breakthrough in tax reforms
November, 27th 2009

As finance minister of West Bengal for more than two decades and chairman of the Empowered Committee of State Finance Ministers, Asim Dasgupta converges the roles seamlessly. A fortnight after releasing the first discussion paper on the goods and services tax (GST), Dasgupta talks to Namrata Acharya and Ishita Ayan Dutt about the GST's rollout and its benefits. Edited excerpts:

How will GST benefit end-users while helping the government on tax collection?
For the first time, there is a continuous set of relief for taxes paid either on inputs or in the previous stage of distributive trade. It starts from the producers or service providers and goes all the way to the retailers. Several important Central and state taxes will be subsumed in the GST.

The central sales tax on inter-state tax, which has been already reduced from 4 to 2 per cent, will be totally phased out. The service tax will be better integrated and given set-offs. For all these reasons, the overall burden of taxes on commodities will fall. That will benefit manufacturers, traders and final consumers.

Since it is a continuous chain of set-offs, which can be audited, tax compliance would increase and result in higher revenues for the Centre and states.

Why is GST considered the biggest tax reform in India?
So far, VAT at the state level or Cenvat at the central level, along with services tax, have been major steps in tax reforms. Before the present tax regime, there was the sales tax regime, where there was a cascading effect on tax. VAT has removed this burden, but it had deficiencies. The Cenvat load remains.

There were several state taxes which were not subsumed in any one tax. The inter-state sales tax or CST was not fully relieved.

All this will be accomplished by the state GST. If VAT was a major improvement in the indirect tax system, GST will be the next logical step and a major breakthrough in the history of tax reforms in the country. With the GST, the positive impact on the GDP and state domestic product may be as high as a 2 per cent gain.

Is that a long-term view?
It is a medium-term view and based on work done by the National Council for Applied Economic Research.

Are difficulties among state governments more or less ironed out?
The first step was agreeing on a common discussion paper. There are certain nitty-gritties to be worked out, like which goods and services will be exempted or included.

We are requesting views from industries, trade, agriculturists and also from the media within a month's time. We have decided such meetings should take place in all the states, with chambers and industry bodies. The release of the discussion paper is a step towards convergence of views.

The second step is the need for a Constitutional amendment, as the power of levying service tax will be given to the state, because it is a dual structure. To subsume so many, many Acts, we also require a Constitutional amendment. The GST on imports will also require one.

The first draft of the Constitutional amendment is expected by the end of November. Side by side, work on the draft for the Central GST and draft model state GST legislation, and draft for inter-state GST (IGST) and rules and procedure will start. Our target date is November-end.

Is April 2010 a realistic deadline for implementing GST?
We do not have a day to waste now. There has been an acceleration in activities over the last one month. We are talking to the states, and trying to understand each others problems.

What about fiscal autonomy of the states?
State governments have autonomy in selecting rates. In GST, the rates will be exactly the same, so it will be a harmonious structure. If there is an exigency, or states have items of local importance in our choice of the list of exempted items which do not effect inter-state trade these will be given flexibility. All federal structures have faced the problem. We are going to take care of it through Constitutional amendments.

States are worried if gains from the service tax will be adequate to compensate for loss on certain accounts. We are in the midst of finalising revenue-neutral rates for the states. For them, there has to be a robust compensation to allay anxiety. We are in the middle of a discussion on how this compensation could be a part of the GST itself.

What about preparation in IT and manpower?
There is a need for making a comprehensive IT structure. When you have inter-state transactions and the innovation of tracking it down through the IGST, the Government of India has to come forward with it.

They are co-operating with us, and a knowledgeable agency will be deployed to finish the implementation of the IGST's IT structure and the connecting data with the state-level IT structure. That should happen by the middle of January. These are important milestones. By the end of December, we will be able to make our target date concrete.

There have been proposals that all indirect taxes should be merged in the proposed GST. Does it have too many exemptions in it?
While this will be a major tax reform, states will lose on certain accounts and gain on others. The central government's worry may be little less than that of the states.

Whenever you give set-offs, it is a loss of revenue. When the set-off is comprehensive and when the central sales tax is actually collected and retained by the state, and when that is zero the states are losing on this account. The state's gain is in terms of levying of service tax and collections.

Sometimes, tax compliance does not take place in the first year. We saw it in the case of VAT. This is a phased approach to GST. That's why, when we will introduce the GST, not all taxes will be included in it. If the tax compliance increases, we will review the situation. The industry should be happy. We have concerns about small dealers and have asked for an exemption limit.

Do you see an additional burden on the Centre for compensating states in the initial phase of GST?
We are discussing it. It all depends on how we calibrate the entire structure. It might happen that the revenue growth might start taking place not from the first year, but from the subsequent year onwards.

There will be a transition where we need a compensation mechanism. It should be such that it is sustainable for the government. It's a challenge, but in VAT we faced similar concerns: we had a pleasant experience, as the rate of growth of VAT revenue doubled in three years from 12 to 25 per cent.

What will be the proposed revenue-neutral rate?
There will be two rates one standard and another lower one. There will be a list of exempted items. For the revenue-neutral date, our target is November-end, by when there should be a consensus within states.

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