The proposal to introduce a Goods and Services Tax (GST) to reform and modernise the countrys complicated indirect tax system is two years old but it has not seen much progress till now. Therefore the first discussion paper released by the empowered committee of state finance ministers is a major step forward as it contains a number of ideas that will go into the finalisation of the proposal.
The case for a GST is appealing because it is based on the concept of a single national market and uniformity of tax rates across it. It seeks to make the tax regime simple so that compliance is high and the administration easy and efficient. There has been no serious political opposition to GST and that should have made preparations to happen at a faster pace.
States have not been reluctant to accept the new regime but some of them have reservations on some aspects and have fears about revenue loss. They have been assured that for five years any revenue loss will be compensated by the Centre. But many are not willing to let go some taxes and discretionary powers they have under the present system.
There should not be any serious dilution of the GST regime as it has been conceived. In July it was decided that there would be a dual taxation structure, with the Centre and the states administering separate rates. Now there is demand for more differential rates and exemptions.
According to the discussion paper, there may be as many as four rates for goods a lower rate for essential goods, a standard rate for general goods and special rates for certain others.
A system of multiple rates and increasing exemptions should be discouraged because they defeat the purpose of GST and would make implementation difficult. The plan to keep octroi and similar local taxes outside the system is therefore not sound from this point of view.
There is the need for a wide consensus on the new system because it changes the entire tax regime. Consultations are needed with the states, industry and business and consumers organisations. But it should be ensured that too many compromises are not made.
It is also important to expedite the development of technical support for the implementation of the system. It seems unlikely that the rollout will happen in April 2010 as originally planned but efforts should be made to stick to the target date.