Long and winding road to a comprehensive GST for India
December, 02nd 2008
Among the many initiatives taken by P Chidambaram, the proposed adoption of a nation-wide Goods and Services Tax (GST) will go down in history as
the most fundamental change in our fiscal system. In February 2006, the then finance minister had announced that the country would migrate by 2010 to a Goods and Services Tax
regime from the current regime of myriad central and state taxes.
To give effect to this, the empowered committee of state finance ministers and a working group have been entrusted with the task of architecting a legal & governance framework for a countrywide GST. This article examines the feasibility of meeting the target of April 2010 for the adoption of GST.
Indirect taxes consist of central taxes and state taxes. Central taxes are duties of customs, duties of central excise and service tax. State taxes comprise mainly of VAT, entry tax and state excise duties. There is also a central sales tax on inter-state transactions that is levied by a central law but collected by the states.
As commonly understood, the concept of GST entails a merger of the aforementioned taxes except for customs duties. As per the emerging consensus among the centre and states, the most practicable structure for India is a dual GST wherein state and central taxes fuse into a single state tax and a single central tax respectively.
However there are significant issues relating to both levy and collection of taxes. We also need to appreciate that there may be considerations other than revenue due to which the present powers of levy and collection are not easy to give up by the politico-administrative entities in the picture. Apart from federal autonomy, it is also the power of patronage which is at stake.
The first issue is a significant reduction in the legislative power of states. Today all states have implemented a VAT regime. However despite a countrywide acceptance of VAT, State tax laws differ significantly. It is even more pronounced when we look at the rules attached to the Acts.
We simply cannot have a nationwide GST if all the states enact their own laws and prescribe their own rules for taxpayers. This however has a bearing on constitutional subjects like the division of taxing powers between the union and the states and the administrative structure of the new tax.
As per Article 246 of the constitution of India, Parliament and state legislatures have the exclusive power to make laws with respect to items in the union list and state list respectively, while both can make laws on items in the concurrent list. The tax laws mentioned in the table create a charge of tax on the occurrence of a taxable event as inferred from the entries in the lists.
Hence combining the taxes and redefining legislative powers will need constitutional amendments in the seventh schedule. Now, as per proviso to Article 368(2) of the constitution, amendment to any list in the Seventh Schedule requires a majority of total membership of the house and two thirds of those present and voting.
It also requires ratification by more than half of the state legislatures. Given the current political situation, whether such an amendment will be carried by the Parliament and state legislatures is anybodys guess. Even if it does happen, it will not happen in a hurry. The present administrative framework for collection of multiple levies may need to be transformed for implementation of GST. Today the tax payer has to contend with various authorities.
In the reformed scenario even if there is a dual tax system, the greatest service that the GST will be a single tax department. It will be a relief if the present tax dispute redressal mechanism also undergoes a makeover. We are yet to see any blueprint of how all this is sought to be achieved.
A restructuring of the revenue wings of states and centre along with turf wars within participating departments is a distinct possibility. The magnitude of such an exercise is mind-boggling and it quite definitely cannot be completed by 2010.
It is not that once the aforementioned issues are ironed out GST is set to roll. The finer details of the design of GST namely exemptions, zero rating, interoperability of tax credits, self assessment and audits also need to be worked out.
The constitutional amendments and the amendments in law would follow suit only after the emergence of a political and administrative consensus on such issues. All this to happen before 1st April 2010 certainly seems a tall order.
Various expert group reports and policy papers on the matter are not in the public domain. Hopefully a greater amount of information would be visible to the public once the tax reform is closer to implementation.
Going by present indications the target of a countrywide GST by April 1 2010 does not realistically appear to be achievable. But that is only if we presume that the Central and State governments would opt for a big bang approach and the multiple taxes of today would cease to be in existence on the D-day. What is more likely is that a phased approach towards implementing a GST will be kick started by April 2010.