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Move fast on GST, federal tax powers will change
January, 13th 2012

The progress on transiting to a goods and services tax (GST) implicit in the agreement on a negative list of services that would allow all other services to be taxed is more apparent than real. States want services including construction, meals in air-conditioned hotels and entertainment to be exempt from central taxation. This would only enlarge the negative list and defeat the goal of comprehensive coverage of services.

However, states cannot be blamed for attempting to protect their turf when there is an overlap in taxation at two levels. In construction, for instance, the Constitution empowers states to tax the goods portion of works contracts, while the Centre charges service tax on the balance.

The turf war is due to the archaic division of taxation powers under the Constitution. This leads to disputes and raises both tax and compliance burden for taxpayers.

However, the turf war will end once the Constitution is amended to empower both the Centre and the states to levy GST concurrently on all services. The government should, therefore, move fast on GST and implement it in the coming fiscal.

States should also agree to subsuming all local indirect taxes and duties under GST. Revenue losses, if any, due to transition to GST can be compensated, just as it was done after India moved to the value-added tax system. GST will cut out a cascade of multiple taxes that most items bear today and lower retail prices. The GST will also dump the existing division of items of taxation between the Centre and the states.

So, it would be futile for the Centre and the states to waste their energies on protecting a states' turf that should ideally have a very limited life left. However, the BJP should not play politics with this most vital reform.

The Bill to amend the Constitution to let states tax services, and the Centre goods up to the retail stage, is pending before a parliamentary committee chaired by BJP leader and former finance minister Yashwant Sinha. On this matter, there should be bipartisan cooperation and the country should move fast on instituting a countrywide GST.

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