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FE Editorial : GSTation
February, 24th 2009

One of the last major elements of reform in tax policy is the introduction of the goods & services tax (GST). The appeal of the GST lies in four key advantages: elimination of all other bad taxes such as octroi, stamp duty, electricity duty, etc; unification of India into a single common market; correct handling of imports and exports and elimination of the artificial distinction between goods and services. If properly implemented, using the ideas and institutional capabilities from the work done by the National Securities Depository Ltd (NSDL) on the tax information network (TIN), GST can reduce corruption and transactions costs. What is not widely understood is the substantial revenue potential of GST. Tax revenues from services will increase substantially, through improvements in compliance that come with integration into a single Vat chain, and through the shift from piecemeal taxation of services towards taxation of all services. At present, the service tax rate is 12%. It increasingly appears that a GST rate of 12% to 14% will yield adequate tax revenues. If a rate of 12% is chosen, it would ease the process of integrating services into GST since there would be no increase in the tax rate for services and a substantial drop in the tax rate for goodsboth are critical in these demand-threatened times.

Making progress on GST requires cooperation from states. The appeal to states lies in three things. First, GST reduces constraints on business and thus increases economic growth, which benefits participating states. Second, GST gives tax revenues to state governments from all services. Third, GST gives state governments hooks into high quality tax administration, based on NSDL and the TIN system, assuming the central government plays its cards right. The UPA government has largely failed to make progress on the GST agenda. Back in 2004, the immediate opportunity for progress lay in merging Cenvat and the central service tax into a central GST and building top quality administrative mechanisms for it. Once this was fully running, one by one, state governments would have plugged into it. Instead, these years have been lost. While the Central Board of Direct Taxes and NSDL have made progress on TIN, thus yielding a steady pace of progress on tax administration for income tax, the administrative capabilities for GST have not come about. Building GST must be a critical element of the tasks of the next government.

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