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GST roadblocks continue to impede progress
May, 21st 2012

It is by now agreed wisdom in the minds of all stakeholders that the present scheme of consumption taxation, or indirect taxation as it were, is no longer sustainable and that the Goods and Services Tax (GST) is by far a better tax model. That being the case, the desired objective should evidently be to move to the GST as quickly as possible. It is however symptomatic of how policy reform takes place here that the country has already twice missed the implementation date of the GST and as yet there is no formal announcement on the target date of implementation, although expectations are that the GST might see the light of day in April 2013. Given this background, this article attempts to identify and discuss the key current roadblocks to a fast track implementation of the GST.

By way of context, it must be noted that the Constitution of India provides for a threefold division of functions and powers those exclusively assigned to the Union Government, those exclusively assigned to state governments and those concurrently assigned to the Union and the State Governments, with residuary powers with the Union Government. It further provides for a clear division of fiscal powers between the Union and the states in order to effectuate these various functions. With regard to taxes, the principle that is adopted is that taxes which have an inter-state base are levied by the Union while those with a local base are levied by the states, with residuary powers belonging to the Union.
As is well known, the dual GST that is proposed to be introduced in India, comprising of the federal GST and the state GST that will operate in parallel and apply on all goods and services, envisages a devolvement of more taxing powers to the states, in the form of the right to tax services and the importation of goods into India, as well as to the Centre, which obtains the right to tax transactions beyond the stage of manufacture, thereby widening the tax base for both the Centre and the states. For a smooth transition to the GST, the ideal is that this widening of the base is achieved with the Centre and states, at the same time, retaining a fair share of their respective fiscal powers, with a mutual exclusivity between the two. However, one of the key tasks of the central government has been to allay the twin apprehensions of the states, of a possible dilution of their fiscal powers and the potential encroachment by the Centre of the states base of taxation. From information available in the public domain , it appears that these apprehensions have recently resurfaced due to two broad points of disagreement between the Centre and the states. The first relates to the negative list basis of taxation of services proposed vide the Union Budget 2012-13 and the second relates to the modalities of compensation to be paid to the states by the Centre on account of the reduction in the rate of the central sales tax (CST) from 4 per cent to 3 per cent in April 2007 and from 3 per cent to 2 per cent in June 2008. These appear, by far, to be the major roadblocks in the way of an expeditious introduction of the GST.

On the first point, as is well known, the negative list basis of taxation of services visualises a tax on all services except those specified in the negative list. The states, via the Empowered Committee of the State Finance Ministers (EC), had apparently supported the introduction of the negative list, prior to the introduction of the GST, as they believed it was the correct way to tax services and the experience on the ground would be helpful for incorporating it in the GST, as and when it was introduced. However, the EC had also made recommendations on the various services to be included in the negative list so as to protect the interests of the states. Accordingly, it appears that activities relating to land & buildings, sale of goods, transport, entertainment and personal services and certain other services, the taxation of which could adversely affect the states, in their estimation, were recommended by the EC to form part of the negative list. However, the negative list, as presently proposed by the Ce ntre, does not include several of these services and they are impliedly therefore to be taxed. Consequently, the proposed negative list of services has apparently become a sticking point between the Centre and the states.

The second area of dispute is in regard to the CST compensation. As is well known, the original idea was to first reduce the rate and then to phase out the CST completely, before the initial target date of implementation of the GST on April 1, 2010. In the view of the states, while the implementation of GST has been delayed, the states have incurred losses on account of the reduction in the CST rates. The states believe therefore that the CST related compensation ought to continue until the time of introduction of the GST or, alternately, the rate of CST ought to be raised back to 4 per cent. The Centres view is apparently that there has been inordinate delay in implementation of the GST and hence no compensation ought to be paid beyond 2011-12. A blame game is apparently going on as to reasons for delay in introduction of the GST. The compensation methodology has itself been a constant source of disagreement between the Centre and the states, leading to delays in release of compensation for the past severa l years. Another disputatious area has been the increase in VAT rates from 4% to 5% in several states. The Centre has apparently computed the compensation after netting off the increase in states revenues arising from the VAT rate increase. This has not been acceptable to the states, who apparently believe that the VAT rate increases are entirely in order and not part of the GST compensation discussion.

It may be that in a country like India, disagreements of the above nature are only to be expected and a resolution ought to be achieved through a statesmanlike dialogue between the Centre and the states. The fact however that this resolution is not yet in sight, at least in the public domain, is very worrying as it has cleared impacted the progression on the GST.

It is imperative therefore that the Centre and the states actively work towards an early resolution. There is simply too much at stake here and the country cannot afford any further delays in this regard.

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