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Change GST model to get over constitutional impasse
August, 30th 2010

Even with all the compromises and exhortations from the Finance Minister, there is a situation in regard to GST which has all the elements of a cul de sac. The more the FM concedes, the more demands are coming for concessions from the States. They basically ask for more power to themselves to alter the duties. Also they would like to change procedures at their will which is clear from their not agreeing on the formality of dispute resolving system. The veto power of the centre has been given up but that has not resolved the disputes.

There does not seem to be any possibility of adhering to the targeted date of April 2011.The States are used to enjoying the right to change rates of sales tax since the inception of the Constitution. There is no doubt that there is an element of politics which seeps in the decision making process. In such a situation of Constitutional deadlock there cannot be any workable IGST. Unless all the States charge the same SGST, the system of IGST cannot work. Another issue is regarding the continuation of CST (Central Sales Tax). There is issue also about whether GST will include taxes on petrol, diesel, alcohol, electricity and octroi.

This impasse can be sol-ved if we do the GST in the way in which I have proposed below.

All Central indirect taxes (not customs) are to be combined and separately all the State taxes are to be combined. Central Excise (along with some similar taxes) and Service Tax are to be combined at the Central level to make it Central GST. At the State level it will be the sale tax (present VAT) and some existing State taxes. To elaborate, all indirect taxes on the supply of goods and services would need to be subsumed into the GST at the central and state level separately.

From the Government of India side Central Excise, additional excise duties, service tax, additional customs duty (CVD) and all cess and surcharges (other than educational cess) will be subsumed into the Central GST. The State GST will subsume the existing VAT, stamp duty, vehicle tax, taxes on goods and passengers, tax on electricity, entertainment tax, entry tax, luxury tax, taxes on lotteries, betting and gambling, pur-chase tax as well as all State cess and surcharges. State GST shall not contain service tax which are now being levied by the Centre.

The Centre will distribute the proceeds from service tax to the States as now. However, since the State VAT will also combine taxes on lotteries and entertainment, which are service taxes, it can very well be called State GST. According to me this is the best and easiest solution since only minor Constitutional change will be necessary. Just for combining Central Excise and Service tax, etc at the Centre and the other taxes at the State level, there will be need for Constitutional change but it is only minor name changing exercise.

And no serious objection can come from the States. At the central level it will be a manufacturing GST which will end at the factory gate but service tax GST will go up to retail stage. However since the State GST will go up to retail stage, all stages are covered. The main advantage will be the amalgamation which will lead to the emergence of quite a simple tax if one rate is maintained. There can be an inter State credit of input duty by following the Cenvat method now being followed by the Centre.

This will not bring about any confrontation between the Centre and the States either in relation to veto power or in relation to changing rates of duty. CST can be abolished by the Centre because it is a Central law. Compensation will be given. The States and the Centre will be left to themselves to manage their taxes. It will be a GST at the same time a dual GST and not a duel GST. Creating a Centre-State combined GST as is now being done is like sowing the seed of a perennial political pot-boiler.

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