Update on GST

[Dr. Sanjiv Agarwal]

On Goods and Service Tax (GST) front, there is now some news to cheer about. The Empowered Committee of State Finance Ministers which met for two days on 28-29 January, 2013 cleared the major hurdles in introduction of GST. However, we are not still sure as to whether it could come in 2014 or even later. Now the onus is on the Parliament to quickly clear the Constitutional Amendment Bill, 2011 which is now almost two years old.  The Centre and the states last week crossed one major hurdle in the way of Goods & Services Tax (GST) by agreeing to a compensation formula for the Central Sales Tax (CST).

A sub-committee of the Centre and states recommended 100 per cent compensation to states for a cut in CST from four per cent to two per cent for 2010-11, 75 per cent for 2011-12 and 50 per cent for 2012-13, respectively and as a result, Centre will now have pay ₹ 34,000 as CST arrears to states.

The Central Government has now agreed to make changes to the Constitution Amendment Bill for GST. In a deviation from its earlier stand, it gave consent to a phased roll-out of GST like the Value Added Tax (VAT). This means that only willing states could embrace the new indirect tax system from the beginning.

States will have the flexibility to opt out of GS. Instead of its earlier proposal for a uniform GST rates across the country, the Union Government has also agreed to have a floor rate of taxation with a narrow band. Thus, GST rates could be in a range or a band to provide flexibility to states. There is also a broad consensus on GST design. States which don’t want GST can opt out and a provision will be inserted in the Bill.

On the flip side, however, there are certain concerns expressed by some states. Given the Indian federal structure, while the top most concern is of fiscal autonomy of the states, it is also feared that states may not be able to generate required funds for various developmental works. Further, there should not be dual authority for the same tax. Also in some states, there are peculiar local taxes such as purchase tax, mandi tax, infrastructure development cess, coal cess, mining cess or royalty etc. There is a need to have a clarity and consensus on whether such taxes be subsumed in GST.  Ideally yes. Economically, states have an issue as every tax is going to be subsumed in GST and states may loose on account of such taxes. How centre and states are going to address this is still not certain. GST would become a dream tax only if it is a simple and comprehensive tax leaving no room for any confusion or bottleneck leading to any inconsistency. 

 

GST : What Next -  Time to wrap up loose ends -  Not likely before 2014 LS elections -  Constitutional Amendment Bill , 2011 - Report of Standing Committee in this Budget session, passage by winter session 2013 -  GST rate - band may be introduced -  Consensus  at Empowered Committee on GST -  Agreement on CST Compensation (Rs. 34000 crore) -  Agreement on dropping Dispute Settlement Body -  GST may be introduced in phases. States to decide / opt out -  Petroleum products under GST -  Alcohol products outside GST -  Sates empowered to raise rates in case of distress

 In meeting of Empowered Committee of State Finance Ministers in February 2013, Finance Minister has mandated the Committee to get the draft on new GST law ready. The issue of CST compensation is also being addressed with suitable budgetary provisions. Since there is no firm date on introduction of GST, states want to have clarity on CST for 2013-14 and its compensation. The Empowered Committee has broadly agreed to amendments in the Constitution.

Not only GST is expected to change the complexion of indirect taxation in India, it will also bring down the prices of goods and services across the board. The consensus among the states (>30) and between the Centre and states hold the key. Once consensus is reached, GST may see the light of the day in a year's time, even during any time of the year, it being a transaction based tax.

 While there is no doubt that GST must see the light of the day, the sooner the better, it should also address the problems in present day taxation i.e., it should seek to achieve rationalization, boost transparency, offer flexibility to Union and states and broaden the much needed tax base. If GST comes into operation, it would achieve the status of integrated and most comprehensive set off tax structure in India leading to enhanced economic activities and tax buoyancy. GST would offer a complete set off and there will be no tax cascading effect as there will be no tax on tax, an ideal proposition for all. Even the Government won't mind as tax revenues would go up substantially (VAT is a live case).

 It is felt that GST may seem to be a reality, if not in 2014, it may surely be in place after the next general elections. The key lies in broad consensus, on simple tax law and commitment of States to a comprehensive tax law which may be a watershed tax reform of the century which our generation will witness. The GST should be a win-win proposition for all- government, trade & industry and consumers.