Sumit Dutt Majumder : GST on the move, again!
There is a saying that a good idea cannot be kept suppressed all the time, - it has only to cross all the hurdles before it blooms. That Goods and Service Tax (GST) is a good idea, there is no doubt about it. But it also has to cross all the hurdles. That explains the delay of over three years in it’s implementation. The then Finance Minister had announced the target date of 1/4/2010 during his budget speech of 2006-07. The people are still keenly waiting for it.
GST is designed to facilitate seamless flow of goods and services through different taxation points. There will be optimum contact with taxmen and minimal cascading effect of taxing the taxes. GST will subsume many existing Central and State taxes. There will be basically two streams of GST—the Central GST and the State GST to be collected by Centre and States respectively. The inter-state movement of goods and services will be covered by the sub-stream i.e. Integrated GST (IGST). At present the interstate movement of goods is covered by Central Sales Tax (CST) which will be phased out once GST is implemented. With uniformity and certainty in mind, the two tax administrations at the Centre and States are expected to have commonality of law, procedure and dispute resolution mechanisms. Due to substantially higher tax base, the GST rate is expected to be much less than what a consumer pays now in the form of different Central and State taxes.
Certain steps that are essential for ushering in GST are amendment of the Constitution, enactment of Central law on GST by Parliament and State laws by the respective State Assemblies, finalisation of GST structure and model including rates of GST, the supporting IT infrastructure in the form of GST Net, and most importantly prior training and reorientation of the officers at the cutting edge level both at Centre and the States, who would implement it.
In view of the existing Union List, State List and Concurrent List of the Constitution, the first imperative is the amendment of Constitution empowering both Centre and the States to levy and collect GST. The Centre has placed an amendment bill before the Parliament. It has three clauses. The first one relates to the aforesaid empowerment of the Centre and the States. The second clause envisages creation of the ‘GST Council’ with all the State Finance Ministers and the Union Minister of State for Finance as members. The Council is to be chaired by the Union Finance Minister. It is proposed that neither the Centre nor any of the Sates would deviate from the GST structure and GST rate without consensus amongst all members of the GST Council. The third clause proposes setting up of a Dispute Settlement Authority (DSA) for resolution of disputes amongst the States and between the Centre and the States, if the agreed GST norms are violated.
While there is no dispute on the first clause regarding empowerment, some States have protested against the second and third clauses on the ground of tinkering with the fiscal autonomy of the States. They argue that once accepted, they would lose the power of varying the GST rates and of taking a particular item out of GST in the event of substantial revenue loss. They also cite their dissatisfaction with the Centre on inadequate compensation for revenue loss on gradual reduction of CST on interstate movement of goods.
While the Constitution amendment Bill is under examination of the Parliamentary Standing Committee on Finance headed by Yashwant Sinha, senior MP and former Union Finance Minister, the Empowered Committee (EC) of State Finance Ministers has apparently made a breakthrough in its meeting at Bhubaneswar last week. First of all, the Centre has reportedly assuaged the hurt feeling of the States by agreeing to compensate for loss of revenue if any, on implementation of GST. Before that, the Centre and the States are reported to have reached an important agreement on Central Sales Tax (CST) compensation, which would remove a perennial road block to progress on GST. Settlement of this single issue does really raise the hope of an early arrival of GST. The other areas of agreement have been reported to be as follows. The idea of a Dispute Settlement Authority (DSA) would be shelved now, and the GST Council would decide about the form and scope of the DSA. In my view, it would be very difficult for the GST Council to handle the inter-State or Centre-State disputes on GST, which in course of time would perhaps increase exponentially. The GST Council would have to rather constitute a DSA at the earliest with the form and structure as it deems best. On having uniform GST rate across the country, as envisaged till now, the Centre has, at the instance of some states, reportedly agreed to set a floor rate for the tax with a narrow band within which the states will retain the right to vary the Sate GST (SGST). I see no harm in such a proposition although ideally it should not happen. At least 50% of the States administering VAT / GST, including countries in European Union do have different VAT rates and still practice levying of GST. But I’m told they are also facing some difficulty in this regard. Any way if it happens in our case to start with, it is still doable, except that the scheme of Integrated GST (IGST) for interstate movement of goods will have to be reworked carefully.
What I see with lot of apprehension is the proposal to give flexibility to the States to join or exit GST at their will on the ground that the States had similar option while implementing VAT. One must understand that GST is a different cup of tea. In intends to create a common economic market for the entire country. We can’t have any State out of the ambit of GST. There is and their will always be interstate movement of goods and services. If one state refuses to adopt GST, how will the taxman compute the tax for the gods & services destined for moving to that state? This problem did not arise while implementing VAT because VAT is an internal tax on sale of goods at a particular state. The inter-sate movement of goods were covered by Central Sales Tax (CST). Therefore, there was no difficulty in implementing VAT by the States, one after another. But GST surely has to be ushered in together by all the Sates and the Centre.
On what would describe ‘consensus’ in the GST council, it has been proposed that Centre’s vote will carry one-third weightage while the strength required to pass a proposal would be three-fourth of the members of the Council. This would need to be carefully and critically examined. The supremacy of Central Government vis-a-vis State Governments on fiscal matters, otherwise enshrined in the Constitution cannot be undermined.
One welcome decision of the Bhubaneswar Meet that will have far-reaching effect is that of bringing Petroleum products within the ambit of GST. Petroleum products being a basic input for most of the industries, there would have been a break in the chain with resultant denial of input tax credit for Petroleum products. That would have brought distortion in GST structure. It is strongly hoped that in very near future even alcohol, one of the two demerit / sin goods would be brought within the ambit of GST. The Centre has already agreed to keep Tobacco & it’s products, another sin goods within GST, while imposing separate Central Excise duty on the item. Similar approach can be adopted for alcohol as well, whereby the States can levy additional State Excise duty on alcohol. This will ensure that the States continue to get the same level of revenue from alcohol while at the same time not breaking the GST chain.
Summing up, a good breakthrough after a prolonged lull! Once the structure is finalised, it’s only a matter of implementation. The backroom work on GST structure and GST Net, the IT infrastructure support for implementing GST is going on parallelly. The amended draft Constitution Amendment Bill would have to be forwarded to the Standing Committee early. It would be better not to fix any more target date. Since it’s doable, let us just do it, if not in one year - at least in two or three years! None can now stop the good idea of GST!