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The key fulcrum of the
proposed GST is the harmonisation of the Centre and state taxes to remove
current distortions and achieve a common market. The finance minister’s recent
statement in Parliament to the effect that the Centre would be willing to
provide compensation for loss of revenue to the states in the initial years of
the GST regime, provided they agreed to a common threshold, common exemption
list and a mechanism to check deviations, is clearly indicative of the Centre’s
intent to have a harmonised GST design. However, the states view this harmony as
a constraint on their taxation powers and want to retain some degree of control
to achieve their social and economic policy objectives.
A Constitutional amendment is a prerequisite to introduction of GST and the
government is considering various options to deal with the issue. In this
context, the Thirteenth Finance Commission (TFC) has suggested the possibility
of levying the model (harmonised) GST pursuant to a tax agreement among the
Centre and the states akin to the erstwhile Article 278 of the Constitution. The
power of the states and the Union to make laws to impose the tax shall be
subject to the terms of this agreement.
As an alternative, consideration is being given to amending the Constitution to
bring in a Fourth List, which would grant concurrent powers to the Centre and
the states for levy and collection of GST. The Fourth List would include the
items to be taxed under GST and would be backed by suitable restriction on the
Centre and the states to levy the taxes to be subsumed under GST.
The main difficulty with both these options is that they do constrain the
autonomy of the states to levy indirect taxes.
One way to break the impasse and build consensus could be to have a harmonised
GST, with flexibility allowed to states to levy certain supplementary taxes —
for instance, supplementary excise on tobacco, petroleum, or any other products
— to achieve their socio-economic objectives. The Council of Finance Ministers,
the constitutional body suggested by TFC, would be entrusted with the
responsibility of deciding any change in the initial design of GST. This Council
could also be the filter for evaluating supplementary levies the states may wish
to impose. The criteria for evaluation would include whether the levy was
compatible with the Indian common market and whether it would have any
collateral impact on the design of GST. This mechanism is a notable feature of
the federal-provincial tax collection agreements in Canada and has worked well.
A ‘flawless’ GST does not envision such leeway. However, if the flexibility of
levying supplementary taxes provides the requisite comfort to the states and
achieves the delicate balancing of interests, the resultant economic benefits
would be worth the tweak in the ideal design.
Source: Business Standard, India, dated
24/05/2010
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