Covering the last mile before a meaningful GST

Although the final report of the technical group of the empowered committee of state finance ministers on the structuring of the proposed goods and services tax (GST) will be submitted to the Centre only a few weeks later, the committee’s chairman Asim Dasgupta, reportedly, threw some hints at the press on what is in store. He said India’s GST might have a dual rate structure; more than one slab of tax for goods and a single rate of service tax at the state level. By this rather terse comment, Mr Dasgupta has, in fact, said a lot.

He iterated the states’ allegiance to the GST system that promises to tax only the value added and avoid cascading of tax. Mr Dasgupta has also seemingly meant that the state governments are not willing to part with their current powers to tax (sale of) goods. Nor would they totally forego the freedom to distinguish between goods in this context.

Rather, the states would also want to get the additional power to tax (most) services under the GST framework. (Currently, the power to tax services is reserved for the Centre under the Constitution. Of late, the Centre has informally agreed to give states the power to tax scores of services of ‘local nature’).

Obviously, the technical group, headed by advisor to the Union finance minister, Parthasarthi Shome, is contemplating to adopt, in great measure, from the Brazilian model of value-added tax, of which Shome himself was one of the architects. In Brazil, a “national, harmonised” dual VAT system is in existence.

A dual rate GST structure is doubtless good for India at the current juncture, considering that states which perform a role larger than the Centre in the implementation of various development programmes, ought not be at the Union government’s mercy for all of their resources. After all, the current politics of Indian polity won’t, at all, allow a single federal rate.

From the point of view of those who see GST a superior indirect tax system simply for its ability to shun tax cascading, however, might fret unless the proposed dual rate structure ensures fungibility of tax credit between the Centre and states. In the absence of such fungibility and the new tax subsuming as many taxes and levies as possible, the proposed GST would barely serve its purpose.

Considering that a central VAT (Cenvat) and a state VAT are already in place, with the former somewhat facilitating credit for tax paid on not only goods but also services consumed in the chain, the proposed dual rate structure would merely refine the reform already implemented.

The more substantial objective of seamless input tax credit would elude the system unless there is credit flow and creditability between the centre and the states. Therefore, it is important to “harmonise” the systems as in Brazil.

But India, owing to the “bureaucratic impulses” of its administration, is unlike Brazil. Besides, the tax administration now looks increasingly under-staffed, as its manpower grows slower than the economy. The administrative system needs to embrace a culture of intelligence-based selective auditing, moving away from the overarching control it now tries to exert.

Excessive controls merely cause wastage of human hours and destroys ease of compliance. Creating the technology base and administrative wherewithal for harmonised GST should indeed be the policymakers’ priority. An adequately equipped clearing house should be set up for Centre-state credit transfer.

A more bearable yet revenue-propping indirect tax system would be welcomed by all stakeholders. India undoubtedly requires a broadbased consumption tax regime that nevertheless doesn’t pinch the taxpayer much. Ideally, the policy should be to tax consumption and to a lesser extent, income and savings.

Source : Economic Times - Gurgaon, Haryana, India, dated 30/11/2007