The Thirteenth Finance Commission Report on the goods
and services tax (GST) is a breath of fresh air. It is indeed visionary and
comprehensive and truly ‘flawless’ as the authors claim. It comes close to the
original concept that Vijay Kelkar outlined in his “Report on Implementation of
the Fiscal Responsibility and Budget Management Act, 2003”.
Notable features of the Task Force recommendations are:
A single tax rate of 7 per cent for the states and 5 per
cent for the Centre.
Inclusion of all goods and services in the GST including
real property, banking services, petroleum, electricity,
alcohol and tobacco.
Subsuming of all indirect taxes, including stamp duties,
entry tax not in lieu of octroi, purchase tax, and the
Central Sales Tax (CST).
Full endorsement of the destination principle of
taxation by shifting the tax base from production to
consumption.
These well designed features will result in
tremendous simplification and rationalisation of tax
structure and could prove to be the tipping point for
converting the Indian tax regime from one of the worst
to one of the best in the world. It would yield
substantial dividends to the Indian economy providing
gains within a range of 0.9 to 1.7 per cent of GDP. It
will strengthen India as a single common market and
provide a stable source of revenue for the states and
local governments. The cooperation between the Center
and states in the design and implementation of GST will
dawn a new era of cooperative federalism.
One of the interesting features of the report is the
creation of a council of state finance ministers, which
will be responsible for any modifications to the design
of GST and for providing compensation to individual
states for any loss in revenues due to GST. This body is
an innovative compromise between the fiscal sovereignty
of the states and the Centre and the need for
harmonisation and cooperation.
While the paper has clearly defined a vision for the new
tax regime, there are many hurdles that remain. Even
though the model outlined by the Finance Commission is a
win-win for both the Centre and the states, the states
may be reluctant to take the giant leap that it entails.
The states have been skeptical of the adequacy of the 7
per cent to replace their current revenues.
The Finance Commission has spent endless hours to
confirm the validity and robustness of this
calculations. This rate is indeed adequate to replace
the current state taxes and provide some surplus from
improved compliance and larger GDP, which has not been
factored by the Finance Commission while calculating the
rate.
The second concern of the states will be the inclusion
of sectors such as real estate and alcohol, which are
the exclusive reserve of the states under the current
constitutional division of taxation powers. Modern GSTs
make no exceptions for such sectors. Their inclusion in
GST is essential to eliminate cascading and to ensure
proper reporting and compliance by all sectors of the
economy.
There are also certain technical features in the design
of GST, which may prove to be challenging. Most notable
among these is the taxation of banking services. No
country in the world has been able to design a model for
inclusion of financial services within a VAT/GST
framework. India, if successful, will chart a new
course, which could well become the model, which the
rest of the world could emulate.
Overall the Finance Commission has designed a balanced
package, which is good for the country, the governments
and for taxpayers. It would be fitting finale to the
journey of Prime Minister Manmohan Singh to free up the
economy from the shackles of regulation and archaic
policies.
Source:
Business Standard, India, dated 18/12/2009
