One
of the last major elements of reform in tax policy is
the introduction of the goods & services tax (GST).
The appeal of the GST lies in four key advantages:
elimination of all other ‘bad taxes’ such as octroi,
stamp duty, electricity duty, etc; unification of India
into a single common market; correct handling of imports
and exports and elimination of the artificial
distinction between goods and services. If properly
implemented, using the ideas and institutional
capabilities from the work done by the National
Securities Depository Ltd (NSDL) on the ‘tax
information network’ (TIN), GST can reduce corruption
and transactions costs. What is not widely understood is
the substantial revenue potential of GST. Tax revenues
from services will increase substantially, through
improvements in compliance that come with integration
into a single Vat chain, and through the shift from
piecemeal taxation of services towards taxation of all
services. At present, the service tax rate is 12%. It
increasingly appears that a GST rate of 12% to 14% will
yield adequate tax revenues. If a rate of 12% is chosen,
it would ease the process of integrating services into
GST since there would be no increase in the tax rate for
services and a substantial drop in the tax rate for
goods—both are critical in these demand-threatened
times.
Making
progress on GST requires cooperation from states. The
appeal to states lies in three things. First, GST
reduces constraints on business and thus increases
economic growth, which benefits participating states.
Second, GST gives tax revenues to state governments from
all services. Third, GST gives state governments hooks
into high quality tax administration, based on NSDL and
the TIN system, assuming the central government plays
its cards right. The UPA government has largely failed
to make progress on the GST agenda. Back in 2004, the
immediate opportunity for progress lay in merging Cenvat
and the central service tax into a central GST and
building top quality administrative mechanisms for it.
Once this was fully running, one by one, state
governments would have plugged into it. Instead, these
years have been lost. While the Central Board of Direct
Taxes and NSDL have made progress on TIN, thus yielding
a steady pace of progress on tax administration for
income tax, the administrative capabilities for GST have
not come about. Building GST must be a critical element
of the tasks of the next government.
Source
: The Financial Express, India, dated 24/02/2009
