GST should subsume all local levies  

Scrap octroi, entry taxes

The guiding principle for a uniform goods and services tax (GST) is to aid creation of a national market where location of a business is not dictated by tax arbitrage opportunities. Ideally, location of a plant should be determined by factors such as proximity to raw materials and availability of other resources, including labour.

The tax environment should allow free movement of goods beyond the borders of a state. However, retaining local levies such as octroi and entry tax would only prevent integration of the fragmented markets.

The Centre should, therefore, reject outright the states’ demand to allow them to retain the power to impose local levies including octroi, when GST is adopted. Coexistence of local levies with GST is akin to repackaging the existing taxation system — where the Centre levies CenVAT (central excise) and service tax and states, value-added tax (VAT) and a host of other local levies — with incremental changes such as offset of taxes paid earlier in the chain.

It is disappointing enough that the consensus GST model proposed to be adopted may have four rates — a central and a state rate for goods and likewise for services. The objective of any tax reform should be to make its administration simple and compliance-easy. On that count, introduction of a four-rate GST and retaining local levies will only make the tax regime more complicated for the assessees.

The Centre must address states’ concerns about revenue loss and provide adequate assurances of compensation. In any case, the Thirteenth Finance Commission will address revenue loss that states may experience upon migrating to GST.

The states should also be pushed to tap their own resources, such as property tax and stamp duty. Collection on account of property tax or stamp duty will improve only if the tax rate is moderate. States such as Delhi that have cut stamp duty rates have seen a surge in registration of property transactions and tax collection.

For a country that ranks low on ease of doing business (Doing Business 2008 of The World Bank), every reform counts in creating a more conducive business environment.

Source : Economic Times - Gurgaon, Haryana, India, dated 25/12/2007