GST without central excise is like Hamlet without the Prince of Denmark

Now that GST is in the air and some research organisations apart from the usual Empowered Committee of State Finance Ministers are working out the details, one news item in the media is of particular importance in this context. The Central Board of Excise & Customs (CBEC) is reportedly of the view that Central Excise should be out of the purview of GST. The argument seems to be that central excise is a fiscal tool used by the government to promote or discourage economic activity and if it is subsumed within the GST, the fiscal tool will not be effective. There has not been any statement reported in the media by the CBEC itself but taking the media report for granted, the issue needs discussion. There have been also some comments coming from the fiscal experts on the subject of inclusion or exclusion of individual taxes. It is, therefore, worth analysing what should be excluded or included.

My unequivocal view is that central excise is the most predominant part of GST. And if GST is made without central excise, then it will be nothing but Hamlet without the Prince of Denmark.

What after all are the elements in GST? Basically they are three: central excise, service tax and VAT (state). Other smaller elements are road tax, motor vehicle tax etc. If it is a national GST, then all of them have to be combined. It is almost a known decision that national GST not being practicable due to constitutional difficulties, it will be dual GST. Central GST can only be central excise plus service tax. The state GST can be a combination of state VAT, service tax and some state taxes. It is a different question whether some service taxes will be given to the states. It may need some Constitutional change also if it is allowed to be levied by the states. If it is to be merely collected by the states and appropriated by the states, it can be done without Constitutional change but by a Parliamentary Act as it is prevalent in the case of Central sales tax, which is a levy by the Centre and collected and appropriated by the states.

Now coming to Central GST, the relative position in terms of revenue is that service tax is about 10 per cent of central excise. It may slightly change in favour of service tax in future but for long the percentage will remain below 15. So leaving out the big brother (central excise) from GST only means that the GST will become nothing but its poor cousin (service tax). This would tantamount to arguing that central excise and service tax should not be combined into a GST.

The argument that central excise is a tool of fiscal policy is equally applicable to service tax also. It is true for all taxes, direct and indirect. If central excise can be used as a fiscal tool, so can the combination of excise and service tax be used as a fiscal tool also. If for promotional purpose central excise duty can be reduced, the same can be done for GST also. In several countries in the world, GST rates have been revised for precisely fiscal dirigisme. Examples are Japan (3 per cent to 5 per cent), Germany, UK etc.

Conclusion: There should be no misunderstanding about the structure and the constituents of GST at the central level and at the state level. Even the GST which is a combination of central excise and service tax will necessarily have to be administered by the Central Board of Excise and Customs. So there will be no administrative change from the present position.

Source : Business Standard - Mumbai, Maharashtra, India, dated 01/09/2008