The
Centre and states have now embarked on implementing
this more rational regime, in the form of a dual
goods and services tax (GST), to be levied
concurrently by both levels of government.
A
dual structure would mean that there would be a
central GST and a state GST, each levied on a
comprehensive base comprising both goods and
services. Thus, a transaction would attract both
taxes.
Ideally,
both taxes should have been merged into a single
national GST, with an appropriate sharing of
revenues between the Centre and states. However,
given the federal structure of the Constitution, a
dual GST is a political necessity.
It
is essential that the GST laws are harmonized
between the Centre and states, and among states.
This will simplify compliance, reduce administration
costs and improve revenue collections: a win-win for
governments and taxpayers.
There
are several dimensions to harmonization—tax base
and rates, tax administration and tax legislation,
and rules and procedures.
It is essential that the base for the tax covers
both goods and services in a seamless manner and is
uniform throughout the country. Under the best
international models, GST is levied on all supplies,
whether of goods, services, real property,
intangibles, or any combination of these. Moreover,
the tax applies at all points in the supply chain.
The current division of tax base under the
Constitution between an exclusive Centre list and an
exclusive state list is archaic and no longer
tenable in India’s modern economy. The
Constitution needs to be amended to give both levels
of government concurrent powers to levy tax on all
supplies, with the proviso that the state tax would
be restricted to supplies for consumption within
that state.
Application of tax on a comprehensive base would
automatically ensure uniformity of the base between
the Centre and states, and across states. Under VAT,
states have exercised their fiscal autonomy to
deviate from the common base agreed to by a
committee of state finance ministers. Such
deviations are unfortunate and should be resisted.
As regards the tax rate, two primary tax rates are
contemplated—a standard rate and a lower rate
applicable to food and other specified necessities.
While a lower rate for food may be inevitable on
social, economic and political grounds, it runs the
risk of seriously compromising the objective of base
harmonization.
Currently, the Centre does not levy any tax on
agricultural output but the states do. There are,
however, significant inter-state variations.
One can only speculate whether a common list
eligible for the lower rate would be an easier
political compromise than a common base with no
such list.
Another element of harmonization is a common set
of rules for the taxation of inter-state
services—for example, telephone calls and
passenger and freight transportation from one
state to another.
There are many other services which are rendered
or consumed across several states, with no unique
place of supply or consumption. Application of
state GST to such services requires a common set
of rules defining the place of supply where they
would be taxable, similar to those defining
international exports and imports of services
under the current service tax.
A common set of place-of-supply rules will avoid
any overlaps or gaps in state taxation of
services.
Harmonization of administration is essential to
reduce duplication of administration costs,
improve enforcement and reduce compliance costs.
Currently, there is little coordination among the
Centre and state administrations. The GST offers
an opportunity for a complete overhaul of tax
administration, to make it more efficient and
effective.
The governments have agreed to adopt a common
taxpayer identification number for the Centre and
state GSTs and harmonize the design of tax forms
and the reporting and filing periods and
procedures.
In addition, it has been proposed that the states
collect the Central GST on behalf of the Centre
from smaller dealers below the registration
threshold of Rs1.5 crore under Central excise.
These are welcome features of the GST
administration and should be extended to other
elements of tax administration.
Two options
There are two options for harmonization of tax
legislation. First, the core GST legislation could
be enacted by Parliament, empowering the states
and the Centre to levy and collect the tax by
referring to the provisions in the core
legislation. This would ensure uniformity in core
legislative provisions, allowing the Centre and
states the flexibility to set rates within the
agreed framework.
The core legislation would include all the
definitions, rules defining the taxable
consideration, input tax credits, timing of tax
payments and adjustments in special circumstances.
They would also include tax form design and audit,
enforcement and appeal procedures. Harmonization
should also extend to the system of tax
interpretation and rulings, such as classification
of goods and services, determination of taxable
consideration and definition of export and import.
This would ensure the setting up of a common rule
of law, with the Centre and states having the
power to enforce this. The central sales tax (CST)
in India provides a useful model for such
harmonization.
Although the CST is a Central levy, it’s
administered by the states, and the revenue from it
goes to the appropriate states. The tax law is
enacted by Parliament but the states collect and
keep the tax. There can be no better example of
harmonization than the conception of the CST model,
with the states enjoying the risks and rewards of
ownership of the tax.
An alternative model would be to have the Centre and
the states each enact their own GST law with
identical core provisions. The difference between
the two alternatives is cosmetic. The second
alternative could be seen to give greater
recognition to the states’ fiscal autonomy.
