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Sukumar
Mukhopadhyay
Former Member, Central Board of Excise & Customs
Though
the government hasn’t made any official announcement as
yet, there seems to be a general acceptance that a dual
Goods and Service Tax (GST) is better than a single one.
Given a choice between single and dual GST, I would go for
the dual GST. We have to keep in mind that India is a
federal country with disparate states. Comparing it with
Australia or Canada does not make much sense.
What
does single GST entail? It means that central excise duty,
service tax and sales tax will be merged together and
collected as one single tax. It has been argued that this
will increase revenue and create a common market. Nothing
can be further from the truth. Such a proposal is neither
economically desirable nor administratively practical. The
reason are given below:
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The
Constitution does not permit the Centre to charge
sales tax. Nor does the Constitution permit the states
to charge central excise duty and service tax. If the
Constitution is amended to combine all three taxes in
one list, (the Union List or the State List or the
Concurrent List), it will mean that the present
federal structure will have to be fundamentally
changed.
If
it goes to the Union List, the Centre will levy
everything. The states are unlikely to agree to that. If
it goes to the State List, the Centre will not agree to
such a loss of fiscal power. If it goes to the the
Concurrent List, there will be complete chaos as no one
can control the power of states to increase rates
depending uopn their whims and fancies.
In
any case, it will completely upset the present concept of
fiscal federalism, which is the cornerstone of Indian
polity. It is an accepted constitutional position that the
‘fundamental structure’ of the Constitution cannot be
changed by an amendment of the Constitution. Besides, a
clear decision will take several years.
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Except
for Australia, which is not really comparable to
India, a unified GST doesn’t exist in any federal
structure. Other countries which have a combined GST
are unitary states. Canada has single federal GST but
it also has a states’ sales tax that actually makes
it dual. Brazil is not an example of single GST
either.
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Who
will collect the GST will be a highly-contested issue.
The states will not allow the Centre to collect and
distribute the taxes. If the tax collection services
of the Centre and the states are merged, as will
happen in case there is single/unified tax, litigation
will go on for decades and the system will not
function properly.
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The
total collection of revenue will remain the same under
both a single/unified GST and a dual one. It is a myth
that revenue will increase under a single/unified GST.
Revenues increase only if the tax base is widened and
not when two existing bases are merged.
Dual
GST will be the most practical system for federal India.
Since the Centre already levies Cenvat and a service tax,
a Central GST can work very well, though some more
harmonisation can take place. Similarly the state GST can
function well with some improvements in introducing
symmetry.
If
one adopts a pragmatic approach and doesn’t get
enamoured by pure theory, one has no option but to accept
the dual GST. A single/unified GST is a singularly bad
idea
Satya
Poddar
Tax Partner, Policy Advisory Group, Ernst & Young,
India
A
single/unified GST, with revenue-sharing between the
Centre and the states would, without a doubt, be ideal for
India. If levied on a comprehensive base at a single rate,
it would rid the system of virtually all economic
distortions and classification disputes.
Replacing
36 taxing statutes (of the Centre and 35 states and union
territories) with only one would lead to a substantial
reduction in compliance costs and free up resources for
other more productive pursuits. It would make common
market for India a reality. Goods and services would move
freely within India with no checkpoint, internal-tax
frontiers or other barriers to trade.
Indeed,
such political economy compromises have been adopted by
China and Australia. China moved to a centralised VAT
while sharing revenues with the provinces — ensuring
that provinces got as much revenues as under the prior
arrangements, plus a share of the increment. In Australia,
the GST is a single national levy and all the GST revenues
collected by the Centre are returned to the states.
The
Harmonised Sales Tax (HST) adopted by three provinces in
Canada (Newfoundland, New Brunswick, and Nova Scotia) is
also in essence a unified GST. It is a tax with one rate,
one base, and one set of rules.
States
in India are unlikely to favour such a compromise, as has
already been revealed in their preference for the dual GST.
The political pundits would argue that a single/unified
GST would severally constrain the fiscal autonomy of the
States, which is so crucial to the federal structure of
our Constitution. It goes without saying that the power to
govern and to raise revenues go together.
But,
fiscal autonomy does not preclude the Centre and the
states to voluntarily agree to harmonise their tax systems
to minimise economic distortions and simplify compliance
and enforcement.
A
single/unified GST would entail complete harmonisation tax
rates, base and administration. The first two elements
could be viewed as important levers on which the states
would want to have some degree of control to achieve their
policy objectives. However, international experience
suggests that making changes to the GST base is not a
suitable instrument for social and economic policy. While
there are intense debates on the tax base at the time the
tax is introduced, changes in the base have been
infrequent once the tax is enacted. This has especially
been the case where the tax was initially levied on a
broad and comprehensive base.
The
Indian experience with inter-state variation in tax rates
has also not been encouraging. Even minor variations lead
to leakages in the form of diversion of sales to low-rate
jurisdictions. For example, year 2005 witnessed a
substantial diversion of gold and silver sales to
Rajasthan where the VAT rate was set at 0.25 per cent
compared to 1.0 per cent elsewhere.
Such
variations would prove to be even more problematic in
taxation of services such as inter-state
telecommunication, transportation, credit cards, banking
and insurance. There is no unique place of consumption of
such services, and any inter-state variation in tax rates
would encourage manoeuvring to minimise the tax.
Thus,
harmonisation of both tax base and rates should be the
ultimate goal of GST reform. A single/unified GST would
assure this outcome. The dual GST could also take us
there, provided it has all the essential elements of a
unified GST.
Source :
Business Standard - Mumbai, Maharashtra, India, dated
01/07/2009 |
