It will be no tragedy if
we miss the April 1, 2010 deadline for rolling out the
Goods and Services Tax (GST). The Centre and the states
are yet to resolve differences on key issues including
the rate-structure, legislative amendments and the
mechanism to compensate states for revenue losses, if
any. The 13th Finance Commission’s task force on GST has
come out with a report that merits close study by both
the Centre and the Empowered Committee of state finance
ministers. GST is the mother of all tax reforms and its
implementation should be preceded by adequate
preparatory work to ensure a smooth transition.
The introduction of GST can wait till the legislative
framework is in place, the IT system that can service it is up and running and
the administration is fully geared to handle the new tax. As of now, the Centre
and the states have only agreed on a dual GST, comprising a central GST and a
state GST. States want a cumulative indirect tax rate of 15% plus compared to
the 12% rate suggested by the Finance Commission task force, as they fear loss
of revenue during transition.
A simple tax regime would require subsuming all state and central taxes under
GST. Legislative changes including the Constitutional amendment to empower
states to levy a tax on services and the Centre to levy a tax on the sale of
goods can always be done, once the rate structure is settled.
The Constitution also needs to be amended to proscribe taxes by local
governments on goods and services such as Octroi and entertainment tax. An
ill-conceived GST could defeat the goal of having a simplified tax system to
usher in a seamless common market in the country. Recall the compliance problems
encountered after the introduction of the value added tax at the manufacturing
level (Modvat) in 1986. Systems were not in place to track transactions, leading
to fictitious claims by manufacturers. Many of them claimed credit on input
taxes that they never paid. Mistakes such as these must not be repeated.
A robust IT system is a pre-requisite for the introduction GST. The Tax
Information Exchange System (Tinxsys), a centralised exchange of all inter-state
dealers, is yet to be fully implemented by all states. Scaling up this system to
include inter-state transactions would take time. But that would be time well
spent.
