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One
benefit of the GST lay in the corresponding removal of
taxes that hold back economic growth — such as stamp
duties, which are mere transaction taxes that afflict the
real estate market, and levies, which impede the free
movement of goods and services. In addition, a key goal of
the GST was to reduce the number of taxmen that an
individual or a firm had to deal with. With only two taxes
— the income tax and the GST — each firm would have to
deal with only two taxmen and all individuals would have
to deal with only one. This would help greatly by
eliminating administrative overheads and corruption.
Tax
reform is about policies, politics and administration. In
the case of the GST, a good deal of policy work is now in
place. It is now well understood that there will be two
taxes at a legal level — the state GST and the central
GST — but that firms will behave as if there is one when
it comes to administration. Imports will be charged the
GST at the point of entry and exports will be refunded the
full burden of indirect taxation that they have suffered
at the point of exit. In terms of administration, the tax
information network (TIN) can be readily modified to go
from the existing income-tax related role to the
implementation of the GST.
That
leaves the politics. The messiest part of moving to the
GST lies in getting state governments to eliminate the
plethora of levies that have sprung up over the years.
West Bengal Finance Minister Asim Dasgupta’s empowered
committee has made progress in obtaining an agreement in
moving towards the GST. However, this agreement is
incomplete because it does not simultaneously envisage the
elimination of all other taxes. The extension of services
into the tax purview of state governments is the last
chance for obtaining the “grand bargain” where other
taxes are eliminated. The Prime Minister and finance
minister must remain engaged with the problem until there
is an agreement on eliminating all other taxes as part of
ushering in the GST.
The
last issue is that of the tax rate. As the fiscal expert
Amaresh Bagchi has emphasised, the calculations in the
FRBM Task Force report were based on a very high GST rate.
This was because it was assumed that only above-median
firms would comply with the GST. A more reasonable
assumption about tax compliance argues in favour of a
lower GST rate. A lower GST rate will, in turn, support
better compliance. Political support for rolling out the
GST, and pressure to remove every other tax as originally
envisaged, will be facilitated if a GST rate of well below
20 per cent is targeted.
Source
: Business Standard / New Delhi, dated December 04, 2007
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