An important milestone in the path
towards the Goods and Services Tax (GST) has been reached, with the Empowered
Committee of State Finance Ministers deciding on a three-tier duty structure for
the goods component. There will be a low rate for goods of mass consumption, a
standard rate for most other items, and a premium rate for a small category of
items. It can be argued that a multiple duty structure is not the best way to go
forward, since it can raise problems of classification and revenue leakages, for
instance. Besides, the States may find it difficult to resist pressures from
interested groups either for exemption or for levy at a lower rate. However,
although a single tax rate is theoretically preferable, it may not be
practicable at this juncture. Ever since Finance Minister Pranab Mukherjee
announced that the GST would be introduced on April 1, 2010, the accent has been
on developing a structure that would be economically viable and politically
acceptable, besides satisfying administrative canons of efficiency and
compliance. In the budget it was announced that, in effect, there would be two
sets of GST — one for the goods, and the other for the services, levied at two
levels. These two would be mutually exclusive and operate across the value
chain.
Now that the structure of the GST for the States has
been determined, attention should shift to overcoming
the practical problems of implementing it. It is at the
level of the States that the introduction of the new
tax, which will replace the State-level Value Added Tax
(VAT) that came into being in 2005, is expected to be
particularly daunting. Among others, a system of
capturing input tax credits must be worked out urgently.
The two big challenges are in the areas of compensating
the States for possible revenue losses and revamping the
legal architecture. In addition to the government, the
13th Finance Commission will address the issue of
compensating the States. There must be a far greater
urgency than what has been in evidence so far in taking
the necessary legal steps, including a constitutional
amendment to enable the States to levy a service tax and
the Centre to tax goods beyond the factory gate. Certain
existing laws such as the Central Excise Act 1944 and
the Finance Act, 1994 need to be repealed. Existing VAT
laws must also be modified or partially repealed. A more
realistic timetable for the GST can be drawn up after
taking into account the progress in fulfilling the legal
and administrative requirements.
