Progress on GST  

A consensus among states to go for three rates for the state level goods and services tax (GST) marks positive movement in implementing this major tax reform. The lack of agreement on a single rate at the state level should not be seen as a major setback, as some tend to. But the success of the transition would depend on putting in place a proper system to allow input tax credit. In any case, an abrupt move from multiple rates of tax to a single rate is neither easy nor advisable, as it has the potential to disrupt stability of prices across a spectrum of goods.

Politically, it is not feasible - no politician would like to take responsibility for imposing higher taxes on citizens. Besides, there would be opposition from industry, particularly those that are required to move to a higher rate of tax, even when all taxes paid through the value chain are offset through input credits. No doubt, a single rate is ideal, as it reduces distortions and misuse of input tax credit. For the policy makers that should be the milestone to be reached in a few years. For the moment, it makes sense to have three rates - a standard rate, a lower rate for essential items, and a nominal rate for precious metals. Exempting some goods from GST makes no sense - in fact, it can discourage production and distribution of these goods achieving scale and organisation.

Agreement on the structure does not, however, mean that GST will commence on April 1, 2010. In the most optimistic scenario, the Centre would succeed in amending the Constitution to allow taxation of both goods and services by the Union government and the states. A joint working group will work out within two months the amendments required to the Constitution and also prepare a model GST law for the Centre and the states. Simultaneously, the states would put their heads together on creating an IT network to capture data on inter-state transactions, necessary to prevent leakage of taxes. They also have to update the database of inter-state transactions. A system to allot new tax identity numbers under GST and for filing of returns has also to be finalised. It is a long haul before the country can move to a GST regime, and policymakers need to remain focused on removing all impediments to its implementation. 

Source : Economic Times, India,  dated 21/09/2009