Pros and cons of the dual GST

It is expected that the final report of the Empowered Committee in relation to the proposed dual-GST will be released towards the end of January 2008. Let us examine some of the challenges surrounding the introduction of the dual-GST.

While the ostensible objective of the GST is to subsume all indirect taxes that are currently imposed on the flow of goods and services, the states appear to have resisted the move to subsume several state taxes.

It would be unfortunate because one of the key benefits of the GST is that it is the only indirect tax of any consequence and entities are able to carry on business by factoring this single tax cost alone.

The challenge of how best to ensure that the revenues of the states are protected and indeed augmented under the GST model is a real one but the answer is certainly not to go back on the fundamental premise of the GST and to therefore exclude a range of state taxes from the GST purview.

Another key policy challenge relating to GST is that of determination of a uniform threshold, which would apply for both the federal GST as well as the state GST. The present position wherein there are signifi-cantly differing thresholds across the two federal indirect taxes of CenVAT and service tax, together with the co-existence of multiple thresholds under the state VAT, is not conducive at all to the intro-duction of a uniform threshold under GST.

Nevertheless, this has to be attempted so that the coverage of the GST is restricted to the relatively larger economic entities based on taxable turnovers. This critical policy challenge needs to be met if the GST is to be successful. On a similar vein, there is a need to address the issue of standardisation of systems, principles and procedures, across the federal and state GST.

If the GST is to be successfully implemented, it is essential that the GST code that would be brought into force at the Centre and the states is similarly worded and ensures that the principles and the procedures underlying the tax, as also the systems to be followed by the assessees in order to enable compliance, are standardised and well understood.

The objective of ensuring that compliance costs related to the dual GST are within manageable limits can only be met through standardisation. The challenge here is that the present tax statutes across the federal indirect taxes (Cen-VAT and service tax) and the state VAT are materially different with regard to their principles and procedures and hence, the task of standardisation is an immense one.

Yet another challenge, given the heterogeneous practice followed in this regard, is standardisation of procedures relating to dispute settlement , ranging from adjudication to appeals/revisions. These are presently very different, with regard to coverage, timelines and various other parameters, across the federal indirect taxes and the state VAT.

This clearly is not sustainable under the GST dispensation and the challenge will be to evolve a commonly acceptable dispute settlement process which would facilitate bringing finality to proceedings within a reasonable timeframe while, at the same time, safeguarding government revenues. This is one area where global best practices, including a fundamental reform of the appellate process, could bring about very tangible results.

In any far-reaching and fundamental fiscal reform process, such as the introduction of the GST, the aspect of the adequate training of the tax administration poses a huge challenge. This is particularly true where sections of the tax administration continue to resist the introduction of the GST.

An enormous amount of time and effort is required to be put in to ensure that the vast bureaucracy in the government tax departments is adequately informed and trained on the fundamentally different tax that is proposed to be introduced.

These training initiatives need to be properly thought through and implemented through a variety of means. Information technology will be a key driver and will be critical in ensuring that the training is rolled out to as many sections of the tax administration as possible. Ultimately, it is battle a for the hearts and minds of large sections of the staff at the federal and state level and the battle must be won if the GST is to succeed.

Source : Economic Times - Gurgaon, Haryana, India, dated 17/01/2008