Time for consensus on GST

The Centre and states should sit down and quickly thrash out a consensus on goods and services tax (GST), not because the deadline set by the Centre is getting close but because it is an important indirect tax reform that would create an integrated country-wide market for goods and services.

Governments at the Centre and states must agree to a low and preferably uniform tax rate that covers a wide base of goods and services. Such transformation of the market, which currently is highly fragmented, and introduction of a lower rate is necessary to bring down overall costs of doing business and thereby keep inflation, caused by manufactured goods, at tolerable levels.

A lower rate of indirect taxes is also essential to bring down the tax-to-income ratio for those at lower income levels. Currently, those at the bottom of the pyramid bear a higher burden of tax than those at the top. That should change as Indian economy evolves, with the dependence shifting to direct taxes. States should stop bargaining to keep many local levies such as octroi and entry tax outside GST if they are genuinely concerned about bringing down costs, promoting entrepreneurship and integrating markets. For that matter, Centre should outright reject the states’ demand to allow them to retain the power to impose local levies including octroi, when GST is adopted.

Experience with implementation of state VAT and the scrapping of central sales tax illustrates the difficulties in pushing through reforms in this country. While rushing a reforms process, particularly something like GST, can prove counter-productive, delaying for the sake of finding a perfect formula would also not be advisable. There is no such thing like a perfect solution; policy measures have to be refined over time to enable smooth implementation. In the case of GST, once a broad consensus is reached on a formula for taxing goods and services as well as sharing of powers to do so, the tax reform must be implemented. The focus should be to keep the tax structure simple to understand and implement. At the end of the day, the governments at the Centre and states must keep the interest of the stakeholders — in this case, the citizens of this country — ahead of their own interest.

Source : Economic Times - Gurgaon, Haryana, India,  dated 19/05/2008