The 13th Finance Commission (TFC) has issued a report of
the task force, constituted by it on 15 December, on
various issues relating to the design and implementation
of the goods and services tax (GST). There are several
differences in the recommendations in this report and
those in the first discussion paper released by the
empowered committee of state finance ministers in
November. The differences relate to several critical
areas such as the tax base, tax rates, threshold limits,
taxation of inter-state supplies of goods and services,
exemptions or compounding systems and taxation of
tobacco, alcohol and petroleum products. In a short
column, it will be appropriate to focus on some of the
important differences.
First, the TFC task force envisages seamless
implementation of GST by all states and the Centre, if
necessary by postponing the implementation date to 1
October. Such a unified roll-out requires a
Constitutional amendment to enable states to levy taxes
on services and the Centre to levy taxes on sales of
goods, an agreement among all states on the amounts to
be levied, removal of the central sales tax (CST) and
implementing machinery that will put in place the
processes to enable this to work. On each of these,
there is no agreement yet within the empowered
committee.
It is unlikely that the empowered committee will be
convinced that a GST rate of 12% (Centre: 5%; states:
7%), as TFC suggests, would be revenue neutral— several
states such as Tamil Nadu are viewing the entire
exercise with some scepticism. There is pressure for a
higher number and a higher proportion of allocation to
states. The issue of CST is not yet settled, as the roll
down of the tax to zero is not proceeding as planned.
There is also no agreement on the exemptions that would
be available. Among the most contentious is alcohol,
where state excise revenues define huge political
patronages. In fact, on excise on wines, there is a
dispute before the World Trade Organization (WTO) that
several states are levying discriminatory state excise
duties. But the task force report recommends GST rates
to cover these through levy of excise duties on tobacco
and spirits. In short, several of the premises of the
TFC task force are, at best, wishes and do not take into
account the realities of the discussions before the
empowered committee.
Second is the issue related to taxes to be subsumed
under GST. The task force has really gone over the top
here. It would like all goods and service sectors to be
integrated into the framework, including the real estate
and the power sectors, though there is no clear
indication how this should be done. Local bodies would
be entitled to a formula-based devolution of 2% in lieu
of entry tax, octroi, cesses, and so on. Quite apart
from the sheer magnitude of legislation required to do
away with the tax collection powers of local bodies,
such a broad-brush approach would be detrimental to
revenue collection in large cities such as Mumbai that
depend heavily on these levies. And how would the 2% be
allocated—by the Centre or by the states? As cities
grow, so do civic needs—would their services be
constrained because the tax revenues allocated to them
do not grow as rapidly? A conceptually elegant solution
does not necessarily lend itself to pragmatic
implementation.
Third, there is a list of exemptions that has been
prescribed: all public services of the government
(Central, state and municipalities or panchayats),
education and health services, the public distribution
system, and so on. TFC also says that no exemptions
should be provided to developers of or units in special
economic zones. It lays down a series of procedures for
claiming set-offs and abatements that would require a
very elaborate information technology-enabled system to
be in place across all states—there is no evidence that
such processes are even under contemplation. There is
also a proposal to empower the committee of state
finance ministers through the Constitution to be a
permanent dispute resolution and solution finding
body—another United Nations or WTO with, perhaps, the
same level of effectiveness.
It is a little surprising that given the empowered
committee is already grappling with the complexities of
GST, the government would have encouraged a parallel
analysis by TFC. If it was intended as a red herring, to
divert attention away from some of the more contentious
views of the committee, perhaps it’s likely to do more
harm than good—encourage contention rather than solve
issues.
Most importantly, the task force report does not address
any of the issues raised in the discussion paper of the
empowered committee, nor attempt to suggest
solutions—almost as though this was a parallel exercise.
It is quite clear that this report has been prepared by
people who have little knowledge of ground realities of
tax collection and implementation at the state level—in
fact, one sees the same disconnect with reality as in
the draft direct tax code released in August.
The above are only examples—there are several more such
problems in the recommendations of the task force. In
short, it is an idealists’ exercise, with no basis in
reality—a fact that the media has yet to recognize.
