GST, finally?

The winter
session of Parliament that begins today could see the tabling of
significant legislation that paves the way for a nationwide goods and
services tax (GST). The Centre appears to have got the states on board
for the Constitution amendment bill that would enable the GST to come
into force.
True, key differences remain: states want the GST to be
levied on all traders whose annual turnover exceeds Rs 10 lakh, while
the Centre favours a higher Rs 25 lakh threshold. States also don’t want
the GST to cover petroleum, alcohol or tobacco. Further, they have
demanded that the bill incorporate provisions to compensate them for
revenue losses arising from GST implementation, whereas the Centre is
unwilling to give any such explicit guarantee.
The above differences are, however, not irresolvable. The right forum
to discuss them is the GST Council, comprising the Union finance
minister and his state-level counterparts, which the bill proposes to
create. The priority today should be to get the bill — which empowers
the Centre to tax sales of goods (that only the states can now do) and
the states to tax services (currently the Centre’s preserve) — passed in
the coming session itself, so that the GST can be rolled out from April
1, 2016. All contentious details, including deciding the so-called GST
revenue-neutral rate, can be sorted out during the interim period. And
that is eminently possible with some large-heartedness on the Centre’s
part. The least it can do is establish a compensation fund to be
administered by the GST Council. This fund could cover any revenue
losses of the states in the short run based on clearly defined
parameters for projecting tax collections under alternative GST/ no-GST
scenarios. It also helps that Prime Minister Narendra Modi has been a
chief minister. An assurance from him on compensating them for genuine
revenue losses would certainly carry credibility.
But any federal compensation has to be made conditional upon the
states agreeing to subsume all local levies, including octroi/ entry
tax, under the GST. Moreover, no product should be exempted from the
GST, which aims at taxing every good and service on the value-added
principle. In a regime where producers at each stage of the value chain
can claim a refund for taxes paid on their inputs, exemption of any
product or levy will only lead to the cascading of taxes. Taxing every
commodity on value addition, including services, would ultimately be
conducive to economic activity. The resultant revenue buoyancy, in turn,
would also not necessitate pegging the combined GST rate as high as 27
per cent, which is what the states are now pushing for.
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