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S Madhavan: Quo vadis, Goods and Services Tax?

With so many detractors this vital tax reform is struggling against the odds

S Madhavan 

S Madhavan

The last week has not been a good one for the chequered Goods and Services Tax (GST). Indeed, if the news reports on the proceedings of the Empowered Committee (EC) are anything to go by, there is a need to reflect on where GST is headed and whether it is likely to see the light of day anytime soon. Hence, the title to the article.

Before we discuss the outcomes of the EC meeting, let us appreciate the fact that GST is, in any case, not likely to be implemented before 2015 for the following reasons:

  • The recent categorical assertion by the prime minister that GST will be implemented by the new government that will assume office, after the general elections in 2014;
  • The new government will most likely assume office only by mid-2014, if not later; and
  • GST is best introduced at the beginning of a fiscal year.

For all these reasons, the earliest likely introduction of this fundamental tax reform measure is April 2015. The question, therefore, is whether even this long-delayed tryst with GST will be met.

Let us now consider the matters that were debated by the EC in its meeting last week:

  • Inclusion of petroleum products and alcohol within GST framework. The reported outcome of the EC meeting is that most member states have opposed this inclusion, ostensibly on grounds of revenue.

  • Subsuming the entry tax in GST. Here again, the reported outcome of the EC meeting is negative and states have opposed the move.

  • Passage of the Constitution Amendment Bill relating to GST by Parliament in its winter session of 2013. Here again, reports have it that certain states believe that the Bill should be considered by Parliament only after it is mooted by the new government that would take office at the Centre in mid-2014.

All these developments are dismaying, notwithstanding that the EC chairman, Abdul Rahim Rather, has apparently stated that a final view on these matters will only be taken by the EC in its next meeting in November. This is because it is very unlikely that the EC's final decision will be contrary to the outcomes listed above and also because an agreement between the Centre and the EC is awaited on a host of other critical aspects of GST as well.

Let us briefly consider the matters on which the EC has tentatively reached some conclusions. It is, by now, acknowledged that GST should be as broad-based as possible, so that the tax rates under GST are consequently moderate. It follows, therefore, that the extension of GST to petroleum products and alcohol is well merited. The states have apparently pressed revenue considerations to oppose this broad-basing. The straightforward answer to this point would be that the states are free to impose excise taxes on these products, at appropriate rates and without the benefit of input tax offsets, over and above the maximum rates of GST that will likely be made applicable to these products.

Surely, such a possible scheme of taxation of petroleum products and alcohol under the GST will protect, and indeed enhance, states' revenue collections from these products? It appears that the apprehension of the states on the extension of GST to petroleum products and alcohol is misplaced. It is another point altogether that there is no clarity on how taxation of these products, outside of GST, will coexist with GST that would be in place for all other products, assuming the status quo continues.

A related point is that the Bill seeks to exclude these products at the threshold itself, whereas it is now universally acknowledged that the exclusions, if at all, must only be brought about via notifications, so the Bill should extend to all products without reservation. One hopes that the EC is at least agreeable to this very basic construct.

As to the point on entry tax, it is surely sub-optimal to keep this tax outside of GST, both because of the pernicious implications of the tax cascading that would result and also because it is detrimental to bringing about a common market for goods in India, which is a key objective of GST. If state revenues and local body revenues are considerations, the answer would be to consequently enhance GST rates by a small percentage to take care of entry tax revenues and to not continue with such a regressive tax. Here again, it is another matter that the levy of entry tax is facing a serious constitutional challenge.

As to the final point on the passage of the Bill, it is again moot as to why such a fundamental enabler as the Bill, which is merely preparatory to other measures and is a basic condition for GST, should be postponed for discussion until the new Parliament, after the elections of 2014, is constituted. This viewpoint is, thus, not a defensible one.

In sum, the conclusions of the latest EC meeting are discouraging for the advent of GST by 2015, which is, by itself, a long-delayed start. There is, however, too much at stake here and none of the stakeholders, including industry, can afford to let matters rest. Hence, despite last week's setback, stakeholders must continue to engage and debate GST and persuade those opposed to it to support this most fundamental of tax reform measures such that, by 2015 at least and surely not later, GST is brought into force and the economy is consequently positioned once again for double-digit growth. There is no other choice.

The author is co-chair of the GST Task Force, Federation of Indian Chambers of Commerce and Industry

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First Published: Sun, October 27 2013. 21:46 IST