Towards a dual GST

A key area of interest in Finance Minister P Chidambaram's Budget speech next week will be the action he outlines for introducing a "national level goods and services tax" by the target date of April 2010. The introduction of a goods and services tax (GST) is in itself an ambitious task. It becomes even more daunting if the goal, as set out by Mr Chidambaram, is to introduce a national-level GST that "should be shared between the Centre and the states". For, the idea of a single national GST replacing the Central value-added tax (VAT), the service tax and the State VAT is likely to face many practical problems under Indian conditions, even though it is often cited as an ideal taxation instrument for federal markets. Politically, a national-level GST may be untenable because states will resent the loss of their power to tax goods and will treat it as an assault on their fiscal autonomy. There are also many sticky administrative issues (e.g. what will happen to the state VAT collection machinery, and who will control the large number of people employed there?) that will come in the way of smooth implementation of a national-level GST.

It will be prudent, therefore, for Mr Chidambaram to attempt only that version of a GST which is politically acceptable and administratively feasible. In other words, a dual GST is a preferred option in which the Centre and the states both retain the power of levying and collecting taxes on goods and services. To be sure, this too will pose quite a few challenges at the administrative level. The taxation procedures and administrative systems in 35 states and union territories will have to be harmonised to ensure that a dual GST results in a truly common market for goods and services across India. All states have to agree to the principles of levying the tax at the destination (or consumption) point and to a floor tariff below which no state can fix its rates. There will be ticklish issues on how services that originate in one state and terminate in another will be taxed, and who will tax them. This will require consultations so that a uniform system of taxation, without any cascading effect, is adopted""and it would be best if the finance minister himself were to chair a committee of state finance ministers so that he can drive the process. But most importantly, the Constitution will have to be amended so that the states get the right to tax services""by holding out this carrot, the Centre should try and get the states to toe the line on many ticklish issues.

This is a task that will take time and the three years between now and the April 2010 deadline may prove to be too short. It would be a pity if in his Budget speech next week, the finance minister fails to outline an action plan to grapple with the very real administrative issues and start the process of amending the Constitution. Without these fundamental changes, the danger is that the country may settle for an ad hoc GST system in which the Centre may harmonise its Central VAT rates with the service tax rates and allow the states to tax some of the services also in addition to the State VAT. That would be an imperfect GST system, with many flaws and without the full benefits of a dual GST.