• Moving forward on GST

  • Moving Forward on GST: Need to Bridge the Trust Deficit

    M. Govinda Rao


    With the budget presentation out of the way, the Government should now take swift initiatives to move forward on some important reform areas that are not contentious. Unfortunately, contrary to the hope of many, the government missed the opportunity to provide clear signals on reforms which could have helped to revive the market sentiment. Now, the only hope for the ruling coalition to come back to power is to use the remaining window of a year and a half to show its clear intention through some important initiatives on reforms. One area where it can gain a lot of goodwill is in persuading the states to move ahead in introducing GST.

    Switching over to the negative list in service taxation is an important initiative in the budget not only because it will expand the tax base, but also will make the transition to GST easier. In fact, with input lax credit extended to both goods and services, in effect, we now have an approximate goods and services tax at the manufacturing stage at the central level, even without a constitutional amendment! Of course, there are some important measures needed to make it a proper GST, even at the manufacturing stage. This includes rationalising the excise duties by converting the remaining items subject to specific duties into ad valorem levies, unifying the tax rates and having a uniform threshold for taxing both goods and services. The negative list will make it politically easier to include all services in the tax net. It will also help in quantifying the size of the tax base more accurately and this will help in estimating the revenue neutral tax rate at both central and state levels. The latter is particularly important as many of the states are quite apprehensive that the size of the tax base may not expand substantially when service tax powers are given to them.

    There are some important transitional measures which the central government will have to initiate to generalise the input tax credit mechanism. In the absence of a comprehensive value added tax, a number of hybrid mechanisms to collect CENVAT have been introduced and going forward, some of them may make a proper input tax credit mechanism difficult, The Central Board of Kxcise and Customs should review the working of the system at present and work out a strategy of making a comprehensive transition to GST. The first important measure, as mentioned above is the rationalization of the prevailing structure of excise duties to minimise exemptions, convert the specific into ad valorem levies and move a number of items in the 000040000000040000merit" rate category into the general category. An important objective of excise duty is to tax the sumptuary items of consumption at high rates, this may be accomplished by having a general GST rate and a special sumptuary rate on these items of consumption. Similar approach may be adopted in the case of consumption items polluting the environment or those considered luxuries.

    The second important transitional measure that CBEC will have to consider is to do away with the practice of tax deduction at source (TDS) in the case of service tax. In a system of comprehensive input tax crediting mechanism which will have to come into vogue


    when we have the GST, the system of TDS is incompatible with the comprehensive tax crediting mechanism. This requires having a uniform threshold for goods and services which implies that the threshold for service taxation will have to be substantially increased. Given that overwhelming proportion of revenue from service taxation comes from high turnover dealers, perhaps a threshold of Rs. 50 lacs for both goods and services could be considered. Of course, the stales will be opposed to the Centre reducing the threshold for the taxation of goods because, it is perceived that this will involve resistance from the small dealers who now will have to pay GST for both the centre and states. Once a uniform threshold is chosen, it is important to have a comprehensive system of tax crediting mechanism and move away from the system of TDS. In fact, under GST, the entire tax is collected at the point of sale and there is no need for the TDS system, but nevertheless, the transition will have to be worked out carefully.

    Equally important are the mechanisms to relieve excise duties on exports of goods and services. At present, the multiple systems such as the duty draw-back or DEPB are much too complicated for the smooth functioning of the GST. Although the latter is supposed to face the sunset, its attractiveness has resulted in the government extending the scheme time and again. It is important to replace all the prevailing schemes with a comprehensive zero-rating of the exports and make it hassle-free. While introducing the value added tax in an ad hoc and fractional manner, both the centre and states have deviated from the standard mechanisms and one such practice is determining the sale values based on MRPs and these are not compatible with the comprehensive GST.

    There is a logjam on the GST reform front mainly on the issue of compensation payable for the reduction of CST. The important issue is not whether the centre or the stales are right on the issue of compensation, but to carry the reform forward in the interest of making the tax system competitive. While it is true that centre cannot pay the compensation infinitely, the states arc justifiably aggrieved that the centre is equally responsible for the delay and therefore, they should be paid the compensation for giving away their central sales tax powers. Considering the benefits of ensuring a seamless trade across the country and considering the need to provide a fresh impetus to the GST reform, the Union Finance Minister should assure the Empowered Committee that the centre will compensate the loss and the states should work out a time bound action plan for taking the reform forward. The reform of this nature requires statesmen in both the centre and states. This requires keeping the national interest at heart rather than partisan interest of a particular states or sectors. The question is do we have so many statesmen who can take the reform forward?


    (The author is Director, NIPFP. The views are personal).