GST: A long and winding road
The goods and services tax has hit a roadblock over taxes on fuel and alcohol. HT takes a look:
What is good and services tax (GST)?
ILLUSTRATION: ABHIMANYU
GST is India’s most ambitious indirect tax reform plan, which aims to
stitch together a common market by dismantling fiscal barriers between
states. It is a single national uniform tax levied across the country on
all goods and services.
Why is it required?
The indirect tax system in India is currently mired in multi-layered taxes levied by the Centre and state governments at different stages of the supply chain, such as excise duty, octroi, central sales tax (CST) and value-added tax (VAT), among others. In GST, all these will be subsumed under a single regime.
Why is it taking so long to roll out GST?
In addition to the passage of the Constitution Amendment Bill by the Parliament and state assemblies, it is also imperative to have a robust countrywide information technology (IT) network and infrastructure to make the implementation seamless across state boundaries. The IT network is still work in progress. The most important issue on which consensus eludes states and the Centre is regarding the states. GST’s implementation faces political hurdles as it could rob state governments of discretionary fiscal power. States also fear that they will suffer heavy revenue losses after GST is implemented. State governments point out that the Centre has been not able to successfully convince them about adequate measures to protect them against potential revenue losses. At a meeting in Shillong, the capital of Meghalaya, state finance ministers have opposed the inclusion of petroleum products and liquor under GST. They have also pressed for a formal mechanism as part of the Constitution Amendment Bill for compensating the states for revenue losses they may have to suffer after GST is rolled out. The states have also demanded that the Centre does not enjoy the power to categorise some items as declared goods — items of special importance on which Centre can impose lower taxes.
How will the system work?
GST, if adopted, can dramatically alter tax administration by giving a one-shot solution to a welter of levies. Under the system, the Centre and states will tax goods and services in identical rates. For instance, if 20% is the agreed rate on a certain good, the Centre and states will collect 10% each on the good.
Why is dual GST required?
India is a federal country where both the Centre and the states have been assigned the powers to levy and collect taxes through appropriate legislation. Both the levels of government have distinct responsibilities to perform according to the division of powers prescribed in the Constitution for which they need to raise resources. A dual GST will conform to fiscal federalism.
When will it be implemented?
The system can be rolled out only when Parliament passes the Constitution Amendment Bill, which has been pending in Parliament since March 2011. A Constitution Amendment Bill can be passed in Parliament only if at least two-thirds of the members vote in its favour. In addition, at least half of the state assemblies will have to pass the Bill. In an election year, it is unlikely that the Bill will be passed in the Parliament and state assemblies.
Why do states believe that they will suffer revenue losses?
There are certain very state specific issues. For example, Maharashtra, earns more than ` 13,000 crore annually from octroi. Gujarat, on the other hand, a highly industrialised state, earns about ` 5,000 crore from its share from the central sales tax.
If there is a loss in revenue, how will states be compensated?
Discussion on GST between the Centre and the states have been largely concentrated working out an independent mechanism to compensate states from revenue losses after rolling out GST. The government has gradually brought down the level of central sales tax (CST) over the past few years from 4% to 2% as a precursor to rolling out GST. As an interim measures, the Centre has periodically compensated state governments for revenue loss.
India is a federal country where both the Centre and the states have been assigned the powers to levy and collect taxes through appropriate legislation. Both the levels of government have distinct responsibilities to perform according to the division of powers prescribed in the Constitution for which they need to raise resources. A dual GST will conform to fiscal federalism.
When will it be implemented?
The system can be rolled out only when Parliament passes the Constitution Amendment Bill, which has been pending in Parliament since March 2011. A Constitution Amendment Bill can be passed in Parliament only if at least two-thirds of the members vote in its favour. In addition, at least half of the state assemblies will have to pass the Bill. In an election year, it is unlikely that the Bill will be passed in the Parliament and state assemblies.
Why do states believe that they will suffer revenue losses?
There are certain very state specific issues. For example, Maharashtra, earns more than ` 13,000 crore annually from octroi. Gujarat, on the other hand, a highly industrialised state, earns about ` 5,000 crore from its share from the central sales tax.
If there is a loss in revenue, how will states be compensated?
Discussion on GST between the Centre and the states have been largely concentrated working out an independent mechanism to compensate states from revenue losses after rolling out GST. The government has gradually brought down the level of central sales tax (CST) over the past few years from 4% to 2% as a precursor to rolling out GST. As an interim measures, the Centre has periodically compensated state governments for revenue loss.
NAME HIMANSHU CHAUDHARY
PGDM 1SEM
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