GST rollout faces taxing times
In troubled waters: With the Centre and states still stuck on the revenue-sharing formula, Goods and Services Tax regime will have to clear many more hurdles before it becomes a reality, reports Gaurav Choudhury.business Updated: Jun 18, 2013 21:30 IST
What is GST?
Goods and Services Tax or 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), value-added tax (VAT) and octroi tax among a host of others. In GST, all these will be subsumed under a single regime.
What impact would it have on prices?
The 13th Finance Commission estimates prices of agricultural goods will increase by 0.61-1.18% while prices of manufactured items would fall by 1.22-2.53 %.
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. The proceeds of the central GST would be shared between the Centre and the states on the basis of the devolution formula recommended by the Finance Commission. GST will also be levied on imports based on the "principle of destination" and the state within which imported goods and services are consumed will earn the revenue as per the state GST of that particular product and service.
Why is dual GST required?
India is a federal country where both the Centre and states have been assigned the powers to levy and collect taxes through appropriate legislation. Both the levels of the 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, therefore, be in keeping with the Constitutional requirement of 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. The Parliament’s Standing Committee on Finance has not yet submitted its report on the Bill. In an election year, it is unlikely that the Bill will be passed in the Parliament and state Assemblies.
Why is it taking so long to roll out GST?
In addition to the passage of the Constitution Amendment Bill by Parliament and state Assemblies, it is also imperative to have a robust country-wide 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 states’ contribution. 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.
Why do states believe that they will suffer revenue losses?
There are certain very state-specific issues. For example, Maharashtra, earns more than R13,000 crore annually from octroi. Gujarat, on the other hand, a highly industrialised state, earns about R5,000 crore from its share in the CST. Agrarian states such as Punjab and Haryana earn more than R2,000 crore from purchase tax. Each of these states fear that they will lose these revenues once these levies get subsumed under GST.
If there is a loss in revenue, how will states be compensated?
For the better part of the last two years, discussion on GST between the Centre and states have largely concentrated on working out an independent mechanism to compensate states from revenue losses after rolling out GST.
How has states been compensatedso far?
The government has gradually brought down the level of CST over the last 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. The empowered committee of state finance ministers had made an interim claim of R19,000 crore. The Centre had disbursed R6,000 crore two years back and another R9,000 crore has been provided for in this year’s budget. The budget is for 2010-11, but the states have been claiming compensation for 2011-12, 2012-13, and now 2013-14. These are issues that remain unresolved till date.