Alternative framework needed to break political impasse on GST
19 September 2011
Satya Poddar and Shalini Mathur
Ernst & Young
The open letters by chief ministers Jayalalithaa and Shivraj Singh Chouhan to the Prime Minister once again emphasize the formidable challenge of building a consensus between the Centre and the states on the Constitutional (Amendment) Bill for the Goods and Services Tax (GST). Even if the governments do reach an agreement, it is not a framework that would bring cheer to industry or serve the needs of the Indian economy in the 21st century. What is needed is an alternative framework, which is politically appealing and economically attractive.
Industry is gravely concerned as the compromises being made by the Centre in the basic GST design to appease the states would dilute the benefits of GST and continue the inefficiencies that plague the current system. For instance, the proposed framework excludes certain sectors (petroleum, natural gas, alcohol and real estate) from the scope of GST. It envisages continuation of state taxes such as the local entry tax, local entertainment tax, and electricity duty. It is a design which would cost the industry dearly on account of tax cascading and would severely impact investments. The industry welcomes harmonization, but not to the flawed base of the tax.
Thus, the fundamental issue is striking a balance between fiscal autonomy and harmonisation.
The recent tour of the Empowered Committee to Europe would have provided an opportunity to the members on how this balance is struck in the European Union (EU). However, the EU model may not be best suited for India. Instead, India should consider the Canadian model, which adopts a different approach for implementing GST.