The steps to the GST
Partner, Tax & Regulatory Services, EY
The finance minister, within the first five minutes of his speech, cautioned that while he would be providing the broad policy direction in his Budget, it would not be wise to expect that everything could be done in the first Budget presented within 45 days of the formation of the government. True to his words, this Budget refrains from announcing any big-bang measures. The indirect tax proposals only amount to some tinkering. However, the sheer number of such changes is a source of dizzying complexity. While each individual change has a purpose and justification, collectively they point to the serious distortions created by the tax system in an efficient functioning of the economy. They make a compelling case for a replacement of the current system by a simpler and more efficient tax applied to a comprehensive base at a uniform low rate, that is, the goods and services tax (GST).
The Budget does confirm the government's commitment to the GST. The minister hopes to find a solution, in the course of this year, that addresses the concerns of the states. However, there is still no clarity how the government proposes to move ahead in this direction. The Economic Survey has suggested that the implementation of a Central GST (CenGST) could be the first step towards the GST. Once the CenGST is implemented, and the information technology system for CenGST has been made operational, revenue estimation risk will be lower and it will be easier for the Centre and the states to move to the GST.
The Economic Survey essentially suggests the decoupling of the CenGST and the state GST instead of the current model of a dual GST, implemented by the Centre and the states at the same time. Indeed this may be a more practical way to translate the goal of the GST into action in the context of Indian federalism.
The fundamental elements of a vibrant federal structure are competition, co-operation and co-ordination. All the three elements can play significant, positive roles in achieving an efficient outcome for the GST.
At present, co-operation is much needed in arriving at a consensus on the GST model. The current framework suggested by the Centre makes it mandatory for all the states to adopt the GST, with full harmonisation of the tax base and the rates (within a narrow band). The states have serious concerns about the loss of fiscal autonomy, and of revenues, under this model and have made various demands to maintain their fiscal powers.
The co-operation between the Centre and the states is missing due to lack of trust. The imposed harmony is being perceived by the states as coercion instead of co-operation by the Centre. The states fear that they will lose their fiscal autonomy if they were to give in to this model. Thus, the fundamental issue is of striking a balance between fiscal autonomy and harmonisation.
The Indian situation has a lot of parallels with Canadian one, where the Constitution empowers the federal and provincial governments to levy a GST without making its adoption and harmonisation mandatory. The federal government there exercised these powers to levy a federal GST in 1991, and invited the provinces to replace their sales taxes by a provincial GST. Recognising the merits of harmonisation, some of the provinces exercised their autonomy to switch over to the GST regime under bilateral harmonisation agreements with the federal government. Doing so did not constitute a surrender of their fiscal autonomy. Rather, it was through the exercise of their autonomy that they chose to enter into the harmonisation agreements with the Centre.
India could follow the Canadian example. The CenGST could be the first step in this direction. Under this model, the Constitutional amendment would be decoupled from the GST design. The Constitution would be amended to empower both the Centre and the states to levy a GST on all goods and services. The Centre would be empowered to levy GST without any conditions. The states would be empowered to levy the GST only pursuant to a harmonisation agreement with the Centre, or pursuant to the recommendation of the GST council. If they so choose, they could continue with their value-added tax and other taxes. While from the business perspective, the model of complete harmonisation is more convenient, it has proven to be unattainable under the model of federalism enshrined in our Constitution.
This model reflects much higher degree of co-ordination and co-operation between the two levels of government. It would also allow a healthy degree of competition among the states. They could compete through setting their own rates, or levying the tax in some other form permitted under the Constitution.
The CenGST option would be meaningful only if the Centre were to levy the tax on a comprehensive base at a low rate. Broadening the base will require many tough decisions, such as bringing in essential items like food and textiles into the GST net and lowering the current registration threshold from Rs 1.5 crore. Is the government committed to taking these tough decisions? The current negative list of services does not reflect this resolve.
The Budget does speak about pruning the negative list to broaden the tax base in preparation for the GST. However, only a few changes have been made to the negative list: that is, sale of space or time for advertisement on online and mobile advertising and radio-taxis. The government must broaden the base more meaningfully.
For the government to go forward, it should build a better structure for research and policy analysis for the GST. In their past deliberations, the Centre and the states have been seriously handicapped in that there was no dedicated institution to provide them qualitative inputs about the GST design and impact. A critical requirement of the hour is to establish a secretariat in the empowered committee to provide rigorous information and well thought-out analysis on the GST. It would provide develop a road map for the implementation of the GST, and undertake studies on various aspects of the GST design. A reform of this order of magnitude cannot be designed and implemented by a committee of officials that assembles periodically to deliberate, with no research and analytical support from a dedicated team with requisite skills in tax policy and administration.