Good Serviceable Tax

The Central government must address five challenges if its April 1, 2016, deadline for rolling out the GST is to be met.

First, the challenge of GST design. This has to be arrived at in two steps. First, the tax base needs to be agreed on. Second, the methodology of levy, collection and appropriation needs to be finalised. So far, neither has been done. The states have not yet agreed to the Centre’s proposal to subsume taxes on petroleum products and entry into the GST. No unanimity has been reached on the proposed threshold of Rs 10 lakh. Also, two major issues that will significantly broaden the GST base and lower the revenue neutral rate (RNR) have not been examined: the inclusion of real estate and the treatment of e-commerce in the GST.

 Preliminary calculations reveal that an additional revenue of about Rs 20,000 crore can be generated by including property transactions in the GST. The ongoing confrontation between Amazon and the government of Karnataka on tax payable on e-commerce transactions highlights the need to put in place transparent and predictable point-of-sales rules for this burgeoning sector.

The empowered committee of state finance ministers (EC) is reportedly considering a recommendation that the RNR for state GST (SGST) be 14 per cent, and 12.7 per cent for Central GST (CGST). This adds up to 26.7 per cent, against the present tax rate of about 26.5 per cent. Imposing a GST with a higher RNR than the present aggregate rate may not be worth the effort. The 13th Finance Commission had suggested a model GST base, according to which the SGST would be 7 per cent and CGST, 5 per cent. The Centre should ensure that the tax base is not diluted unreasonably and all revenue options are explored to keep the RNR as low as possible.

Further, which agency will have the last word on design is unclear. As per the draft Constitutional (122nd Amendment) Bill, all the parameters will be finalised by the GST council, which will come into being only after the amendment. However, the amendment won’t be passed until there is agreement on the design, the RNR as well as the levy and appropriation modalities. The bill should be amended to allow the GST design to be frozen prior to its approval.

The second challenge is the need to promote inclusion. So far, discussions have been confined to two of the four stakeholders: the Centre and the states. Since the EC takes decisions on consensus, issues raised by a minority often hold sway. The other stakeholders in the GST framework industry, traders and consumers —  are not involved in the debate. This can be done by making the proceedings of the EC more transparent by publishing not only its meeting agenda and minutes on its website but also the reports of its various committees. Further, trade, industry and consumer representatives should be invited to address the EC on all issues of importance. 

Third, the reinforcement of trust between the Centre and the states. The states have not yet received compensation promised by the Centre for the reduction of Central sales tax. No provision has been made for this in the 2014-15 Union budget. 

This is dampening the states’ enthusiasm. Further, there is an asymmetric burden on the states for the implementation of the GST. They surrender more taxes than the Centre to the GST pool and have less revenue sources outside this pool than the Centre. Keeping this in mind, the Centre should relax its present stance and agree to the states’ demand to compensate GST losses for a period of five years. The fourth challenge relates to operational issues, the most important being the goods and services tax network (GSTN). 

There is need for an information-intensive electronic network to allow for uniform registration, reporting and tax-payment practices across all the states. While the GSTN company has been set up, the states will have to run complementary portals that can integrate with this network. Many small states do not have this capacity. We must, therefore, allow for differential implementation. Some states could join the network at their own pace. In addition, the operating procedure and training manuals need to be finalised along with integrated GST and place of supply rules. Operating staff as well as traders and dealers will have to be trained. 

The fifth challenge is timing. As was seen during the implementation of the VAT in 2005, some states may not join the GST for reasons other than fiscal. If the 2016 deadline is to be met, the design must be tweaked to accommodate staggered implementation. Thus, the GST design should provide for both staggered and differential implementation. Unless these five challenges are holistically addressed, it may be difficult to meet the GST deadline. To catalyse this process, the Centre could consider implementing a CGST with effect from April 1, 2015. The present Central excise and service tax levies should be merged into a single CGST, allowing for a common return, assessment, and audit and refund framework for both these taxes. Taking this step would signal the Centre’s strong commitment to the GST