Issues like dual control of the tax base and cutting the threshold will increase the taxman's powers so much it will cause havoc -- all of this needs a serious political resolution on the part of the central government
While the states continue to cross swords with the Centre on the implementation of the Goods and Services Tax (GST) Bill and allegations get made about the opposition being largely political, perhaps the government needs to call an all-party meeting to discuss some of the issues again. Even if you ignore for the moment the issue of getting the state finance ministers to agree to the broad principles of taxation, the most immediate concern is to be able to pass the Constitutional Amendment Bill which requires a two-thirds majority in Parliament and then getting half the state legislators to ratify this. Which means Parliament has to function and all parties, some of whom are not part of the Empowered Committee on GST but still have a sizeable number of MPs, need to be on board.
The issue of arriving at a revenue-neutral-rate is an important one, but it would be naïve to assume all the opposition is only political. Not all BJP states, for instance, are opposing GST—the fact that a BJP politician should be heading the Empowered Committee of State Finance Ministers is the most eloquent proof of this. Two, not all Congress states are supporting GST in an unambiguous manner—Maharashtra has, for instance, brought up the issue of its octroi collections at various points in time. Haryana, similarly, has brought up various issues of its own from time to time.
Theoretically, states will benefit from the powers they will have, once the Constitutional Amendment Bill is passed, to be able to tax services as well. But from what people in the Empowered Committee say, the Central government has not been able to come up with a figure of just how much extra service tax the states will get. The compensation issue, in many ways, is the core of the issue and the fact that P Chidambaram has agreed to the principle of compensation has helped move GST forward.
The problem, and this is something the 14th Finance Commission has to resolve, is to fix compensation levels so that individual states don’t feel cheated—obviously states that produce more goods than they import from other states stand to lose the most from the abolition of Central Sales Tax that is an integral part of the GST process. While it is not clear the states will accept what the Finance Commission suggests, this is where an all-party meeting will prove to be a useful tool. Under what has been agreed to so far by Chidambaram, states will get full compensation for tax losses in FY11 due to the reduction in CST levels and the figure will be reduced to 75% for FY12 and 50% for FY13.
For the years after this, the Finance Commission will have to come up with a solution. Even if the states argue that they don’t get that much more additional tax revenues from taxing services, the fact that 28-29% (it should be 32% but the presence of a large number of cesses that are not shared reduces the effective revenue-sharing) of central taxes get devolved to states will automatically benefit them. So if the GST raises central revenues, as the states fear, by R100, say, R28 of this will go to the states anyway. Put another way, about a third of all state tax revenues today, come by way of their share in central revenues—as compared to R6,45,070 crore of state taxes, states got R3,02,190 crore from the Centre by way of their share in central taxes. A higher Finance Commission-mandated share for tax devolution to the states should, in all probability, fix a large part of the problem.
But let’s go beyond this, assuming that the compensation will be fixed somehow. There is a far greater problem that needs tackling. And that relates to what’s technically called “dual control” and the “threshold” of taxation, both of which could become big problems if not resolved politically.
Under “dual control”, both the Centre and the states get to tax the same base of goods and services as they get produced and as they get consumed. Which means that every trader or manufacturer above the “threshold” level will have to be taxed by two sets of people—central tax officials as well as state-level tax officials. Just imagine the havoc this will create in terms of harassment by the taxman—and God help if the two sets of officials choose to take a different view of the same transaction. In which case, a method needs to be evolved to ensure taxpayers get to deal with just one set of officials, whether a central government one or a state-government one needs to be settled.
This problem gets even more serious when combined with the common threshold that’s being talked of. Right now, states charge VAT on traders who have a turnover of more than R10 lakh while the Centre levies excise duty only on manufacturers who have an annual turnover of R1.5 crore. If, as is being proposed today, there is a common threshold of R30 lakh, this means very large number of small scale manufacturers will now come under the tax net—of the central government and one of the state government. It was because such producers obviously don’t generate much revenue, at least in comparison to the harassment potential, that they were eliminated from the excise net in the first place. Bringing them back, needless to say, will cause a huge problem at even the political level.
Whether an all-party meeting can help resolve this issue or not is not clear but, at the current pace of negotiations in the Empowered Committee, this issue is going nowhere. Somebody needs to step in to raise the level of negotiations.