Given the hardening political equations, the chances of the government being able to implement one of India’s biggest tax reforms—the goods and services tax (GST)—before the elections look difficult. In order to pass the Constitutional Amendment Bill for GST, the government needs a two-thirds majority in Parliament and then this needs to be ratified by half the states. As of today, even the Standing Committee report on the GST Bill has not been received. Individual states, particularly the non-UPA ones, will continue to voice their objections and talk of how their revenues are being squeezed. Yesterday’s FE carried an article in the Ideas caFE section by Madhya Pradesh finance minister Raghavji giving such examples. So, he said, the state stood to lose R2,000 crore on annual entry taxes if these were subsumed in GST—given how such taxes ensure India is not one common market, the tax will naturally be eliminated under GST. Raghavji, similarly, complained of how a common threshold for taxing entities would hurt states. Right now, the Centre doesn’t levy excise duties on firms with an annual production base of under R1.5 crore while states levy VAT on firms with a turnover of more than R10 lakh. A common R25 lakh threshold, according to this logic, will allow the Centre to tax more firms while reducing the taxable base for states.
The problem with this argument is that it doesn’t take into account the upside in the states’ tax base from being allowed to, for the first time in their history, tax the services sector. Or the fact that they can, again a first, levy a countervailing duty on imports. Which is why, while central excise and service taxes average around 12% and VAT rates are around the same, the Vijay Kelkar committee had come out with its revenue neutral rate—a rate at which no one loses out on tax collections—of 12% for both the central and state GST combined. Imagine the savings for the consumer. For this to happen, though, states need to agree to allow as many items to come under GST as possible. While states have opposed bringing petroleum under GST, Kelkar’s dual-GST needs to be considered. If Maharashtra, say, has a 20% VAT on diesel and the GST rate is 12%, under the Kelkar formula, 12% can be set off by buyers in other states while 8% will be a deadweight loss.
There is a lot of work that needs to be done apart from the getting two-thirds of MPs to vote for the GST Bill. This includes agreeing on what baskets to put commodities in—merit/standard/demerit. Two days ago, the states turned down a proposal of the communications ministry to charge a lower rates for mobile phones and tablet PCs, for instance. Other areas that need work are the structure of the IT backbone, common rules for taxation of commodities—is a telephone with a camera to be classified as a phone or a camera?—flexibility for states in levying taxes, and many more. An opt-in formula, as in the case of VAT, is to be allowed to give the states the flexibility to join when they want—the obvious problem here is that, the greater the flexibility required, the more complex the rules become for everyone. The larger point, and that is why the Opposition is delaying things, is that once GST is implemented, states that opt out will find their manufacturing edge blunted—who will want to buy inputs manufactured in Gujarat if the taxes imposed on them cannot be set off in other states who are part of the GST system?