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Not just politics PDF Print E-mail
Friday, 18 February 2011 00:00
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Prime Minister Manmohan Singh set the cat among the pigeons when he hinted that one of the reasons for the BJP’s opposition to the Goods and Service Tax (GST) was the action taken by the central government by arresting Amit Shah in Gujarat. While the BJP has denied any such link, there is little doubt the issue has been politicised. Rajasthan, for instance, was opposed to GST while it was ruled by the BJP but became pro-GST once the Congress came to power; Karnataka was pro-GST as long as it was ruled by the Congress but became anti-GST when the BJP came to power.

 

That said, it is equally true many states have had a problem with the GST and if some of this opposition has died down, it is because the central government has changed its stance on many issues because of the opposition from various states. One of the biggest problems states have had has been the proposed GST Council, which will decide on tax rates on various goods and services (the current rates doing the rounds are 12% for special goods, 16% for services and 20% for goods; and after two years, the rate for goods will also be brought down to 16%). Since the GST Council will decide on what the rates will be, the states were quite upset with the union finance ministry’s proposal that the FM would head the council and also have veto power. The veto power clause has now been dropped. While states have been arguing they will lose large revenues once GST comes into being, since they will no longer have the flexibility to raise or lower tax rates, the Centre has been blowing hot and cold. Thirteenth Finance Commission chief Vijay Kelkar suggested a Rs 50,000-crore compensation fund, but that doesn’t seem to be on the table any more. There is a general understanding that states will be compensated for their losses for a few years, but states point to a similar promise when VAT was introduced and that their demands for past years have still not been fully compensated. There is also the issue, which NIPFP professor Kavita Rao raises, of how revenue-neutral rates are different for each state (so there will be losers) and how some compensation for a few years won’t fix the structural issue.

That said, there are obvious gains to be made from a common

Indian market that GST will result in, though the gains are likely to be a lot less than the 2% of GDP that the 13th Finance Commission estimated, since the taxation levels being talked of now are significantly higher than that envisaged by the Commission. But moving to get that gain requires the Centre to also show maturity (as it finally did on the veto issue) and some give and take. From all concerned.

 

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