Goods & Service Tax

The Centre should get out of commodity taxation, perhaps with the exception of items such as petroleum, tobacco and telecom.

The Centre should be more liberal if it wants to get the States on board to implement a nationwide goods and services tax (GST) from the coming financial year. There are two main reasons for it. The first is that the finances of most State Government are in a disarray today, after having registered significant improvement during the period from 2003-04 to 2007-08. That was also the time when they moved from a sales tax to a value-added tax regime. Since this transition happened while the Indian economy was booming, the revenue buoyancy accompanying it ensured that the States’ fiscal interests were more than taken care of. It is different now, with a slowing economy that has impacted revenue collections as well. The Centre has to, therefore, be flexible enough in addressing concerns expressed by the States, especially with regard to revenue losses arising from a switchover to GST. Here, it has to weight the trade-offs between compensating the States fairly for such losses and the gains for the overall economy resulting from a GST regime.

The second reason has to do with the existing scheme of taxation itself, which is rather biased in the Centre’s favour. The latter currently taxes manufacture (excise), imports (customs), incomes (both of individuals and companies) and even services. That largely leaves only taxation on sales with the States. This system is both iniquitous and distortionary, as it leads States to impose all sorts of cascading levies to make up for their otherwise limited powers of taxation. The proposed GST is certainly an improvement, as it gives equal power to the Centre and the States to tax all goods and services based on the ‘destination principle’. That essentially means only the final consumer of the good or service paying the full tax, with sellers collecting taxes at each stage and setting these off against what they paid on their inputs. By subsuming all taxes under just two heads – a Central GST and a State GST – the proposed multi-stage value-added tax on goods and services would avoid the problems of multiple and cascading rates inherent in the present regime.

Ideally speaking, it would be even better if the Centre were to leave commodity taxation entirely to the States, while retaining the powers to tax only personal/corporate earnings and select high-value items (petroleum products, tobacco and telecom services, say) with itself. The revenues from these should suffice for it to discharge essential functions relating to Defence or fiscal transfers to poorer States. But since we are in a far-from-ideal world, it makes sense to push for the second-best solution of a dual-GST now. Here, the lead should come from the Centre, especially when the main opposition Bharatiya Janata Party now seems more favourably disposed to the idea. Evolving a bipartisan consensus is something it should strongly strive for.