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GST Caught in Womb of Big Questions!

TIOL - COB( WEB) - 340
APRIL 18, 2013

By Shailendra Kumar, Editor

THE GST (Goods & Services Tax) is once again back in news with a bang! Going by a sudden spurt in the number of news reports and authoritative articles, a common reader may gather the impression that the GST-cart is on the right path. But all such optimism may turn out to be misplaced if one goes by the Number of Big Questions, which remain not even partly answered. Every time, a news reporter speaks to either the Empowered Committee (EC) Chairman or a Finance Minister of one of the States, attending the EC meeting, the First Big Question, which is raised, is that their major concern is about losing their Fiscal Autonomy. What an ironical fate for the poor GST? At a time when the Centre has already tabled a Constitutional Amendment Bill under Article 368 to amend the Entries in the Union and State Lists, and many politicians can be heard talking about getting the Bill passed during the Monsoon Session of the Parliament, such a fundamental question being raised again and again on different occasions, further clouds the nebulous future of the proposed reforms.

What is the historical background of such a fear lurking in the mind of all the States? One perhaps needs to revisit the story of making of our Constitution. Unlike the USA where each State was independent and a sovereign entity in itself, and they decided to 'come together' to form a Federation, our leaders of freedom struggle never had such a choice. They had to deal with a wide array of colourful States ruled by Maharajas and Nawabs. All of them had to be brought to the table for an agreement to form a 'Union of States' and not a 'Unity of States', and the biggest task before our constitution-makers was to 'hold them together'. In this backdrop, although the founders of Indian Constitution did provide a separate sphere of legislative powers to States to run their own local affairs but were not given any flesh of sovereignty to decide their own future course of action. The Constitution provides clear-cut distribution of legislative powers but since there is a tell-tale bias in favour of the unitary structure of the constitution to 'hold together' the disparate variety of States, there is a deep-seated historical prejudice among the States against the Centre. Given the fact that in case of a dispute between the State List and the Concurrent List in the 7th Schedule of the Constitution, the latter would prevail like the Union List, the States have a historically-nursed suspicion against the Union of India. Although most jurists may find our Constitution as quasi-federal, the co-ordinate bodies like States perhaps find it difficult to trust the Centre. And that is why most States, particularly the ones ruled by the opposition parties, are opposed to the GST proposal, which may denude them of their limited fiscal autonomy.

Although one may not blame them for such a political bias but they are certainly to be blamed for 'killing' the third tier of our governance system - that is Panchayati Raj Institution (PRI) and Urban Local Bodies (ULBs). India has lost a lot on the issue of decentralisation of powers and local governance. Only recently, the State of Punjab voiced its opposition to GST for subsuming local taxes like Entry Tax. Notwithstanding a Constitutional amendment to strengthen the institution of Panchayati Raj, most States have not allowed them to grow up on its own and manage its affairs by raising their own revenue. As per Studies, these PRIs have been given very limited power to levy taxes, which range between 2 to 6% of their total revenue requirements. Thus, they survive on grants-in-aid from the States. That is the reason that PRIs or ULBs have not earned the faith of the people they govern. Therefore, it is indeed a good opportunity for the Central Government and our Parliament to extend the arch of GST even to the PRIs and convince the States to leave out a few local taxes to be levied and collected by them rather than subsuming them in the proposed GST. Some of them can be the Purchase Tax (Punjab earns about Rs 1500 Cr from it); Rural Development Fund; Infrastructure Development Cess; Entertainment Tax; Property Tax; Luxury Tax, Octroi etc. Since the Union Government has promised to compensate the States for revenue loss for five years, it is good time to negotiate with them and reserve certain local taxes to be levied and collected by the third-tier institution of our governance system. The fact that the Parliament will be resorting to Article 368, and all the THREE lists of Entries are going to be amended, an insertion in relation to local bodies may serve India better than what we are witness to so far.

Let's now go to some of the statistics, which may indicate that if the States join the GST bandwagon, they might lose the political hedonism to levy taxes at their own will but would certainly gain more in terms of hard cash. At present all the States put together collect about Rs 2,10,000 Crore VAT revenue, which is the largest constituent of their revenue kitty. Interestingly, a major chunk of VAT comes from petroleum products. In addition, they get about Rs 35000 Cr from the CST. Rest is accounted by taxes like State Excise duty and other local taxes. Let's now look at what the Union of India garners from the Central Excise duty and Service Tax, which would be subsumed by the proposed GST. As per the latest figures, it is a little more than Rs THREE lakh Crore. So, in terms of revenue, the States would be gaining more than the Centre, which may end up garnering not more than 10-15% of what it collects today. How? The supply of goods is valued in the range of 35-40 lakh crore today. About two-third of this value is already taxed by the Centre in the form of Central Excise Duty. On the rest, the Centre further collects Service Tax on the services rendered in relation to supply of goods. So, what is left out for the levy of VAT is only about one-third of the total value of goods. In this background, the fiscal economics favours a decision in favour of GST by the States rather than keeping away to protect their festering revenue turfs.

What is the second Big Question? It is learnt that the States are not in favour of allowing entry of the Centre to tax the Retail Business. Once the GST is introduced, both the stake-holders would exchange their turfs for levying CGST and SGST. Since the Centre is offering manufacturing to be taxed by the SGST, it makes no sense to fear that the Centre would be capturing the retail business for collection of CGST. Given the economics that the Centre would not be making huge gains, the States should welcome this idea as they would certainly be making a substantial gain by getting the power to tax services and also manufacturing of goods. Rather than making the threshold-business more complicated for taxing the small business and Dual Control causing duel between the Centre and States, the Union Government should leave small traders for the States and the States should similarly leave large business taxpayers for the Centre. Given the fact that the States have no experience in taxing large corporates following complicated financial architecture, it would be in their interest not to expose their revenue machineries to lock horns with large taxpayers having multiple plants across the country.

Another Big Question, which needs to be looked into is that since GST is going to be a destination-based consumption tax, States need to understand the implications of services provided at one place but consumed at different places. At present, the CBEC has notified the Place of Provision of services rules, 2012 and thus easily taxes them. Once the levy shifts to the destination, it needs to be kept in mind that poor States may lose more revenue as services are largely consumed more in urban centres. So, Developed States may gain more at the cost of the poor.

Yet another Big Question could be - What will be the effect of GST on devolution of revenue to be decided by the Finance Commission under Article 280 of the Constitution. Since Central Excise, Service Tax, VAT and other many taxes would be subsumed, and the turf to levy taxes becomes common, what impact the proposed reform may have on the devolutionary formula of the Finance Commission. Is Centre going to tell them that there is not much left to be devolved out of the common pool?

Going by the flurries of activities in the Ministry of Finance one may gather the impression that a lot of work has been done to make the GST roll-out a smooth affair but the Big Question is - No study has been done to measure the Efficiency of this new levy. To measure it, one needs to take into account the Trade Perspective, the number of returns to be filed; the number of payments to be made and the time taken. All these factors constitute the Compliance Cost of a tax. Keeping in mind such an objective, all the preparations for introduction of GST should be done rather than coming out with new Designs and GST Network at different fora. In fact, there can be many more BIG Questions but the pith and substance of my suggestions is that it is a historic opportunity for both the Centre and the States to make it a truly big bang tax reform and do everything possible to enhance efficiency index of this proposed levy by making use of modern technologies. Let's hope good sense prevails in all the camps of the stake-holders, and the future makes it a win-win case for the trade and commerce, the States, the Centre, small businesses and also organised revenue services involved in this proposed tax-athon!