The hopes raised three months ago about a possible early agreement between the Centre and the states over the contentious goods and services tax (GST) have again suffered a setback.
The endorsement of a blueprint for the GST by the Parliamentary committee on finance was expected to clear the hurdles because the committee had representation from all parties and was headed by a senior BJP MP. But the empowered committee of state finance ministers which has been discussing the GST for many years has again made demands which would rob the proposed system of most of its benefits. The committee has also gone back on some issues on which there seemed to have been an agreement. The main hindrance to an agreement is the states’ fear that the GST may adversely affect their revenues.
The GST is meant to create a single national taxation system by eliminating the complex multitude of state taxes, excise and other levies. It proposes to subsume all these levies under one state and Central level tax levy. It promotes efficiency, reduces leakage and corruption and helps consumers of goods and services by lowering prices. It is estimated that the introduction of the GST can increase the GDP by about two per cent. The states now want two most important revenue earners, petroleum and alcohol, to be kept out of the GST’s purview.
They have also opposed subsuming entry tax or octroi in the GST. Exemptions for some items, especially for major ones, will weaken the proposed tax system. States impose high rates of tax on some items like petroleum and they will have to give up this power in a GST regime. Unfortunately they do not realise that a comprehensive GST system will boost economic activity and actually give them more revenues than they earn now. The experience with the value added tax (VAT), which was introduced some years ago, shows that.
The GST was to be implemented in 2010. Even now it is embroiled in controversy and uncertainty. It requires a Constitution amendment bill for implementation. Though there was some hope that it could be implemented from 2015 if the bill is introduced and passed in the coming winter session of Parliament, this now seems impossible. The states should relent on their ill-thought-out position in their own interest. The Centre should also do more, if necessary, by legal guarantees, to allay their fears.