ST: Exemptions will create distortions

The compromise reached between the Centre and the states over outstanding issues relating to the Goods and Services Tax (GST) should lead to an early introduction of the enabling legislation in Parliament.

The Centre wants to roll out the GST from April 1, 2016 and proposes to introduce the bill during the current session of Parliament. Since a Constitution amendment is needed for the GST and it has to be passed  by Parliament and  ratified by state assemblies it is doubtful if the whole process can be gone through in time to meet the target date set by the government. But the fact that an agreement has been reached is a good sign and both the Centre and the state governments deserve praise for the spirit of accommodation they have shown.

The GST is a uniform countrywide tax on goods and services which will replace the current plethora of Central and state taxes. It will create a single Indian market which will boost trade and business and increase tax compliance. It is good for manufacturers, traders, governments and consumers. One major area of difference between the Centre and the states relates to the compensation to be paid to the states for their loss of revenue resulting from a shift to the new tax system.

Another was about the items to be included in the GST regime. While ideally all goods and services should be included, the states wanted petroleum, tobacco and alcohol to be excluded. A GST without these items would not make sense. The compromise seems to be that alcohol may be excluded from the GST and petroleum products may be kept out for some years. It is desirable to define the period at this stage itself. It is not a good idea to create exemptions in any tax system as they will create distortions and make the system less efficient. The states have, however, done well to agree that entry tax may be subsumed in the GST.

The clause for compensation for states may be included in the Constitution amendment bill so that there is a firm guarantee that the Centre will respect its |commitment. The states had become apprehensive and distrustful of the Centre in this respect because the latter has gone back on its promises in the past. A GST system resulting from all these compromises may not be the best but Centre’s thinking may be that it is better than having no GST at all. In the past, near agreements on GST have proved deceptive and the latest accord should not go their way.