Taxing times

It is unfortunate that new hurdles have come up in the way of implementation of the goods and services tax (GST) system, scheduled to be introduced from April 1, 2011. The earlier deadline of April 1, 2010, has already been missed but the earnest efforts of both the Centre and the states had given hope till last month that the differences would be sorted out and the much-expected system would be ready for a roll-out. But it became clear last week that there are important issues that remain to be resolved. Part of the problem is political, with the BJP-ruled states unwilling to extend ready co-operation to the Centre. But the opposition to the GST as it is envisaged now is more substantial than political too, as it is clear from the reservations expressed by even Congress-ruled states like Andhra Pradesh and Haryana.

The main issue that threatens to derail the plan is the Centre’s insistence that it should have a veto power on the tax rates that might be proposed by the states in future. The GST would turn the country into a single market and simplify the present complicated and diverse tax system. The Centre wants to have the last word on any changes that states might want to make. But the states’ fear of loss of their financial autonomy is genuine. They have already conceded a lot of ground, as of course the Centre also has. The agreement on a two-tier tax system for the Centre  and the states and the decision to migrate to a single rate in three years are results of long negotiations and mark a healthy compromise. The decisions to compensate states for possible revenue losses and leave out petroleum products from the scope of GST were also climbdowns by the Centre.

But the idea of veto power goes against the spirit of fiscal autonomy of the states and financial federalism. If the GST has to be rolled out in April next year the Constitution amendment bill has to be introduced in the current parliament session. A standing committee has to examine it, it has to be passed by parliament and ratified by at least 15 states. This does not seem to be possible if the present deadlock is not resolved soon. GST will modernise the tax system, reduce evasions, help to contain prices and even speed up economic growth. It should not be further delayed.

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