Progress on GST

It is good that States have agreed on levying Goods and Services Tax (GST) on all traders and service providers with an annual turnover exceeding ₹10 lakh. Also, the Centre seems to be willing to leave administrative control over collection from entities with a turnover of less than ₹1.5 crore with the States. Both moves — consensus on the threshold for GST imposition and small businesses being spared from dealing with dual authorities — are shots in the arm for the introduction of a system of indirect taxation that will make India a single national market. Today, both the Centre and the States levy a plethora of taxes at varying rates creating barriers to free movement of goods and services. As a result, we have an increasingly fragmented internal market within a single sovereign nation. Contrast this to the European Union which comprises 28 independent countries which have come together to forge a single market through a uniform system of duties.

The idea behind GST is to subsume all multiple levies under one Central and one State-level tax. Besides, every good and service is to be taxed on the value-added principle. Producers at each stage of the value chain can claim credit for taxes paid on their inputs. This will ensure no cascading of taxes, as is the case now. But GST can succeed only with a robust IT backbone that allows easy registration, processing of payments and filing of returns by businesses. Further, no product or levy should be excluded from GST. Inability to set off tax on, for example, diesel consumed in producing a good against the tax paid on the latter undermines the very concept of a value-added tax. The same goes for entry tax/octroi: States cannot insist on not subsuming these levies within GST.

States, no doubt, have genuine concerns about potential revenue losses from GST implementation. They need to be told that a regime in which every commodity is taxed on a value-added basis, together with an IT-enabled seamless input tax credit chain, will give a huge boost to economic activity and automatically generate revenue buoyancy. But convincing States is not going to be easy and Prime Minister Narendra Modi should pull out all the stops in trying to do so. As a former chief minister, he is well placed to understand the sensitivities of States — including his own, which has apprehensions about GST. He must assure the States that the Centre is not only prepared, but obliged, to fully compensate them for any revenue loss. This should, however, be made conditional upon their agreeing to subsuming all local levies under GST and limiting exemptions to only select items such as alcohol, tobacco and lotteries. Federal compensation is a small price to pay for the successful roll-out of the mother of all indirect tax reforms. And one that brooks no further delay.

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