If the Centre needs to adopt a sensitive and reflective approach, the states too need to realise that they are not just competing amongst each other but also face global competition.
Former prime minister Manmohan Singh once said that the Indian GST regime could be “an envy of the world”. The Modi government too is investing all energies for seeking clearance of a similar GST regime touting it a major second generation reform that would incentivise investment and growth and enabling resources for more spent on social welfare schemes.
Following reflects on most of the arguments advanced so far and add some more.
The spread of GST in different countries has been one of the most important developments in taxation over the last six decades. Owing to its capacity to raise revenue in a most transparent and neutral manner, 150 countries have adopted the GST. With increase of international trade in services, the GST has become a preferred global standard. All countries belonging to Organisation for Economic Cooperation and Development (OECD) group, except the US, follow this taxation structure.
The proposed Indian GST regime aims at removing distortion in tax regime arising out of multiplicity of taxes and exemptions. At the same time, it will give every opportunity to traders and other stakeholders to make a voluntary compliance which will result into widening of the tax base. It will simplify taxation system, eradicating miseries being faced by trading community in present taxation system. It will end the cobweb of various taxes levied at different stages from production to distribution and will also bring end to multiple authority taxation regime.
The proposed unified tax structure takes the form of a “dual” GST to be levied concurrently by both the Centre and states. In principle GST is the same as the value added tax (VAT) – already adopted by states – but with a wider base. While the VAT – which replaced the sales tax – was imposed only on goods, the GST will be a VAT on goods and services. In the concurrent tax regime, states tax sale of goods but not services. The Centre taxes manufacturing and services but not wholesale/retail trade. The GST is expected to usher in a uniform tax regime across India through an expansion of the base of each into the others territory. The same taxable base will be subject to both GSTs. However, the power to make laws in respect of supplies in the course of inter-state trade or commerce will be vested only in the Centre This is why a constitutional amendment was necessary – to give concurrent powers to both the states and the Centre to make laws on the taxation of goods as well as services. Thus the GST will simplify tax administration, improve compliance and eliminate economic distortions in production, trade and consumption. Apart from providing incentive for industry, business and investment this move would enhance resources for the Centre to spend more on social welfare policies. Second, by giving credit for taxes paid on input at every stage of the supply claim and taxing only the final consumer, it avoids the ‘cascading’ of taxes, thereby cutting production costs, and making export more competitive.
If GST becomes a reality, it would constitute India into a single largest new common market. This common market will have a bigger economy than the whole of Sub-Saharan Africa, more states than the European Union (EU) has as its members, and twice the population of North America. There are 29 mini Indias (29 States) within one big India. The 29 states have operated independently and separately in many respects. They have been setting their own taxes, changing import duties on goods from neighbouring states and have their own politics, culture and even languages. The proposed move will replace more than dozen levies with a single goods and services tax (GST).
Given the size of India’s states and a predicted growth rate of at least 7.5 per cent over the next five years, the potential benefits of integration and India becoming a new common market for investors are huge. It is pointed out that in population terms, U.P. is equivalent to Brazil, Maharashtra would be Mexico, while Bihar is on par with the Philippines and Telangana is comparable to Canada. If the government succeeds in forging a single market, the biggest winners could be some of the poorest states, like the boom for EU newcomers from Central Europe in 2004.
According to a McKinsey report (2012), eight Indian states accounted for about 45% of the $1.8 trillion gross domestic product (GDP). For India to grow at 9-10% some states need to grow at 15-16% which is possible and the GST could play a significant role.
India has potential of growth of as much as 8.5% in next three years, which would be the fastest among major economies. Achieving those levels of expansion requires both Centre and states to act with common vision and purpose or what has been termed as ‘vibrant cooperative federalism’. This begs political maturity on part of all involved.
It is pointed out that India has not moved towards purist form of GST and devised its own diluted form, of the GST that will widen tax base and make it identical both for Centre and the States. That is because, unlike, say, an excise duty (where base consists of manufacturers) the GST is paid only by the final consumer. The seller of the goods or services remits this GST to the state after deducting the taxes already paid by him earlier in the supply chain. The Indian GST, like all indirect taxes, is a tax on consumption, in seeking to institute a uniform rate on all forms of consumption, it tightens the tax net – currently riddled with numerous holes in the form of multiple rates and exemptions and classifications – in addition to widening it. Many countries that have adopted the GST have also exempted essential commodities from it, or kept lower rates for selected goods – no harm India too can adopt such strategy so that marginalised sections of society may feel less effect.
The GST provides an historic opportunity for the country and common public. How the two sides of the debate in Parliament plan on discarding their rigidity and seizing the opportunity – the nation is watching.
For example, the concern of Tamil Nadu government to spend more on certain welfare subjects, States should be able to control their tax revenue. Perhaps it is to ally such concern that GST bill speaks of GST Council fixing not just rates “including floor rates with bands.” A band would give room for states to vary their rates depending on their need.
The author is a former member of the Law Commission of India.