With only nine months remaining before the proposed implementation of the Goods and Services Tax, building a consensus on amending the Constitution to provide wider taxation powers to both the states and the Centre is emerging as the key roadblock in implementing this pan-India tax.
This is the basic building block before GST can be rolled out, since the states don't have the powers to tax services and the Centre can't levy tax on goods produced beyond the factory gate.
Referring to the timeline for amending the Constitution, Govinda Rao, director of National Institute of Public Finance and Policy, a Delhi-based economic research institution, said: "You cannot do this by April."
Under the Excise Act, the Centre has power only to levy tax till the factory gate. To cover the transaction between the factory gate and final point of sale, the Constitution needed to be amended to empower the Central government to levy GST, he said.
Rao, who is also a member of the Prime Minister's Economic Advisory Council, has now written to Prime Minister Manmohan Singh saying it's better to delay the implementation of GST rather than roll it out in a hurried fashion.
The point about sharing tax powers between the Centre and the states was also recently raised by K Anbazhagan, finance minister of Tamil Nadu, who said the GST should not erode the states' fiscal autonomy. He said the April 1, 2010, deadline is "premature and hurried".
Any amendment to the Constitution requires a two-third majority in both Houses of Parliament, with not less than 50 per cent of the MPs attending.
The idea of a combined GST was first proposed by a committee headed by Rao. The report titled "Final report of the expert committee on taxation of services" was submitted to the finance ministry in March 2001, and one of the recommendations was to introduce a tax similar to GST.
The aim of GST is to have one uniform tax and do away with multiple taxes like excise duty, central sales tax and services tax, so that tax administration and payment can be done easily. At present, a few taxes on finished products at the state level cannot be set off against tax paid on inputs. This leads to a cascading effect of taxes on the final product.
Another point raised by Rao, one of the leading experts on public finance, is that tax reforms should be introduced when the economy is doing well, just as the Value Added Tax was introduced in 2005. "It would be bad timing to introduce GST when the economy is slowing down," he said.
Capturing inter-state transactions
Under GST, it's the end-consumer who finally pays the tax. For example, a producer who pays tax on inputs can set it off against tax paid on the final product. So, the tax paid by this producer is only on his value addition.
Thus in this consumption-based tax, capturing inter-state transactions is important. The progress here, however, is tardy and no information has been provided so far by the empowered committee of state finance ministers on how this will be tackled.
At present, inter-state transactions are taxed under Central Sales Tax, which was supposed to be reduced to zero by April 2010, from 2 per cent.
The empowered committee decided to create a database of inter-state transactions through a system called TINXSYS. It captures data on C-forms issued by the states.
"The data collected is dated and also there is no information on C-forms received by exporting state, which is crucial to complete the circle," said R Kavita Rao, a senior fellow with NIPFP. Information provided by the empowered committee-maintained website (www.tinxsys.com) shows that data has been received only till June 2008.
Impact on states
Since GST is a consumption-based tax, producing states like Gujarat, Maharastra and Tamil Nadu are likely to incur revenue losses. But on an overall basis, the introduction of GST at 16 per cent - with the Centre and the states levying 8 per cent each - will not result in any revenue loss, according to a recent working paper that Rao has published.
Another concern is that post-GST, area-based exemptions - under which companies need not pay indirect taxes - will not be extended. States fear that firms would relocate their manufacturing bases once tax incentives are gone, leading to a decline in revenue collections.States have also demanded compensation for any revenue loss from implementing GST for five years.
When the value added tax was introduced from April 2005, the Centre had agreed to compensate any revenue loss 100 per cent in the first year, 75 per cent in the second year and 50 per cent in the third year. Since VAT revenue showed good growth, the Centre received claims of only Rs 13,167 crore (Rs 131.67 billion) till January 31, 2008.
In general, the introduction of GST is likely to raise the tax revenue, so revenue losses are likely to be minimal. "The GST, if introduced as scheduled on April 1, 2010, would increase revenues 1 or 2 per cent of the Gross Domestic Product," said Rohini Malkani, economist with Citi India.
