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First decisive step

The Empowered Committee of State Finance Ministers has done well to agree on the introduction of a dual GST (Goods and Services Tax) at the Centre and the States from April 2010. The State-level VAT now covers all important States and Union Territories. As Finance Minister P. Chidambaram has been pointing out, the performance of VAT, wherever introduced, has surpassed all expectations. The time is right to decide on introducing a combined GST from a prospective date. No ro ad map has been announced so far, and there would obviously be plenty of details to be worked out and political compromises struck before the GST could become a reality. Along the way, there would be several tax reform measures involving the Centre and the 35 States and Union Territories. Among the major issues to be sorted out are those related to the structure of the tax, the base, and the tax rate, besides administrative matters. It is important that the new dual structure does not compromise on the fundamentals of a sound tax structure or the fiscal autonomy of the States. The dual GST, even if not the ideal, is a necessary compromise and probably the best option in the present circumstances, although it does not completely unify the tax structure and administration. The tax rate needs to be kept as low as possible to secure better compliance; at present the CENVAT is at 16 per cent while the State VAT is at 12.5 per cent. These do not give any idea as to what a revenue neutral tax rate should be. There is a multiplicity of tax rates and the base is narrow.

Assuming low compliance in the early years, the Kelkar Committee had recommended a combined GST rate of 20 per cent, but the view is gaining ground that a lower rate will be more appropriate. It will also be politically more acceptable. Apart from the rate being reasonable, the new GST must be as comprehensive as is possible. It would be necessary to levy separate excise duties on petroleum products as well as on harmful products such as tobacco. A key task from now on would be to phase out all other taxes that stand in the way. Administrative matters during the transition period and beyond are going to be critical to the success of the scheme. These include legislative enactments, sprucing up the tax machinery, educating tax payers, and addressing their concerns on an ongoing basis and establishing an effective and speedy adjudicating mechanism. The decision to introduce the GST is only the first step. It will need a great deal of political will and administrative acumen to make the transition to the dual tax structure least painful.

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