Roll it out

Resolve persisting Centre-state differences on GST. Government cannot again miss the opportunity

An urgent imperative for the upcoming Union budget is to focus on expanding the tax base and increasing tax efficiency through the imposition of a goods and services tax (GST). For several years now, the government has promised to introduce a GST, yet the process has moved far too slowly. The value added tax is seen as one that could help increase tax compliance. While there has been an increase in manufacturing output, excise payments have not kept pace, indicating tax evasion. Last year's budget took a step towards the GST by equalising the tax rates on goods and services. This year, the government must resolve the differences that persist, get the agreement of states, and propose a bill to carry out the required constitutional amendments. As a first step, the Centre could promise to pay full compensation to states for loss of revenue due to reduction in the central sales tax. This may be useful in reducing the trust deficit between the Centre and states.

There are a number of issues that the Centre and states have been negotiating that would need to be resolved in order to implement the GST. These include the structure of rates and what might be a revenue neutral tax. States wish to retain the freedom to fix their rates and in a federal framework that is a justified demand. But if there are multiple rates, and tax administration across states is not well integrated, it may lower the effectiveness of the GST. Tax administration is another issue. How will the uniformity of rules, procedures and forms be ensured? What systems will ensure minimum costs for the tax payer? The question of threshold is equally important. While poorer states may wish to tax businesses with a low turnover, say over Rs 5 lakh, richer states may want to reduce the cost of collecting taxes by focusing on bigger businesses and charging GST only on those businesses with a turnover above Rs 50 lakh. Finally, a constitutional amendment is required to enable both the Centre and the states to levy taxes on both goods and services.

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