GST: Change of attitude needed

Ashwani Mahajan
Once again implementation of the GST has got into rough weathers in the recent meeting of the States’ finance ministers. GST is actually a type of tax reform, which will help overcoming the multiplicity of indirect taxes. It is supposed that once GST is implemented, it will replace all other types of indirect taxes. Once GST is put into place, State VAT, Excise Duty, Service Tax etc., will all cease to exist. However there are number of unresolved issues between States and the Centre, which have been coming in way of actual implementation of GST. According to constitution of India, power to impose taxes is so divided between Centre and the States, that except intoxicants (wines) and toilet preparations, all other commodities are subject to imposition of excise duty by the Centre. States get their maximum revenue from state VAT (formerly known as State Sales Tax) and Excise Duty on intoxicants and toiletries. In this case, imposition of a uniform GST, sub venting all taxes, necessitates convergence between Centre and the States.
First step in the direction of imposition of GST is a constitutional amendment, as GST would change the whole structure of taxation. The constitutional amendment bill prepared by the central government is such that intoxicants and petroleum products would be included in GST and by implication states would lose the right to impose tax on intoxicants and petroleum products. States are now objecting to this proposal. Centre’s contention is that states were earlier ready for this clause, which they are declining to accept. Background behind this issue is that earlier when BJP-JDU government was ruling in Bihar, then Deputy Chief Minister and Finance Minister of Bihar, Shri Sushil Modi was nominated the chairman of the Empowered Committee on GST. At that time perhaps the solution to this problem was found, such that, let the constitutional amendment includes intoxicants and petroleum under GST and later the same may be excluded at the implementation stage, as exclusion of these items altogether would make it difficult to implement the same as and when consensus reaches in this regard. However, now states are not readying to accept this clause, as the power to decide about which tax would be in the list of items excluded in GST would be vested with the Union Finance Minister. Since states do not trust that Union Finance Minister will actually do it, they want exclusion of these two groups of commodities in the constitution itself. Since a major portion of tax revenue of the states comes from State excise duty on wines etc. and VAT on petroleum products, they do not want any tinkering with these sources of their revenue. Argument of the states is that they should not be any case deprived of their financial powers in the name of tax reforms.
GST is Important But?
Major argument in favour of GST is that due to multiplicity of indirect taxes, prices of the commodities go up more than proportionately. This happens because not only taxes are imposed at various levels; even same tax is imposed at various stages. For instance, if a commodity passes through various stages of production and transactions, before it actually reaches the final consumer, generally tax is imposed on the full value at every stage. Producers and the traders try to recover, not only the amount of tax on consumer, rather much more than that, as obviously they seek profit on their total cost, which obviously include taxes paid. The phenomenon of price rise due to multiplicity of taxes, is called ‘cascading effect’. VAT is, but only a partial solution to the problem of cascading, as multiple taxes continue to be imposed. Since there is a provision of tax credit on taxes (of different types), in GST, in principle, price of the commodity would increase by an amount not more than the tax.
However, imposition of GST would mean end of states’ power to impose these taxes, their revenue may come down drastically, which perhaps would be difficult to actually compensate by their share in GST.
GST has always been under the clouds of controversies. At first the issue of division between states and the union was under dispute and then the classification of goods and services was the bone of contention. Even in the draft amendment bill prepared by the Centre, states that the power to classify the goods between merit and others would remain with the centre, is not acceptable to the states.
Financial Crisis of the States
In the Indian federal system, there is a clear cut division of powers to impose taxes, in our constitution. Accordingly, the taxes within the jurisdiction of the states and the centre are given unambiguously. Most of the commodities except intoxicants and toilet preparations are subject to imposition of excise duty by the centre. All incomes of the individual’s and the companies, except agricultural incomes are also taxed by the centre. In the last more than a decade service tax has also emerged as a major source of income of the Centre. States collect maximum revenue from State Sales Tax, State Excise Duty on wines, registration fees etc. Not only that Centre has more and sure sources of revenue than the States, tax revenues of the Centre have been growing at a pace higher than that of the states. It is notable that at present taxation comprises of 17.2 percent of GDP; of which share of the states is 55 percent, while that of centre it is 45 percent. Between 2000-01 and 2012-13, tax revenue of states increased by 462 percent, while that of centre increased by 565 percent.
Opposition not merely from Opposition Parties
Till now the opposition to GST has been coming from only the opposition in general and BJP ruled states in particular. However, important aspect of the latest objections is that it is coming equally from congress ruled states like Haryana and Assam. This is primarily because the states are now apprehending immediate loss of revenue if GST is implemented according to present proposal, a major part of their revenue coming from intoxicants and petroleum products would be eroded and their power to change the tax rate on these items would also be lost.
Though 13th Finance Commission has proposed a compensation of rupees 50,000 crores for the losses incurred to states arising out of implementation of GST, States’ major complaint is that the compensation amount of rupees 9000 crores, as their dues for loss of withdrawal of Central Sales Tax, is not disbursed to the states till date. They are demanding immediate disbursal of this amount.
Arrogance of the Centre
One can conclude that opposition to GST is not an opposition to a tax reform and this opposition is not limited to a set of states, namely opposition ruled states. GST, implementation of which was supposed from April 2010 at the first instance, has constantly been postponed due to lack of consensus on one or the other aspect. Lack of trust of the states with the centre is the major road block in this direction. States, already in financial crunch, are not ready to take any risk. Constitutionally Centre cannot compel states to adopt GST by simply citing benefits of the same. If Central Government is really serious about GST, it must make unambiguous commitment on compensating states for all losses, whatsoever; perhaps only then states may be prepared to adopt the same.
(The author is Associate Professor, Dept of Economics, P.G.D.A.V. College (University of Delhi)