Flawless GST - Recommendations - Total 12% Tax
THE Task Force has recommended a ‘flawless' GST in the context of the federal structure which would optimise efficiency, equity and effectiveness. The ‘flawless' GST is designed as a consumption type destination VAT based on invoice-credit method.
It provides for a comprehensive base including financial services and immovable property. To the extent there are exemptions, albeit limited to items covered for distribution through the public distribution system, and health and education services, the purity of the GST is diluted. A threshold exemption of Rs. 10 lakh has also been provided for small businesses. Imports into the country are proposed to be taxed in the same manner as domestically produced goods. Like intermediate inputs, full and immediate credit for tax paid on capital goods will also be provided. Further, it also provides for a single rate of tax of 12 percent for all general goods and services across all states, comprising of 5 percent by the Centre and 7 percent by the States. However, products of high value like gold and platinum will be subject to tax at the rate of 1 percent each by the Centre and the States and exports will be zero rated.
There is empirical evidence to suggest that the switchover from the present distortionary taxation of goods and services to a ‘flawless' GST will, amongst others, increase productivity of all factors of production and hence enhance GDP. The switchover has also been analysed to be pro-poor and therefore, further the cause of poverty reduction. Further in the Indian context, a dual VAT type tax concurrently levied by both the Centre and the States would enable the creation of a common market.
Given the benefits of the changeover to the flawless GST, it would be economically rational for all levels of Government to introduce and successfully implement the flawless GST and for the Central Government to invest in incentivising the State Government to adopt the flawless GST. It is recommended that the Central Government should provide a sum of Rs 30,000 crores over the next five years which will be used to compensate the States for revenue loss, if any, and the balance for distribution between the States on the basis of the same formula applicable for tax devolution to the States.
The implications for fiscal management are far-reaching. It will significantly improve fiscal management through higher tax buoyancy. While the RNR for State level ‘TF- taxes' (including Stamp duty) is only 6 percent, the Task Force has allowed them a higher rate of 7 percent along with the flexibility to phase out the stamp duty over a period of next three years. This has the potential to increase the combined tax revenues of States by an estimated amount of Rs 70,000 crores. In addition, it is also recommended that the States should be provided with an additional Rs 30,000 crores as incentive to adopt a ‘flawless' GST. Therefore, the switch over to the flawless GST will augment the combined resource base of the States by an aggregate sum of Rs 100,000 crores.
The Task Force recognises that the levy will be imposed and enforced by a large number of Governments. Therefore, there would be constant pressure on States to deviate from the pure VAT model and trigger harmful tax competition. This would jeopardise the sustainability of the benefits from the implementation of the ‘flawless' GST. Therefore, it is also necessary to establish an institutional mechanism which would be responsible for making any change in the design and structure of the VAT. The recommendation to establish a Council of Finance Ministers is intended to subsume the independent powers of the both the Central and State Governments to levy tax on goods and services in favour of collective exercise of the powers. Therefore, there is no exacerbation in the vertical imbalance in the fiscal powers.
The First Discussion Paper released by the Empowered Committee of Finance Ministers on 10th November, 2009 envisages an extremely diluted form of GST under which, inter alia, (i) a number of cascading taxes including purchase tax will continue to be levied by the States; and (ii) the base is considerably eroded on account of the proposed continuation of the exemptions. The design of the GST as envisaged by the Empowered Committee is a significant dilution of the ‘flawless' GST. Consequently, the potential economic benefits from a switch over to the flawless GST would not be realised.
The Task Force has recommended that the implementation of the GST should be postponed to 1st October, 2010. The benefits from the switch over to the GST are contingent upon the purity of the GST design. In the context of VAT, international experience shows that any design-related ‘VAT mistakes are very hard to rectify'. Therefore, it must be ensured that there are no design related mistakes at birth. However, if there is a trade-off between the timeline and the design of the GST, the dilemma must be resolved in favour of design.
Further, in order to implement the ‘flawless' GST it would be necessary to undertake constitutional amendments to enable both the Centre and the States to exercise concurrent jurisdiction over the taxation of all goods and services, creation of the proposed Council of Finance Ministers and assignment of part of the GST proceeds to the third-tier of government. These amendments must, inter alia, provide that the taxation of goods and services by both the Centre and the States should be a consumption-type, destination based GST.
The introduction of the ‘flawless' GST is one of the most important reform agenda which can provide a new impetus to Indian industry and inclusive growth. It is an economic game changer. All stakeholders must unite and develop the necessary will to cooperate in introducing the flawless GST. It would be worthwhile to make greater political investment in this endeavour.