The winter session of Parliament that begins today could see the tabling of significant legislation that paves the way for a nationwide goods and services tax (GST). The Centre appears to have got the states on board for the Constitution amendment bill that would enable the GST to come into force. True, key differences remain: states want the GST to be levied on all traders whose annual turnover exceeds ` 10 lakh, while the Centre favours a higher ` 25 lakh threshold. States also dont want the GST to cover petroleum, alcohol or tobacco. Further, they have demanded that the bill incorporate provisions to compensate them for revenue losses arising from GST implementation, whereas the Centre is unwilling to give any such explicit guarantee.
The above differences are, however, not irresolvable. The right forum to discuss them is the GST Council, comprising the Union finance minister and his state-level counterparts, which the bill proposes to create. The priority today should be to get the bill — which empowers the Centre to tax sales of goods (that only the states can now do) and the states to tax services (currently the Centres preserve) — passed in the coming session itself, so that the GST can be rolled out from April 1, 2016. All contentious details, including deciding the so-called GST revenue-neutral rate, can be sorted out during the interim period. And that is eminently possible with some large-heartedness on the Centres part. The least it can do is establish a compensation fund to be administered by the GST Council. This fund could cover any revenue losses of the states in the short run based on clearly defined parameters for projecting tax collections under alternative GST/ no-GST scenarios. It also helps that Prime Minister Narendra Modi has been a chief minister. An assurance from him on compensating them for genuine revenue losses would certainly carry credibility.
But any federal compensation has to be made conditional upon the states agreeing to subsume all local levies, including octroi/ entry tax, under the GST. Moreover, no product should be exempted from the GST, which aims at taxing every good and service on the value-added principle. In a regime where producers at each stage of the value chain can claim a refund for taxes paid on their inputs, exemption of any product or levy will only lead to the cascading of taxes. Taxing every commodity on value addition, including services, would ultimately be conducive to economic activity. The resultant revenue buoyancy, in turn, would also not necessitate pegging the combined GST rate as high as 27 per cent, which is what the states are now pushing for.
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