April Deadline For GST Introduction In India Is Increasingly Unlikely

by Mary Swire, Tax-News.com, Hong Kong

03 July 2009

Amending the Constitution to provide wider taxation powers to both the states and the Centre is proving one of a number of obstacles in implementing the Goods and Services Tax (GST). Amid rumblings in the states that the uniform tax is diametrically opposed to the federal principles of the Constitution, any amendment to the Constitution would require a two-third majority in both Houses of Parliament, with a quorum of not less than 50%.

According to a Business Standard report, Govinda Rao, director of National Institute of Public Finance and Policy (NIPFP) and a member of the Prime Minister’s Economic Advisory Council, has written to Prime Minister Manmohan Singh saying it is better to delay the implementation of GST rather than roll it out in a hurried fashion. The idea of a combined GST was first proposed by a committee headed by Rao in March 2001. GST is a uniform tax on goods and services that replaces multiple taxes like excise duty, central sales tax and services tax, so that tax administration and payment is streamlined.

In a speech published by the finance ministry, Vijay Kelkar, chairman of the Thirteenth Finance Commission (TFC), addressing Assocham, the umbrella organisation for Indian chambers of commerce, said that if the introduction of GST in India generated similar growth benefits to those when introduced in Canada, it would be worth USD15bn a year to the Indian economy. He also indicated that the Centre would be willing to compensate the states: 'It is possible some states may want assurances that existing revenues will be protected when they implement GST.' The Commission, he said, is willing to consider providing for compensation to advance the implementation of a “flawless” GST. Kelkar defined 'flawless GST' as one that will subsume all the major state level taxes, use a single rate, allow for only essential exemptions and eliminate all barriers to trade. The TFC under Kelkar will soon give its recommendations on distribution of tax revenues between the Centre and states for the first five years starting April 1, 2010. It is clear, that with the huge sums of money at stake, a large amount of horsetrading will be needed between the Centre and the states in order to boil down the many different taxes and tax rates into one 'flawless' rate.

Setting appropriate GST rates is a deep-seated problem. According to various reports, the main rate of GST, on both goods and services, is likely to be in the range of 14 - 16%, . The GST rate on goods at the federal and state levels could be a single or a multiple one. GST on goods may comprise of two or more nominal rates plus a zero rate for exports and for specified goods. With regard to the federal and the state GST rate on services, the country needs to come to terms with the fact that the GST rate on services will be at par with that on goods. Given that there is no state service tax at the moment, this would mean a significant increase in the taxation of services. Many state politicians, including Tamil Nadu Chief Minister and DMK chief M.Karunanidhi, regard the GST as highly regressive, in that it will move the burden of tax from the luxuries of the rich to the necessities of the poor. There is no sign as yet of a clear consensus on GST rates. However detail on this and many other practical issues, for example tax thresholds for businesses required to participate in collection, is needed before the complex legislation can be drafted and debated.

Finance Minister, Pranab Mukherjee, delivers his budget speech on July 6, during which he is also expected to lay a roadmap for the launch of the ambitious tax reform. Perhaps this will throw more light as to whether and how the April 1, 2010 target is still achievable.

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