Creaky Consensus

Genuine doubts on success of GST are still looming large as consensus on the introduction of the same appears loose and creaky.

After a long and arduous test of central government’s persuasive skills, states have finally agreed to the introduction of the long awaited Goods and Services Tax (GST). Decks have been cleared for the nationwide roll-out of GST in 2014 albeit by the new government after general elections. Genuine doubts on success of GST are still looming large despite a broad agreement with states on the contours of GST. Value Added Tax (VAT) experience coming  handy to this apprehension. All the hoopla created around  (VAT) has been fizzled out just in few years due to the over tinkering of VAT rates by the states. This has   defeated  the very purpose of harmonized taxation system for goods across the states.  

GST being at second level after VAT is more comprehensive in nature. It, as the name suggests, will be applicable to goods and services both and will replace litany of indirect taxes at state as well as at central level. Taxing services which yet falls in Central Govt. territory will come in the purview of state Govt in a limited manner. Although political reverberations on this radical tax hint that even if it is implemented, it may face the same fate as VAT did.

Indirect taxes, levied on the consumption goods are quite heterogeneous. Taxes like excise duty, custom duty, services tax, Central sales tax  are put by the central Govt while VAT/sales tax, Octroi are levied by the state govts. Rates of state level indirect taxes are varied in various states leading to incongruity and confusion for producers and consumers. As India is going to adopt dual GST i.e. the combination of Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST), it has potential to set aside these several central and state level indirect taxes by mere a single tax. CGST will subsume excise duty, services tax and additional duties of custom while SGST will substitute VAT/sales tax, octroi,state surcharges etc. This SGST rate is supposed to be uniform across the states. Uniform GST will help reduce inflation as common tax regime can take off the demand pressures from the market, a fact endorsed by RBI deputy Governor Sudhir Gokharan.

Another characteristic of GST is that it is a destination/consumption based tax i.e. it will be charged only on value added at every single stage of production. The tax on value addition is ensured through a tax credit mechanism throughout the supply chain. GST paid on the procurement of goods and services is available for set-off against the GST payable on the supply of goods or services. The idea is that the final consumer will bear the GST charged to him by the last person in the supply chain. This mechanism of GST has instilled a sense of excitement among industries which have gone wary of giving plethora of taxes to plethora of departments. Consumers will also be benefited as industries will pass on their profit to consumers in the long run by lowering down prices.

It is true that no ideal tax model can be fitted in all countries but any internationally-experimented model, if adopted, must not be tampered with to the extent that the real purpose of the same loses its value. That is exactly what happened with VAT and is happening with GST model in India. Brinkmanship of state politicos has neither let survive any tax reform in India before, nor would it now. The fact that GST will restrict the power of state govt. to levy additional discretionary taxes and that no state will like its state exchequer get totally dependent on central bounties, they will try their best to deviate themselves from it. The adhocism of taxation structure is the real cause of worry as state Govts have not yet subscribed the fact that a stable tax regime is a must for growth. Consensus on introduction of GST appears creaky and loose. Hence, at central level GST might work but the fate is uncertain for states. if GST could be implemented homogeneously across the states keeping in view the revenue-neutral rates for them, it is well and good, otherwise trampled GST, the one in discussion right now will take it nowhere but VAT way.