With the Rajya Sabha passing the Constitution (122nd Amendment) Bill, 2014, a major hurdle in the government's plan for rolling out the goods and services tax (GST) from next year has been crossed. It has taken more than a decade for the idea of the GST to reach this level and brighten the prospects of a uniform indirect tax structure across the country, subsuming in it a host of levies such as the central excise, sales tax, octroi, and service tax. It has been hailed as a game-changer, ushering in the biggest indirect tax reform since at least 1991. India Inc should benefit with improved ease of doing business, consumers are likely to gain in the long run from lower prices and investors may find the indirect tax regime more stable and attractive with the Indian market no longer fragmented. The Indian economy, too, is expected to experience a mild boost in its growth even as the incidence of tax evasion should decline and more economic entities would be encouraged to come under the tax net to take advantage of the set-offs provided in the new taxation system.
What was passed on Wednesday is certainly not a perfect model of a GST system, but its overall structure is a welcome start for the roll-out process. It is, therefore, a relief that the Congress pressure on the government to scrap the proposed one per cent tax levy on inter-state trade in the GST structure has succeeded, rescuing it from a distortion that would have led to cascading of taxes. Also laudable is the idea of an empowered GST Council, with adequate representation of states, so that the Centre cannot have its way in the fixation of rates or in deciding the mode of dispute resolution unless it can secure the support of almost two-thirds of the states. A federal tax system like the GST cannot work without cooperative federalism and giving states the comfort of having a reasonable say in the way tax rates are to be fixed. The government should also be complimented for having resisted the pressure to introduce a cap on the GST rate in the Constitution amendment Bill. Agreeing to such a demand would have been counterproductive.
There are, however, many challenges, some of which arise out of the imperfections in the Bill. The GST will now apply on some petroleum products like petrol, diesel, aviation fuel, natural gas and crude oil at a later date. This means other products such as kerosene, naphtha and liquefied petroleum gas would come under the GST regime. This will give rise to a piquant situation where petroleum companies will have to keep juggling between the GST and the non-GST systems for different sets of products. Moreover, the exclusion of these items from the GST for some years will not help in keeping the overall tax rates as low as possible. The larger the number of items excluded from the GST regime, the more difficult it will be to keep the rates low. Already, potable alcohol and some petroleum products are excluded and it will be a tough challenge to keep the revenue neutral rate down to about 15 per cent, as a government-appointed committee has recommended.
The lack of clarity on compensating states for their revenue loss would be another bone of contention. Hopefully, these issues would be resolved soon. No less challenging will be the task of rolling out a robust technology platform for the payment of taxes and reimbursing set-offs. It will also be important to ensure an efficient earmarking of jurisdiction between revenue officers of the states and the Centre so that the final goal of revenue collection without any harassment is not sacrificed at the altar of a bureaucratic turf battle. In short, a long tortuous path lies ahead before the GST can be rolled out to realise the full benefits of the new taxation system.