Serious Delhi-state differences likely on GST implementation

AT FIRST it looked like shadow boxing. India's ruling Bharatiya Janata Party (BJP) was determined to bring in the Goods and Services Tax (GST) Bill. For that, it needed a constitutional amendment to change the way people could be taxed. The largest opposition party, the Congress, was equally firm that it would not allow the constitutional amendment unless some clauses were changed. The Congress had, while in power earlier, proposed the GST but had been thwarted by the BJP, then in the opposition. Now the tables are turned.

The bill came closer to being passed when the federal Cabinet finally approved on July 27 key changes to the GST Constitutional Amendment Bill after the federal finance minister consulted state finance ministers. These changes meant the states would get full compensation for five years for revenue loss arising from the transition to GST, and the federal government would not impose an additional one per cent levy on supply of goods from manufacturing states. At the same time, the GST rate won't be capped at 18 per cent.

These were key demands of the Congress, which had insisted they be met if it was to back the legislation. Public opinion mostly supported the need for change. Transport of goods across the country would speed up as trucks would no longer have to wait at octroi nakas (stations) to be taxed at city entry points or state boundaries. The main push for the bill comes from business, which would operate in a "one India market" and not many that the present system supposedly ensures.

Government spokesmen say the bill will have revolutionary consequences. "The nation is on the cusp of executing one of the most ambitious and remarkable tax reforms in its independent history," they maintain - adding, somewhat incredibly, that the move would boost India's gross domestic product by one per cent or more. While the new tax proposals have some benefits, they can lead to serious problems in implementation and concentrate power further in the hands of the central government.

India is a federal country with financial powers divided between the centre, the states and local bodies such as municipal corporations. The only other comparable country is the United States, one of the few countries that have not experimented with a goods and services tax. The GST is more extensive than the value-added tax and has had mixed results in countries - such as the UK, Australia, Singapore and Canada - where it has been implemented.

In India, the situation is made more complicated by the country being a federal state with power to tax divided between the centre and the states. Already, a turf war has broken out between tax departments of the centre and the states over their assessment and adjudication powers. States are demanding that they should get sole administrative powers to carry out assessment, scrutiny and passing of orders for entities and traders up to an annual turnover of 15 million rupees (S$300,900), and beyond that, both the states and the centre should have these powers.

he central body, on its part, has said if states get exclusive control over up to 15 million rupees, the centre should get exclusive control over above that limit. Since the GST has two parts - the central GST and the state GST - such differences would persist.

Further it still hasn't been clarified how much of the GST would be taken by the centre and by each state. By collecting more tax than it is entitled to, the centre would have power over disbursal of funds to the states. Besides, there are large cities such as Mumbai and Delhi, each of which has annual budgets of around 300 billion rupees.

Would they be willing to give the power to the central or state government to collect the money and then disburse it to them? This would mean further concentration of power in the federal government and weakening of democratic practices. Arvind Subramaniam, chief economic adviser to the government, wrote recently in The Hindu newspaper: "The GST is fiendishly, mind-bogglingly complex to administer."

While many states have given their assent to the GST bill, serious differences will arise in its implementation, especially with a hostile government at the centre. In the present system, the rate of sales tax imposed on a particular commodity within the boundaries of each state is decided by the state government and these tax rates vary across states. Enforcing the same rates across states would therefore amount to eroding the autonomy of the state in exercising its already limited tax powers.