Reforms are sometimes about getting the timing right. Thus, diesel decontrol was an easy decision, given the steep slide in global crude prices. But this isn’t the case with the goods and services tax (GST), where the Centre is still struggling to get the states on board. For the states, the sole concern seems to be revenues — which again has to do mainly with timing. The previous government erred in not rolling out the GST when economic growth as well as revenue collections of the states were buoyant. The ongoing economic slowdown has led to a renewed fiscal crisis for most states. They are, hence, reluctant to implement the GST without adequate guarantees of being compensated for any revenue losses arising from the switchover to the new indirect tax regime. The Centre, on its part, has not really gone beyond giving general assurances.
The GST aims at replacing a system where the Centre and the states levy a plethora of taxes at varying rates, creating barriers to the free movement of goods and services within the country. Compare this to the EU, where 28 independent nations could come together to forge a single market through a uniform system of levies. The GST will subsume multiple levies under one Central and one state-level tax. Further, it is to be imposed on the value-added principle, with producers at each stage of the value chain claiming credit for taxes paid on their inputs. This will do away with any cascading of taxes. But for that, no product or levy should be exempted from the GST. The demand by the states to keep out petroleum products or entry tax/ octroi is preposterous: The inability to set off tax on, say, diesel consumed in producing a good against tax paid on the latter undermines the very idea of a value-added tax.
The only way out of this imbroglio is for the Centre to come out with a clear and transparent formula for estimating revenue losses and compensation thereof. While the states may be unreasonable in asking that such provisions be incorporated in the Constitution amendment bill paving the way for the GST, the Centre could be more specific and generous, if only to ensure the passage of this much-delayed reform. The GST will ultimately result in greater revenue buoyancy by boosting all-round economic activity. But it may not be easy to convince the states of that today.