The passage of the Constitution (122 amendment) Bill which provides for the introduction of a Goods and Services Tax or GST marks just the first step in the long road towards a seamless national common market and a tax structure without distortions and one that boosts efficiency as well as growth. The bill will be an enabling provision to allow the Central and state governments to build a new tax regime which will subsume the central sales tax (CST), State Value Added Tax (VAT), entry tax besides replacing the central excise duty and service tax with the promise of bringing under the tax net all transactions including real estate and helping check tax evasion. It is therefore welcome that the government has been able to negotiate with the principal Opposition party to resolve issues that were threatening to derail this reform. That said, some near term challenges need to be addressed.
The foremost is the working out of an appropriate standard rate which will be applicable to both the Central and state governments and which is non-inflationary and acceptable to all. The Congress wants the rate to be capped at 18 per cent, though states want the NDA government to peg it at over 20 per cent, citing revenue concerns. The second challenge relates to the compensation mechanism for states in the first phase of the unveiling of this tax. The Modi government has promised to compensate states for potential revenue losses for five years but if this is not tapered off, as was the case during implementation of VAT, it could lead to perverse incentives for states or pose the risk of a moral hazard. This compensation will then have to come from perhaps a levying of either corporate or income tax — which would be unfortunate — when a road map to lower such taxes has already been unveiled. Then there is the information technology backbone or infrastructure which will support the GST. Putting in place a structure which will allow for capturing value addition while providing for setting off tax credits for millions of transactions is bound to test policymakers, the revenue department and states.
Purists argue that going ahead with a flawed design for a transformative reform measure could be detrimental. But waiting for the perfect law would mean sacrificing gains built over a long, tortuous course. If the European Union — an amalgamation of disparate nations — could build a common market with a single currency, there is no reason why India should not succeed. That’s why at the next stage it is important to have a simple design, a relatively low single standard rate and few exemptions.