Be indirect

There has been unprecedented collection in direct taxes in the current fiscal year. Indirect taxes have, however, lagged behind. While latest estimates suggest that the government might exceed its budget targets even for indirect taxes, these would be primarily on the back of higher custom duty collections. Excise collections remain sluggish. This happened despite the good growth in manufacturing seen during most of the year. This evidence points to the need for concentrating on excise as one of the main focus areas in Budget 2008.

The government has committed to a goods and services tax GST by April 2010. This is arguably the most important missing piece in the far-reaching reforms of Indian tax policy, which began in the 1980s. The implementation of the state VAT laid the foundation for further reform of India8217;s indirect tax system. A GST of roughly 20 per cent 8212; with 12 per cent for the Centre and 8 per cent for the states 8212; will produce the tax revenues required to eliminate every other tax on production and sales. Thereby, individuals and firms will have to only pay three taxes: property tax, income tax and GST. Recordkeeping, filing of tax forms and associated corruption with the multiplicity of levies would be eliminated. In particular, a key benefit would be to build India as a common market, where goods and services move freely across state boundaries. Finally, a GST would make possible the full elimination of customs duties. These are all extremely attractive features. The devil is now in the execution. Achieving all these wonderful changes requires considerable political and administrative effort.

The first milestone that the ministry of finance needs to shoot for is the launch of a 8216;Central GST8217;, which combines the CENVAT and the Central Service Tax into a single IT system on the lines of the Tax Information Network TIN, which has worked so well for income tax. In Budget 2008 Finance Minister P. Chidambaram can also start with cutting the excise rate to 14 per cent as part of the move towards a single rate. The next milestone is an agreement where the states are given revenues from all services, in return for the removal of all their existing distortionary taxes, and an agreement on harmonisation of tax administration so that every firm in India only faces one tax man. With the man who dreamt this up, Vijay Kelkar, chairing the Thirteenth Finance Commission, Chidambaram has an ideal partner to start this process.