March 1, 2006
In the Budget speech, Finance Minister P Chidambaram has set a 2010 date for the introduction of the Goods and Services Tax (GST). This is fantastic news. It will help India achieve economies of scale by becoming a common market, and help India score in the global market for labour-intensive manufacturing. The question is now about translating this intent into execution.
Indian democracy involves many actors, and has an exquisite dispersion of power. Complex fiscal reforms hence require special care in planning and implementation. Two important role models can be cited. The first was the FRBM itself, which was led by Yashwant Sinha and Jaswant Singh, and implemented in a non-partisan manner, which lent itself to consummation by the UPA government. The second was the State VAT, which was led by the Empowered Committee of State Finance Ministers in a non-partisan framework. Both these were multi-year efforts through carefully crafted institutional arrangements, which ultimately succeeded. In similar fashion, an Empowered Committee for GST Implementation now needs to be set up. Unlike the State VAT, the GST involves both Centre and States. Hence, it is fitting that this committee should be chaired by the FM.
There are four parts to the GST effort: establishing IT systems, building the Central GST, the political effort of agreeing on “a grand bargain,” and administrative efforts at the state level. Simultaneous efforts need to be undertaken on all four fronts, under the oversight of the Empowered Committee.
The first task is that of the IT systems. The Tax Information Network (TIN) system, built by NSDL, is the right foundation for implementing the GST. TIN already reaches 600,000 establishments, and these are exactly the establishments which need to be plugged into the GST. Hence, the IT development work should be initiated at NSDL now, so that we can be ready by April 2007.
The second task is that of consolidating Central Excise, the Central Service Tax and VAT on imports (i.e. CVD) into a single tax called the Central GST. This can be announced in the budget speech of February 2007 and become operational in April 2007, which dovetails with the time taken for IT implementation work connected with TIN. Over fiscal 2007-08, this system would go through debugging and incremental refinement, and the Finance Bill of February 2008 would introduce legal amendments that should put a closure on this task.
The next task is that of interacting with the states. On one hand, this is the political question about revenue sharing. The most fair formulation would place the entire GST collection into the hands of the Finance Commission for sharing with States. Calculations and fiscal scenarios must be made, and discussed with State finance ministers, in order to arrive at an agreement.
The goal should be to complete these discussion and lawmaking efforts by December 2008. After this, the focus would shift to state-level administration. At first, individual states should be merged into the TIN, one by one, at an administrative level while keeping the State VAT distinct from the Central GST.
Once all major states are administratively working through the TIN, and the “grand bargain” has been agreed to, the stage would be set to throw a switch in April 2010, where India would become a common market with a single Goods and Services Tax.
Even though 2010 appears to be far away, in order to achieve a GST in 2010, we need to get going with key action points right now. It may then become possible to actually hit a deadline like 2008 or 2009 if events play out right.
—(The writer is Chairman of India Development Foundation, New Delhi) \
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