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Tuesday, July 27, 2021

A taxing matter

Both form and content of GST Constitution amendment bill need to be re-thought.

Written by V Bhaskar |
February 24, 2015 3:06:39 am
Proposed levy of an additional 1 per cent on inter-state trade raises concerns. Such an origin-based tax in a destination-based framework would go against all canons of taxation. Proposed levy of an additional 1 per cent on inter-state trade raises concerns. Such an origin-based tax in a destination-based framework would go against all canons of taxation.

The Constitution (122nd Amendment) Bill, enabling the implementation of the GST, is likely to be taken up by Parliament during this budget session. But there are five key concerns about the bill.

First, the passage of the bill will not bring closure to the GST debate. It will merely mark its formal commencement. This is because the bill empowers the proposed GST Council to make recommendations on all the building blocks critical to the tax. These include the tax base, rates, threshold and exemptions as well as the place of supply rules and the GST on imports. The Central and state GST bills will be formulated based on these recommendations. But if the GST is to be introduced by April 1, 2016, time is of the essence. The membership of the proposed GST Council is broadly the same as of the existing empowered committee of state finance ministers (EC). Since the finalisation of the GST’s parameters is bound to spark a time-consuming, vigorous debate, it may be desirable for the EC to start examining these issues immediately. Unfortunately, the EC has been unable to meet since the chairman’s post became vacant after the J&K elections. This post needs to be filled up immediately so that the nitty-gritty work on the GST can start and the April 2016 deadline can be met.

Second, it appears that the GST Council will be a purely recommendatory body. This brings into question the effectiveness of its governance. Like the present EC, it will have no teeth to enforce its recommendations. Neither the states nor the Centre will have an incentive to comply with its recommendations. Initially, there were expectations that the agreed-on VAT framework would be applied consistently across the nation. But these expectations, founded on the consensual recommendations of the EC, have been belied. Some states have levied surcharges, others have restricted tax credits and still others have deliberately delayed refund payments. The EC has been either unable or unwilling to bring these states to implement a uniform VAT structure in the country.

We must guard against the onset of a similar environment under the GST. That would dilute its promise of creating a common national market. The GST Council must be suitably empowered to make decisions — rather than just recommendations — and given the authority to enforce them. The argument that the wisdom of the state legislatures should not be anticipated by the council is not convincing. The states have, in the past, passed legislation based on the recommendations of external bodies. Fiscal responsibility legislation, for instance, was enacted by all the states based on the recommendation of the 12th Finance Commission. Similarly, the state GST bills can be based on the decisions of the GST Council, especially as representatives of all the states will participate in the decision-making process.

Third, the proposed levy of an additional tax of 1 per cent on inter-state trade raises concerns. The levy of such an origin-based tax in a destination-based framework would go against all canons of taxation. It would result in tax cascading, rendering industries less, rather than more, competitive, while permitting the continuance of tax exportation. When the Centre has undertaken to provide compensation to the states for revenue losses they may incur under the GST, the relevance of this clause is questionable.

Fourth, three clauses of the Constitution amendment bill — Clauses 18, 19 and 20 — do not amend the Constitution at all. Clause 18 imposes the additional 1 per cent tax. Clause 19 enables the payment of compensation to the states. Clause 20 details transitional provisions. The articles of the Constitution that stand amended or replaced by these three clauses have not been specified in the bill. If these are new clauses, where they will be inserted in the Constitution is equally unclear. These clauses seem to have been included in the bill to allay the concerns of the states on both the Centre’s ability and its willingness to grant compensation to the states. It may not be desirable to address such a trust deficit in this manner. The most appropriate placement of these three clauses appears to be in the Central GST bill. The Centre may have to convince the states about the credibility of such an arrangement.

Fifth, the bill amends entry 62 of the State List of the Seventh Schedule of the Constitution. The luxury tax, betting tax as well as taxes on entertainment presently levied by the states under this entry have been subsumed into the GST. It is, therefore, proposed that entry 62 be revised to read: “Taxes on entertainment and amusements to the extent levied and collected by panchayats, municipalities, regional councils and district councils”. It is debatable whether taxes to be levied by panchayats and municipalities can find a place in the State List in the Seventh Schedule. At best, if at all, they can find a place in the 11th and 12th Schedules of the Constitution, which deal with the subjects that may be allotted to panchayats and municipalities by state governments.

Both the form and the content of the Constitution (122nd Amendment) Bill may need careful scrutiny. Perhaps, given the complexity of the issues involved, it may be desirable to refer it to a select committee of Parliament.

The writer is a former special chief secretary, finance department, government of Andhra Pradesh, and joint secretary, 13th Finance Commission.

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