The Narendra Modi government has done well to thrash out a deal with states on the contentious issue of sharing of administrative powers over the Goods and Services Tax (GST). States had been insisting on control over assessees with an annual turnover of up to Rs 1.50 crore.
The Modi government was initially not willing to extend that leeway. But with states unwilling to concede ground, it had become a sticking point that threatened to derail the plans to implement the ambitious indirect tax reform from April 1. In a welcome step, the Centre has now agreed to an arrangement where small taxpayers under the GST will be divided between the states and the Centre in the proportion of 90:10 for the purpose of audit and scrutiny that would be done on a random basis. Administrative control over all taxpayers falling above the Rs 1.5 crore turnover threshold will be shared, again randomly, on a 50:50 basis. Finance Minister Arun Jaitley, moreover, has clarified that no assessee would be subject to oversight of both the Centre and states. That should please industry and trade, which was dreading the prospect of dual control.
The other crucial demand of the states that the Modi government has conceded relates to the power to tax economic activity in the high seas within 12 nautical miles of India’s territorial waters. The coastal states were demanding the right to do this under the integrated GST law. By showing flexibility and not making either of the two issues a matter of prestige, the Centre has hopefully paved the way for a rollout of the GST from July 1. While that may be later than the original date of April 1, this kind of delay is well within accepted limits. It is a fact that the GST cannot be a reality without getting states on board. And the Centre — more so in the context of collateral damage to the economy from demonetisation and lowering of growth forecasts by agencies, the IMF being the latest — cannot afford to get it wrong on the GST. The onus is on the Modi government to be persistent and yet display a spirit of accommodation.
But there is still unfinished work ahead. The GST Council has to finalise the draft laws relating to the GST, which then have to be introduced in the upcoming budget session of Parliament. Even more challenging is deciding on the nitty-gritty of tax rates and exemptions applicable on different commodities — which is again the job of the council that has both the Union finance minister and his state-level counterparts — and, equally important, putting in place a robust GST network IT backbone for the smooth functioning of the new tax regime. Getting all these pieces right within an acceptable time period will be the test for the Modi government post-demonetisation.