Given the complexity involved in conceptualising and implementing the Goods and Services Tax (GST), it is becoming clearer by the day that the scheme cannot be introduced by April 1, 2010, as originally proposed. An overwhelming majority of States have expressed themselves in favour of a less rigid time frame. The Centre has not yet brought before Parliament the legislation to amend the Constitution without which the GST cannot be put in place. More basically, the Centre and the States are yet to reach a consensus on what the goods and services tax rates should be. The Empowered Committee of State Finance Ministers has come out in favour of a dual structure. The Centre and the States will have their own laws and rates, and there will be a multiplicity of rates for goods and services. More recently, there have been suggestions favouring a combined GST across the country, incorporating the tax rates of both the Centre and the States. The National Institute of Public Finance and Policy has said the combined GST could be around 17-18 per cent. This is substantially higher than the 12 per cent combined tax rate — five per cent for the Centre and seven per cent for the States — proposed by the 13th Finance Commission recently. The Commission has also recommended the creation of a safety net for the States with a corpus of Rs. 30,000 crore to be funded by the Centre over five years.
The sharp difference in the rates proposed by the two expert bodies indicates, more than anything else, the difficulty in working out a revenue-neutral tax rate that will be fair to all the stakeholders. At this stage, there is no clarity on whether it will be possible to subsume all the indirect taxes into the new levy. The administrative costs involved, including those for the development of crucial technology inputs, have yet to be calculated. Although there are major hurdles to be crossed before a consensus can be arrived at, the time has come to educate all the stakeholders on the merits of the GST, which is not a new tax but only an improvement over the prevailing consumption tax systems at the Centre and in the States. At present, there is a value added tax (VAT) at the manufacturing stage on goods and a separate tax on selected services at the Centre, and a VAT up to the retail stage at the State level. Tax bases at the Centre and in the States overlap and, despite the input credits given at various levels, there is considerable cascading that distorts tax incidence and makes manufacturing non-competitive in many cases. The GST is expected to expand the tax base and reduce distortions by eliminating input taxes.