An important milestone in the path towards the Goods and Services Tax (GST) has been reached, with the Empowered Committee of State Finance Ministers deciding on a three-tier duty structure for the goods component. There will be a low rate for goods of mass consumption, a standard rate for most other items, and a premium rate for a small category of items. It can be argued that a multiple duty structure is not the best way to go forward, since it can raise problems of classification and revenue leakages, for instance. Besides, the States may find it difficult to resist pressures from interested groups either for exemption or for levy at a lower rate. However, although a single tax rate is theoretically preferable, it may not be practicable at this juncture. Ever since Finance Minister Pranab Mukherjee announced that the GST would be introduced on April 1, 2010, the accent has been on developing a structure that would be economically viable and politically acceptable, besides satisfying administrative canons of efficiency and compliance. In the budget it was announced that, in effect, there would be two sets of GST — one for the goods, and the other for the services, levied at two levels. These two would be mutually exclusive and operate across the value chain.

Now that the structure of the GST for the States has been determined, attention should shift to overcoming the practical problems of implementing it. It is at the level of the States that the introduction of the new tax, which will replace the State-level Value Added Tax (VAT) that came into being in 2005, is expected to be particularly daunting. Among others, a system of capturing input tax credits must be worked out urgently. The two big challenges are in the areas of compensating the States for possible revenue losses and revamping the legal architecture. In addition to the government, the 13th Finance Commission will address the issue of compensating the States. There must be a far greater urgency than what has been in evidence so far in taking the necessary legal steps, including a constitutional amendment to enable the States to levy a service tax and the Centre to tax goods beyond the factory gate. Certain existing laws such as the Central Excise Act 1944 and the Finance Act, 1994 need to be repealed. Existing VAT laws must also be modified or partially repealed. A more realistic timetable for the GST can be drawn up after taking into account the progress in fulfilling the legal and administrative requirements.

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