A pragmatic approach

July 25, 2010 10:18 pm | Updated 11:50 pm IST

Finance Minister Pranab Mukherjee's latest proposals on the Goods and Services Tax (GST) might not quite meet the standards set by the Centre itself six months ago. At that time, a strong case was made out for a single tax rate over a wide base, with very few exemptions and a relatively low tax threshold. However, with a view to reaching a consensus with the States and bringing all of them on board, Mr. Mukherjee has adopted a pragmatic approach. The idea clearly is to embark on this important tax reform even if, in the first instance, it meant moving farther away from the ideal than earlier envisaged. The new proposals reflect the recommendations of the Empowered Committee of State Finance Ministers in its first discussion paper last November. There will be a dual structure: a Central GST and a State GST. However, over a three-year period, the two separate rates will converge in stages into a single GST. The Finance Minister has now proposed three separate rates: 20 per cent for normal goods, 12 per cent for merit goods and 16 per cent for services. The Centre has rejected the States' plea to set a high exemption threshold of Rs.1.5 crore for goods, preferring to have a much lower and uniform exemption limit of Rs.10 lakh for both goods and services.

To assuage the States' concerns over loss of financial autonomy, it is proposed to leave out petro products and electricity from the ambit of the GST. That would provide the States autonomy to levy taxes on these high-yielding items. Besides, the Finance Minister has promised to compensate the States for possible revenue losses on account of the introduction of GST. Even after all the flexibility shown by the Centre on critical issues raised by the States, it is still not clear whether the deadline of April 1, 2011, for introducing this tax will be met. There is very little perceptible movement in respect of almost all the legal and administrative steps that need to be taken before the GST could be put in place. An up-to-date technology platform is a vital prerequisite. There have so far been few concerted attempts at educating the public on the new tax. There ought to be a greater sense of urgency than what has been in evidence so far in taking the necessary legal steps — for instance, getting the Constitution amended to enable the States to levy a service tax and the Centre to tax goods beyond the factory gate. The existing VAT laws and also some others like the Central Excise Act, 1944 and the Finance Act, 1994 have to be repealed or amended. In the circumstances, even the new time frame for the GST seems unrealistic.

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