Missing the Elephant in the Room

It has been claimed that the Goods and Services Tax (GST) Bill recently passed by Parliament is “the single biggest tax reform measure in independent India.” The new law is expected to provide a harmonised structure for levying indirect taxes (including excise, customs, sales, service taxes and duties) that will minimise distortions, ensure better compliance, lead to tax buoyancy and enable the creation of a “common national market.” The GST Council, chaired by the finance minister with state finance ministers as members, will have to decide on a number of contentious issues in the coming weeks and months. Importantly, the negotiations will be on what should be the unified tax rate and the revenue neutral rate (or the rate which would leave state governments with at least the same level of tax revenue as at present), the goods and services that would be exempted from payment of the GST, the thresholds limits, the notification of timelines and the mechanisms for dispute resolutions. There remains considerable ambivalence on a number of these issues and the “silver bullet” might miss its mark. To resolve all these contentions by the end of March 2017 will certainly not be possible.

The GST is a continuation of the process initiated by the value added tax (VAT) regime that started 11 years ago. It was originally conceived as a single tax that subsumes all central and state indirect taxes. However, the exclusion of certain critical taxes, notably taxes on petroleum products, electricity, stamp duties on immovable properties and excise duties on alcohol, till a date is notified by the council, leaves a gaping hole in the plan to implement a common indirect tax regime. These taxes account for between a quarter and a half of total revenues of states. Exempting petroleum products and electricity that are important intermediate products from the purview of GST will put to test the claims of eliminating the cascading impact of the present “tax on tax” regime. Keeping alcohol out of the ambit of the GST reeks of an easy compromise, while the exclusion of stamp duties for real estate transactions are clear signs that the union and state governments are far from serious about reducing the use of black money in transactions relating to land and immovable property which too have a cascading ­effect.