The Hindu Business Line : De-taxing consensus

It is just as well that a consensus has been reached between the Centre and the States on the compensation package for phasing out the Central Sales Tax (CST) considering the tortuous course the implementation of the value added tax system has taken. Still, many elements are to fall into place before the country can claim to have truly ushered in a structural reform of the goods and services taxation system, based on value addition at successive stages of commerce with the final burden falling on the ultimate consumer.

Understandably, both the Finance Minister and the Chairman of the Committee representing the States are guarded about revealing the nature of the financial package agreed upon. With the Centre and the States going into Budget-making mode, any hint on the question would only lead to tax-payers arranging their affairs between now and the next financial year so as to minimise their tax burden; this would mean adverse revenue implications for the States this fiscal itself. But what Dr Asim Dasgupta, Chairman of the Empowered Committee of State Finance Ministers on VAT, chose to indicate suggests that the Government is proceeding on the right track. The decision to transfer the amounts collected by the Centre on over 70 services to the States as part of the compensation mechanism is welcome and could be the prelude to a transfer to the States of the power to impose a tax on services, with limited exceptions. A unified system of taxation in the hands of the Centre is quite unthinkable, as that would leave the States with virtually no powers of levy but a huge development administration burden. Of course, keeping a federation of States going, the vast regional, social disparities and all, means that the Centre must enjoy greater latitude in the matter of taxation. Perhaps, the Centre's thinking is that as a unified system of taxation of goods and services is not slated till 2010, there is no hurry for a fundamental reform of the tax regime.

The decision to transfer to the States the right to impose a tax on tobacco and tobacco products too is a step in the right direction. The concept of certain goods being too important from a national perspective for States to be trusted with the powers of taxing them is open to challenge in this era of diversified economy. It is also an affront to the federal character of national politics. While CST abolition may have its conceptual merits, the fact that the tax plays a significant role in the fiscal situation cannot be ignored. The Centre would do well to put in place a mechanism of compensation that must not only be fair but must also seen to be so by the States for the tax reform to succeed.