The Hindu Business Line : One tax, two assessments

For all the gloss that is being put on a composite goods and services tax as being a single tax with two components, it is clear that the official thinking is in favour of some kind of dual assessment, one at the Central and the other at the State level. This is unfortunate. Not just for the fact that an opportunity to usher in a radical restructuring of the taxation system in the economy has been lost but also for letting go of what is by all accounts a propitious time. The first year of office is always the best time to push in radical measures of reform. The Government gets not only the much needed political space and time to handle any adverse political or administrative fallout but also enjoys the luxury of not having to be swayed by political considerations with the next elections far into the future.

The argument in favour of a single point of levy of tax and its assessment is quite compelling. The bulk of the goods produced are meant for immediate consumption. Certainly with credit crunch becoming a constant factor in the economy few producers enjoy the luxury of making goods merely to build up an inventory. True, there are exceptions to the rule, such as in the case of sugar where crushing of sugarcane is restricted to perhaps just six months in the year even if consumption happens right through. As for services, they are invariably consumed and by extension, sold at the instantaneous point of production. It makes sense therefore to let the States take charge of such a stream of tax revenue. The fact that the country has built up an administrative structure for levy and collection of central excise duties at the point of manufacture and again at the point of sale by the States is no justification for perpetuating an irrational tax regime.

It is perhaps time to leave commodity taxation entirely in the hands of the States effectively letting them levy and collect taxes at all points of sale. It means a revenue loss for the Centre, but against this must be set the fact of declining importance of excise duty receipts in the overall Central finances. They now account for only 20 per cent of the total tax revenues from 40 per cent less than a decade ago. One can expect the share of excise duty collections will continue to decline. The process can indeed be accelerated with successive across-the-board reductions in the basic rate of excise leading to a complete phase out similar to what is being contemplated in the case of central sales tax. The revenue loss will be made good simply because it can be made up through an increase in the basic and minimum alternative rate of taxes on corporate income. Further, the reduction in excise duty rate ought naturally to buoy corporate profits and therefore tax collections. As an added measure of comfort the Centre can perhaps retain the right to levy excise duty on tobacco and petroleum products till such time the revenue flows stabilise. A rational road map for complete phasing out of duties on manufacture is possible. What is needed is the requisite political will and a capacity for visionary thinking in reforming the country’s tax structure.

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