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After three futile attempts and amidst continuing political opposition by many States, the Finance Minister tabled the 150th Constitution (Amendment) Bill (GST Bill) in Parliament, which is almost a leap towards implementation of the Goods & Services Tax (GST). But then it only goes thus far ; The GST model conceived under the Bill is not what has been promised all along by the Finance Minister or what was recommended by the 13th Finance Commission.
The Bill is witnessing reservations from various sections, including the Planning Commission and the industry, for various flaws. On second thoughts, however, it seems like an intended move by the Finance Minister who is running against time for the implementation of GST by April 2012 and has been unable to achieve consensus of the Empowered Committee, many of whom are driving their individual State-level political agenda.
The speed at which the Bill was approved by the Cabinet and introduced in Parliament is reflective of the desperation for implementation of the GST. In that hurried process,what was perceived as one of the most important tax reforms has fallen rather flat.
Glaring defects
One of the most glaring defects of the Bill is to keep the key sectors such as petroleum completely outside the GST. The petroleum sector which includes, petrol, diesel, natural gas, is fundamental to an emerging market economy such as ours, and will contribute significantly to increase in input cost due to cascading of taxes. The proposal to keep real estate outside GST would be a death knell to an already crippled industry reeling under the dual taxation by the States and the Centre.
There appears no social, fiscal or economic reason for keeping these core sectors outside the GST, which will only compound the misery of the impact of tax cascading and perhaps culminate into high costs for commercial and industrial activity in the country. It appears that electricity will also continue to be a State tax subject and kept outside GST.
The Bill allows continuance of other taxes such as octroi, entry tax, and entertainment tax that can be levied by a regional council or panchayat or municipality. The co-existence of these taxes alongside the GST would undo the structural benefits of GST and surely not help in making the tax administration less complex for the corporate world.
Short-sighted strategy
The Finance Minister seems to have had a very short-sighted strategy limited to addressing what seems like his personal agenda of implementing GST by April 2012, without any indications of a long-term strategy to set right the above fundamental flaws in the proposed model.
The exclusions of the core sectors would permanently limit the Government's ability to move towards a comprehensive and flawless GST even in the future.
This could have been avoided if the Constitutional amendment was limited to empowering the Centre and the States to levy GST in a comprehensive manner on all supplies and real property and the current proposal to exclude the core sectors from GST could have been achieved under the delegated legislative powers. This would have provided the much-needed flexibility to work towards a more comprehensive GST in the future.
Another alternative could have been for the Government to amend to Constitution to provide for a comprehensive GST platform including all the core sectors, real property & electricity, however, with an option to the States to individually choose to include or exclude the identified sectors under GST. While this strategy could have gone against the immediate agenda of a common and uniform GST , it could have provided the platform for a comprehensive and uniform GST at a future stage without diluting the current model.
Dangerous precedent
The Bill as introduced in the Parliament, while seeking to create simplicity, efficiency and harmonisation of tax law has failed not only to do that with that purpose, but also has created a dangerous precedent of compromise on State-induced politics in tax law. In the current scenario, however, the Bill will be placed before a Standing Committee for further discussions and deliberations. This gives Parliament another opportunity to factor in the concerns of all stakeholders to draft a legislation which is comprehensive and not coloured by myopic State-level politics.
(The author is a Tax Partner, Ernst & Young.)
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