GST opportunity squandered as the blamegame goes on

The Centre’s plan to table the revised Constitutional Amendment Bill, with the changes recommended by the Standing Committee, during the winter session of Parliament appears uncertain after the States objected to the draft Bill during the Empowered Committee meeting on October 21, 2013.

The contention is over the inclusion of petroleum and liquor in the Goods and Services Tax (GST), and the complete subsuming of entry tax.

It is surprising that the States are again raising the issue of petroleum and liquor inclusion, as they were reconciled to it until recently, provided they had the flexibility to levy additional tax with no input tax credit.

This move to stall an important reform is hard to comprehend in the prevailing economic environment of sub-5 per cent GDP and slowing revenues both at the Centre and in the States.

The idea of GST is to create a common market, end cascading effects, and rationalise the indirect tax regime — these would otherwise be lost with a truncated base and multiple taxes outside GST. For instance, petroleum products are pervasive in industry supply-chain, and leaving them outside GST would result in significant cascading and distortion, akin to entry tax outside GST. A significantly truncated base also creates the danger of high GST rates, which would be equally unpalatable to the Centre and States.

Another worry is the refrain from some States on their inherent lower consumption, and the loss that some manufacturing States may suffer in the absence of Central Sales Tax (CST) and the shift to the destination principle. Though some of these issues might reflect ground reality, there can be no comprise on the GST design or the fact that the tax is on consumption and based on the destination principle.

These back-and-forth discussions on GST between the Centre and States have gone on for years, and the Centre has gone a fair distance to arrive at a consensus. It appeared the States too had relented on contentious issues, but the current objections have again created a roadblock. Even if GST was unlikely to see the light of day under the current Government, there was hope that at least the revised Constitutional Amendment Bill would be tabled in Parliament.

Every such delay leads to frustration and doubts in industry, both local and overseas, and reflects our inability as a nation to forge a consensus on an important tax reform. The urgency to simplify our complex and inefficient indirect tax regime and shore up much-needed growth seems to be lost on our elected representatives.

The author is Partner and National Leader – Indirect Tax Services, EY

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