Bumps along road to GST

The liberalisation process started in 1991 hastened the integration of India with the global economy. But the free movement of goods and services between the States has been handicapped by ineffective tax reforms.

Considering the country's unique form of federalism, the States will play a key role in the success of a common market. Mr Baldev Raj Nayar's research paper Globalization, the State, and India's Halting March to Common Market: The Political Economy of Tax Reform Under Federalism ” ( India Review, Volume 10, Issue 3, 2011 ) tries to throw some light on this contentious subject.

The paper discusses the relationship between globalisation and tax reform; the evolution of tax reform after economic liberalisation, including the role of the State in that evolution; and the motivations in tax reform.

With the Centre making little headway towards achieving a common Goods and Services Tax (GST), he has aptly picked an oxymoron, ‘halting' and ‘march', for his title.

STRIVING FOR CONSENSUS

One of the issues that came up was the States' concern over loss of fiscal autonomy under the proposed system. The Centre and States have not been able to evolve a consensus on the framework to be adopted so far. Pending this, it may be a tough ask for the Centre to push through the Constitutional Amendment Bill in Parliament. An amendment to the Constitution is necessary for dual GST to be implemented in India.

The research paper has highlighted the importance of the State (Central Government) role in the push towards GST. “Even though the common market has not fully arrived as yet in India, impressive strides toward it have been made through tax reform… The common market, however, does not follow automatically from globalisation. The movement toward the common market in India underlines the critical role of the State and political institutions in generating adequate responses to the challenges of globalisation.”

The indirect tax system in the country represented by the combination of the Central excise and the States sales tax systems “remains extremely irrational from the economic point of view”.

The idea of the GST is to unify all indirect taxes such as excise duty, service tax and octroi. Once GST is implemented, it is likely to improve GDP growth. This would help in bringing a large portion of the country's unreported economy into the tax net.

“The cumulative pressure of the high incidence of taxes and of tax cascading (tax on tax) led to massive tax avoidance and tax evasion; additionally, it turned the tax system into one that was increasingly resistant to squeezing more revenue out of it.”

Mr Nayar feels that it is the Union Government's responsibility to streamline GST. “If the Centre felt that tax reform at the State level was essential, the States had to be sold on the idea.” States would have to give up their powers for indirect taxes under the GST and share taxation proceeds with the Centre once they arrive at mutual agreements.

CREDIT TO SINHA

The paper dwells in detail on the role of Mr Yashwant Sinha, the Finance Minister of the NDA Government, in pushing the successful agenda of implementing Value added tax (VAT).

The current ruling establishment can take a leaf or two from ‘Mr Sinha's statesmanship'. “To move state tax reform forward, the Finance Minister, Mr Sinha called a meeting of the state CMs, at which time he showed rare statesmanship in limiting his active role to serving as counsellor and facilitator rather than trying to dominate the tax reform agenda as would normally be the wont of central ministers.”

This was an astute move; sales tax was constitutionally within the States' jurisdiction, and Mr Sinha realised that the regionalisation of politics and consequent fragmentation of the national party system in recent years had made the States considerably more assertive in relation to the Centre.

Mr Asim Dasgupta of CPI-M (ex-Finance Minister of West Bengal) was appointed as Chairman of the Empowered Committee for the implementation of on VAT.

This paper could not have come at a better time. The Government recently announced Mr Sushil Kumar Modi, Finance Minister of Bihar from BJP, to the head the panel for the implementation and roadmap of GST.

The Thirteenth Finance Commission rightly said: “A key economic feature of a nation State is the existence of an internal common market. An important objective of economic policy should be to make sure that this market functions as efficiently as possible.” It is in this context that it endorsed the GST, characterising it as “indeed, a ‘game-changing' reform to create India as a common market.”

Let us hope the dreams of late Raja Jesudoss Chelliah, widely regarded as the intellectual father of India's tax reforms, come true soon.

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