Work in progress

| Updated on January 17, 2018

The foundation stone for GST has been laid, but a long journey lies ahead

It was a watershed moment on Wednesday when the Rajya Sabha passed the Constitution (122nd Amendment) Bill, paving the way for the introduction of a new tax regime with virtually a single rate across a large basket of goods and services, and creating a unified common domestic market. There can be no turning back on GST from now on. That it has taken more than a decade to seal a political consensus on introduction of GST is not actually surprising, given the number of States and the country’s sheer socio-economic diversity. For all the wrangling along the way, the ruling party and the others have done well to display a spirit of give and take. However, there’s still a long way to go before GST gets going on the ground. At least 15 of the 29 States need to ratify the Constitution Amendment, after which it will be put up for Presidential Assent. After that, both the Centre and States will enact a new set of tax laws. It bears reiteration that a key objective of GST is to reduce the logistics cost of business, simplify tax rates and introduce tax credit across the gamut of goods and services. The new framework will ease doing business by ending the confusion over what falls under ‘goods’ or ‘services’ (a problem that exists because the Centre alone can tax the latter at present). As the Subramanian Committee report submitted in December 2015 argues, GST can work as a compelling force for ‘Make in India’, by lowering costs and making domestic industry more competitive than protectionism ever can.

Fine though the GST edifice looks in principle, there are still areas of uncertainty. The shares of the States as a whole, and between them, remain to be decided. It appears that the Centre is settling for a rather high average rate of above 20 per cent (central plus State levies) — an increase from 15 per cent to 18 per cent for services and a lowering of the levy on goods from 25 per cent to about 22 per cent. Since this is more than the ideal average rate of about 14 per cent proposed by the Subramanian Committee, it perhaps implies that a larger basket of goods and services are being kept out of the GST bracket than envisaged by the Centre. While the model GST Bill allows elbow room to the States to exempt certain goods or tax those exempted by the Centre, the overall impact on the buoyancy of the GST mechanism should not be lost sight of. Instead of seeking to exempt categories of business, it would be more equitable to re-examine the threshold turnover level, which is now just ₹10 lakh as per the model GST law.

Enough thought has not been given to ensuring that the gains arising to producers and traders from tax credits are passed on to consumers. Our regulatory systems should be prepared to address these concerns. In sum, GST remains a work in progress, although the foundation stone has been well and truly laid.

Published on August 04, 2016

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