GST compensation problem can be solved

What is the similarity between the implementation of GST in India and the performance of the Indian cricket team? In both the cases, we live in eternal hope.

To be fair to the government, it has taken the initial steps towards implementing GST by getting the Constitutional Bill passed in the Lok Sabha. The Bill is now before a Rajya Sabha panel.

The latest development is that a few States have repeated an objection they raised when GST was a concept years ago — being short-changed on the compensation they are due to the loss of tax revenue. At present, the Bill provides for the tapering of compensation for revenue loss from the fourth year.

For the first three, States would be given full compensation. This would reduce to 75 per cent in the fourth year and 50 per cent in the fifth year.

The States want their entire pound of flesh for all the five years. A few States such as Punjab and Haryana, which also levy a Purchase Tax, have asked for exclusion of this tax from GST or compensation for a period of 15 years. Some States are also demanding that they should have the exclusive power to levy their share of “sin” taxes on tobacco and alcohol.

All the negotiating skills of the Central Government would be put to test here, especially in States where they are not in power.

There is no dearth of complexity in India. When it comes to taxes, this complexity increases. Implementing a single GST in such a complex environment is not an easy task. As a solution, we diluted GST to a multiple GST — Central GST, State GST and Integrated GST.

When the Constitutional Amendment Bill was doing the rounds of the Lok Sabha, the multiplicity increased. To help manufacturing States (whatever that could mean), there was a proposition to impose a 1 per cent “Help GST” over and above all the GSTs.

This appears to be an attempt at pleasing a few lobbyists.

The present VAT laws across many States, including those that are asking for the 1 per cent Help GST, are skewed.

Some years back, automobile companies in Maharashtra raised an objection to the provision in VAT laws on input credit that encouraged companies to manufacture outside the State rather than in it.

If the 1 per cent levy stays, a toy that travels through 5 states would be costlier by 5 per cent just because of the journey. It would be easier and cheaper to import from China.

The main obstacle to moving on with GST appears to be the compensation to the States. When no one has an idea as to how GST will fare in terms of revenue, it is surprising that both sides are attempting a solution even before the problem has arisen.

The Centre should create a GST Fund in the next Budget with a reasonably large corpus. The Fund should be used for the exclusive purposes of compensating the States for loss of revenue. Annual additions can be made to the Fund based on the experiences of the past year and a proper audit of the loss of revenue claims.

Ideally, there should be a sunset clause for the closure of the Fund after a period of time. By creating a Fund, the Centre will have proved that it is committed to the compensation issue, and at the same time the States will get only what they have lost.

However, there are issues other than compensation that both the Central and State governments have to fix. Are States GST-ready in terms of technology?

Are the officers of all tax departments fully aware of the nuances of a diluted GST? Has training been provided to the inspector who will issue the tax notice?

Learning on the go can only add to the uncertainty all around — and needless bouts of excitement from the tax administration at the expense of the taxpayer.

The writer is a chartered accountant