The European Union project has brought together 28 independent nations to create a single market for free movement of goods and services through a uniform system of duties. India, by contrast, is a single sovereign entity where a plethora of taxes at varying rates levied by the Centre and the States have led to increasingly fragmented internal markets. The introduction of a Goods and Services Tax (GST) regime, subsuming these multiple levies under one Central and one State-level value-added tax (VAT) on all goods and services, was mooted only with a view to prevent such fragmentation and realise the true potential of a single national market of 1.2 billion consumers. It is unfortunate, then, to see this far-reaching reform flounder, for which the Centre is equally to blame as the States.
The reasons for the States’ obstructionism are predictable. They don’t want GST to cover petroleum products and alcohol. The former contributed Rs 1,10,875 crore in sales tax revenues in 2012-13, while excise from liquor yielded another Rs 80,000 crore or so. Bringing these under GST would mean forgoing their ‘right’ to tax these products at rates they decide upon. For instance, this varies for diesel from 9.24 per cent in Haryana to 25 per cent in Chhattisgarh. But it’s about more than just petro-products and alcohol. The Empowered Committee of State Finance Ministers that met earlier this week has also opposed subsuming entry tax/octroi within GST. Exclusion of particular products or local levies undermines the basic philosophy of GST, which is to tax every good and service in a manner that the producer at each stage of the value chain can claim credit for taxes paid on his/her inputs. Inability to set-off tax on, say, diesel consumed in producing a good against the VAT payable on the latter breaks the input tax credit chain. It results in cascading of taxes and not taxing of value-addition as it should be.
But the Centre is not blameless in this affair. For States, the sole concern is potential revenues forgone from implementing GST. It is for the Centre to convince them that a regime where every commodity gets taxed on a value-added basis – including services, on which States currently cannot impose tax – will help boost economic activity and generate revenue buoyancy. One way to assuage the fears of States is to compensate them for any revenue losses arising during the transition to GST. Going by the experience of VAT, which was introduced in a limited manner for goods from 2005, such shortfalls proved ephemeral: The fiscal position of States, if anything, has staged overall improvement since then. By not willing to backstop any loss of revenues – quite unlikely in the first place – the Centre has displayed a lack of both initiative and conviction in trying to implement what is a game-changing reform.